2015
O U R S U C C E S S
I S YO U R S U C C E S S
For over 36 years, your trust has kept us strong. But it’s your
enthusiasm for sharing us with your business associates, families,
friends, and neighbors that has kept us growing. Thank you for
making Central Valley Community Bank who we are today.
You’re important to us. And we promise to keep giving you
reasons to share us with those who are important to you.
TO O U R S H A R E H O L D E R S
For the Central Valley Community Bank team and customers, 2015 will be remembered as a year of celebration
marking the Bank’s 35th anniversary – a successful year thanks to the long-term strategic planning that has guided
this bank since before its founding in 1980.
2015 Highlights
The Bank was honored as “Best Business Bank” for the second consecutive
year and 2015’s “Best Company to Work For” in The Business Journal’s
“Best of Central Valley Business Awards” for Fresno, Madera, Kings and
Tulare Counties.
In April, a new name was given to the Bank’s investment department:
Central Valley Investment Services. While investment services are still
provided through Investment Centers of America, Inc., the new name
builds greater continuity to the Bank’s brand.
through technology and adapting to consumer demands for healthier
foods. The Bank’s Agribusiness team continues to grow as a result of
bankers with extensive technical industry knowledge and a focus on
relationship-building and referrals.
Commercial Real Estate lending increased in 2015, including construction
lending opportunities, indicating the Valley’s continued economic
recovery. Throughout the Valley, communities are focused on economic
development strategies through collaborative partnerships, many with the
goal of redevelopment in historic districts such as downtowns.
The year saw us continuing to improve efficiencies and reallocate
expenses to take advantage of faster growth opportunities, which is
leading to the closure of one Fresno office effective April 15, 2016.
This closure will result in pre-tax expense savings of approximately
$500,000 annually.
Central Valley Community Bank continues to be classified as
Well Capitalized above regulatory requirements, and is 5 Star rated
by Bauer Financial.
Among the year’s financial highlights were: a return on average assets
(ROAA) of 0.90%, compared to 0.46% in 2014; a $47,233,000
increase in total average loans from $539,529,000 in 2014 to
$586,762,000 in 2015; and a $59,238,000 increase in total average
deposits, from $1,006,560,000 in 2014 to $1,065,798,000 in 2015.
Our full year results reflect the benefits of our 35-year commitment
to relationship banking, and are consistent with improved financial
results throughout the Company. Loans and deposits continued to
grow and we were pleased with our initiatives focused on growing
non-interest income in the areas of mortgage loan generation and
investment income.
Additionally, we experienced a small recovery on a large, former
non-performing loan relationship, and recoveries are expected to
continue into 2016. While the Valley’s economy has improved (albeit
at a slower pace than California as a whole) we believe the Company is
positioned to maintain sensible growth throughout our service area.
The Valley’s water situation continues to require close monitoring.
Fortunately, our Agribusiness clients appear to be prepared and are
successfully managing their operations. Despite the drought, many
crops experienced sustainable yields. Additionally, farmers made innovative
adjustments to conserve water, as well as implemented business practices
2
Small Business lending also rose in 2015, as the Valley’s largest business
segment saw growth in employment, as well as the need for upgraded
equipment and technology. Many of these businesses benefitted from
partnerships with the Bank’s educational resources such as the Service
Core of Retired Executives (SCORE). We continued to demonstrate our
commitment to Valley businesses by being named “2015 Most Active
Lender for SBA 504 Loans” by Success Capital in Stanislaus County for
October 2014 through September 2015.
Mortgage lending increased as well in 2015, almost entirely the result of
referrals. Word-of-mouth recommendations from the Bank’s team and
customers led to significant activity in this category, and we will continue
to focus on additional referral development in 2016.
Leadership Transitions
The Bank’s current success is the result of plans that have been strategically
made and executed throughout our 35-year journey. Plans backed by a
philosophy of financial stability, local decision-making and a commitment
to earn our customers’ business.
These values still shape every decision made by our dedicated executive
leadership team, which ensured the Bank would stay the course through
the season of leadership succession in 2015. Dan Doyle and I executed a
smooth transition upon his retirement as CEO, and Dan Cunningham
continued in his role as Lead Independent Director, symbolizing the
continuity of the strength, stability and experience our team and customers
have come to count on.
Founding Director, Sid Cox, announced his retirement after 36 years
of service, effective January 20, 2016. The Board unanimously appointed
Cox as Founding Director Emeritus, making him only the second to
receive this honor since the Company’s formation. Our team and
customers can rest assured that Cox will continue to offer input, expertise
and advocacy for the Company and Bank as Founding Director Emeritus.
Bank Recognition and Community Service
Our Community Reinvestment Act advocacy with nonprofit, tribal
and government organizations continued to expand in 2015. We
provided financial literacy training, technical assistance on financial
matters, credit consulting, low-cost checking and savings accounts
for the “unbanked,” and economic development efforts for key
neighborhood revitalization initiatives.
Central Valley Community Bank also continued to help fight hunger
and assist communities hardest hit by the drought with the 2nd annual
Food Fund Challenge. Our Valley-wide public relations outreach
motivated businesses to help their local food banks, leading the Bank to
contribute $5,000 to seven food banks in Tulare, Fresno, Madera,
Merced, Stanislaus, San Joaquin and Sacramento Counties.
Not only do such efforts demonstrate our commitment to improving
our communities, but they truly set us apart from the national banks.
As a local bank, we are deeply invested in the success of our communities
and in the lives of those who live there. Our community support simply
makes sense.
Customer Security
The Bank’s Free Document Shredding events were held at 14
Central Valley Community Bank offices in 2015. In its 9th year, this
security-focused campaign allowed businesses and individuals to shred
confidential files during tax season. Valley Crime Stoppers also partnered
with the Bank at select events.
With identity theft still on the rise, the Bank has responded with identity
protection resources at our branches and on our website. Besides our
Free Document Shredding campaign, we have also invested significantly in
state-of-the-art protection, procedures and continued customer education.
We continue to support cybersecurity initiatives throughout the Bank.
Our website offers such resources as: free online security awareness
courses, FDIC consumer protection alerts, identity protection videos,
and consumer information on preventing identity theft, obtaining a
credit report, protecting personal data online and more.
with more robust Cash Management services, eStatements, and expanded
Bill Pay and Mobile Banking services.
The Bank also began a three-year program called Voice of the
Customer, in which we request input on various aspects of our
customer service to ensure that the Bank is meeting needs, providing
a positive experience and encouraging referral opportunities. Based
on our customer scores from 2015, the Bank is performing well above
national benchmarks and the program is already helping us fine-tune
our service.
An Employee Task Force was also formed in 2015, based on feedback
from a team member survey. The Task Force has been studying the results
of that anonymous survey, and preparing an Action Plan to help us
implement programs to improve efficiencies, create employment growth
opportunities, generate improved customer experiences and more.
2016 Outlook
For the remainder of 2016, our focus will be on continued loan
growth, expense management, and developing non-interest income
lines of business in order to further improve ROAA and increase
shareholder value.
We believe the drivers of our success in 2016 will be: asset quality
and maintaining strong underwriting and regulatory compliance,
maintaining sufficient capital and liquidity, the strength and growth
of our balance sheet, a stable and improved net interest margin and
enhanced profitability, and strengthening our organizational structure
as we pursue external growth opportunities in Sacramento.
This year will also see a redesigned CVCB.com with upgrades and features
including: a more responsive design optimized for all device types, intuitive
navigation to make our products and services easier to access, and safe,
secure Online Banking with improved login from all devices.
Central Valley Community Bank will implement two key product
strategies in 2016, including security chip-enabled debit and credit
cards, and a new Business Visa Platinum Rewards program.
Customer Satisfaction
In the first quarter of 2015, we launched a new homepage login for both
Business and Personal Online Banking platforms, offering a more
streamlined and customer-friendly approach to secure online banking.
And in March, we updated to a new Business Online Banking service
Of course, our people are our most valuable investment. And 2016
will find us demonstrating that, as we continue to provide training
at every employee level and reinforce the importance of working
together as a team to give our customers the relationship banking
experience they deserve.
On behalf of the Central Valley Community Bancorp Board of Directors, we thank you
for your loyal support and we will continue to work hard each day to earn your trust as
we serve the financial needs of California’s San Joaquin Valley.
Daniel J. Doyle
Chairman of the Board,
Central Valley Community Bancorp
Central Valley Community Bank
James M. Ford
President & CEO,
Central Valley Community Bancorp
Central Valley Community Bank
3
O U R S T R O N G H I S TO R Y
Central Valley Community Bancorp (the “Company”) was established on November 15, 2000, as the holding company
for Central Valley Community Bank (the “Bank”) and is registered as a bank holding company with the Board of Governors
of the Federal Reserve System. The Company currently conducts no operations other than through its ownership of the Bank.
The common stock of the Company trades on the NASDAQ stock exchange under the symbol CVCY.
A Strong History Of Steady Growth
Central Valley Community Bank, founded in 1979 as Clovis Community
Bank, is a California State chartered bank with deposit accounts insured
by the Federal Deposit Insurance Corporation (FDIC). The Bank
commenced operations on January 10, 1980, in Clovis, California, with
12 professional bankers and beginning assets of $2,000,000. The Bank
now operates 20 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. Additionally, the Bank operates Commercial Real Estate, SBA
and Agribusiness Lending Departments. Central Valley Investment
Services are provided by Investment Centers of America, Inc. With assets
exceeding $1.2 billion as of December 31, 2015, 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 36-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 Executive Management Team,
the Bank continues to focus on personalized service, customer referrals
and employee satisfaction. Central Valley Community Bank’s strong
foundation, concern for its team and training opportunities at all levels 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.
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 the Bank, which continues to expand its commercial
banking team to serve even more customers. Central Valley Community
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 a Preferred SBA Lender.
At Central Valley Community Bank 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 – Central Valley Community Bank 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.
Central Valley Community Bank 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
the Bank 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 the Bank
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 civic and philanthropic organizations in addition to industry
groups at the state and national levels. Providing leadership-by-example
sets the pace for the entire team who are committed to improving and
strengthening the quality of life in the communities where they live, work
and raise their families. This is evidenced by The Business Journal’s “Best
of Central Valley Business Awards” where the Bank was honored as
“Best Business Bank” for the past two years and “Best Company to
Work For” for 2015 in the four-county Central Valley.
For maximum convenience, personal services are available through Personal
Online Banking with Bill Pay, Mobile Banking, Popmoney (person-to-person
payments) and eStatements, in addition to Business Online Banking services
for businesses of all sizes including Bill Pay, Mobile Banking, eStatements
and custom-tailored Cash Management services. In addition, ATMs are
located at most offices, BankLine provides 24-hour telephone banking, and
extended days and banking hours are offered at select offices.
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, the Bank has grown steadily and sensibly
for over 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.
4
James M. Ford
President and CEO,
Central Valley Community Bancorp
Central Valley Community Bank
Daniel J. Doyle
Chairmain of the Board,
Central Valley Community Bancorp
Central Valley Community Bank
William S. Smittcamp
President/Owner,
Wawona Frozen Foods
Edwin S. Darden, Jr.
Architect,
Darden Architects, Inc.
B O A R D O F D I R E C TO R S
A 36-Year Tradition of Strong & Secure Banking
Daniel N. Cunningham
Lead Independent Director,
Central Valley Community Bancorp
Central Valley Community Bank
Director, Quinn Group Inc.
Joseph B. Weirick
Investments
F.T. “Tommy” Elliott, IV
Owner,
Wileman Bros. & Elliott, Inc.
Kaweah Container, Inc.
Steven D. McDonald
Secretary of the Board,
Central Valley Community Bancorp
Central Valley Community Bank
President, McDonald Properties, Inc.
Louis C. McMurray
President,
Charles McMurray Co.
Not Pictured: Founding Directors Emeriti – Wanda L. Rogers and Sidney B. Cox
5
O U R P E O P L E M A K E
T H E D I F F E R E N C E
From the day we opened our doors in 1980, our customers haven’t stopped talking about our refreshingly personal approach to service. A uniquely
customer-focused attitude that comes from the heart of each team member, ensuring deep customer satisfaction and enabling the Bank to keep pace
with the changing needs of the communities we serve. From our strong executive management team to our bankers in every branch, our people are
committed to serving you with the same values that formed the foundation of Central Valley Community Bank… and are dedicated to working
hard to earn your business and trusted referrals every day.
Renee Savage
Senior Vice President,
Loan Servicing
Karen Smith
Senior Vice President,
Regional Manager
Mark Smith
Senior Vice President,
Central Valley Commercial Team Leader
Theodore Thome
Senior Vice President,
Mid-Valley Commercial Team Leader
Rick Whitsell
Senior Vice President,
Sacramento Regional Manager
Senior Vice Presidents
Lawrence Cardoso
Senior Vice President,
Regional Manager
Cathy Chatoian
Senior Vice President,
Cash Management Team Leader
Christopher Clark
Senior Vice President,
Senior Credit Officer
Terry Crawford
Senior Vice President,
Agribusiness Team Leader
Dawn Crusinberry
Senior Vice President,
Controller
Daniel Demmers
Senior Vice President,
Director of InformationTechnology
Teresa Gilio
Senior Vice President,
Central Operations
Marci Madsen
Senior Vice President,
Human Resources
Constantine Makayed
Senior Vice President,
Senior Risk Manager
Jeff Pace
Senior Vice President,
Real Estate Team Leader
Holding Company
& Bank Officers
James M. Ford
President and CEO
David A. Kinross
Executive Vice President,
Chief Financial Officer
Patrick J. Carman
Executive Vice President,
Chief Credit Officer
Bank Executive Officers
Gary D. Quisenberry
Executive Vice President,
Commercial and Business Banking
Lydia E. Shaw
Executive Vice President,
Community Banking
Independent Auditors
Crowe Horwath LLP, Sacramento, CA
Counsel
Downey Brand LLP, Sacramento, CA
6
Exceptional Employees
Each year Central Valley Community Bank’s top-performing
team members are recognized as the Circle of Elite.
The 2015 Circle of Elite included:
Trisha Barba
Assistant Vice President,
BSA/AML Officer
Chris Miller
Assistant Vice President,
Cash Management Service & Support Officer
Jennifer Emerson
Assistant Vice President,
Agribusiness Loan Underwriter
Hiren Patel
Vice President,
Accounting Manager
Vonne Gross
Real Estate Loan Support Specialist
Patricia Payan
Customer Service Supervisor
Christine Hopson
Financial Services Representative
Jose Ramos
Human Resources Specialist
Jacquie Krenz
Assistant Vice President,
Assistant Branch Manager
Monica Sasso
Loan Servicing Operations Specialist
Shelly Lo
Financial Services Representative
Karen Smith
Senior Vice President,
Regional Manager
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
Caring
Integrity
Teamwork
Loyalty
Trustworthiness
Central Valley Community Bank Executive Management
From Left to Right: Patrick J. Carman, Gary D. Quisenberry, James M. Ford, Lydia E. Shaw, David A. Kinross
7
T R E N D A N A LY S I S
Central Valley Community Bancorp
2
6
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8
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9
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5
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3
5
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.
2011 2012 2013 2014 2015
2011 2012 2013 2014 2015
2011 2012 2013 2014 2015
Net Income (In Thousands)
Diluted Earnings Per Share
Average Total Loans (In Thousands)
6
2
5
,
2
2
2
,
1
$
,
3
8
4
7
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4
2011 2012 2013 2014 2015
2011 2012 2013 2014 2015
2011 2012 2013 2014 2015
Average Total Deposits (In Thousands)
Return on Shareholders’ Equity
Average Total Assets (In Thousands)
8
C O M PA R AT I V E S TO C K
P R I C E P E R F O R M A N C E
Central Valley Community Bancorp
Total Return Performance
Index Value
100.00
100.00
100.00
96.46
95.82
88.73
111.49
138.63
105.75
205.31
205.76
227.04
227.04
Central Valley
Community Bancorp
162.35
154.78
152.00
157.42
169.94
SNL NASDAQ
Bank Index
155.18
Russell 2000
2010
2011
2012
2013
2014
2015
Note: The graph above shows the cumulative total shareholder return on Central Valley Community Bancorp common stock compared
to the cumulative total returns for the Russell 2000 Index and the S&P Banks Index, measured as of the last trading day of each year shown.
The graph assumes an investment of $100 on December 31, 2010 and reinvestment of dividends on the date of payment without commissions.
The performance graph represents past performance and should not be considered to be an indication of future stock performance.
The stock price performance shown above should not be indicative of potential future stock price performance.
Source: SNL Financial LC
9
Consolidated Balance Sheets
December 31, 2015 and 2014 (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 $470,080 at December 31, 2015 and $423,639 at
December 31, 2014)
Held-to-maturity investment securities (Fair value of $35,142 at December 31, 2015 and $35,096 at
December 31, 2014)
Loans, less allowance for credit losses of $9,610 at December 31, 2015 and $8,308 at December 31, 2014
Bank premises and equipment, net
Bank owned life insurance
Federal Home Loan Bank stock
Goodwill
Core deposit intangibles
Accrued interest receivable and other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing
Interest bearing
Total deposits
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, none
issued and outstanding
Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 10,996,773 at
December 31, 2015 and 10,980,440 at December 31, 2014
Retained earnings
Accumulated other comprehensive income, net of tax
Total shareholders’ equity
$
$
$
2015
2014
$
23,339
70,988
290
94,617
477,554
31,712
588,501
9,292
20,702
4,823
29,917
1,024
18,594
21,316
55,646
366
77,328
432,535
31,964
564,280
9,949
20,957
4,791
29,917
1,344
19,118
1,276,736
$
1,192,183
$
428,773
687,494
1,116,267
5,155
15,991
1,137,413
-
54,424
80,437
4,462
139,323
376,402
662,750
1,039,152
5,155
16,831
1,061,138
-
54,216
71,452
5,377
131,045
Total liabilities and shareholders’ equity
$
1,276,736
$
1,192,183
The accompanying notes are an integral part of these consolidated financial statements.
10
Consolidated Statements
of Income
For the Years Ended December 31, 2015, 2014, and 2013 (In thousands, except per share amounts)
2015
2014
2013
INTEREST INCOME:
Interest and fees on loans
Interest on deposits in other banks
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
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
Advertising
Professional services
Internet banking expenses
Acquisition and integration
Amortization of core deposit intangibles
Other expense
Total non-interest expenses
Income before provision for income taxes
PROVISION (BENEFIT) 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
Cash dividends per common share
$
$
$
$
$
$
30,504
210
4,793
6,315
41,822
948
99
-
1,047
40,775
600
40,175
3,070
596
1,197
1,042
11
1,495
580
1,396
9,387
20,836
4,669
1,059
1,139
548
520
608
1,504
709
-
320
4,104
36,016
13,546
2,582
10,964
-
10,964
1.00
1.00
0.18
$
$
$
$
$
$
29,493
176
5,538
5,832
41,039
1,060
96
-
1,156
39,883
7,985
31,898
3,280
614
1,205
544
63
904
327
1,227
8,164
19,721
4,835
762
1,820
624
488
589
1,176
520
-
337
4,466
35,338
4,724
(570)
5,294
-
5,294
0.48
0.48
0.20
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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
1,099
7,831
17,427
4,109
696
1,383
527
472
476
1,088
397
976
268
3,866
31,685
9,597
1,347
8,250
350
7,900
0.77
0.77
0.20
11
Consolidated Statements
of Comprehensive Income
For the Years Ended December 31, 2015, 2014, and 2013 (In thousands)
NET INCOME
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
Less: reclassification for net gains included in net income
Amortization of net unrealized gains transferred during the period
Other comprehensive income (loss), before tax
Tax (expense) benefit related to items of other comprehensive income
Total other comprehensive income (loss)
Comprehensive income (loss)
$
$
2015
2014
2013
10,964
$
5,294
$
8,250
59
1,481
(78)
(1,500)
585
(915)
10,049
$
13,847
904
(21)
12,922
(5,259)
7,663
12,957
$
(15,510)
1,265
-
(16,775)
6,903
(9,872)
(1,622)
The accompanying notes are an integral part of these consolidated financial statements.
12
Consolidated Statements
of Changes in Shareholders’ Equity
For the Years Ended December 31, 2015, 2014, and 2013 (In thousands, except share amounts)
Balance, January 1, 2013
Net income
Other comprehensive loss
Redemption of preferred stock Series C
Cash dividend ($0.20 per common share)
Stock issued for acquisition
Stock-based compensation expense
Stock options exercised and related tax benefit
Preferred stock dividends and accretion
Balance, December 31, 2013
Net income
Other comprehensive income
Restricted stock granted, forfeited and related tax benefit
Stock-based compensation expense
Cash dividend ($0.20 per common share)
Stock options exercised and related tax benefit
Balance, December 31, 2014
Net income
Other comprehensive loss
Restricted stock granted, forfeited and related tax benefit
Stock-based compensation expense
Cash dividend ($0.18 per common share)
Stock options exercised and related tax benefit
Preferred Stock
Common Stock
Series C
Shares
Amount
Shares
Amount
7,000 $
7,000 9,558,746 $
40,583 $
-
-
(7,000)
-
-
-
-
-
-
-
-
-
-
(7,000)
-
-
- 1,262,605
-
-
93,329
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- 10,914,680
-
-
-
-
56,850
-
-
-
-
-
8,910
-
- 10,980,440
-
-
-
-
7,263
-
-
-
-
-
9,070
-
-
-
-
-
12,494
98
806
-
53,981
-
-
-
173
-
62
54,216
-
-
(96)
238
-
66
Accumulated
Other
Comprehensive
Income (Loss) Shareholders’
(Net of Taxes)
Equity
Total
Retained
Earnings
62,496 $
8,250
-
-
(2,048)
-
-
-
(350)
68,348
5,294
-
-
-
(2,190)
-
71,452
10,964
-
-
-
(1,979)
-
7,586 $
-
(9,872)
-
-
-
-
-
-
(2,286)
-
7,663
-
-
-
-
5,377
-
(915)
-
-
-
-
117,665
8,250
(9,872)
(7,000)
(2,048)
12,494
98
806
(350)
120,043
5,294
7,663
-
173
(2,190)
62
131,045
10,964
(915)
(96)
238
(1,979)
66
Balance, December 31, 2015
- $
- 10,996,773 $
54,424 $
80,437 $
4,462 $
139,323
The accompanying notes are an integral part of these consolidated financial statements.
13
Consolidated Statements
of Cash Flows
For the Years Ended December 31, 2015, 2014, and 2013 (In thousands)
2015
2014
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Net decrease in deferred loan fees
Depreciation
Accretion
Amortization
Stock-based compensation
Excess tax benefit from exercise of stock options
Provision for credit losses
Net realized gains on sales and calls of available-for-sale investment securities
Net realized gains on calls of held-to-maturity investment securities
Net loss (gain) 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 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 calls of held-to-maturity investment securities
Proceeds from maturity and principal repayment of available-for-sale investment
securities
Net increase in loans
Proceeds from sale of other real estate owned
Purchases of premises and equipment
Purchases of bank owned life insurance
FHLB stock (purchased) redeemed
Proceeds from bank owned life insurance
Proceeds from sale of premises and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, interest-bearing and savings deposits
Net (decrease) increase in time deposits
Repayments of short-term borrowings to Federal Home Loan Bank
Redemption of preferred stock Series C
Proceeds from exercise of stock options
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:
Transfer of securities from available-for-sale to held-to-maturity
Unrealized gain on transfer of securities from available-for-sale to held-to-maturity
Foreclosure of loan collateral and recognition of other real estate owned
Assumption of debt related to foreclosure of other real estate owned
Common stock issued in Visalia Community Bank acquisition
The accompanying notes are an integral part of these consolidated financial statements.
14
$
10,964
$
5,294
$
(270)
1,392
(1,196)
8,024
238
(6)
600
(1,481)
(14)
6
(11)
(596)
(345)
2,109
-
(963)
(933)
17,518
-
(198,851)
93,167
810
53,593
(24,776)
359
(741)
(325)
(32)
1,365
-
(75,431)
90,732
(13,617)
-
-
60
6
(1,979)
-
75,202
17,289
77,328
(305)
1,355
(1,015)
7,949
173
(7)
7,985
(904)
-
201
(63)
(614)
-
(3,021)
-
537
(408)
17,157
-
(146,468)
79,757
-
52,665
(69,047)
488
(1,328)
(900)
(292)
-
363
(84,762)
50,643
(15,634)
-
-
55
7
(2,190)
-
32,881
(34,724)
112,052
8,250
(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
$
$
$
$
$
$
$
$
94,617
$
77,328
$
112,052
1,059
1,865
-
-
227
121
-
$
$
$
$
$
$
$
1,171
1,360
31,346
163
235
-
-
$
$
$
$
$
$
$
1,430
1,790
-
-
190
-
12,494
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 in accordance
with U.S. Generally Accepted Accounting Principles 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.
Cash and Cash Equivalents - For the purpose of the statement of cash flows,
cash, due from banks with maturities less than 90 days, interest-earning deposits
in other banks, 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
banks, 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 in
the period which the transfer occurs. For the year ended December 31, 2015,
there were no transfers between categories. During the year ended December 31,
2014 management transferred $31,346,000 of securities from available-for-sale to
held-to-maturity.
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 collectability 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
collectability 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. Loans past due 90 days
still on accrual are individually evaluated and deemed to be well secured, with no
loss potential, and expected to be fully paid or brought current within a
reasonable time. 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
15
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
are no longer past due and unpaid, or the loan otherwise becomes both well
secured and in the process of collection. 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
a valuation allowance for probable incurred credit losses in the Company’s loan
portfolio. 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.
At December 31, 2013, the Company had 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 Company’s allowance for credit 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. At
December 31, 2014, the Company no longer had any purchased credit impaired
loans.
16
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
segment (and in certain cases peer loss data) 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 collectability of the portfolio. The most recent review of
risk rating was completed in December 2015. 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 credit 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
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Consumer and installment - An installment loan portfolio is usually comprised
values, the Company’s underwriting policies, the character of the loan portfolio,
and probable losses inherent in the portfolio taken as a whole. Inherent credit
risk and qualitative reserve factors are inherently subjective and are driven by the
repayment risk associated with each class of loans described below.
Commercial:
Commercial and industrial - Commercial and industrial loans are generally
underwritten to existing cash flows of operating businesses. Debt coverage is
provided by business cash flows and economic trends influenced by
unemployment rates and other key economic indicators are closely correlated to
the credit quality of these loans. Past due receivables indicate the borrower’s
capacity to repay their obligations may be deteriorating.
Agricultural land and production - Loans secured by crop production and
livestock are especially vulnerable to two risk factors that are largely outside the
control of Company and borrowers: commodity prices and weather conditions.
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 costs 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.
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. 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, when acquired, is initially recorded at fair value less estimated disposition
costs, establishing a new cost basis. 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, 2015 and 2014 represents the excess of the cost of Visalia
Community Bank, Service 1st Bancorp and Bank of Madera County 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
17
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 2015, so goodwill was not required to be retested. Goodwill is
the only intangible asset with an indefinite life on our balance sheet.
Intangible Assets - The intangible assets at December 31, 2015 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, 2015 and determined no impairment was
necessary. Core deposit intangibles are also tested for impairment between annual
tests if an event occurs or circumstances change that would more likely than not
reduce the fair value below its carrying amount. No such events or circumstances
arose during the fourth quarter of 2015, so core deposit intangibles were not
required to be retested.
Loan Commitments and Related Financial Instruments - Financial instruments
include off-balance 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.
18
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, if any, on preferred stock and
accretion of discount) by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock, such as stock
options or warrants, result in the issuance of common stock which shares in the
earnings of the Company. All data with respect to computing earnings per share
is retroactively adjusted to reflect stock dividends and splits and the treasury
stock method is applied to determine the dilutive effect of stock options in
computing diluted EPS.
Comprehensive Income - Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income includes unrealized
gains and losses on securities available for sale which are also recognized as
separate components of equity.
Loss Contingencies - Loss contingencies, including claims and legal actions arising
in the ordinary course of business, are recorded as liabilities when the likelihood
of loss is probable and an amount or range of loss can be reasonably estimated.
Management does not believe there are such matters that will have a material
effect on the financial statements.
Restrictions on Cash: - Cash on hand or on deposit with the Federal Reserve
Bank was required to meet regulatory reserve and clearing requirements.
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, 2015, 2014, and 2013 were
$6,000, $7,000, and $17,000, 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.
Recently Issued Accounting Standards:
FASB Accounting Standards Update (ASU) 2015-03 - Interest-Imputation of
Interest (Subtopic 835-30)—Simplifying the Presentation of Debt Issuance Costs:
ASU 2015-03 requires the debt issuance costs related to a recognized debt
liability be presented in the balance sheet as a direct deduction from the carrying
amount of that debt liability, consistent with debt discounts. The recognition and
measurement guidance for debt issuance costs is not affected by the amendments
in ASU 2015-03. ASU 2015-03 will be effective for the Company on January 1,
2016, and is not expected to have a significant impact on the Company’s
consolidated financial statements.
FASB Accounting Standards Update (ASU) 2015-16 - Business Combinations
(Subtopic 805)—Simplifying the Accounting for Measurement-Period Adjustments:
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
ASU 2015-16 requires that adjustments to provisional amounts that are identified
during the measurement period of a business combination be recognized in the
reporting period in which the adjustment amounts are determined. Furthermore,
the income statement effects of such adjustments, if any, must be calculated as if
the accounting had been completed at the acquisition date. The portion of the
amount recorded in current-period earnings that would have been recorded in
previous reporting periods if the adjustment to the provisional amounts had been
recognized as of the acquisition date is required to be reported separately on the
face of the income statement, or disclosed within the footnotes to the financial
statements. Under previous guidance, adjustments to provisional amounts
identified during the measurement period are to be recognized retrospectively.
ASU 2015-16 is effective for the Company on January 1, 2016 and is not
expected to have a significant impact on the Company’s consolidated financial
statements.
FASB Accounting Standards Update (ASU) 2016-01 - Financial Instruments—
Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities, was issued January 2016. ASU 2016-01 addresses certain
aspects of recognition, measurement presentation, and disclosure of financial
instruments. Most notably the ASU changes the income statement impact of
equity investments held by the Company and the requirement for the Company
to use the exit price notion when measuring the fair value of financial
instruments for disclosure purposes. The Company will be required to adopt the
provisions of ASU 2016-01 on January 1, 2018. Management is evaluating the
impact that this ASU will have on the Company’s financial statements.
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. Visalia Community Bank’s assets
(unaudited) as of July 1, 2013 totaled approximately $197.621 million. 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 $1.4 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.
Pro Forma Results of Operations
The accompanying consolidated financial statements include the accounts of
Visalia Community Bank since July 1, 2013. The following table presents pro
forma results of operations information for the periods presented as if the
acquisition had occurred on January 1, 2013 after giving effect to certain
adjustments. The pro forma results of operations for the year ended
December 31, 2013 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 2013. 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 Year Ended
December 31,
2013
$36,773
298
8,576
36,917
8,134
783
$ 7,351
350
$ 7,001
$
$
0.68
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.
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.
19
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS (Continued)
The estimated carrying and fair values of the Company’s financial instruments are
as follows (in thousands):
December 31, 2015
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Amount
$ 23,339 $ 23,339 $
- $
- $ 23,339
70,988
290
70,988
290
-
-
-
-
-
70,988
290
477,554
investment securities
477,554
7,536
470,018
31,712
588,501
-
-
35,142
-
-
585,737
35,142
585,737
4,823
N/A
N/A
N/A
N/A
6,355
27
3,414
2,914
6,355
1,116,267
976,433
139,353
- 1,115,786
5,155
101
-
-
-
76
3,200
3,200
25
101
December 31, 2014
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Amount
$ 21,316 $ 21,316 $
- $
- $ 21,316
Financial assets:
Cash and due from
banks
Interest-earning
deposits in other
banks
Federal funds sold
Available-for-sale
Held-to-maturity
investment securities
Loans, net
Federal Home Loan
Bank stock
Accrued interest
receivable
Financial liabilities:
Deposits
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
55,646
366
55,646
366
-
-
-
-
-
55,646
366
432,535
investment securities
432,535
7,585
424,950
Held-to-maturity
investment securities
Loans, net
Federal Home Loan
Bank stock
Accrued interest
receivable
Financial liabilities:
Deposits
Junior subordinated
deferrable interest
debentures
Accrued interest
payable
31,964
564,280
-
-
35,096
-
-
564,667
35,096
564,667
4,791
N/A
N/A
N/A
N/A
5,793
25
3,212
2,556
5,793
1,039,152
885,704
153,475
- 1,039,179
5,155
114
-
-
-
90
3,119
3,119
24
114
These estimates do not reflect any premium or discount that could result from
offering the Company’s entire holdings of a particular financial instrument for
sale at one time, nor do they attempt to estimate the value of anticipated future
business related to the instruments. In addition, the tax ramifications related to
the realization of unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in any of these estimates.
20
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) Investment Securities - 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 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 credit losses. For collateral dependent loans, fair value is
commonly based on recent real estate appraisals. These appraisals may utilize a
single valuation approach or a combination of approaches including comparable
sales and the income approach. Adjustments are routinely made in the appraisal
process by the independent appraisers to adjust for differences between the
comparable sales and income data available. Such adjustments are usually
significant and typically result in a Level 3 classification of the inputs for
determining fair value. Non-real estate collateral may be valued using an
appraisal, net book value per the borrower’s financial statements, or aging reports,
adjusted or discounted based on management’s historical knowledge, changes in
market conditions from the time of the valuation, and management’s expertise
and knowledge of the client and client’s business, resulting in a Level 3 fair value
classification. Impaired loans are evaluated on a quarterly basis for additional
impairment and adjusted accordingly. The methods utilized to estimate the fair
value of loans do not necessarily represent an exit price.
(d) FHLB Stock - It is not practicable to determine the fair value of FHLB stock
due to restrictions placed on its transferability.
(e) Other real estate 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.
(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.
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS
(Continued)
Non-recurring Basis
(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 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, 2015 (in
thousands):
Fair
Value
Level 1
Level 2
Level 3
Impaired loans:
Consumer:
Equity loans and lines
of credit
$
132 $
- $
- $
Total consumer
Total impaired
loans
132
132
-
-
-
-
132
132
132
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, 2015:
Total assets measured at fair
value on a non-recurring
basis
$
132 $
- $
- $
132
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
52,901 $
- $
52,901 $
188,268
225,259
-
-
188,268
225,259
3,590
7,536
-
7,536
3,590
-
Total assets measured at
fair value on a
recurring basis
$ 477,554 $
7,536 $ 470,018 $
-
-
-
-
-
-
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,
2015, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at
December 31, 2015. Also there were no liabilities measured at fair value on a
recurring basis at December 31, 2015.
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 credit 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 ASC 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, 2015.
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 $166,000 with
a valuation allowance of $34,000 at December 31, 2015, and a resulting fair
value of $132,000. The valuation allowance represents specific allocations for the
allowance for credit losses for impaired loans.
During the year ended December 31, 2015 there was no provision for credit
losses related to loans carried at fair value, compared to a provision of
$3,921,000 for the year ended December 31, 2014. During the year ended
December 31, 2015 there were no net charge-offs related to loans carried at fair
value compared to $3,539,000 of charge-offs for the year ended December 31,
2014.
There were no liabilities measured at fair value on a non-recurring basis at
December 31, 2015.
21
Fair
Value
Level 1
Level 2
Level 3
credit
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, 2014:
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):
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
33,090 $
- $
33,090 $
149,295
237,872
-
-
149,295
237,872
4,693
7,585
-
7,585
4,693
-
Total assets measured at
fair value on a
recurring basis
$ 432,535 $
7,585 $ 424,950 $
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, 2014. Also there were no liabilities measured at fair value on a
recurring basis at December 31, 2014.
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
22
recognized at fair value which was below cost at December 31, 2014 (in
thousands):
Fair
Value
Level 1
Level 2
Level 3
Impaired loans:
Commercial:
Commercial and industrial $
7,019 $
- $
- $
7,019
Total commercial
7,019
Consumer:
Equity loans and lines of
Total consumer
777
777
-
-
-
-
-
-
7,019
777
777
-
-
-
-
-
-
Total impaired loans
$
7,796 $
- $
- $
7,796
Total assets measured at fair
value on a non-recurring
basis
$
7,796 $
- $
- $
7,796
Impaired loans that are measured for impairment using the fair value of the
collateral for collateral dependent loans had a principal balance of $8,239,000
with a valuation allowance of $443,000 at December 31, 2014, and a resulting
fair value of $7,796,000. The valuation allowance represents specific allocations
for the allowance for credit losses for impaired loans.
The following table presents quantitative information about level 3 fair value
measurements for financial instruments measured at fair value on a non-recurring
basis at December 31, 2014 (dollars in thousands):
Description
Fair Value
Valuation
Technique(s)
Significant Unobservable
Input(s)
Range (Weighted
Average)
Commercial
$
7,019
and industrial
Sales
comparison
Appraiser adjustments
on sales comparable data
0.00%-6.00%
Management Management
estimates
adjustments for
depreciation in values
depending on property
types
8.00%-25.00%
Equity loans
$
777
and lines of
credit
Sales
comparison
Appraiser adjustments
on sales comparable data
0.00%-3.50%
Management Management
estimates
adjustments for
depreciation in values
depending on property
types
11.00%
4.
INVESTMENT SECURITIES
The fair value of the available-for-sale investment portfolio reflected an unrealized
gain of $7,474,000 at December 31, 2015 compared to an unrealized gain of
$8,896,000 at December 31, 2014. The unrealized gain recorded is net of
$3,076,000 and $3,661,000 in tax liabilities as accumulated other comprehensive
income within shareholders’ equity at December 31, 2015 and 2014, respectively.
Notes to
Consolidated Financial Statements
4.
INVESTMENT SECURITIES (Continued)
December 31, 2014
The following tables set forth the carrying values and estimated fair values of
our investment securities portfolio at the dates indicated (in thousands):
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Estimated
Fair Value
December 31, 2015
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Held-to-Maturity Securities
Debt securities:
Obligations of states and
political subdivisions
Estimated
Fair Value
$
31,964 $
3,138 $
(6) $
35,096
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
52,803 $
315 $
(217) $
52,901
181,785
6,779
(296)
188,268
225,636
1,042
(1,419)
225,259
2,356
7,500
1,234
36
-
-
3,590
7,536
During 2014, the Company transferred from available-for-sale to
held-to-maturity selected municipal securities having a book value of
$31,346,000, and a market value of $31,509,000, including a net unrealized gain
of $163,000. During the year ended and at December 31, 2015, accretion of this
unrealized gain totaling $78,000 was recorded as interest income and the
remaining balance of unamortized unrealized gains of $64,000 is included as a
component of accumulated other comprehensive income in shareholders’ equity.
During the year ended and at December 31, 2014, accretion of this unrealized
gain totaling $21,000 was recorded as interest income and the remaining balance
of unamortized unrealized gains of $142,000 is included as a component of
accumulated other comprehensive income in shareholders’ equity.
Proceeds and gross realized gains (losses) on investment securities for the years
ended December 31, 2015, 2014, and 2013 are shown below (in thousands):
$ 470,080 $
9,406 $
(1,932) $ 477,554
Years Ended December 31,
2015
2014
2013
December 31, 2015
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Estimated
Fair Value
Available-for-Sale Securities
Proceeds from sales or calls
Gross realized gains from sales or calls
Gross realized losses from sales or calls
Held-to-Maturity Securities
Proceeds from calls
Gross realized gains from calls
$
$
$
$
$
$
93,167
$
1,715
(234) $
$
79,757
$
1,754
(850) $
88,146
2,728
(1,463)
810
14
$
$
-
-
$
$
-
-
Held-to-Maturity Securities
Debt securities:
Obligations of states and
political subdivisions
$
31,712 $
3,431 $
(1) $
35,142
December 31, 2014
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
33,088 $
245 $
(243) $
33,090
143,343
6,266
(314)
149,295
236,629
2,033
(790)
237,872
3,079
7,500
1,614
85
-
-
4,693
7,585
$ 423,639 $
10,243 $
(1,347) $ 432,535
Losses recognized in 2015, 2014, and 2013 were incurred in order to
reposition the investment securities portfolio based on the current rate
environment. The securities which were sold at a loss were acquired when the
rate environment was not as volatile. The securities which were sold were
primarily purchased several years ago to serve a purpose in the rate environment
in which the securities were purchased. The Company addressed risks in the
security portfolio by selling these securities and using the proceeds to purchase
securities that fit with the Company’s current risk profile.
The provision for income taxes includes $615,000, $372,000, and $521,000
income tax impact from the reclassification of unrealized net gains on
available-for-sale securities to realized net gains on available-for-sale securities for
the years ended December 31, 2015, 2014, and 2013, respectively.
23
Notes to
Consolidated Financial Statements
4.
INVESTMENT SECURITIES
(Continued)
Investment securities with unrealized losses at December 31, 2015 and 2014
are summarized and classified according to the duration of the loss period as
follows (in thousands):
December 31, 2015
Less than 12 Months 12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Available-for-Sale Securities
Debt Securities:
U.S. Government
agencies
Obligations of states
and political
subdivisions
U.S. Government
sponsored entities
and agencies
collateralized by
residential mortgage
obligations
$ 21,348 $
(125) $
3,954 $
(92) $ 25,302 $
(217)
40,016
(296)
-
-
40,016
(296)
124,688
(1,109)
16,234
(310) 140,922
(1,419)
$ 186,052 $
(1,530) $ 20,188 $
(402) $ 206,240 $
(1,932)
December 31, 2015
Less than 12 Months 12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Held-to-Maturity Securities
Debt Securities:
Obligations of states
and political
subdivisions
$
1,053 $
(1) $
- $
- $
1,053 $
(1)
December 31, 2014
Less than 12 Months 12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Available-for-Sale Securities
Debt Securities:
U.S. Government
agencies
Obligations of states
and political
subdivisions
U.S. Government
sponsored entities
and agencies
collateralized by
residential mortgage
obligations
$ 10,950 $
(193) $
1,737 $
(50) $ 12,687 $
(243)
16,776
(89)
15,290
(225)
32,066
(314)
52,905
(420)
31,000
(370)
83,905
(790)
$ 80,631 $
(702) $ 48,027 $
(645) $ 128,658 $
(1,347)
December 31, 2014
Less than 12 Months 12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Held-to-Maturity Securities
Debt Securities:
Obligations of states
and political
subdivisions
$
1,067 $
(6) $
- $
- $
1,067 $
(6)
24
We periodically evaluate each investment security for other-than-temporary
impairment, relying primarily on industry analyst reports, observation of market
conditions and interest rate fluctuations. The portion of the impairment that is
attributable to a shortage in the present value of expected future cash flows
relative to the amortized cost should be recorded as a current period charge to
earnings. The discount rate in this analysis is the original yield expected at time
of purchase.
As of December 31, 2015, 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 investment securities with an unrealized loss at December 31, 2015,
and identified those that had an unrealized loss for at least a consecutive
12 month period, which had an unrealized loss at December 31, 2015 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 downgraded 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.
U.S. Government Agencies - At December 31, 2015, the Company held 17 U.S.
Government agency securities of which seven 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. The contractual terms
of those investments do not permit the issuer to settle the securities at a price
less than the amortized costs of the 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, 2015.
Obligations of States and Political Subdivisions - At December 31, 2015, the
Company held 154 obligations of states and political subdivision securities of
which 13 were in a loss position for less than 12 months and none were in a loss
position and have been in a loss position for 12 months or more. The unrealized
losses on the Company’s investments in obligations of states and political
subdivision securities were caused by interest rate changes. Because the decline in
market value is attributable to changes in interest rates and not credit quality,
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, 2015.
U.S. Government Sponsored Entities and Agencies Collateralized by Residential
Mortgage Obligations - At December 31, 2015, the Company held 186 U.S.
Government sponsored entity and agency securities collateralized by residential
mortgage obligation securities of which 48 were in a loss position for less than
12 months and 14 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, 2015.
Private Label Residential Mortgage Backed Securities - At December 31, 2015,
the Company had a total of 17 PLRMBS with a remaining principal balance of
$2,356,000 and a gross and net unrealized gain of approximately $1,234,000.
None of these securities had an unrealized loss at December 31, 2015. Nine of
these PLRMBS with a remaining principal balance of $2,094,000 had credit
Notes to
Consolidated Financial Statements
4.
INVESTMENT SECURITIES
(Continued)
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
ratings below investment grade. The Company continues to monitor these
securities for changes in credit ratings or other indications of credit deterioration.
The following table provides a rollforward for the years ended December 31,
2015 and 2014 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 of credit losses recognized
Amounts related to credit loss for which an OTTI
charge was not previously recognized
Change in value attributable to other factors
Ending balance of credit losses recognized
Years ended
December 31,
2015
2014
747
$
800
-
-
-
(53)
747
$
747
$
$
The amortized cost and estimated fair value of investment securities at
December 31, 2015 and 2014 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.
Available-for-Sale Securities
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
Held-to-Maturity Securities
After ten years
December 31, 2015
Amortized
Cost
Estimated
Fair Value
$
-
12,297
37,376
132,112
$
-
12,695
38,397
137,176
181,785
188,268
225,636
225,259
2,356
7,500
3,590
7,536
$ 470,080
$ 477,554
December 31, 2015
Amortized
Cost
Estimated
Fair Value
$
31,712
$
35,142
Investment securities with amortized costs totaling $116,268,000 and
$96,490,000 and fair values totaling $119,773,000 and $100,747,000 were
pledged as collateral for borrowing arrangements, public funds and for other
purposes at December 31, 2015 and 2014, respectively.
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
2015
loans
2014
loans
$
102,197
17.1% $
89,007
15.5%
30,472
5.1%
39,140
6.8%
commercial
132,669
22.2%
128,147
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
Net deferred
origination costs
Total gross loans
Allowance for credit
losses
168,910
28.2%
176,804
38,685
6.5%
38,923
117,244
19.6%
106,788
74,867
10,520
12.5%
1.8%
57,501
6,611
22.3%
30.9%
6.8%
18.7%
10.0%
1.2%
410,226
68.6%
386,627
67.6%
42,296
12,503
7.1%
2.1%
47,575
10,093
8.3%
1.8%
54,799
9.2%
57,668
10.1%
417
146
598,111
100.0%
572,588
100.0%
(9,610)
(8,308)
At December 31, 2015 and 2014, loans originated under Small Business
Administration (SBA) programs totaling $10,704,000 and $8,782,000,
respectively, were included in the real estate and commercial categories.
Approximately $215,223,000 in loans were pledged under a blanket lien as
collateral to the FHLB for the Bank’s remaining borrowing capacity of
$308,356,000 as of December 31, 2015. 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 $2,056,000, $1,657,000, and
$1,373,000 have been deferred as loan origination costs for the years ended
December 31, 2015, 2014, and 2013, respectively.
Purchased Credit Impaired Loans
At December 31, 2013, the Company had 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. There were no such
loans outstanding at December 31, 2015 and 2014.
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. 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
25
52,803
52,901
Total loans
$
588,501
$
564,280
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
(Continued)
(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.
Accretable yield, or income expected to be collected for the year ended
December 31, 2015, 2014, and 2013 is as follows (in thousands):
Years ended December 31,
2015
2014
2013
Balance at beginning of year
New loans acquired
Accretion of income
Reclassification from non-accretable
difference
Disposals
Balance at end of year
$
$
-
-
-
-
-
-
$
$
$
94
-
(907)
813
-
-
$
-
105
(124)
113
-
94
Allowance for Credit Losses
The allowance for credit losses (the ‘‘allowance’’) is a valuation allowance for
probable incurred credit losses in the Company’s loan portfolio. 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 credits 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 probable incurred 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 (and in
certain cases peer loss data) 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.
Changes in the allowance for credit losses were as follows (in thousands):
Years Ended December 31,
2015
2014
2013
Balance, beginning of year
Provision charged to operations
Losses charged to allowance
Recoveries
$
$
$
8,308
600
(961)
1,663
9,208
7,985
(9,834)
949
10,133
-
(1,446)
521
Balance, end of year
$
9,610
$
8,308
$
9,208
The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 2015 and 2014 by portfolio
segment (in thousands):
Allowance for credit losses:
Beginning balance, January 1, 2015
Provision charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2015
Allowance for credit losses:
Beginning balance, January 1, 2014
Provision charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2014
Commercial
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
$
3,130
190
(802)
1,044
3,562
2,444
9,660
(9,145)
171
$
$
$
4,058
1,114
-
32
5,204
5,174
(1,447)
(183)
514
$
$
$
1,078
(772)
(159)
587
734
1,168
152
(506)
264
$
$
$
42
68
-
-
110
422
(380)
-
-
8,308
600
(961)
1,663
9,610
9,208
7,985
(9,834)
949
3,130
$
4,058
$
1,078
$
42
$
8,308
The following is a summary of the allowance for credit losses by impairment methodology and portfolio segment as of December 31, 2015 and December 31, 2014
(in thousands):
Allowance for credit losses:
Ending balance, December 31, 2015
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Ending balance, December 31, 2014
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
26
Commercial
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
3,562
1
3,561
3,130
230
2,900
$
$
$
$
$
$
5,204
128
5,076
4,058
162
3,896
$
$
$
$
$
$
734
35
699
1,078
220
858
$
$
$
$
$
$
110
-
110
42
-
42
$
$
$
$
$
$
9,610
164
9,446
8,308
612
7,696
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, 2015 and December 31, 2014 by portfolio segment and by impairment methodology (in
thousands):
Loans:
Ending balance, December 31, 2015
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance, December 31, 2014
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Commercial
Real Estate
Consumer
Total
$
$
$
$
$
$
132,669
30
132,639
128,147
7,268
120,879
$
$
$
$
$
$
410,226
5,199
405,027
386,627
8,512
378,115
$
$
$
$
$
$
54,799
1,470
53,329
57,668
3,046
54,622
$
$
$
$
$
$
597,694
6,699
590,995
572,442
18,826
553,616
The following table shows the loan portfolio by class allocated by management’s internal risk ratings at December 31, 2015 (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
$
77,783
20,422
$
22,607
-
$
1,807
10,050
$
163,570
34,916
110,833
66,347
10,520
40,332
12,488
3,785
644
1,683
-
-
-
-
1,555
3,125
4,728
8,520
-
1,964
15
Total
$
537,211
$
28,719
$
31,764
$
-
-
-
-
-
-
-
-
-
-
$
102,197
30,472
168,910
38,685
117,244
74,867
10,520
42,296
12,503
$
597,694
The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2014 (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
$
78,333
39,140
$
170,568
32,114
95,831
55,018
6,611
42,334
10,072
2,345
-
2,778
1,130
215
2,123
-
72
-
$
8,329
-
$
3,458
5,679
10,742
360
-
5,169
21
Total
$
530,021
$
8,663
$
33,758
$
-
-
-
-
-
-
-
-
-
-
$
89,007
39,140
176,804
38,923
106,788
57,501
6,611
47,575
10,093
$
572,442
27
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, 2015 (in thousands):
Total Past
Due
Current
Total
Loans
Recorded
Investment
> 90 Days
Accruing
Non-
accrual
Greater
Than
90 Days
Past Due
$
30-59 Days
Past Due
60-89 Days
Past Due
Commercial:
Commercial and industrial
Agricultural land and
$
production
Real estate:
Owner occupied
Real estate construction and
other land loans
Commercial real estate
Agricultural real estate
Other real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
$
-
-
-
-
-
98
-
-
-
38
-
-
-
-
-
-
-
166
-
Total
$
136
$
166
$
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
98
-
-
166
38
$
102,197
$
102,197
$
30,472
-
168,910
38,685
117,146
74,867
10,520
-
42,130
12,465
30,472
-
168,910
38,685
117,244
74,867
10,520
-
42,296
12,503
$
302
$
597,392
$
597,694
$
The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2014 (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
$
172
$
88
$
-
-
164
547
-
-
-
-
30
-
-
-
-
-
-
-
-
Greater
Than
90 Days
Past Due
Total Past
Due
Current
Total
Loans
Recorded
Investment
> 90 Days
Accruing
-
-
249
-
-
-
-
227
-
$
260
$
88,747
$
89,007
$
-
413
547
-
-
-
227
30
39,140
176,391
38,376
106,788
57,501
6,611
47,348
10,063
39,140
-
176,804
38,923
106,788
57,501
6,611
-
47,575
10,093
Total
$
913
$
88
$
476
$
1,477
$
570,965
$
572,442
$
28
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
29
-
347
-
567
-
-
1,457
13
$
2,413
Non-
accrual
$
7,265
-
1,363
547
1,468
360
-
3,030
19
$
14,052
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, 2014 (in thousands):
The following table shows information related to impaired loans by class at
December 31, 2015 (in thousands):
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
With no related allowance
recorded:
Commercial:
Commercial and industrial
$
-
$
1
$
Real estate:
Owner occupied
Real estate construction and
other land loans
Commercial real estate
Total real estate
Consumer:
Equity loans and lines of
credit
Total with no related
allowance recorded
With an allowance recorded:
Commercial:
Commercial and industrial
Real estate:
Owner occupied
Commercial real estate
Total real estate
Consumer:
Equity loans and lines of
credit
Consumer and installment
Total consumer
Total with an allowance
recorded
Total
166
3,125
1,162
4,453
1,291
5,744
30
180
566
746
166
13
179
955
$
6,699
$
245
3,125
1,302
4,672
1,991
6,664
33
212
588
800
179
15
194
1,027
7,691
$
-
-
-
-
-
-
-
1
18
110
128
33
2
35
164
164
The recorded investment in loans excludes accrued interest receivable and net
loan origination fees, due to immateriality.
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
Total real estate
Consumer:
Equity loans and lines of
credit
Total with no related
allowance recorded
With an allowance recorded:
Commercial:
Commercial and industrial
Real estate:
Owner occupied
Real estate construction and
other land loans
Commercial real estate
Total real estate
Consumer:
Equity loans and lines of
credit
Consumer and installment
Total consumer
Total with an allowance
recorded
Total
$
6,440
$
9,991
$
—
6,440
1,188
547
1,794
360
3,889
1,722
11,713
1,255
799
1,794
360
4,208
2,019
2,707
12,348
18,628
828
199
3,542
882
4,623
1,008
19
1,027
6,478
835
219
3,542
1,022
4,783
1,026
21
1,047
6,665
$
18,826
$
25,293
$
—
—
—
—
—
—
—
—
—
—
230
30
72
60
162
217
3
220
612
612
The recorded investment in loans excludes accrued interest receivable and net
loan origination fees, due to immateriality.
29
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, 2015, 2014, and 2013 (in thousands):
With no related allowance recorded:
Commercial:
Commercial and industrial
Total commercial
Real estate:
Owner occupied
Real estate construction and other land loans
Commercial real estate
Agricultural 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
Total commercial
Real estate:
Owner occupied
Real estate construction and other land loans
Commercial real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
Total with an allowance recorded
Total
Year Ended December 31,
2015
Year Ended December 31,
2014
Year Ended December 31,
2013
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
2,921
$
2,921
770
1,266
1,939
211
4,186
1,858
-
1,858
8,965
243
243
190
2,297
753
3,240
328
16
344
3,827
-
-
231
79
-
-
310
-
-
-
310
-
-
-
-
-
-
-
-
-
-
-
$
638
$
638
2,063
1,276
574
28
3,941
1,826
8
1,834
6,413
423
423
264
3,782
214
4,260
303
27
330
5,013
$
12,792
$
310
$
11,426
$
-
-
2
24
-
-
26
-
-
-
26
-
-
-
-
267
55
322
-
-
-
322
348
$
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
7,090
$
14,368
$
-
-
-
-
-
-
-
-
-
-
-
111
111
-
86
329
47
462
-
-
-
573
573
Foregone interest on nonaccrual loans totaled $340,000, $716,000, and
$661,000 for the years ended December 31, 2015, 2014, and 2013, respectively.
Interest income recognized on cash basis during the years presented above was
not considered significant for financial reporting purposes.
Troubled Debt Restructurings:
As of December 31, 2015 and 2014, the Company has a recorded investment
in troubled debt restructurings of $5,623,000 and, $6,600,000, respectively. The
Company has allocated $1,000 and $132,000 of specific reserves for those loans
at December 31, 2015 and 2014, respectively. The Company has committed to
lend no additional amounts as of December 31, 2015 to customers with
outstanding loans that are classified as troubled debt restructurings.
For the years ended December 31, 2015 and 2014 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.
30
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, 2015 (dollars in thousands):
Troubled Debt Restructurings:
Commercial:
Commercial and industrial
Pre-
Modification
Outstanding
Recorded
Investment (1)
Number of
Loans
Principal
Modification
Post
Modification
Outstanding
Recorded
Investment (2)
Outstanding
Recorded
Investment
2
$
42
$
-
$
42
$
30
(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, 2014 (dollars in thousands):
Troubled Debt Restructurings:
Commercial:
Commercial and Industrial
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
$
$
25
$
7
32
$
-
-
-
$
$
25
$
7
32
$
25
4
29
(1) Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.
(2) Balance outstanding after principal modification, if any borrower reduction to recorded investment.
A loan is considered to be in payment default once it is 90 days contractually
past due under the modified terms. There were no defaults on troubled debt
restructurings within 12 months following the modification during the years
ended December 31, 2015 and 2014.
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following (in thousands):
7. OTHER REAL ESTATE OWNED
The Company had no other real estate owned (OREO) at December 31, 2015
or December 31, 2014. The table below provides a summary of the change in
other real estate owned (OREO) balances for the years ended December 31,
2015 and 2014 (in thousands):
Land
Buildings and improvements
Furniture, fixtures and equipment
Leasehold improvements
Less accumulated depreciation and
amortization
December 31,
2015
2014
$
$
1,131
6,680
10,539
4,005
22,355
1,131
6,545
9,943
4,055
21,674
(13,063)
(11,725)
$
9,292
$
9,949
Depreciation and amortization included in occupancy and equipment expense
totaled $1,392,000, $1,355,000 and $1,133,000 for the years ended
December 31, 2015, 2014, and 2013, respectively.
Balance, beginning of year
Additions
1st lien assumed upon foreclosure
Dispositions
Write-downs
Net gain on dispositions
Balance, end of year
December 31,
2015
2014
$
$
$
-
227
121
(359)
-
11
-
$
190
235
-
(488)
-
63
-
As of December 31, 2015 the Bank had no OREO properties. In 2015, the
Bank foreclosed on one property collateralized by real estate. Proceeds from
OREO sales totaled $359,000 during 2015. The Company realized $11,000 in
net gains from the sale of all properties.
As of December 31, 2014 the Bank had no OREO properties. In 2014, the
Bank foreclosed on one property collateralized by real estate. Proceeds from
OREO sales totaled $488,000 during 2015. The Company realized $63,000 in
net gains from the sale of all properties.
31
Notes to
Consolidated Financial Statements
8. GOODWILL AND INTANGIBLE ASSETS
9. DEPOSITS
The change in goodwill during the years ended December 31, 2015, 2014, and
2013 is as follows (in thousands):
Interest-bearing deposits consisted of the following (in thousands):
Balance, beginning of year
Acquired goodwill
Impairment
Balance, end of year
$
$
2015
2014
2013
$
29,917
-
-
$
29,917
-
-
23,577
6,340
-
29,917
$
29,917
$
29,917
Savings
Money market
NOW accounts
Time, $250,000 or more
Time, under $250,000
December 31,
2015
2014
$
$
81,383
239,241
227,167
42,149
97,554
71,381
228,268
209,781
45,792
107,528
$
687,494
$
662,750
Business combinations involving the Company’s acquisition of the equity
interests or net assets of another enterprise give rise to goodwill. Total goodwill at
December 31, 2015 and 2014 was $29,917,000. Total goodwill at December 31,
2015 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 2015, so goodwill was not required to be retested.
The intangible assets at December 31, 2015 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, 2015, the weighted average remaining amortization period is
seven years. The carrying value of intangible assets at December 31, 2015 was
$1,024,000, net of $1,741,000 in accumulated amortization expense. The
carrying value at December 31, 2014 was $1,344,000, net of $1,421,000 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, 2015 and
determined no impairment was necessary. Amortization expense recognized was
$320,000 for 2015, $337,000 for 2014, and $268,000 for 2013.
The following table summarizes the Company’s estimated core deposit
intangible amortization expense for each of the next five years (in thousands):
Estimated Core
Deposit
Intangible
Amortization
$
$
137
137
137
137
137
339
1,024
Years Ending December 31,
2016
2017
2018
2019
2020
Thereafter
Total
32
Aggregate annual maturities of time deposits are as follows (in thousands):
Years Ending December 31,
2016
2017
2018
2019
2020
Thereafter
$
108,380
19,485
7,874
1,630
1,693
641
$
139,703
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,
2015
2014
2013
$
$
$
30
141
231
546
$
32
174
209
645
40
229
251
750
948
$
1,060
$
1,270
10. BORROWING ARRANGEMENTS
Federal Home Loan Bank Advances - As of December 31, 2015 and 2014, the
Company had no Federal Home Loan Bank (FHLB) of San Francisco advances.
Approximately $215,223,000 in loans were pledged under a blanket lien as
collateral to the FHLB for the Bank’s remaining borrowing capacity of
$308,356,000 as of December 31, 2015. FHLB advances are also secured by
investment securities with amortized costs totaling $750,000 and $1,256,000 and
market values totaling $825,000 and $1,364,000 at December 31, 2015 and
2014, 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, 2015 and 2014, the Company had no Federal funds
purchased.
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, 2015
and 2014, at interest rates which vary with market conditions. The Bank also
had a line of credit in the amount of $2,328,000 and $2,441,000 with the
Federal Reserve Bank of San Francisco at December 31, 2015 and 2014,
respectively, which bears interest at the prevailing discount rate collateralized by
investment securities with amortized costs totaling $2,578,000 and $2,729,000
and market values totaling $2,598,000 and $2,757,000, respectively. At
December 31, 2015 and 2014, the Bank had no outstanding short-term
borrowings under these lines of credit.
Notes to
Consolidated Financial Statements
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, 2015, 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, 2015, the rate
was 1.92%. Interest expense recognized by the Company for the years ended
December 31, 2015, 2014, and 2013 was $99,000, $96,000 and $98,000,
respectively.
12.
INCOME TAXES
The provision for (benefit from) income taxes for the years ended December 31,
2015, 2014, and 2013 consisted of the following (in thousands):
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. The Company
established a deferred tax valuation allowance in the amount $20,000 as of
December 31, 2014 for California capital loss carry-forwards. The California
capital loss carry-forward expired in 2015 unutilized; thus, the deferred balance
as well as the related valuation allowance was written off as of December 31,
2015.
Deferred tax assets (liabilities) consisted of the following (in thousands):
Deferred tax assets:
Allowance for credit losses
Deferred compensation
Net operating loss carryovers
Bank premises and equipment
Mark-to-market adjustment
Other deferred
Other-than-temporary impairment
Loan and investment impairment
State Enterprise Zone credit carry-forward
State capital loss carry-forward
Alternative minimum tax credit
Partnership income
State taxes
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,
2015
2014
$
3,823
5,038
75
351
96
313
267
721
1,067
-
3,525
87
266
3,188
4,979
698
186
98
511
267
887
1,444
20
3,338
70
1
15,629
-
15,687
(20)
15,629
15,667
(921)
(3,076)
(421)
(319)
(664)
(5,401)
(1,871)
(3,661)
(553)
(319)
(553)
(6,957)
Federal
State
Total
Net deferred tax assets
$
10,228
$
8,710
2015
Current
Deferred
Provision for income taxes
2014
Current
Deferred
Benefit from income taxes
2013
Current
Deferred
Provision for (benefit from)
income taxes
$
$
$
$
$
$
2,945
(1,208)
1,737
(125)
(397)
(522)
2,217
(645)
$
$
$
$
$
$
$
$
$
$
570
275
845
(37)
(11)
(48)
(445)
220
3,515
(933)
2,582
(162)
(408)
(570)
1,772
(425)
1,572
$
(225)
$
1,347
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
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, 2015, 2014, and 2013 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
2015
2014
2013
34.0 %
34.0 %
34.0 %
4.1 %
(0.7)%
0.4 %
(15.9)%
(2.5)%
(0.7)%
0.8 %
(3.1)%
2.4 %
(42.2)%
(3.9)%
(2.4)%
- %
0.1 %
3.1 %
(20.5)%
(1.8)%
(1.4)%
(1.4)%
1.4 %
3.4 %
Effective tax rate
19.1 %
(12.0)%
14.1 %
At December 31, 2015, the Company had no Federal net operating loss
(‘‘NOL’’) carry-forwards. At December 31, 2015, the Company had a Federal
33
Notes to
Consolidated Financial Statements
12.
INCOME TAXES
(Continued)
Alternative Minimum Tax credit of approximately $3,525,000 which does not
expire, and a California NOL of $1,046,000, from prior business combinations
that is subject to Internal Revenue Code (IRC) Sec. 382 annual limitations. The
California NOL will begin to expire in 2027. The Company had Enterprise
Zone Credits of approximately $1,596,000 which begin expiring in 2023. In
addition, the Company had a California capital loss carry-forward of $282,000
which expired at the end of 2015 unutilized. As such, the deferred balance as
well as the related valuation allowance for this carry-forward was written off as of
December 31, 2015.
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. At December 31, 2015, the Company had one state
income tax examination in process by the California Franchise Tax Board for the
years ended December 31, 2011 and 2012. The outcome of the examination is
not settled. There are no pending U.S. federal or local income tax examinations
by those taxing authorities. The Company is no longer subject to the
examination by U.S. federal taxing authorities for the years ended before
December 31, 2012 and by the state and local taxing authorities for the years
ended before December 31, 2011.
A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows (in thousands):
Balance, beginning of year
Additions based on tax positions related to
prior years
Reductions for tax positions of prior years
Balance, end of year
December 31,
2015
2014
$
$
180
$
180
106
-
-
-
286
$
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 year ended December 31, 2015, the Company recorded $106,000
in interest or penalties related to uncertain tax positions. During the years ended
December 31, 2014 and 2013, 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 $2,273,000, $2,391,000 and $2,123,000
for the years ended December 31, 2015, 2014, and 2013, respectively.
Future minimum lease payments on noncancelable operating leases are as
follows (in thousands):
Years Ending December 31,
2016
2017
2018
2019
2020
Thereafter
$
2,243
1,955
1,747
1,280
1,124
2,216
$
10,565
Federal Reserve Requirements - Banks are required to maintain reserves with the
Federal Reserve Bank equal to a percentage of their reservable deposits. The
amount of such reserve balances required at December 31, 2015 was $800,000.
34
Correspondent Banking Agreements - The Bank maintains funds on deposit with
other federally insured financial institutions under correspondent banking
agreements. Uninsured deposits totaled $21,853,000 at December 31, 2015.
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.
The following financial instruments represent off-balance-sheet credit risk (in
thousands):
Commitments to extend credit
Standby letters of credit
December 31,
2015
2014
$
$
215,952
1,214
$
$
212,501
1,630
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, 2015 and 2014. The
Company recognizes these fees as revenue over the term of the commitment or
when the commitment is used.
At December 31, 2015, commercial loan commitments represent 61% of total
commitments and are generally secured by collateral other than real estate or
unsecured. Real estate loan commitments represent 28% of total commitments
and are generally secured by property with a loan-to-value ratio not to exceed
80%. Consumer loan commitments represent the remaining 11% of total
commitments and are generally unsecured. In addition, the majority of the Bank’s
loan commitments have variable interest rates.
At December 31, 2015 and 2014, the balance of a contingent allocation for
probable loan loss experience on unfunded obligations was $150,000 and
$165,000, respectively. 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. Changes in this
contingent allocation are recorded in other non-interest expense.
Concentrations of Credit Risk - At December 31, 2015, in management’s
judgment, a concentration of loans existed in commercial loans and real-estate-
related loans, representing approximately 97.9% of total loans of which 22.2%
were commercial and 75.7% were real-estate-related.
At December 31, 2014, in management’s judgment, a concentration of loans
existed in commercial loans and real-estate-related loans, representing
approximately 98.2% of total loans of which 22.3% were commercial and 75.9%
were real-estate-related.
Management believes the loans within these concentrations have no more than
the typical risks of collectability. However, in light of the current economic
Notes to
Consolidated Financial Statements
13. COMMITMENTS AND CONTINGENCIES
(Continued)
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 collectability, 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.
Effective January 1, 2015, bank holding companies with consolidated assets of
$1 billion or more and banks like Central Valley Community Bank must comply
with new minimum capital ratio requirements to be phased-in between
January 1, 2015 and January 1, 2019, which consist of the following: (i) a new
common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a
Tier 1 capital to total risk weighted assets ratio of 6% (increased from 4%);
(iii) a total capital to total risk weighted assets ratio of 8% (unchanged from
current rules); and (iv) a Tier 1 capital to adjusted average total assets
(‘‘leverage’’) ratio of 4%.
In addition, a ‘‘capital conversation buffer’’ is established which, when fully
phased-in, will require maintenance of a minimum of 2.5% of common equity
Tier 1 capital to total risk weighted assets in excess of the regulatory minimum
capital ratio requirements described above. The 2.5% buffer will increase the
minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%,
(ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The
new buffer requirement will be phased-in between January 1, 2016 and
January 1, 2019. If the capital ratio levels of a banking organization fall below
the capital conservation buffer amount, the organization will be subject to
limitations on (i) the payment of dividends; (ii) discretionary bonus payments;
(iii) discretionary payments under Tier 1 instruments; and (iv) engaging in share
repurchases.
Management believes that the Company and the Bank met all their capital
adequacy requirements as of December 31, 2015 and 2014. There are no
conditions or events since those notifications that management believes have
changed those categories. The capital ratios for the Company and the Bank
under the new capital framework are presented in the table below.
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
Common Equity Tier 1 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, 2015
December 31, 2014
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$ 105,825
$ 48,950
$ 104,878
8.65% $ 95,936
4.00% $ 45,894
8.58% $ 95,298
$ 61,148
$ 48,918
5.00% $ 57,341
4.00% $ 45,873
$ 103,152
$ 34,650
$ 104,878
13.44%
4.50%
13.67%
$ 50,017
$ 34,627
6.50%
4.50%
N/A
N/A
N/A
N/A
N/A
8.36%
4.00%
8.31%
5.00%
4.00%
N/A
N/A
N/A
N/A
N/A
$ 105,825
$ 46,200
$ 104,878
13.79% $ 95,936
6.00% $ 28,075
13.67% $ 95,298
13.67%
4.00%
13.59%
$ 61,560
$ 46,170
8.00% $ 42,080
6.00% $ 28,053
6.00%
4.00%
$ 115,466
$ 61,601
$ 114,513
15.04% $ 104,447
8.00% $ 56,150
14.93% $ 103,809
14.88%
8.00%
14.80%
$ 76,949
$ 61,560
10.00% $ 70,133
8.00% $ 56,106
10.00%
8.00%
Dividends - During 2015, the Bank declared and paid cash dividends to the
Company in the amount of $2,260,000 in connection with 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 $1,979,000 or $0.18 per common share cash
dividend to shareholders of record during the year ended December 31, 2015.
During 2014, the Bank declared and paid cash dividends to the Company in
the amount of $2,350,000, connection with cash dividends to the Company’s
shareholders approved by the Company’s Board of Directors. The Company
declared and paid a total of $2,190,000 or $0.20 per common share cash
dividend to shareholders of record during the year ended December 31, 2014.
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 approved by the Company’s
Board of Directors. 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.
The Company’s primary source of income with which to pay cash dividends is
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, 2015, $2,991,000 of the Bank’s retained earnings were
free of these restrictions.
35
Notes to
Consolidated Financial Statements
14. SHAREHOLDERS’ EQUITY
(Continued)
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.
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):
Basic Earnings Per Common Share:
Net income
Less: Preferred stock dividends and
accretion
Income available to common
shareholders
For the Years Ended December 31,
2015
2014
2013
$
10,964
$
5,294
$
8,250
-
-
(350)
$
10,964
$
5,294
$
7,900
Weighted average shares outstanding
10,931,927
10,919,235
10,245,448
Net income per common share
Diluted Earnings Per Common Share:
Net income
Less: Preferred stock dividends and
accretion
$
$
1.00
$
0.48
$
0.77
10,964
$
5,294
$
8,250
-
-
(350)
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
Net income per diluted common
share
$
10,964
$
5,294
$
7,900
10,931,927
10,919,235
10,245,448
83,836
80,703
62,592
11,015,763
10,999,938
10,308,040
$
1.00
$
0.48
$
0.77
Outstanding options, restricted stock, and warrants of 26,704, 170,585, and
202,355 were not factored into the calculation of dilutive stock options at
December 31, 2015, 2014, and 2013, respectively, because they were
anti-dilutive.
15. SHARED-BASED COMPENSATION
On December 31, 2015, the Company had three 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 80,045 shares remain reserved for issuance
for options already granted to employees and directors under incentive and
nonstatutory agreements. In May 2005, the Company adopted the Central Valley
Community Bancorp 2005 Omnibus Incentive Plan (2005 Plan) for which
213,678 shares remain reserved for issuance for options already committed to be
granted to employees and directors under incentive and nonstatutory agreements.
The 2005 plan expired on March 16, 2015. While outstanding arrangements to
issue shares under these plans, including options, continue in force until their
expiration, no new options will be granted under these plans. The plans require
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 plans expire on dates
determined by the Board of Directors, but not later than ten years from the date
of grant. The vesting period for the options, restricted common stock awards and
option related stock appreciation rights is determined by the Board of Directors
and is generally over five years.
In May 2015, the Company adopted the Central Valley Community Bancorp
2015 Omnibus Incentive Plan (2015 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 2015 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 ten years from the date of grant. The vesting period for the options,
restricted common stock awards and option related stock appreciation rights is
determined by the Board of Directors and is generally over five years. The
maximum number of shares that can be issued with respect to all awards under
the plan is 875,000. Currently under the 2015 Plan, there are 875,000 shares
remain reserved for future grants as of December 31, 2015.
For the years ended December 31, 2015, 2014, and 2013, the compensation
cost recognized for share-based compensation was $238,000, $173,000, and
$98,000, respectively. The recognized tax benefit for share-based compensation
expense was $14,000, $12,000, and $28,000 for 2015, 2014, and 2013,
respectively.
Stock Options - The Company bases the fair value of the options granted on the
date of grant using a Black-Scholes Merton option pricing model that uses
assumptions based on expected option life and the level of estimated forfeitures,
expected stock volatility, risk free interest rate, and dividend yield. The expected
term and level of estimated forfeitures of the Company’s options are based on the
Company’s own historical experience. Stock volatility is based on the historical
volatility of the Company’s stock. The risk-free rate is based on the U. S.
Treasury yield curve for the periods within the contractual life of the options in
effect at the time of grant. The compensation cost for options granted is based
on the weighted average grant date fair value per share.
No options to purchase shares of the Company’s common stock were granted
during the years ending December 31, 2015, 2014 and 2013 from any of the
Company’s stock based compensation plans.
36
240,695 $
6.83
4.06 $
1,251
16. EMPLOYEE BENEFITS
Notes to
Consolidated Financial Statements
15. SHARED-BASED COMPENSATION (Continued)
A summary of the combined activity of the Plans for the year ended
December 31, 2015 follows (dollars in thousands, except per share amounts):
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Shares
Aggregate
Intrinsic Value
368,360 $
(9,070) $
(118,595) $
8.89
6.64
13.25
Options outstanding at
January 1, 2015
Options exercised
Options forfeited
Options outstanding at
December 31, 2015
Options vested or
expected to vest at
December 31, 2015
Options exercisable at
December 31, 2015
238,746 $
6.82
4.04 $
1,243
208,375 $
6.65
3.65 $
1,122
Information related to the stock option plan during each year follows (in
thousands):
2015
2014
2013
Intrinsic value of options exercised
Cash received from options
exercised
Excess tax benefit realized for option
exercises
$
$
$
42
60
6
$
$
$
45
55
7
$
$
$
82
789
17
As of December 31, 2015, there was $86,000 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under all Plans. The cost is expected to be recognized over a weighted
average period of 1.72 years. The total fair value of options vested was $91,000
and $99,000 for the years ended December 31, 2015 and 2014, respectively.
Restricted Common Stock Awards - The 2005 Plan and 2015 Plan provide for
the issuance of shares to directors and officers. Restricted common stock grants
typically vest over a five-year period. Restricted common stock (all of which are
shares of our common stock) is subject to forfeiture if employment terminates
prior to vesting. The cost of these awards is recognized over the vesting period of
the awards based on the fair value of our common stock on the date of the
grant.
The following table summarizes restricted stock activity for the year ended
December 31, 2015 as follows:
Nonvested outstanding shares at January 1, 2015
Granted
Vested
Forfeited
Nonvested outstanding shares at December 31,
2015
Weighted
Average
Grant
Date
Fair Value
$
$
$
$
$
12.68
10.79
12.67
12.95
12.34
Shares
56,850
9,268
(11,085)
(2,005)
53,028
During the years ended December 31, 2015 and 2014, 9,268 and 57,330
shares of restricted common stock were granted from the 2005 Plan. The
restricted common stock had a weighted average fair value of $10.79 and $12.68
per share on the date of grant during the years ended December 31, 2015 and
2014, respectively. These restricted common stock awards vest 20% after Year 1.
Thereafter, 20% of the remaining restricted stock will vest on each anniversary of
the initial award commencement date and will be fully vested on the fifth such
anniversary.
As of December 31, 2015, there were 53,028 shares of restricted stock that are
nonvested and expected to vest. Share-based compensation cost charged against
income for restricted stock awards was $161,000 for the year ended
December 31, 2015, and $82,000 for the year ended December 31, 2014.
As of December 31, 2015, there was $554,000 of total unrecognized
compensation cost related to nonvested restricted common stock. Restricted stock
compensation expense is recognized on a straight-line basis over the vesting
period. This cost is expected to be recognized over a weighted average remaining
period of 3.58 years and will be adjusted for subsequent changes in estimated
forfeitures. Restricted common stock awards had an intrinsic value of $638,000
at December 31, 2015.
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 one-month employment period. 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 $270,000 and $225,000 to
the profit sharing plan in 2015 and 2013, respectively. There was no
contribution by the Bank to the profit sharing plan in 2014.
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,
2015, 2014, and 2013, 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, 2015, 2014, and 2013, the Bank made matching
contributions totaling $585,000, $499,000, and $382,000, respectively.
Deferred Compensation Plans - The Bank has a nonqualified Deferred
Compensation Plan which provides directors with an unfunded, deferred
compensation program. Under the plan, eligible participants may elect to defer
some or all of their current compensation or director fees. Deferred amounts earn
interest at an annual rate determined by the Board of Directors (3.24% at
December 31, 2015). At December 31, 2015 and 2014, the total net deferrals
included in accrued interest payable and other liabilities were $3,238,000 and
$3,154,000, 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 the beneficiary and owner of the policies. The cash surrender
value of the policies totaled $3,949,000 and $3,519,000 and at December 31,
2015 and 2014, respectively. Income recognized on these policies, net of related
expenses, for the years ended December 31, 2015, 2014, and 2013, was
$105,000, $103,000, and $108,000, respectively.
In October 2105, the Board of Directors of the Company and the Bank
adopted a board resolution to create the Central Valley Community Bank
Executive Deferred Compensation Plan (the Executive Plan). Pursuant to the
Executive Plan, all eligible executives of the Bank may elect to defer up to
50 percent of their compensation for each deferral year. Deferred amounts earn
interest at an annual rate determined by the Board of Directors. No deferrals
were made during the year ended December 31, 2015.
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, 2015, 2014, and 2013, totaled $447,000,
$537,000, and $581,000, respectively. Accrued compensation payable under the
salary continuation plans totaled $5,419,000 and $5,283,000 at December 31,
2015 and 2014, respectively.
37
Notes to
Consolidated Financial Statements
16. EMPLOYEE BENEFITS
(Continued)
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 2015 and 2014
(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
2015
2014
$
584
143,531
454
$
368
135,366
589
$
144,569
$
136,323
$
$
5,155
91
5,246
5,155
123
5,278
54,216
71,452
5,377
Shareholders’ equity:
Common stock
Retained earnings
Accumulated other comprehensive income, net
of tax
54,424
80,437
4,462
Total shareholders’ equity
139,323
131,045
Total liabilities and shareholders’ equity
$
144,569
$
136,323
In connection with these plans, the Bank purchased single premium life
insurance policies with cash surrender values totaling $6,037,000 and $5,870,000
at December 31, 2015 and 2014, respectively. Income recognized on these
policies, net of related expense, for the years ended December 31, 2015, 2014,
and 2013 totaled $167,000, $166,000, and $145,000, respectively.
In connection with the acquisition of Service 1st Bank and Visalia Community
Bank (VCB), the Bank assumed a liability for the estimated present value of
future benefits payable to former key executives of Service 1st and VCB . The
liability relates to change in control benefits associated with Service 1st’s and
VCB’s salary continuation plans. The benefits are payable to the individuals when
they reach retirement age. At December 31, 2015 and 2014, the total amount of
the liability was $2,822,000 and $2,898,000, respectively. Expense recognized by
the Bank in 2015, 2014 and 2013 associated with these plans was $78,000,
$233,000, and $202,000, 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 $10,716,000,
and $11,568,000 at December 31, 2015 and 2014, respectively. Income
recognized on these policies, net of related expenses, for the years ended
December 31, 2015, 2014, and 2013, was $194,000, $345,000, and $241,000,
respectively.
The current annual tax-free interest rate on all life insurance policies is 4.49%.
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):
Balance, January 1, 2015
Disbursements
Amounts repaid
Balance, December 31, 2015
Undisbursed commitments to related parties, December 31,
2015
$
$
$
1,778
5,514
(886)
6,406
1,954
38
Notes to
Consolidated Financial Statements
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
(Continued)
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2015, 2014, and 2013
(In thousands)
Income:
Dividends declared by Subsidiary - eliminated in consolidation
Other income
Total income
Expenses:
Interest on junior subordinated deferrable interest debentures
Professional fees
Other expenses
Total expenses
Income before equity in undistributed net income of Subsidiary
Equity in undistributed net income of Subsidiary, net of distributions
Income before income tax benefit
Benefit from income taxes
Net income
Preferred stock dividend and accretion of discount
Income available to common shareholders
Comprehensive income (loss)
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2015, 2014, and 2013
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed net income of subsidiary, net of distributions
Stock-based compensation
Tax benefit from exercise of stock options
Net (increase) decrease in other assets
Net increase (decrease) in other liabilities
Benefit from deferred income taxes
Net cash provided by 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
Proceeds from exercise of stock options
Redemption of preferred stock Series C
Tax benefit from exercise of stock options
Net cash used in financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest
Non-cash investing and financing activities:
Common stock issued in Visalia Community Bank acquisition
2015
2014
2013
$
$
$
2,260
3
2,263
99
156
411
666
1,597
9,080
10,677
287
10,964
-
10,964
10,049
$
$
$
2,350
3
2,353
96
187
389
672
1,681
3,325
5,006
288
5,294
-
5,294
12,957
$
18,000
5
18,005
98
102
424
624
17,381
(9,414)
7,967
283
8,250
350
7,900
(1,622)
$
$
2015
2014
2013
$
10,964
$
5,294
$
8,250
(9,080)
238
(6)
50
(32)
(5)
2,129
-
(1,979)
-
60
-
6
(1,913)
216
368
584
97
-
$
$
$
(3,325)
173
(7)
(50)
34
(8)
2,111
-
(2,190)
-
55
-
7
(2,128)
(17)
385
368
194
-
$
$
$
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
39
$
$
$
Notes to
Consolidated Financial Statements
19. SUBSEQUENT EVENT
On January 20, 2016, management sold certain investment securities with a
book value of $23.0 million in a routine restructuring of the investment
portfolio. Through the proper operation of the Company’s internal control
process related to investment securities, management discovered after the
transaction settled that five of the 13 securities sold were previously designated as
Held to Maturity (HTM). The book value of the HTM securities sold was
$8.0 million. The gain realized on the sale of the HTM securities was $648,000.
The Company will reclassify the remaining HTM securities as Available for Sale
as of January 20, 2016.
40
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
Other non-interest income
Net realized gains on investment securities
Total non-interest expense
Provision for (benefit from)income taxes
Net income (loss)
Net income (loss) available to common shareholders
Basic earnings (loss) per share
Diluted earnings (loss) per share
Unaudited Quarterly Statement of Operations Data
(In thousands, except per share amounts)
Q4 2015
Q3 2015
Q2 2015
Q1 2015
Q4 2014
Q3 2014
Q2 2014
Q1 2014
$
10,638 $
-
10,638
1,842
37
9,003
611
10,352 $
100
10,065 $
500
9,720 $
-
10,005 $
8,385
9,876 $
-
9,905 $
(400)
10,252
1,722
-
9,028
429
9,565
2,364
732
8,697
886
9,720
1,965
726
9,288
657
1,620
1,752
331
8,819
(2,750)
9,876
1,821
240
9,051
535
10,305
1,980
64
8,734
922
10,099
-
10,099
1,708
269
8,736
724
$
$
$
$
2,903 $
2,517 $
3,078 $
2,466 $
(2,366) $
2,351 $
2,693 $
2,616
2,903 $
2,517 $
3,078 $
2,466 $
(2,366) $
2,351 $
2,693 $
2,616
0.27 $
0.23 $
0.28 $
0.23 $
(0.22) $
0.22 $
0.25 $
0.26 $
0.23 $
0.28 $
0.22 $
(0.22) $
0.21 $
0.24 $
0.24
0.24
41
Financial Statements and Supplementary Data
Management’s Report on Internal Control Over Financial Reporting
The Shareholders and Board of Directors
Central Valley Community Bancorp and Subsidiary
Fresno, California
The management of Central Valley Community Bancorp is responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f ) promulgated under the Securities
Exchange Act of 1934 as a process designed by, or under the supervision of our Chief Executive Officer and Chief Financial Officer
and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally
accepted accounting principles and includes those policies and procedures that:
*
our assets:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
*
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial
statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors; and
*
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this
assessment, management used the criteria issued in the 2013 Internal Control-Integrated Framework (Framework) established and
updated by the Committee of Sponsoring Organizations of the Treadway Commission (‘‘COSO’’). Based on that assessment, the
Company’s management believes that, as of December 31, 2015, our internal control over financial reporting is effective based on
those criteria.
Crowe Horwath LLP, the independent registered public accounting firm that audited the Company’s consolidated financial
statements included in the Annual Report on Form 10-K for the year ended December 31, 2015, has issued an audit report on the
effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the Public Company
Accounting Oversight Board that appears on the next page.
42
Report of
Independent Registered Public Accounting Firm
The Shareholders and Board of Directors
Central Valley Community Bancorp and Subsidiary
Fresno, California
We have audited the accompanying consolidated balance sheets of Central Valley Community Bancorp and subsidiary (the
‘‘Company’’) as of December 31, 2015 and 2014, 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, 2015. We also have audited the
Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an
opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Central Valley Community Bancorp and subsidiary as of December 31, 2015 and 2014, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31, 2015 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, Central Valley Community Bancorp and subsidiary maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Sacramento, California
March 15, 2016
43
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)
2015
2014
2013
2012
2011
$
41,822 $
1,047
41,039 $
1,156
34,836 $
1,385
31,820 $
1,883
40,775
600
40,175
9,387
36,016
13,546
2,582
10,964
-
39,883
7,985
31,898
8,164
35,338
4,724
(570)
5,294
-
33,451
-
33,451
7,831
31,685
9,597
1,347
8,250
350
29,937
700
29,237
7,242
27,274
9,205
1,685
7,520
350
10,964 $
5,294 $
7,900 $
7,170 $
1.00 $
0.48 $
0.77 $
0.75 $
1.00 $
0.48 $
0.77 $
0.75 $
0.18 $
0.20 $
0.20 $
0.05 $
31,820
2,942
31,357
1,050
30,307
6,271
28,240
8,338
1,861
6,477
486
5,991
0.63
0.63
-
December 31,
(In thousands)
2015
2014
2013
2012
2011
580,544 $
588,501
1,116,267
1,276,736
139,323
1,173,591
520,511 $
564,280
1,039,152
1,192,183
131,045
1,074,942
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
529,046 $
577,784
1,065,798
1,222,526
135,062
1,112,758
513,866 $
531,382
1,006,560
1,157,483
130,414
1,052,097
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
$
$
$
$
$
$
Data from 2013 reflects the partial year impact of the acquisition of Visalia Community Bank on July 1, 2013.
44
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 VCB was
merged with and into the Bank. VCB had three full-service offices in Visalia and
one in Exeter which continue to be operated by the Bank. The Company’s
market area includes the central valley area from Sacramento, California to
Bakersfield, California.
During 2015, 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.
As of December 31, 2015, the Bank operated 21 full-service offices. The
Sunnyside office is scheduled for closure and consolidation with the Fresno
Downtown office in April 2016. 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 had been negatively impacted by
the recession that began in 2007 and the related real estate market and the
slowdown in residential construction. The recession impacted most industries in
our market area. Initially, housing values throughout the nation and especially in
the Central Valley decreased dramatically, which in turn negatively affected the
personal net worth of much of the population in our service area. Over the last
several years the economy, as evidenced by the California and Central Valley
unemployment rates, and housing prices have shown slow but steady
improvement. 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, currency exchanges, and demand. Since the beginning of 2012, California
has been experiencing 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. We closely monitored the
water and the related issues affecting our customers in 2015 and 2014, and we
will continue to remain vigilant for signs of deterioration within the loan
portfolio in an effort to manage credit quality and work with borrowers where
possible to mitigate any losses.
OVERVIEW
Diluted earnings per share (EPS) for the year ended December 31, 2015 was
$1.00 compared to $0.48 and $0.77 for the years ended December 31, 2014 and
2013, respectively. Net income for 2015 was $10,964,000 compared to
$5,294,000 and $8,250,000 for the years ended December 31, 2014 and 2013,
respectively. The increase in net income and EPS was primarily driven by a
decrease in provision for credit losses, an increase in net interest income, and an
increase in non-interest income offset by increases in non-interest expense in
2015 compared to 2014. Total assets at December 31, 2015 were
$1,276,736,000 compared to $1,192,183,000 at December 31, 2014.
Return on average equity for 2015 was 8.12% compared to 4.06% and 6.89%
for 2014 and 2013, respectively. Return on average assets for 2015 was 0.90%
compared to 0.46% and 0.84% for 2014 and 2013, respectively. Total equity was
$139,323,000 at December 31, 2015 compared to $131,045,000 at
December 31, 2014. The increase in equity in 2015 compared to 2014 was
driven by the retention of earnings net of dividends paid offset by a decrease in
unrealized gains on available-for-sale securities recorded in accumulated other
comprehensive income (AOCI).
Average total loans increased $47,233,000 or 8.75% to $586,762,000 in 2015
compared to $539,529,000 in 2014. In 2015, we recorded $600,000 provision
for credit losses compared to $7,985,000 in 2014 and none in 2013. The
Company had nonperforming assets, consisting entirely of nonaccrual loans,
totaling $2,413,000 at December 31, 2015. At December 31, 2014,
nonperforming assets totaled $14,052,000. Net recoveries (charge-offs) for 2015
were $702,000 compared to $(8,885,000) for 2014 and $(925,000) for 2013.
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.
45
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 8.12% for the year ended 2015 compared to 4.06% and
6.89% for the years ended 2014 and 2013, respectively. In 2015, compared to
2014 we experienced an increase in net income primarily driven by a decrease in
provision for credit losses and an increase in non-interest income, offset by an
increase in provision for income taxes and an increase in non-interest expenses.
We experienced an increase in capital due to increases in retained earnings offset
by a decrease in accumulated other comprehensive income.
Our net income for the year ended December 31, 2015 increased $5,670,000
compared to 2014 and decreased $2,956,000 in 2014 compared to 2013. During
2015, net income increased due to a decrease in the provision for credit losses,
increases in net interest income, and increases in non-interest income, partially
offset by an increase in tax expense and increases in non-interest expenses,
compared to 2014. Net interest income increased because of increases in loan
and investment income and decreases in interest expense on deposits. Net interest
income increased as a result of yield changes, asset mix changes, and an increase
in average earning assets, partially offset by an increase in interest-bearing
liabilities. Net interest income during 2015 was positively impacted by the
collection of nonaccrual loans which resulted in a recovery of interest income of
approximately $431,000. The recovery was partially offset by reversal of
approximately $7,000 in interest income on loans put on nonaccrual during the
year. Net interest income during 2014 was positively impacted by the collection
in full of a non-accrual loan of $1,870,000 which resulted in a recovery of
foregone interest of $879,000, partially offset by the reversal of approximately
$237,000 in interest income associated with loans placed on nonaccrual status
during the year. During the year ended 2015, the non-interest income increase
was primarily driven by a $591,000 increase in net realized gains on sales and
calls of investment securities, an increase in loan placement fees of $498,000, a
$253,000 increase in Federal Home Loan Bank dividends, and a $345,000 gain
on life insurance which is included in other income, partially offset by a
$210,000 decrease in service charge income, a $176,000 decrease in other
income, a decrease of $52,000 in gains on the sale of other real estate owned,
and a $8,000 decrease in interchange fees, in 2015 compared to 2014.
Non-interest expenses increased in 2015 compared to 2014 primarily due to
increases in salary and employee benefit expenses of $1,115,000, internet banking
expenses of $189,000, professional services of $328,000, regulatory assessments of
$297,000, and advertising fees of $19,000, partially offset by decreases of data
processing expenses of $681,000, occupancy and equipment expenses of
$166,000, ATM/Debit card expenses of $76,000, and amortization of core
deposit intangibles of $17,000. During 2015, our net interest margin (NIM)
decreased 10 basis points to 4.01% compared to 2014. Basic EPS was $1.00 for
2015 compared to $0.48 and $0.77 for 2014 and 2013, respectively. Diluted
EPS was $1.00 for 2015 compared to $0.48 and $0.77 for 2014 and 2013,
respectively. The increase in EPS in 2015 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 2015 was 0.90% compared to 0.46% and 0.84% for the years ended
December 31, 2014 and 2013, respectively. The 2015 increase in ROA is
primarily due to the increase in net income. Annualized ROA for our peer group
was 1.16% at December 31, 2015. Peer group information from SNL Financial
data includes bank holding companies in central California with assets from
$600 million to $2.5 billion.
our net interest margin by focusing on core deposits and managing the cost of
funds. Our net interest margin (fully tax equivalent basis) was 4.01% for the year
ended December 31, 2015, compared to 4.11% and 4.09% for the years ended
December 31, 2014 and 2013, respectively. We experienced a decrease in 2015
net interest margin compared to 2014, resulting from the decline in loan and
investment yields. The effective tax equivalent yield on total earning assets
decreased 12 basis points, while the cost of total interest-bearing liabilities
decreased 2 basis points and the cost of total deposits decreased 2 basis points.
Our cost of total deposits in 2015 was 0.09% compared to 0.11% for the same
period in 2014 and 0.15% for the year ended December 31, 2013. Our net
interest income before provision for credit losses increased $892,000 or 2.24% to
$40,775,000 for the year ended 2015 compared to $39,883,000 and
$33,451,000 for the years ended 2014 and 2013, 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 2015 increased $1,223,000 or
14.98% to $9,387,000 compared to $8,164,000 in 2014 and $7,831,000 in
2013. The increase resulted primarily from increases in net realized gains on sales
and calls of investment securities, loan placement fees, and Federal Home Loan
Bank dividends, partially offset by a decrease in service charge income,
interchange fees, appreciation in cash surrender value of bank owned life
insurance, and gain on sale of other real estate owned compared to 2014.
Customer service charges decreased $210,000 or 6.40% to $3,070,000 in 2015
compared to $3,280,000 and $3,156,000 in 2014 and 2013, 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 $2,413,000 and $14,052,000 at December 31, 2015 and 2014,
respectively. Nonperforming assets totaled 0.40% of gross loans as of
December 31, 2015 and 2.45% of gross loans as of December 31, 2014. The
Company had no other real estate owned (OREO) at December 31, 2015 or
December 31, 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
7.09% during 2015 to $1,276,736,000 as of December 31, 2015 from
$1,192,183,000 as of December 31, 2014. Total gross loans increased 4.46% to
$598,111,000 as of December 31, 2015, compared to $572,588,000 at
December 31, 2014. Total investment securities and Federal funds sold increased
9.61% to $509,556,000 as of December 31, 2015 compared to $464,865,000 as
of December 31, 2014. Total deposits increased 7.42% to $1,116,267,000 as of
December 31, 2015 compared to $1,039,152,000 as of December 31, 2014. Our
loan to deposit ratio at December 31, 2015 was 53.58% compared to 55.10% at
December 31, 2014. The loan to deposit ratio of our peers was 75.73% at
December 31, 2015.
Development of Revenue Streams
Capital Adequacy
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. Specifically, we have focused on net interest
income through a variety of processes, including increases in average interest
earning assets, and minimizing the effects of the recent interest rate decline on
At December 31, 2015, we had a total capital to risk-weighted assets ratio of
15.04%, a Tier 1 risk-based capital ratio of 13.79%, common equity Tier 1 ratio
of 13.44%, and a leverage ratio of 8.65%. At December 31, 2014, we had a
total capital to risk-weighted assets ratio of 14.88%, a Tier 1 risk-based capital
ratio of 13.67% and a leverage ratio of 8.36%. At December 31, 2015, on a
46
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
OVERVIEW
(Continued)
stand-alone basis, the Bank had a total risk-based capital ratio of 14.93%, a
Tier 1 risk based capital ratio of 13.67%, common equity Tier 1 ratio of
13.67%, and a leverage ratio of 8.58%. At December 31, 2014, the Bank had a
total risk-based capital ratio of 14.80%, Tier 1 risk-based capital of 13.59% and
a leverage ratio of 8.31%. Note 14 of the audited Consolidated Financial
Statements provides more detailed information concerning the Company’s capital
amounts and ratios. Effective January 1, 2015, bank holding companies with
consolidated assets of $1 billion or more were required to comply with new
minimum capital ratio requirements to be phased-in between January 1, 2015
and January 1, 2019, which consist of the following: (i) a new common equity
Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to
total risk weighted assets ratio of 6% (increased from 4%); (iii) a total capital to
total risk weighted assets ratio of 8% (unchanged from current rules); and (iv) a
Tier 1 capital to adjusted average total assets (‘‘leverage’’) ratio of 4%.
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
69.24% for 2015 compared to 69.42% for 2014 and 73.06% for 2013. The
improvement in the efficiency ratio in 2015 is due to the growth in revenues
outpacing the growth in non-interest expense. The increase in the efficiency ratio
in 2014 compared to 2013 is due to the growth in revenues outpacing the
growth in non-interest expense. The Company’s net interest income before
provision for credit losses plus non-interest income increased 4.40% to
$50,162,000 in 2015 compared to $48,047,000 in 2014 and $41,282,000 in
2013, while operating expenses increased 1.92% in 2015, 11.53% in 2014, and
16.17% in 2013.
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 $308,356,000 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
$572,171,000 or 44.82% of total assets at December 31, 2015 and
$509,863,000 or 42.77% of total assets as of December 31, 2014.
RESULTS OF OPERATIONS
NET INCOME
Net income was $10,964,000 in 2015 compared to $5,294,000 and
$8,250,000 in 2014 and 2013, respectively. Basic earnings per share was $1.00,
$0.48, and $0.77 for 2015, 2014, and 2013, respectively. Diluted earnings per
share was $1.00, $0.48, and $0.77 for 2015, 2014, and 2013, respectively. ROE
was 8.12% for 2015 compared to 4.06% for 2014 and 6.89% for 2013. ROA
for 2015 was 0.90% compared to 0.46% for 2014 and 0.84% for 2013.
The increase in net income for 2015 compared to 2014 can be attributed to a
decrease in the provision for credit losses, an increase in net interest income, and
an increase in non-interest income, partially offset by an increase in provision for
income taxes and an increase in non-interest expense. The decrease in net income
for 2014 compared to 2013 can be attributed to an increase in the provision for
credit losses and an increase in non-interest expense, partially offset by an
increase in net-interest income before provision for credit losses, an increase in
non-interest income, and a decrease in provision for income taxes.
INTEREST INCOME AND EXPENSE
Net interest income is the most significant component of our income from
operations. Net interest income (the interest rate spread) is the difference between
the gross interest and fees earned on the loan and investment portfolios and the
interest paid on deposits and other borrowings. Net interest income depends on
the volume of and interest rate earned on interest-earning assets and the volume
of and interest rate paid on interest-bearing liabilities.
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.
47
Year Ended December 31, 2015
Interest
Income/
Expense
Average
Interest
Rate
Average
Balance
Year Ended December 31, 2014
Interest
Income/
Expense
Average
Interest
Rate
Average
Balance
Year Ended December 31, 2013
Interest
Income/
Expense
Average
Interest
Rate
Average
Balance
$
64,963 $
209
0.32%
$
53,781 $
175
0.32%
$
46,672 $
164
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
INTEREST INCOME AND EXPENSE (Continued)
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
285,585
178,247
463,832
251
529,046
578,899
4,813
Total interest-earning assets
1,112,758 $
Allowance for credit losses
Nonaccrual loans
Other real estate owned
Cash and due from banks
Bank premises and equipment
Other non-earning assets
(8,978)
7,863
33
25,019
9,664
76,167
4,793
9,569
14,362
1
14,572
30,504
580
45,656
1.68%
5.37%
3.10%
0.25%
2.75%
5.27%
12.05%
4.10%
296,014
163,778
459,792
293
513,866
533,531
4,700
1,052,097 $
(8,147)
5,998
36
23,905
10,511
73,083
Total average assets
$
1,222,526
$
1,157,483
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
$
300,741 $
227,743
59,810
89,573
677,867
5,156
261
141
191
355
948
99
Total interest-bearing liabilities
683,023 $
1,047
Non-interest bearing demand
deposits
Other liabilities
Shareholders’ equity
387,931
16,510
135,062
Total average liabilities and
shareholders’ equity
$
1,222,526
0.09%
0.06%
0.32%
0.40%
0.14%
1.89%
0.15%
$
265,751 $
229,769
60,630
101,588
657,738
5,155
662,893 $
348,822
15,354
130,414
5,538
8,837
14,375
1
14,551
29,493
327
44,371
241
174
228
417
1,060
96
1,156
2,375
8,755
11,130
1
11,295
26,519
177
37,991
291
229
219
531
1,270
116
1,386
1.87%
5.40%
3.13%
0.25%
2.83%
5.53%
6.96%
4.22%
0.09%
0.08%
0.38%
0.41%
0.16%
1.83%
0.17%
$
$
235,487
163,494
398,981
206
445,859
445,300
4,171
895,330 $
(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
570,182 $
283,956
13,040
119,746
0.35%
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%
$
1,157,483
$
986,924
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)
$
45,656
4.10%
$
44,371
4.22%
$
37,991
4.24%
1,047
0.15%
1,156
0.17%
1,386
0.24%
$
44,609
4.01%
$
43,215
4.11%
$
36,605
4.09%
(1) Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $3,254, $3,005, and $2,977 in 2015,
2014, and 2013, respectively.
(2) Loan interest income includes loan fees of $255 in 2015, $272 in 2014, and $320 in 2013.
(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.
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 the changes in interest income
and interest expense due to changes in average asset and liability balances
(volume) and changes in average interest rates for the periods indicated. The
change in interest due to both rate and volume has been allocated to the change
in rate.
For the Years Ended
December 31, 2015
Compared to 2014
For the Years Ended
December 31, 2014
Compared to 2013
Volume
Rate
Net
Volume
Rate
Net
(In thousands)
$
36 $
(2) $
34 $
21 $
(10) $
11
(195)
780
(550)
(48)
(745)
732
731
15
2,432
67
585
—
2,507
7
(598)
—
(1,496)
246
(13)
—
1,011
253
746
—
4,479
25
2,499
—
(1,505)
125
3,163
82
3,245
—
2,974
150
3,135
(1,850)
1,285
5,271
1,109
6,380
30
(3)
(50)
(23)
1
(43)
(34)
(12)
(89)
2
(13)
(37)
(62)
(112)
3
169
27
(23)
173
(10)
(274)
(105)
(18)
(91)
(383)
(10)
9
(114)
(210)
(20)
(22)
(87)
(109)
163
(393)
(230)
Changes in Volume/Rate
Increase (decrease) due to
changes in:
Interest income:
Interest-earning deposits
in other banks
Investment securities:
Taxable
Non-taxable (1)
Total investment
securities
Federal funds sold
Loans
FHLB Stock
Total earning
assets (1)
Interest expense:
Deposits:
Savings, NOW and
MMA
Certificates of deposit
under $100,000
Certificates of deposit
$100,000 and over
Total interest-bearing
deposits
Other borrowed funds
Total interest bearing
liabilities
Net interest income (1)
$
3,157 $ (1,763) $
1,394 $
5,108 $
1,502 $
6,610
(1) Computed on a tax equivalent basis for securities exempt from federal income
taxes.
Interest and fee income from loans increased $1,011,000 or 3.43% in 2015
compared to 2014. Interest and fee income increased $2,974,000 or 11.21% in
2014 compared to 2013. The increase in 2015 is attributable to an increase in
average total loans outstanding offset by a 26 basis point decrease in the yield on
loans. Interest income during 2015 was positively impacted by the collection of
nonaccrual loans which resulted in a recovery of interest income of approximately
$431,000. The recovery was partially offset by reversal of approximately $7,000
in interest income on loans put on nonaccrual status during the year. The
increase in 2014 is attributable to a increase in average total loans outstanding
offset by a 43 basis point decrease in the yield on loans. Interest and fee income
from loans during 2014 was positively impacted by the collection in full of
nonaccrual loans totaling $1,870,000 which resulted in a recovery of net interest
income of approximately $642,000. Average total loans for 2015 increased
$47,233,000 to $586,762,000 compared to $539,529,000 for 2014 and
$454,483,000 for 2013. The yield on loans for 2015 was 5.27% compared to
5.53% and 5.96% for 2014 and 2013, respectively.
Interest income from total investments on a non tax-equivalent basis, (total
investments include investment securities, Federal funds sold, interest-bearing
deposits in other banks, and other securities), decreased $228,000 or 1.97% in
2015 compared to 2014. The yield on average investments decreased 8 basis
points to 2.75% for the year ended December 31, 2015 from 2.83% for the year
ended December 31, 2014. Average total investments increased $15,180,000 to
$529,046,000 in 2015 compared to $513,866,000 in 2014. In 2014, total
investment income on a non tax-equivalent basis increased $3,229,000 or
38.82% compared to 2013.
A significant portion of the investment portfolio is mortgage-backed securities
(MBS) and collateralized mortgage obligations (CMOs). At December 31, 2015,
we held $228,849,000 or 44.94% of the total market value of the investment
portfolio in MBS and CMOs with an average yield of 1.80%. 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 cumulative net of tax effect of the change in market value of the
available-for-sale investment portfolio as of December 31, 2015 was an unrealized
gain of $4,462,000 and is reflected in the Company’s equity. At December 31,
2015, the average life of the investment portfolio was 5.77 years and the market
value reflected a pre-tax unrealized gain of $7,474,000. 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, 2015 and 2014, no OTTI was recorded. For the year ended
December 31, 2013, OTTI was recorded in the amount of $17,000. 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, 2015, an immediate rate increase of 200 basis points
would result in an estimated decrease in the market value of the investment
portfolio by approximately $37,255,000. Conversely, with an immediate rate
decrease of 200 basis points, the estimated increase in the market value of the
investment portfolio would be $31,622,000. 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 2015 increased $783,000 to $41,822,000 compared
to $41,039,000 in 2014 and $34,836,000 in 2013. The increase was the result
of yield changes, asset mix changes, and an increase in average earning assets,
partially offset by an increase in interest-bearing liabilities. The tax equivalent
yield on interest earning assets decreased to 4.10% for the year ended
December 31, 2015 from 4.22% for the year ended December 31, 2014. Average
interest earning assets increased to $1,112,758,000 for the year ended
December 31, 2015 compared to $1,052,097,000 for the year ended
December 31, 2014. Average interest-earning deposits in other banks increased
$11,182,000 comparing 2015 to 2014. Average yield on these deposits was
0.32%. Average investments and interest-earning deposits increased $15,180,000
but the tax equivalent yield on those assets decreased 8 basis points. Average total
loans increased $47,233,000 and the yield on average loans decreased 26 basis
points.
Impacting the increase in total interest income in 2014 was the collection of
approximately $642,000 of net foregone interest, asset mix changes, and increase
49
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
INTEREST INCOME AND EXPENSE
(Continued)
in average earning assets, partially offset by an increase in interest-bearing
liabilities. The yield on interest-earning assets decreased to 4.22% for the year
ended December 31, 2014 from 4.24% for the year ended December 31, 2013.
Average interest-earning assets increased to $1,052,097,000 for the year ended
December 31, 2014 compared to $895,330,000 for the year ended
December 31, 2013.
Interest expense on deposits in 2015 decreased $112,000 or 10.57% to
$948,000 compared to $1,060,000 in 2014 and $1,270,000 in 2013. The
decrease in interest expense in 2015 compared to 2014 was primarily due to the
repricing of interest-bearing deposits which decreased 2 basis points to 0.14% in
2015 from 0.16% in 2014. The decrease in interest expense in 2014 compared
to 2013 was due to repricing of interest-bearing deposits, which decreased 6 basis
points to 0.16% in 2014 from 0.22% in 2013. Average interest-bearing deposits
were $677,867,000 for 2015 compared to $657,738,000 and $564,537,000 for
2014 and 2013, respectively. The increases in average interest-bearing deposits in
2015 and 2014 was the result of organic growth.
Average other borrowings were $5,156,000 with an effective rate of 1.89% for
2015 compared to $5,155,000 with an effective rate of 1.83% for 2014. In
2013, the average other borrowings were $5,645,000 with an effective rate of
2.05%. 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 debentures were
acquired in the merger with Service 1st and carry a floating rate based on the
three month LIBOR plus a margin 1.60%. The rate was 1.92% for 2015, 1.83%
for 2014, and 1.84% for 2013.
The cost of all of our interest-bearing liabilities decreased 2 basis points to
0.15% for 2015 compared to 0.17% for 2014 and 0.24% for 2013. The cost of
total deposits decreased to 0.09% for the year ended December 31, 2015
compared to 0.11% and 0.15% for the years ended December 31, 2014 and
2013, respectively. Average demand deposits increased 11.21% to $387,931,000
in 2015 compared to $348,822,000 for 2014 and $283,956,000 for 2013. The
ratio of non-interest demand deposits to total deposits increased to 36.40% for
2015 compared to 34.65% and 33.47% for 2014 and 2013, respectively.
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
Net interest income before provision for credit losses for 2015 increased
$892,000 or 2.24% to $40,775,000 compared to $39,883,000 for 2014 and
$33,451,000 for 2013. The increase in 2015 was due to the increase in average
earning assets and 2 basis point decrease in the average interest rate on interest-
bearing deposits, partially offset by the decrease in the average rate on earning
assets. Our net interest margin (NIM) decreased 10 basis points. Yield on interest
earning assets decreased 12 basis points while the effective rate on interest bearing
liabilities decreased 2 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 income before provision for credit losses increased $6,432,000 in 2014
compared to 2013, mainly due to the increase in average earning assets and 7
basis point decrease in the average interest rate on deposits liabilities. Average
interest-earning assets were $1,112,758,000 for the year ended December 31,
2015 with a NIM of 4.01% compared to $1,052,097,000 with a NIM of 4.11%
in 2014, and $895,330,000 with a NIM of 4.09% in 2013. 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 incurred credit losses through a charge to operating
income based upon the composition of the loan portfolio, delinquency levels,
historical 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
50
individual credit officer. The grading is then submitted to the Chief Credit
Officer (CCO), who reviews the grades for accuracy and gives final approval. The
CCO is not involved in loan originations. The risk grading and reserve allocation
is analyzed quarterly by the Senior Risk Manager, CCO, Chief Financial Officer,
and Board; and at least annually by a third party credit reviewer and by various
regulatory agencies.
Quarterly, the Senior Risk Manager and the CCO set the specific reserve for
all adversely risk-graded credits. This process includes the utilization of loan
delinquency reports, classified asset reports, collateral analysis, 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 credit
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. Changes in the allowance for credit
losses 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.
Management believes that all adjustments, if any, to the allowance for credit
losses are supported by the timely and consistent application of methodologies
and processes resulting in detailed documentation of the allowance of the
allowance calculation and other portfolio trending analysis.
The allocation of the allowance for credit losses is set forth below (in
thousands):
Loan Type
Commercial:
December 31,
2015
December 31,
2014
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
Unallocated reserves
$
3,143
419
1,556
694
1,686
1,149
119
500
234
110
2,753
377
1,380
837
1,201
564
76
811
267
42
Total allowance for credit losses
$
9,610
$
8,308
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 incurred credit losses 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.
There were $600,000 additions made to the allowance for credit losses in
2015, compared to $7,985,000 and none for the same periods in 2014 and
2013, respectively. These provisions are primarily the result of our assessment of
the overall adequacy of the allowance for credit losses considering a number of
factors as discussed in the ‘‘Allowance for Credit Losses’’ section below. During
the fourth quarter of 2014, the Company recorded a provision for credit losses of
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
PROVISION FOR CREDIT LOSSES
(Continued)
approximately $8.4 million in connection with the partial charge-off of a single
commercial and agricultural relationship. The Company is actively working to
collect all balances legally owed to the Company. The Company plans to
continue to track and identify any expenses, net of recoveries, associated with the
collection efforts of this commercial and agricultural relationship. For the year
ended December 31, 2015 and 2014, collection expenses related to this
relationship totaled $436,000 and $27,000, respectively.
During the year ended December 31, 2015, the Company had net recoveries
totaling $702,000 compared to net charge-offs of $8,885,000 and $925,000 for
the same periods in 2014 and 2013, respectively. The net charge-off (recovery)
ratio, which reflects net charge-offs (recoveries) to average loans, was (0.12)%,
1.65% and 0.20% for 2015, 2014, and 2013, respectively.
Nonperforming loans were $2,413,000 and $14,052,000 at December 31,
2015 and 2014, respectively. Nonperforming loans as a percentage of total loans
were 0.40% at December 31, 2015 compared to 2.45% at December 31, 2014.
The Company had no other real estate owned at December 31, 2015 and
December 31, 2014 as compared to $190,000 at December 31, 2013.
We had loans past due, not including nonaccrual loans, totaling $136,000 at
December 31, 2015 compared to $336,000 at December 31, 2014. Excluding
2014, the Company has seen a decline in the amount of non-performing loans
to an amount more in line with historical levels before the recession triggered by
the financial crisis of 2008.
Notwithstanding improvements in the economy, 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.
Many of the agricultural crops grown by our Central Valley customers have been
harvested with preliminary results demonstrating that California’s drought and
unusual weather patterns have had an impact with lower crop yields compared to
the previous year for certain crops. Many farmers and ranchers have instituted
improved farming practices including planting less acreage, as part of the
mitigation for the cost of water delivery and the expense of pumping. We closely
monitored the water and the related issues affecting our customers in 2015 and
2014. 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, 2015, 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 $600,000 in 2015,
$7,985,000 in 2014, and none in 2013, was $40,175,000 for 2015 compared to
$31,898,000 and $33,451,000 for 2014 and 2013, 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 $9,387,000 in 2015
compared to $8,164,000 and $7,831,000 in 2014 and 2013, respectively. The
$1,223,000 or 14.98% increase in non-interest income was due to increases in
net realized gains on sales and calls of investment securities, loan placement fees,
Federal Home Loan Bank dividends, and other income, compared to the
comparable 2014 period, partially offset by a decrease in service charge income,
interchange fees, and appreciation in cash surrender value of bank owned life
insurance. The $333,000 or 4.25% increases in non-interest income comparing
2014 to 2013 was due to increases in service charge income, interchange fees,
appreciation in cash surrender value of bank owned life insurance, Federal Home
Loan Bank dividends, and gain on sale of other real estate owned, partially offset
by gains on sales and calls of investment securities and loan placement fees.
Customer service charges decreased $210,000 to $3,070,000 in 2015
compared to $3,280,000 in 2014 and $3,156,000 in 2013. The decrease in 2015
from 2014, is due to lower analyzed service charge fee income. The increase in
2014 from 2013 is mainly due to increases in overdraft and analyzed service
charge fee income.
During the year ended December 31, 2015, we realized net gains on sales and
calls of investment securities of $1,495,000. In 2014, we realized a net gain of
$904,000 compared to a net gain of $1,265,000 in 2013 from sales and calls of
investment securities. The net gains in 2015 , 2014, and 2013 were the results of
partial restructuring of the investment portfolio designed to improve the future
performance of the portfolio. 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 $596,000 in 2015 compared to $614,000 and
$495,000 in 2014 and 2013, 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 $1,197,000 in 2015 compared to $1,205,000 and
$962,000 in 2014 and 2013, respectively. Part of the increases in 2014 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 $498,000 in 2015 to $1,042,000 compared to $544,000 in 2014
and $677,000 in 2013. Fees were higher in 2015 compared to 2014 and 2013.
Refinancing and new mortgage activity increased in 2015 and decreased slightly
in 2014. We continue to see the historically low mortgage rates 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, 2015, we held $4,823,000 in FHLB stock compared to
$4,791,000 at December 31, 2014. Dividends in 2015 increased to $580,000
compared to $327,000 in 2014 and $177,000 in 2013.
Other income increased to $1,396,000 in 2015 compared to $1,227,000 and
$1,099,000 in 2014 and 2013, respectively. The period-to-period increase in
2015 compared to 2014 was primarily due to increases in electronic funds
transfer fee income and non-customer check cashing fees. In addition, the
Company realized a $345,000 tax-free gain related to the collection of life
insurance proceeds in June 2015 which is included in Other income.
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 $678,000 or 1.92% to $36,016,000 in 2015 compared to $35,338,000
in 2014, and $31,685,000 in 2013.
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 69.24% for 2015 compared to 69.42% for 2014 and 73.06%
for 2013. The improvement in the efficiency ratio in 2015 is due to the growth
in revenues outpacing the growth in non-interest expense. The improvement in
the efficiency ratio in 2014 compared to 2013 is also due to the growth in
revenues outpacing the growth in non-interest expense.
51
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
NON-INTEREST EXPENSES (Continued)
Salaries and employee benefits increased $1,115,000 or 5.65% to $20,836,000
in 2015 compared to $19,721,000 in 2014 and $17,427,000 in 2013. Full time
equivalents were 273 for the year ended December 31, 2015 compared to 271
for the year ended December 31, 2014. In addition, the increase in 2015 as
compared to 2014 is a result of higher commissions on loan originations, group
health insurance expenses and profit sharing expenses. The Company had no
profit sharing expense in 2014. 2015 also had higher loan origination costs
which reduce the Company’s total salaries and employee benefits.
At December 31, 2015, we had three 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. In May 2015, the Company adopted the
Central Valley Community Bancorp 2015 Omnibus Incentive Plan (2015 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. Currently under the 2015
Plan, there are 875,000 shares remain reserved for future grants as of
December 31, 2015. The Central Valley Community Bancorp 2000 Stock
Option Plan (2000 Plan) for which 80,045 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) provided 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 213,678 shares reserved for issuance for
options and restricted stock awards already committed to be granted to
employees and directors under incentive and nonstatutory agreements. The 2005
Plan expired May 16, 2015 and no additional grants will be made under this
plan.
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, 2015, 2014, and 2013, the compensation
cost recognized for share based compensation was $238,000, $173,000 and
$98,000, respectively.
As of December 31, 2015, there was $86,000 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under all plans. The cost is expected to be recognized over a weighted
average period of 1.72 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, 2015 and 2014.
During the year ended December 31, 2015, 9,268 shares of restricted common
stock were granted from the 2005 Plan. The restricted common stock had a fair
market value of $10.79 per share on the date of grant. As of December 31,
2015, there was $554,000 of total unrecognized compensation cost related to
nonvested restricted common stock. Restricted stock compensation expense is
recognized on a straight-line basis over the vesting period. This cost is expected
to be recognized over a weighted average remaining period of 3.58 years and will
be adjusted for subsequent changes in estimated forfeitures.
Occupancy and equipment expense decreased $166,000 or 3.43% to
$4,669,000 in 2015 compared to $4,835,000 in 2014 and $4,109,000 in 2013.
The decrease in 2015 was the result of the closure of an ATM location in
Visalia. The increase in 2014 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 increased $297,000 or 38.98% to $1,059,000 in 2015
compared to $762,000 and $696,000 in 2014 and 2013, respectively. The
assessment base for calculating the amount owed is average assets minus average
tangible equity. The increase in regulatory assessments was a result of higher
assessment rate which was a result of changes in credit quality ratios used in
determining the assessment rate along with higher average assets.
52
Data processing expenses were $1,139,000 in 2015 compared to $1,820,000 in
2014 and $1,383,000 in 2013. The $681,000 or 37.42% decrease in 2015, was
a result of higher expenses in 2014 which related to final conversion from VCB
platforms and largely due to the renegotiation of data processing contracts which
became effective January 1, 2015. The $437,000 or 31.60% increase in 2014
compared to 2013 is the result of increased processing charges related to the
VCB acquisition and an increase of accounts and services provided to our
customers and branches.
Amortization of core deposit intangibles was $320,000 for 2015, $337,000 for
2014, and $268,000 for 2013. During 2015, amortization expense related to
Service 1st Bank core deposit intangible (CDI) was $183,000, and amortization
expense related to VCB CDI was $137,000. During 2014, amortization expense
related to Service 1st Bank core deposit intangible (CDI) was $200,000, and
amortization expense related to VCB CDI was $137,000. 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.
ATM/Debit card expenses decreased $76,000 to $548,000 for the year ended
December 31, 2015 compared to $624,000 in 2014 and $527,000 in 2013.
License and maintenance contracts increased $32,000 to $520,000 for the year
ended December 31, 2015 compared to $488,000 and $472,000 in 2014 and
2013, respectively. Other non-interest expenses decreased $362,000 or 8.11% to
$4,104,000 in 2015 compared to $4,466,000 in 2014 and $3,866,000 in 2013.
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
2015
%
Other
Expense Average
Assets
2014
%
Other
Expense Average
Assets
2013
Stationery/supplies
Amortization of software
Director fees and related
expenses
Telephone
Postage
Armored courier fees
Risk management expense
Loss (gain) on sale or
write-down of assets
Donations
Personnel other
Education/training
General insurance
Appraisal fees
Operating losses
Other
Total other non-interest
expense
$
269
240
306
292
212
218
163
6
185
173
148
150
66
56
1,620
(Dollars in thousands)
0.02% $
0.02%
0.03%
0.02%
0.02%
0.02%
0.01%
-%
0.02%
0.01%
0.01%
0.01%
0.01%
-%
0.13%
266
224
262
230
238
221
207
201
179
154
135
141
130
53
1,825
0.02% $
0.02%
0.02%
0.02%
0.02%
0.02%
0.02%
0.02%
0.02%
0.01%
0.01%
0.01%
0.01%
-%
0.16%
257
243
233
219
202
155
155
(1)
160
122
135
126
89
67
1,704
0.02%
0.02%
0.02%
0.02%
0.02%
0.01%
0.01%
-%
0.01%
0.01%
0.01%
0.01%
0.01%
0.01%
0.15%
$
4,104
0.34% $
4,466
0.39% $
3,866
0.34%
PROVISION FOR INCOME TAXES
Our effective income tax rate was 19.1% for 2015 compared to (12.0)% for
2014 and 14.1% for 2013. The Company reported an income tax provision
(benefit) of $2,582,000, $(570,000), and $1,347,000 for the years ended
December 31, 2015, 2014, and 2013, respectively. Changes in the Company’s
effective tax rate other than changes in the level of income before taxes were due
in part to changes in tax law which limited the use of various tax credits and
incentive beginning in 2014 and the ratio of non-taxable income to total income
before taxes.
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
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
PREFERRED STOCK DIVIDENDS AND ACCRETION
(Continued)
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 during the year ended
December 31, 2013.
FINANCIAL CONDITION
SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS
December 31, 2015 compared to December 31, 2014.
Total assets were $1,276,736,000 as of December 31, 2015, compared to
$1,192,183,000 as of December 31, 2014, an increase of 7.09% or $84,553,000.
Total gross loans were $598,111,000 as of December 31, 2015, compared to
$572,588,000 as of December 31, 2014, an increase of $25,523,000 or 4.46%.
The total investment portfolio (including Federal funds sold and interest-earning
deposits in other banks) increased 11.53% or $60,033,000 to $580,544,000.
Total deposits increased 7.42% or $77,115,000 to $1,116,267,000 as of
December 31, 2015, compared to $1,039,152,000 as of December 31, 2014.
Shareholders’ equity increased $8,278,000 or 6.32% to $139,323,000 as of
December 31, 2015, compared to $131,045,000 as of December 31, 2014. The
increase in shareholders’ equity was driven by the retention of earnings net of
dividends paid, partially offset by a decrease in unrealized gains on
available-for-sale investment securities recorded in accumulated other
comprehensive income (AOCI). Accrued interest payable and other liabilities
were $15,991,000 as of December 31, 2015, compared to $16,831,000 as of
December 31, 2014, a decrease of $840,000.
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,
2015, investment securities with a fair value of $118,400,000, or 23.25% 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, 2015 was 53.58% compared to 55.10% at
December 31, 2014. The loan to deposit ratio of our peers was 75.73% at
December 31, 2015. Peer group information from SNL Financial data includes
bank holding companies in central California with assets from $600 million to
$2.5 billion. The total investment portfolio, including Federal funds sold and
interest-earning deposits in other banks, increased 11.53% or $60,033,000 to
$580,544,000 at December 31, 2015, from $520,511,000 at December 31,
2014. The market value of the portfolio reflected an unrealized gain of
$7,474,000 at December 31, 2015, compared to an unrealized gain of
$8,896,000 at December 31, 2014.
Losses recognized in 2015, 2014, and 2013 were incurred in order to
reposition the investment securities portfolio based on the current rate
environment. The securities which were sold at a loss were acquired when the
rate environment was not as volatile. The securities which were sold were
primarily purchased several years ago to serve a purpose in the rate environment
in which the securities were purchased. The Company is addressing risks in the
security portfolio by selling these securities and using proceeds to purchase
securities that fit with the Company’s current risk profile.
On January 20, 2016, management sold certain investment securities with a
book value of $23.0 million in a routine restructuring of the investment
portfolio. Through the proper operation of the Company’s internal control
process related to investment securities, management discovered after the
transaction settled that five of the 13 securities sold were previously designated as
Held to Maturity (HTM). The book value of the HTM securities sold was
$8.0 million. The gain realized on the sale of the HTM securities was $648,000.
The Company will reclassify the remaining HTM securities as Available for Sale
as of January 20, 2016.
We periodically evaluate each investment security for other-than-temporary
impairment, relying primarily on industry analyst reports, observation of market
conditions and interest rate fluctuations. The portion of the impairment that is
attributable to a shortage in the present value of expected future cash flows
relative to the amortized cost should be recorded as a current period charge to
earnings. The discount rate in this analysis is the original yield expected at time
of purchase.
As of December 31, 2015, 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 investment securities with an unrealized loss at December 31, 2015,
and identified those that had an unrealized loss for at least a consecutive
12 month period, which had an unrealized loss at December 31, 2015 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 downgraded 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, 2015, the Company had a total of 17 PLRMBS with a
remaining principal balance of $2,356,000 and a net unrealized gain of
approximately $1,234,000. Nine of these PLRMBS with a remaining principal
balance of $2,094,000 had credit ratings below investment grade. The Company
continues to monitor these securities for changes in credit ratings or other
indications of credit deterioration. No credit related OTTI charges related to
PLRMBS were recorded during the year ended December 31, 2015.
See Note 4 to the audited Consolidated Financial Statements for carrying
values and estimated fair values of our investment securities portfolio.
53
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
LOANS
Total gross loans increased $25,523,000 or 4.46% to $598,111,000 as of December 31, 2015, compared to $572,588,000 as of December 31, 2014.
The following table sets forth information concerning the composition of our loan portfolio as of and for the years ended December 31, 2015, 2014, 2013, 2012,
and 2011.
Loan Type
(Dollars 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
2015
2014
2013
2012
2011
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
$
102,197
17.1% $
89,007
15.5% $
87,082
17.0% $
77,956
19.7% $
78,089
18.3%
30,472
132,669
5.1%
22.2%
39,140
128,147
6.8%
22.3%
31,649
118,731
6.1%
23.1%
26,599
104,555
6.7%
26.4%
29,958
108,047
7.0%
25.3%
168,910
28.2%
176,804
30.9%
156,781
30.6%
114,444
28.9%
113,183
26.4%
38,685
117,244
74,867
10,520
410,226
42,296
12,503
54,799
417
598,111
(9,610)
6.5%
19.6%
12.5%
1.8%
68.6%
7.1%
2.1%
9.2%
100.0%
38,923
106,788
57,501
6,611
386,627
47,575
10,093
57,668
146
572,588
(8,308)
6.8%
18.7%
10.0%
1.2%
67.6%
8.3%
1.8%
10.1%
100.0%
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%
Total loans
$
588,501
$
564,280
$
503,149
$
385,185
$
415,999
At December 31, 2015, loans acquired in the VCB acquisition had a balance
of $62,395,000, of which $1,617,000 were commercial loans, $51,576,000 were
real estate loans, and $9,202,000 were consumer loans. At December 31, 2014,
loans acquired in the VCB acquisition had a balance of $77,882,000, of which
$3,590,000 were commercial loans, $62,792,000 were real estate loans, and
$11,500,000 were consumer loans.
At December 31, 2015, in management’s judgment, a concentration of loans
existed in commercial loans and real-estate-related loans, representing
approximately 97.9% of total loans of which 22.2% were commercial and 75.7%
were real-estate-related. This level of concentration is consistent with 98.2% at
December 31, 2014. Although we believe the loans within this concentration
have no more than the normal risk of collectability, 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 collectability, 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, 2015 and 2014.
We believe that our commercial real estate loan underwriting policies and
practices result in prudent extensions of credit, but recognize that our lending
activities result in relatively high reported commercial real estate lending levels.
Commercial real estate loans include certain loans which represent low to
moderate risk and certain loans with higher risks.
The Board of Directors review and approve concentration limits and
exceptions to limitations of concentration are reported to the Board of Directors
at least quarterly.
NONPERFORMING ASSETS
Nonperforming assets consist of loans past due 90 days or more that are still
accruing interest, loans on nonaccrual status, and foreclosed property classified as
Other Real Estate Owned (OREO). We measure all loans placed on nonaccrual
status for impairment based on the fair value of the underlying collateral or the
net present value of the expected cash flows.
At December 31, 2015, total nonperforming assets totaled $2,413,000, or
0.19% of total assets, compared to $14,052,000, or 1.18% of total assets at
December 31, 2014. Total nonperforming assets at December 31, 2015, included
nonaccrual loans totaling $2,413,000, no OREO, and no repossessed assets.
Nonperforming assets at December 31, 2014 consisted of $14,052,000 in
nonaccrual loans, no OREO, and no repossessed assets. At December 31, 2015,
we had four loans considered troubled debt restructurings (‘‘TDRs’’) totaling
$1,337,000 which are included in nonaccrual loans compared to three TDRs
totaling $1,826,000 at December 31, 2014. 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,
2015 and 2014 is set forth below. The Company had no loans past due more
than 90 days and still accruing interest at December 31, 2015 and 2014.
Management is not aware of any potential problem loans, which were current
and accruing at December 31, 2015, 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.
54
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Composition of Nonaccrual, Past Due and Restructured Loans
NONPERFORMING ASSETS (Continued)
(As of December 31, dollars in thousands)
Nonaccrual Loans:
Commercial and industrial
Owner occupied
Agricultural real estate
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
Equity loans and line of credit
Consumer and Installment
Total nonaccrual
Accruing loans past due 90 days or more
Total nonperforming loans
Nonperforming loans to total loans
Ratio of nonperforming loans to allowance for credit losses
Loans considered to be impaired
Related allowance for credit losses on impaired loans
2015
2014
2013
2012
2011
$
$
$
$
-
324
-
567
172
13
29
23
-
-
1,285
-
2,413
-
2,413
0.40%
25.11%
6,699
164
$
$
$
$
$
7,265
1,363
360
1,468
1,751
19
-
-
547
-
1,279
-
14,052
-
14,052
$
2.45%
169.14%
18,826
612
$
$
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
-
14,434
3.38%
126.66%
23,644
4,368
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, 2015 and 2014, we had impaired loans
totaling $6,699,000 and $18,826,000, 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
$340,000 for the year ended December 31, 2015 of which $104,000 was
attributable to troubled debt restructurings. Foregone interest on nonaccrual loans
totaled $716,000 and $661,000 for the years ended December 31, 2014 and
2013, respectively of which $139,000 and $279,000 was attributable to troubled
debt restructurings, respectively.
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, 2015.
(In thousands)
Non-accrual loans:
Commercial and industrial
Real estate
Real estate construction and land
development
Agricultural 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
Balances
December 31,
2014
Additions to
Nonaccrual
Loans
Net Pay
Downs
Transfer to
Foreclosed
Collateral -
OREO
Returns to
Accrual
Status
Charge
Offs
Balances
December 31,
2015
$
$
7,209
2,831
-
360
1,751
19
56
-
547
1,279
190
720
53
-
152
3
-
25
-
41
$
(6,620)
(2,660)
$
$
-
-
$
-
-
$
(779)
-
(53)
(360)
(1,364)
(6)
(27)
(2)
(547)
(35)
-
-
(227)
-
-
-
-
-
-
-
(111)
-
-
-
-
-
-
-
(29)
(3)
-
-
-
-
-
891
-
-
172
13
29
23
-
1,285
2,413
Total non-accrual
$
14,052
$
1,184
$
(11,674)
$
(227)
$
(111)
$
(811)
$
The following table provides a summary of the annual change in the OREO
balance:
(In thousands)
Balance, beginning of year
Additions
1st lien assumed upon foreclosure
Dispositions
Write-downs
Net gain on disposition
Balance, end of year
Years Ended
December 31,
2015
2014
$
$
$
-
227
121
(359)
-
11
-
$
190
235
-
(488)
-
63
-
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, 2015 the Bank had no
OREO properties. In 2015, the Bank foreclosed on one property collateralized by
real estate. Proceeds from OREO sales totaled $359,000 during 2015. The
Company realized $11,000 in net gains from the sale of all properties.
As of December 31, 2014 the Bank had no OREO properties. In 2014, the
Bank foreclosed on one property collateralized by real estate. Proceeds from
OREO sales totaled $488,000 during 2014. The Company realized $63,000 in
net gains from the sale of all properties.
ALLOWANCE FOR CREDIT LOSSES
We have established a methodology for the determination of the adequacy of
the allowance 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
incurred credit losses in the Company’s loan portfolio. The allowance consists of
two primary components, specific reserves related to impaired loans and general
reserves for probable incurred 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 (and in
certain cases peer loss data) over the most recent 20 quarters, and qualitative
factors including economic trends in the Company’s service areas, industry
56
experience and trends, geographic concentrations, estimated collateral values, the
Company’s underwriting policies, the character of the loan portfolio, and
probable losses incurred in the portfolio taken as a whole. Management has
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, and a time period sufficient 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 recoveries, 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 credit
losses 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 Senior Risk Manager and the
Chief Credit Officer (CCO) 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 credit
losses in our loan and lease portfolio. 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.
Management 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 probable incurred losses. The Bank’s asset
monitoring process includes the use of asset classifications to segregate the assets,
largely loans, 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. In general, all
credit facilities exceeding 90 days of delinquency require classification and are
placed on nonaccrual.
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,
2015
2014
$
$
8,308
600
(961)
1,663
9,208
7,985
(9,834)
949
$
9,610
$
8,308
Allowance for credit losses to total loans
1.61%
1.45%
As of December 31, 2015, the allowance for credit losses (ALLL) stood at
$9,610,000, compared to $8,308,000 at December 31, 2014, a net increase of
$1,302,000. The increase in the ALLL was due to net recoveries and a provision
for credit losses during the year ended December 31, 2015, the retention of
which was necessitated by management’s observations and assumptions about the
existing credit quality of the loan portfolio. Net recoveries totaled $702,000 while
the provision for credit losses was $600,000. The balance of classified loans and
loans graded special mention, totaled $31,764,000 and $28,719,000 at
December 31, 2015 and $33,758,000 and $8,663,000 at December 31, 2014.
The balance of undisbursed commitments to extend credit on construction and
other loans and letters of credit was $217,166,000 as of December 31, 2015,
compared to $214,131,000 as of December 31, 2014. At December 31, 2015
and 2014, the balance of a contingent allocation for probable loan loss
experience on unfunded obligations was $150,000 and $165,000, respectively.
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 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.
The ALLL as a percentage of total loans was 1.61% at December 31, 2015,
and 1.45% at December 31, 2014. Total loans include VCB loans that were
recorded at fair value in connection with the acquisition of $62,395,000 at
December 31, 2015 and $77,882,000 at December 31, 2014. Excluding these
VCB loans from the calculation, the ALLL to total gross loans was 1.79% and
1.68% as of December 31, 2015 and 2014, respectively and general reserves
associated with non-impaired loans to total non-impaired loans was 1.79% and
1.62%, respectively. The loan portfolio acquired in the VCB merger was booked
at fair value with no associated allocation in the ALLL. The size of the fair value
discount remains adequate for all non-impaired acquired loans; therefore, there is
no associated allocation in the ALLL. While non-performing loans improved
substantially during 2015, the liquidation of collateral associated with a single
commercial and agricultural relationship that was charged down to its net
realizable value during the year ended December 31, 2014, the migration of
special mention loans from $8,663,000 to $28,719,000 and changes in
qualitative factors during the year ended December 31, 2015 gave rise to the
need for additional general loan loss reserves.
The Company’s loan portfolio balances in 2015 increased through organic
growth. The higher allowance for credit losses to total loans ratio is supported by
the recent acceleration of growth rates of loans included in the ALLL as well as
the high loss experienced in 2014. During the fourth quarter of 2014, the
Company recorded a provision for credit losses of approximately $8.4 million in
connection with the partial charge-off of a single commercial and agricultural
relationship. The Company is actively working to collect all balances legally owed
to the Company. The Company plans to continue to track and identify any
expenses, net of recoveries, associated with the collection efforts of this
commercial and agricultural relationship, and management of the Company
continues to work to minimize any future losses related to this credit. For the
year ended December 31, 2015, collection expenses related to this relationship
totaled $436,000 as compared to $27,000 in 2014.
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 (or peer data) by portfolio segment over the
most recent 20 quarters, and qualitative factors. 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. However, the total reserve rates on
non-impaired loans include qualitative factors which are systematically derived
and consistently applied to reflect conservatively estimated losses from loss
contingencies at the date of the financial statements. Based on the above
considerations and given recent changes in historical charge-off rates included in
the ALLL modeling and the changes in other factors, management determined
that the ALLL was appropriate as of December 31, 2015.
Non-performing loans totaled $2,413,000 as of December 31, 2015, and
$14,052,000 as of December 31, 2014. The allowance for credit losses as a
percentage of nonperforming loans was 398.26% and 59.12% as of
December 31, 2015 and December 31, 2014, respectively. In addition,
management believes that the likelihood of recoveries on previously charged-off
loans continues to improve based on the collection efforts of management
combined with improvements in the value of real estate which serves as the
primary source of collateral for loans. Management believes the allowance at
December 31, 2015 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, 2015 was $29,917,000 consisting 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 significant decline in net
earnings could be indicative of a decline in the fair value of goodwill and result
in impairment. For that reason, goodwill is assessed at least annually for
impairment.
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 2015, so goodwill was not required to be retested.
The intangible assets at December 31, 2015 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, 2015 was $1,024,000,
net of $1,741,000 in accumulated amortization expense. The carrying value at
December 31, 2014 was $1,344,000, net of $1,421,000 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, 2015 and determined no
impairment was necessary. In addition, management determined that no events
had occurred between the annual evaluation date and December 31, 2015 which
would necessitate further analysis. Amortization expense recognized was $320,000
for 2015, $337,000 for 2014 and $268,000 2013.
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,
2016
2017
2018
2019
2020
Thereafter
Total
Estimated Core
Deposit
Intangible
Amortization
$
$
137
137
137
137
137
339
1,024
DEPOSITS AND BORROWINGS
The Bank’s deposits are insured by the Federal Deposit Insurance Corporation
(FDIC) up to applicable legal limits. All of a depositor’s 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 $77,115,000 or 7.42% to $1,116,267,000 as of
December 31, 2015, compared to $1,039,152,000 as of December 31, 2014.
Interest-bearing deposits increased $24,744,000 or 3.73% to $687,494,000 as of
December 31, 2015, compared to $662,750,000 as of December 31, 2014.
Non-interest bearing deposits increased $52,371,000 or 13.91% to $428,773,000
as of December 31, 2015, compared to $376,402,000 as of December 31, 2014.
Average non-interest bearing deposits to average total deposits was 36.40% for
the year ended December 31, 2015 compared to 34.65% for the same period in
2014. Our total market share of deposits in Fresno, Madera, San Joaquin, and
Tulare counties was 3.77% in 2015 compared to 3.81% in 2014 based on FDIC
deposit market share information published as of June 2015.
The composition of the deposits and average interest rates paid at
December 31, 2015 and December 31, 2014 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
2015
Deposits Rate
2014
Deposits Rate
$
227,167
239,241
139,703
81,383
687,494
428,773
20.4% 0.10% $
21.4% 0.06%
12.5% 0.37%
7.3% 0.04%
61.6% 0.14%
38.4%
209,781
228,268
153,320
71,381
662,750
376,402
20.2% 0.11%
22.0% 0.08%
14.7% 0.40%
6.9% 0.05%
63.8% 0.16%
36.2%
Total deposits
$
1,116,267 100.0%
$
1,039,152 100.0%
There were no short-term or long-term FHLB borrowings as of December 31,
2015 and December 31, 2014. 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,
2015, 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,
2015, the rate was 1.92%. Interest expense recognized by the Company for the
years ended December 31, 2015, 2014, and 2013 was $99,000, $96,000 and
$98,000, 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.
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 $139,323,000 as of December 31, 2015,
compared to $131,045,000 as of December 31, 2014. The increase in
shareholders’ equity is the result of increase in retained earnings from net income
of $10,964,000, exercise of stock options, including the related tax benefit of
$66,000, and the effect of share based compensation expense of $238,000, offset
by common stock cash dividends of $1,979,000 and a decrease in accumulated
other comprehensive income (AOCI) of $915,000.
During 2015, the Bank declared and paid cash dividends to the Company in
the amount of $2,260,000 in connection with the 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 $1,979,000 or $0.18 per common share cash
dividend to shareholders of record during the year ended December 31, 2015.
During 2014, the Bank declared and paid cash dividends to the Company in
the amount of $2,350,000 in connection with the 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 $2,190,000 or $0.20 per common share cash
dividend to shareholders of record during the year ended December 31, 2014.
During 2013, the Bank declared and paid cash dividends to the Company 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 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.
58
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
CAPITAL RESOURCES
(Continued)
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 Board of Governors, the FDIC and other federal banking agencies have
issued risk-based capital adequacy guidelines intended to provide a measure of
capital adequacy that reflects the degree of risk associated with a banking
organization’s operations for both transactions reported on the balance sheet as
assets, and transactions, such as letters of credit and recourse arrangements, which
are reported as off-balance-sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off-balance-sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. government securities, to
100% for assets with relatively higher credit risk, such as business loans.
A banking organization’s risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk-adjusted assets and off-balance-sheet items. The
regulators measure risk-adjusted assets and off-balance-sheet items against both
total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained
earnings, noncumulative perpetual preferred stock and minority interests in
certain subsidiaries, less most other intangible assets. Tier 2 capital may consist of
a limited amount of the allowance for possible loan and lease losses and certain
other instruments with some characteristics of equity. The inclusion of elements
of Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies.
In December 2010, the internal Basel Committee on Bank Supervision (‘‘Basel
Committee’’) released its final framework for strengthening international capital
and liquidity regulation, now officially identified as ‘‘Basel III,’’ which, when fully
phased-in, would require bank holding companies and their bank subsidiaries to
maintain substantially more capital than currently required, with a greater
emphasis on common equity. The Basel III capital framework, among other
things:
• introduces as a new capital measure, Common Equity Tier 1 (‘‘CET1’’),
more commonly known in the United States as ‘‘Tier 1 Common,’’ and
defines CET1 narrowly by requiring that most adjustments to regulatory
capital measures be made to CET1 and not to the other components of
capital, and expands the scope of the adjustments as compared to existing
regulations;
• when fully phased in, requires banks to maintain: (i) a newly adopted
international standard, a minimum ratio of CET1 to risk-weighted assets of
at least 4.5%, plus a 2.5% ‘‘capital conservation buffer’’ (which is added to
the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a
minimum ratio of CET1 to risk-weighted assets of at least 7%); (ii) an
additional ‘‘SIFI buffer’’ for those large institutions deemed to be
systemically important, ranging from 1.0% to 2.5%, and up to 3.5% under
certain conditions; (iii) a minimum ratio of Tier 1 capital to risk-weighted
assets of at least 6.0%, plus the capital conservation buffer (which is added
to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively
resulting in a minimum Tier 1 capital ratio of 8.5% upon full
implementation); (iv) a minimum ratio of Total (that is, Tier 1 plus Tier 2)
capital to risk-weighted assets of at least 8.0%, plus the capital conservation
buffer (which is added to the 8.0% total capital ratio as that buffer is
phased in, effectively resulting in a minimum total capital ratio of 10.5%
upon full implementation); and (v) as a newly adopted international
standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1
capital to balance sheet exposures plus certain off-balance sheet exposures (as
the average for each quarter of the month-end ratios for the quarter); and
• an additional ‘‘countercyclical capital buffer,’’ generally to be imposed when
national regulators determine that excess aggregate credit growth becomes
associated with a buildup of systemic risk, that would be a CET1 add-on to
the capital conservation buffer in the range of 0% to 2.5% when fully
implemented.
In July 2013, the U.S. banking agencies approved the U.S. version of Basel III.
The federal bank regulatory agencies adopted version of Basel III revises the
risk-based and leverage capital requirements and the method for calculating
risk-weighted assets to make them consistent with Basel III and to meet the
requirements of the Dodd-Frank Act. Although many of the rules contained in
these final regulations are applicable only to large, internationally active banks,
some of them apply on a phased in basis to all banking organizations, including
the Company and the Bank. Among other things, the rules establish a new
minimum common equity Tier 1 ratio (4.5% of risk-weighted assets), a higher
minimum Tier 1 risk-based capital requirement (6.0% of risk-weighted assets)
and a minimum non-risk-based leverage ratio (4.00% eliminating a 3.00%
exception for higher rated banks). The new additional capital conservation buffer
of 2.5% of risk weighted assets over each of the required capital ratios will be
phased in from 2016 to 2019 and must be met to avoid limitations on the
ability of the Company and the Bank to pay dividends, repurchase shares or pay
discretionary bonuses. The additional ‘‘countercyclical capital buffer’’ is also
required for larger and more complex institutions. The new rules assign higher
risk weighting to exposures that are more than 90 days past due or are on
nonaccrual status and certain commercial real estate facilities that finance the
acquisition, development or construction of real property. The rules also change
the permitted composition of Tier 1 capital to exclude trust preferred securities,
mortgage servicing rights and certain deferred tax assets and include unrealized
gains and losses on available for sale debt and equity securities (with a one-time
opt out option for Standardized Banks (banks with less than $250 billion of total
consolidated assets and less than $10 billion of foreign exposures) which the
Company and the Bank intend to exercise). The rules, including alternative
requirements for smaller community financial institutions like the Company and
the Bank, would be phased in through 2019. The implementation of the Basel
III framework commenced on January 1, 2015.
A bank that does not achieve and maintain the required capital levels may be
issued a capital directive by the FDIC to ensure the maintenance of required
capital levels. As discussed above, the Company and the Bank are required to
maintain certain levels of capital.
59
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
CAPITAL RESOURCES (Continued)
The following table presents the Company’s and the Bank’s Regulatory capital
ratios as of December 31, 2015 and December 31, 2014.
December 31, 2015
December 31, 2014
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$ 105,825
$
48,950
$ 104,878
8.65% $
4.00% $
8.58% $
95,936
45,894
95,298
$
$
61,148
48,918
5.00% $
4.00% $
57,341
45,873
$ 103,152
$
34,650
$ 104,878
$
$
50,017
34,627
13.44%
4.50%
13.67%
6.50%
4.50%
N/A
N/A
N/A
N/A
N/A
$ 105,825
$
46,200
$ 104,878
13.79% $
6.00% $
13.67% $
95,936
28,075
95,298
$
$
61,560
46,170
8.00% $
6.00% $
42,080
28,053
$ 115,466
$
61,601
$ 114,513
15.04% $ 104,447
56,150
14.93% $ 103,809
8.00% $
$
$
76,949
61,560
10.00% $
8.00% $
70,133
56,106
8.36%
4.00%
8.31%
5.00%
4.00%
N/A
N/A
N/A
N/A
N/A
13.67%
4.00%
13.59%
6.00%
4.00%
14.88%
8.00%
14.80%
10.00%
8.00%
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
Common Equity Tier 1 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
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, 2015, the Company had
unpledged securities totaling $394,296,000 available as a secondary source of
liquidity and total cash and cash equivalents of $94,617,000. Cash and cash
equivalents at December 31, 2015 increased 22.36% compared to December 31,
2014. 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.
60
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, 2015, our available
borrowing capacity includes approximately $40,000,000 in Federal funds lines
with our correspondent banks and $308,356,000 in unused FHLB advances. At
December 31, 2015, 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, 2015 and 2014:
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,
2015
2014
$ 40,000 $ 40,000
-
- $
$
$308,356 $290,851
$
-
- $
$215,223 $183,036
$215,307 $183,171
$
$
$
$
2,328 $
- $
2,578 $
2,598 $
2,441
-
2,729
2,757
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
$217,166,000 as of December 31, 2015 compared to $214,131,000 as of
December 31, 2014. 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.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
CRITICAL ACCOUNTING POLICIES
(Continued)
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.
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 incurred credit losses in the Company’s loan portfolio. 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.
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.
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, 2015, 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
Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk (IRR) and credit risk constitute the two greatest sources of
financial exposure for insured financial institutions that operate like we do. IRR
represents the impact that changes in absolute and relative levels of market
interest rates may have upon our net interest income (NII). Changes in the NII
are the result of changes in the net interest spread between interest-earning assets
and interest-bearing liabilities (timing risk), the relationship between various rates
(basis risk), and changes in the shape of the yield curve.
We realize income principally from the differential or spread between the
interest earned on loans, investments, other interest-earning assets and the interest
incurred on deposits and borrowings. The volumes and yields on loans, deposits
and borrowings are affected by market interest rates. As of December 31, 2015,
78.87% of our loan portfolio was tied to adjustable-rate indices. The majority of
our adjustable rate loans are tied to prime and reprice within 90 days. However,
in the current low rate environment, several of our loans, tied to prime, are at
their floors and will not reprice until prime plus the factor is greater than the
floor. The majority of our time deposits have a fixed rate of interest. As of
December 31, 2015, 77.77% of our time deposits matures within one year or
less.
Changes in the market level of interest rates directly and immediately affect
our interest spread, and therefore profitability. Sharp and significant changes to
market rates can cause the interest spread to shrink or expand significantly in the
near term, principally because of the timing differences between the adjustable
rate loans and the maturities (and therefore repricing) of the deposits and
borrowings.
the level of interest income and interest expense recorded on a large portion of
the Company’s assets and liabilities, and the market value of all interest earning
assets and interest bearing liabilities, other than those which possess a short term
to maturity. Virtually all of the Company’s interest earning assets and interest
bearing liabilities are located at the Bank level. Thus, virtually all of the
Company’s interest rate risk exposure lies at the Bank level other than
$5.2 million in subordinated debentures issued by the Company’s subsidiary
Service 1st Capital Trust I. As a result, all significant interest rate risk procedures
are performed at the Bank level.
The fundamental objective of the Company’s management of its assets and
liabilities is to maximize the Company’s economic value while maintaining
adequate liquidity and an exposure to interest rate risk deemed by management
to be acceptable. Management believes an acceptable degree of exposure to
interest rate risk results from the management of assets and liabilities through
maturities, pricing and mix to attempt to neutralize the potential impact of
changes in market interest rates. The Company’s profitability is dependent to a
large extent upon its net interest income, which is the difference between its
interest income on interest earning assets, such as loans and investments, and its
interest expense on interest bearing liabilities, such as deposits and borrowings.
The Company is subject to interest rate risk to the degree that its interest
earning assets re-price differently than its interest bearing liabilities. The
Company manages its mix of assets and liabilities with the goals of limiting its
exposure to interest rate risk, ensuring adequate liquidity, and coordinating its
sources and uses of funds.
Our management and Board of Directors’ Asset/Liability Committees (ALCO)
The Company seeks to control interest rate risk exposure in a manner that will
are responsible for managing our assets and liabilities in a manner that balances
profitability, IRR and various other risks including liquidity. The ALCO operates
under policies and within risk limits prescribed, reviewed, and approved by the
Board of Directors.
The ALCO seeks to stabilize our NII by matching rate-sensitive assets and
liabilities through maintaining the maturity and repricing of these assets and
liabilities at appropriate levels given the interest rate environment. When the
amount of rate-sensitive liabilities exceeds rate-sensitive assets within specified
time periods, NII generally will be negatively impacted by an increasing interest
rate environment and positively impacted by a decreasing interest rate
environment. Conversely, when the amount of rate-sensitive assets exceeds the
amount of rate-sensitive liabilities within specified time periods, net interest
income will generally be positively impacted by an increasing interest rate
environment and negatively impacted by a decreasing interest rate environment.
In recent years, we have shifted our mix of assets from consisting primarily of
loans to a current mix that is approximately half loans and half securities, none
of which are held for trading purposes. The value of these securities is subject to
interest rate risk, which we must monitor and manage successfully in order to
prevent declines in value of these assets if interest rates rise in the future. The
speed and velocity of the repricing of assets and liabilities will also contribute to
the effects on our NII, as will the presence or absence of periodic and lifetime
interest rate caps and floors.
Simulation of earnings is the primary tool used to measure the sensitivity of
earnings to interest rate changes. Earnings simulations are produced using a
software model that is based on actual cash flows and repricing characteristics for
all of our financial instruments and incorporates market-based assumptions
regarding the impact of changing interest rates on current volumes of applicable
financial instruments.
Interest rate simulations provide us with an estimate of both the dollar amount
and percentage change in NII under various rate scenarios. All assets and
liabilities are normally subjected to up to 400 basis point increases and decreases
in interest rates in 100 basis point increments. Under each interest rate scenario,
we project our net interest income. From these results, we can then develop
alternatives in dealing with the tolerance thresholds.
The assets and liabilities of a financial institution are primarily monetary in
nature. As such they represent obligations to pay or receive fixed and
determinable amounts of money that are not affected by future changes in prices.
Generally, the impact of inflation on a financial institution is reflected by
fluctuations in interest rates, the ability of customers to repay their obligations
and upward pressure on operating expenses. Although inflationary pressures are
not considered to be of any particular hindrance in the current economic
environment, they may have an impact on the company’s future earnings in the
event those pressures become more prevalent.
As a financial institution, the Company’s primary component of market risk is
interest rate volatility. Fluctuations in interest rates will ultimately impact both
62
allow for adequate levels of earnings and capital over a range of possible interest
rate environments. The Company has adopted formal policies and practices to
monitor and manage interest rate risk exposure. Management believes historically
it has effectively managed the effect of changes in interest rates on its operating
results and believes that it can continue to manage the short-term effects of
interest rate changes under various interest rate scenarios.
Management employs asset and liability management software to measure the
Company’s exposure to future changes in interest rates. The software measures
the expected cash flows and re-pricing of each financial asset/liability separately in
measuring the Company’s interest rate sensitivity. Based on the results of the
software’s output, management believes the Company’s balance sheet is evenly
matched over the short term and slightly asset sensitive over the longer term as of
December 31, 2015. This means that the Company would expect (all other
things being equal) to experience a limited change in its net interest income if
rates rise or fall. The level of potential or expected change indicated by the tables
below is considered acceptable by management and is compliant with the
Company’s ALCO policies. Management will continue to perform this analysis
each quarter.
The hypothetical impacts of sudden interest rate movements applied to the
Company’s asset and liability balances are modeled quarterly. The results of these
models indicate how much of the Company’s net interest income is ‘‘at risk’’
from various rate changes over a one year horizon. This exercise is valuable in
identifying risk exposures. Management believes the results for the Company’s
December 31, 2015 balances indicate that the net interest income at risk over a
one year time horizon for a 100 basis points (‘‘bps’’), 200 bps, 300 bps, and 400
bps rate increase and a 100 bps decrease is acceptable to management and within
policy guidelines at this time. Given the low interest rate environment, 200 bps,
300 bps, and 400 bps decreases are not considered a realistic possibility and are
therefore not modeled.
The results in the table below indicate the change in net interest income the
Company would expect to see as of December 31, 2015, if interest rates were to
change in the amounts set forth:
Sensitivity Analysis of Impact of Rate Changes on Interest Income
$ Change from % Change from
Hypothetical Change in Rates
(Dollars in thousands)
Up 400 bps
Up 300 bps
Up 200 bps
Up 100 bps
Unchanged
Down 100 bps
Rates at
Projected Net December 31, December 31,
2015
Interest Income
Rates at
2015
$
46,532 $
45,429
44,323
43,233
42,204
40,844
4,328
3,225
2,119
1,029
-
(1,360)
10.25%
7.64%
5.02%
2.44%
-
(3.22)%
Quantitative and Qualitative Disclosures About Market Risk
It is important to note that the above table is a summary of several forecasts
and actual results may vary from any of the forecasted amounts and such
difference may be material and adverse. The forecasts are based on estimates and
assumptions made by management, and that may turn out to be different, and
may change over time. Factors affecting these estimates and assumptions include,
but are not limited to: 1) competitor behavior, 2) economic conditions both
locally and nationally, 3) actions taken by the Federal Reserve Board, 4) customer
behavior and 5) management’s responses to each of the foregoing. Factors that
vary significantly from the assumptions and estimates may have material and
adverse effects on the Company’s net interest income; therefore, the results of this
analysis should not be relied upon as indicative of actual future results.
The following table shows management’s estimates of how the loan portfolio is
segregated between variable-daily, variable other than daily and fixed rate loans,
and estimates of re-pricing opportunities for the entire loan portfolio at
December 31, 2015 and 2014:
Rate Type
(Dollars in thousands)
Variable rate
Fixed rate
December 31, 2015
December 31, 2014
Balance
Percent of
Total
Balance
Percent of
Total
$ 471,757
126,354
78.87% $ 455,735
21.13% 116,853
79.59%
20.41%
Total gross loans
$ 598,111
100.00% $ 572,588
100.00%
Approximately 78.87% of our loan portfolio is tied to adjustable rate indices
and 38.67% of our loan portfolio reprices within 90 days. As of December 31,
2015, we had 1,453 commercial and real estate loans totaling $348,180,000 with
floors ranging from 3.25% to 7.50% and ceilings ranging from 7.00% to
30.00%.
The following table shows the repricing categories of the Company’s loan
portfolio at December 31, 2015 and 2014:
Repricing
(Dollars in thousands)
< 1 Year
1-3 Years
3-5 Years
> 5 Years
December 31, 2015
December 31, 2014
Balance
$ 250,705
124,385
139,417
83,604
Percent of
Total
Balance
Percent of
Total
41.91% $ 253,221
20.80% 115,022
23.31% 120,065
84,280
13.98%
44.22%
20.09%
20.97%
14.72%
Total gross loans
$ 598,111
100.00% $ 572,588
100.00%
Assumptions are inherently uncertain, and, consequently, the model cannot
precisely measure net interest income or precisely predict the impact of changes
in interest rates on net interest income. Actual results will differ from simulated
results due to timing, magnitude and frequency of interest rate changes, as well
as changes in market conditions and management strategies which might
moderate the negative consequences of interest rate deviations.
63
Stock Price
Information
The Company’s common stock is listed for trading on the NASDAQ Capital Market under the ticker symbol CVCY. As of March 4, 2016, the Company had approximately
943 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, 2014
June 30, 2014
September 30, 2014
December 31, 2014
March 31, 2015
June 30, 2015
September 30, 2015
December 31, 2015
$
$
Sales Prices for the Company’s Common Stock
High
11.90
13.90
13.46
11.61
12.16
12.35
12.50
12.50
Low
10.67
10.61
10.63
10.45
9.55
10.25
10.66
10.51
The Company paid $0.18 and $0.20 per year in common share cash dividends in 2015 and 2014 respectively. 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
Wedbush Securities
(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, Corporate Secretary at (800) 298-1775.
64
Notes
65
W H E R E I N V E S T M E N T I S
M E A S U R E D I N C O M M I T M E N T
Investing in our communities has always been one of the guiding principles of Central Valley Community Bank.
Financially supporting worthwhile projects and organizations is important, but it’s just one of the ways in which we
invest. Our teams of local banking professionals also invest time gaining a deep understanding of their marketplace and
its people. Not to mention investing our talents helping local organizations succeed, and enabling our communities to
grow stronger. While some banks are content to measure their community investment in cash, we prefer to measure ours
in commitment. Because the yields are easier to see now, and generations from now.
Ag Lenders Society of California
Alzheimer’s Association
American Bankers Association
American Cancer Society
American Heart Association
American Institute of Certified Public Accountants
American Red Cross
Armenian Museum of Fresno
Boys and Girls Club of Merced County
Boys & Girls Club of Tracy
Big Creek Elementary School
Building Industry Association of Tulare and Kings County
Builders Exchange of Merced and Mariposa
Business Network International Tracy Business Partners
Business Organization of Old Town Clovis
California Bankers Association
California Chamber of Commerce
California Cotton Ginners Association
California Financial Crimes Investigators Association
California Health Sciences University
California Odyssey Soccer Club
California State University, Fresno
California State University, Fresno – Ag One Foundation
California State University, Fresno – Alumni Association
California State University, Fresno – Career Development Center
California State University, Fresno – Craig School of Business
California State University, Fresno – Gazarian Real Estate Center
California State University, Fresno – Foundation
California State University, Fresno – Maddy Institute
Central California Child Development Services
Central California Women’s Conference
Central California Society for Prevention of Cruelty to Animals
Central Sierra Historical Society
Central Valley Blue Star Moms
Central Valley Hispanic Chamber of Commerce
Central Valley Recovery Services
Central Valley SCORE
Central Valley Senior Coalition
Central Valley Sons of Italy Foundation
Certified Development Corporation of Tulare County
Clovis Chamber of Commerce
Clovis Hall Of Fame
Clovis Jets Track Club
Clovis Rodeo Association
Coarsegold Chamber of Commerce
Community Food Bank
Community Hospitals of Central California
66
Court Appointed Special Advocates of Stanislaus County
Delta College Foundation
Doug McDonald Scholarship
Downtown Visalia Foundation
Ducor Union Elementary School District
Eastern Madera County Chamber of Commerce
East Fresno Kiwanis Club
Economic Development Corporation of Fresno County
Economic Development Corporation of Tulare County
El Dorado Park Community Development Corporation
Emergency Food Bank and Family Services
Exceptional Parents Unlimited
Executives Association of Tulare County
Exeter Ag Boosters
Exeter By Design Foundation
Exeter Chamber of Commerce
Exeter Community Service Guild
Exeter Community Services & Recreation
Exeter Union High School
Feed Our Future
Fig Garden Swim Team
Financial Credit Networks, Inc.
Financial Services Information Sharing and Analysis Center
Forward Fresno Foundation, Inc.
Foundation for Clovis Schools
Foundation for Fresno County Public Library
Fresno Area Hispanic Chamber of Commerce
Fresno Area Hispanic Foundation
Fresno Art Museum
Fresno Association of REALTORS
Fresno Business Council
Fresno County Farm Bureau
Fresno Flats Historical Village and Park
Fresno Metro Black Chamber of Commerce
Fresno Rescue Mission
Fresno Women’s Trade Club
Friends of the Oakhurst Library
Golden West Trailblazer Foundation
Goldenrod Elementary School
Greater Fresno Area Chamber of Commerce
Greater Merced Chamber of Commerce
Greater Stockton Chamber of Commerce
Habitat For Humanity
Hands In The Community
Helping Our Own Destiny Prevention Program
Hinds Hospice
Independent Community Bankers of America
(CONTINUED)
International Association of Lions Clubs
Junior League of San Joaquin County
Kaweah Delta Health Care District
Kerman 4-H Club
Kerman Chamber of Commerce
Kerman Future Farmers of America Alumni Association
Kerman Historical Society
Kerman Rotary Club
Kerman Senior Advisory Board
Kerman Unified Education Foundation
Kerman Youth Soccer League
Kings County Farm Bureau
Kings & Tulare County Continuum of Care on Homelessness
Leukemia & Lymphoma Society Central California Chapter
Lodi Chamber of Commerce
Lodi Police Foundation
Lodi-Tokay Rotary Club
LOEL Center & Gardens
Luso-American Life Insurance Society
Mable Barron Elementary School Parent Teacher Student Association
Madera Association of REALTORS
Madera Community Hospital Foundation
Madera County Farm Bureau
Madera County Food Bank
Madera District Chamber of Commerce
Madera National Little League
Madera Police Officers Association
Make-A-Wish Foundation of Central California
Marjaree Mason Center
McHenry House Tracy Family Shelter
Medical Group Management Association
Merced Boosters Club
Merced County Chamber of Commerce
Merced County Farm Bureau
Merced County Food Bank
Merced Police Officers Association
Modesto Chamber of Commerce
Modesto Christian School
Modesto Sunrise Rotary
National Association of Government Guaranteed Lenders
National Association of Real Estate Appraisers
National Notary Association
Neighborhood Church of Visalia
Networking for Women of Tulare County
Notre Dame de Namur University
Oakdale Educational Foundation
Oakhurst Area Chamber of Commerce
Our Lady of Perpetual Help School
Park of the Sierras
Phi Delta Chi Colony
Pine Ridge Elementary Boosters
Poverello House
Professional Women’s Resource
Pro-Youth HEART Program
Purposed II Praise School of Dance
Rancho Cordova Chamber of Commerce
Regents of the University of California
Rotary Club of Clovis
Rotary Club of Fresno
Rotary Club of Merced
Rotary Club of Sacramento
Sacramento Food Bank & Family Services
Sacramento Medical Group Management Association
San Joaquin County Farm Bureau
San Joaquin Dental Society
San Joaquin River Parkway Conservation Trust, Inc.
San Joaquin Valley Town Hall
Second Harvest Food Bank
Sequoia Council of the Boy Scouts of America
Shaver Lake Lions Club
Sierra Club Foundation
Sierra High School Future Farmers of America
Sierra Lions Club
Sierra Oakhurst Kiwanis Club
Sierra Women’s Service Club
Society for Human Resource Management
Soroptimist International of Modesto
Soroptimist International of Visalia
Southeast Fresno Community Economic Development Association
Spirit of Woman of California
Spring Valley Elementary School
Stagg High School Football
Stanislaus County Fair
Stanislaus County Farm Bureau
Stockton Athletic Hall of Fame
Stockton Shelter For The Homeless
Stockton Sunrise Rotary Club
Stocktonians Taking Action to Neutralize Drugs Affordable Housing
The American Legion
The Bank CEO Network
The Buddhist Church of Stockton
The Bulldog Foundation
The Clovis Community Foundation
The Downtown Fresno Partnership
The Exeter Art Gallery and Museum
The Merced County Fair
The Roman Catholic Diocese of Fresno
The Risk Management Association
The Salvation Army
Toastmasters International
Tracy Chamber of Commerce
Tracy Sunrise Rotary
Traver Joint Elementary District
Tree Fresno
Tulare County Animal Control
Tulare County Cattle Drive Beef Boosters
Tulare County Farm Bureau
Tulare Golf Course
Turning Point Pregnancy Care Center
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
Univision Contigo
Valley Children’s Hospital Alegria Guild
Valley Children’s Hospital Foundation
Valley Crime Stoppers
Valley Preparatory Academy
Visalia Breakfast Lions Club
Visalia Chamber of Commerce
Visalia County Center Rotary Club
Visalia Economic Development Corporation
Visalia Fox Theatre
Visalia Pro Youth
Visalia Host Lions Club
Visalia Sportsmen’s Association
Visalia Sunset Rotary Club
Warnors Center
West Visalia Kiwanis Club
Wish Upon A Star
YMCA Camp Sequoia Lake
Yosemite Gateway Association of REALTORS
67
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
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
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
Corporate Office
7100 North Financial Drive,
Suite 101
Fresno, CA 93720
(559) 298-1775
(800) 298-1775
Fresno Downtown
2404 Tulare Street
Fresno, CA 93721
(559) 268-6806
River Park
8375 North Fresno Street
Fresno, CA 93720
(559) 447-3350
Tracy
60 West 10th Street
Tracy, CA 95376
(209) 830-6995
68
Investing In Relationships.