DEEPLY ROOTED FOR THRIVING GROWTH, YEAR AFTER YEAR
Central Valley Community Bancorp enjoyed record growth in 2016, reaping the fruits of a successful year by
Central Valley Community Bank. Much of today’s growth stems from our deeply rooted business relationships –
a long-term investment that is now coming to fruition in our expanded service area, additional team members
and customers, new products and remodeled facilities. Look for the Bank to continue flourishing throughout the
San Joaquin Valley and Greater Sacramento Region.
TO OUR SHAREHOLDERS
As Central Valley Community Bancorp looks back on 2016, it is with celebration for another
successful year and optimism for the bright future unfolding, thanks to the strategic vision that has
guided us from the beginning.
2016: Snapshots of Strength
The Company’s positive performance trends continued in 2016, evidenced
by the year-over-year growth of loans and deposits – a reflection of the Bank
team’s hard work and customer referrals. Our strategic focus continues to
improve the Company’s financial metrics, while deepening and expanding
client relationships.
Total average assets for the year ended December 31, 2016, were
$1,321,007,000 compared to $1,222,526,000 for the year ended
December 31, 2015, an increase of $98,481,000 (8.06%). Total average
loans were $646,573,000 for the year ended December 31, 2016, an
increase of $59,811,000 over the $586,762,000 for the year ended
December 31, 2015. Total average deposits increased $78,433,000, or
7.36%, to $1,144,231,000 for the year ended December 31, 2016,
compared to $1,065,798,000 for the same period in 2015.
Additionally, the Company was pleased to declare cash dividends to
shareholders of record in each of the four quarters of 2016.
The positive growth trend in revenue, loans and deposits illustrates the
tremendous dedication of our team, customers, shareholders and
communities. Still, despite the above average rainfall experienced so far in
2017, we continue to monitor the agricultural risk throughout the San
Joaquin Valley due to various impacts on farming.
The Bank is well-positioned to build upon business growth opportunities
throughout our footprint, particularly in the Greater Sacramento region.
Economic indicators are trending positively throughout our service area, and
a renewed sense of optimism has been expressed from both the business
community and consumers alike. This trend translates into opportunities for
our Company.
A Successful Merger
The Bank completed a merger with Sierra Vista Bank in 2016 – a key step
in our strategy of increasing our Greater Sacramento presence.
The addition of the Sierra Vista Bank team enhances our position as a solid
financial alternative in Greater Sacramento, and the added full-service offices
in Folsom, Fair Oaks and Cameron Park allow Central Valley Community
Bank to provide long-term opportunities for our businesses, customers,
employees and communities.
Leadership Arrivals & Remembrances
Built on a foundation of shared values and strategic vision, Central Valley
Community Bank has enjoyed 37 years of consistently strong leadership.
While the faces may occasionally change, the commitment to our customers,
shareholders, employees and communities has remained unwavering.
The Bank was pleased to add to Gary D. Gall to the Board of Directors in
2016, upon completion of the Sierra Vista Bank merger. His knowledge of
community business banking in the Greater Sacramento region has already
opened the door to new opportunities for our commercial lending team.
In 2016, we were saddened to lose one of the Bank’s Founding Directors,
Wanda Rogers, former President of Rogers Helicopters, Inc. Wanda served
as a Founding Director and Chairman of the Board from 1979-1998, and
also chaired the loan committee.
Recently Central Valley Community Bank lost another Founding Director,
Joe Weirick. A strong advocate for small businesses and residents of the
Central Sierras, Joe served Central Valley Community Bank for over 37
years. Throughout his life, Joe devoted himself to family, friends, business
and his community, and he will be missed by all.
The Changing Face of Banking
The Bank kept pace with the evolving financial landscape, driven in part
by the rise in online and mobile banking, by responding with strategic
branch changes in 2016, consolidating one of our Fresno branches into a
nearby office. Looking forward in 2017, the Bank’s Gold River commercial
banking office will be relocated to a new, full-service banking office located
in Greater Sacramento’s Roseville community in April, so we may better
serve our growing business and personal banking customers with branch
operations and a commercial banking team in one convenient location.
Recognized & Respected in our Industry
The Company was added to the Russell 2000® Index in 2016, a leading
equity benchmark of US-based companies widely used by investment
managers and institutional investors, leading to more interest in our stock
and increased volume being traded.
The Bank achieved “Premier” performance from The Findley Reports in
2016 – the firm’s second-highest performance rating, based upon 2015
operating results.
2
Additionally, the Bank earned a 5-Star Superior rating from Bauer Financial
based on 2016 financial results, the highest distinction from this respected
financial rating agency.
Community Reinvestment Act advocacy continues to be a priority
including ongoing work with nonprofit, tribal and government
organizations to provide training in financial literacy, technical assistance
with financial matters, credit counseling, low-cost checking and savings
accounts for those with no banking experience, and economic development
expertise for important neighborhood revitalization projects.
Awards & Honors
Central Valley Community Bank was one of only 45 organizations across
the country selected by NASDAQ and EverFi to receive the prestigious
Innovation in Financial Education Award. Through our partnership with
EverFi, the Bank volunteers with high schools to provide financial
instruction using digital education modules supported by team members
in the classroom.
In 2016, Central Valley Community Bank was honored as “Best Business
Bank” for the third consecutive year and “Best Company to Work For”
for the second consecutive year in The Business Journal’s “Best of Central
Valley Business Readers’ Choice Awards” for Fresno, Madera, Kings and
Tulare Counties.
Customer Convenience & Security
Since 2014, the Bank has sought customer input on various aspects of
our customer service through our Voice of the Customer program.
Our customer satisfaction and performance scores continued to exceed
our expectations in 2016, improving over 2015. The program will continue
in 2017.
In 2016, Central Valley Community Bank added the MoneyPass® ATM
Network free of a surcharge, giving our customers access to over 25,000
ATMs nationwide.
Mobile Deposit for personal and business banking customers became
available in 2016, giving mobile app users the convenience of depositing
checks using their device’s camera.
Investing in Relationships & Community Service
Central Valley Community Bank has always been an advocate for family
businesses and a partner in our communities. From providing superior
customer service and charitable giving to offering competitive financial
products and education, we demonstrate our commitment daily by meeting
the unique needs of each customer.
Our partnership with the University of the Pacific Institute for Family
Business expanded in 2016 to include a dedicated resource center that helps
family businesses address common issues and meet challenges through
interactive forums, workshops and events.
Insurance Against Cyberattacks
Educating customers on their need for Cyber Risk Insurance was a priority
in 2016. As digital systems dominate the business marketplace, the risk to
data security is at an all-time high. To help our customers protect themselves,
the Bank offers a referral program to a variety of Cyber Risk Insurance
options, from data restoration services to equipment replacement, financial
loss prevention to ongoing monitoring services and more.
Celebrating a Decade of Document Shredding
One of the Bank’s most-utilized identity protection efforts turned ten years
old in 2016. Our Free Document Shredding Events were held at 16 Central
Valley Community Bank offices, allowing businesses and individuals to
securely shred confidential files during the data-sensitive period around tax
season, in addition to learning more about all ranges of identity protection
and cybersecurity. At select events, partner Valley Crime Stoppers provided
additional resources to support crime prevention.
2017 Outlook
Loan growth and expense management will be our focus in 2017, as well
as building non-interest income lines of business. Beyond these financial
performance goals is the ongoing teamwork exhibited by our people, who
truly pulled together for our customers in 2016 and are taking our service to
new heights in 2017. Outstanding individuals and teams are the heartbeat
of our Bank, and we are continuing to recruit, train and reward more of
them in 2017.
While we are on the lookout for market growth opportunities in 2017,
we are also looking inward at improving efficiency. All team members are
evaluating current practices and considering new technologies to improve
the customer experience and create shareholder value.
As you can see, we have much to be grateful for – and loyal supporters like
you are at the top of the list. All of us on the Central Valley Community
Bancorp Board of Directors want to thank our shareholders, employees,
customers and communities for the trust you’ve placed in us, and for the
privilege of serving the financial needs of this special place we call home.
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
OUR STRONG HISTORY
Central Valley Community Bank, founded in 1979, 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 common stock of the Company trades on the NASDAQ stock exchange
under the symbol CVCY.
A History Of Strength – A Heart Of Service
Central Valley Community Bank now operates 22 full-service offices in
17 communities within the San Joaquin Valley and Greater Sacramento
Region and employs over 320 team members. Offices are located in Cameron
Park, Clovis, Exeter, Fair Oaks, Folsom, Fresno, Gold River, Kerman, Lodi,
Madera, Merced, Modesto, Oakhurst, Prather, 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 $1.4 billion as of
December 31, 2016, 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 37-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 and Greater Sacramento Region. 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.
Always On The Leading Edge Of Security & Convenience
Central Valley Community Bank maintains state-of-the-art data processing and
information systems, and offers a complete line of innovative and competitive
business and personal deposit and loan products. Through FDIC insurance,
customer deposits for all insurable accounts are protected up to $250,000.
For maximum convenience, personal services are available through Personal
Online Banking with Bill Pay, Mobile Banking, Mobile Deposit, Popmoney
(person-to-person payments) and eStatements, in addition to Business Online
Banking services for businesses of all sizes including Bill Pay, Mobile Banking,
Mobile Deposit, eStatements and custom-tailored Cash Management services.
In addition, ATMs are located at all offices, customers have free access to ATMs
within MoneyPass® Network, BankLine provides 24-hour telephone banking,
and extended days and banking hours are offered at select offices.
A Proud Reputation Built On Personal Relationships
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
4
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 manufacturers to large
agribusiness organizations, healthcare companies 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.
Supporting Our Communities In So Many Ways
Focused on investing in the communities it serves, the Bank annually
supports a wide variety of organizations with financial donations and
the talents and energy of its people. Additionally, Bank management
serves in leadership positions for civic and philanthropic organizations
as well as 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
Reader’s Choice Awards” where the Bank was honored as “Best Business
Bank” for the third consecutive year and “Best Company to Work For”
for the second consecutive year in the four-county Central Valley.
A Firm Foundation For Building A Strong 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 nearly four 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.
Daniel J. Doyle
Chairman of the Board,
Central Valley Community Bancorp
Central Valley Community Bank
James M. Ford
President and CEO,
Central Valley Community Bancorp
Central Valley Community Bank
Daniel N. Cunningham
Lead Independent Director,
Central Valley Community Bancorp
Central Valley Community Bank
Director, Quinn Group Inc.
Steven D. McDonald
Secretary of the Board,
Central Valley Community Bancorp
Central Valley Community Bank
President, McDonald Properties, Inc.
B O A R D O F D I R E C TO R S
Investing In Relationships Since 1980
William S. Smittcamp
President/Owner,
Wawona Frozen Foods
Joseph B. Weirick
Investments
Passed Away February, 2017
F.T. “Tommy” Elliott, IV
Owner,
Wileman Bros. & Elliott, Inc.
Kaweah Container, Inc.
Gary D. Gall
Retired Bank Executive
Louis C. McMurray
President,
Charles McMurray Co.
Edwin S. Darden, Jr.
Architect,
Darden Architects, Inc.
5
YOUR TRUSTED TEAM PROVIDING THE SERVICE YOU DESERVE
At Central Valley Community Bank, we work hard to cultivate a culture of trust. The seeds of trust are planted in
our people through collaboration, communication and living our company values: leadership, caring, integrity,
teamwork, loyalty and trustworthiness. Trust blossoms in how those values are nurtured and protected and in how
we advocate for our customers with our uniquely personal approach to service and our ability to provide business
solutions to customer needs. Whether guiding the next generation of a family-owned business, helping students with
financial literacy or leading a small business forum, trust is earned in many ways at Central Valley Community
Bank. No wonder so many of our customers refer us to their colleagues and family members.
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
Buchalter, A Professional Corporation,
Sacramento, CA
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
Constantine Makayed
Senior Vice President,
Senior Risk Manager
Jeff Pace
Senior Vice President,
Real Estate Team Leader
Gina Peragine
Senior Vice President,
Loan Servicing
Karen Smith
Senior Vice President,
Regional Manager
Mark Smith
Senior Vice President,
Central Valley Commercial Team Leader
Daniel Demmers
Senior Vice President,
Director of Information Technology
Dorothy Thomas
Senior Vice President,
SBA Manager
Teresa Gilio
Senior Vice President,
Central Operations
Marci Madsen
Senior Vice President,
Human Resources
Theodore Thome
Senior Vice President,
Mid-Valley Commercial Team Leader
Rick Whitsell
Senior Vice President,
Sacramento Regional Manager
6
Exceptional Employees
Each year Central Valley Community Bank’s top-performing
team members are recognized.
The 2016 President’s Award included:
Linda Jones
Personal Banker
Mindy Martin
Vice President,
Mortgage Loan Officer
Mission Statement
As A Full Service Bank, We Are Committed To:
Providing a full range of financial services desired by our
customers, while providing superior customer service
delivered in a highly professional and personal manner.
Maintaining a positive work environment and investing
in each individual to “be the best they can be.”
Contributing to the quality of life in the communities
we serve.
The 2016 Circle of Elite included:
Continuing to maximize shareholder value.
Erik Emde
Small Business/Consumer
Loan Underwriter
Aaron Page
Vice President,
Credit Officer
Lynne Greenlee
Commercial Loan Support Specialist
Fatima Phillips
Electronic Banking Supervisor
Erik Meza
Deposit Services Utility
Shannon Millican
Financial Services Representative
Carina Nava
Assistant Vice President,
Customer Service Manager
Erin Probasco
Vice President,
Agribusiness Relationship Officer
Chanti Suong
Network Associate
Ramina Ushana
Vice President,
Branch Manager
Being the “Bank of Choice” for customers and employees!
Core Values
Leadership
Caring
Integrity
Teamwork
Loyalty
Trustworthiness
The 2016 Team Awards included:
Community Banking Team: Commercial Banking Team: Support Team:
Fresno Downtown Office
Real Estate Department Cash Management Team
Central Valley Community Bank Executive Management
From Left to Right: Patrick J. Carman, Gary D. Quisenberry, James M. Ford, Lydia E. Shaw and David A. Kinross
7
T R E N D A N A LY S I S
Central Valley Community Bancorp
2
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2012 2013 2014 2015 2016
2012 2013 2014 2015 2016
2012 2013 2014 2015 2016
Net Income (In Thousands)
Diluted Earnings Per Share
Average Total Loans (In Thousands)
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4
2012 2013 2014 2015 2016
2012 2013 2014 2015 2016
2012 2013 2014 2015 2016
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
397.82
Central Valley
Community Bancorp
235.36
265.56
SNL NASDAQ
Bank Index
212.83
213.30
171.31
161.52
177.42
191.53
196.45
Russell 2000
169.43
161.95
143.71
119.19
116.35
100.00
100.00
100.00
2011
2012
2013
2014
2015
2016
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 SNL NASDAQ Bank Index, measured as of the last trading day of each year shown.
The graph assumes an investment of $100 on December 31, 2011 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
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2016 and 2015 (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 $548,640 at December 31, 2016 and $470,080 at
December 31, 2015)
Held-to-maturity investment securities (Fair value of $35,142 at December 31, 2015)
Loans, less allowance for credit losses of $9,326 at December 31, 2016 and $9,610 at December 31, 2015
Bank premises and equipment, net
Bank owned life insurance
Federal Home Loan Bank stock
Goodwill
Core deposit intangibles
Accrued interest receivable and other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Short-term borrowings
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: 12,143,815 at
December 31, 2016 and 10,996,773 at December 31, 2015
Retained earnings
Accumulated other comprehensive (loss) income, net of tax
Total shareholders’ equity
$
$
$
2016
2015
$
28,185
10,368
15
38,568
547,749
-
747,302
9,407
23,189
5,594
40,231
1,383
29,900
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
1,443,323
$
1,276,736
$
495,815
760,164
1,255,979
400
5,155
17,756
428,773
687,494
1,116,267
-
5,155
15,991
1,279,290
1,137,413
-
71,645
92,904
(516)
164,033
-
54,424
80,437
4,462
139,323
Total liabilities and shareholders’ equity
$
1,443,323
$
1,276,736
The accompanying notes are an integral part of these consolidated financial statements.
10
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Income
For the Years Ended December 31, 2016, 2015, and 2014 (In thousands, except per share amounts)
2016
2015
2014
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
Total interest expense
Net interest income before provision for credit losses
(REVERSAL OF) 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
Net realized gains on sales and calls of investment securities
Other-than-temporary impairment loss on 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
Professional services
ATM/Debit card expenses
License & maintenance contracts
Directors’ expenses
Advertising
Internet banking expenses
Acquisition and integration expenses
Amortization of core deposit intangibles
Other expense
Total non-interest expenses
Income before provision for income taxes
PROVISION (BENEFIT) FOR INCOME TAXES
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
Cash dividends per common share
$
$
$
$
$
34,051
289
5,876
6,460
46,676
975
121
1,096
45,580
(5,850)
51,430
3,022
558
1,228
1,083
1,920
(136)
630
1,286
9,591
21,881
4,754
642
1,707
1,258
633
531
530
576
678
1,782
149
3,801
38,922
22,099
6,917
15,182
1.34
1.33
0.24
$
$
$
$
$
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
1,495
-
580
1,407
9,387
20,836
4,669
1,059
1,139
1,504
548
520
439
608
709
-
320
3,665
36,016
13,546
2,582
10,964
1.00
1.00
0.18
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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
904
-
327
1,290
8,164
19,721
4,835
762
1,820
1,176
624
488
501
589
520
-
337
3,965
35,338
4,724
(570)
5,294
0.48
0.48
0.20
11
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Comprehensive Income
For the Years Ended December 31, 2016, 2015, and 2014 (In thousands)
NET INCOME
Other Comprehensive Income (Loss):
Unrealized gains (losses) on securities:
Unrealized holdings (losses) gains arising during the period
Less: reclassification for net gains included in net income
Less: reclassification for other-than-temporary impairment loss included in net income
Transfer of investment securities from held-to-maturity to available-for-sale
Amortization of net unrealized gains transferred
Other comprehensive (loss) income, before tax
Tax benefit (expense) related to items of other comprehensive income
Total other comprehensive (loss) income
Comprehensive income
2016
2015
2014
$
15,182
$
10,964
$
5,294
(9,924)
1,224
(136)
2,647
(64)
(8,429)
3,451
(4,978)
59
1,481
-
-
(78)
(1,500)
585
(915)
$
10,204
$
10,049
$
13,847
904
-
-
(21)
12,922
(5,259)
7,663
12,957
The accompanying notes are an integral part of these consolidated financial statements.
12
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Changes in Shareholders’ Equity
For the Years Ended December 31, 2016, 2015, and 2014 (In thousands, except share amounts)
Balance, January 1, 2014
Net income
Other comprehensive income
Restricted stock granted, forfeited and related tax benefit
Cash dividend ($0.20 per common share)
Stock-based compensation expense
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
Balance, December 31, 2015
Net income
Other comprehensive loss
Stock issued for acquisition
Restricted stock granted, forfeited and related tax benefit
Stock-based compensation expense
Cash dividend ($0.24 per common share)
Stock options exercised and related tax benefit
Common Stock
Shares
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
(Net of Taxes)
Total
Shareholders’
Equity
10,914,680
-
-
56,850
-
-
8,910
10,980,440
-
-
7,263
-
-
9,070
10,996,773
-
-
1,058,851
52,911
-
-
35,280
$
$
53,981
-
-
-
-
173
62
54,216
-
-
(96)
238
-
66
54,424
-
-
16,678
(2)
284
-
261
$
68,348
5,294
-
-
(2,190)
-
-
71,452
10,964
-
-
-
(1,979)
-
80,437
15,182
-
-
-
(2,715)
-
$
(2,286)
-
7,663
-
-
-
-
5,377
-
(915)
-
-
-
-
4,462
-
(4,978)
-
-
-
-
120,043
5,294
7,663
-
(2,190)
173
62
131,045
10,964
(915)
(96)
238
(1,979)
66
139,323
15,182
(4,978)
16,678
(2)
284
(2,715)
261
Balance, December 31, 2016
12,143,815
$
71,645
$
92,904
$
(516)
$
164,033
The accompanying notes are an integral part of these consolidated financial statements.
13
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Cash Flows
For the Years Ended December 31, 2016, 2015, and 2014 (In thousands)
2016
2015
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Net decrease in deferred loan costs
Depreciation
Accretion
Amortization
Stock-based compensation
Excess tax benefit from exercise of stock options
(Reversal of ) provision for credit losses
Other than temporary impairment losses on investment securities
Net realized gains on sales and calls of available-for-sale investment securities
Net realized gains on sales or calls of held-to-maturity investment securities
Net loss on sale and disposal of equipment
Net gain on sale of other real estate owned
Increase in bank owned life insurance, net of expenses
Net gain on bank owned life insurance
Net (increase) decrease in accrued interest receivable and other assets
Net increase (decrease) in accrued interest payable and other liabilities
Benefit (provision) for deferred income taxes
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
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 sales or 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
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 in time deposits
Proceeds of borrowings from other financial institutions
Proceeds from exercise of stock options
Excess tax benefit from exercise of stock options
Cash dividend payments on common stock
Net cash (used in) provided by financing activities
(Decrease) increase in cash and cash equivalents
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
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 held-to-maturity to available-for-sale
Unrealized gain on transfer of securities from held-to-maturity to available-for-sale
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
Transfer of loans to other assets
Assumption of debt related to foreclosure of other real estate owned
Common stock issued in Sierra Vista Bank acquisition
The accompanying notes are an integral part of these consolidated financial statements.
14
$
15,182
$
10,964
$
(851)
1,320
(1,142)
7,912
284
(30)
(5,850)
136
(1,224)
(696)
4
-
(558)
(190)
(4,711)
821
2,592
12,999
13,241
(278,664)
167,163
9,257
50,531
(29,930)
-
(861)
-
-
928
7
(68,328)
26,372
(25,038)
400
231
30
(2,715)
(720)
(56,049)
94,617
(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
$
$
$
$
$
$
$
$
$
$
$
38,568
$
94,617
$
1,053
5,840
23,131
526
-
-
-
363
-
16,678
$
$
$
$
$
$
$
$
$
$
1,059
1,865
-
-
-
-
227
-
121
-
$
$
$
$
$
$
$
$
$
$
5,294
(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
77,328
1,171
1,360
-
-
31,346
163
235
-
-
-
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - Central Valley Community Bancorp (the ‘‘Company’’) was incorporated
on February 7, 2000 and subsequently obtained approval from the Board of
Governors of the Federal Reserve System to be a bank holding company in
connection with its acquisition of Central Valley Community Bank (the ‘‘Bank’’).
The Company became the sole shareholder of the Bank on November 15, 2000
in a statutory merger, pursuant to which each outstanding share of the Bank’s
common stock was exchanged for one share of common stock of the Company.
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 22 full service offices throughout California’s San Joaquin
Valley and Greater Sacramento Region. 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. lntercompany transactions and balances are eliminated in
consolidation.
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 and purchased 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.
Investment Securities - Investments are classified into the following categories:
• Available-for-sale securities, reported at fair value, with unrealized gains and
losses excluded from earnings and reported, net of taxes, as accumulated other
comprehensive income (loss) within shareholders’ equity.
• Held-to-maturity securities, which management has the positive intent and
ability to hold to maturity, reported at amortized cost, adjusted for the
accretion of discounts and amortization of premiums.
Management determines the appropriate classification of its investments at the
time of purchase and may only change the classification in certain limited
circumstances. All transfers between categories are accounted for at fair value in
the period which the transfer occurs. For the year ended December 31, 2016
management transferred $23.1 million of securities from held-to-maturity to
available-for-sale. During the year ended December 31, 2015, there were no
transfers between categories. Due to the 2016 transfer, management is precluded
from utilizing the held-to-maturity designation until the second quarter of 2018.
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 - 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 principal balances.
However, when a loan becomes impaired and the future collectability of interest
and principal is in serious doubt, the 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. 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 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. A loan placed on non-accrual status
may be restored to accrual status when principal and interest are no longer past
due and unpaid, or the loan otherwise becomes both well secured and in the
process of collection. 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.
15
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Acquired loans and Leases - Loans and leases acquired through purchase or
through a business combination are recorded at their fair value at the acquisition
date. Credit discounts are included in the determination of fair value; therefore,
an allowance for loan and lease losses is not recorded at the acquisition date.
Should the Company’s allowance for credit losses methodology indicate that the
credit discount associated with acquired, non-purchased credit impaired loans, is
no longer sufficient to cover probable losses inherent in those loans, the
Company will establish an allowance for those loans through a charge to
provision for credit losses. At the time of an acquisition, we evaluate loans to
determine if they are purchase credit impaired loans. Purchased credit impaired
loans are those acquired loans with evidence of credit deterioration for which it
was probable at acquisition that we would be unable to collect all contractual
payments. We make this determination by considering past due and/or
nonaccrual status, prior designation of a troubled debt restructuring, or other
factors that may suggest we will not be able to collect all contractual payments.
Purchased credit impaired loans are initially recorded at fair value with the
difference between fair value and estimated future cash flows accreted over the
expected cash flow period as income only to the extent we can reasonably
estimate the timing and amount of future cash flows. In this case, these loans
would be classified as accruing. In the event we are unable to reasonably estimate
timing and amount of future cash flows, or if the loan is acquired primarily for
the rewards of ownership of the underlying collateral, the loan is classified as
non-accrual. An acquired loan previously classified by the seller as a troubled
debt restructuring is no longer classified as such at the date of acquisition. Past
due status is reported based on contractual payment status.
All loans not otherwise classified as purchase credit impaired are recorded at
fair value with the discount to contractual value accreted over the life of the loan.
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 made to maintain the
adequacy of the total allowance after credit losses and loan growth. Credit
exposures determined to be uncollectible are charged against the allowance. Cash
received on previously charged off amounts is recorded as a recovery to the
allowance. The overall allowance consists of two primary components, specific
reserves related to impaired loans and general reserves for inherent losses related
to loans that are not impaired.
A loan is considered impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due,
including principal and interest, according to the contractual terms of the
original agreement. 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 come solely from the sale or operation of 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.
When determining the allowance for loan losses on acquired loans, we
bifurcate the allowance between legacy loans and acquired loans. Loans remain
designated as acquired until either (i) loan is renewed or (ii) loan is substantially
modified whereby modification results in a new loan. When determining the
16
allowance on acquired loans, the Company estimates probable incurred credit
losses as compared to the Company’s recorded investment, with the recorded
investment being net of any unaccreted discounts from the acquisition.
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 segregates the allowance by 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.
Commercial:
Commercial and industrial - Commercial and industrial loans are generally
underwritten to existing cash flows of operating businesses. Additionally,
economic trends influenced by unemployment rates and other key economic
indicators are closely correlated to the credit quality of these loans. Past due
payments may 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 commercial real estate - 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.
Investor commercial real estate - Investor 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.
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
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 may indicate that the borrowers’ capacity to repay their
obligations may be deteriorating.
Installment and other consumer loans - An installment loan portfolio is usually
comprised of a large number of small loans scheduled to be amortized over a
specific period. Most installment loans are made directly for consumer purchases.
Other consumer loans include credit card and other open ended unsecured
consumer loans. Credit cards and open ended unsecured loans generally have a
higher rate of default than all other portfolio segments and are also impacted by
weak economic conditions and trends. Credit cards and open ended unsecured
loans 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.
Risk Rating - 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 2016. 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
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.
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.
Investments in Low Income Housing Tax Credit Funds - The Bank has invested
in limited partnerships that were formed to develop and operate affordable
housing projects for low or moderate income tenants throughout California. Our
ownership in each limited partnership is less than two percent. In accordance
with ASU No. 2014-01, Investments—Equity Method and Joint Ventures
(Topic 323), we elected to account for the investments in qualified affordable
housing tax credit funds using the proportional amortization method. Under the
proportional amortization method, the initial cost of the investment is amortized
in proportion to the tax credits and other tax benefits received and the net
investment performance is recognized as part of income tax expense (benefit).
Each of the partnerships must meet the regulatory minimum requirements for
affordable housing for a minimum 15-year compliance period to fully utilize the
tax credits. If the partnerships cease to qualify during the compliance period, the
credit may be denied for any period in which the project is not in compliance
and a portion of the credit previously taken is subject to recapture with interest.
The investment in Low Income Housing Tax Credit Funds is reported as part of
other assets.
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
17
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
Foreclosed Assets - Assets acquired through or instead of loan foreclosure are
initially recorded at fair value less costs to sell when acquired, establishing a new
cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is
recorded through operations. Operating costs after acquisition are expensed.
Gains and losses on disposition are included in noninterest expense.
The carrying value of foreclosed assets was $362,000 at December 31, 2016,
and is included in other assets on the consolidated balance sheets. No foreclosed
assets were recorded at December 31, 2015.
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.
Business Combinations - The Company accounts for acquisitions of businesses
using the acquisition method of accounting. Under the acquisition method, assets
and liabilities assumed are recorded at their estimated fair values at the date of
acquisition. Management utilizes various valuation techniques included
discounted cash flow analyses to determine these fair values. Any excess of the
purchase price over amounts allocated to the acquired assets, including
identifiable intangible assets, and liabilities assumed is recorded as goodwill.
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, 2016 and 2015 represents the excess of the cost of Sierra Vista
Bank, 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. 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 2016, 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, 2016 represent the
estimated fair value of the core deposit relationships acquired in the acquisition
of Sierra Vista Bank in 2016, and the 2013 acquisition of Visalia Community
Bank. Core deposit intangibles are being amortized using the straight-line
method over an estimated life of 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, 2016 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 2016, 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
18
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded.
Income Taxes - The Company files its income taxes on a consolidated basis with
its Subsidiary. The allocation of income tax expense represents each entity’s
proportionate share of the consolidated provision for income taxes.
Income tax expense represents the total of the current year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred tax assets
and liabilities are recognized for the tax consequences of temporary differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment. On the balance sheet, net deferred tax
assets are included in accrued interest receivable and other assets.
The realization of deferred income tax assets is assessed and a valuation
allowance is recorded if it is ‘‘more likely than not’’ that all or a portion of the
deferred tax assets will not be realized. ‘‘More likely than not’’ is defined as
greater than a 50% chance. All available evidence, both positive and negative is
considered to determine whether, based on the weight of that evidence, a
valuation allowance is needed.
Accounting for Uncertainty in Income Taxes - The Company uses a
comprehensive model for recognizing, measuring, presenting and disclosing in the
financial statements tax positions taken or expected to be taken on a tax return.
A tax position is recognized as a benefit only if it is more likely than not that the
tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For tax
positions not meeting the more likely than not test, no tax benefit is recorded.
Interest expense and penalties associated with unrecognized tax benefits, if any,
are classified as income tax expense in the consolidated statement of income.
Retirement Plans - Employee 401(k) plan expense is the amount of employer
matching contributions. Profit sharing plan expense is the amount of employer
contributions. Contributions to the profit sharing plan are determined at the
discretion of the Board of Directors. Deferred compensation and supplemental
retirement plan expense is allocated over years of service.
Earnings Per Common Share - Basic earnings per common share (EPS), which
excludes dilution, is computed by dividing income available to common
shareholders (net income after deducting dividends, 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
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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, 2016, 2015, and 2014 were
$30,000, $6,000, and $7,000, 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.
Recently Issued Accounting Standards:
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 by making targeted improvements to GAAP as follows: (1) require
equity investments (except those accounted for under the equity method of
accounting or those that result in consolidation of the investee) to be measured
at fair value with changes in fair value recognized in net income. However, an
entity may choose to measure equity investments that do not have readily
determinable fair values at cost minus impairment, if any, plus or minus changes
resulting from observable price changes in orderly transactions for the identical or
a similar investment of the same issuer; (2) simplify the impairment assessment
of equity investments without readily determinable fair values by requiring a
qualitative assessment to identify impairment. When a qualitative assessment
indicates that impairment exists, an entity is required to measure the investment
at fair value; (3) eliminate the requirement to disclose the fair value of financial
instruments measured at amortized cost for entities that are not public business
entities; (4) eliminate the requirement for public business entities to disclose the
method(s) and significant assumptions used to estimate the fair value that is
required to be disclosed for financial instruments measured at amortized cost on
the balance sheet; (5) require public business entities to use the exit price notion
when measuring the fair value of financial instruments for disclosure purposes;
(6) require an entity to present separately in other comprehensive income the
portion of the total change in the fair value of a liability resulting from a change
in the instrument-specific credit risk when the entity has elected to measure the
liability at fair value in accordance with the fair value option for financial
instruments; (7) require separate presentation of financial assets and financial
liabilities by measurement category and form of financial asset (that is, securities
or loans and receivables) on the balance sheet or the accompanying notes to the
financial statements; and (8) clarify that an entity should evaluate the need for a
valuation allowance on a deferred tax asset related to available-for-sale securities
in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is
effective for interim and annual reporting periods beginning after December 15,
2017. Early application is permitted as of the beginning of the fiscal year of
adoption only for provisions (3) and (6) above. Early adoption of the other
provisions mentioned above is not permitted. The Company has performed a
preliminary evaluation of the provisions of ASU No. 2016-01. Based on this
evaluation, the Company has determined that ASU No. 2016-01 is not expected
to have a material impact on the Company’s financial position, results of
operations or cash flows.
FASB Accounting Standards Update (ASU) 2016-02 - Leases—Overall
(Subtopic 845): was issued February 2016. Under the new guidance, lessees will
be required to recognize the following for all leases (with the exception of
short-term leases): 1) a lease liability, which is the present value of a lessee’s
obligation to make lease payments, and 2) a right-of-use asset, which is an asset
that represents the lessee’s right to use, or control the use of, a specified asset for
the lease term. Lessor accounting under the new guidance remains largely
unchanged as it is substantially equivalent to existing guidance for sales-type
leases, direct financing leases, and operating leases. Leveraged leases have been
eliminated, although lessors can continue to account for existing leveraged leases
using the current accounting guidance. Other limited changes were made to align
lessor accounting with the lessee accounting model and the new revenue
recognition standard. All entities will classify leases to determine how to recognize
lease-related revenue and expense. Quantitative and qualitative disclosures will be
required by lessees and lessors to meet the objective of enabling users of financial
statements to assess the amount, timing, and uncertainty of cash flows arising
from leases. The intention is to require enough information to supplement the
amounts recorded in the financial statements so that users can understand more
about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for
interim and annual reporting periods beginning after December 15, 2018; early
adoption is permitted. All entities are required to use a modified retrospective
approach for leases that exist or are entered into after the beginning of the
earliest comparative period in the financial statements. They have the option to
use certain relief; full retrospective application is prohibited. The Company is
currently evaluating the provisions of ASU No. 2016-02. The Company has
determined that the provisions of ASU No. 2016-02 may result in an increase in
assets to recognize the present value of the lease obligations with a corresponding
increase in liabilities, however, the Company does not expect this to have a
material impact on the Company’s results of operations.
FASB Accounting Standards Update (ASU) 2016-09 - Compensation—Stock
Compensation (Subtopic 718): Improvements to Employee Share-Based Payment
Accounting, was issued March 2016. This ASU includes provisions intended to
simplify various aspects related to how share-based payments are accounted for
and presented in the financial statements. Some of the key provisions of this new
ASU include: (1) companies will no longer record excess tax benefits and certain
tax deficiencies in additional paid-in capital (‘‘APIC’’). Instead, they will record
all excess tax benefits and tax deficiencies as income tax expense or benefit in the
income statement, and APIC pools will be eliminated. The guidance also
eliminates the requirement that excess tax benefits be realized before companies
can recognize them. In addition, the guidance requires companies to present
excess tax benefits as an operating activity on the statement of cash flows rather
than as a financing activity; (2) increase the amount an employer can withhold
to cover income taxes on awards and still qualify for the exception to liability
classification for shares used to satisfy the employer’s statutory income tax
withholding obligation. The new guidance will also require an employer to
classify the cash paid to a tax authority when shares are withheld to satisfy its
statutory income tax withholding obligation as a financing activity on its
statement of cash flows (current guidance did not specify how these cash flows
should be classified); and (3) permit companies to make an accounting policy
election for the impact of forfeitures on the recognition of expense for share-
based payment awards. Forfeitures can be estimated, as required today, or
recognized when they occur. ASU No. 2016-09 is effective for interim and
annual reporting periods beginning after December 15, 2016. Early adoption was
permitted, but all of the guidance must be adopted in the same period. The
Company has evaluated the provisions of ASU No. 2016-09 to determine the
potential impact of the new standard and has determined that it is not expected
to have a material impact on the Company’s financial position, results of
operations or cash flows.
FASB Accounting Standards Update (ASU) 2016-13 - Measurement of Credit
Losses on Financial Instruments (Subtopic 326): Financial Instruments—Credit Losses
was issued June 2016. This ASU significantly changes how entities will measure
credit losses for most financial assets and certain other instruments that aren’t
measured at fair value through net income. In issuing the standard, the FASB is
responding to criticism that today’s guidance delays recognition of credit losses.
The standard will replace today’s ‘‘incurred loss’’ approach with an ‘‘expected loss’’
model. The new model, referred to as the current expected credit loss (‘‘CECL’’)
model, will apply to: (1) financial assets subject to credit losses and measured at
amortized cost, and (2) certain off-balance sheet credit exposures. This includes,
but is not limited to, loans, leases, held-to-maturity securities, loan commitments,
and financial guarantees. The CECL model does not apply to available-for-sale
(‘‘AFS’’) debt securities. For AFS debt securities with unrealized losses, entities
will measure credit losses in a manner similar to what they do today, except that
the losses will be recognized as allowances rather than reductions in the
amortized cost of the securities. As a result, entities will recognize improvements
19
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
to estimated credit losses immediately in earnings rather than as interest income
over time, as they do today. The ASU also simplifies the accounting model for
purchased credit-impaired debt securities and loans. ASU 2016-13 also expands
the disclosure requirements regarding an entity’s assumptions, models, and
methods for estimating the allowance for loan and lease losses. In addition,
entities will need to disclose the amortized cost balance for each class of financial
asset by credit quality indicator, disaggregated by the year of origination.
ASU No. 2016-13 is effective for interim and annual reporting periods beginning
after December 15, 2019; early adoption is permitted for interim and annual
reporting periods beginning after December 15, 2018. Entities will apply the
standard’s provisions as a cumulative-effect adjustment to retained earnings as of
the beginning of the first reporting period in which the guidance is effective
(i.e., modified retrospective approach). While the Company is currently
evaluating the provisions of ASU No. 2016-13 to determine the potential impact
the new standard will have on the Company’s Consolidated Financial Statements,
it has taken steps to prepare for the implementation when it becomes effective,
such as forming an internal task force, gathering pertinent data, consulting with
outside professionals, and evaluating its current IT systems.
2. ACQUISITION OF SIERRA VISTA BANK
Effective October 1, 2016, the Company acquired Sierra Vista Bank,
headquartered in Folsom, California, wherein Sierra Vista Bank, with one branch
in Folsom, one branch in Fair Oaks, and one branch in Cameron Park, merged
with and into Central Valley Community Bancorp’s subsidiary, Central Valley
Community Bank, in a combined cash and stock transaction. Sierra Vista Bank’s
assets (unaudited) as of October 1, 2016 totaled approximately $155.154 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 1.059 million shares of its common stock and cash
totaling approximately $9.469 million to the former shareholders of Sierra Vista
Bank.
In accordance with GAAP guidance for business combinations, the Company
recorded $10.314 million of goodwill and $508,000 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. Acquisition related costs of $1,782,000 are included in the
income statement for the year ended December 31, 2016.
The acquisition was consistent with the Company’s strategy to build a regional
presence in Central California. The acquisition offers the Company the
opportunity to increase profitability by introducing existing products and services
to the acquired customer base as well as add new customers in the expanded
region. Goodwill arising from the acquisition consisted largely of synergies and
the cost savings resulting from the combined operations.
The following table summarizes the consideration paid for Sierra Vista Bank
and the amounts of the assets acquired and liabilities assumed recognized at the
acquisition date (in thousands):
Merger consideration:
Cash
Common stock issued
Fair Value of Total Consideration Transferred
Recognized amounts of identifiable assets acquired and liabilities
assumed:
Cash and cash equivalents
Loans, net
Core deposit intangible
Premises and equipment
Federal Home Loan Bank stock
Deferred taxes and taxes receivable
Bank owned life insurance
Other assets
Total assets acquired
Deposits
Deposit premium
Other liabilities
Total liabilities assumed
Total identifiable net assets
Goodwill
$
9,468
16,793
$ 26,261
$ 22,709
122,533
508
586
771
4,417
2,664
966
155,154
138,236
142
829
139,207
15,947
$ 10,314
The fair value of net assets acquired includes fair value adjustments to certain
loans that were not considered impaired as of the acquisition date. The fair value
adjustments were determined using discounted contractual cash flows. As such,
these loans were not considered impaired at the acquisition date and were not
subject to the guidance relating to purchased credit impaired loans, which have
shown evidence of credit deterioration since origination. Loans acquired that were
not subject to these requirements include non-impaired loans and customer
receivables with a fair value and gross contractual amounts receivable of
$121,902,000 and $124,396,000, respectively, on the date of acquisition. See
Note 5 for discussion of purchased credit impaired loans.
Pro Forma Results of Operations
The accompanying consolidated financial statements include the accounts of
Sierra Vista Bank since October 1, 2016. The following table presents pro forma
results of operations information for the periods presented as if the acquisition
had occurred on January 1, 2015 after giving effect to certain adjustments. The
unaudited pro forma results of operations for the years ended December 31,
2016 and 2015 include the historical accounts of the Company and Sierra Vista
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 2015. No assumptions have been applied to the
20
Notes to
Consolidated Financial Statements
2. ACQUISITION OF SIERRA VISTA BANK
(Continued)
The estimated carrying and fair values of the Company’s financial instruments
pro forma results of operations regarding possible revenue enhancements, expense
efficiencies or asset dispositions. (In thousands, except per-share amounts):
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
For the Years Ended
December 31,
2016
2015
$50,491
(5,750)
9,930
47,350
18,821
5,817
$46,499
645
9,912
40,971
14,795
3,101
$13,004
$11,694
Net income available to common shareholders
$13,004
$11,694
Basic earnings per common share
Diluted earnings per common share
$
$
1.15
1.14
$
$
1.07
1.06
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.
are as follows (in thousands):
December 31, 2016
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Amount
Financial assets:
Cash and due from
banks
$ 28,185 $ 28,185 $
- $
- $ 28,185
Interest-earning
deposits in other
banks
Federal funds sold
Available-for-sale
investment
securities
Loans, net
Federal Home Loan
Bank stock
Accrued interest
receivable
Financial liabilities:
Deposits
Short-term borrowings
Junior subordinated
deferrable interest
debentures
Accrued interest
payable
Financial assets:
Cash and due from
banks
Interest-earning
deposits in other
banks
Federal funds sold
Available-for-sale
10,368
15
10,368
15
-
-
-
-
10,368
15
547,749
747,302
7,416
-
540,333
-
-
761,023
547,749
761,023
5,594
7,885
N/A
N/A
N/A
N/A
26
4,517
3,342
7,885
1,255,979 1,099,200
-
400
156,711
400
- 1,255,911
400
-
5,155
144
-
-
-
3,235
3,235
111
33
144
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
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
31,712
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
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.
21
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS (Continued)
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,
22
generally maturing within ninety days, approximate their fair values resulting in a
Level 2 classification.
(h) Other Borrowings - The fair values of the Company’s long-term borrowings
are estimated using discounted cash flow analyses based on the current borrowing
rates for similar types of borrowing arrangements resulting in a Level 2
classification.
The fair values of the Company’s Subordinated Debentures are estimated using
discounted cash flow analyses based on the current borrowing rates for similar
types of borrowing arrangements resulting in a Level 3 classification.
(i) Accrued Interest Receivable/Payable - The fair value of accrued interest
receivable and payable is based on the fair value hierarchy of the related asset or
liability.
(j) Off-Balance Sheet Instruments - Fair values for off-balance sheet, credit-related
financial instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties’ credit standing. The fair value of commitments is not material.
Assets Recorded at Fair Value
The following tables present information about the Company’s assets and
liabilities measured at fair value on a recurring and non-recurring basis as of
December 31, 2016:
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
Total assets measured at
fair value on a
recurring basis
68,970 $
- $
68,970 $
290,299
178,221
-
-
290,299
178,221
2,843
7,416
-
7,416
2,843
-
$ 547,749 $
7,416 $ 540,333 $
-
-
-
-
-
-
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,
2016, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at
December 31, 2016. Also there were no liabilities measured at fair value on a
recurring basis at December 31, 2016.
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS
(Continued)
Non-recurring Basis
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, 2015:
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, 2016 (in
thousands):
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
Fair
Value
Level 1
Level 2
Level 3
Impaired loans:
Consumer:
Equity loans and lines
of credit
$
47 $
- $
- $
Total impaired loans
Other repossessed assets
47
362
-
-
-
-
47
47
362
Total assets measured at fair
value on a non-recurring
basis
$
409 $
- $
- $
409
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, 2016.
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 $62,000 with
a valuation allowance of $15,000 at December 31, 2016, and a resulting fair
value of $47,000. The valuation allowance represents specific allocations for the
allowance for credit losses for impaired loans.
During the year ended December 31, 2016 specific allocation for the
allowance for credit losses related to loans carried at fair value was $15,000,
compared to none during the year ended December 31, 2015. There were no net
charge-offs related to loans carried at fair value at December 31, 2016 and 2015.
There were no liabilities measured at fair value on a non-recurring basis at
December 31, 2016.
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
52,901 $
- $
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.
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.
Non-recurring Basis
The Company may be required, from time to time, to measure certain assets
and liabilities at fair value on a non-recurring basis. These include the following
assets and liabilities that are measured at the lower of cost or fair value that were
recognized at fair value which was below cost at December 31, 2015 (in
thousands):
Fair
Value
Level 1
Level 2
Level 3
Impaired loans:
Consumer:
Equity loans and lines of
credit
Total consumer
132
132
-
-
-
-
Total impaired loans
$
132 $
- $
- $
132
132
132
Total assets measured at fair
value on a non-recurring
basis
$
132 $
- $
- $
132
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
23
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS
(Continued)
of the allowance for credit losses. For collateral dependent real estate 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 Topic 310 is not a fair value
measurement since the discount rate utilized is the loan’s effective interest rate
which is not a market rate. There were no changes in valuation techniques used
during the year ended December 31, 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. During the year ended December 31,
2015, there was no net charge-offs related to loans carried at fair value.
There were no liabilities measured at fair value on a non-recurring basis at
December 31, 2015
4.
INVESTMENT SECURITIES
The fair value of the available-for-sale investment portfolio reflected an unrealized
loss of $891,000 at December 31, 2016 compared to an unrealized gain of
$7,474,000 at December 31, 2015. The unrealized (loss)/gain recorded is net of
$(375,000) and $3,076,000 in tax (benefits) liabilities as accumulated other
comprehensive income within shareholders’ equity at December 31, 2016 and
2015, respectively.
24
The following tables set forth the carrying values and estimated fair values of
our investment securities portfolio at the dates indicated (in thousands):
December 31, 2016
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
69,005 $
242 $
(277) $
68,970
288,543
6,109
(4,353)
290,299
181,785
484
(4,048)
178,221
1,807
7,500
1,036
-
-
(84)
2,843
7,416
$ 548,640 $
7,871 $
(8,762) $ 547,749
December 31, 2015
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
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
$ 470,080 $
9,406 $
(1,932) $ 477,554
December 31, 2015
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Estimated
Fair Value
Held-to-Maturity Securities
Debt securities:
Obligations of states and
political subdivisions
$
31,712 $
3,431 $
(1) $
35,142
Notes to
Consolidated Financial Statements
4.
INVESTMENT SECURITIES (Continued)
During 2014, to better manage our interest rate risk, the Company transferred
from available-for-sale to held-to-maturity selected municipal securities in our
portfolio having a book value of approximately $31 million, a market value of
approximately $32 million, and a net unrecognized gain of approximately
$163,000. This transfer was completed after careful consideration of our intent
and ability to hold these securities to maturity. During the first quarter of 2016,
management sold certain investment securities of which management identified
that five of the 13 securities sold were previously designated as held-to-maturity
(HTM). Through an oversight during the portfolio restructuring analysis related
to this transaction, management unintentionally sold these five HTM securities.
The book value of the HTM securities sold was $8.5 million. The gain realized
on the sale of the HTM securities was $696,000. As such, management was
required to reclassify the remaining HTM securities with a fair value of
$23.1 million to the AFS designation. At December 31, 2016 and December 31,
2015 the remaining unaccreted balance of these HTM securities associated with
the original transfer from AFS to HTM and included in accumulated other
comprehensive income was $0 and $64,000, respectively.
Proceeds and gross realized gains (losses) on investment securities for the years
ended December 31, 2016, 2015, and 2014 are shown below (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 $ 21,348 $
Obligations of states and
political subdivisions
40,016
(125) $
3,954 $
(92) $ 25,302 $
(217)
(296)
-
-
40,016
(296)
U.S. Government
sponsored entities and
agencies collateralized
by residential mortgage
obligations
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
Years Ended December 31,
2016
2015
2014
Held-to-Maturity Securities
Debt Securities:
Obligations of states
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 sales and calls
Gross realized gains from sales or calls
$
$ 167,163
2,223
$
$
(999) $
$
$
93,167
1,715
$
(234) $
79,757
1,754
(850)
$
$
9,257
696
$
$
810
14
$
$
-
-
Losses recognized in 2016, 2015, and 2014 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 (benefit) for income taxes includes $515,000, $615,000, and
$372,000 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, 2016, 2015, and 2014, respectively.
Investment securities with unrealized losses at December 31, 2016 and 2015
are summarized and classified according to the duration of the loss period as
follows (in thousands):
December 31, 2016
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 $ 34,586 $
Obligations of states and
political subdivisions
122,522
(198) $ 10,438 $
(79) $ 45,024 $
(277)
(4,353)
-
-
122,522
(4,353)
U.S. Government
sponsored entities and
agencies collateralized
by residential mortgage
obligations
Other equity securities
118,719
7,416
(3,866)
(84)
7,666
-
(182)
-
126,385
7,416
(4,048)
(84)
$ 283,243 $
(8,501) $ 18,104 $
(261) $ 301,347 $
(8,762)
and political
subdivisions
$
1,053 $
(1) $
- $
- $
1,053 $
(1)
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, 2016, 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, 2016,
and identified those that had an unrealized loss for at least a consecutive
12 month period, which had an unrealized loss at December 31, 2016 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 obligations of states and political subdivisions 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 during March 2016 that a $136,000 credit
related impairment related to one security with a fair value of $2,995,000 and a
pre-impairment amortized cost of $3,131,000 existed. The Company recorded an
other-than-temporary impairment loss of $136,000 during the twelve months
ended December 31, 2016. There were no OTTI losses recorded during the
twelve months ended December 31, 2015.
U.S. Government Agencies - At December 31, 2016, the Company held 21 U.S.
Government agency securities of which seven were in a loss position for less than
12 months and four were in a loss position and had 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, 2016.
25
Notes to
Consolidated Financial Statements
4.
INVESTMENT SECURITIES
(Continued)
Obligations of States and Political Subdivisions - At December 31, 2016, the
Company held 172 obligations of states and political subdivision securities of
which 57 were in a loss position for less than 12 months and none were in a loss
position or had 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, 2016.
U.S. Government Sponsored Entities and Agencies Collateralized by Residential
Mortgage Obligations - At December 31, 2016, the Company held 147 U.S.
Government sponsored entity and agency securities collateralized by residential
mortgage obligation securities of which 34 were in a loss position for less than
12 months and nine 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, 2016.
Private Label Residential Mortgage Backed Securities - At December 31, 2016,
the Company had a total of 16 PLRMBS with a remaining principal balance of
$1,807,000 and a gross and net unrealized gain of approximately $1,036,000.
None of these securities had an unrealized loss at December 31, 2016. Twelve of
these PLRMBS with a remaining principal balance of $2,707,000 had credit
ratings below investment grade. The Company continues to monitor these
securities for changes in credit ratings or other indications of credit deterioration.
The following table provides a rollforward for the years ended December 31,
2016 and 2015 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.
Years ended
December 31,
Beginning balance of credit losses recognized
Amounts related to credit loss for which an OTTI
charge was not previously recognized
Realized losses for securities sold
Ending balance of credit losses recognized
$
$
747
$
747
136
(9)
-
-
874
$
747
The amortized cost and estimated fair value of investment securities at
December 31, 2016 and 2015 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.
26
2016
2015
Consumer:
December 31, 2016
December 31, 2015
Available-for-Sale
Held-to-Maturity
Available-for-Sale
Amortized Estimated Amortized Estimated Amortized Estimated
Fair Value
Fair Value
Fair Value
Cost
Cost
Cost
Within one year
After one year through five years
After five years through ten years
After ten years
$
- $
- $
15,145
35,667
237,731
15,484
35,614
239,201
- $
-
-
31,712
- $
-
-
35,142
- $
12,297
37,376
132,112
-
12,695
38,397
137,176
288,543
290,299
31,712
35,142
181,785
188,268
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
69,005
68,970
181,785
178,221
1,807
7,500
2,843
7,416
-
-
-
-
-
-
-
-
52,803
52,901
225,636
225,259
2,356
7,500
3,590
7,536
$ 548,640 $ 547,749 $
31,712 $ 35,142 $ 470,080 $ 477,554
Investment securities with amortized costs totaling $86,418,000 and
$116,268,000 and fair values totaling $88,903,000 and $119,773,000 were
pledged as collateral for borrowing arrangements, public funds and for other
purposes at December 31, 2016 and 2015, respectively.
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
Outstanding loans are summarized as follows (in thousands):
Loan Type
Commercial:
Commercial and
industrial
Agricultural land and
production
% of
December 31, Total
loans
2016
% of
December 31, Total
loans
2015
$
88,652
11.7% $
102,197
17.1%
25,509
3.4%
30,472
5.1%
Total commercial
114,161
15.1%
132,669
22.2%
Real estate:
Owner occupied
Real estate construction
and other land loans
Commercial real estate
Agricultural real estate
Other real estate
Total real estate
Equity loans and lines of
credit
Consumer and
installment
Total consumer
Net deferred origination
costs
Total gross loans
Allowance for credit losses
191,665
25.3%
168,910
28.2%
69,200
184,225
86,761
18,945
550,796
9.1%
24.3%
11.5%
2.7%
72.9%
38,685
117,244
74,867
10,520
410,226
6.5%
19.6%
12.5%
1.8%
68.6%
64,494
8.5%
42,296
7.1%
25,910
90,404
3.5%
12.0%
12,503
54,799
2.1%
9.2%
1,267
756,628
(9,326)
100.0%
417
598,111
(9,610)
100.0%
Total loans
$
747,302
$
588,501
At December 31, 2016 and 2015, loans originated under Small Business
Administration (SBA) programs totaling $16,590,000 and $10,704,000,
respectively, were included in the real estate and commercial categories.
Approximately $270,539,000 in loans were pledged under a blanket lien as
collateral to the FHLB for the Bank’s remaining borrowing capacity of
$173,992,000 as of December 31, 2016. The Bank’s credit limit varies according
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
(Continued)
Loans acquired during each year for which it was probable at acquisition that
to the amount and composition of the investment and loan portfolios pledged as
collateral.
Salaries and employee benefits totaling $2,344,000, $2,056,000, and
$1,657,000 have been deferred as loan origination costs for the years ended
December 31, 2016, 2015, and 2014, respectively.
Purchased Credit Impaired Loans
At December 31, 2016, the Company had loans that were acquired in
acquisitions, 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 at December 31, 2015.
The carrying amount of those loans is included in the balance sheet amounts
of loans receivable at December 31. The amounts of loans at December 31 are as
follows (in thousands):
Commercial
Outstanding balance
Carrying amount, net of allowance of $0
December 31,
2016
2015
$
$
$
612
612
612
$
$
$
-
-
-
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
(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, 2016, 2015, and 2014 is as follows (in thousands):
Years ended December 31,
2016
2015
2014
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
-
-
all contractually required payments would not be collected are as follows (in
thousands):
December 31,
2016
2015
Contractually required payments receivable on PCI
loans at acquisition:
Commercial
Total
Cash flows expected to be collected at acquisition
Fair value of acquired loans at acquisition
$
$
$
$
982
982
693
631
$
$
$
$
Certain of the loans acquired by the Company that are within the scope of
Topic ASC 310-30 are not accounted for using the income recognition model of
the Topic because the Company cannot reliably estimate cash flows expected to
be collected. The carrying amounts of such loans (which are included in the
carrying amount, net of allowance, described above) are as follows.
Loans acquired during the year
Loans at the end of the year
Allowance for Credit Losses
December 31,
2016
2015
$
$
631
612
$
$
-
-
-
-
-
-
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):
Balance, beginning of year
(Reversal of ) Provision charged to
operations
Losses charged to allowance
Recoveries
Years Ended December 31,
2016
2015
2014
$
9,610
$
8,308
$
9,208
(5,850)
(883)
6,449
600
(961)
1,663
7,985
(9,834)
949
Balance, end of year
$
9,326
$
9,610
$
8,308
27
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 2016, 2015, and 2014 by
portfolio segment (in thousands):
Allowance for credit losses:
Beginning balance, January 1, 2016
(Reversal of ) Provision charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2016
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
$
$
$
$
$
$
$
$
$
$
$
3,562
(6,048)
(621)
5,287
2,180
3,130
190
(802)
1,044
3,562
2,444
9,660
(9,145)
171
$
$
$
$
$
5,204
11
-
985
6,200
4,058
1,114
-
32
5,204
5,174
(1,447)
(183)
514
$
$
$
$
$
734
203
(262)
177
852
1,078
(772)
(159)
587
734
1,168
152
(506)
264
$
$
$
$
$
110
(16)
-
-
94
42
68
-
-
110
422
(380)
—
—
9,610
(5,850)
(883)
6,449
9,326
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, 2016 and December 31, 2015
(in thousands):
Allowance for credit losses:
Ending balance, December 31, 2016
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Ending balance, December 31, 2015
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Commercial
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
2,180
3
2,177
3,562
1
3,561
$
$
$
$
$
$
6,200
241
5,959
5,204
128
5,076
$
$
$
$
$
$
852
63
789
734
35
699
$
$
$
$
$
$
94
-
94
110
-
110
$
$
$
$
$
$
9,326
307
9,019
9,610
164
9,446
The following table shows the ending balances of loans as of December 31, 2016 and December 31, 2015 by portfolio segment and by impairment methodology (in
thousands):
Loans:
Ending balance, December 31, 2016
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance, December 31, 2015
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
28
Commercial
Real Estate
Consumer
Total
$
$
$
$
$
$
114,161
487
113,674
132,669
30
132,639
$
$
$
$
$
$
550,796
4,238
546,558
410,226
5,199
405,027
$
$
$
$
$
$
90,404
544
89,860
54,799
1,470
53,329
$
$
$
$
$
$
755,361
5,269
750,092
597,694
6,699
590,995
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
(Continued)
The following table shows the loan portfolio by class allocated by management’s internal risk ratings at December 31, 2016 (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
$
75,212
16,562
$
907
8,681
$
184,987
62,538
179,966
49,270
18,779
62,782
25,890
2,865
5,259
1,548
10,390
166
95
-
$
12,533
266
3,813
1,403
2,711
27,101
-
1,617
20
Total
$
675,986
$
29,911
$
49,464
$
-
-
-
-
-
-
-
-
-
-
$
88,652
25,509
191,665
69,200
184,225
86,761
18,945
64,494
25,910
$
755,361
The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade 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
$
The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2016 (in thousands):
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
90 Days
Past Due
Total Past
Due
Current
Total
Loans
Recorded
Investment
> 90 Days
Accruing
Commercial:
Commercial and industrial
Agricultural land and
$
production
Real estate:
Owner occupied
Real estate construction and
other land loans
Commercial real estate
Agricultural real estate
Other real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
$
-
-
87
-
565
-
-
62
38
Total
$
752
$
-
-
-
-
-
-
-
48
-
48
$
$
-
-
-
-
-
-
-
-
-
-
$
-
-
87
-
565
-
-
110
38
$
88,652
$
88,652
$
25,509
25,509
191,578
191,665
69,200
183,660
86,761
18,945
64,384
25,872
69,200
184,225
86,761
18,945
64,494
25,910
$
800
$
754,561
$
755,361
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
102,197
30,472
168,910
38,685
117,244
74,867
10,520
42,296
12,503
$
597,694
$
Non-
accrual
447
-
107
-
1,082
-
-
526
18
$
2,180
29
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2015 (in thousands):
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
$
Total Past
Due
Current
Total
Loans
Recorded
Investment
> 90 Days
Accruing
Non-
accrual
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
98
-
-
166
38
$
102,197
$
102,197
$
30,472
30,472
168,910
168,910
38,685
117,146
74,867
10,520
42,130
12,465
38,685
117,244
74,867
10,520
42,296
12,503
$
302
$
597,392
$
597,694
$
-
-
-
-
-
-
-
-
-
$
$
29
-
347
-
567
-
-
1,457
13
2,413
The following table shows information related to impaired loans by class at
The following table shows information related to impaired loans by class at
December 31, 2016 (in thousands):
December 31, 2015 (in thousands):
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
With no related allowance
recorded:
Commercial:
Commercial and industrial
$
447
$
612
$
Real estate:
Owner occupied
Commercial 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
Real estate:
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
107
827
934
167
6
173
111
967
1,078
234
9
243
1,554
1,933
40
40
2,222
1,082
3,304
359
12
371
2,222
1,146
3,368
364
12
376
3,715
5,269
$
3,784
5,717
$
$
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.
-
-
-
-
-
-
-
-
3
79
162
241
61
2
63
307
307
The recorded investment in loans excludes accrued interest receivable and net
loan origination fees, due to immateriality.
30
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, 2016, 2015, and 2014 (in thousands):
Year Ended December 31,
2016
Year Ended December 31,
2015
Year Ended December 31,
2014
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance recorded:
Commercial:
Commercial and industrial
Agricultural land and production
Total commercial
Real estate:
Owner occupied
Real estate construction and other land loans
Commercial real estate
Agricultural real estate
Other real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
$
$
115
42
157
$
-
-
-
162
2,393
903
173
-
3,631
598
41
639
-
196
55
-
-
251
-
-
-
Total with no related allowance recorded
4,427
251
With an allowance recorded:
Commercial:
Commercial and industrial
Agricultural land and production
Total commercial
Real estate:
Owner occupied
Real estate construction and other land loans
Commercial real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
Total with an allowance recorded
Total
441
104
545
120
171
548
839
203
19
222
1,606
6,033
$
3
-
3
-
-
-
-
-
-
-
3
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
$
$
-
-
-
$
638
-
638
231
79
-
-
-
310
-
-
-
310
-
-
-
-
-
-
-
-
-
-
-
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
-
-
-
2
24
-
-
-
26
-
-
-
26
-
-
-
-
267
55
322
-
-
-
322
348
$
254
$
12,792
$
310
$
11,426
$
Foregone interest on nonaccrual loans totaled $245,000, $340,000, and
$716,000 for the years ended December 31, 2016, 2015, and 2014, 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, 2016 and 2015, the Company has a recorded investment
in troubled debt restructurings of $3,109,000 and, $5,623,000, respectively. The
Company has allocated $82,000 and $1,000 of specific reserves for those loans at
December 31, 2016 and 2015, respectively. The Company has committed to
lend no additional amounts as of December 31, 2016 to customers with
outstanding loans that are classified as troubled debt restructurings.
For the years ended December 31, 2016 and 2015 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.
31
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, 2016 (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
$
45
$
-
$
45
$
40
(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, 2015 (dollars in thousands):
Troubled Debt Restructurings:
Commercial:
Commercial and Industrial
Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment (1)
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.
A loan is considered to be in payment default once it is 90 days contractually
7. OTHER REAL ESTATE OWNED
past due under the modified terms. There were no defaults on troubled debt
restructurings within 12 months following the modification during the years
ended December 31, 2016 and 2015.
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following (in thousands):
Land
Buildings and improvements
Furniture, fixtures and equipment
Leasehold improvements
Less accumulated depreciation and
amortization
December 31,
2016
2015
$
$
1,131
6,680
11,521
4,100
23,432
1,131
6,680
10,539
4,005
22,355
(14,025)
(13,063)
$
9,407
$
9,292
Depreciation and amortization included in occupancy and equipment expense
totaled $1,320,000, $1,392,000 and $1,355,000 for the years ended
December 31, 2016, 2015, and 2014, respectively.
The Company had no other real estate owned (OREO) at December 31, 2016
or December 31, 2015. The table below provides a summary of the change in
other real estate owned (OREO) balances for the years ended December 31,
2016 and 2015 (in thousands):
Balance, beginning of year
Additions
1st lien assumed upon foreclosure
Dispositions
Write-downs
Net gain on dispositions
Balance, end of year
December 31,
2016
2015
$
$
-
-
-
-
-
-
-
$
$
-
227
121
(359)
-
11
-
As of December 31, 2016 and 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.
32
Notes to
Consolidated Financial Statements
8. GOODWILL AND INTANGIBLE ASSETS
9. DEPOSITS
The change in goodwill during the years ended December 31, 2016, 2015, and
2014 is as follows (in thousands):
Interest-bearing deposits consisted of the following (in thousands):
2016
2015
2014
Balance, beginning of year
Acquired goodwill
Impairment
Balance, end of year
$
$
29,917
10,314
-
40,231
$
$
29,917
-
-
29,917
$
$
29,917
-
-
29,917
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, 2016 and 2015 was $40,231,000 and 29,917,000, respectively.
Total goodwill at December 31, 2016 consisted of $10,314,000, $6,340,000,
$14,643,000, and $8,934,000 representing the excess of the cost of Sierra Vista
Bank, 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 2016, so goodwill was not required to be retested.
The intangible assets at December 31, 2016 represent the estimated fair value
of the core deposit relationships acquired in the acquisition of Sierra Vista Bank
in 2016 of $508,000 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 ten years from the date of acquisition. At
December 31, 2016, the weighted average remaining amortization period is ten
years. The carrying value of intangible assets at December 31, 2016 was
$1,383,000, net of $490,000 in accumulated amortization expense. The carrying
value at December 31, 2015 was $1,024,000, net of $1,741,000 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, 2016 and determined no
impairment was necessary. Amortization expense recognized was $149,000 for
2016, $320,000 for 2015, and $337,000 for 2014.
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,
2017
2018
2019
2020
2021
Thereafter
Total
Estimated Core
Deposit
Intangible
Amortization
$
$
188
188
188
188
188
443
1,383
Savings
Money market
NOW accounts
Time, $250,000 or more
Time, under $250,000
December 31,
2016
2015
$
$
105,098
250,749
247,623
39,284
117,410
81,383
239,241
227,167
42,149
97,554
$
760,164
$
687,494
Aggregate annual maturities of time deposits are as follows (in thousands):
Years Ending December 31,
2017
2018
2019
2020
2021
Thereafter
$
133,669
15,582
3,506
1,752
1,473
712
$
156,694
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,
2016
2015
2014
$
$
$
27
133
290
525
$
30
141
231
546
32
174
209
645
975
$
948
$
1,060
10. BORROWING ARRANGEMENTS
Federal Home Loan Bank Advances - As of December 31, 2016 and 2015, the
Company had no Federal Home Loan Bank (FHLB) of San Francisco advances.
Approximately $270,539,000 in loans were pledged under a blanket lien as
collateral to the FHLB for the Bank’s remaining borrowing capacity of
$173,992,000 as of December 31, 2016. FHLB advances are also secured by
investment securities with amortized costs totaling $584,000 and $750,000 and
market values totaling $637,000 and $825,000 at December 31, 2016 and 2015,
respectively. The Bank’s credit limit varies according to the amount and
composition of the investment and loan portfolios pledged as collateral.
Lines of Credit - The Bank had unsecured lines of credit with its correspondent
banks which, in the aggregate, amounted to $40,000,000 at December 31, 2016
and 2015, at interest rates which vary with market conditions. As of
December 31, 2016, the Company had $400,000 in Federal funds purchased.
The Company had no overnight borrowings outstanding under these credit
facilities at December 31, 2015.
Federal Reserve Line of Credit - The Bank has a line of credit in the amount of
$9,102,000 and $2,328,000 with the Federal Reserve Bank of San Francisco
(FRB) at December 31, 2016 and 2015, respectively, which bears interest at the
prevailing discount rate collateralized by investment securities with amortized
costs totaling $2,407,000 and $2,578,000 and market values totaling $2,436,000
and $2,598,000, respectively. At December 31, 2016 and 2015, the Bank had no
outstanding borrowings with the FRB.
33
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, 2016, 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, 2016, the rate
was 2.48%. Interest expense recognized by the Company for the years ended
December 31, 2016, 2015, and 2014 was $121,000, $99,000 and $96,000,
respectively.
12.
INCOME TAXES
The provision for (benefit from) income taxes for the years ended December 31,
2016, 2015, and 2014 consisted of the following (in thousands):
2016
Current
Deferred
Provision for income taxes
2015
Current
Deferred
Provision for (benefit from)
income taxes
2014
Current
Deferred
Provision for (benefit from)
income taxes
$
$
$
$
$
$
Federal
State
Total
3,720
1,100
4,820
2,945
(1,208)
1,737
(125)
(397)
$
$
$
$
$
605
1,492
2,097
570
275
845
(37)
(11)
$
$
$
$
$
4,325
2,592
6,917
3,515
(933)
2,582
(162)
(408)
(522)
$
(48)
$
(570)
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
34
given economic conditions and other factors. The realization of deferred income
tax assets is assessed and a valuation allowance is recorded if it is more likely
than not that all or a portion of the deferred tax asset will not be realized. More
likely than not is defined as greater than a 50% chance. All available evidence,
both positive and negative is considered to determine whether, based on the
weight of the evidence, a valuation allowance is needed. Thus, Management
concludes no valuation allowance is necessary against deferred tax assets,
Deferred tax assets (liabilities) consisted of the following (in thousands):
Deferred tax assets:
Allowance for credit losses
Deferred compensation
Unrealized loss on available-for-sale
investment securities
Net operating loss 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
Alternative minimum tax credit
Partnership income
State taxes
Total deferred tax assets
Deferred tax liabilities:
Finance leases
Unrealized gain on available-for-sale
investment securities
Core deposit intangible
FHLB stock
Loan origination costs
Bank premises and equipment
Total deferred tax liabilities
$
December 31,
2016
2015
$
3,267
5,304
375
3,816
-
167
338
273
1,285
209
2,438
114
297
3,823
5,038
-
75
351
96
313
267
721
1,067
3,525
87
266
17,883
15,629
(474)
-
(582)
(327)
(918)
(71)
(2,372)
(921)
(3,076)
(421)
(319)
(664)
-
(5,401)
Net deferred tax assets
$
15,511
$
10,228
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, 2016, 2015, and 2014 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
Change in uncertain tax positions
Other
Effective tax rate
2016
2015
2014
35.0 %
34.0 %
34.0 %
7.0 %
4.1 %
(0.7)%
(10.3)%
(1.1)%
0.1 %
0.6 %
31.3 %
(15.9)%
(2.5)%
0.8 %
(1.4)%
19.1 %
(42.2)%
(3.9)%
- %
0.8 %
(12.0)%
As of December 31, 2016, the Company had Federal and California net
operating loss (‘‘NOL’’) carry-forwards of $9,001,000 and $9,442,000,
respectively. These NOLs were acquired through business combinations and are
subject to IRC 382 and begin expiring in 2028 and 2017, for federal and
California purposes, respectively. While they are subject to IRC Section 382,
management has determined that all of the NOLs are more than likely than not
to be utilized.
At December 31, 2016, the Company had a Federal Alternative Minimum Tax
credit of approximately $2,438,000 which does not expire. The Company had
Notes to
Consolidated Financial Statements
12.
INCOME TAXES
(Continued)
Enterprise Zone Credits of approximately $316,000 which begin expiring in
2023.
The Company and its Subsidiary file income tax returns in the U.S. federal
and California jurisdictions. The Company conducts all of its business activities
in the State of California. There are no pending U.S. federal or California
Franchise Tax Board 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, 2013 and by the state and
local taxing authorities for the years ended before December 31, 2012.
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,
2016
2015
$
$
286
$
44
(32)
298
$
180
106
-
286
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 expect the amount of unrecognized tax benefits to decrease in the
next 12 months due to closure of statues of limitation s in the taxing
jurisdictions.
During the years ended December 31, 2016 and 2015, the Company recorded
$44,000 and $106,000, respectively, in interest or penalties related to uncertain
tax positions. During the year ended December 31, 2014, 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 $2,300,000, $2,273,000 and $2,391,000
for the years ended December 31, 2016, 2015, and 2014, respectively.
Future minimum lease payments on noncancelable operating leases are as
follows (in thousands):
Years Ending December 31,
2017
2018
2019
2020
2021
Thereafter
$
2,350
2,057
1,441
1,274
993
1,425
$
9,540
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, 2016 was $4,575,000.
Correspondent Banking Agreements - The Bank maintains funds on deposit with
other federally insured financial institutions under correspondent banking
agreements. Uninsured deposits totaled $10,645,000 at December 31, 2016.
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,
2016
2015
$
$
257,557
1,858
$
$
215,952
1,214
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, 2016 and 2015. The
Company recognizes these fees as revenue over the term of the commitment or
when the commitment is used.
At December 31, 2016, commercial loan commitments represent 55% of total
commitments and are generally secured by collateral other than real estate or
unsecured. Real estate loan commitments represent 35% of total commitments
and are generally secured by property with a loan-to-value ratio not to exceed
80%. Consumer loan commitments represent the remaining 10% of total
commitments and are generally unsecured. In addition, the majority of the Bank’s
loan commitments have variable interest rates.
At December 31, 2016 and 2015, the balance of a contingent allocation for
probable loan loss experience on unfunded obligations was $125,000 and
$150,000, 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, 2016, in management’s
judgment, a concentration of loans existed in commercial loans and real-estate-
related loans, representing approximately 96.5% of total loans of which 15.1%
were commercial and 81.4% were real-estate-related.
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.
Management believes the loans within these concentrations have no more than
the typical risks of collectability. However, in light of the current economic
environment, additional declines in the performance of the economy in general,
or a continued decline in real estate values or drought-related decline in
agricultural business in the Company’s primary market area could have an adverse
impact on 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
35
Notes to
Consolidated Financial Statements
13. COMMITMENTS AND CONTINGENCIES
(Continued)
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.
Capital ratios are reviewed by Management on a regular basis to ensure that
capital exceeds the prescribed regulatory minimums and is adequate to meet our
anticipated future needs. For all periods presented, the Bank’s ratios exceed the
regulatory definition of ‘‘well capitalized’’ under the regulatory framework for
prompt correct action and the Company’s ratios exceed the required minimum
ratios for capital adequacy purposes.
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. The capital conservation buffer as of December 31, 2016 was
0.625%. 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, 2016 and 2015. 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 are
presented in the table below (exclusive of the capital conservation buffer).
36
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, 2016
December 31, 2015
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$ 122,601
$ 56,057
$ 121,079
8.75% $ 105,825
4.00% $ 48,950
8.64% $ 104,878
$ 70,080
$ 56,064
5.00% $ 61,148
4.00% $ 48,918
8.65%
4.00%
8.58%
5.00%
4.00%
$ 120,080
$ 43,426
$ 121,079
12.48% $ 103,152
4.50% $ 34,650
12.59% $ 104,878
13.44%
4.50%
13.67%
$ 62,665
$ 43,383
6.50% $ 50,017
4.50% $ 34,627
6.50%
4.50%
$ 122,601
$ 57,901
$ 121,079
12.74% $ 105,825
6.00% $ 46,200
12.59% $ 104,878
13.79%
6.00%
13.67%
$ 77,126
$ 57,845
8.00% $ 61,560
6.00% $ 46,170
8.00%
6.00%
$ 132,052
$ 77,202
$ 130,530
13.72% $ 115,466
8.00% $ 61,601
13.57% $ 114,513
15.04%
8.00%
14.93%
$ 96,408
$ 77,126
10.00% $ 76,949
8.00% $ 61,560
10.00%
8.00%
Dividends - During 2016, the Bank declared and paid cash dividends to the
Company in the amount of $13,010,000 in connection with the SVB
acquisition, and cash dividends to the Company’s shareholders approved by the
Company’s Board of Directors. The Bank may not pay any dividend that would
cause it to be deemed not ‘‘well capitalized’’ under applicable banking laws and
regulations. The Company declared and paid a total of $2,715,000 or $0.24 per
common share cash dividend to shareholders of record during the year ended
December 31, 2016.
During 2015, the Bank declared and paid cash dividends to the Company in
the amount of $2,260,000, 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 $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 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.
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, 2016, $15,257,000 of the Bank’s retained earnings were
free of these restrictions.
Notes to
Consolidated Financial Statements
14. SHAREHOLDERS’ EQUITY
(Continued)
A reconciliation of the numerators and denominators of the basic and diluted
earnings per common share computations is as follows (in thousands, except
share and per share amounts):
For the Years Ended December 31,
2016
2015
2014
Basic Earnings Per Common Share:
Net income
Weighted average shares outstanding
$
15,182
11,331,166
$
10,964
10,931,927
$
5,294
10,919,235
Net income per common share
$
1.34
$
1.00
$
0.48
Diluted Earnings Per Common Share:
Net income
Weighted average shares outstanding
Effect of dilutive stock options and
$
15,182
11,331,166
$
10,964
10,931,927
$
5,294
10,919,235
warrants
104,283
83,836
80,703
Weighted average shares of common
stock and common stock
equivalents
Net income per diluted common
share
11,435,449
11,015,763
10,999,938
$
1.33
$
1.00
$
0.48
No outstanding options and restricted stock awards were anti-dilutive at
December 31, 2016. Outstanding options and restricted stock of 26,704 and
170,585 were not factored into the calculation of dilutive stock options at
December 31, 2015, and 2014, respectively, because they were anti-dilutive.
15. SHARED-BASED COMPENSATION
On December 31, 2016, 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.
The Central Valley Community Bancorp 2000 Stock Option Plan (2000 Plan)
expired on November 15, 2010. The Central Valley Community Bancorp 2005
Omnibus Incentive Plan (2005 Plan) was adopted in May 2005 and expired
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 829,200 shares
remain reserved for future grants as of December 31, 2016.
For the years ended December 31, 2016, 2015, and 2014, the compensation
cost recognized for share-based compensation was $284,000, $238,000, and
$173,000, respectively. The recognized tax benefit for share-based compensation
expense was $44,000, $14,000, and $12,000 for 2016, 2015, and 2014,
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, 2016, 2015 and 2014 from any of the
Company’s stock based compensation plans.
A summary of the combined activity of the Plans for the year ended
December 31, 2016 follows (dollars in thousands, except per share amounts):
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Shares
Aggregate
Intrinsic Value
240,695 $
(35,280) $
(3,200) $
6.83
6.55
8.77
202,215 $
6.87
3.26 $
2,647
201,347 $
6.87
3.25 $
2,636
187,105 $
6.78
3.06 $
2,466
Options outstanding at
January 1, 2016
Options exercised
Options forfeited
Options outstanding at
December 31, 2016
Options vested or
expected to vest at
December 31, 2016
Options exercisable at
December 31, 2016
Information related to the stock option plan during each year follows (in
thousands):
2016
2015
2014
Intrinsic value of options exercised
Cash received from options
exercised
Excess tax benefit realized for option
exercises
$
$
$
235
231
30
$
$
$
42
60
6
$
$
$
45
55
7
As of December 31, 2016, there was $32,000 of total unrecognized
compensation cost related to non-vested stock options granted under all Plans.
The cost is expected to be recognized over a weighted average period of
0.70 years. The total fair value of options vested was $15,220 and $91,000 for
the years ended December 31, 2016 and 2015, respectively.
37
Notes to
Consolidated Financial Statements
15. SHARED-BASED COMPENSATION (Continued)
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, 2016 as follows:
Nonvested outstanding shares at January 1, 2016
Granted
Vested
Forfeited
Nonvested outstanding shares at December 31,
2016
Weighted
Average
Grant
Date
Fair Value
$
$
$
$
$
12.34
14.10
12.38
12.95
13.35
Shares
53,028
54,650
(12,438)
(1,739)
93,501
During the years ended December 31, 2016, 2015 and 2014, 54,650, 9,268
and 57,330 shares of restricted common stock were granted from outstanding
grants under the 2005 and 2015 Plans. The restricted common stock had a
weighted average fair value of $14.10, $10.79 and $12.68 per share on the date
of grant during the years ended December 31, 2016, 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, 2016, there were 93,501 shares of restricted stock that are
nonvested and expected to vest. Share-based compensation cost charged against
income for restricted stock awards was $235,000 for the year ended
December 31, 2016, $161,000 for the year ended December 31, 2015, and
$82,000 for the year ended December 31, 2014.
As of December 31, 2016, there was $1,035,000 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 3.74 years and will be adjusted for subsequent changes in estimated
forfeitures. Restricted common stock awards had an intrinsic value of $1,866,000
at December 31, 2016.
16. EMPLOYEE BENEFITS
401(k) and Profit Sharing Plan - The Bank has established a 401(k) and profit
sharing plan. The 401(k) plan covers substantially all employees who have
completed a 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 $380,000 and $270,000 to
the profit sharing plan in 2016 and 2015, 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,
2016, 2015, and 2014, 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, 2016, 2015, and 2014, the Bank made matching
contributions totaling $604,000, $585,000, and $499,000, respectively.
Deferred Compensation Plans - The Bank has a nonqualified Deferred
Compensation Plan which provides directors with an unfunded, deferred
38
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 (3.09% at
December 31, 2016). At December 31, 2016 and 2015, the total net deferrals
included in accrued interest payable and other liabilities were $3,440,000 and
$3,238,000, 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 $3,297,000 and $3,949,000 and at December 31,
2016 and 2015, respectively. Income recognized on these policies, net of related
expenses, for the years ended December 31, 2016, 2015, and 2014, was $83,000,
$105,000, and $103,000, respectively.
In October 2015, 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 (3.09% at
December 31, 2016). At December 31, 2016, the total net deferrals included in
accrued interest payable and other liabilities were $52,000. 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, 2016, 2015, and 2014, totaled $489,000,
$447,000, and $537,000, respectively. Accrued compensation payable under the
salary continuation plans totaled $5,572,000 and $5,419,000 at December 31,
2016 and 2015, respectively.
In connection with these plans, the Bank purchased single premium life
insurance policies with cash surrender values totaling $6,196,000 and $6,037,000
at December 31, 2016 and 2015, respectively. Income recognized on these
policies, net of related expense, for the years ended December 31, 2016, 2015,
and 2014 totaled $159,000, $167,000, and $166,000, 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, 2016 and 2015, the total amount of
the liability was $2,788,000 and $2,822,000, respectively. Expense recognized by
the Bank in 2016, 2015 and 2014 associated with these plans was $120,000,
$78,000, and $233,000, 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 $11,014,000,
and $10,716,000 at December 31, 2016 and 2015, respectively. Income
recognized on these policies, net of related expenses, for the years ended
December 31, 2016, 2015, and 2014, was $298,000, $194,000, and $345,000,
respectively.
The current annual tax-free interest rate on all life insurance policies is 4.14%.
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, 2016
Disbursements
Amounts repaid
Balance, December 31, 2016
Undisbursed commitments to related parties, December 31,
2016
$
$
$
6,406
1,501
(1,182)
6,725
1,807
Notes to
Consolidated Financial Statements
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 2016 and 2015
(In thousands)
ASSETS
Cash and cash equivalents
Investment in Bank subsidiary
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Junior subordinated debentures due to subsidiary grantor trust
Other liabilities
Total liabilities
Shareholders’ equity:
Common stock
Retained earnings
Accumulated other comprehensive (loss) income, net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
2016
2015
$
887
167,666
790
$
584
143,531
454
$
169,343
$
144,569
$
$
5,155
155
5,310
71,645
92,904
(516)
5,155
91
5,246
54,424
80,437
4,462
164,033
139,323
$
169,343
$
144,569
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2016, 2015, and 2014
(In thousands)
2016
2015
2014
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
Income available to common shareholders
Comprehensive income
$
$
$
13,010
4
13,014
121
133
779
1,033
11,981
2,852
14,833
349
15,182
10,204
$
$
$
2,260
3
2,263
99
156
411
666
1,597
9,080
10,677
287
10,964
10,049
$
$
$
2,350
3
2,353
96
187
389
672
1,681
3,325
5,006
288
5,294
12,957
39
Notes to
Consolidated Financial Statements
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2016, 2015, and 2014
(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
Proceeds from exercise of stock options
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 Sierra Vista Bank acquisition
2016
2015
2014
$
15,182
$
10,964
$
5,294
(2,852)
284
(30)
(405)
64
98
12,341
(9,584)
(2,715)
231
30
(2,454)
303
584
887
112
16,678
$
$
$
(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
-
$
$
$
40
Supplementary
Financial Information
The following supplementary financial information is not a part of the Company’s financial statements.
Unaudited Quarterly Statement of Operations Data
(In thousands, except per share amounts)
Q4 2016
Q3 2016
Q2 2016
Q1 2016
Q4 2015
Q3 2015
Q2 2015
Q1 2015
Net interest income
(Reversal of ) 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
Net income available to common shareholders
Basic earnings per share
Diluted earnings per share
$
12,773 $
-
12,773
2,154
84
10,913
1,492
10,995 $
(1,000)
11,208 $
(4,600)
10,604 $
(250)
11,995
1,849
286
9,655
1,361
15,808
2,094
420
9,377
2,887
10,854
1,574
1,130
8,977
1,177
10,638 $
-
10,638
1,842
37
9,003
611
10,352 $
100
10,065 $
500
10,252
1,722
-
9,028
429
9,565
2,364
732
8,697
886
2,606 $
3,114 $
6,058 $
3,404 $
2,903 $
2,517 $
3,078 $
9,720
-
9,720
1,965
726
9,288
657
2,466
2,606 $
3,114 $
6,058 $
3,403 $
2,903 $
2,517 $
3,078 $
2,466
0.21 $
0.28 $
0.55 $
0.31 $
0.27 $
0.23 $
0.28 $
0.21 $
0.28 $
0.55 $
0.31 $
0.26 $
0.23 $
0.28 $
0.23
0.22
$
$
$
$
The results for the fourth quarter 2016 include the results of the assets and liabilities acquired from Sierra Vista Bank in addition to the continued organic growth of
the Company.
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, 2016. 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, 2016, 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, 2016, 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, 2016 and 2015, 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, 2016. We also have audited the
Company’s internal control over financial reporting as of December 31, 2016, 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, 2016 and 2015, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31, 2016 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, 2016, 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 29, 2017
43
Selected
Consolidated Financial Data
Statements of Income
Total interest income
Total interest expense
Net interest income before provision for credit losses
(Reversal of ) 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)
2016
2015
2014
2013
2012
$
46,676 $
1,096
41,822 $
1,047
41,039 $
1,156
34,836 $
1,385
45,580
(5,850)
51,430
9,591
38,922
22,099
6,917
15,182
-
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
15,182 $
10,964 $
5,294 $
7,900 $
1.34 $
1.00 $
0.48 $
0.77 $
1.33 $
1.00 $
0.48 $
0.77 $
0.24 $
0.18 $
0.20 $
0.20 $
31,820
1,883
29,937
700
29,237
7,242
27,274
9,205
1,685
7,520
350
7,170
0.75
0.75
0.05
December 31,
(In thousands)
2016
2015
2014
2013
2012
558,132 $
747,302
1,255,979
1,443,323
164,033
1,319,065
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
560,860 $
636,475
1,144,231
1,321,007
154,325
1,210,082
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
$
$
$
$
$
$
Data from 2016 reflects the partial year impact of the acquisition of Sierra Vista Bank on October 1, 2016. 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; (3) a
decline in economic conditions in the Central Valley; (4) the Company’s ability
to continue its internal growth at historical rates; (5) the Company’s ability to
maintain its net interest margin; (6) the decline quality of the Company’s
earning assets; (7) decline in credit quality; (8) changes in the regulatory
environment; (9) fluctuations in the real estate market; (10) changes in business
conditions and inflation; (11) changes in securities markets (12) 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.’’
We are not able to predict all the factors that may affect future results. You
should not place undue reliance on any forward looking statement, which
speaks only as of the date of this Report on Form 10-K. Except as required by
applicable laws or regulations, we do not undertake any obligation to update or
revise any forward looking statement, whether as a result of new information,
future events or otherwise.
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 Company and Sierra
Vista Bank (SVB) completed a merger under which SVB was merged with and
into the Bank on October 1, 2016. SVB had one branch in Folsom, one branch
in Fair Oaks, and one branch in Cameron Park 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 2016, 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, 2016, the Bank operated 22 full-service offices. The Bank
has a Real Estate Division, an Agribusiness Center and an SBA Lending Division
in Fresno. All real estate related transactions are conducted and processed through
the Real Estate Division, including interim construction loans for single family
residences and commercial buildings. We offer permanent single family residential
loans through our mortgage broker services. The SVB acquisition added total
assets, at fair value, of approximately $155.15 million, $122.53 million in loans,
at fair value, and $138.38 million in deposits, at fair value, at October 1, 2016.
SVB’s results of operations have been included in the Company’s results of
operations beginning October 1, 2016. The one-time pre-tax severance, retention,
acquisition and integration costs totaled $1.78 million for the year ended
December 31, 2016.
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. From time to time, California
experiences severe droughts, which could significantly harm the business of our
customers and the credit quality of the loans to those customers. We closely
monitor the water resources and the related issues affecting our customers, and
will 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, 2016 was
$1.33 compared to $1.00 and $0.48 for the years ended December 31, 2015 and
2014, respectively. Net income for 2016 was $15,182,000 compared to
$10,964,000 and $5,294,000 for the years ended December 31, 2015 and 2014,
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 and
the provision for income taxes in 2016 compared to 2015. Total assets at
December 31, 2016 were $1,443,323,000 compared to $1,276,736,000 at
December 31, 2015.
Return on average equity for 2016 was 9.84% compared to 8.12% and 4.06%
for 2015 and 2014, respectively. Return on average assets for 2016 was 1.15%
compared to 0.90% and 0.46% for 2015 and 2014, respectively. Total equity was
$164,033,000 at December 31, 2016 compared to $139,323,000 at
December 31, 2015. The increase in equity in 2016 compared to 2015 was
primarily driven by the issuance of stock in connection with the Sierra Vista
Bank acquisition, as well as the retention of earnings, net of dividends paid,
partially offset by a decrease in unrealized gains on available-for-sale securities
recorded in accumulated other comprehensive income (AOCI).
Average total loans increased $59,811,000 or 10.19% to $646,573,000 in
2016 compared to $586,762,000 in 2015. In 2016, we recorded a reverse
provision for $5,850,000 for credit losses compared to a provision for $600,000
in 2015 and $7,985,000 in 2014. The Company had nonperforming assets,
consisting of $2,180,000 in nonaccrual loans and $362,000 in repossessed assets,
totaling $2,542,000 at December 31, 2016. At December 31, 2015,
nonperforming assets totaled $2,413,000. Net recoveries (charge-offs) for 2016
were $5,566,000 compared to $702,000 for 2015 and $(8,885,000) for 2014.
Refer to ‘‘Asset Quality’’ below for further information.
Key Factors in Evaluating Financial Condition
and Operating Performance
In evaluating our financial condition and operating performance, 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;
45
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OVERVIEW
(Continued)
• Asset quality;
• Asset growth;
• Capital adequacy;
• Operating efficiency; and
• Liquidity.
Return to Our Shareholders
One measure of our return to our shareholders is the return on average equity
(ROE). ROE is a ratio that measures net income divided by average shareholders’
equity. Our ROE was 9.84% for the year ended 2016 compared to 8.12% and
4.06% for the years ended 2015 and 2014, respectively.
Our net income for the year ended December 31, 2016 increased $4,218,000
compared to 2015 and increased $5,670,000 in 2015 compared to 2014. During
2016, 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 2015.
Net interest income increased primarily because of increases in loan and
investment income, offset by increases in interest expense on deposits. During
2016, our net interest margin (NIM) increased 8 basis points to 4.09%
compared to 2015. Our net interest margin 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 2016 was
positively impacted by the collection of nonaccrual loans which resulted in a
recovery of interest income of approximately $657,000. The recovery was
partially offset by reversal of approximately $71,000 in interest income on loans
placed on nonaccrual during the year. Net interest income during 2015 was
positively impacted by the collection of non-accrual loan 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.
During the year ended 2016, the increase in non-interest income was primarily
driven by a $425,000 increase in net realized gains on sales and calls of
investment securities, an increase in loan placement fees of $41,000, a $50,000
increase in Federal Home Loan Bank dividends, a $31,000 increase in
interchange fees, partially offset by a $48,000 decrease in service charge income,
and a $121,000 decrease in other income, in 2016 compared to 2015. The
Company also realized $190,000 and $345,000 tax-free gains related to the
collection of life insurance proceeds in 2016 and 2015, respectively, which are
included in other non-interest income. In addition, the Company recorded an
other-than-temporary impairment loss of $136,000 during the year ended
December 31, 2016.
Non-interest expenses increased in 2016 compared to 2015 primarily due to
the SVB acquisition. The net increase year over year was a result of increases in
salary and employee benefit expenses of $1,045,000, increase in acquisition and
integration expenses of $1,782,000, data processing expenses of $568,000,
occupancy and equipment expenses of $85,000, ATM/Debit card expenses of
$85,000, partially offset by a decrease in Internet banking expenses of $31,000, a
decrease of regulatory assessments of $417,000, advertising fees of $32,000,
professional services of $246,000, and amortization of core deposit intangibles of
$171,000. Basic EPS was $1.34 for 2016 compared to $1.00 and $0.48 for 2015
and 2014, respectively. Diluted EPS was $1.33 for 2016 compared to $1.00 and
$0.48 for 2015 and 2014, respectively. The increase in EPS for 2016 is primarily
due to the increase in net income.
We experienced an increase in capital due to increases in retained earnings and
from the issuance of common stock as a result of the Sierra Vista Bank
acquisition, offset by a decrease in accumulated other comprehensive income.
data includes bank holding companies in central California with assets from
$600 million to $2.5 billion.
Development of Revenue Streams
Over the past several years, we have focused on not only our net income, but
improving the consistency of our revenue streams in order to create more
predictable future earnings and reduce the effect of changes in our operating
environment on our net income. Specifically, we have focused on net interest
income through a variety of strategies, including increases in average interest
earning assets, and minimizing the effects of the recent interest rate decline on
our net interest margin by focusing on core deposits and managing the cost of
funds. Our net interest margin (fully tax equivalent basis) was 4.09% for the year
ended December 31, 2016, compared to 4.01% and 4.11% for the years ended
December 31, 2015 and 2014, respectively. We experienced an increase in 2016
net interest margin compared to 2015, resulting from the increase in loan and
investment yields. The effective tax equivalent yield on total earning assets
increased 8 basis points, while the cost of total interest-bearing liabilities and
total deposits remained unchanged. Our cost of total deposits in 2016 and 2015
was 0.09% compared to 0.11% for the same period in 2014. Our net interest
income before provision for credit losses increased $4,805,000 or 11.78% to
$45,580,000 for the year ended 2016 compared to $40,775,000 and
$39,883,000 for the years ended 2015 and 2014, 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 2016 increased $204,000 or
2.17% to $9,591,000 compared to $9,387,000 in 2015 and $8,164,000 in 2014.
The increase resulted primarily from increases in net realized gains on sales and
calls of investment securities, loan placement fees, interchange fees, and Federal
Home Loan Bank dividends, partially offset by a decrease in service charge
income, appreciation in cash surrender value of bank owned life insurance, and
gain on sale of other real estate owned compared to 2015. Customer service
charges decreased $48,000 or 1.56% to $3,022,000 in 2016 compared to
$3,070,000 and $3,280,000 in 2015 and 2014, 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 classified and nonperforming loans, and is a key element
in estimating the future earnings of a company. Total nonperforming assets were
$2,542,000 and $2,413,000 at December 31, 2016 and 2015, respectively.
Nonperforming assets totaled 0.34% of gross loans as of December 31, 2016 and
0.40% of gross loans as of December 31, 2015. The nonperforming assets for
2016 includes repossessed asset of $362,000 compared to no repossessed asset at
December 31, 2015. The Company had no other real estate owned (OREO) at
December 31, 2016 or December 31, 2015. 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.
The ratio of nonperforming loans to total loans was 0.29% as of
December 31, 2016 and 0.40% as of December 31, 2015. The allowance for
credit losses as a percentage of outstanding loan balance was 1.23% as of
December 31, 2016 and 1.61% as of December 31, 2015. The ratio of net
recoveries to average loans was 0.86% as of December 31, 2016 and 0.12% as of
December 31, 2015.
Asset Growth
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 2016 was 1.15% compared to 0.90% and 0.46% for the years ended
December 31, 2015 and 2014, respectively. The 2016 increase in ROA is
primarily due to the increase in net income. Annualized ROA for our peer group
was 0.99% at December 31, 2016. Peer group information from SNL Financial
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
13.05% during 2016 to $1,443,323,000 as of December 31, 2016 from
$1,276,736,000 as of December 31, 2015. Total gross loans increased 26.50% to
46
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OVERVIEW
(Continued)
$756,628,000 as of December 31, 2016, compared to $598,111,000 at
December 31, 2015. Total investment securities and Federal funds sold increased
7.50% to $547,764,000 as of December 31, 2016 compared to $509,556,000 as
of December 31, 2015. Total deposits increased 12.52% to $1,255,979,000 as of
December 31, 2016 compared to $1,116,267,000 as of December 31, 2015. Our
loan to deposit ratio at December 31, 2016 was 60.24% compared to 53.58% at
December 31, 2015. The loan to deposit ratio of our peers was 78.96% at
December 31, 2016. The growth information above includes the results of our
acquisition of Sierra Vista Bank which added approximately $122,533,000 in net
loans and $138,236,000 in deposits during 2016.
Capital Adequacy
At December 31, 2016, we had a total capital to risk-weighted assets ratio of
13.72%, a Tier 1 risk-based capital ratio of 12.74%, common equity Tier 1 ratio
of 12.48%, and a leverage ratio of 8.75%. 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% and a leverage ratio of 8.65%. At December 31, 2016, on a
stand-alone basis, the Bank had a total risk-based capital ratio of 13.57%, a
Tier 1 risk based capital ratio of 12.59%, common equity Tier 1 ratio of
12.59%, and a leverage ratio of 8.64%. At December 31, 2015, the Bank had a
total risk-based capital ratio of 14.93%, Tier 1 risk-based capital of 13.67% and
a leverage ratio of 8.58%. Note 14 of the audited Consolidated Financial
Statements provides more detailed information concerning the Company’s capital
amounts and ratios. As of January 1, 2015, along with other community banking
organizations, the Company and the Bank became subject to new capital
requirements, and certain provisions of the new rules are being phased in
through 2019 under the Dodd-Frank Act and Basel III. The Company’s
consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital
ratios exceeded the regulatory guidelines for a well-capitalized financial institution
under the Basel III regulatory requirements at December 31, 2016.
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
68.45% for 2016 compared to 69.22% for 2015 and 69.33% for 2014. The
improvement in the efficiency ratio in 2016 is due to the growth in revenues
outpacing the growth in non-interest expense. The increase in the efficiency ratio
in 2015 compared to 2014 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 9.99% to
$55,171,000 in 2016 compared to $50,162,000 in 2015 and $48,047,000 in
2014, while operating expenses increased 8.07% in 2016, 1.92% in 2015, and
11.53% in 2014.
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 $351,713,000 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
$586,317,000 or 40.62% of total assets at December 31, 2016 and
$572,171,000 or 44.82% of total assets as of December 31, 2015.
RESULTS OF OPERATIONS
NET INCOME
Net income was $15,182,000 in 2016 compared to $10,964,000 and
$5,294,000 in 2015 and 2014, respectively. Basic earnings per share was $1.34,
$1.00, and $0.48 for 2016, 2015, and 2014, respectively. Diluted earnings per
share was $1.33, $1.00, and $0.48 for 2016, 2015, and 2014, respectively. ROE
was 9.84% for 2016 compared to 8.12% for 2015 and 4.06% for 2014. ROA
for 2016 was 1.15% compared to 0.90% for 2015 and 0.46% for 2014.
The increase in net income for 2016 compared to 2015 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 including acquisition and
integration expenses related to the SVB acquisition. The increase in net income
for 2015 compared to 2014 was primarily attributed to a decrease in the
provision for credit losses, and an increase in non-interest income, partially offset
by an increase in provision for income taxes and an increase in non-interest
expense.
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
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INTEREST INCOME AND EXPENSE
(Continued)
Year Ended December 31, 2016
Interest
Income/
Expense
Average
Interest
Rate
Average
Balance
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
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
$
53,514 $
289
0.54%
$
64,963 $
209
0.32%
$
53,781 $
175
313,006
194,224
507,230
116
560,860
644,282
4,940
5,876
9,787
15,663
-
15,952
34,051
630
50,633
1.88%
5.04%
3.09%
0.51%
2.84%
5.29%
12.75%
4.18%
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%
285,585
178,247
463,832
251
529,046
578,899
4,813
1,112,758 $
(8,978)
7,863
25,019
9,664
76,200
296,014
163,778
459,792
293
513,866
533,531
4,700
1,052,097 $
(8,147)
5,998
23,905
10,511
73,119
Total interest-earning assets
1,210,082 $
Allowance for credit losses
Nonaccrual loans
Cash and due from banks
Bank premises and equipment
Other non-earning assets
(10,098)
2,291
23,840
9,053
85,839
Total average assets
$
1,321,007
$
1,222,526
$
1,157,483
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Savings and NOW accounts
Money market accounts
Time certificates of deposit
Total interest-bearing
deposits
Other borrowed funds
$
337,804 $
249,620
139,656
727,080
5,157
317
133
525
975
121
Total interest-bearing liabilities
732,237 $
1,096
Non-interest bearing demand
deposits
Other liabilities
Shareholders’ equity
417,151
17,294
154,325
Total average liabilities and
shareholders’ equity
$
1,321,007
0.09%
0.05%
0.38%
0.13%
2.35%
0.15%
$
300,741 $
227,743
149,383
677,867
5,156
261
141
546
948
99
683,023 $
1,047
0.09%
0.06%
0.37%
0.14%
1.89%
0.15%
387,931
16,510
135,062
$
265,751 $
229,769
162,218
657,738
5,155
662,893 $
348,822
15,354
130,414
$
1,222,526
$
1,157,483
5,538
8,837
14,375
1
14,551
29,493
327
44,371
241
174
645
1,060
96
1,156
0.32%
1.87%
5.40%
3.13%
0.25%
2.83%
5.53%
6.96%
4.22%
0.09%
0.08%
0.40%
0.16%
1.83%
0.17%
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)
$
50,633
4.18%
$
45,656
4.10%
$
44,371
4.22%
1,096
0.15%
1,047
0.15%
1,156
0.17%
$
49,537
4.09%
$
44,609
4.01%
$
43,215
4.11%
(1) Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $3,327, $3,254, and $3,005 in 2016,
2015, and 2014, respectively.
(2) Loan interest income includes loan fees of $134 in 2016, $255 in 2015, and $272 in 2014.
(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, 2016
Compared to 2015
For the Years Ended
December 31, 2015
Compared to 2014
Volume
Rate
Net
Volume
Rate
Net
(In thousands)
$
(36) $
116 $
80 $
36 $
(2) $
34
460
857
623
(639)
1,083
218
(195)
780
(550)
(48)
(745)
732
1,317
(1)
3,446
16
(16)
-
101
34
1,301
(1)
3,547
50
585
-
2,507
7
(598)
-
(1,496)
246
(13)
-
1,011
253
4,742
235
4,977
3,135
(1,850)
1,285
46
(36)
10
-
10
2
14
16
22
38
48
30
(22)
(53)
(23)
1
26
22
48
(43)
(46)
(89)
2
(13)
(99)
(112)
3
(22)
(87)
(109)
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
Time certificate of
deposits
Total interest-bearing
deposits
Other borrowed funds
Total interest bearing
liabilities
Net interest income (1)
$
4,732 $
197 $
4,929 $
3,157 $ (1,763) $
1,394
(1) Computed on a tax equivalent basis for securities exempt from federal income
taxes.
Interest and fee income from loans increased $3,547,000 or 11.63% in 2016
compared to 2015. Interest and fee income from loans increased $1,011,000 or
3.43% in 2015 compared to 2014. The increase in 2016 is primarily attributable
to an increase in average total loans outstanding, as well as an increase in the
yield on loans by 2 basis points. The net interest income during 2016 was
positively impacted by the SVB acquisition in addition to the collection of
nonaccrual loans which resulted in a recovery of interest income of approximately
$657,000. The recovery was partially offset by reversal of approximately $71,000
in interest income on loans placed on nonaccrual status during the year. 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 placed on nonaccrual status during the year. Average total loans
for 2016 increased $59,811,000 to $646,573,000 compared to $586,762,000 for
2015 and $539,529,000 for 2014. Of the increase in 2016, approximately
$31.6 million was attributed to organic growth and approximately $28.2 million
from the acquisition of SVB. The yield on loans for 2016 was 5.29% compared
to 5.27% and 5.53% for 2015 and 2014, respectively.
Interest income from total investments on a non tax-equivalent basis, (total
investments include investment securities, Federal funds sold, interest-bearing
deposits in other banks, and other securities), increased $1,307,000 or 11.55% in
2016 compared to 2015. The yield on average investments increased 9 basis
points to 2.84% for the year ended December 31, 2016 from 2.75% for the year
ended December 31, 2015. Average total investments increased $31,814,000 to
$560,860,000 in 2016 compared to $529,046,000 in 2015. In 2015, total
investment income on a non tax-equivalent basis decreased $228,000 or 1.97%
compared to 2014.
A significant portion of the investment portfolio is mortgage-backed securities
(MBS) and collateralized mortgage obligations (CMOs). At December 31, 2016,
we held $181,064,000 or 33.06% of the total market value of the investment
portfolio in MBS and CMOs with an average yield of 1.88%. We invest in
Collateralized Mortgage Obligations (CMO) and Mortgage Backed Securities,
(MBS) as part of our overall strategy to increase our net interest margin. CMOs
and MBS by their nature are affected by prepayments which are impacted by
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, 2016 was an unrealized
loss of $516,000 and is reflected in the Company’s equity. At December 31,
2016, the average life of the investment portfolio was 6.18 years and the market
value reflected a pre-tax unrealized loss of $891,000. Management reviews market
value declines on individual investment securities to determine whether they
represent other-than-temporary impairment (OTTI). For the year ended
December 31, 2016, OTTI was recorded in the amount of $136,000. For the
years ended December 31, 2015 and 2014, no OTTI was recorded. 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, 2016, an immediate rate increase of 200 basis points
would result in an estimated decrease in the market value of the investment
portfolio by approximately $(43,123,000). Conversely, with an immediate rate
decrease of 200 basis points, the estimated increase in the market value of the
investment portfolio would be $40,501,000. 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 2016 increased $4,854,000 to $46,676,000 compared
to $41,822,000 in 2015 and $41,039,000 in 2014. 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 increased to 4.18% for the year ended
December 31, 2016 from 4.10% for the year ended December 31, 2015. Average
interest earning assets increased to $1,210,082,000 for the year ended
December 31, 2016 compared to $1,112,758,000 for the year ended
December 31, 2015. Average interest-earning deposits in other banks decreased
$11,449,000 comparing 2016 to 2015. Average yield on these deposits was
0.54% compared to 0.32% on December 31, 2016 and December 31, 2015
respectively. Average investments and interest-earning deposits increased
$31,814,000 but the tax equivalent yield on those assets increased 9 basis points.
Average total loans increased $59,811,000 and the yield on average loans
increased 2 basis points.
49
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INTEREST INCOME AND EXPENSE
(Continued)
The increase in total interest income total for 2015 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 yield on interest-earning
assets increased 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.
Interest expense on deposits in 2016 increased $27,000 or 2.85% to $975,000
compared to $948,000 in 2015 and $1,060,000 in 2014. The increase in interest
expense in 2016 compared to 2015 was a result of the deposits acquired in the
fourth quarter acquisition of Sierra Vista Bank. The yield on interest-bearing
deposits decreased 1 basis points to 0.13% in 2016 from 0.14% in 2015. The
decrease in interest expense in 2015 compared to 2014 was due to repricing of
interest-bearing deposits, which decreased 2 basis points to 0.14% in 2015 from
0.16% in 2014. Average interest-bearing deposits were $727,080,000 for 2016
compared to $677,867,000 and $657,738,000 for 2015 and 2014, respectively.
The increases in average interest-bearing deposits in 2016 and 2015 was the
result of organic growth and the SVB acquisition in 2016.
Average other borrowings were $5,157,000 with an effective rate of 2.35% for
2016 compared to $5,156,000 with an effective rate of 1.89% for 2015. In
2014, the average other borrowings were $5,155,000 with an effective rate of
1.83%. Included in other borrowings are the junior subordinated deferrable
interest debentures acquired from Service 1st, advances on lines of credit,
advances from the Federal Home Loan Bank (FHLB), and overnight borrowings.
The debentures were acquired in the merger with Service 1st and carry a floating
rate based on the three month LIBOR plus a margin of 1.60%. The rate was
2.48% for 2016, 1.92% for 2015, and 1.83% for 2014.
The cost of all interest-bearing liabilities remained unchanged at 0.15% basis
points for 2016 and 2015 compared to 0.17% for 2014. The cost of total
deposits remained unchanged at 0.09% for the year ended December 31, 2016
and December 31, 2015 compared to 0.11% for the year ended 2014. Average
demand deposits increased 7.53% to $417,151,000 in 2016 compared to
$387,931,000 for 2015 and $348,822,000 for 2014. The ratio of non-interest
demand deposits to total deposits increased to 36.46% for 2016 compared to
36.40% and 34.65% for 2015 and 2014, respectively.
Net interest income before provision for credit losses for 2016 increased
$4,805,000 or 11.78% to $45,580,000 compared to $40,775,000 for 2015 and
$39,883,000 for 2014. The increase in 2016 was due to the increase in average
earning assets while the yield on interest bearing liabilities remained unchanged.
Our net interest margin (NIM) increased 8 basis points. Yield on interest earning
assets increased 8 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 reflective of the
Federal Reserve rate increase. Net interest income before provision for credit
losses increased $892,000 in 2015 compared to 2014, mainly due to the increase
in average earning assets and a 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. Average interest-earning assets were $1,210,082,000 for the year
ended December 31, 2016 with a NIM of 4.09% compared to $1,112,758,000
with a NIM of 4.01% in 2015, and $1,052,097,000 with a NIM of 4.11% in
2014. 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 when 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
50
established initial responsibility for the accuracy of credit risk grades with the
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,
2016
December 31,
2015
Commercial and industrial
Agricultural land and production
$
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
$
1,884
296
1,408
698
1,969
1,969
156
483
369
94
3,143
419
1,556
694
1,686
1,149
119
500
234
110
Total allowance for credit losses
$
9,326
$
9,610
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. While the overall level of loans with an internal risk rating of
substandard has increased by $17.7 million or 55.7% to $49.5 million at
December 31, 2016 from $31.8 million at December 31, 2015, the classification
of those loans has migrated from Agricultural land and production to
Agricultural real estate. Management believes that the additional collateral
obtained related to these classified assets provides the Company with a reduced
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
Real estate:
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
PROVISION FOR CREDIT LOSSES
(Continued)
risk of loss if a default event was to occur. The increase in substandard loans
related to acquired SVB loans was $4.0 million at December 31, 2016. In
addition, the level of commercial and industrial loans graded special mention or
worse have substantially declined from $24.4 million at December 31, 2015 to
$13.4 million at December 31, 2016. However, as of December 31, 2016, 2016,
$12.5 million of the $13.4 million are graded substandard as compared to the
$1.8 million of the $24.4 million as of December 31, 2015. Management
believes that the level of allowance for loan losses allocated to Commercial and
Real estate loans has been adjusted accordingly.
During the year ended December 31, 2016, the company recorded a reverse
provision for credit losses of $5,850,000 compared to a provision of $600,000
and $7,985,000 for the same periods in 2015 and 2014, respectively. The
reversal from the allowance for credit losses is primarily the result of $5,566,000
in net loan loss recoveries and 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.
During the years ended December 31, 2016, 2015 and 2014 the Company
had net charge-offs (recoveries) totaling $(5,566,000), $(702,000), and
$8,885,000 respectively. The net charge-off (recovery) ratio, which reflects net
charge-offs (recoveries) to average loans, was (0.86)%, (0.12)% and 1.65% for
2016, 2015, and 2014, respectively.
Nonperforming loans were $2,180,000 and $2,413,000 at December 31, 2016
and 2015, respectively. Nonperforming loans as a percentage of total loans were
0.29% at December 31, 2016 compared to 0.40% at December 31, 2015. The
Company had no other real estate owned at December 31, 2016, December 31,
2015, and December 31, 2014. The carrying value of foreclosed assets was
$362,000 at December 31, 2016, and is included in other assets on the
consolidated balance sheets. No foreclosed assets were recorded at December 31,
2015 and December 31, 2014.
We had no loans past due, not including nonaccrual loans at December 31,
2016 compared to $136,000 at December 31, 2015. 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 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 continue to closely monitor the water and the
related issues affecting our customers. 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, 2016, there were $49.5 million
in classified loans of which $27.1 million related to agricultural real estate,
$12.5 million to commercial and industrial loans, $3.8 million to real estate
owner occupied, $1.4 million to real estate construction, and $2.7 million to
commercial real estate. This compares to $31.8 million in classified loans as of
December 31, 2015 of which $8.5 million related to agricultural real estate,
$3.1 million to real estate construction, $1.8 million to commercial and
industrial, $10.1 million to agricultural production, and $4.7 million to
commercial real estate. The reduction in classified agricultural production loans
relates to the refinance of a single loan which is now secured by agricultural real
estate. The increase in classified agricultural real estate relates primarily to this
single borrower with multiple loans totaling approximately $20.0 million which
continues to perform under the terms of the loan agreements, while management
has observed and continues to monitor some indications of deterioration in the
borrower’s overall financial condition. These changes in classified loans
contributed to the shift in the amount of allowance for credit losses allocated
between commercial loans and real estate loans.
As of December 31, 2016, 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 was $51,430,000 for
2016 compared to $40,175,000 and $31,898,000 for 2015 and 2014,
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 $9,591,000 in 2016
compared to $9,387,000 and $8,164,000 in 2015 and 2014, respectively. The
$204,000 or 2.17% increase in non-interest income in 2016 was due to increases
in net realized gains on sales and calls of investment securities, loan placement
fees, Federal Home Loan Bank dividends, and interchange fees compared to
2015, partially offset by a decrease in service charge income, appreciation in cash
surrender value of bank owned life insurance, gain on other real estate owned,
and other income. The $1,223,000 or 14.98% increases in non-interest income
in 2015 compared to 2014 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, partially offset by a decrease in service charge
income, interchange fees, and appreciation in cash surrender value of bank owned
life insurance.
Customer service charges decreased $48,000 to $3,022,000 in 2016 compared
to $3,070,000 in 2015 and $3,280,000 in 2014. The decrease in 2016 from
2015 and in 2015 from 2014 was the result of lower NSF fees and lower
analyzed service charge fee income.
During the year ended December 31, 2016, we realized net gains on sales and
calls of investment securities of $1,920,000. In 2016, we recorded an
other-than-temporary impairment loss of $136,000 as compared to none during
the year ended December 31, 2015, and 2014. In 2015, we realized a net gain of
$1,495,000 compared to a net gain of $904,000 in 2014 from sales and calls of
investment securities. The net gains in 2016, 2015, and 2014 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 $558,000 in 2016 compared to $596,000 and
$614,000 in 2015 and 2014, 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 $1,228,000 in 2016 compared to $1,197,000 and
$1,205,000 in 2015 and 2014, respectively. Part of the increases in 2016 was
attributable to the SVB 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 $41,000 in 2016 to $1,083,000 compared to $1,042,000 in 2015
and $544,000 in 2014. Fees were higher in 2016 compared to 2015 and 2014.
Refinancing and new mortgage activity increased in 2016 and in 2015. In
competing for mortgage loans in our market, we continue to see the historically
low mortgage rates and first time home buyer tax incentives driving business in
the mortgage market.
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, 2016, we held $5,594,000 in FHLB stock compared to
$4,823,000 at December 31, 2015. Dividends in 2016 increased to $630,000
compared to $580,000 in 2015 and $327,000 in 2014.
Other income decreased to $1,286,000 in 2016 compared to $1,407,000 and
$1,290,000 in 2015 and 2014, respectively. The period-to-period decrease in
2016 compared to 2015 was primarily due to the decrease in realized tax-free
gain of $190,000 compared to $345,000 related to the collection of life
insurance proceeds which is included in other income.
51
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
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 $2,906,000 or 8.07% to $38,922,000 in 2016 compared to
$36,016,000 in 2015, and $35,338,000 in 2014. The net increase
period-over-period is primarily due to the SVB acquisition and integration
expenses of $1,782,000 and various items discussed below.
Our efficiency ratio, measured as the percentage of non-interest expenses
(exclusive of amortization of core deposit intangibles, other real estate owned,
and repossessed asset 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 68.45% for 2016 compared to 69.22% for 2015 and
69.33% for 2014. The improvement in the efficiency ratio in 2016 and 2015 is
due to the growth in revenues outpacing the growth in non-interest expense.
Salaries and employee benefits increased $1,045,000 or 5.02% to $21,881,000
in 2016 compared to $20,836,000 in 2015 and $19,721,000 in 2014. Full time
equivalents were 277 for the year ended December 31, 2016 compared to 273
for the year ended December 31, 2015. The increase in salaries and employee
benefits in 2016 compared to 2015 is a result of higher overall salary and benefit
expenses; however, direct loan origination costs including salaries and employee
benefits, which are capitalized and expensed as an adjustment to interest and fees
on loans increased during 2016 compared to 2015. The SVB acquisition
attributed to approximately $426,000 of the increase in 2016.
For the years ended December 31, 2016, 2015, and 2014, the compensation
cost recognized for share based compensation was $284,000, $238,000 and
$173,000, respectively. As of December 31, 2016, there was $1,067,000 of total
unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under all plans. The cost is expected to be recognized over
a weighted average period of 3.70 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, 2016 and 2015. Restricted stock awards of 54,650 shares and
9,268 shares were awarded in 2016 and 2015, respectively.
Occupancy and equipment expense increased $85,000 or 1.82% to $4,754,000
in 2016 compared to $4,669,000 in 2015 and $4,835,000 in 2014. The
addition of three new branches from the SVB acquisition resulted in
approximately $68,000 increase in rent expense. The decrease in 2015 was the
result of the closure of an ATM location in Visalia. The Company made no
changes in depreciation expense methodology.
Regulatory assessments decreased $417,000 or 39.38% to $642,000 in 2016
compared to $1,059,000 and $762,000 in 2015 and 2014, respectively. The
assessment base for calculating the amount owed is average assets minus average
tangible equity. Beginning in the third quarter of 2016, the FDIC approved a
final rule revising DIF assessment formulas which resulted in lower assessments
for the Company. The higher assessment rate in 2015 was a result of changes in
credit quality ratios used in determining the assessment rate along with higher
average assets.
Data processing expenses were $1,707,000 in 2016 compared to $1,139,000 in
2015 and $1,820,000 in 2014. The $568,000 or 49.87% increase in 2016
primarily resulted from transitioning to a new provider for data transmission.
Acquisition and integration expenses related to the SVB merger were $1,782,000
in 2016 compared to none in 2015. Professional services decreased $246,000 in
2016 compared to 2015.
Amortization of core deposit intangibles was $149,000 for 2016, $320,000 for
2015, and $337,000 for 2014. During 2016, amortization expense related to
SVB core deposit intangible (CDI) was $12,000, and amortization expense
related to VCB CDI was $137,000. During 2015, amortization expense related
to Service 1st Bank CDI was $183,000, and amortization expense related to
VCB CDI was $137,000. During 2014, amortization expense related to Service
1st Bank CDI was $200,000, and amortization expense related to VCB CDI was
$137,000.
ATM/Debit card expenses increased $85,000 to $633,000 for the year ended
December 31, 2016 compared to $548,000 in 2015 and $624,000 in 2014.
License and maintenance contracts increased $11,000 to $531,000 for the year
ended December 31, 2016 compared to $520,000 and $488,000 in 2015 and
52
2014, respectively. Other non-interest expenses decreased $136,000 or 3.71% to
$3,801,000 in 2016 compared to $3,665,000 in 2015 and $3,965,000 in 2014.
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
2016
%
Other
Expense Average
Assets
2015
%
Other
Expense Average
Assets
2014
$
Stationery/supplies
Amortization of software
Director fees and related
expenses
Telephone
Postage
Armored courier fees
Risk management expense
Loss on sale or write-down
of assets
Donations
Personnel other
Credit card expense
Education/training
General insurance
Appraisal fees
Operating losses
Other
Total other non-interest
expense
(Dollars in thousands)
0.02% $
0.02%
0.03%
0.03%
0.02%
0.02%
0.01%
-%
0.01%
0.01%
0.01%
0.01%
0.01%
0.01%
0.01%
0.07%
269
240
306
292
212
218
163
6
185
173
124
148
150
66
56
1,057
0.02% $
0.02%
0.03%
0.02%
0.02%
0.02%
0.01%
-%
0.02%
0.01%
0.01%
0.01%
0.01%
0.01%
-%
0.09%
266
224
262
230
238
221
207
201
179
154
95
135
141
130
53
1,229
247
257
333
357
200
227
150
4
171
161
196
154
159
86
175
924
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%
0.01%
0.14%
$
3,801
0.29% $
3,665
0.30% $
3,965
0.32%
PROVISION FOR INCOME TAXES
Our effective income tax rate was 31.3% for 2016 compared to 19.1% for
2015 and (12.0)% for 2014. The Company reported an income tax provision
(benefit) of $6,917,000, $2,582,000, and $(570,000) for the years ended
December 31, 2016, 2015, and 2014, respectively. The effective tax rate in 2016
was affected by the large negative provision for credit losses which resulted in
higher pretax and taxable income and also diluted the impact of the Company’s
tax exempt municipal bonds and other tax planning strategies. In addition,
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 incentives beginning in 2014.
FINANCIAL CONDITION
SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS
December 31, 2016 compared to December 31, 2015.
Total assets were $1,443,323,000 as of December 31, 2016, compared to
$1,276,736,000 as of December 31, 2015, an increase of 13.05% or
$166,587,000. Total gross loans were $756,628,000 as of December 31, 2016,
compared to $598,111,000 as of December 31, 2015, an increase of
$158,517,000 or 26.50%. The total investment portfolio (including Federal
funds sold and interest-earning deposits in other banks) decreased 3.86% or
$22,412,000 to $558,132,000. Total deposits increased 12.52% or $139,712,000
to $1,255,979,000 as of December 31, 2016, compared to $1,116,267,000 as of
December 31, 2015. Shareholders’ equity increased $24,710,000 or 17.74% to
$164,033,000 as of December 31, 2016, compared to $139,323,000 as of
December 31, 2015. The increase in shareholders’ equity was driven by the
issuance of stock in connection with the Sierra Vista Bank acquisition, as well as
the retention of earnings, net of dividends paid, partially offset by a decrease in
unrealized gains on available-for-sale securities recorded in accumulated other
comprehensive income (AOCI). Accrued interest payable and other liabilities
were $17,756,000 as of December 31, 2016, compared to $15,991,000 as of
December 31, 2015, an increase of $1,765,000.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
FAIR VALUE
The Company measures the fair value 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
The following table reflects the balances for each category of securities at year
end:
Available-for-Sale Securities
(In thousands)
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
Amortized Cost at December 31,
2016
2015
2014
$
69,005 $
52,803 $
33,088
288,543
181,785
143,343
181,785
225,636
236,629
1,807
7,500
2,356
7,500
3,079
7,500
Total Available-for-Sale Securities
$ 548,640 $ 470,080 $ 423,639
Held-to-Maturity Securities
(In thousands)
Obligations of states and political subdivisions
2016
2015
2014
$
- $ 31,712 $ 31,964
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,
2016, investment securities with a fair value of $88,903,000, or 16.23% 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, 2016 was 60.24% compared to 53.58% at
December 31, 2015. The loan to deposit ratio of our peers was 78.96% at
December 31, 2016. 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, decreased 3.86% or $22,412,000 to
$558,132,000 at December 31, 2016, from $580,544,000 at December 31,
2015. The market value of the portfolio reflected an unrealized loss of $891,000
at December 31, 2016, compared to an unrealized gain of $7,474,000 at
December 31, 2015.
Losses recognized in 2016, 2015, and 2014 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.
During 2014, to better manage our interest rate risk, the Company transferred
from available-for-sale to held-to-maturity selected municipal securities in our
portfolio having a book value of approximately $31 million, a market value of
approximately $32 million, and a net unrecognized gain of approximately
$163,000. This transfer was completed after careful consideration of our intent
and ability to hold these securities to maturity. During the first quarter of 2016,
management sold certain investment securities of which management identified
that five of the 13 securities sold were previously designated as held-to-maturity
(HTM). Through an oversight during the portfolio restructuring analysis related
to this transaction, management unintentionally sold these five HTM securities.
The book value of the HTM securities sold was $8.5 million. The gain realized
on the sale of the HTM securities was $696,000. As such, management was
required to reclassify the remaining HTM securities with a fair value of
$23.1 million to the AFS designation. At December 31, 2016 and December 31,
2015 the remaining unaccreted balance of these HTM securities associated with
the original transfer from AFS to HTM and included in accumulated other
comprehensive income was $0 and $64,000, respectively.
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, 2016, 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, 2016,
and identified those that had an unrealized loss for at least a consecutive
12 month period, which had an unrealized loss at December 31, 2016 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 obligations of states and political subdivisions 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 during March 2016 that a $136,000 credit
related impairment related to one security with a fair value of $2,995,000 and a
pre-impairment amortized cost of $3,131,000 existed. The Company recorded an
other-than-temporary impairment loss of $136,000 during the twelve months
ended December 31, 2016. There were no OTTI losses recorded during the
twelve months ended December 31, 2015.
At December 31, 2016, the Company had a total of 16 PLRMBS with a
remaining principal balance of $1,807,000 and a net unrealized gain of
approximately $1,036,000. Twelve of these PLRMBS with a remaining principal
balance of $2,707,000 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, 2016.
53
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INVESTMENTS
(Continued)
The amortized cost, maturities and weighted average yield of investment securities at December 31, 2016 are summarized in the following table.
(Dollars in thousands)
Available-for-Sale Securities
Debt securities (1)
U.S. Government agencies $
Obligations of states and
political subdivisions
(2)
U.S. Government
sponsored entities and
agencies collateralized
by residential mortgage
obligations
In one year or less
After one through five
years
After five through ten
years
After ten years
Total
Amount
Yield(1)
Amount
Yield(1)
Amount
Yield(1)
Amount
Yield(1)
Amount
Yield(1)
-
-
-
-
-
-
$
-
-
$
10,745
4.40% $
58,260
4.30% $
69,005
4.31%
15,145
3.49%
35,667
3.97%
237,731
4.78%
288,543
4.61%
2,709
4.54%
3,190
3.48%
175,886
3.81%
181,785
3.81%
Private label residential
mortgage backed
securities
Other equity securities
-
7,500
7,500
$
-
2.27%
142
-
4.74%
-
4
-
5.00%
-
1,661
-
5.91%
-
1,807
7,500
2.27% $
17,996
3.66% $
49,606
4.03% $
473,538
4.36% $
548,640
5.81%
2.27%
4.31%
(1) 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. Expected maturities will also differ from contractual maturities due to unscheduled principal pay downs.
(2) Not computed on a tax equivalent basis.
LOANS
Total gross loans increased $158,517,000 or 26.50% to $756,628,000 as of December 31, 2016, compared to $598,111,000 as of December 31, 2015.
The following table sets forth information concerning the composition of our loan portfolio as of and for the years ended December 31, 2016, 2015, 2014, 2013,
and 2012.
Loan Type
(Dollars in thousands)
Commercial:
2016
2015
2014
2013
2012
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Commercial and industrial
Agricultural land and production
$
88,652
25,509
11.7% $
3.4%
Total commercial
114,161
15.1%
102,197
30,472
132,669
17.1% $
5.1%
89,007
39,140
15.5% $
6.8%
87,082
31,649
17.0% $
6.1%
77,956
26,599
22.2%
128,147
22.3%
118,731
23.1%
104,555
19.7%
6.7%
26.4%
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 (1)
Allowance for credit losses
Total loans (1)
(1) Includes nonaccrual loans of:
$
$
191,665
25.3%
168,910
28.2%
176,804
30.9%
156,781
30.6%
114,444
28.9%
69,200
184,225
86,761
18,945
550,796
64,494
25,910
90,404
1,267
756,628
(9,326)
747,302
2,180
9.1%
24.3%
11.5%
2.7%
72.9%
8.5%
3.5%
12.0%
100.0%
$
$
38,685
117,244
74,867
10,520
410,226
42,296
12,503
54,799
417
598,111
(9,610)
588,501
2,413
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)
564,280
14,052
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)
503,149
7,586
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)
385,185
9,695
8.4%
13.6%
7.2%
2.0%
60.1%
10.9%
2.6%
13.5%
100.0%
54
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
LOANS
(Continued)
At December 31, 2016, loans acquired in the SVB and VCB acquisitions had
a balance of $168,296,000, of which $7,239,000 were commercial loans,
$129,520,000 were real estate loans, and $31,537,000 were consumer loans. 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, 2016, in management’s judgment, a concentration of loans
existed in commercial loans and real-estate-related loans, representing
approximately 96.5% of total loans of which 15.1% were commercial and 81.4%
were real-estate-related. This level of concentration is consistent with 97.9% at
December 31, 2015. Although we believe the loans within this concentration
have no more than the normal risk of collectability, a substantial decline in the
performance of the economy in general or a 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, 2016 and 2015.
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.
LOAN MATURITIES
The following table presents information concerning loan maturities and sensitivity to changes in interest rates of the indicated categories of our loan portfolio, as well
as loans in those categories maturing after one year that have fixed or floating interest rates at December 31, 2016.
(In thousands)
Loan Maturities:
Commercial and agricultural
Real estate construction and other land loans
Other real estate
Consumer and installment
Sensitivity to Changes in Interest Rates:
Loans with fixed interest rates
Loans with floating interest rates (1)
(1) Includes floating rate loans which are currently at their floor rate in accordance with their respective
One Year or
Less
After One
Through Five
Years
After Five
Years
Total
$
$
$
$
$
73,243
55,809
47,152
9,994
186,198
56,936
129,262
186,198
26,084
$
$
$
$
$
21,694
4,162
69,067
8,464
103,387
67,120
36,268
103,388
32,228
$
$
$
$
$
19,224
9,229
365,377
71,946
465,776
59,980
405,795
465,775
284,506
$
$
$
$
$
114,161
69,200
481,596
90,404
755,361
184,036
571,325
755,361
342,818
loan agreement
NONPERFORMING ASSETS
Nonperforming assets consist of nonperforming loans, other real estate owned
(OREO), and repossessed assets. Nonperforming loans are those loans which have
(i) been placed on nonaccrual status; (ii) been classified as doubtful under our
asset classification system; or (iii) become contractually past due 90 days or more
with respect to principal or interest and have not been restructured or otherwise
placed on nonaccrual status. A loan is classified as nonaccrual when 1) it is
maintained on a cash basis because of deterioration in the financial condition of
the borrower; 2) payment in full of principal or interest under the original
contractual terms is not expected; or 3) principal or interest has been in default
for a period of 90 days or more unless the loan is both well secured and in the
process of collection. 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.
Our consolidated financial statements are prepared on the accrual basis of
accounting, including the recognition of interest income on loans. Interest
income from nonaccrual loans is recorded only if collection of principal in full is
not in doubt and when cash payments, if any, are received.
Loans are placed on nonaccrual status and any accrued but unpaid interest
income is reversed and charged against income when the payment of interest or
principal is 90 days or more past due. Loans in the nonaccrual category are
treated as nonaccrual loans even though we may ultimately recover all or a
portion of the interest due. These loans return to accrual status when the loan
becomes contractually current, future collectability of amounts due is reasonably
assured, and a minimum of six months of satisfactory principal repayment
performance has occurred. See Note 5 of the Company’s audited Consolidated
Financial Statements in Item 8 of this Annual Report.
At December 31, 2016, total nonperforming assets totaled $2,542,000, or
0.18% of total assets, compared to $2,413,000, or 0.19% of total assets at
December 31, 2015. Total nonperforming assets at December 31, 2016, included
nonaccrual loans totaling $2,180,000, no OREO, and $362,000 in repossessed
assets. Nonperforming assets at December 31, 2015 consisted of $2,413,000 in
nonaccrual loans, no OREO, and no repossessed assets. At December 31, 2016,
we had one loan considered a troubled debt restructuring (‘‘TDR’’) totaling
$20,000 which is included in nonaccrual loans compared to four TDRs totaling
$1,337,000 at December 31, 2015. We have no outstanding commitments to
lend additional funds to any of these borrowers. See Note 5 of the Company’s
audited Consolidated Financial Statements in Item 8 of this Annual Report
concerning our recorded investment in loans for which impairment has been
recognized.
A summary of nonaccrual, restructured, and past due loans at December 31,
2016, 2015, 2014, 2013, and 2012 is set forth below. The Company had no
loans past due more than 90 days and still accruing interest at December 31,
2016 and 2015. Management is not aware of any potential problem loans, which
were current and accruing at December 31, 2016, where serious doubt exists as
to the ability of the borrower to comply with the present repayment terms.
Management can give no assurance that nonaccrual and other nonperforming
loans will not increase in the future.
55
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 real estate
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
Interest foregone
Nonperforming loans to total loans
Accruing loans past due 90 days or more
Accruing troubled debt restructurings
Ratio of nonperforming loans to allowance for credit losses
Loans considered to be impaired
Related allowance for credit losses on impaired loans
2016
2015
2014
2013
2012
$
$
$
$
$
$
$
447
87
-
1,082
526
18
-
20
-
-
-
-
2,180
-
2,180
245
0.29%
-
3,089
23.38%
5,269
307
$
$
$
$
$
$
$
-
324
-
567
172
13
29
23
-
-
1,285
-
2,413
-
2,413
340
0.40%
-
4,286
25.11%
6,699
164
$
$
$
$
$
$
$
7,265
1,363
360
1,468
1,751
19
-
-
547
-
1,279
-
14,052
-
14,052
716
2.45%
-
4,774
169.14%
18,826
612
$
$
$
$
$
$
$
335
1,777
-
158
721
-
1,192
384
1,450
-
1,565
4
7,586
-
7,586
661
1.48%
-
5,771
82.38%
13,357
1,007
$
$
$
$
$
$
$
-
213
-
-
237
-
-
1,362
6,288
-
1,595
-
9,695
-
9,695
693
2.45%
-
7,410
95.68%
17,105
510
As of December 31, 2016 and 2015, we had impaired loans totaling
$5,269,000 and $6,699,000, respectively. 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. Impaired loans are
identified from internal credit review reports, past due reports, overdraft listings,
and third party reports of examination. Borrowers experiencing problems such as
operating losses, marginal working capital, inadequate cash flow or business
interruptions which jeopardize collection of the loan are also reviewed for
possible impairment classification. 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 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. For collateral dependent loans secured by real estate, we obtain external
appraisals which are updated at least annually to determine the fair value of the
collateral, and we record an immediate charge off for the difference between the
book value of the loan and the appraised value less selling costs 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 $245,000 for the year ended December 31,
2016 of which $2,000 was attributable to troubled debt restructurings. Foregone
interest on nonaccrual loans totaled $340,000 and $716,000 for the years ended
December 31, 2015 and 2014, respectively of which $104,000 and $139,000 was
attributable to troubled debt restructurings, respectively.
56
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, 2016.
(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
Total non-accrual
Balances
December 31,
2015
Additions to
Nonaccrual
Loans
Net Pay
Downs
Transfer to
Foreclosed
Collateral
Returns to
Accrual
Status
Charge
Offs
Balances
December 31,
2016
$
$
-
891
-
-
172
13
29
23
-
1,285
2,413
$
1,741
832
$
-
-
608
72
-
-
-
-
(405)
(387)
-
-
(128)
(8)
(29)
(3)
-
(1,285)
$
$
(321)
-
$
-
(167)
$
(568)
-
447
1,169
-
-
-
(41)
-
-
-
-
-
-
(30)
-
-
-
-
-
-
-
(96)
(18)
-
-
-
-
-
-
526
18
-
20
-
-
$
3,253
$
(2,245)
$
(362)
$
(197)
$
(682)
$
2,180
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,
2016
2015
$
$
-
-
-
-
-
-
-
$
$
-
227
121
(359)
-
11
-
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, 2016 the Bank had no
OREO properties. The carrying value of foreclosed assets was $362,000 at
December 31, 2016, and is included in other assets on the consolidated balance
sheets. No foreclosed assets were recorded at December 31, 2015.
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.
ALLOWANCE FOR CREDIT LOSSES
We have established a methodology for determining 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
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) losses accrued for on loans when they are probable of occurring
and can be reasonably estimated and (2) losses 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 and real estate, into various risk categories. The Bank uses the
various asset classifications as a means of measuring risk and determining the
adequacy of valuation allowances by using a nine-grade system to classify assets.
In general, all credit facilities exceeding 90 days of delinquency require
classification and are placed on nonaccrual.
57
395,771
405,040
11,396
(123)
-
(217)
(319)
(1,430)
(761)
(2,850)
515
-
45
-
-
327
887
(1,963)
700
10,133
2.56%
(0.48)%
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
ALLOWANCE FOR CREDIT LOSSES
(Continued)
The following table summarizes the Company’s loan loss experience, as well as provisions and recoveries (charge-offs) to the allowance and certain pertinent ratios for
the periods indicated:
(Dollars in thousands)
Loans outstanding at December 31,
Average loans outstanding during the year
Allowance for credit losses:
Balance at beginning of year
Deduct loans charged off:
Commercial and industrial
Agricultural production
Owner occupied
Real estate construction and other land loans
Commercial real estate
Consumer loans
Total loans charged off
Add recoveries of loans previously charged off:
Commercial and industrial
Agricultural production
Owner occupied
Real estate construction and other land loans
Commercial real estate
Consumer loans
Total recoveries
Net recoveries (charge offs)
(Reversal) Provision charged to credit losses
2016
2015
2014
2013
2012
$
$
$
$
$
$
755,361
646,573
9,610
(621)
-
-
-
-
(262)
(883)
3,656
1,631
-
702
283
177
6,449
5,566
(5,850)
$
$
$
597,694
586,762
8,308
(802)
-
-
-
-
(159)
(961)
954
90
-
32
-
587
1,663
702
600
$
$
$
572,442
539,529
9,208
(7,423)
(1,722)
(183)
-
-
(506)
(9,834)
171
-
150
364
-
264
949
(8,885)
7,985
$
$
$
512,516
454,483
10,133
(713)
-
(281)
-
(4)
(448)
(1,446)
315
-
-
16
-
190
521
(925)
-
Balance at end of year
$
9,326
$
9,610
$
8,308
$
9,208
$
Allowance for credit losses as a percentage of
outstanding loan balance
Net recoveries (charge offs) to average loans outstanding
1.23%
0.86%
1.61%
0.12%
1.45%
(1.65)%
1.80%
(0.20)%
Managing credits identified through the risk evaluation methodology includes
developing a business strategy with the customer to mitigate our losses. Our
management continues to monitor these credits with a view to identifying as
early as possible when, and to what extent, additional provisions may be
necessary.
The allowance for credit losses is reviewed at least quarterly by the Bank’s and
our Board of Directors’ Audit/Compliance Committee. Reserves are allocated to
loan portfolio segments using percentages which are based on both historical risk
elements such as delinquencies and losses and predictive risk elements such as
economic, competitive and environmental factors. We have adopted the specific
reserve approach to allocate reserves to each impaired asset for the purpose of
estimating potential loss exposure. Although the allowance for credit losses is
allocated to various portfolio categories, it is general in nature and available for
the loan portfolio in its entirety. Additions may be required based on the results
of independent loan portfolio examinations, regulatory agency examinations, or
our own internal review process. Additions are also required when, in
management’s judgment, the reserve does not properly reflect the potential loss
exposure.
58
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
ALLOWANCE FOR CREDIT LOSSES
(Continued)
The allocation of the allowance for credit losses is set forth below:
2016
2015
2014
2013
2012
Percent of
Loans in
Each
Category to
Total Loans
Amount
Percent of
Loans in
Each
Category to
Total Loans
Amount
Percent of
Loans in
Each
Category to
Total Loans
Amount
Percent of
Loans in
Each
Category to
Total Loans
Amount
Percent of
Loans in
Each
Category to
Total Loans
Amount
1,884
296
1,408
698
1,969
1,969
156
483
369
94
11.7% $
3.4%
25.3%
9.1%
24.3%
11.5%
2.7%
8.5%
3.5%
3,143
419
1,556
694
1,686
1,149
119
500
234
110
17.1% $
5.1%
28.2%
6.5%
19.6%
12.5%
1.8%
7.1%
2.1%
2,753
377
1,380
837
1,201
564
76
811
267
42
15.5% $
6.8%
30.9%
6.8%
18.7%
10%
1.2%
8.3%
1.8%
1,928
516
1,697
1,289
1,406
672
110
874
294
422
17% $
6.1%
30.6%
8.3%
16.8%
8.6%
0.9%
9.5%
2.2%
2,071
605
2,153
1,035
1,886
646
157
1,158
383
39
19.7%
6.7%
28.9%
8.4%
13.6%
7.2%
2%
10.9%
2.6%
Loan Type (Dollars 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
Unallocated reserves
Total allowance for credit losses
$
9,326
100% $
9,610
100% $
8,308
100% $
9,208
100% $
10,133
100%
Loans are charged to the allowance for credit losses when the loans are deemed
uncollectible. It is the policy of management to make additions to the allowance
so that it remains adequate to cover all probable loan charge offs that exist in the
portfolio at that time. We assign qualitative and environmental factors
(Q factors) to each loan category. Q factors include reserves held for the effects
of lending policies, economic trends, and portfolio trends along with other
dynamics which may cause additional stress to the portfolio.
As of December 31, 2016, the allowance for credit losses (ALLL) stood at
$9,326,000, compared to $9,610,000 at December 31, 2015, a net decrease of
$284,000. The decrease in the ALLL was due to net recoveries and a reverse
provision for credit losses during the year ended December 31, 2016 which was
necessitated by management’s observations and assumptions about the existing
credit quality of the loan portfolio. Net recoveries totaled $5,566,000 while the
reversal of provision for credit losses was $5,850,000. The balance of classified
loans and loans graded special mention, totaled $49,464,000 and $29,911,000 at
December 31, 2016 and $31,764,000 and $28,719,000 at December 31, 2015.
This increase in classified loans necessitated additional allocation within the
ALLL; however it was offset by improvements in qualitative factors (moderating
drought conditions), as well as relative improvements in loss trends, past dues,
and other credit variables, causing the allowance level to decrease. The balance of
undisbursed commitments to extend credit on construction and other loans and
letters of credit was $259,415,000 as of December 31, 2016, compared to
$217,166,000 as of December 31, 2015. At December 31, 2016 and 2015, the
balance of a contingent allocation for probable loan loss experience on unfunded
obligations was $125,000 and $150,000, 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 1.23% at December 31, 2016,
and 1.61% at December 31, 2015. Total loans include SVB and VCB loans that
were recorded at fair value in connection with the acquisitions of $168,296,000
at December 31, 2016 and $62,395,000 at December 31, 2015. Excluding these
acquired loans from the calculation, the ALLL to total gross loans was 1.59%
and 1.79% as of December 31, 2016 and 2015, respectively and general reserves
associated with non-impaired loans to total non-impaired loans was 1.55% and
1.79%, respectively. The loan portfolio acquired in the mergers 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.
The Company’s loan portfolio balances in 2016 increased through organic
growth and the acquisition of SVB. Management believes that the change in the
allowance for credit losses to total loans ratios is directionally consistent with the
composition of loans and the level of nonperforming and classified loans,
partially offset by the general economic conditions experienced in the central
California communities serviced by the Company and recent improvements in
real estate collateral values.
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, 2016.
Non-performing loans totaled $2,180,000 as of December 31, 2016, and
$2,413,000 as of December 31, 2015. The allowance for credit losses as a
percentage of nonperforming loans was 427.80% and 398.26% as of
December 31, 2016 and December 31, 2015, 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, 2016 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, 2016 was $40,231,000 consisting of $10,314,000, $6,340,000,
$14,643,000 and $8,934,000 representing the excess of the cost of Sierra Vista
Bank, Visalia Community Bank, Service 1st Bancorp and Bank of Madera
County, respectively, over the net amounts assigned to assets acquired and
liabilities assumed in the transactions accounted for under the purchase method
59
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
GOODWILL AND INTANGIBLE ASSETS
(Continued)
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 $139,712,000 or 12.52% to $1,255,979,000 as of
December 31, 2016, compared to $1,116,267,000 as of December 31, 2015.
Interest-bearing deposits increased $72,670,000 or 10.57% to $760,164,000 as of
December 31, 2016, compared to $687,494,000 as of December 31, 2015.
Non-interest bearing deposits increased $67,042,000 or 15.64% to $495,815,000
as of December 31, 2016, compared to $428,773,000 as of December 31, 2015.
In conjunction with the acquisition of Sierra Vista Bank the Company acquired
total interest bearing deposits of $82,197,000, consisting of $10,292,000,
$24,704,000, $41,887,000 and $5,314,000 in NOW, MMA, Time and Savings
deposits, respectively, and $56,039,000 in non-interest bearing deposits. Average
non-interest bearing deposits to average total deposits was 36.46% for the year
ended December 31, 2016 compared to 36.40% for the same period in 2015.
Our total market share of deposits in Fresno, Madera, San Joaquin, and Tulare
counties was 3.76% in 2016 compared to 3.77% in 2015 based on FDIC
deposit market share information published as of June 2016.
The composition of the deposits and average interest rates paid at
December 31, 2016 and December 31, 2015 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
2016
Deposits Rate
2015
Deposits Rate
$
247,623
250,749
156,694
105,098
760,164
495,815
19.7% 0.12% $
19.9% 0.05%
12.5% 0.38%
8.4% 0.03%
60.5% 0.13%
39.5%
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%
Total deposits
$
1,255,979 100.0%
$
1,116,267 100.0%
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 2016; therefore, goodwill was not required to be
retested.
The intangible assets at December 31, 2016 represent the estimated fair value
of the core deposit relationships acquired in the 2016 acquisition of Sierra Vista
Bank of $508,000 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 ten years from the date of acquisition. The
carrying value of intangible assets at December 31, 2016 was $1,383,000, net of
$490,000 in accumulated amortization expense. The carrying value at
December 31, 2015 was $1,024,000, net of $1,741,000 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, 2016 and determined no
impairment was necessary. In addition, management determined that no events
had occurred between the annual evaluation date and December 31, 2016 which
would necessitate further analysis. Amortization expense recognized was $149,000
for 2016, $320,000 for 2015 and $337,000 for 2014.
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,
2017
2018
2019
2020
2021
Thereafter
Total
Estimated Core
Deposit
Intangible
Amortization
$
$
188
188
188
188
188
443
1,383
We have no known foreign deposits. The following table sets forth the average amount of and the average rate paid on certain deposit categories which were in excess
of 10% of average total deposits for the years ended December 31, 2016, 2015, and 2014.
2016
2015
2014
Balance
Rate
Balance
Rate
Balance
Rate
$
$
$
$
$
246,770
249,620
139,656
417,151
0.12% $
222,839
0.10% $
197,630
0.05% $
227,743
0.06% $
229,769
0.38% $
149,383
0.37% $
162,218
-
$
387,931
-
$
348,822
1,144,231
0.09% $
1,065,798
0.09% $
1,006,560
0.11%
0.08%
0.40%
-
0.11%
(Dollars in thousands)
NOW accounts
Money market accounts
Time certificates of deposit
Non-interest bearing demand
Total deposits
60
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
DEPOSITS AND BORROWINGS
(Continued)
The following table sets forth certain financial ratios for the years ended
December 31, 2016, 2015, and 2014.
The following table sets forth the maturity of time certificates of deposit and
other time deposits of $100,000 or more at December 31, 2016.
(In thousands)
Three months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
$
$
34,009
20,108
41,186
14,893
110,196
Net income:
To average assets
To average shareholders’ equity
Dividends declared per share to net
income per share
Average shareholders’ equity to
average assets
2016
2015
2014
1.15%
9.84%
0.90%
8.12%
0.46%
4.06%
19.20%
18.00%
41.67%
11.68%
11.05%
11.27%
There were no short-term or long-term FHLB borrowings as of December 31,
2016 or December 31, 2015. 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 Bank had unsecured lines of credit
with its correspondent banks which, in the aggregate, amounted to $40,000,000
at December 31, 2016 and 2015, at interest rates which vary with market
conditions. As of December 31, 2016, the Company had $400,000 in Federal
funds purchased. The Company had no overnight borrowings outstanding under
these credit facilities at December 31, 2015.
CAPITAL RESOURCES
Capital serves as a source of funds and helps protect depositors and
shareholders against potential losses. Historically, the primary sources of capital
for the Company have been internally generated capital through retained earnings
and the issuance of common and preferred stock.
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 $164,033,000 as of December 31, 2016,
compared to $139,323,000 as of December 31, 2015. The increase in
shareholders’ equity is the result of an increase in retained earnings from our net
income of $15,182,000, the issuance of stock in connection with the Sierra Vista
Bank acquisition in the amount of $16,678,000, the exercise of stock options,
including the related tax benefit of $261,000, and the effect of share-based
compensation expense of $284,000, partially offset by common stock cash
dividends of $2,715,000 and a decrease in accumulated other comprehensive
income (AOCI) of $4,978,000.
During 2016, the Bank declared and paid cash dividends to the Company in
the amount of $13,010,000 in connection with the cash dividends to the
Company’s shareholders approved by the Company’s Board of Directors and the
cash portion of the SVB transaction. 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 $2,715,000 or $0.24
per common share cash dividend to shareholders of record during the year ended
December 31, 2016.
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
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
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.
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, requires bank holding companies and their bank subsidiaries to
maintain substantially more capital than currently required, with a greater
emphasis on common equity.
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
61
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
CAPITAL RESOURCES
(Continued)
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 (through 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 elected at March 31, 2015. The
rules, including alternative requirements for smaller community financial
institutions like the Company and the Bank, will be phased in through 2019.
The implementation of the Basel III framework commenced on January 1, 2015.
As of December 31, 2016 and 2015, the Company and the Bank met or
exceeded all of their capital requirements inclusive of the capital buffer.
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.
The following table presents the Company’s and the Bank’s Regulatory capital
ratios (excluding capital conservation buffer) as of December 31, 2016 and 2015.
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, 2016
December 31, 2015
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$ 122,601
$
56,057
$ 121,079
8.75% $ 105,825
4.00% $
48,950
8.64% $ 104,878
$
$
70,080
56,064
5.00% $
4.00% $
61,148
48,918
$ 120,080
$
43,426
$ 121,079
12.48% $ 103,152
34,650
12.59% $ 104,878
4.50% $
$
$
62,665
43,383
6.50% $
4.50% $
50,017
34,627
$ 122,601
$
57,901
$ 121,079
12.74% $ 105,825
46,200
12.59% $ 104,878
6.00% $
$
$
77,126
57,845
8.00% $
6.00% $
61,560
46,170
$ 132,052
$
77,202
$ 130,530
13.72% $ 115,466
61,601
13.57% $ 114,513
8.00% $
$
$
96,408
77,126
10.00% $
8.00% $
76,949
61,560
8.65%
4.00%
8.58%
5.00%
4.00%
13.44%
4.50%
13.67%
6.50%
4.50%
13.79%
6.00%
13.67%
8.00%
6.00%
15.04%
8.00%
14.93%
10.00%
8.00%
The Company succeeded to all of the rights and obligations of the 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,
2016, 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 five years after issuance, 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,
2016, the rate was 2.48%. Interest expense recognized by the Company for the
years ended December 31, 2016, 2015, and 2014 was $121,000, $99,000 and
$96,000, respectively.
LIQUIDITY
Liquidity management involves our ability to meet cash flow requirements
arising from fluctuations in deposit levels and demands of daily operations, which
include funding of securities purchases, providing for customers’ credit needs and
ongoing repayment of borrowings. Our liquidity is actively managed on a daily
basis and reviewed periodically by our management and Director’s Asset/Liability
Committees. This process is intended to ensure the maintenance of sufficient
funds to meet our needs, including adequate cash flows for off-balance sheet
commitments.
Our primary sources of liquidity are derived from financing activities which
include the acceptance of customer and, to a lesser extent, broker deposits,
Federal funds facilities and advances from the Federal Home Loan Bank of San
Francisco (FHLB). These funding sources are augmented by payments of
principal and interest on loans, the routine maturities and pay downs of securities
from the securities portfolio, the stability of our core deposits and the ability to
sell investment securities. As of December 31, 2016, the Company had
unpledged securities totaling $458,846,000 available as a secondary source of
liquidity and total cash and cash equivalents of $38,568,000. Cash and cash
equivalents at December 31, 2016 decreased 59.24% compared to December 31,
2015. Primary uses of funds include withdrawal of and interest payments on
deposits, origination and purchases of loans, purchases of investment securities,
and payment of operating expenses. Due to the negative impact of the slow
economic recovery, we have been cautiously managing our asset quality.
Consequently, expanding our loan portfolio or finding adequate investments to
utilize some of our excess liquidity has been difficult in the current economic
environment.
As a means of augmenting our liquidity, we have established Federal funds
lines with various correspondent banks. At December 31, 2016, our available
borrowing capacity includes approximately $40,000,000 in Federal funds lines
with our correspondent banks and $351,713,000 in unused FHLB advances. At
December 31, 2016, we were not aware of any information that was reasonably
likely to have a material effect on our liquidity position.
62
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
LIQUIDITY
(Continued)
The following table reflects the Company’s credit lines, balances outstanding,
and pledged collateral at December 31, 2016 and 2015:
Credit Lines
(In thousands)
Unsecured Credit Lines (interest rate varies with
market):
Credit limit
Balance outstanding
Federal Home Loan Bank (interest rate at
prevailing interest rate):
Credit limit
Balance outstanding
Collateral pledged
Fair value of collateral
Federal Reserve Bank (interest rate at prevailing
discount interest rate):
Credit limit
Balance outstanding
Collateral pledged
Fair value of collateral
December 31, December 31,
2016
2015
$
$
$
$
$
$
$
$
$
40,000 $
400 $
40,000
-
351,713
- $
175,160 $
175,218 $
308,356
-
215,223
215,307
9,102 $
- $
2,407 $
2,436 $
2,328
-
2,578
2,598
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
$259,415,000 as of December 31, 2016 compared to $217,166,000 as of
December 31, 2015. For a more detailed discussion of these financial
instruments, see Note 13 to the audited Consolidated Financial Statements in this
Annual Report.
Contractual Obligations
The contractual obligations of the Company, summarized by type of obligation
and contractual maturity, at December 31, 2016, are as follows:
trust preferred securities mature on October 7, 2036, and are redeemable
quarterly at the Company’s option.
In the ordinary course of business, the Company is party to various operating
leases. For operating leases, the dollar balances reflected in the table above are
categorized by the due date of the lease payments. Operating leases represent the
total minimum lease payments under non-cancelable operating leases.
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission (SEC) has issued disclosure guidance
for ‘‘critical accounting policies.’’ The SEC defines ‘‘critical accounting policies’’
as those that require application of management’s most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain and may change in future periods.
Our accounting policies are integral to understanding the results reported. Our
significant accounting policies are described in detail in Note 1 in the audited
Consolidated Financial Statements. Not all of the significant accounting policies
presented in Note 1 of the audited Consolidated Financial Statements in this
Annual Report require management to make difficult, subjective or complex
judgments or estimates.
Use of Estimates
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amount of assets, liabilities,
revenues and expenses. On an ongoing basis, management evaluates the estimates
used. Estimates are based upon historical experience, current economic conditions
and other factors that management considers reasonable under the circumstances.
These estimates result in judgments regarding the carrying values of assets and
liabilities when these values are not readily available from other sources, as well as
assessing and identifying the accounting treatments of contingencies and
commitments. These estimates and assumptions affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
may differ from these estimates under different assumptions.
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.
Less Than
One Year
One to
Three
Years
Three to
Five
Years
After
Five
Years
Total
Allowance for Credit Losses
(In thousands)
Deposits
Subordinated
debentures
Operating leases
$ 1,232,953 $ 19,089 $
3,225 $
712 $ 1,255,979
-
2,350
-
3,498
-
2,267
5,155
1,425
5,155
9,540
Total
$ 1,235,303 $ 22,587 $
5,492 $
7,292 $ 1,270,674
Deposits represent both non-interest bearing and interest bearing deposits.
Interest bearing deposits include interest bearing transaction accounts, money
market and savings deposits and certificates of deposit. Deposits with
indeterminate maturities, such as demand, savings and money market accounts
are reflected as obligations due in less than one year.
Subordinated debentures represent notes issued to a capital trust which was
formed solely for the purpose of issuing trust preferred securities. These
subordinated debentures were acquired as a part of the merger with Service 1st.
The aggregate amount indicated above represents the full amount of the
contractual obligation. All of these securities are variable rate instruments. The
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.
63
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
CRITICAL ACCOUNTING POLICIES
(Continued)
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, 2016, 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
Quantitative and Qualitative Disclosures About Market Risk for further
discussion.
64
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, 2016,
75.64% 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, 2016, 85.39% 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
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 and engages
consultants 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, 2016. 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, 2016 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, 2016, 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,
2016
Interest Income
Rates at
2016
$
64,907 $
62,135
59,381
56,651
54,119
51,686
10,788
8,016
5,262
2,532
-
(2,433)
19.93%
14.81%
9.72%
4.68%
-
(4.50)%
65
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, 2016 and 2015:
Rate Type
(Dollars in thousands)
Variable rate
Fixed rate
December 31, 2016
December 31, 2015
Balance
Percent of
Total
Balance
Percent of
Total
$ 571,325
184,036
75.64% $ 471,757
24.36% 126,354
78.87%
21.13%
Total gross loans
$ 755,361
100.00% $ 598,111
100.00%
Approximately 75.64% of our loan portfolio is tied to adjustable rate indices
and 34.09% of our loan portfolio reprices within 90 days. As of December 31,
2016, we had 2,511 commercial and real estate loans totaling $444,796,000 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, 2016 and 2015:
Repricing
(Dollars in thousands)
< 1 Year
1-3 Years
3-5 Years
> 5 Years
December 31, 2016
December 31, 2015
Balance
$ 309,397
153,680
183,834
108,450
Percent of
Total
Balance
Percent of
Total
40.95% $ 250,705
20.35% 124,385
24.34% 139,417
83,604
14.36%
41.91%
20.80%
23.31%
13.98%
Total gross loans
$ 755,361
100.00% $ 598,111
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.
66
Stock Price
Information
The Company’s common stock is listed for trading on the NASDAQ Capital Market under the ticker symbol CVCY. As of March 7, 2017, the Company had approximately
971 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, 2015
June 30, 2015
September 30, 2015
December 31, 2015
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
$
$
Sales Prices for the Company’s Common Stock
High
12.16
12.35
12.50
12.50
12.49
14.64
16.42
20.00
Low
9.55
10.25
10.66
10.51
9.45
10.78
13.30
13.75
The Company paid $0.24 and $0.18 per year in common share cash dividends in 2016 and 2015, 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 of this Annual Report.
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 Le-Ann Ruiz, Corporate Secretary at (800) 298-1775.
67
WHERE GIVING BACK IS SECOND NATURE
At Central Valley Community Bank, giving back to our communities is a natural part of who we are and what
we do. We live, work and raise families here, just like our customers. So we invest regularly to help tackle the
challenges facing the San Joaquin Valley and Greater Sacramento Region. And our people give generously of their
time and talents to support community causes and build the vitality of local businesses. In every Bank branch, our
community pride is in full bloom as we partner with these worthwhile organizations throughout this special
region we call home. Naturally.
Ag Lenders Society of California
Alzheimer’s Foundation of America
Alzheimer’s Society
American Bankers Association
American Cancer Society
American Heart Association
American Institute of Certified Public Accountants
American Red Cross
Arts Consortium
Association of Commercial Real Estate
Boys and Girls Clubs of Fresno County
Boys & Girls Clubs of the Sequoias
Building Industry Association of Tulare and Kings County
Business Network International
Business Organization of Old Town
California Armenian Home
California Bankers Association
California Chamber of Commerce
California Community Builders Inc.
California Farm Bureau Federation
California Medical Group
California State University, Fresno
California State University, Fresno – Alumni Association
California State University, Fresno – Craig School of Business
California State University, Fresno – Maddy Institute
California State University, Fresno – University Business Center
California State University, Fresno – Bulldog Foundation
Carnegie Arts Center
Celebrant Singers
Center for Land-Based Learning
Central California Society for Prevention of Cruelty to Animals
Central California Women’s Conference
Central Sierra Historical Society
Central Valley Chapter of the Risk Management Association
Central Valley Christian School
Central Valley Community Foundation
Central Valley SCORE
Central Valley Sons of Italy Foundation
Certified Development Corporation of Tulare County
City of Exeter Community Services
Clovis American Legion Post #147
Clovis Chamber of Commerce
Clovis Community Foundation
Clovis Museum
Clovis Rodeo Association
Coarsegold Chamber of Commerce
Community Food Bank
Court Appointed Special Advocates of Fresno & Madera Counties
68
Court Appointed Special Advocates of Sacramento County
Court Appointed Special Advocates of Stanislaus County
Court Appointed Special Advocates of El Dorado County
Delta College Foundation
Department of Consumer Affairs
Doug McDonald Scholarship
Downtown Visalia Foundation
Eastern Fresno County Historical Society
Eastern Madera County Chamber of Commerce
Economic Development Corporation
El Concilo
El Dorado Food Bank
El Dorado Park Community Development Corporation
Emergency Food Bank of Greater Stockton
Environmental Bankers Association
Exceptional Parents Children’s Center Unlimited
Executives Association of Tulare County
Exeter Ag Boosters
Exeter Chamber of Commerce
Exeter Eels Swim Team
Exeter Sober Graduation Inc.
Fair Oaks Chamber of Commerce
Fair Oaks Historical Society
Fig Garden Swim & Racquet Club
Financial Credit Networks, Inc.
Financial Services Information Sharing and Analysis Center
Folsom Family Expo
Folsom Historic Society
Folsom, El Dorado & Sacramento Historical Railroad Association
Foundation for Clovis Schools
Foundation for Fresno County Public Library
Fresno Area Hispanic Foundation
Fresno Art Museum
Fresno Association of REALTORS
Fresno Business Council
Fresno City & County Chamber of Commerce
Fresno County Economic Development Corporation
Fresno County Farm Bureau
Fresno Fire Chiefs Foundation
Fresno Metro Black Chamber of Commerce
Fresno Philharmonic
Fresno Rescue Mission
Fresno Temple Church of God in Christ
Fresno Women’s Trade Club
Give Every Child a Chance
Grand Theatre Center for the Arts
Greater Fresno Area Chamber of Commerce
Greater Merced Chamber of Commerce
(CONTINUED)
Greater Stockton Chamber of Commerce
Habitat for Humanity of Tulare County
Hands in the Community
Hands on Central California
Hinds Hospice
Independent Community Bankers of America
Joint Services Honors Command
Junior League of San Joaquin County
Kaweah Delta Health Care District
Kaweah Delta Hospital Foundation
Kerman Boys Basketball Boosters
Kerman Chamber of Commerce
Kerman Youth Soccer League
Kids for Christmas
Kings & Tulare County Homeless Alliance
Kings County Farm Bureau
KVIE Public Television
Latinas Unidas
Leadership Stockton
Leukemia & Lymphoma Society Central California Chapter
LifeSTEPS
Lions Clubs International
Lodi Chamber of Commerce
Lodi Police Foundation
Lodi Tokay Rotary Club
LOEL Center & Gardens
Madera Association of REALTORS
Madera Chamber of Commerce
Madera Community Hospital Foundation
Madera County Food Bank
Marjaree Mason Center
Merced County Association of REALTORS
Merced County Chamber of Commerce
Merced County Fair
Merced County Farm Bureau
Merced County Food Bank
Merced Police Officers’ Association
Modesto Chamber of Commerce
Modesto Christian School
Momentum Dance Academy
Mountain Community Recreation Foundation
National Association of Government Guaranteed Lenders
National Association of Mortgage Brokers
National Rotary Association
Networking for Women of Tulare County
North State Building Industry Association
Oakdale Educational Foundation
Oakhurst Area Chamber of Commerce
Oakhurst Community Center
Oakhurst Sierra Sunrise Rotary
Opening Doors Inc.
Parenting Network
Pine Ridge Elementary Boosters
Placerville Kiwanis Club
Poverello House
Powerhouse Ministries
Rainbow School
Reach Out and Read San Joaquin
Redwood Ranger Bank Booster Club
Regents of the University of California
Relay For Life
Rocklin Youth Soccer Club
Roseville Area Chamber of Commerce
Rotary Club of Cameron Park
Rotary Club of Clovis
Rotary Club of Folsom
Rotary Club of Fresno
Rotary Club of Kerman
Rotary Club of Madera
Rotary Club of Merced
Rotary Club of North Stockton
Rotary Club of Sacramento
Rotary International
Sacramento Food Bank & Family Services
Sacramento Master Singers
Sacramento Metropolitan Chamber of Commerce
Sacramento Regional Builders Exchange
San Joaquin County Farm Bureau
San Joaquin River Parkway and Conservation Trust, Inc.
San Joaquin Valley Town Hall
Second Harvest Food Bank
Sequoia Council of the Boy Scouts of America
Sierra Foothill Conservancy
Sierra High School Future Farmers of America
Sierra Lions Club
Sierra Women’s Service Club
Signature User Group
SKP Park of the Sierras
Society for Human Resource Management
Society of St. Vincent De Paul
Soroptimist International of Madera
Soroptimist International of the Sierras Inc.
Southeast Fresno Community Economic Development Association
Stanislaus County Farm Bureau
Stockton Athletic Hall of Fame
Stockton Shelter for the Homeless
Stockton Sunrise Rotary Club
The Bank CEO Network
The Buddhist Church of Stockton
The Downtown Fresno Partnership
The Exeter Art Gallery and Museum
The Glass Slipper
The Risk Management Association – Central Valley Chapter
The Risk Management Association – Fresno Chapter
The Risk Management Association – Sacramento Chapter
The Roman Catholic Diocese of Fresno
The Salvation Army
Tracy Chamber of Commerce
Tracy High School Sports Boosters
Tracy Sunrise Rotary
Traver Joint Elementary District
Trusted Advisory Group
Tulare County Economic Development Corporation
Tulare County Farm Bureau
Tulare Kings Hispanic Chamber of Commerce
Twin Lakes Food Bank
United Way California Capital Region
United Way of Fresno and Madera Counties
United Way of Merced County
United Way of San Joaquin County
United Way of Stanislaus County
United Way of Tulare County
University of the Pacific
Valley Children’s Hospital Alegria Guild
Valley Children’s Hospital Foundation
Valley Children’s Hospital La Feliz Guild
Valley Children’s Hospital La Sierra Guild
Valley Crime Stoppers
Visalia Breakfast Lions Club
Visalia Chamber of Commerce
Visalia Economic Development Corporation
Visalia Enforcers Association
Visalia Police Activities League
Visalia Senior Center
Visalia Sunset Rotary Club
West Fresno Family Resource Center
West Visalia Kiwanis Club
Western Payments Alliance
69
Notes
70
Notes
71
Fresno Downtown
2404 Tulare Street
Fresno, CA 93721
(559) 268-6806
River Park
8375 North Fresno Street
Fresno, CA 93720
(559) 447-3350
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
Roseville
2999 Douglas Boulevard,
Suite 160
Roseville, CA 95661
(916) 859-2550
Stockton
2800 West March Lane,
Suite 120
Stockton, CA 95219
(209) 956-7800
Tracy
60 West 10th Street
Tracy, CA 95376
(209) 830-6995
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
1044 East Herndon Avenue,
Suite 106
Fresno, CA 93720
(559) 323-3384
Investing In Relationships.
www.cvcb.com
Customer Service
(800) 298-1775
(559) 298-1775
Cameron Park
3311 Coach Lane
Cameron Park, CA 95682
(530) 676-3400
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
Fair Oaks
10123 Fair Oaks Boulevard
Fair Oaks, CA 95628
(916) 293-4910
Folsom
1710 Prairie City Road,
Suite 100
Folsom, CA 95630
(916) 850-1500
Fresno
Corporate Office
7100 North Financial Drive,
Suite 101
Fresno, CA 93720
(559) 298-1775
Fig Garden Village
5180 North Palm,
Suite 105
Fresno, CA 93704
(559) 221-2760
72