2013
Annual Report
Investing In Relationships
1
Benefit From Our Partnership
Investing In So Many Ways
At Central Valley Community Bank, we are just the right amounts of
both big and small – the strong power and security of a big bank together
with the values and relationships of a community bank. We are local too.
We live, work and understand the needs of our customers and the
communities we serve. We believe in and practice the core values that
founded our Bank in 1980 with only $2 million in assets. Now with over
$1 billion in assets our beliefs and practices have not wavered. Year after
year we are privileged to demonstrate this by sharing our resources, talents
and the energy of our people with the communities and organizations we
are so honored to serve. Thank you for your trust and partnering with the
bank that invests in so many ways.
Affinion Group Inc.
Ag Lenders Society of California
Alluvial Community Garden
Alzheimer’s Foundation of Central California
American Bankers Association
American Cancer Society
American Heart Association
American Institute of Certified Public Accountants
American Red Cross Central Valley
Angie’s List
Association of Commercial Real Estate
Boys & Girls Club of Tracy
Buddhist Church of Stockton
Business Organization of Old Town Clovis
California Armenian Home
California Bankers Association
California Chamber of Commerce
California Cotton Ginners Association
California Farm Bureau Federation Young Farmers & Ranchers
California Financial Crimes Investigators Association
California State University, Fresno - Craig School of Business
California State University, Fresno - Foundation
California State University Fresno - Maddy Institute
CenterStage Clovis Community Theatre
Central California Society for Prevention of Cruelty to Animals
Central East High School
Central Valley Business Incubator
Central Valley SCORE
Central Valley Sons of Italy Foundation
Certified Development Corporation of Tulare County
Certified Financial Planner Board of Standards, Inc.
Children’s Hospital Central California Alegria Guild
Children’s Hospital Central California Foundation
Children’s Hospital Central California Las Madrinas Guild
2
Clearpoint Credit Counseling Solutions
Clovis Chamber of Commerce
Clovis North Girls Softball League
Clovis Rodeo Association
Clovis Senior Services Center
Coarsegold Chamber of Commerce
Community Food Bank
Community Medical Foundation
Court Appointed Special Advocates of Fresno and Madera Counties
Court Appointed Special Advocates of Stanislaus County
Cultural Arts Rotary Club of Fresno
David Bliss Memorial Golf Tournament
Doug McDonald Scholarship
Downtown Visalia Foundation
Eastern Madera County Chamber of Commerce
East Fresno Kiwanis Club
Economic Development Corporation
El Concilio Council for the Spanish Speaking
El Dorado Park Community Development Corporation
Exceptional Parents Unlimited
Executives Association of Tulare County
Exeter Chamber of Commerce
Exeter Community Service Guild
Foundation for Clovis Schools
Fresno Area Crime Stoppers
Fresno Area Hispanic Chamber of Commerce
Fresno Association of REALTORS
Fresno Business Council
Fresno City & County Historical Society
Fresno County Farm Bureau
Fresno River Park Rotary Club
Give Every Child A Chance
Greater Fresno Area Chamber of Commerce
Greater Merced Chamber of Commerce
Greater Stockton Chamber of Commerce
Hinds Hospice
H.O.P.E. Animal Foundation
Independent Community Bankers of America
International Association of Lions Clubs
Junior Achievement
Junior League of San Joaquin County
Katey’s Kids, a Sebastian Foundation
Kaweah Delta Hospital Foundation
Kerman Chamber of Commerce
Kerman-Floyd Elementary School
Kerman Girls Softball League
Kerman High School
Kerman Rotary Club
Kerman Senior Advisory Board
Kerman Youth Soccer League
Kids’ International Dental Services
Kings County Farm Bureau
Leverage OurExperience Knights of Columbus
Latinas Unidas
Leadership Stockton Alumni Association
Leukemia & Lymphoma Society Central California Chapter
LifeSTEPS
Lincoln High School Lacrosse
Lodi Chamber of Commerce
Lodi Police Foundation
Lodi Reds Baseball Club
LOEL Center & Gardens
Lost Girls Motorcycle Club Central Valley
Madera Association of REALTORS
Madera Community Hospital Foundation
Madera County Farm Bureau
Madera County Food Bank
Madera District Chamber of Commerce
Madera Police Officers Association
Madera Rotary Club
Marjaree Mason Center
McSwain Elementary School
Medical Group Management Association
Merced Boosters Club
Merced County Association of REALTORS
Merced County Chamber of Commerce
Merced County Farm Bureau
Merced County Hispanic Chamber of Commerce
Merced Police Officers Association
Merced Rotary Club
Modesto Chamber of Commerce
Modesto Rotary Club
MusicFirst
National Association of Government Guaranteed Lenders
National Association of Home Builders
National Child Safety Council
National Notary Association
NeighborWorks HomeOwnership Center Sacramento Region
NorCal Trojans Youth Baseball
Oakdale Educational Foundation
Oakhurst Community Park
Our Lady of Perpetual Help School
PBID Partners of Downtown Fresno
Pine Ridge Elementary School
Poverello House
Pro-Youth / HEART
Rancho Cordova Chamber of Commerce
Reedley College
Regents of the University of California
Rotary Club of Clovis
Rotary Club of Fig Garden
Rotary Club of Fresno
Rotary Club of Merced
Rotary Club of Sacramento
Rotary Club of Visalia
Ruiz 4 Kids
Sacramento Metro Chamber of Commerce
Saint Agnes Medical Center
Sequoia Council of the Boy Scouts of America
Shaver Lake Lions Club
Sierra Lions Club
Sierra Mountain Little League
Sierra Unified School District
Soroptimist International of the Sierras
Soroptimist International of Visalia
Southeast Fresno Community Economic Development Association
Spirit of Woman of California
Stagg High School Football
Stanislaus County Farm Bureau
Stockton Athletic Hall of Fame
Stockton Sunrise Rotary Club
Stocktonians Taking Action to Neutralize Drugs Affordable Housing
Talahi Media Arts
The Bulldog Foundation
The Clovis Community Foundation
The Downtown Association of Fresno
The Kings Fair
The Merced County Fair
The Risk Management Association
The Salvation Army
The University of Texas MD Anderson Cancer Center
Tracy Chamber of Commerce
Tracy Hills Growers and Vintners Association
Tracy Sunrise Rotary
Trauma Intervention Program
Tree Fresno
Tulare County Farm Bureau
Tulare & Kings Counties Builders Exchange
Twilight Haven
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
United Way of Tulare County
University of the Pacific
Valley Center For The Blind
Valley Oak Society for Prevention of Cruelty to Animals
Valley Public Television
Vineyard Christian Middle School
Visalia Chamber of Commerce
Visalia County Center Rotary Club
Visalia Emergency Aid Council
Warnors Center for the Performing Arts
West Fresno Family Resource Center
West Visalia Kiwanis Club
Western Payments Alliance
Women’s Success Network
Women’s Trade Club of Fresno County
Wreaths Across America
Yosemite Gateway Association of REALTORS
Yosemite Lakes Park Volunteer Fire Fighters Department
3
Grow YourSatisfactionBorrow OurStrength To Our Shareholders
A Record-Setting Year
Central Valley Community Bank enjoyed a record-setting 2013 validated
by solid strategic planning that allowed the Company to thrive despite
economic challenges nationwide and, especially, in our region. Acquiring
Visalia Community Bank helped us reach new standards in total bank
assets, deposits and loans. The legacy Central Valley Community Bank
experienced significant deposit growth and saw a return to loan growth after
several years of declining gross loan totals. The Bank continued to introduce
new financial products and services with new, more-convenient electronic
ways to deliver them to our loyal customers. The value of providing traditional
brick-and-mortar service has increased with the management of 21 full-service
offices in 14 communities within seven San Joaquin Valley counties.
There is increasing concern about the impact of drought on our region’s
biggest industry, agriculture, its service industry providers and critical
workforce. Additionally, government regulation continues to impose
financial burdens on banks without helping our customers. We are,
however, optimistic about 2014, anticipating a slowly improving economy
further-adding to our loan growth.
For 34 years, Central Valley Community Bank has provided leadership,
service and security that have cultivated great trust among our customers
and communities. We are well-positioned to take advantage of today’s
opportunities and plan for a bright tomorrow.
By The Numbers
We are proud to have remained profitable throughout the Great Recession,
allowing us to grow and be confident about the future. The Company’s
assets increased by $255 million (28.69%) in 2013, to finish the year at
over $1.1 billion.
When a public company reaches $1 billion in assets, generally more
investors are able to participate in following and purchasing successful bank
stock like CVCY that meet their investment profile. This additional activity
may lead to higher multiples and higher prices in stock. We believe reaching
this new threshold may generate more buying and selling of our Company’s
stock, which will provide more liquidity for our shareholders in the future.
With ever-more-costly regulation of financial services companies and
competitive demand for new products and technology, larger organizations
have an advantage by spreading costs over a larger base. Customer needs can
be met through more-competitive pricing, new delivery channels and locations.
Company earnings increased in 2013 over 2012. We were, however,
challenged by declining net interest margin due to low demand for loans
most of the year; the low-rate environment for interest-earning assets driven
by the Federal Reserve’s influence on controlling interest rates; and our
market’s strong competition for loans.
We loaned $117 million (29.61%) more to individuals and businesses than
in 2012 and deposits were up $253 million (33.63%), the majority due to
the acquisition of Visalia Community Bank. Agriculture-related loans and
increased residential real estate lending pushed base loan growth for
4
Central Valley Community Bank after several years of decline. While
normal seasonal borrowing by agricultural customers was strong, use of lines
of credit by business customers declined because of economic uncertainty
and competitive pricing and terms being offered in the marketplace.
Despite media reports to the contrary, community-minded banks like
ours work hard to provide additional loans to businesses and consumers.
Overall lower loan demand has been fueled by the significant changes and
costs in healthcare, tax increases and lack of confidence in a quick economic
turnaround. We are pleased to see recent improvement in loan demand,
but it is not robust.
Net income growth of 9.71% for 2013 was the greatest in Company
history, driven by increases in net interest and non-interest income, and by
lower provision for credit losses offset by increases in non-interest expense.
There was little net income benefit in 2013 from the Visalia Community
Bank acquisition, but we expect to see that benefit in 2014 and beyond.
Non-interest expense was stable and there was an increase in non-interest
income from securities called/sold and loan placement fees.
Central Valley Community Bank does well compared with the average
of our peers, and 2013 was a good year, especially considering economic
challenges, low interest rates and regulatory costs. We also outperform
our peers in asset quality, deposits and ability to grow.
Our favorable mix of deposits allows a low cost of funds, but our net
interest margin is under pressure from low interest rates for earning assets
and the increase in our securities portfolio due to soft loan demand.
Central Valley Community Bank continues to exceed the regulatory designation
of a well-capitalized institution, allowing the maintenance of a safe and sound
banking environment that benefits our customers and communities.
Central Valley Community Bank, again in 2013, received the highest 5-star
distinction from Bauer Financial, while the Findley Reports named the Bank
a Premier Performing Bank, based upon 2012 operating results, and as one of
11 California banks that were truly deemed exceptional over the past 30 years.
Good Value For Shareholders
The Company’s stock price increased $3.49 per share (45%) from 2012 year
end. Greater shareholders’ equity was driven by issuing stock as part of the
Visalia Community Bank acquisition and a net increase in retained earnings.
It was partially offset by decreases in preferred stock and accumulated other
comprehensive income, due to higher longer-term interest rates. The result
was a decrease in the market value of the Company’s available-for-sale
investment securities.
At year end, $7 million was paid off in preferred stock to the U.S Department
of the Treasury from participation in the Small Business Lending Fund.
Our Company’s financial strength enabled us to continue to declare and pay
$2,048,000 in cash dividends to holders of common stock ($0.20 per share).
Sandler O’Neill + Partners, L.P. named the Company stock as one of their
“2013 Top Investment Ideas” for the second time in the past three years.
Additionally, as we shared Company successes at investor conferences
around the country, we were complimented for our business practices,
especially asset quality. Investors noted that our Company excels at all
important elements affecting their investment decisions.
In completing the merger with Visalia Community Bank, the Company
added a team of seasoned banking professionals, three full-service offices in
Visalia and one in Exeter and long-term value to our growth and profitability.
Teamwork, Leadership And Commitment
Central Valley Community Bank’s investment in teamwork blends seasoned
banking experience with new ideas to serve our customers and to thrive in a
competitive marketplace challenged by economic doubt.
The acquisition of Visalia Community Bank, which was responsible for
a large part of our balance-sheet growth, was the culmination of an
efficiently-blended team working smart and hard. It also yielded a new
board member, F.T. “Tommy” Elliott, IV, former chairman of the Visalia
Community Bank board.
The Board of Directors announced in February 2014, that separate
positions for CEO and president have been established at the Bank,
naming veteran banker James M. Ford as President beginning February 1, 2014.
Daniel J. Doyle will continue to serve as President and CEO of Central
Valley Community Bancorp and CEO of the Bank. Following retirement,
expected at the end of 2014, Doyle will Chair both boards and
Daniel N. Cunningham, the Chairman since 1998, will continue as
the Board Lead Director.
Ford brings over 30 years of banking and overall financial leadership expertise
from Oregon and California, most recently serving as the President and
CEO for a $1.2 billion in assets community bank franchise. Ford’s respected
leadership experience directly aligns with the Bank’s strategic vision, commitment
to core values and desire to do the right thing for our customers, employees,
communities and shareholders. With the continuity of our seasoned Senior
Management team working with Ford and our existing Board of Directors,
no change in the strategic direction of the Company is anticipated.
Doyle’s strong commitment to customers is equaled to his industry influence
which extends to service on the Federal Reserve Bank of San Francisco’s
Community Depository Institutions Advisory Council, California Bankers
Association Federal Political Action Committee, American Bankers
Association National Political Action Committee and Pacific Coast Banking
School Board of Directors.
This commitment to customers and community service leadership is
extended by Bank employees volunteering their time and talent to
nonprofit and civic organizations helping people throughout California’s
San Joaquin Valley.
Added Protection, Customer Convenience And Education
While developing desired delivery channels, especially electronic and
point-of-sale products, the Bank is investing significant time and money in
state-of-the-art protection, procedures and customer education to preserve
the security and confidentiality of our customers’ financial information.
What seem like ongoing breaches through retail companies are outside
the control of banks and are disturbing, inconvenient and frustrating for
everyone involved. We support requiring more controls on these large
retail companies to protect our customers.
Another issue is growing costs to the banking industry of Dodd-Frank,
the Consumer Financial Protection Bureau and expectations of regulators
enforcing new and old regulations, some of which add no value for our
customers and provide little benefit in safety and soundness. Attempts to
modify the impact on community banks, have accomplished little, so far.
Looking Forward
Expectations have been achieved from the acquisition of Visalia Community
Bank to date and we expect to see even more benefits in 2014. While we
believe the economy will remain in slow-growth mode in 2014, we expect
the Valley’s future to be bright as we look to 2015 and beyond. We are
well-positioned to take advantage to grow our banking franchise in all our
geographic and market sectors.
However, optimism must be tempered by concern for the Valley’s food
and agriculture-related industry, as well as the potential negative impact
on a number of small communities, centered upon availability of affordable
water for a third consecutive year.
We appreciate the loyal support of our shareholders and we do not take
this for granted. Our Board and every Central Valley Community Bank
employee work hard every day to create value.
Daniel J. Doyle
President and CEO
Central Valley Community Bancorp
CEO, Central Valley Community Bank
Daniel N. Cunningham
Chairman of the Board
Director, Quinn Group, Inc.
5
Our Strong History
A 34-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 –
Reaching $1 Billion & Beyond
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. CVCB operates 21 full-service offices in 14 communities,
within seven San Joaquin Valley counties and employs nearly 300 team
members. Offices are located in Clovis, Exeter, Fresno, Kerman, Lodi,
Madera, Merced, Modesto, Oakhurst, Prather, Sacramento, Stockton,
Tracy and Visalia. The Bank operates Commercial Real Estate,
SBA and Agribusiness Lending Departments, investment services
are provided by Investment Centers of America, and Central Valley
Community Insurance Services, LLC, provides financial and
insurance solutions for businesses and individuals. With assets
exceeding $1.1 billion as of December 31, 2013, Central Valley
Community Bank has grown into a well-capitalized institution,
with a proven track record of financial strength, security and stability.
Yet despite the Bank’s growth, it has remained true to its original
“roots” – a commitment to its core values of integrity, trustworthiness,
caring, loyalty, leadership and teamwork.
Central Valley Community Bank distinguishes itself from other financial
institutions through its 34-year track record of strength, security, client
advocacy and the values that have guided the Bank since its opening.
The Bank’s unique brand of personalized service has strategically grown
throughout California’s 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’s strong foundation and concern for its team has afforded the
ongoing addition and retention of high-quality employees.
Unparalleled Innovation, Unmatched Protection
& Unbeatable Convenience
Central Valley Community Bank maintains state-of-the-art data
processing and information systems, and offers a complete line of
innovative and 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, Personal Online Banking, Bill Pay, Mobile
Banking, Popmoney (person-to-person payments) and eStatements are
available, in addition to custom-tailored Cash Management services for
businesses of all sizes. In addition, ATMs are located 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 Preferred SBA Lender and
ranked number one SBA 504 Lender for Fresno, Kings and
Madera counties for 9 of the past 14 years. At CVCB you will
find the secure lending power of a big bank plus the stable values
and relationships of a community bank. From small to large;
agribusiness to manufacturing; healthcare to service industries;
and everything in between - CVCB is always ready to leverage
its strength, experience and commitment to help businesses
thrive, even in the toughest economic times by offering tailored
lending products.
CVCB is dedicated to providing outstanding value to customers by
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 are important to banking customers,
and CVCB is well-positioned to provide them, with an ongoing
emphasis on privacy, safety and convenience.
When A Bank’s Core Values Reflect Its Community –
Special Things Happen
Focused on investing in the communities it serves - annually CVCB
provides financial support and dedicates the talents and energy of its
people to a wide variety of organizations, with management serving in
leadership positions for over 80 different civic, philanthropic and industry
organizations throughout its footprint. Providing leadership-by-example,
this includes CEO Dan Doyle, who currently serves on the Federal
Reserve Bank of San Francisco’s Community Depository Institutions
Advisory Council, California Bankers Association Federal Political Action
Committee, American Bankers Association National Political Action
Committee, Pacific Coast Banking School, Fresno Mayor’s President’s
Council, 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 three decades, 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 - Investing in Relationships.
6
Daniel J. Doyle
President and CEO
Central Valley Community Bancorp
CEO, Central Valley Community Bank
Daniel N. Cunningham
Chairman of the Board
Director, Quinn Group, Inc.
William S. Smittcamp
President/Owner
Wawona Frozen Foods
Board Of Directors
A 34-Year Tradition Of Strong & Secure Banking
Edwin S. Darden, Jr.
Architect
Darden Architects, Inc.
Sidney B. Cox
Owner
Cox Communications
Joseph B. Weirick
Investments
Tommy Elliott
Owner
Wileman Bros. & Elliott, Inc.
Kaweah Container, Inc.
Steven D. McDonald
Secretary of the Board
President
McDonald Properties, Inc.
Louis C. McMurray
President
Charles McMurray Co.
Not Pictured: Wanda Rogers, Director Emeritus and Founding President, Rogers Helicopters, Inc.
7
Investing In Our People
Officers
Holding Company & Bank Officers:
Daniel J. Doyle
Chief Executive Officer
David A. Kinross
Senior Vice President,
Chief Financial Officer
Thomas L. Sommer
Senior Vice President,
Credit Administrator
Bank Officers:
James M. Ford
President
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
Maria Alaniz
Vice President,
Branch Manager
Evey Amado
Vice President,
Cash Management Officer
Susan Armstrong
Vice President,
Branch Manager
Jacquie Ashjian
Vice President,
Credit Officer
Chad Bringe
Vice President,
Commercial Loan Officer
Patrick Carman
Vice President,
Senior Credit Officer
Vicki Casares
Vice President,
Branch Manager
Cathy Chatoian
Vice President,
Cash Management Manager
Jenhi Ciapponi
Vice President,
Agribusiness Loan Officer
Patrick Condry
Vice President,
Small Business /Consumer Loan Underwriter
8
Terry Crawford
Vice President,
Agricultural Lending Group Manager
Brad Majors
Vice President,
Branch Manager
Tom Crawley
Vice President,
Commercial Real Estate Loan Officer
Constantine Makayed
Vice President,
Credit Review Officer
Dawn Crusinberry
Vice President,
Controller
Craig Dadian
Vice President,
Business Development Officer
Gina Manley
Vice President,
Branch Manager
Mindy Martin
Vice President,
Mortgage Loan Officer
Stan Davis
Vice President,
Small Business/Consumer Loan Manager
Sheryl Michael
Vice President,
Branch Manager
JR Delgadillo
Vice President,
Branch Manager
Heather Mills
Vice President,
Private Banking Officer
Daniel Demmers
Vice President,
Director of Information Technology
Leslee Minas
Vice President,
Branch Manager
Autumn Muller-Carrillo
Vice President,
Branch Manager
Elizabeth Salas
Vice President,
Small Business Development Officer
Renee Savage
Vice President,
Special Assets/Loan Service Manager
Judy Silicato
Vice President,
Branch 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
Jason Vasquez
Vice President,
Commercial Loan Officer
William Donohoe
Vice President,
Agribusiness Loan Officer
Bob Elledge
Vice President,
Agribusiness Loan Officer
Steve Freeland
Vice President,
Special Assets Officer
Rod Geist
Vice President,
Branch Manager
Teresa Gilio
Vice President,
Central Operations Manager
Tim Harris, CFP
Vice President,
Senior Private Banking Officer
James Heino
Vice President,
Commercial Loan Officer
Linda Hischier
Vice President,
Commercial Loan Officer
Denise Jereb
Vice President,
Compliance Manager
Charles Jones
Vice President,
Agribusiness Loan Officer
Marci Madsen
Vice President,
Human Resources Director
Rosie Nunes
Vice President,
Small Business Development Officer
Robert Walker
Vice President,
Agribusiness Loan Officer
Linda Ogata
Vice President,
Commercial Loan Officer
Jeannine Welton
Vice President,
Branch Manager
Chaundra Olsen
Vice President,
Branch Manager
Jennette Williams
Vice President,
Commercial Loan Officer
Jean Ornelas
Vice President,
Residential Construction Loan Officer
Stefani Woods
Vice President,
Commercial Loan Officer
Jeff Pace
Vice President,
Real Estate Department Manager
Carol Worstein
Vice President,
Branch Manager
Joseph Yodsnukis
Vice President,
Commercial Loan Officer
Independent Auditors
Crowe Horwath LLP, Sacramento, CA
Counsel
Downey Brand LLP, Sacramento, CA
Wendy Parlavecchio
Vice President,
Mortgage Loan Officer
Scott Quatacker
Vice President,
Agribusiness Loan Officer
Justin Redman
Vice President,
Commercial Real Estate Loan Officer
Shannon Reinard
Vice President,
Branch Manager
Steve Romeo
Vice President,
Private Banking Officer
Mission Statement
As A Full Service Bank, We Are Committed To:
Providing a full range of financial services desired
by our customers, while providing superior
customer service delivered in a highly professional
and personal manner.
Maintaining a positive work environment and investing
in each individual to “be the best they can be.”
Contributing to the quality of life in the communities we serve.
Continuing to maximize shareholder value.
Being the “Bank of Choice” for customers and employees!
Core Values
Leadership
Integrity
Loyalty
Caring
Teamwork
Trustworthiness
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 2013 Circle of Elite included:
Jacquie Ashjian
Vice President, Credit Officer
Gloria Carter
Retail Administration Coordinator
Cathy Chatoian
Vice President, Cash Management Manager
Katie Hall
Electronic Banking Team Lead
Serena Loftis
Central Operations Representative
Wendy Parlavecchio
Vice President, Mortgage Loan Officer
Kurt Stinson
Assistant Vice President, Training Manager
Jenna Valentino
Overdraft Privilege Coordinator
Jeannine Welton
Vice President, Branch Manager - Team Leader
Central Valley Community Bank Senior Management
Pictured From Left: David Kinross, Lydia Shaw, Daniel Doyle, James Ford, Gary Quisenberry and Thomas Sommer
9
Trend Analysis
Central Valley Community Bancorp
0
5
2
,
8
$
0
2
5
,
7
$
7
7
4
,
6
$
9
7
2
,
3
$
0
1
0
2
8
8
5
,
2
$
9
0
0
2
1
1
0
2
2
1
0
2
3
1
0
2
8
2
.
0
$
9
0
0
2
1
3
0
$
.
0
1
0
2
3
6
.
0
$
1
1
0
2
8
5
4
,
2
8
4
$
0
4
3
,
5
5
4
$
1
9
2
,
8
2
4
$
3
8
4
,
4
5
4
$
0
4
0
,
5
0
4
$
7
7
.
0
$
5
7
.
0
$
2
1
0
2
3
1
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
Net Income (In Thousands)
Diluted Earnings Per Share
Average Total Loans (In Thousands)
3
9
4
,
8
4
8
$
,
1
0
6
9
1
7
$
,
9
8
7
7
7
6
$
,
3
6
2
2
3
6
$
,
6
6
1
6
3
6
$
,
4
2
9
6
8
9
$
,
8
7
0
3
5
8
$
,
8
7
1
0
0
8
$
,
9
0
5
2
5
7
$
,
2
5
8
8
5
7
$
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
%
0
1
.
3
9
0
0
2
%
1
4
.
3
0
1
0
2
%
6
2
.
6
1
1
0
2
%
6
5
.
6
2
1
0
2
%
9
8
.
6
3
1
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
Average Total Deposits (In Thousands)
Return on Shareholders’ Equity
Average Total Assets (In Thousands)
10
Comparative Stock Price Performance
Central Valley Community Bancorp
Total Return Performance
Index Value
12-31-08
12-31-09
12-31-10
12-31-11
12-31-12
12-31-13
100.00
100.00
100.00
127.17
90.10
81.12
161.32
95.71
91.38
154.59
88.15
84.92
179.86
126.68
101.22
of potential future stock price performance.
Source: SNL Financial LC
249.69
Russell 2000
187.61
Central Valley
Community Bancorp
145.48
SNL NASDAQ
Bank Index
11
$
$
$
Consolidated Balance Sheets
December 31, 2013 and 2012 (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 $447,108 at December 31, 2013 and $381,074 at
December 31, 2012)
Loans, less allowance for credit losses of $9,208 at December 31, 2013 and $10,133 at December 31, 2012
Bank premises and equipment, net
Other real estate owned
Bank owned life insurance
Federal Home Loan Bank stock
Goodwill
Core deposit intangibles
Accrued interest receivable and other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Short-term borrowings
Junior subordinated deferrable interest debentures
Accrued interest payable and other liabilities
Total liabilities
Commitments and contingencies (Note 13)
Shareholders’ equity:
Preferred stock, no par value, $1,000 per share liquidation preference; 10,000,000 shares authorized, Series C,
issued and outstanding: none at December 31, 2013 and 7,000 shares at December 31, 2012
Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 10,914,680 at
December 31, 2013 and 9,558,746 at December 31, 2012
Retained earnings
Accumulated other comprehensive (loss) income, net of tax
Total shareholders’ equity
2013
2012
$
25,878
85,956
218
112,052
443,224
503,149
10,541
190
19,443
4,499
29,917
1,680
20,940
22,405
30,123
428
52,956
393,965
385,185
6,252
-
12,163
3,850
23,577
583
11,697
1,145,635
$
890,228
$
356,392
647,751
1,004,143
-
5,155
16,294
1,025,592
-
53,981
68,348
(2,286)
120,043
240,169
511,263
751,432
4,000
5,155
11,976
772,563
7,000
40,583
62,496
7,586
117,665
890,228
Total liabilities and shareholders’ equity
$
1,145,635
$
The accompanying notes are an integral part of these consolidated financial statements.
12
12
Consolidated Statements
of Income
For the Years Ended December 31, 2013, 2012, and 2011 (In thousands, except per share amounts)
2013
2012
2011
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
Interchange fees
Loan placement fees
Gain on disposal of other real estate owned
Net realized gains 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
ATM/Debit card expenses
License & maintenance contracts
Consulting fees
Advertising
Audit and accounting fees
Legal fees
Acquisition and integration
Amortization of core deposit intangibles
Other expense
Total non-interest expenses
Income before provision for income taxes
PROVISION FOR INCOME TAXES
Net income
Net income
Preferred stock dividends and accretion
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
Cash dividends per common share
$
$
$
$
$
$
$
26,519
164
-
2,375
5,778
34,836
1,270
98
17
1,385
33,451
-
33,451
3,156
495
962
677
-
1,265
-
-
-
177
1,100
7,832
17,427
4,109
696
1,383
527
472
461
476
511
116
976
268
4,264
31,686
9,597
1,347
8,250
8,250
350
7,900
0.77
0.77
0.20
$
$
$
$
$
$
$
23,913
108
2
3,289
4,508
31,820
1,630
107
146
1,883
29,937
700
29,237
2,774
391
767
631
12
1,639
-
-
-
36
992
7,242
15,597
3,578
652
1,125
369
362
162
558
514
185
284
200
3,688
27,274
9,205
1,685
7,520
7,520
350
7,170
0.75
0.75
0.05
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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
758
274
615
298
(31)
-
(31)
9
1,063
6,271
15,762
3,795
845
1,178
369
324
340
735
491
335
-
414
3,652
28,240
8,338
1,861
6,477
6,477
486
5,991
0.63
0.63
-
13
13
Consolidated Statements
of Comprehensive Income
For the Years Ended December 31, 2013, 2012, and 2011 (In thousands)
NET INCOME
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains
Less: reclassification for net gains included in net income
Other comprehensive (loss) income, before tax
Tax benefit (expense) related to items of other comprehensive income
Total other comprehensive (loss) income
Comprehensive (loss) income
$
$
2013
2012
2011
8,250
$
7,520
(15,510)
1,265
(16,775)
6,903
(9,872)
(1,622)
$
7,522
1,639
5,883
(2,421)
3,462
10,982
$
6,477
5,632
267
5,365
(2,208)
3,157
9,634
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, 2013, 2012, and 2011 (In thousands, except share amounts)
Preferred Stock
Common Stock
Series A
Series C
Shares
Amount
Shares
Amount
Shares
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss) Shareholders’
(Net of Taxes)
Equity
Total
Balance, January 1, 2011
Net income
7,000 $
-
6,864
-
- $
-
- 9,368,016 $
-
-
49,815 $
6,477
967 $
-
97,391
6,477
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
Balance, December 31, 2012
Net income
Net change in unrealized gain (loss) on
available-for-sale investment securities
Stock issued for acquisition
Redemption of preferred stock Series C
Stock-based compensation expense
Cash dividend payment ($0.20 per common
share)
Stock options exercised and related tax benefit
Preferred stock dividends
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(7,000)
-
-
(7,000)
-
7,000
-
-
7,000
-
-
-
-
-
-
-
136
-
-
-
-
-
-
-
-
-
-
179,800
-
39,745 $
-
-
-
-
(185)
196
796
-
-
-
-
-
-
-
(486)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7,000
-
7,000 9,547,816
-
-
40,552
-
55,806
7,520
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(58,100)
69,030
-
7,000
-
7,000 9,558,746
-
-
-
-
(7,000)
-
(7,000)
-
-
1,262,605
-
-
-
108
-
(488)
411
-
40,583
-
-
12,494
-
98
-
-
(480)
-
-
(350)
62,496
8,250
-
-
-
-
-
-
-
93,329
-
-
806
-
(2,048)
-
(350)
-
-
-
- $
3,157
-
-
-
-
-
-
4,124
-
3,462
-
-
-
-
-
7,586
-
(9,872)
-
-
-
-
-
3,157
7,000
(7,000)
(185)
196
796
(350)
107,482
7,520
3,462
108
(480)
(488)
411
(350)
117,665
8,250
(9,872)
12,494
(7,000)
98
(2,048)
806
(350)
Balance, December 31, 2013
- $
- 10,914,680 $
53,981 $
68,348 $
(2,286)$
120,043
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, 2013, 2012, and 2011 (In thousands)
2013
2012
2011
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 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
Increase in bank owned life insurance, net of expenses
Net gain on bank owned life insurance
Net decrease (increase) in accrued interest receivable and other assets
Net decrease in prepaid FDIC Assessments
Net (decrease) increase in accrued interest payable and other liabilities
(Benefit) provision for deferred income taxes
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash and cash equivalents acquired in acquisition
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 (increase) decrease in loans
Proceeds from sale of other real estate owned
Purchases of premises and equipment
Purchases of bank owned life insurance
FHLB stock redeemed (purchased)
Proceeds from bank owned life insurance
Proceeds from sale of premises and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, interest-bearing and savings deposits
Net increase (decrease) in time deposits
Repayments of short-term borrowings to Federal Home Loan Bank
Redemption of preferred stock Series C
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
Common stock issued in Visalia Community Bank acquisition
Accrued preferred stock dividends
The accompanying notes are an integral part of these consolidated financial statements.
$
8,250
$
7,520
$
(294)
1,133
(852)
9,179
98
(17)
-
-
(1,265)
(1)
-
(495)
-
410
1,542
(1,805)
(296)
15,587
40,935
(222,668)
88,146
76,512
(4,393)
263
(1,159)
-
48
-
1
(22,315)
75,663
2,841
(4,000)
(7,000)
-
789
-
17
(2,048)
(438)
65,824
59,096
52,956
(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
$
$
$
$
$
$
$
$
$
112,052
$
52,956
$
1,430
1,790
-
190
-
-
12,494
-
$
$
$
$
$
$
$
$
1,939
1,193
-
2,337
-
-
-
88
$
$
$
$
$
$
$
$
6,477
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
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 21 full service offices in Clovis, Exeter, Fresno, Kerman,
Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Sacramento, Stockton, Tracy,
and Visalia, 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. 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 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.
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, 2013 and December 31, 2012, there were no
transfers between categories. At December 31, 2013 and 2012, 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 prospect 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 (the ‘‘allowance’’) is
an estimate of probable credit losses 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.
The Company has loans that were acquired in an acquisition, for which there
was, at acquisition, evidence of deterioration of credit quality since origination
and for which it was probable, at acquisition, that all contractually required
payments would not be collected. These purchased credit impaired loans are
recorded at the amount paid, such that there is no carryover of the seller’s
allowance for loan losses. After acquisition, losses are recognized by an increase in
the allowance for loan losses. The Company estimates the amount and timing of
expected cash flows for each loan and the expected cash flows in excess of
amount paid is recorded as interest income over the remaining life of the loan
(accretable yield). The excess of the loan’s contractual principal and interest over
expected cash flows is not recorded (nonaccretable difference). Over the life of
the loan, expected cash flows continue to be estimated. If the present value of
expected cash flows is less than the carrying amount, a loss is recorded. If the
present value of expected cash flows is greater than the carrying amount, it is
recognized as part of future interest income.
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 a simple average of historical losses by portfolio
18
18
segment over the most recent 20 quarters, 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
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 2013. 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
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
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 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 Business Oversight, as an integral part
of their examination process, review the adequacy of the allowance. Also, subject
to examination by independent specialists. 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, 2013 and 2012 represents the excess of the cost of Visalia
Community Bank, 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
19
19
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 2013, so goodwill was not required to be retested. Goodwill is
the only intangible asset with an indefinite life on our balance sheet.
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.
Intangible Assets - The intangible assets at December 31, 2013 represent the
estimated fair value of the core deposit relationships acquired in the acquisition
of Service 1st Bank in 2008, and the 2013 acquisition of Visalia Community
Bank. Core deposit intangibles are being amortized using the straight-line
method over an estimated life of seven - ten years from the date of acquisition.
Management evaluates the remaining useful lives quarterly to determine whether
events or circumstances warrant a revision to the remaining periods of
amortization. Based on the evaluation, no changes to the remaining useful lives
was required. Management performed an annual impairment test on core deposit
intangibles as of September 30, 2013 and determined no impairment was
necessary.
Loan Commitments and Related Financial Instruments - Financial instruments
include offbalance sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The
face amount of these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded.
Income Taxes - The Company files its income taxes on a consolidated basis with
its Subsidiary. The allocation of income tax expense represents each entity’s
proportionate share of the consolidated provision for 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
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.
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, 2013, 2012, and 2011 were
$17,000, $26,000, and $116,000, 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 3. 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
Presentation of Comprehensive Income
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
20
20
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
additional detail about those amounts. ASU 13-02 is effective prospectively for
annual and interim periods beginning after December 15, 2012. The Company
adopted this standard on January 1, 2013. The adoption of this ASU did not
have a material impact on the Company’s financial position, results of operations,
or cash flows.
2. ACQUISITION OF VISALIA COMMUNITY BANK
Effective July 1, 2013, the Company acquired Visalia Community Bank,
headquartered in Visalia, California, wherein Visalia Community Bank,with three
branches in Visalia and one branch in Exeter, merged with and into Central
Valley Community Bancorp’s subsidiary, Central Valley Community Bank, in a
combined cash and stock transaction. The acquired assets and liabilities were
recorded at fair value at the date of acquisition.
Under the terms of the merger agreement, the Company issued an aggregate of
approximately 1.263 million shares of its common stock and cash totaling
approximately $11.05 million to the former shareholders of Visalia Community
Bank. Each Visalia Community Bank common shareholder of record at the
effective time of the merger became entitled to receive 2.971 shares of common
stock of the Company for each of their shares of Visalia Community Bank
common stock.
In accordance with GAAP guidance for business combinations, the Company
recorded $6.34 million of goodwill and $1.37 million of other intangible assets
on the acquisition date. The other intangible assets are primarily related to core
deposits and are being amortized using a straight-line method over a period of
ten years with no significant residual value. For tax purposes purchase accounting
adjustments, including goodwill are all non-taxable and/or non-deductible.
The acquisition was consistent with the Company’s strategy to build a regional
presence in Central California. The acquisition offers the Company the
opportunity to increase profitability by introducing existing products and services
to the acquired customer base as well as add new customers in the expanded
region. Goodwill arising from the acquisition consisted largely of synergies and
the cost savings resulting from the combined operations.
The following table summarizes the consideration paid for Visalia Community
Bank and the amounts of the assets acquired and liabilities assumed recognized at
the acquisition date (in thousands):
Merger consideration:
Cash
Common stock issued
Fair Value of Total Consideration Transferred
Recognized amounts of identifiable assets acquired and liabilities
assumed:
Cash and cash equivalents
Loans, net
Investments
Core deposit intangible
Premises and equipment
Federal Home Loan Bank stock
Other real estate owned
Deferred taxes and taxes receivable
Bank owned life insurance
Other assets
Total assets acquired
Deposits
Other liabilities
Total liabilities assumed
Total identifiable net assets
Goodwill
$
$
$
11,050
12,727
23,777
51,985
113,467
14,818
1,365
4,263
698
263
3,179
6,786
797
197,621
174,206
5,978
180,184
17,437
$
6,340
The fair value of net assets acquired includes fair value adjustments to certain
loans that were not considered impaired as of the acquisition date. The fair value
adjustments were determined using discounted contractual cash flows. However,
the Company believes that all contractual cash flows related to these financial
instruments will be collected. As such, these loans were not considered impaired
at the acquisition date and were not subject to the guidance relating to purchased
credit impaired loans, which have shown evidence of credit deterioration since
origination. Loans acquired that were not subject to these requirements include
non-impaired loans and customer receivables with a fair value and gross
contractual amounts receivable of $110,891,000 and $113,743,000, respectively,
on the date of acquisition. See Note 5 for discussion of purchased credit impaired
loans.
Pro Forma Results of Operations
The following table presents pro forma results of operations information for
the periods presented as if the acquisition had occurred on January 1, 2012 after
giving effect to certain adjustments. The pro forma results of operations for the
years ended December 31, 2013 and 2012 include the historical accounts of the
Company and Visalia Community Bank and pro forma adjustments as may be
required, including the amortization of intangibles with definite lives and the
amortization or accretion of any premiums or discounts arising from fair value
adjustments for assets acquired and liabilities assumed. The pro forma
information is intended for informational purposes only and is not necessarily
indicative of the Company’s future operating results or operating results that
would have occurred had the acquisition been completed at the beginning of
2012. No assumptions have been applied to the pro forma results of operations
regarding possible revenue enhancements, expense efficiencies or asset
dispositions. (In thousands, except per share amounts):
For the Years Ended
December 31,
2013
2012
$
$
$
$
$
36,773
298
8,576
36,917
8,134
783
7,351
350
7,001
0.68
0.68
$
$
$
$
$
36,964
1,534
9,394
35,531
9,293
1,625
7,668
350
7,318
0.67
0.68
Net interest income
Provision for credit losses
Non-interest income
Non-interest expense
Income before provision for income taxes
Provision for income taxes
Net income
Preferred stock dividends and accretion
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
3.
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.
21
21
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS (Continued)
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.
The estimated carrying and fair values of the Company’s financial instruments
are as follows (in thousands):
December 31, 2013
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Amount
$ 25,878 $ 25,878 $
- $
- $ 25,878
85,956
218
85,956
218
-
-
-
-
85,956
218
443,224
503,149
7,514
-
435,710
-
-
507,361
443,224
507,361
4,499
N/A
N/A
N/A
N/A
5,026
21
2,976
2,029
5,026
1,004,143
-
834,864
-
169,065
-
- 1,003,929
-
-
5,155
129
-
-
-
2,750
2,750
105
24
129
December 31, 2012
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Amount
$ 22,405 $ 22,405 $
- $
- $ 22,405
30,123
428
30,123
428
-
-
-
-
30,123
428
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:
Deposits
Short-term borrowings
Junior subordinated
deferrable interest
debentures
Accrued interest
payable
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
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
22
22
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. Purchased credit
impaired (PCI) loans are measured at estimated fair value on the date of
acquisition. Carrying value is calculated as the present value of expected cash
flows and approximates fair value. 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.
(e) Other real state owned - OREO is measured at fair value less estimated costs
to sell when acquired, establishing a new cost basis. 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 to
adjust for differences between the comparable sales and income data available.
The Company records OREO as non-recurring with level 3 measurement inputs.
(f) 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 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.
393,965
385,185
7,948
-
386,017
-
-
388,834
393,965
388,834
(d) FHLB Stock - It is not practicable to determine the fair value of FHLB stock
due to restrictions placed on its transferability.
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS
(Continued)
(g) 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.
(h) 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.
(i) 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.
(j) 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, 2013:
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):
Fair
Value
Level 1
Level 2
Level 3
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
18,203 $
- $
18,203 $
158,407
253,709
-
-
158,407
253,709
5,391
7,514
-
7,514
5,391
-
Total assets measured at
fair value on a
recurring basis
$ 443,224 $
7,514 $ 435,710 $
-
-
-
-
-
-
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,
2013, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at
December 31, 2013. Also there were no liabilities measured at fair value on a
recurring basis at December 31, 2013.
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 the following
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, 2013 (in
thousands):
Fair
Value
Level 1
Level 2
Level 3
Impaired loans:
Consumer:
Equity loans and lines of
credit
Total consumer
Total impaired loans
Total assets measured at
fair value on a
non-recurring basis
$
$
$
133 $
133
133 $
- $
-
- $
- $
-
- $
133
133
133
133 $
- $
- $
133
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, 2013.
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 $194,000 with
a valuation allowance of $61,000 at December 31, 2013, resulting in an
additional allowance for loan losses of $61,000 for the year ended December 31,
2013, down to their fair value of $133,000.
23
23
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS
(Continued)
The following two tables present information about the Company’s assets and
liabilities measured at fair value on a recurring and nonrecurring 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):
Fair
Value
Level 1
Level 2
Level 3
Available-for-sale securities
Debt Securities:
U.S. Government agencies $
Obligations of states and
political subdivisions
U.S. Government
sponsored entities and
agencies collateralized
by residential mortgage
obligations
Private label residential
mortgage backed
securities
Other equity securities
9,454 $
- $
9,454 $
161,678
208,510
-
-
161,678
208,510
6,375
7,948
-
7,948
6,375
-
Total assets measured at
fair value on a
recurring basis
$ 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.
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 the following
assets and liabilities that are measured at the lower of cost or fair value that were
24
24
recognized at fair value which was below cost at December 31, 2012 (in
thousands):
Fair
Value
Level 1
Level 2
Level 3
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
$
194 $
- $
- $
194
4,863
5,057
233
233
-
-
-
-
-
-
-
-
4,863
5,057
233
233
Total impaired loans
$
5,290 $
- $
- $
5,290
Total assets measured at
fair value on a
non-recurring basis
$
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 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 allocation in the allowance for loan losses of $19,000
for the year ended December 31, 2012 down to their fair value of $5,290,000.
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, 2012.
4.
INVESTMENT SECURITIES
The fair value of the available-for-sale investment portfolio reflected an unrealized
loss of $3,884,000 at December 31, 2013 compared to an unrealized gain of
Notes to
Consolidated Financial Statements
4.
INVESTMENT SECURITIES
(Continued)
$12,891,000 at December 31, 2012. The unrealized loss or gain recorded is net
of $1,598,000 in tax benefits and $5,305,000 in tax liabilities as accumulated
other comprehensive income within shareholders’ equity at December 31, 2013
and 2012, respectively. The Company did not have any held-to-maturity
securities during the years ended December 31, 2013 or 2012.
The following two tables set forth the carrying values and estimated fair values
of our investment securities portfolio at the dates indicated (in thousands):
December 31, 2013
available-for-sale securities to realized net gains on available-for-sale securities for
the years ended December 31, 2013, 2012, and 2011, respectively.
Investment securities with unrealized losses at December 31, 2013 and 2012
are summarized and classified according to the duration of the loss period as
follows (in thousands):
December 31, 2013
Less than 12 Months 12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
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
18,172 $
115 $
(84) $
18,203
162,018
2,906
(6,517)
158,407
254,978
1,075
(2,344)
253,709
4,344
7,596
1,047
2
-
(84)
5,391
7,514
$ 447,108 $
5,145 $
(9,029) $ 443,224
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
Other equity securities
$
4,132 $
(75) $
968 $
(9) $
5,100 $
(84)
89,556
(5,007)
15,015
(1,510) 104,571
(6,517)
148,853
7,416
(2,070)
(84)
19,199
-
(274) 168,052
7,416
-
(2,344)
(84)
$ 249,957 $
(7,236) $ 35,182 $
(1,793) $ 285,139 $
(9,029)
December 31, 2012
Less than 12 Months 12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
December 31, 2012
Available-for-Sale Securities
Debt Securities:
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
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
Proceeds and gross realized gains (losses) on investment securities for the years
ended December 31, 2013, 2012, and 2011 are shown below (in thousands):
Years Ended December 31,
2013
2012
2011
Available-for-Sale Securities
Proceeds from sales or calls
Gross realized gains from sales or calls
Gross realized losses from sales or calls
$
$
$
$
88,146
2,728
$
(1,463) $
39,119
$
2,121 $
(482) $
44,700
1,119
(821)
The provision for income taxes includes $521,000, $674,000, and $110,000
income tax impact from the reclassification of unrealized net gains on
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) $
$ 30,572 $
(385) $
- $
- $
- $
3,590 $
(23)
- $ 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)
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. Under ASC 320-10, the portion of the
impairment that is attributable to a shortage in the present value of expected
future cash flows relative to the amortized cost should be recorded as a current
period charge to earnings. The discount rate in this analysis is the original yield
expected at time of purchase.
As of December 31, 2013, 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, 2013, and identified those that had an unrealized loss for at least
a consecutive 12 month period, which had an unrealized loss at December 31,
2013 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.
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
25
25
Notes to
Consolidated Financial Statements
4.
INVESTMENT SECURITIES
(Continued)
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.
U.S. Government Agencies - At December 31, 2013, the Company held seven
U.S. Government agency securities of which two were in a loss position for less
than 12 months and one was in a loss position and has 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, 2013.
Obligations of States and Political Subdivisions - At December 31, 2013, the
Company held 162 obligations of states and political subdivision securities of
which 66 were in a loss position for less than 12 months and 14 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,
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, 2013.
U.S. Government Sponsored Entities and Agencies Collateralized by Residential
Mortgage Obligations - At December 31, 2013, the Company held 209 U.S.
Government sponsored entity and agency securities collateralized by residential
mortgage obligation securities of which 65 were in a loss position for less than
12 months and 16 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, 2013.
Private Label Residential Mortgage Backed Securities - At December 31, 2013,
the Company had a total of 21 PLRMBS with a remaining principal balance of
$4,344,000 and a net unrealized gain of approximately $1,047,000. None of
these securities had an unrealized loss at December 31, 2013. Eight of these
PLRMBS with a remaining principal balance of $3,400,000 had credit ratings
below investment grade, and the Company recorded an OTTI charge of $17,000
related to two of these securities. As of December 31, 2013, these two PLRMBS
had an unrealized gain of $81,000. The Company continues to perform extensive
analyses on all PLRMBS securities.
The following table provides a roll forward for the years ended December 31,
2013 and 2012 of investment securities credit losses recorded in earnings (in
thousands). The beginning balance represents the credit loss component for
which OTTI occurred on debt securities in prior periods. Additions represent the
first time a debt security was credit impaired or when subsequent credit
impairments have occurred on securities for which OTTI credit losses have been
previously recognized.
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
Years ended
December 31,
2013
2012
$
783
$
783
17
-
-
-
-
-
Ending balance
$
800
$
783
The amortized cost and estimated fair value of investment securities at
December 31, 2013 and 2012 by contractual maturity are shown in the two
tables 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, 2013
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, 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
Total
Amortized
Cost
Estimated
Fair Value
$
-
1,769
22,099
138,150
$
-
1,939
22,687
133,781
162,018
158,407
18,172
18,203
254,978
253,709
4,344
7,596
5,391
7,514
$ 447,108
$ 443,224
Amortized
Cost
Estimated
Fair Value
$
150
10,355
20,256
120,551
$
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
Investment securities with amortized costs totaling $98,701,000 and
$81,245,000 and fair values totaling $99,209,000 and $89,343,000 were pledged
as collateral for borrowing arrangements, public funds and for other purposes at
December 31, 2013 and 2012, respectively.
26
26
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
Outstanding loans are summarized as follows (in thousands):
Loan Type
Commercial:
Commercial and
industrial
Agricultural land
and production
Total
December 31, % of Total
December 31, % of Total
2013
loans
2012
loans
$
87,082
17.0% $
77,956
19.7%
31,649
6.1%
26,599
6.7%
commercial
118,731
23.1%
104,555
Real estate:
Owner occupied
Real estate
construction and
other land loans
Commercial real
estate
Agricultural real
estate
Other real estate
156,781
30.6%
114,444
42,329
86,117
44,164
4,548
8.3%
16.8%
8.6%
0.9%
33,199
53,797
28,400
8,098
Total real estate
333,939
65.2%
237,938
Consumer:
Equity loans and
lines of credit
Consumer and
installment
Total consumer
Deferred loan fees,
net
Total gross loans
Allowance for credit
losses
9.5%
2.2%
11.7%
48,594
11,252
59,846
(159)
42,932
10,346
53,278
(453)
512,357
100.0%
395,318
100.0%
(9,208)
(10,133)
Total loans
$
503,149
$
385,185
The table above includes loans acquired at fair value on July 1, 2013 with
outstanding balances of $99,948,000 as of December 31, 2013.
At December 31, 2013 and 2012, loans originated under Small Business
Administration (SBA) programs totaling $7,345,000 and $5,586,000, respectively,
were included in the real estate and commercial categories. Approximately
$119,539,000 in loans were pledged under a blanket lien as collateral to the
FHLB for the Bank’s remaining borrowing capacity of $272,797,000 as of
December 31, 2013. 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 $1,373,000, $754,000, and $229,000
have been deferred as loan origination costs for the years ended December 31,
2013, 2012, and 2011, respectively.
Purchased Credit Impaired Loans
The Company has loans that were acquired in an acquisition, for which there
was, at acquisition, evidence of deterioration of credit quality since origination
and for which it was probable, at acquisition, that all contractually required
payments would not be collected.
These purchased credit impaired (PCI) loans are recorded at the amount paid,
such that there is no carryover of the seller’s allowance for loan losses. After
acquisition, losses are recognized by an increase in the allowance for loan losses.
The Company estimates the amount and timing of expected cash flows for each
PCI loan and the expected cash flows in excess of amount paid is recorded as
interest income over the remaining life of the loan (accretable yield). The excess
of each PCI loan’s contractual principal and interest over expected cash flows is
not recorded (nonaccretable difference). Over the life of the loan, expected cash
flows continue to be estimated. If the present value of expected cash flows is less
than the carrying amount, a loss is recorded. If the present value of expected cash
flows is greater than the carrying amount, it is recognized as part of future
interest income.
The carrying amount of PCI loans is included in the balance sheet amounts of
loans receivable at December 31, 2013. The amounts of PCI loans at
December 31, 2013 and 2012 are as follows (in thousands):
Real estate
Outstanding balance
Carrying amount, net of allowance of $0
December 31,
2013
2012
$
$
$
2,465
2,465
2,465
$
$
$
Accretable yield, or income expected to be collected on PCI loans for the year
ended December 31, 2013, 2012, and 2011 is as follows (in thousands):
Years ended December 31,
2013
2012
2011
26.4%
28.9%
8.4%
13.6%
7.2%
2.0%
60.1% Balance at beginning of year
New loans acquired
Accretion of income
10.9% Reclassification from (to)
non-accretable difference
2.6% Disposals
$
$
-
105
(124)
113
-
13.5% Balance at end of year
$
94
$
-
-
-
-
-
-
$
$
During the year ended December 31, 2013, the Company did not increase or
decrease the allowance for loan losses with respect to PCI loans.
Loans acquired during each period or year for which it was probable at
acquisition that all contractually required payments would not be collected are as
follows (in thousands):
December 31,
2013
2012
Contractually required payments receivable on PCI
loans at acquisition:
Real estate
Total
Cash flows expected to be collected at
acquisition
Fair value of acquired loans at acquisition
$
$
$
$
6,912
6,912
2,681
2,576
$
$
$
$
Certain of the loans acquired by the Company that are within the scope of
Topic ASC 310-30 are not accounted for using the income recognition model of
the Topic because the Company cannot reliably estimate cash flows expected to
be collected. The carrying amounts of such loans (which are included in the
carrying amount, net of allowance, described above) are as follows (in thousands):
December 31,
2013
2012
Loans acquired during the year
Loans at the end of the year
$
$
1,324
1,324
$
$
-
-
27
27
-
-
-
-
-
-
-
-
-
-
-
-
-
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
(Continued)
Changes in the allowance for credit losses were as follows (in thousands):
Balance, beginning of year
Provision charged to operations
Losses charged to allowance
Recoveries
Balance, end of year
Years Ended December 31,
2013
2012
2011
$
$
10,133
-
(1,446)
521
11,396
700
(2,850)
887
$
11,014
1,050
(1,532)
864
$
9,208
$
10,133
$
11,396
The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 2013 and 2012 by portfolio
segment (in thousands):
Allowance for credit losses:
Beginning balance, January 1, 2013
Provision charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2013
Allowance for credit losses:
Beginning balance, January 1, 2012
Provision charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2012
Commercial
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
$
2,676
166
(713)
315
2,444
2,266
18
(123)
515
$
$
$
5,877
(434)
(285)
16
5,174
7,155
643
(1,966)
45
$
$
$
1,541
(115)
(448)
190
1,168
1,836
139
(761)
327
$
$
$
39
383
-
-
422
139
(100)
-
-
10,133
-
(1,446)
521
9,208
11,396
700
(2,850)
887
2,676
$
5,877
$
1,541
$
39
$
10,133
The following is a summary of the allowance for credit losses by impairment methodology and portfolio segment as of December 31, 2013 and December 31, 2012
(in thousands):
Allowance for credit losses:
Ending balance, December 31, 2013
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Ending balance, December 31, 2012
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Commercial
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
2,444
469
1,975
2,676
40
2,636
$
$
$
$
$
$
5,174
465
4,709
5,877
465
5,412
$
$
$
$
$
$
1,168
73
1,095
1,541
5
1,536
$
$
$
$
$
$
422
-
422
39
-
39
$
$
$
$
$
$
9,208
1,007
8,201
10,133
510
9,623
The table above excludes the recorded investment in loans acquired with deteriorated quality of $2,465,000 with no allowance at December 31, 2013.
28
28
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
(Continued)
The following table shows the ending balances of loans as of December 31, 2013 and December 31, 2012 by portfolio segment and by impairment methodology (in
thousands):
Commercial
Real Estate
Consumer
Total
Loans:
Ending balance, December 31, 2013
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance, December 31, 2012
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
$
$
$
$
$
$
118,731
1,527
117,204
104,555
2,405
102,150
$
$
$
$
$
$
333,939
9,540
324,399
237,938
12,868
225,070
$
$
$
$
$
$
59,846
2,290
57,556
53,278
1,832
51,446
The following table shows the loan portfolio by class allocated by management’s internal risk ratings at December 31, 2013 (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
$
81,732
31,649
$
144,082
31,776
77,589
42,151
4,548
41,999
10,946
$
2,244
-
5,229
3,959
3,718
2,013
-
2,400
46
$
3,106
-
7,470
6,594
4,810
-
-
4,195
260
Total
$
466,472
$
19,609
$
26,435
$
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
512,516
13,357
499,159
395,771
17,105
378,666
Total
87,082
31,649
156,781
42,329
86,117
44,164
4,548
48,594
11,252
$
512,516
The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2012 (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
$
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
$
-
-
-
-
-
-
-
-
-
-
$
77,956
26,599
114,444
33,199
53,797
28,400
8,098
42,932
10,346
$
395,771
29
29
Notes to
Consolidated Financial Statements
5.
LOANS AND 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, 2013 (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
30-59 Days
Past Due
60-89 Days
Past Due
$
274
$
236
$
-
-
1,272
-
-
-
-
10
86
-
134
-
-
-
-
147
-
Total
Past Due
Current
Total Loans
Recorded
Investment
> 90 Days
Accruing
$
510
$
86,572
$
87,082
$
Greater
Than 90
Days
Past Due
-
-
-
418
1,824
-
-
-
-
252
-
-
-
-
-
409
86
31,649
-
154,957
42,329
86,117
44,164
4,548
-
48,185
11,166
31,649
-
156,781
42,329
86,117
44,164
4,548
-
48,594
11,252
Total
$
1,642
$
517
$
670
$
2,829
$
509,687
$
512,516
$
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
Total
Past Due
Current
Total
Loans
Recorded
Investment
> 90 Days
Accruing
$
-
-
$
77,956
$
77,956
$
26,599
213
114,231
-
-
-
-
-
27
33,199
53,797
28,400
8,098
42,932
10,319
26,599
-
114,444
33,199
53,797
28,400
8,098
-
42,932
10,346
$
240
$
395,531
$
395,771
$
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
$
-
-
-
-
-
-
-
-
-
-
30
30
Non-accrual
$
1,527
-
2,161
1,450
158
-
-
2,286
4
$
7,586
Non-accrual
$
-
-
1,575
6,288
-
-
-
1,832
-
$
9,695
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table shows information related to impaired loans by class at
December 31, 2012 (in thousands):
The following table shows information related to impaired loans by class at
December 31, 2013 (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
$
350 $
-
385 $
-
350
3,160
1,449
502
-
-
5,111
2,029
4
2,033
385
4,159
2,136
891
-
-
7,186
2,826
5
2,831
Total with no related allowance recorded
7,494
10,402
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
1,177
-
1,177
385
4,044
-
-
-
4,429
257
-
257
1,222
-
1,222
425
4,044
-
-
-
4,469
264
-
264
-
-
-
-
-
-
-
-
-
-
-
-
-
469
-
469
3
462
-
-
-
465
73
-
73
Total with an allowance recorded
5,863
5,955
1,007
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
Total
$
13,357 $
16,357 $
1,007
The recorded investment in loans excludes accrued interest receivable and net
loan origination fees, due to immateriality.
The recorded investment in loans excludes accrued interest receivable and net
loan origination fees, due to immateriality.
31
31
Notes to
Consolidated Financial Statements
5.
LOANS AND 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, 2013, 2012, and 2011 (in thousands):
Year Ended
December 31, 2013
Year Ended
December 31, 2012
Year Ended
December 31, 2011
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance recorded:
Commercial:
Commercial and industrial
Agricultural land and production
Total commercial
Real estate:
Owner occupied
Real estate construction and other land loans
Commercial real estate
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
$
$
329
-
329
2,321
2,342
279
-
-
4,942
1,998
9
2,007
7,278
1,309
-
1,309
997
4,295
-
-
-
5,292
489
-
489
$
-
-
-
-
-
-
-
-
-
-
-
-
-
111
-
111
86
329
47
-
-
462
-
-
-
$
952
-
952
1,053
4,933
301
-
-
6,287
1,561
6
1,567
8,806
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
Total with an allowance recorded
7,090
573
9,486
601
10,832
Total
$
14,368
$
573
$
18,292
$
601
$
16,114
$
-
-
-
-
-
-
-
-
-
-
-
-
-
181
-
181
-
230
-
-
-
230
-
-
-
411
411
Foregone interest on nonaccrual loans totaled $661,000, $693,000, and
$954,000 for the year ended ended December 31, 2013, 2012, and 2011,
respectively.
Troubled Debt Restructurings:
As of December 31, 2013 and 2012, the Company has a recorded investment
in troubled debt restructurings of $10,366,000 and $16,655,000, respectively.
The Company has allocated $946,000 and $487,000 of specific reserves for those
loans at December 31, 2013 and 2012, respectively. The Company has
committed to lend zero as of December 31, 2013 to customers with outstanding
loans that are classified as troubled debt restructurings.
For the years ended December 31, 2013 and 2012 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.
LOANS AND 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, 2013 (in thousands):
Troubled Debt Restructurings:
Real Estate:
Real Estate - Commercial
Pre-
Modification
Outstanding
Recorded
Investment (1)
Number of
Loans
Principal
Modification
Post
Modification
Outstanding
Recorded
Investment (2)
Outstanding
Recorded
Investment
1
$
620
$
-
$
620
$
344
(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, 2012 (in thousands):
Troubled Debt Restructurings:
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.
A loan is considered to be in payment default once it is 90 days contractually
7. OTHER REAL ESTATE OWNED
past due under the modified terms. There was no defaults on troubled debt
restructurings within twelve months following the modification during the year
ended ended December 31, 2013. 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 was zero
at December 31, 2012.
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following (in thousands):
Land
Buildings and improvements
Furniture, fixtures and equipment
Leasehold improvements
Less accumulated depreciation and amortization
December 31,
2013
2012
$
$
1,131
6,982
8,875
4,091
838
3,362
8,351
3,804
21,079
(10,538)
16,355
(10,103)
$
10,541
$
6,252
Depreciation and amortization included in occupancy and equipment expense
totaled $1,133,000, $972,000 and $1,212,000 for the years ended December 31,
2013, 2012, and 2011, respectively.
The Company had $190,000 in other real estate owned (OREO) at
December 31, 2013 as compared to none at December 31, 2012. The table
below provides a summary of the change in other real estate owned (OREO)
balances for the years ended December 31, 2013 and 2012 (in thousands):
Balance, beginning of year
Additions
Dispositions
Write-downs
Net gain on disposition
Balance, end of year
December 31,
2013
2012
$
$
$
-
453
(263)
-
-
-
2,337
(2,349)
-
12
190
$
-
As of December 31, 2013 the Bank had $190,000 in OREO properties. In
2013, the Bank foreclosed on one property collateralized by real estate. During
the year ended December 31, 2013, the Bank assumed two properties via the
Visalia Community Bank acquisition which were subsequently sold by year end
2013. Proceeds from OREO sales totaled $263,000 during 2013. The Company
did not realize any gain or loss from the sale of all properties.
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. The Bank received income of $90,000
during 2012 from operations of storage facilities held as OREO.
33
33
Notes to
Consolidated Financial Statements
8. GOODWILL AND INTANGIBLE ASSETS
9. DEPOSITS
The change in goodwill during the years ended December 31, 2013, 2012,
Interest-bearing deposits consisted of the following (in thousands):
and 2011 (in thousands):
Beginning of year
Acquired goodwill
Impairment
End of year
2013
2012
2011
$
23,577
6,340
-
$
23,577
-
-
23,577
-
-
29,917
$
23,577
$
23,577
$
$
Savings
Money market
NOW accounts
Time, $100,000 or more
Time, under $100,000
December 31,
2013
2012
$
$
61,918
234,515
182,364
116,016
52,938
39,573
173,486
161,328
91,880
44,996
$
647,751
$
511,263
Total goodwill at December 31, 2013 was $29,917,000 compared to
$23,577,000. Total goodwill at December 31, 2013 consisted of $6,340,000,
$14,643,000 and $8,934,000 representing the excess of the cost of Visalia
Community Bank, 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 Company’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 2013, so goodwill was not required to be retested.
The intangible assets at December 31, 2013 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 2013 acquisition of Visalia Community Bank of
$1,365,000. Core deposit intangibles are being amortized using the straight-line
method over an estimated life of seven to ten years from the date of acquisition.
At December 31, 2013, the weighted average remaining amortization period is
five years. The carrying value of intangible assets at December 31, 2013 was
$1,680,000, net of $1,085,000 in accumulated amortization expense. The
carrying value at December 31, 2012 was $583,000, net of $817,000 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 useful lives was required. Management performed an annual
impairment test on core deposit intangibles as of September 30, 2013 and
determined no impairment was necessary. Amortization expense recognized was
$268,000 for 2013, $200,000 for 2012, and $414,000 for 2011.
The following table summarizes the Company’s estimated core deposit
intangible amortization expense for each of the next five years (in thousands):
Years Ending December 31,
2014
2015
2016
2017
2018
Thereafter
Total
Estimated Core
Deposit Intangible
Amortization
$
$
337
320
137
137
137
612
1,680
34
34
Aggregate annual maturities of time deposits are as follows (in thousands):
Years Ending December 31,
2014
2015
2016
2017
2018
Thereafter
$
135,118
16,461
2,639
10,335
4,401
-
$
168,954
Interest expense recognized on interest-bearing deposits consisted of the
following (in thousands):
Savings
Money market
NOW accounts
Time certificates of deposit
Years Ended December 31,
2013
2012
2011
$
$
$
40
229
251
750
$
32
392
270
936
47
692
321
1,602
1,270
$
1,630
$
2,662
10. 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,
2013
Amount
$
$
-
-
-
-
2012
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 $3,985,000 and $4,016,000 and market values totaling $4,084,000 and
$4,225,000 at December 31, 2013 and 2012, 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, 2013 and 2012, the Company had no Federal funds
purchased.
Notes to
Consolidated Financial Statements
10. 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, 2013
and $40,000,000 at December 31, 2012, at interest rates which vary with market
conditions. The Bank also had a line of credit in the amount of $51,000 and
$127,000 with the Federal Reserve Bank of San Francisco at December 31, 2013
and 2012, respectively which bears interest at the prevailing discount rate
collateralized by investment securities with amortized costs totaling $48,000 and
$115,000 and market values totaling $52,000 and $129,000, respectively. At
December 31, 2013 and 2012, the Bank had no outstanding short-term
borrowings under these lines of credit.
11.
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
Service 1st Capital Trust I is a Delaware business trust formed by Service 1st.
The Company succeeded to all of the rights and obligations of Service 1st in
connection with the merger with Service 1st as of November 12, 2008. The
Trust was formed on August 17, 2006 for the sole purpose of issuing trust
preferred securities fully and unconditionally guaranteed by Service 1st. Under
applicable regulatory guidance, the amount of trust preferred securities that is
eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a
pro forma basis. At December 31, 2013, 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, 2013, the rate
was 1.84%. Interest expense recognized by the Company for the years ended
December 31, 2013, 2012, and 2011 was $98,000, $107,000 and $100,000,
respectively.
12.
INCOME TAXES
The provision for (benefit from) income taxes for the years ended December 31,
2013, 2012, and 2011 consisted of the following (in thousands):
2013
Current
Deferred
Provision for income taxes
2012
Current
Deferred
Provision for income taxes
2011
Current
Deferred
Benefit from income taxes
Federal
State
Total
$
$
$
$
$
$
2,217
(645)
1,572
1,196
249
1,445
686
893
1,579
$
$
$
$
$
$
(445)
220
(225)
49
191
240
(95)
377
282
$
$
$
$
$
$
1,772
(425)
1,347
1,245
440
1,685
591
1,270
1,861
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, 2013 and 2012, the Company established a deferred
tax valuation allowance in the amount of $108,000 and $110,000, respectively,
for California capital loss carryforwards.
35
35
Notes to
Consolidated Financial Statements
12.
INCOME TAXES
(Continued)
Deferred tax assets (liabilities) consisted of the following (in thousands):
Deferred tax assets:
Allowance for credit losses
Deferred compensation
Unrealized loss on available-for-sale
investment securities
$
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
Total deferred tax assets
Valuation allowance
Net deferred tax asset after valuation
allowance
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
December 31,
2013
2012
$
3,492
5,102
1,598
206
264
154
594
289
1,914
981
108
2,238
32
7
70
4,170
3,832
-
521
862
184
253
282
352
783
110
1,025
20
7
77
17,049
(108)
12,478
(110)
16,941
12,368
(1,963)
-
(692)
(319)
(406)
(3,380)
(2,548)
(5,305)
(240)
(241)
(256)
(8,590)
Net deferred tax assets
$
13,561
$
3,778
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, 2013, 2012, and 2011 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
Change in prior year estimates
Other
2013
2012
2011
34.0 %
34.0 %
34.0 %
0.4 %
2.8 %
3.6 %
(20.5)%
(1.8)%
(1.4)%
(1.4)%
1.4 %
3.4 %
(16.7)%
(1.4)%
(1.4)%
0.5 %
- %
0.5 %
(14.0)%
(1.6)%
(1.6)%
0.5 %
- %
1.4 %
Effective tax rate
14.1 %
18.3 %
22.3 %
At December 31, 2013, the Company had California net operating loss
(‘‘NOL’’) carry-forwards of approximately $2,885,000 from the Service 1st and
Visalia Community Bank acquisitions, subject to an Internal Revenue Code
(IRC) Sec. 382 annual limitation of $1,802,000. Management expects to fully
utilize the Service 1st and Visalia Community Bank California NOL carry-
forwards. California suspended utilization of NOLs for 2009, 2010 and 2011 tax
years for taxpayers with business income in excess of $300,000. The California
NOL will begin to expire in 2019.
The Company and its Subsidiary file income tax returns in the U.S. federal
and California jurisdictions. The Company conducts all of its business activities
in the State of California. There are currently no pending U.S. federal, state or
local income tax examinations by those taxing authorities. The Company is no
longer subject to the examination by U.S. federal taxing authorities for the years
ended before December 31, 2010 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, 2013
Additions based on tax positions related to the current year
Reductions for tax positions of prior years
Balance at December 31, 2013
$
$
316
55
(191)
180
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, 2013, 2012, and 2011, the Company
did not recognize any interest or penalties related to uncertain tax positions.
13. COMMITMENTS AND CONTINGENCIES
Leases - The Bank leases certain of its branch facilities and administrative offices
under noncancelable operating leases. Rental expense included in occupancy and
equipment and other expenses totaled $2,123,000, $1,947,000 and $1,982,000
for the years ended December 31, 2013, 2012, and 2011, respectively.
Future minimum lease payments on noncancelable operating leases are as
follows (in thousands):
Years Ending December 31,
2014
2015
2016
2017
2018
Thereafter
$
2,267
2,191
1,639
1,240
1,227
3,138
$
11,702
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, 2013.
Correspondent Banking Agreements - The Bank maintains funds on deposit with
other federally insured financial institutions under correspondent banking
agreements. Uninsured deposits totaled $11,480,000 at December 31, 2013.
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.
36
36
Notes to
Consolidated Financial Statements
13. COMMITMENTS AND CONTINGENCIES
(Continued)
The following financial instruments represent off-balance-sheet credit risk (in
thousands):
Commitments to extend credit
Standby letters of credit
December 31,
2013
2012
$
$
191,072
1,595
$
$
162,261
590
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, 2013 and 2012. The
Company recognizes these fees as revenue over the term of the commitment or
when the commitment is used.
At December 31, 2013, commercial loan commitments represent 53% of total
commitments and are generally secured by collateral other than real estate or
unsecured. Real estate loan commitments represent 34% 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 13% of total
commitments and are generally unsecured. In addition, the majority of the Bank’s
loan commitments have variable interest rates.
At December 31, 2013, the balance of a contingent allocation for probable
loan loss experience on unfunded obligations was $141,000. 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, 2012.
Concentrations of Credit Risk - At December 31, 2013, in management’s
judgment, a concentration of loans existed in commercial loans and real-estate-
related loans, representing approximately 97.8% of total loans of which 23.1%
were commercial and 74.7% were real-estate-related.
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%
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 or drought-related decline in
agricultural business in the Company’s primary market area could have an adverse
impact on collectibility, increase the level of real-estate-related nonperforming
loans, or have other adverse effects which alone or in the aggregate could have a
material adverse effect on the financial condition, results of operations and cash
flows of the Company.
Contingencies - The Company is subject to legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to such actions will not materially affect
the consolidated financial position or consolidated results of operations of the
Company.
14. SHAREHOLDERS’ EQUITY
Regulatory Capital - The Company and the Bank are subject to certain regulatory
capital requirements administered by the Board of Governors of the Federal
Reserve System and the FDIC. Failure to meet these minimum capital
requirements could result in mandatory or, discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company’s
consolidated financial statements.
The Company and the Bank each meet specific capital guidelines that involve
quantitative measures of their respective assets, liabilities and certain off-balance-
sheet items as calculated under regulatory accounting practices. These quantitative
measures are established by regulation and require that the Company and the
Bank maintain minimum amounts and ratios of total and Tier 1 capital to
risk-weighted assets and of Tier 1 capital to average assets. 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.
Management knows of no conditions or events since that notification that would
change 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 to 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 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, 2013 and 2012. There are no
conditions or events since those notifications that management believes have
changed those categories.
37
37
Notes to
Consolidated Financial Statements
14. 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, 2013
December 31, 2012
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$ 88,320
$ 43,394
$ 87,674
8.14% $ 90,866
4.00% $ 34,418
8.09% $ 87,911
10.56%
4.00%
10.22%
$ 54,218
$ 43,375
5.00% $ 42,994
4.00% $ 34,395
5.00%
4.00%
$ 88,320
$ 25,454
$ 87,674
13.88% $ 90,866
4.00% $ 19,926
13.79% $ 87,911
18.24%
4.00%
17.67%
$ 38,151
$ 25,434
6.00% $ 29,848
4.00% $ 19,899
6.00%
4.00%
$ 96,292
$ 50,908
$ 95,639
15.13% $ 97,299
8.00% $ 39,853
15.04% $ 94,336
19.53%
8.00%
18.96%
$ 63,585
$ 50,868
10.00% $ 49,747
8.00% $ 39,798
10.00%
8.00%
Dividends - During 2013, the Bank declared and paid cash dividends to the
Company in the amount of $18,000,000 in connection with the VCB
acquisition, the Series C Preferred redemption, and cash dividends to the
Company’s shareholders approved by the Company’s Board of Directors. The
Bank may not pay any dividend that would cause it to be deemed not ‘‘well
capitalized’’ under applicable banking laws and regulations. The Company
declared and paid a total of $2,048,000 or $0.20 per common share cash
dividend to shareholders of record during the year ended December 31, 2013.
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. On October 17,
2012, the Company 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.
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 Business Oversight 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, 2013, retained earnings of $2,433,000 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.
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 the 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
the 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. No shares of Series B Preferred Stock or non-voting common stock
remain outstanding.
Capital Purchase Program - Small Business Lending Fund - On August 18, 2011,
the Company entered into a Securities Purchase Agreement (SPA) 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 (Series C Preferred) 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 repurchased 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 for total consideration
of $185,000.
On December 31, 2013, the Company redeemed all 7,000 outstanding shares
of its Series C Preferred from the Treasury, in exercise of its optional redemption
rights pursuant to the terms of the Series C Preferred under the Company’s
charter and the SPA. The Company paid the Treasury $7,087,500 in connection
with the redemption, representing $1,000 per share of the Series C Preferred plus
all accrued and unpaid dividends through the date of the redemption. The
obligations of the Company under the SPA are terminated as a result of the
redemption. No additional shares of Series C Preferred are outstanding.
38
38
Notes to
Consolidated Financial Statements
14. SHAREHOLDERS’ EQUITY (Continued)
A reconciliation of the numerators and denominators of the basic and diluted
earnings per common share computations is as follows (in thousands, except
share and per share amounts):
For the Years Ended December 31,
2013
2012
2011
Basic Earnings Per Common Share:
Net income
Less: Preferred stock dividends
and accretion
$
8,250
$
7,520
$
6,477
(350)
(350)
(486)
Income available to common
shareholders
Weighted average shares
outstanding
$
7,900
$
7,170
$
5,991
10,245,448
9,587,784
9,522,066
Net income per common share
$
0.77
$
0.75
$
0.63
Diluted Earnings Per Common
Share:
Net income
Less: Preferred stock dividends and
accretion
Income available to common
shareholders
Weighted average shares
outstanding
Effect of dilutive stock options
and warrants
Weighted average shares of
common stock and common
stock equivalents
$
8,250
$
7,520
$
6,477
(350)
(350)
(486)
$
7,900
$
7,170
$
5,991
10,245,448
9,587,784
9,522,066
62,592
28,629
16,596
10,308,040
9,616,413
9,538,662
Net income per diluted common
share
$
0.77
$
0.75
$
0.63
Outstanding options and warrants of 202,355, 352,319, and 436,619 were not
factored into the calculation of dilutive stock options at December 31, 2013,
2012, and 2011, respectively, because they were anti-dilutive.
15. SHARED-BASED COMPENSATION
On December 31, 2013, 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 203,660 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 5 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 176,770
shares reserved for issuance for options already granted to employees and 296,540
remain reserved for future grants as of December 31, 2013. 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.
No options to purchase shares of the Company’s common stock were granted
during the years ending December 31, 2013 and 2011 from any of the
Company’s stock based compensation plans. 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. 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, 2013, 2012, and 2011, the compensation
cost recognized for share based compensation was $98,000, $108,000, and
$196,000, respectively. The recognized tax benefit for share based compensation
expense was $28,000, $16,000, and $36,000 for 2013, 2012, and 2011,
respectively.
A summary of the combined activity of the Plans for the year ended
December 31, 2013 follows (dollars in thousands, except per share amounts):
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Shares
Aggregate
Intrinsic Value
499,289 $
(93,329) $
(25,530) $
8.78
8.45
9.15
380,430 $
8.83
4.71 $
1,176
375,055 $
8.85
4.66 $
2,928
278,890 $
9.38
3.49 $
776
Options outstanding at
January 1, 2013
Options exercised
Options forfeited
Options outstanding at
December 31, 2013
Options vested or
expected to vest at
December 31, 2013
Options exercisable at
December 31, 2013
39
39
Notes to
Consolidated Financial Statements
15. SHARED-BASED COMPENSATION
(Continued)
Information related to the stock option plan during each year follows (in
thousands, except per share amounts):
2013
2012
2011
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
$
$
$
$
-
82
789
17
$
$
$
$
3.40
93
385
26
$
$
$
$
-
417
680
116
As of December 31, 2013, there was $268,000 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 3.15 years. The total fair value of options vested was $102,000
and $140,000 for the years ended December 31, 2013 and 2012, respectively.
16. EMPLOYEE BENEFITS
401(k) and Profit Sharing Plan - The Bank has established a 401(k) and profit
sharing plan. The 401(k) plan covers substantially all employees who have
completed a three-month period in which they are credited with at least
1000 hours of service. Participants in the profit sharing plan are eligible to
receive employer contributions after completion of 2 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 $225,000 , $210,000, and $150,000 to the
profit sharing plan in 2013, 2012 and 2011, respectively.
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,
2013, 2012, and 2011, 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, 2013, 2012, and 2011, the Bank made matching
contributions totaling $382,000, $388,000, and $352,000, respectively.
Deferred Compensation Plan - The Bank has a nonqualified Deferred
Compensation Plan which provides directors with an unfunded, deferred
compensation program. Under the plan, eligible participants may elect to defer
some or all of their current compensation or director fees. Deferred amounts earn
interest at an annual rate determined by the Board of Directors (2.85% at
December 31, 2013). At December 31, 2013 and 2012, the total net deferrals
included in accrued interest payable and other liabilities were $2,976,000 and
$1,978,000, 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 $3,416,000 and $3,308,000 and at December 31,
2013 and 2012, respectively. Income recognized on these policies, net of related
expenses, for the years ended December 31, 2013, 2012, and 2011, was
$108,000, $103,000, and $98,000, 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 15 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, 2013, 2012, and 2011, totaled $581,000,
$658,000, and $341,000, respectively. Accrued compensation payable under the
salary continuation plans totaled $4,834,000 and $4,339,000 at December 31,
2013 and 2012, respectively.
In connection with these plans, the Bank purchased single premium life
insurance policies with cash surrender values totaling $4,804,000 and $4,659,000
at December 31, 2013 and 2012, respectively. Income recognized on these
policies, net of related expense, for the years ended December 31, 2013, 2012,
and 2011 totaled $145,000, $150,000, and $144,000, 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, 2013 and
2012, the total amount of the liability was $1,907,000 and $1,807,000,
respectively. Expense recognized by the Bank in 2013, 2012 and 2011 associated
with these plans was $194,000, $184,000, and $98,000, 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 $4,326,000, and $4,196,000 at December 31, 2013 and
2012, respectively. Income recognized on these policies, net of related expenses,
for the years ended December 31, 2013, 2012, and 2011, was $130,000,
$150,000, and $140,000, respectively.
In connection with the acquisition of Visalia Community Bank (VCB), the
Bank assumed a liability for the estimated present value of future benefits payable
to former key executives of VCB. The liability relates to change in control
benefits associated with VCB’s salary continuation plans. The benefits are payable
to the individuals when they reach retirement age. At December 31, 2013, the
total amount of the liability was $863,000. Expense recognized by the Company
in 2013 associated with these plans was $8,000. 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
$6,897,000 at December 31, 2013. Income recognized on these policies, net of
related expenses, for the year ended December 31, 2013 was $111,000.
The current annual tax-free interest rate on all life insurance policies is 4.91%.
40
40
Notes to
Consolidated Financial Statements
17. LOANS TO RELATED PARTIES
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):
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
For the Years Ended December 31, 2013, 2012, and 2011
(In thousands)
Balance, January 1, 2013
Disbursements
Amounts repaid
Balance, December 31, 2013
Undisbursed commitments to related parties, December 31,
2013
$
$
$
716
162
(71)
807
1,426
Income:
Dividends declared by
Subsidiary - eliminated in
consolidation
$
Other income
Total income
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 2013 and 2012
(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:
Preferred stock, Series C
Common stock
Retained earnings
Accumulated other comprehensive (loss)
income, net of tax
2013
2012
$
385
124,378
523
$
2,807
119,812
576
$
125,286
$
123,195
$
$
5,155
88
5,243
-
53,981
68,348
5,155
375
5,530
7,000
40,583
62,496
(2,286)
7,586
Total shareholders’ equity
120,043
117,665
Total liabilities and shareholders’ equity
$
125,286
$
123,195
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, net of
distributions
Income before income tax
benefit
Benefit from income taxes
Net income
Preferred stock dividend and
accretion of discount
Income available to common
shareholders
Comprehensive (loss) income
2013
2012
2011
$
18,000
5
18,005
$
3,000
3
3,003
98
102
424
624
107
140
587
834
-
3
3
100
148
352
600
17,381
2,169
(597)
(9,414)
4,993
6,854
7,967
283
8,250
350
7,162
358
7,520
350
$
$
7,900
(1,622)
$
$
7,170
10,982
$
$
6,257
220
6,477
486
5,991
9,634
41
41
Notes to
Consolidated Financial Statements
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2013, 2012, and 2011
(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 decrease (increase) in other assets
Net (decrease) increase in other liabilities
Benefit for deferred income taxes
Net cash provided by (used in) operating activities
Cash flows used in investing activities:
Investment in subsidiary
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
Redemption of preferred stock Series C
Warrant purchase
Tax benefit from exercise of stock options
Net cash (used in) provided by financing activities
(Decrease) increase 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
Common stock issued in Visalia Community Bank acquisition
2013
2012
2011
$
8,250
$
7,520
$
6,477
9,414
98
(17)
86
(198)
(18)
17,615
(11,358)
(2,048)
(437)
-
789
(7,000)
-
17
(8,679)
(2,422)
2,807
385
125
-
12,494
$
$
$
$
(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
-
$
$
$
$
42
42
Supplementary
Financial Information
The following supplementary financial information is not a part of the Company’s financial statements.
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
(In thousands, except per share data)
Q4
2013 (1)
Q3
2013 (1)
Q2 2013
Q1 2013
Q4 2012
Q3 2012
Q2 2012
Q1 2012
$
$
$
$
$
9,192 $
-
9,192
1,965
8,538
408
10,536 $
-
10,536
1,813
8,991
389
6,878 $
-
6,845 $
-
7,189 $
200
7,572 $
-
7,510 $
100
6,878
1,828
7,224
195
6,845
2,226
6,933
355
6,989
1,829
6,983
193
7,572
2,284
6,655
745
7,410
1,471
6,718
454
2,211 $
2,969 $
1,287 $
1,783 $
1,642 $
2,456 $
1,709 $
7,666
400
7,266
1,658
6,918
293
1,713
2,123 $
2,882 $
1,199 $
1,696 $
1,554 $
2,369 $
1,622 $
1,625
0.19 $
0.26 $
0.13 $
0.18 $
0.16 $
0.25 $
0.17 $
0.19 $
0.26 $
0.12 $
0.18 $
0.16 $
0.25 $
0.17 $
0.17
0.17
(1) The increase in Q4 2013 and Q3 2013 is a result of the Visalia Community Bank acquisition effective July, 1, 2013.
43
43
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, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes
in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
Sacramento, California
March 21, 2014
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)
2013
2012
2011
2010
2009
$
34,836 $
1,385
31,820 $
1,883
34,299 $
2,942
36,013 $
4,283
33,451
-
33,451
7,832
31,686
9,597
1,347
8,250
350
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
7,900 $
0.77 $
7,170 $
0.75 $
5,991 $
0.63 $
2,884 $
0.31 $
40,734
6,627
34,107
10,514
23,593
5,850
27,531
1,912
(676)
2,588
365
2,223
0.29
0.77 $
0.75 $
0.63 $
0.31 $
0.28
0.20 $
0.05 $
- $
- $
-
December 31,
(In thousands)
2013
2012
2011
2010
2009
529,398 $
503,149
1,004,143
1,145,635
120,043
1,042,552
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
445,859 $
444,770
848,493
986,924
119,746
895,330
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
$
$
$
$
$
$
Data from 2013 reflects the partial year impact of the acquisition of Visalia Community Bank on July 1, 2013.
45
45
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
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. Effective July 1, 2013, the Company and
Visalia Community Bank (VCB) completed a merger under which Visalia
Community Bank, with three full-service offices in Visalia and one in Exeter,
merged with and into the Bank. The Company’s market area includes the central
valley area from Sacramento, California to Bakersfield, California.
During 2013, 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.
The Bank now operates 21 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. During early 2014, California experienced a severe drought.
If the drought significantly harms the business of our customers, the credit
quality of the loans to those customers could decline as a specific consequence of
the drought.
OVERVIEW
Diluted earnings per share (EPS) for the year ended December 31, 2013 was
$0.77 compared to $0.75 and $0.63 for the years ended December 31, 2012 and
2011, respectively. Net income for 2013 was $8,250,000 compared to
$7,520,000 and $6,477,000 for the years ended December 31, 2013, 2012, and
2011, respectively. The increase in net income and EPS was primarily driven by
increases in net interest income, lower provision for credit losses, increase in
non-interest income, partially offset by increases in non-interest expense in 2013
compared to 2012. Total assets at December 31, 2013 were $1,145,635,000
compared to $890,228,000 at December 31, 2012.
Return on average equity for 2013 was 6.89% compared to 6.56% and 6.26%
for 2012 and 2011, respectively. Return on average assets for 2013 was 0.84%
compared to 0.88% and 0.81% for 2012 and 2011, respectively. Total equity was
$120,043,000 at December 31, 2013 compared to $117,665,000 at
December 31, 2012. The increase in assets and equity in 2013 compared to
2012 is primarily related to the VCB acquisition on July 1, 2013, and also due
to increases in deposits and retained earnings offset by a decrease in other
comprehensive income.
Average total loans increased $49,443,000 or 12.21% to $454,483,000 in
2013 compared to $405,040,000 in 2012. In 2013, we recorded no provision for
credit losses compared to $700,000 in 2012 and $1,050,000 in 2011. The
Company had nonperforming assets totaling $7,776,000 at December 31, 2013.
Nonperforming assets included nonaccrual loans totaling $7,586,000 and Other
Real Estate Owned (OREO) totaling $190,000. At December 31, 2012,
nonperforming assets totaled $9,695,000 consisting of $9,695,000 in nonaccrual
loans. Net charge-offs for 2013 were $925,000 compared to $1,963,000 for 2012
and $668,000 for 2011. Refer to ‘‘Asset Quality’’ below for further information.
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.
46
46
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
OVERVIEW
(Continued)
Return to Our Shareholders
One measure of our return to our shareholders is the return on average equity
(ROE). Our ROE was 6.89% for the year ended 2013 compared to 6.56% and
6.26% for the years ended 2012 and 2011, respectively. In 2013, compared to
2012 we experienced both an increase in net income and an increase in capital
due to increases in retained earnings, offset by a decrease in other comprehensive
income.
Our net income for the year ended December 31, 2013 increased $730,000
compared to 2012 and increased $1,043,000 for 2012 compared to 2011.
During 2013, net income increased due to increases in net interest income,
increases in non-interest income, a decrease in the provision for credit losses and
a decrease in tax expense, partially offset by increases in non-interest expenses in
2013 compared to 2012. Net interest income increased because of increases in
loan and investment income, partially offset by decreases in interest expense on
deposits. Net interest income during 2013 was positively impacted by the
collection in full of a non-accrual loan of $4,731,000 which resulted in a
recovery of foregone interest of $1,484,000. Non-interest income increased
primarily driven by a $382,000 increase in service charge income, a $195,000
increase in interchange fees, a $141,000 increase in Federal Home Loan Bank
dividends, and an increase in loan placement fees of $46,000, partially offset by a
$374,000 decrease in net realized gains on sales and calls of investment securities
and a decrease of $12,000 in gains on the sale of other real estate owned.
Non-interest expenses increased in 2013 compared to 2012 primarily due to
increases in acquisition and integration-related expenses of $692,000, salary and
employee benefit expenses of $1,830,000, occupancy and equipment expenses of
$531,000, consulting expenses of $299,000, data processing expenses of
$258,000, amortization of core deposit intangibles of $68,000, and regulatory
assessments of $44,000, partially offset by decreases in legal fees of $69,000, and
advertising fees of $82,000. During 2013, our net interest margin (NIM)
decreased 12 basis points compared to 2012. Basic EPS was $0.77 for 2013
compared to $0.75 and $0.63 for 2012 and 2011, respectively. Diluted EPS was
$0.77 for 2013 compared to $0.75 and $0.63 for 2012 and 2011, respectively.
The increase in EPS in 2013 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 2013 was 0.84% compared to 0.88% and 0.81% for the years ended
December 31, 2012 and 2011, respectively. The 2013 decrease in ROA is
primarily due to the increase in average assets as a result of the VCB acquisition.
Annualized ROA for our peer group was 0.86% at September 30, 2013. Peer
group information from SNL Financial data includes bank holding companies in
central California with assets from $300 million to $1.2 billion that are not
subchapter S corporations.
Development of Revenue Streams
Over the past several years, we have focused on not only our net income, but
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. We minimized the effects of the recent interest
rate decline on our net interest margin by focusing on core deposits and
managing the cost of funds. Our net interest margin (fully tax equivalent basis)
was 4.09% for the year ended December 31, 2013, compared to 4.21% and
4.63% for the years ended December 31, 2012 and 2011, respectively. The
decrease in net interest margin compared to 2012 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 22 basis points, while the cost of total interest-bearing liabilities
decreased 13 basis points and the cost of total deposits decreased 8 basis points.
Our cost of total deposits in 2013 was 0.15% compared to 0.23% for the same
period in 2012 and 0.39% for the year ended December 31, 2011. Our net
interest income before provision for credit losses increased $3,514,000 or 11.74%
to $33,451,000 for the year ended 2013 compared to $29,937,000 and
$31,357,000 for the years ended 2012 and 2011, 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 2013 increased $590,000 or
8.15% to $7,832,000 compared to $7,242,000 in 2012 and $6,271,000 in 2011.
The increase resulted primarily from increases in service charge income,
interchange fees, and loan placement fees compared to the comparable 2012
period, partially offset by a decreases in net realized gains on sales and calls of
investment securities and gain on sale of other real estate owned. Customer
service charges increased $382,000 or 13.77% to $3,156,000 in 2013 compared
to $2,774,000 and $2,903,000 in 2012 and 2011, 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 $7,776,000 and $9,695,000 at December 31, 2013 and 2012,
respectively. Nonperforming assets totaled 1.52% of gross loans as of
December 31, 2013 and 2.45% of gross loans as of December 31, 2012. The
Company had $190,000 in other real estate owned (OREO) at December 31,
2013 as compared to none at December 31, 2012. The OREO property held at
December 31, 2013 was sold for book value during January 2014. 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
28.69% during 2013 to $1,145,635,000 as of December 31, 2013 from
$890,228,000 as of December 31, 2012. Total gross loans increased 29.61% to
$512,357,000 as of December 31, 2013, compared to $395,318,000 at
December 31, 2012. Total investment securities and Federal funds sold increased
12.44% to $443,442,000 as of December 31, 2013 compared to $394,393,000
as of December 31, 2012. Total deposits increased 33.63% to $1,004,143,000 as
of December 31, 2013 compared to $751,432,000 as of December 31, 2012.
The asset growth in 2013 was largely due to the VCB Acquisition. Our loan to
deposit ratio at December 31, 2013 was 51.02% compared to 52.61% at
December 31, 2012. The loan to deposit ratio of our peers was 70.41% at
September 30, 2013.
Capital Adequacy
At December 31, 2013, we had a total capital to risk-weighted assets ratio of
15.13%, a Tier 1 risk-based capital ratio of 13.88% and a leverage ratio of
8.14%. 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, 2013, on a stand-alone basis, the Bank had a total
risk-based capital ratio of 15.04%, a Tier 1 risk based capital ratio of 13.79%
and a leverage ratio of 8.09%. At December 31, 2012, the Bank had a total
risk-based capital ratio of 18.96%, Tier 1 risk-based capital of 17.67% and a
leverage ratio of 10.22%. The deterioration in 2013 is due to an increase in risk
weighted assets while risk adjusted capital decreased primarily due to the
redemption of Series C Preferred Stock. Note 14 of the audited Consolidated
Financial Statements provides more detailed information concerning the
Company’s capital amounts and ratios.
47
47
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
OVERVIEW
(Continued)
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
78.50% for 2013 compared to 75.99% for 2012 and 75.68% for 2011. The
increase in the efficiency ratio in 2013 is due to an increase in net interest
income that is less than the increase in operating expenses. The decline in the
efficiency ratio in 2012 compared to 2011 is due to a decrease in net interest
income that is greater than the decrease in operating expenses. The Company’s
net interest income before provision for credit losses plus non-interest income
increased 11.04% to $41,283,000 in 2013 compared to $37,179,000 in 2012
and $37,628,000 in 2011, while operating expenses increased 16.18% in 2013,
decreased 3.42% in 2012, and decreased 1.71% in 2011.
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 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. We have available unsecured lines of credit with correspondent
banks totaling approximately $40,000,000 and secured borrowing lines of
approximately $272,797,000 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
$555,276,000 or 48.47% of total assets at December 31, 2013 and
$446,921,000 or 50.20% of total assets as of December 31, 2012.
RESULTS OF OPERATIONS
NET INCOME
Net income was $8,250,000 in 2013 compared to $7,520,000 and $6,477,000
in 2012 and 2011, respectively. Basic earnings per share was $0.77, $0.75, and
$0.63 for 2013, 2012, and 2011, respectively. Diluted earnings per share was
$0.77, $0.75, and $0.63 for 2013, 2012, and 2011, respectively. ROE was
6.89% for 2013 compared to 6.56% for 2012 and 6.26% for 2011. ROA for
2013 was 0.84% compared to 0.88% for 2012 and 0.81% for 2011.
The increase in net income for 2013 compared to 2012 can be attributed to a
decrease in the provision for credit losses, an increase in interest income, an
increase in non interest income, and a decrease in provision for income taxes,
partially offset by an increase in non-interest expense. 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.
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, 2013
Year Ended December 31, 2012
Year Ended December 31, 2011
Average
Balance
Interest
Income/
Expense
Average
Interest
Rate
Average
Balance
Interest
Income/
Expense
Average
Interest
Rate
Average
Balance
Interest
Income/
Expense
Average
Interest
Rate
$
46,672 $
164
0.35%
$
36,836 $
108
0.29%
$
73,016 $
SCHEDULE OF AVERAGE
BALANCES, 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
235,487
163,494
398,981
206
445,859
445,300
4,171
Total interest-earning assets
895,330 $
Allowance for credit losses
Non-accrual 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
$
$
(9,713)
9,183
50
21,296
7,816
62,962
986,924
215,668 $
193,833
48,729
106,307
564,537
5,645
Total interest-bearing liabilities
570,182 $
Non-interest bearing demand
deposits
Other liabilities
Shareholders’ equity
283,956
13,040
119,746
Total average liabilities and
shareholders’ equity
$
986,924
2,375
8,755
11,130
1
11,295
26,519
177
37,991
291
229
219
531
1,270
116
1,386
3,289
6,830
10,119
2
10,229
23,913
36
34,178
302
392
466
470
1,630
253
1,883
1.01%
5.35%
2.79%
0.25%
2.53%
5.96%
4.24%
4.24%
0.13%
0.12%
0.45%
0.50%
0.22%
2.05%
0.24%
$
$
218,325
113,039
331,364
618
368,818
394,575
3,544
766,937 $
(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
511,228 $
217,529
9,760
114,561
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
715,862 $
(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
$
853,078
$
800,178
187
4,548
5,248
9,796
2
9,985
26,098
9
36,092
368
692
688
914
2,662
280
2,942
0.26%
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%
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)
$
37,991
4.24%
$
34,178
4.46%
$
36,092
5.04%
1,386
0.24%
1,883
0.37%
2,942
0.58%
$
36,605
4.09%
$
32,295
4.21%
$
33,150
4.63%
(1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $2,977, $2,322, and $1,784 in 2013, 2012, and 2011,
respectively.
(2) Loan interest income includes loan fees of $320 in 2013, $646 in 2012, and $399 in 2011.
(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 increased $2,606,000 or 10.90% in 2013
compared to 2012. Interest and fee income decreased $2,185,000 or 8.37% in
2012 compared to 2011. The increase in 2013 is attributable to a increase in
average total loans outstanding offset by a 10 basis point decrease in the yield on
loans. Net interest income during 2013 was positively impacted by VCB
acquisition in addition to the collection in full of a non-accrual loan of
$4,731,000 which resulted in a recovery of foregone interest of $1,484,000. The
decrease in 2012 is attributable to a decrease in average total loans outstanding
and a 26 basis point decrease in yield on loans compared to 2011. Average total
loans for 2013 increased $49,443,000 to $454,483,000 compared to
$405,040,000 for 2012 and $428,291,000 for 2011. The yield on loans for 2013
was 5.96% compared to 6.06% and 6.32% for 2012 and 2011, 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), increased $410,000 or 5.19% in
2013 compared to 2012. The yield on average investments decreased 24 basis
points to 2.53% for the year ended December 31, 2013 from 2.77% for the year
ended December 31, 2012. 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 $77,041,000 to
$445,859,000 in 2013 compared to $368,818,000 in 2012. In 2012, total
investment income decreased $294,000 or 3.58% compared to 2011. The
increase of the investment portfolio balance at significantly reduced yields
contributed to the decreases in net interest income and net interest margin.
A significant portion of the investment portfolio is mortgage-backed securities
(MBS) and collateralized mortgage obligations (CMOs). At December 31, 2013,
we held $259,100,000 or 58.46% of the total market value of the investment
portfolio in MBS and CMOs with an average yield of 0.94%. 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 loss of $2,286,000 and is reflected in
the Company’s equity. At December 31, 2013, the average life of the investment
portfolio was 5.62 years and the market value reflected a pre-tax loss of
$3,884,000. Management reviews market value declines on individual investment
securities to determine whether they represent other-than-temporary impairment
(OTTI). For the years ended December 31, 2013 and 2011, OTTI was recorded
in the amount of $17,000 and $31,000, respectively. No OTTI was recorded in
2012. 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, 2013, an immediate rate increase of 200 basis points
would result in an estimated decrease in the market value of the investment
portfolio by approximately $40,981,000. Conversely, with an immediate rate
decrease of 200 basis points, the estimated increase in the market value of the
investment portfolio would be $32,152,000. The modeling environment assumes
management would take no action during an immediate shock of 200 basis
points. 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 2013 increased $3,016,000 to $34,836,000 compared
to $31,820,000 in 2012 and $34,299,000 in 2011. The increase was the result
of collection of $1,484,000 of foregone interest, asset mix changes, and an
increase in average earning assets, partially offset by an increase in interest-bearing
liabilities. The yield on interest earning assets decreased to 4.24% for the year
ended December 31, 2013 from 4.46% for the year ended December 31, 2012.
Average interest earning assets increased to $895,330,000 for the year ended
December 31, 2013 compared to $766,937,000 for the year ended
December 31, 2012. Average interest-earning deposits in other banks increased
$9,836,000 comparing 2013 to 2012. Average yield on these deposits was
0.35%. Average investments increased $77,041,000 but the tax equivalent yield
on average investment securities decreased 24 basis points. Average total loans
increased $49,443,000 and the yield on average loans decreased 10 basis points.
The decrease in total interest income in 2012 was due to the 58 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 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.
Interest expense on deposits in 2013 decreased $360,000 or 22.09% to
$1,270,000 compared to $1,630,000 in 2012 and $2,662,000 in 2011. The
decrease in interest expense in 2013 compared to 2012 was primarily due to the
repricing of interest-bearing deposits which decreased 10 basis points to 0.22% in
2013 from 0.32% in 2012. The decrease in interest expense in 2012 compared
to 2011 was due to repricing of interest-bearing deposits, which decreased 22
basis points to 0.32% in 2012 from 0.54% in 2011. Average interest-bearing
deposits were $564,537,000 for 2013 compared to $502,072,000 and
$495,545,000 for 2012 and 2011, respectively. The increases in average interest-
bearing deposits in 2013 was the result of the Visalia Community Bank
acquisition and our own organic growth.
Average other borrowings decreased to $5,645,000 with an effective rate of
2.05% for 2013 compared to $9,156,000 with an effective rate of 2.76% for
2012. In 2011, the average other borrowings were $10,265,000 with an effective
rate of 2.73%. 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 3.64 for
2013, and 3.59% 2012, and 2011.
The cost of all of our interest-bearing liabilities decreased 13 basis points to
0.24% for 2013 compared to 0.37% for 2012 and 0.58% for 2011. The cost of
total deposits decreased to 0.15% for the year ended December 31, 2013
compared to 0.23% and 0.39% for the years ended December 31, 2012 and
2011, respectively. Average demand deposits increased 30.54% to $283,956,000
in 2013 compared to $217,529,000 for 2012 and $182,244,000 for 2011. The
ratio of non-interest demand deposits to total deposits increased to 33.47% for
2013 compared to 30.23% and 26.89% for 2012 and 2011, respectively.
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
Net interest income before provision for credit losses for 2013 increased
$3,514,000 or 11.74% to $33,451,000 compared to $29,937,000 for 2012 and
$31,357,000 for 2011. The increase in 2013 was due to the increase in average
earning assets and 9 basis point decrease in the average interest rate on deposits,
partially offset by the decrease in the average rate on earning assets. Our net
interest margin (NIM) decreased 12 basis point. Yield on interest earning assets
decreased 22 basis points while the effective rate on interest bearing liabilities
only decreased 13 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. Net interest
50
50
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
(Continued)
income before provision for credit losses decreased $1,420,000 in 2012 compared
to 2011 mainly due to the 42 basis point decrease in our net interest margin
(NIM). Average interest-earning assets were $895,330,000 for the year ended
December 31, 2013 with a net interest margin (NIM) of 4.09% compared to
$766,937,000 with a NIM of 4.21% in 2012, and $715,862,000 with a NIM of
4.63% in 2011. 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 based on inherent risk in those loans.
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
2013
Loans
2012
Loans
Commercial and industrial
Agricultural land and production
$
1,928
516
17.0% $
6.1%
2,071
605
19.7%
6.7%
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
1,697
30.6%
2,153
28.9%
1,289
1,406
672
110
5,174
874
294
422
8.3%
16.8%
8.6%
0.9%
65.2%
9.5%
2.2%
1,035
1,886
646
157
5,877
1,158
383
39
8.4%
13.6%
7.2%
2.0%
60.1%
10.9%
2.6%
Total allowance for credit losses
$
9,208
$
10,133
Loans are charged to the allowance for credit losses when the loans are deemed
uncollectible. It is the policy of management to make additions to the allowance
so that it remains adequate to cover all probable loan charge-offs that exist in the
portfolio at that time. We 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 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. See further discussion of the impact of the VCB acquisition on the
allowance for credit losses in the Results of Operations Allowance for Credit
Losses section below.
There were no additions made to the allowance for credit losses in 2013,
compared to $700,000, and $1,050,000 for the same period in 2012, and 2011,
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. The
increase in unallocated reserves in the current period is primarily due to an
additional risk factor which management is further analyzing related to the recent
increase in long-term interest rates and the effects that higher rates may have on
certain borrowers’ debt service capabilities, particularly those with home equity
loans. During the year ended December 31, 2013, the Company had net charge
offs totaling $925,000 compared to $1,963,000 and $668,000 for the same
periods in 2012 and 2011, respectively. The net charge off ratio, which reflects
net charge-offs to average loans, was 0.20%, 0.48% and 0.16% for 2013, 2012,
and 2011, respectively. The charged off loans were previously identified and
adequately reserved for as of December 31, 2012.
Nonperforming loans were $7,586,000 and $9,695,000 at December 31, 2013
and 2012, respectively. Nonperforming loans as a percentage of total loans were
1.48% at December 31, 2013 compared to 2.45% at December 31, 2012. There
was other real estate owned in the amount of $190,000 at December 31, 2013
compared to none at December 31, 2012 and December 31, 2011.
We had loans past due, not including non accrual loans, totaling $637,000 at
December 31, 2013 compared to $27,000 at December 31, 2012. 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 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, 2013, 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.
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
Net interest income, after the provision for credit losses of $0 in 2013,
$700,000 in 2012, and $1,050,000 in 2011, was $33,451,000 for 2013
compared to $29,237,000 and $30,307,000 for 2012 and 2011, respectively.
NON-INTEREST INCOME
Non-interest income is comprised of customer service charges, gains on sales
and calls of investment securities, income from appreciation in cash surrender
value of bank owned life insurance, loan placement fees, Federal Home Loan
Bank dividends, and other income. Non-interest income was $7,832,000 in 2013
compared to $7,242,000 and $6,271,000 in 2012 and 2011, respectively. The
$590,000 or 8.15% increase in non-interest income was due to increases in
51
51
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
NON-INTEREST INCOME
(Continued)
service charge income, interchange fees, Federal Home Loan Bank dividends, and
loan placement fees, partially offset by a decrease in gains on sales and calls of
investment securities. The $971,000 or 15.48% increase in non-interest income
comparing 2012 to 2011 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 disposal of other real estate owned and a decrease in service
charge income.
Customer service charges increased $382,000 to $3,156,000 in 2013 compared
to $2,774,000 in 2012 and $2,903,000 in 2011. The increase in 2013 from
2012, and in 2012 from 2011 is mainly due to increases in overdraft and
analyzed service charge fee income. The $382,000 increase in 2013 is due to the
inclusion of VCB service charges of approximately $510,000 offset by a decrease
in the legacy Company service charge income of 128,000.
During the year ended December 31, 2013, we realized net gain on sales and
calls of investment securities of $1,265,000. In 2012, we realized a net gain of
$1,639,000 compared to a net loss of $298,000 in 2011 from sales and calls of
securities. The net gains in 2013 and 2012 were the results of partial
restructuring of the investment portfolio designed to improve the future
performance of the portfolio. For the year ended December 31, 2011, we realized
a $31,000 other-than-temporary impairment write down on certain investment
securities. See Footnote 4 to the audited Consolidated Financial Statements for
more detail.
Income from the appreciation in cash surrender value of bank owned life
insurance (BOLI) totaled $495,000 in 2013 compared to $391,000 and
$382,000 in 2012 and 2011, 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.
Interchange fees totaled $962,000 in 2013 compared to $767,000 and
$758,000 in 2012 and 2011, respectively. Part of the increase in 2013 is
attributable to the VCB acquisition.
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 $46,000 in 2013 to $677,000 compared to $631,000 in 2012 and
$274,000 in 2011. Fees were higher in 2013 compared to 2012 and 2011.
Refinancing and new mortgage activity increased in 2013 and 2012 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, 2013, we held $4,499,000 in FHLB stock compared to
$3,850,000 at December 31, 2012. Dividends in 2013 increased to $177,000
compared to $36,000 in 2012 and $9,000 in 2011.
Other income increased to $1,100,000 in 2013 compared to $992,000 and
$1,063,000 in 2012 and 2011, respectively. The period-to-period increase in
2013 compared to 2012 was primarily due to 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,acquisition and integration-related expenses, data processing expenses,
ATM/Debit card expenses, license and maintenance contract expenses, and
professional services (consisting of audit, accounting, consulting and legal fees)
are the major categories of non-interest expenses. Non-interest expenses increased
$4,412,000 or 16.18% to $31,686,000 in 2013 compared to $27,274,000 in
2012, compared to $28,240,000 in 2011, which was a decrease of $966,000 in
2012.
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 78.50% for 2013 compared to 75.99% for 2012 and 75.68%
for 2011. The deterioration in the efficiency ratio in 2013 is due to an increase
in operating expenses partially offset by an increase in net interest income. The
decline in the efficiency ratio in 2012 compared to 2011 is due to a decrease in
net interest income that is greater than the decrease in operating expenses.
Salaries and employee benefits increased $1,830,000 or 11.73% to
$17,427,000 in 2013 compared to $15,597,000 in 2012 and $15,762,000 in
2011. Full time equivalents were 241 at December 31, 2013 compared to 208 at
December 31, 2012.
At December 31, 2013, 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 203,660 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 176,770 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, 2013, 2012, and 2011, the compensation
cost recognized for share based compensation was $98,000, $108,000 and
$196,000, respectively.
As of December 31, 2013, there was $268,000 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under the two plans. The cost is expected to be recognized over a
weighted average period of 3.15 years. See Notes 1 and 15 to the audited
Consolidated Financial Statements for more detail.
No options to purchase shares of the Company’s common stock were issued
during the years ending December 31, 2013 and 2011. 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. All options were granted with an
exercise price equal to the market value on the grant date.
Occupancy and equipment expense increased $531,000 or 14.84% to
$4,109,000 in 2013 compared to $3,578,000 in 2012 and $3,795,000 in 2011.
The increase in 2013 was primarily due to increases in rent and depreciation
expense for the premises acquired from VCB. The Company made no changes in
depreciation expense methodology.
Regulatory assessments decreased $44,000 or 6.75% to $696,000 in 2013
compared to $652,000 and $845,000 in 2012 and 2011, 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.
Acquisition and integration-related expenses increased $692,000 to $976,000
in 2013 compared to $284,000 in 2012, which were all related to the VCB
acquisition. There were no acquisition and integration expenses in 2011.
Data processing expenses were $1,383,000 in 2013 compared to $1,125,000 in
2012 and $1,178,000 in 2011. The $258,000 or 22.93% increase in 2013, is the
result of increased processing charges related to increase of accounts and services
provided to our customers and branches. The $53,000 decrease in 2012
compared to 2011 was a result of a reduction in terms of our core processing
contract.
Legal fees decreased $69,000 or 37.30% to $116,000 for the year ended
December 31, 2013 compared to $185,000 and $335,000 in 2012 and 2011,
respectively. The higher legal fees in 2012 and 2011 are primarily due to issues
related to nonperforming assets and other loan related legal expenses.
Amortization of core deposit intangibles was $268,000 for 2013, $200,000 for
2012, and $414,000 for 2011. During 2013, amortization expense related to
Service 1st Bank core deposit intangible (CDI) was $200,000, and amortization
expense related to VCB CDI was $68,000. During 2012, CDI amortization
expense related solely to Service 1st Bank CDI. Bank of Madera County CDI
was fully amortized at the end of 2011. During 2011, CDI amortization expense
included $200,000 for Service 1st Bank CDI and $214,000 for the Bank of
Madera County CDI.
52
52
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
NON-INTEREST EXPENSES (Continued)
Consulting fees increased $299,000 to $461,000 for the year ended
December 31, 2013 compared to $162,000 and $340,000 in 2012 and 2011,
respectively. Higher consulting fees in 2013 related to costs for recruiting
qualified candidates for a Bank President position and for support and defense
for the Company’s tax examination.
ATM/Debit card expenses increased $158,000 to $527,000 for the year ended
December 31, 2013 compared to $369,000 in 2012 and 2011. License and
maintenance contracts increased $110,000 to $472,000 for the year ended
December 31, 2013 compared to $362,000 and $324,000 in 2012 and 2011,
respectively. Other non-interest expenses increased $576,000 or 15.62% to
$4,264,000 in 2013 compared to $3,688,000 in 2012 and $3,652,000 in 2011,
primarily due to the VCB acquisition.
The following table describes significant components of other non-interest
expense as a percentage of average assets.
For the years ended December 31,
%
Other
Expense Average
Assets
2013
%
Other
Expense Average
Assets
2012
%
Other
Expense Average
Assets
2011
Internet banking expense
Stationery/supplies
Amortization of software
Director fees and related
$
expenses
Telephone
Postage
Donations
Education/training
General insurance
Appraisal fees
Operating losses
Other
Total other non-interest
expense
397
257
243
233
219
202
160
135
126
89
67
2,136
(Dollars in thousands)
0.04% $
0.03%
0.02%
0.02%
0.02%
0.02%
0.02%
0.01%
0.01%
0.01%
0.01%
0.22%
270
221
196
215
169
183
148
155
120
77
85
1,849
0.03% $
0.03%
0.02%
0.03%
0.02%
0.02%
0.02%
0.02%
0.01%
0.01%
0.01%
0.22%
247
245
232
219
236
198
154
160
125
112
125
1,599
0.03%
0.03%
0.03%
0.03%
0.03%
0.02%
0.02%
0.02%
0.01%
0.01%
0.01%
0.19%
$
4,264
0.43% $
3,688
0.43% $
3,652
0.43%
PROVISION FOR INCOME TAXES
Our effective income tax rate was 14.04% for 2013 compared to 18.31% for
2012 and 22.32% for 2011. The Company reported an income tax provision of
$1,347,000, $1,685,000, and $1,861,000 for the years ended December 31,
2013, 2012, and 2011, respectively. The decrease in the effective tax rate in 2013
compared to 2012 is due to an increase in interest income on non-taxable
investment securities and the reversal of a reserve for prior years’ uncertain tax
positions. The Company maintains a reserve for uncertain income taxes in
accordance with ASC 710-10-25 (formerly FIN 48). During the third quarter of
2013, the California Franchise Tax Board concluded the tax examination of the
Company’s 2008, 2009, and 2010 tax filings; and we accordingly reversed the
unneeded reserve for those tax years. The Company has also benefited from tax
credits and deductions related to the California enterprise zone program; however,
those benefits will be reduced beginning January 1, 2014 due to the legislative
changes affecting the program. Our low effective tax rate 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 (SPA) 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
(Series C Preferred) 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 repurchased 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 for total consideration of $185,000.
On December 31, 2013, the Company redeemed all 7,000 outstanding shares
of its Series C Preferred from the Treasury, in exercise of its optional redemption
rights pursuant to the terms of the Series C Preferred under the Company’s
charter and the SPA. The Company paid the Treasury $7,087,500 in connection
with the redemption, representing $1,000 per share of the Series C Preferred plus
all accrued and unpaid dividends through the date of the redemption. The
obligations of the Company under the SPA are terminated as a result of the
redemption. No additional shares of Series C Preferred are outstanding.
We accrued preferred stock dividends to the Treasury and accretion of the
issuance discount in the amount of $350,000 and $350,000 during the years
ended December 31, 2013 and 2012, respectively.
FINANCIAL CONDITION
SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS
December 31, 2013 compared to December 31, 2012.
Total assets were $1,145,635,000 as of December 31, 2013, compared to
$890,228,000 as of December 31, 2012, an increase of 28.69% or
$255,407,000. Total gross loans were $512,357,000 as of December 31, 2013,
compared to $395,318,000 as of December 31, 2012, an increase of
$117,039,000 or 29.61%. The total investment portfolio (including Federal
funds sold and interest-earning deposits in other banks) increased 24.71% or
$104,882,000 to $529,398,000. Total deposits increased 33.63% or
$252,711,000 to $1,004,143,000 as of December 31, 2013, compared to
$751,432,000 as of December 31, 2012. Shareholders’ equity increased
$2,378,000 or 2.02% to $120,043,000 as of December 31, 2013, compared to
$117,665,000 as of December 31, 2012. The increase in shareholders’ equity was
driven by the issuance of stock as part of the Visalia Community Bank (VCB)
acquisition and a net increase in retained earnings partially offset by decreases in
other accumulated other comprehensive income (AOCI) and preferred stock.
Accrued interest payable and other liabilities were $16,294,000 as of
December 31, 2013, compared to $11,976,000 as of December 31, 2012, an
increase of $4,318,000. The balance sheet increases during 2013 were primarily
driven by the VCB acquisition which closed on July 1, 2013.
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 3 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,
53
53
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
INVESTMENTS
(Continued)
2013, investment securities with a fair value of $99,209,000, or 22.38% 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, 2013 was 51.02% compared to 52.61% at
December 31, 2012. The loan to deposit ratio of our peers was 70.41% at
September 30, 2013. Peer group information from SNL Financial data includes
bank holding companies in central California with assets from $300 million to
$1.2 billion that are not subchapter S corporations. The total investment
portfolio, including Federal funds sold and interest-earning deposits in other
banks, increased 24.71% or $104,882,000 to $529,398,000 at December 31,
2013, from $424,516,000 at December 31, 2012. The market value of the
portfolio reflected an unrealized loss of $3,884,000 at December 31, 2013,
compared to an unrealized gain of $12,891,000 at December 31, 2012.
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. Under ASC 320-10, the portion of the
impairment that is attributable to a shortage in the present value of expected
future cash flows relative to the amortized cost should be recorded as a current
LOANS
period charge to earnings. The discount rate in this analysis is the original yield
expected at time of purchase.
As of December 31, 2013, 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, 2013, and identified those that had an unrealized loss for at least
a consecutive 12 month period, which had an unrealized loss at December 31,
2013 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.
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.
At December 31, 2013, the Company had a total of 21 PLRMBS with a
remaining principal balance of $4,344,000 and a net unrealized gain of
approximately $1,047,000. Eight of these PLRMBS with a remaining principal
balance of $3,400,000 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, 2013.
See Note 4 to the audited Consolidated Financial Statements for carrying
values and estimated fair values of our investment securities portfolio.
Total gross loans increased $117,039,000 or 29.61% to $512,357,000 as of December 31, 2013, compared to $395,318,000 as of December 31, 2012.
The following table sets forth information concerning the composition of our loan portfolio as of and for the years ended December 31, 2013, 2012, 2011, 2010,
and 2009.
Loan Type
(In thousands)
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
Deferred loan fees, net
Total gross loans
Allowance for credit losses
2013
2012
2011
2010
2009
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
$
87,082
17.0% $
77,956
19.7% $
78,089
18.3% $
81,318
18.8% $
93,282
20.3%
31,649
118,731
6.1%
23.1%
26,599
104,555
6.7%
26.4%
29,958
108,047
7.0%
25.3%
20,604
101,922
4.8%
23.6%
13,903
107,185
3.0%
23.3%
156,781
30.6%
114,444
28.9%
113,183
26.4%
111,888
25.9%
106,606
23.2%
42,329
86,117
44,164
4,548
333,939
48,594
11,252
59,846
(159)
512,357
(9,208)
8.3%
16.8%
8.6%
0.9%
65.2%
9.5%
2.2%
11.7%
100.0%
33,199
53,797
28,400
8,098
237,938
42,932
10,346
53,278
(453)
395,318
(10,133)
8.4%
13.6%
7.2%
2.0%
60.1%
10.9%
2.6%
13.5%
100.0%
33,047
62,523
42,596
7,892
259,241
51,106
9,765
60,871
(764)
427,395
(11,396)
7.7%
14.6%
9.9%
1.8%
60.4%
12.0%
2.3%
14.3%
100.0%
32,038
63,627
44,397
8,103
260,053
58,860
11,261
70,121
(499)
431,597
(11,014)
7.4%
14.7%
10.3%
1.9%
60.2%
13.6%
2.6%
16.2%
100.0%
51,633
71,420
38,759
4,610
273,028
65,353
14,033
79,386
(392)
459,207
(10,200)
11.2%
15.6%
8.4%
1.0%
59.4%
14.2%
3.1%
17.3%
100.0%
Total loans
$
503,149
$
385,185
$
415,999
$
420,583
$
449,007
At December 31, 2013, loans acquired in the VCB acquisition had a balance of $99,948,000, of which $12,686,000 were commercial loans, $71,833,000 were real
estate loans, and $15,429,000 were consumer loans.
54
54
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
LOANS
(Continued)
NONPERFORMING ASSETS
At December 31, 2013, in management’s judgment, a concentration of loans
existed in commercial loans and real-estate-related loans, representing
approximately 97.8% of total loans of which 23.1% were commercial and 74.7%
were real-estate-related. This level of concentration is consistent with 97.4% at
December 31, 2012. 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, 2013 and 2012.
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 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.
At December 31, 2013, total nonperforming assets totaled $7,776,000, or
0.68% of total assets, compared to $9,695,000, or 1.09% of total assets at
December 31, 2012. Total nonperforming assets at December 31, 2013, included
nonaccrual loans totaling $7,586,000, $190,000 in OREO, and no repossessed
assets. Nonperforming assets at December 31, 2012 consisted of $9,695,000 in
nonaccrual loans and no OREO or repossessed assets. At December 31, 2013, we
had ten loans considered troubled debt restructurings (‘‘TDRs’’) totaling
$4,595,000 which are included in nonaccrual loans compared to seven TDRs
totaling $9,245,000 at December 31, 2012. 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,
2013 and 2012 is set forth below. The Company had no loans past due more
than 90 days and still accruing interest at December 31, 2013 and 2012.
Management is not aware of any potential problem loans, which were current
and accruing at December 31, 2013, 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.
Composition of Non-accrual, Past Due and Restructured Loans
(In thousands)
Non-accrual 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
Consumer and Installment
Total non-accrual
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,
2013
December 31,
2012
December 31,
2011
December 31,
2010
December 31,
2009
$
$
$
$
335
1,777
-
158
721
-
1,192
384
1,450
-
-
1,565
4
7,586
-
7,586
1.48%
82.38%
13,357
1,007
$
$
$
$
-
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
-
14,434
$
18,561
$
3.38%
126.66%
23,644
4,368
$
$
4.30%
168.52%
18,561
2,124
$
$
2,868
2,218
7,691
965
301
348
28
2,282
2,214
-
-
44
-
18,959
-
18,959
4.13%
185.87%
18,959
752
We measure our impaired loans by using the fair value of the collateral if the
loan is collateral dependent and the present value of the expected future cash
flows discounted at the loan’s original contractual interest rate if the loan is not
collateral dependent. As of December 31, 2013 and 2012, we had impaired loans
totaling $13,357,000 and $17,105,000, 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
$661,000 for the year ended December 31, 2013 of which $279,000 was
attributable to troubled debt restructurings. Foregone interest on nonaccrual loans
totaled $693,000 and $954,000 for the years ended December 31, 2012 and
2011, respectively of which $669,000 and $769,000 was attributable to troubled
debt restructurings, respectively.
55
55
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
NONPERFORMING ASSETS (Continued)
The following table provides a reconciliation of the change in non-accrual loans for the year ended December 31, 2013.
(Dollars in thousands)
Non-accrual loans:
Commercial and industrial
Real estate
Equity loans and lines of credit
Consumer
Restructured loans (non-accruing):
Commercial and industrial
Real estate
Real estate construction and land
development
Equity loans and lines of credit
Consumer
Total non-accrual
Balances
December 31,
2012
Additions to
Non-accrual
Loans
Net Pay
Downs
Transfer to
Foreclosed
Collateral -
OREO
Returns to
Accrual
Status
Charge
Offs
Balances
December 31,
2013
$
$
-
213
237
-
-
1,362
6,288
1,595
-
9,695
$
$
389
1,847
1,013
9
2,100
7
285
111
5
(54)
(125)
(66)
(2)
(211)
(65)
(5,123)
(141)
(1)
$
$
-
-
(190)
-
$
-
-
-
(7)
-
-
-
-
-
-
(920)
-
-
-
$
-
-
(273)
-
(697)
-
-
-
-
$
5,766
$
(5,788)
$
(190)
$
(927)
$
(970)
$
335
1,935
721
-
1,192
384
1,450
1,565
4
7,586
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,
2013
2012
$
$
-
453
(263)
-
-
-
2,337
(2,349)
-
12
$
190
$
-
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, 2013 the Company had
$190,000 in OREO property which was subsequently sold for book value during
January 2014. As of December 31, 2012, 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.
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 20 quarters, 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. During the first quarter of 2013, management determined that
the most recent 20 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 16 quarter rolling average to a 20 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 would continue to be factored into the
general reserve analysis. Management determined that it was necessary to expand
the average period to capture enough data due to the size of the portfolio to
produce statistically accurate historical loss calculations. We believe this period is
an appropriate look back period.
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.
56
56
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
ALLOWANCE FOR CREDIT LOSSES
(Continued)
The following table sets forth information regarding our allowance for credit
losses at the dates and for the periods indicated:
(Dollars in thousands)
Balance, beginning of year
Provision charged to operations
Losses charged to allowance
Recoveries
Balance, end of year
Years Ended
December 31,
2013
2012
$
$
10,133
-
(1,446)
521
11,396
700
(2,850)
887
$
9,208
$
10,133
Allowance for credit losses to total loans
1.80%
2.56%
As of December 31, 2013, the balance in the allowance for credit losses was
$9,208,000 compared to $10,133,000 as of December 31, 2012. The decrease
was due to net charge offs during the year ended December 31, 2013 being
greater than the amount of the provision for credit losses. Net charge offs totaled
$925,000 while the provision for credit losses was $0. Loans charged off in 2013
were fully reserved at December 31, 2012. The balance of commitments to
extend credit on undisbursed construction and other loans and letters of credit
was $192,667,000 as of December 31, 2013, compared to $162,851,000 as of
December 31, 2012. At December 31, 2013, the balance of a contingent
allocation for probable loan loss experience on unfunded obligations was
$141,000. 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 Directors’ Loan Committee have
established reserve levels based on economic uncertainties and other risks that
exist as of each reporting period.
As of December 31, 2013, the allowance for credit losses was 1.80% of total
gross loans compared to 2.56% as of December 31, 2012. During the year ended
December 31, 2013, there were no major changes in loan concentrations that
significantly affected the allowance for credit losses. The decrease in the ALLL as
a percentage of total loans is primarily due to the inclusion of $99,948,000 from
VCB loans that were recorded at fair value in connection with the acquisition
and therefore have no related allowance. Excluding these VCB loans from the
calculation, the allowance for credit losses to total gross loans as of December 31,
2013 was 2.23%. The increase in loan totals was driven primarily by an increase
in agricultural loans which have a favorable loss history and from the loans
acquired as part of the VCB acquisition. Approximately $2,000,000 in VCB loan
balances and an additional $4,850,000 in unfunded commitments were
refinanced during the later half of 2013, which decreased the allowance allocation
by approximately $300,000 as of December 31, 2013.
The 2013 decrease in the ALLL balance was due to improvement in our
historical losses along with improvements in the risk and composition of the loan
portfolio. Historic loss rates declined substantially, as high-loss quarters began
dropping off from the five-year moving average. Qualitative factors also declined
to reflect the trends in losses, improvements in the general economy, and the
lower level of substandard loans.
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 20
quarters, and qualitative factors. The increase in unallocated reserves in the
current period is primarily due to an additional risk factor which management is
further analyzing related to the recent increase in long-term interest rates and the
effects that higher rates may have on certain borrowers’ debt service capabilities,
particularly those with home equity loans. 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 discounted cash flow 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. Q factors include reserves held for the
effects of lending policies, economic trends, and portfolio trends along with other
dynamics which may cause additional stress to the portfolio. Assumptions
regarding the collateral value of various under-performing loans may affect the
level and allocation of the allowance for credit losses in future periods. The
allowance may also be affected by trends in the amount of charge offs
experienced or expected trends within different loan portfolios.
Non-performing loans totaled $7,586,000 as of December 31, 2013, and
$9,695,000 as of December 31, 2012. The allowance for credit losses as a
percentage of nonperforming loans was 121.38% and 104.52% as of
December 31, 2013 and December 31, 2012, respectively. Management believes
the allowance at December 31, 2013 is adequate based upon its ongoing analysis
of the loan portfolio, historical loss trends and other factors. However, no
assurance can be given that the Company may not sustain charge-offs which are
in excess of the allowance in any given period.
GOODWILL AND INTANGIBLE ASSETS
Business combinations involving the Bank’s acquisition of the equity interests
or net assets of another enterprise give rise to goodwill. Total goodwill at
December 31, 2013 was $29,917,000 compared to $23,577,000 at
December 31, 2012. The total goodwill at December 31, 2013 consisted of
$6,340,000, $14,643,000 and $8,934,000 representing the excess of the cost of
Visalia Community Bank, 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 2013, so goodwill was not required to be retested.
The intangible assets at December 31, 2013 represent the estimated fair value
of the core deposit relationships acquired in the 2008 acquisition of Service
1st Bank of $1,400,000 and the 2013 acquisition of Visalia Community Bank of
$1,365,000. Core deposit intangibles are being amortized using the straight-line
method over an estimated life of seven to ten years from the date of acquisition.
The carrying value of intangible assets at December 31, 2013 was $1,680,000,
net of $1,085,000 in accumulated amortization expense. The carrying value at
December 31, 2012 was $583,000, net of $817,000 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 useful lives
was required. Management performed an annual impairment test on core deposit
intangibles as of September 30, 2013 and determined no impairment was
necessary. Amortization expense recognized was $268,000 for 2013, $200,000 for
2012 and $414,000 2011. $214,000 of the 2011 amortization was the remaining
amortization for the Bank of Madera County core deposit intangible. The core
deposit intangible from the 2005 acquisition of Bank of Madera County was
fully amortized as of December 31, 2011.
57
57
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
GOODWILL AND INTANGIBLE ASSETS
(Continued)
The following table summarizes the Company’s estimated core deposit
intangible amortization expense for each of the next five years (in thousands):
Years Ending December 31,
2014
2015
2016
2017
2018
Thereafter
Total
Estimated Core
Deposit Intangible
Amortization
$
$
337
320
137
137
137
612
1,680
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. 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 $252,711,000 or 33.63% to $1,004,143,000 as of
December 31, 2013, compared to $751,432,000 as of December 31, 2012.
Interest-bearing deposits increased $136,488,000 or 26.70% to $647,751,000 as
of December 31, 2013, compared to $511,263,000 as of December 31, 2012.
Non-interest bearing deposits increased $116,223,000 or 48.39% to
$356,392,000 as of December 31, 2013, compared to $240,169,000 as of
December 31, 2012. These deposit increases are primarily related to the VCB
acquisition which closed on July 1, 2013. Approximately $174 million in
deposits were recorded as a part of the acquisition. Average non-interest bearing
deposits to average total deposits was 33.47% for the year ended December 31,
2013 compared to 30.23% for the same period in 2012. Our total market share
of deposits in Fresno, Madera, and San Joaquin counties was 3.50% in 2013
compared to 3.58% in 2012 based on FDIC deposit market share information
published as of June 2013.
The composition of the deposits and average interest rates paid at
December 31, 2013 and December 31, 2012 is summarized in the table below.
(Dollars in thousands)
NOW accounts
MMA accounts
Time deposits
Savings deposits
Total interest-bearing
Non-interest bearing
% of
% of
December 31, Total Effective December 31, Total Effective
2013
Deposits Rate
2012
Deposits Rate
$
182,364
234,515
168,954
61,918
647,751
356,392
18.2% 0.15% $
23.3% 0.12%
16.8% 0.48%
6.2% 0.08%
64.5% 0.22%
35.5%
161,328
173,486
136,876
39,573
511,263
240,169
21.4% 0.19%
23.1% 0.22%
18.2% 0.64%
5.3% 0.09%
68.0% 0.32%
32.0%
Total deposits
$
1,004,143 100.0%
$
751,432 100.0%
There were no short term borrowings as of December 31, 2013, compared to
$4,000,000 as of December 31, 2012 which represented FHLB advances with a
weighted average interest of 3.59% and weighted average maturity of 0.1 years.
There were no long-term FHLB borrowings outstanding at December 31,
2013 or 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,
2013, 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,
2013, the rate was 1.84%. Interest expense recognized by the Company for the
years ended December 31, 2013, 2012, and 2011 was $98,000, $107,000 and
$100,000, respectively.
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 $120,043,000 as of December 31, 2013,
compared to $117,665,000 as of December 31, 2012. The increase in
shareholders’ equity is the result of increase in retained earnings from net income
of $8,250,000, issuance of common stock as a part of the VCB acquisition of
$12,494,000, exercise of stock options, including the related tax benefit of
$806,000, and the effect of share based compensation expense of $98,000 offset
by a decrease in accumulated other comprehensive income (AOCI) of
$9,872,000, redemption of preferred stocked of $7,000,000, preferred stock
dividends of $350,000, and common stock cash dividends of $2,048,000.
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.
58
58
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
CAPITAL RESOURCES (Continued)
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 the 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
the 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. No shares of Series B Preferred Stock or non-voting common stock
remain outstanding. See Note 14 to the audited Consolidated Financial
Statements in this report for a more detailed discussion.
On August 18, 2011, the Company entered into a Securities Purchase
Agreement (SPA) 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 repurchased 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 for total
consideration of $185,000. See Note 14 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 2013, the Bank declared and paid cash dividends to the Company in
the amount of $18,000,000 in connection with the VCB acquisition, the
Series C Preferred redemption, and cash dividends to the Company’s shareholders
approved by the Company’s Board of Directors. The Bank may not pay any
dividend that would cause it to be deemed not ‘‘well capitalized’’ under
applicable banking laws and regulations. The Company declared and paid a total
of $2,048,000 or $0.20 per common share cash dividend to shareholders of
record during the year ended December 31, 2013.
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. On October 17, 2012, the
Company 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.
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, 2013 and December 31, 2012.
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, 2013
December 31, 2012
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
88,320
43,394
87,674
54,218
43,375
88,320
25,454
87,674
38,151
25,434
96,292
50,908
95,639
63,585
50,868
8.14% $
4.00% $
8.09% $
90,866
34,418
87,911
5.00% $
4.00% $
42,994
34,395
13.88% $
4.00% $
13.79% $
90,866
19,926
87,911
6.00% $
4.00% $
29,848
19,899
15.13% $
8.00% $
15.04% $
97,299
39,853
94,336
10.00% $
8.00% $
49,747
39,798
10.56%
4.00%
10.22%
5.00%
4.00%
18.24%
4.00%
17.67%
6.00%
4.00%
19.53%
8.00%
18.96%
10.00%
8.00%
We are required to deduct the disallowed portion of net deferred tax assets
from Tier 1 capital in calculating our capital ratios. Generally, disallowed deferred
tax assets that are dependent upon future taxable income are limited to the lesser
of the amount of deferred tax assets that we expect to realize within one year,
based on projected future taxable income, or 10% of the amount of our Tier 1
capital. Disallowed deferred tax assets deducted from Tier 1 capital were
$7,330,000 and $53,000 at December 31, 2013 and 2012, 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, 2013, the Company had
unpledged securities totaling $344,015,000 available as a secondary source of
liquidity and total cash and cash equivalents of $112,052,000. Cash and cash
equivalents at December 31, 2013 increased 111.59% compared to
December 31, 2012. 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, 2013, our available
59
59
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
LIQUIDITY
(Continued)
borrowing capacity includes approximately $40,000,000 in Federal funds lines
with our correspondent banks and $272,797,000 in unused FHLB advances. At
December 31, 2013, 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, 2013 and 2012:
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,
2013
2012
$ 40,000 $ 40,000
-
- $
$
$272,797 $133,034
$
4,000
- $
$119,539 $ 94,368
$119,902 $ 94,809
$
$
$
$
51 $
- $
48 $
52 $
127
-
115
129
The liquidity of our parent company, Central Valley Community Bancorp, is
primarily dependent on the payment of cash dividends by its subsidiary, Central
Valley Community Bank, subject to limitations imposed by regulations.
OFF-BALANCE SHEET ITEMS
In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk. These financial instruments include
commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded or
related fees are incurred or received. The balance of commitments to extend
credit on undisbursed construction and other loans and letters of credit was
$192,667,000 as of December 31, 2013 compared to $162,851,000 as of
December 31, 2012. For a more detailed discussion of these financial
instruments, see Note 13 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 13
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 an estimate
of probable credit losses inherent in the Company’s loan portfolio that have been
incurred as of the balance sheet date. The adequacy of the allowance is
monitored on an on-going basis and is based on our management’s evaluation of
numerous factors. These factors include the quality of the current loan portfolio,
the trend in the loan portfolio’s risk ratings, current economic conditions, loan
concentrations, loan growth rates, past-due and nonperforming trends, evaluation
of specific loss estimates for all significant problem loans, historical charge-off
and recovery experience and other pertinent information. See Note 1 to the
audited Consolidated Financial Statements in this Annual Report for more detail
regarding our allowance for credit losses.
The calculation of the allowance for credit losses is by nature inexact, as the
allowance represents our management’s best estimate of the probable losses
inherent in our credit portfolios at the reporting date. These credit losses will
occur in the future, and as such cannot be determined with absolute certainty at
the reporting date.
Impairment of Investment Securities
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 prospect 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.
60
60
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
CRITICAL ACCOUNTING POLICIES
(Continued)
Amortization of Premiums/Discount Accretion on Investments
by nature inexact, and represents management’s best estimate of the grant date
fair value of the share based payments. See Note 15 to the audited Consolidated
Financial Statements in this Annual Report.
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
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, 2013, 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 December 31, 2013, the Company had approximately
888 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, 2012
June 30, 2012
September 30, 2012
December 31, 2012
March 31, 2013
June 30, 2013
September 30, 2013
December 31, 2013
$
$
Sales Prices for the Company’s Common Stock
High
7.25
7.75
8.50
9.25
9.00
10.14
10.50
12.82
Low
5.25
6.77
6.90
7.74
7.69
8.00
9.09
9.50
The Company paid $0.20 per common share cash dividends in 2013. The Company paid a $0.05 per common share cash dividend in 2012. The Company’s primary source
of income with which to pay cash dividends are dividends from the Bank. The Bank would not pay any dividend that would cause it to be deemed not “well capitalized” under
applicable banking laws and regulations. See Note 14 in the audited Consolidated Financial Statements in Item 8 of 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
Sunnyside
570 South Clovis Avenue,
Suite 101
Fresno, CA 93727
(559) 323-3400
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
Investing In Relationships.
www.cvcb.com
CUSTOMER SERVICE
(800) 298-1775
(559) 298-1775
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
Exeter
300 East Pine Street
Exeter, CA 93221
(559) 594-9919
FRESNO
Fig Garden Village
5180 North Palm Avenue,
Suite 105
Fresno, CA 93704
(559) 221-2760
Financial Drive
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
Tracy
60 West 10th Street
Tracy, CA 95376
(209) 830-6995
VISALIA
Caldwell
2245 West Caldwell Avenue
Visalia, CA 93277
(559) 737-5641
Floral
120 North Floral Street
Visalia, CA 93291
(559) 625-8733
Mission Oaks Plaza
5412 Avenida de los Robles
Visalia, CA 93291
(559) 730-2851
Mary’s Vineyard Shopping Center
Walk-Up and Drive-Up ATMs only
1349 East Noble Avenue
Visalia, CA 93292
BUSINESS LENDING
Business Lending
7100 North Financial Drive,
Suite 101
Fresno, CA 93720
(559) 298-1775
(800) 298-1775
Agribusiness
1044 East Herndon Avenue,
Suite 106
Fresno, CA 93720
(559) 323-3493
Real Estate
1044 East Herndon Avenue,
Suite 106
Fresno, CA 93720
(559) 323-3365
SBA Lending
8375 North Fresno Street
Fresno, CA 93720
(559) 323-3384
64
Investing In Relationships.
www.cvcb.com • (800) 298-1775