GROWING THE ECONOMY.
FROM OUR FIELDS TO OUR CITIES AND BEYOND.
As Central Valley Community Bancorp reflects on another successful year, we take pride in the Bank’s legacy of
growth - the result of strategic planning, visionary leadership and the support of our team and customers. We
also take pride in the economic growth that results from our investment in the relationships, businesses and
the communities we serve. From the productive fields to city cores supported by family-owned businesses –
growth in every category will serve to strengthen and sustain our territory for many years.
2017: STRATEGIC GROWTH, SUSTAINED STRENGTH
The year 2017 will be remembered as a solid year for Central Valley Community Bank in terms of
financial performance, market expansion, and leadership and relationship growth – all indicators for
continued success into the future.
The year began with measured optimism throughout our economy.
There was hope of healthcare and regulatory reform along with an outline
of tax reform. Our region’s economy was continuing its slow recovery and
business prospects looked promising. By mid-year, it became clear that a
number of those reforms would not be forthcoming; that is, until tax
reform was enacted at year-end. While ushering in a future of lower
corporate tax rates, this reform also affected the fourth quarter financial
results of institutions like ours.
Notwithstanding the remeasurement of our net deferred tax assets that
resulted from the 2017 tax law changes, the Company’s core business
continued to expand, benefiting from our 38-year community bank
relationship model that’s consistently delivered throughout our territory.
Total average assets for the year ended December 31, 2017, were
$1,491,696,000 compared to $1,321,007,000, for the year ended
December 31, 2016, an increase of 12.9%. Total average loans increased
22.7%, from $646,573,000 for the year ended December 31, 2016, to
$793,343,000 for the year ended December 31, 2017. Total average
deposits increased 12.2% to $1,284,305,000 for the year ended
December 31, 2017. Additionally, the Company paid a $0.24 per
share cash dividend on its common stock. The total return performance
of our stock over the past five years has been notable. An investment of
$100 five years ago in our stock produced a total return as of
December 31, 2017 of $283.05, which represents a compounded
annual growth rate of 23.1%.
Timely Mergers, Tremendous Results
We experienced accelerated growth in Greater Sacramento with the
acquisitions of Sierra Vista Bank in late 2016 and Folsom Lake Bank in
late 2017. These acquisitions resulted in diversification in our territory,
improving the Company’s prospects for 2018 and beyond.
In less than two years, our Greater Sacramento footprint has expanded
from one branch focused primarily on commercial lending, to multiple
full-service branches spanning Folsom, Fair Oaks, Cameron Park,
Rancho Cordova and Roseville, helping fulfill our long-term strategy
for Northern California expansion.
On the subject of transitions, Raymond James Financial, Inc. now
serves as a resource for our Central Valley Investment Services (CVIS)
team and clients – our two organizations sharing a like-minded
commitment to providing the highest standards of service and
innovative investment solutions.
2
Optimizing Our Team & Leadership
The Company added Karen Musson and Robert “Bob” Flautt to our
Board of Directors this past year. Karen brings many years of experience
leading her family-owned agribusiness company, and is an active board
member for many community and philanthropic organizations. Bob
brings over 40 years of bank leadership to our Board, most recently serving
as President, CEO and board member of Folsom Lake Bank. He has also
shared his expertise with the banking industry through service to the
Western Bankers Association, formerly the California Bankers Association,
for many years and is active in several community organizations.
Karen and Bob’s financial experience, leadership, business advocacy and
community stewardship complement those of our other Board members,
and we look forward to their contributions to the Company’s success.
The Bank’s growth in recent years prompted the creation of a new
executive level position to ensure that our community banking model
continues to be managed with excellence. That position was filled by
James Kim, Executive Vice President, Chief Administrative Officer. As
head of the Administrative Division, James oversees central operations,
information technology and facilities management, among other
responsibilities. In addition, Dawn Cagle joins the Managing Committee
as Senior Vice President, Human Resources Director due to a retirement.
We are pleased to welcome James and Dawn to our Company and
appreciate the leadership and innovation they each bring to enhance our
culture of success.
Investing In Our Communities
Financially supporting beneficial organizations and projects is just one way
in which Central Valley Community Bank invests in the communities we
serve. We also count it a privilege to invest our time and talents helping
these local organizations succeed, and helping our communities grow
stronger as a result.
Putting that philosophy into action takes the participation of our nearly
345 team members, as well as the support of our communities.
In addition to delivering corporate financial support we are proud to
report that team members logged over 4,200 hours serving 143 nonprofit
and service organizations throughout our territory. In total, the Bank
served 192 nonprofit, civic and trade organizations in 2017, covering a
wide range of local charities, philanthropies and business groups. The
number of local community organizations we serve has nearly doubled in
the last ten years.
Our partnerships with the University of the Pacific Institute for Family
Business and the Fresno State Institute for Family Business have continued
to thrive. These partnerships include a dedicated resource center that helps
family businesses address common issues and meet their challenges through
interactive forums, workshops and events. Through each of these programs,
family business owners, managers and family members are brought together
to work through succession transitions, cast vision and enact strategic plans
for the business and the family. This, among other services the Bank offers,
has helped numerous family business customers navigate their future.
In fall 2017, members of our Bank team delivered a presentation on
cybersecurity with the Fresno State Institute for Family Business.
Presenters addressed the online security challenges faced by banks and, while
acknowledging that no system is entirely fail-proof, emphasized the
measures taken by Central Valley Community Bank to ensure its online
platforms are secure. They stressed the need for all businesses to stay abreast
on this ever-changing subject, and to continuously train employees on best
practices for prevention.
Our team continues to be deeply involved with SCORE (Service Corps
of Retired Executives) – a nonprofit organization providing free business
mentoring, educational workshops and seminars to small businesses
located in Central California and the Greater Sacramento Region.
Our work with SCORE has resulted in many success stories for nonprofits
and small businesses.
Central Valley Community Bank continues to emerge as a trusted resource
and leader in the fight against identity theft and cybercrimes. Among the
ways we help consumers protect themselves is through informational
seminars and, for the eleventh consecutive year, free document shredding
events. Once again we partnered with Pacific Shredding and Valley Crime
Stoppers to offer free shredding services to customers, businesses and
individuals at 18 Bank offices throughout the San Joaquin Valley and
Greater Sacramento Region.
During the holiday season, the Bank sponsored its fourth annual Business
Food Fund Challenge to help local families in need. The challenge was
issued to businesses throughout our region, resulting in the Bank’s
contribution of $8,500 to ten local food banks, which provided
approximately 76,500 pounds of food to those in need. To date, the
program has raised $25,500, and over 229,500 pounds of food.
Enhancing Customer Convenience, Education & Security
Among the innovations introduced to customers in 2017 were Loan
eStatements for Personal and Business loan accounts, which allow
customers to easily and safely access their loans through the Bank’s
eStatements platform.
Additionally, the Bank enhanced our online security for Personal Online
Banking, implementing two-factor authentication which protects personal
information more effectively than previous methods.
Another Year Of Honors & Recognition
Our financial performance continues to receive industry acclaim and
national recognition. Some of our 2017 highlights included:
• Being ranked 19 out of 100 by S&P Global Marketing Intelligence for
“Top Performing Community Banks Between $1-$10 Billion in Assets.”
• Earning the “Premier” rating in the 2017 Findley Reports which publishes
the most comprehensive analysis and comparison of California’s financial
institutions. Recipients of Findley Reports ratings are recognized for
achieving exceptional performance.
• Receiving the 5-Star Superior rating from Bauer Financial, a distinction it
has earned for 19 of the past 21 quarters. This rating identifies financial
institutions that are among the nation’s strongest and safest, operating above
regulatory capital requirements.
• Being honored for the fourth consecutive year as “Best Business Bank” in
The Business Journal’s 2017 Best of Central Valley Business Awards, and
runner up for the “Best Company to Work For.”
• Once again receiving the honor of Bank of the Year by CenCal Business
Group for being the #1 SBA 504 lender in the Central Valley.
• Receiving two American Advertising Awards presented through the Fresno
Advertising Federation: a Silver “Addy” for our website design, and a Bronze
“Addy” for our “Greater Banking Now In Greater Sacramento” campaign.
2018 Outlook
As we enter 2018, the Company’s prospects look bright. We have
successfully integrated both recent acquisitions and our teams are
expanding relationships. Economic indicators such as growth in housing
starts, growth in payroll employment, lowered unemployment rates and
steady population growth all point to a continuation of the recovery in
our territory.
We are, however, carefully monitoring our region’s low rainfall and
snowpack. Without improvement, our territory is at risk of heading back
into drought conditions. While reservoirs are well above 15-year averages
now, it will only take one or two dry seasons to regress into drought. We are
well-acquainted with this situation, and remain cautious as agriculture is
such a vital economic driver, with much of our territory relying on the
strength of agribusiness for the health of the overall economy.
While the Bank can proudly reflect on many past accomplishments, we will
strive to exceed our own expectations in 2018 with a continued emphasis
on growing loans, improving efficiencies and managing expenses. All while
relentlessly adhering to our Core Values of teamwork, integrity, leadership,
loyalty, caring, and trustworthiness.
For Central Valley Community Bancorp, we cannot reflect on the successes
of 2017 without crediting our team for another year of excellent
performance and leadership, our shareholders for a year of confidence and
trust, and our valued customers and communities for a year of rewarding
relationships. Investing in those relationships has been our privilege, and the
dividends are evident both in the growth of the Bank and in the growing
strength of the communities we serve.
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 Bancorp (the “Company”) was established on November 15, 2000, as the
holding company for Central Valley Community Bank (the “Bank”) and is registered as a bank
holding company with the Board of Governors of the Federal Reserve System. The 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, 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 Bank operates full-service offices in 18 communities within the San
Joaquin Valley and Greater Sacramento Region, and employs nearly 345 team
members. Offices are located in Cameron Park, Clovis, Exeter, Fair Oaks,
Folsom, Fresno, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather,
Rancho Cordova, Roseville, Stockton, Tracy and Visalia. Additionally, the
Bank operates Commercial Real Estate, SBA and Agribusiness Lending
Departments. Central Valley Investment Services are provided by Raymond
James Financial, Inc.
With assets exceeding $1.6 billion as of December 31, 2017, Central Valley
Community Bank has grown into a well-capitalized institution, with a proven
track record of financial strength, security and stability. The Company’s
financial performance continues to receive industry acclaim and national
recognition. 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 nearly four-decade 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, eStatements and custom-tailored Cash
Management services. In addition, ATMs are located at all offices, and
customers have free access to ATMs nationwide within the MoneyPass
network, BankLine provides 24-hour telephone banking and extended days
and banking hours are offered at select offices.
4
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 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, the #1 SBA 504 Lender in the
Central Valley and CenCal Business Group’s Bank of the Year.
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 Awards” where the Bank was
honored for the fourth consecutive year as “Best Business Bank” and was
second runner-up in the “Best Company to Work For” category in the
four-county Central Valley.
A Firm Foundation For Building A Strong Future
Thanks to the vision of the Company’s leadership, as well as 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 values that formed the
Bank’s firm foundation.
B O A R D O F D I R E C TO R S
Investing In Relationships Since 1980
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.
William S. Smittcamp
President and Owner,
Wawona Frozen Foods
Louis C. McMurray
President,
Charles McMurray Co.
Edwin S. Darden, Jr.
Architect,
Darden Architects, Inc.
F.T. “Tommy” Elliott, IV
Owner,
Wileman Bros. & Elliott, Inc.
Kaweah Container, Inc.
Gary D. Gall
Retired Bank Executive
Karen A. Musson
Marketing and Media,
Gar Tootelian, Inc.
Robert J. Flautt
Retired Bank Executive
5
STRENGTH. EXPERIENCE. PARTNERSHIP. SATISFACTION.
ALL FROM ONE TERRIFIC TEAM.
Our people have always been the heart and soul of Central Valley Community Bank, a truth revealed daily in each
of our core values: leadership, caring, integrity, teamwork, loyalty and trustworthiness. The result? A culture of strength,
where empowerment benefits team members and customers alike. A wealth of experience that comes from working
closely with customers from diverse businesses and backgrounds throughout our territory. A sense of partnership as we
become advocates for our customers, whether providing a business owner with strategic guidance or helping a student
with financial literacy. Ultimately, it’s our people – our team – that give customers the distinctively authentic,
personal brand of satisfaction that’s unique to Central Valley Community Bank.
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
James J. Kim
Executive Vice President,
Chief Administrative Officer
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
Gina Peragine
Gina Peragine
Senior Vice President,
Senior Vice President,
Loan Servicing
Loan Servicing
Steve Romeo
Steve Romeo
Senior Vice President,
Senior Vice President,
Sacramento Commercial Banking
Sacramento Commercial Banking
Team Leader
Team Leader
Rick Shaeffer
Rick Shaeffer
Senior Vice President,
Senior Vice President,
Agribusiness Team Leader
Agribusiness Team Leader
Karen Smith
Karen Smith
Senior Vice President,
Senior Vice President,
Director of Client Relationships
Director of Client Relationships
Mark Smith
Mark Smith
Senior Vice President,
Senior Vice President,
Central Valley Commercial Team Leader
Central Valley Commercial Team Leader
Dorothy Thomas
Dorothy Thomas
Senior Vice President,
Senior Vice President,
SBA Manager
SBA Manager
Theodore Thome
Theodore Thome
Senior Vice President,
Senior Vice President,
Mid-Valley Commercial Team Leader
Mid-Valley Commercial Team Leader
Stefani Woods
Stefani Woods
Senior Vice President,
Senior Vice President,
South Valley Commercial Team Leader
South Valley Commercial Team Leader
Senior Vice Presidents
Dawn Cagle
Senior Vice President,
Human Resources
Cathy Chatoian
Senior Vice President,
Cash Management Team Leader
Christopher Clark
Senior Vice President,
Senior Credit Officer
Dawn Crusinberry
Senior Vice President,
Controller
Daniel Demmers
Senior Vice President,
Director of Information Technology
Rod Geist
Senior Vice President,
Director of Business Development
Teresa Gilio
Senior Vice President,
Central Operations
Blaine Lauhon
Senior Vice President,
Senior Credit Officer
Gary Litzsinger
Senior Vice President,
Senior Risk Officer
Jeff Pace
Senior Vice President,
Real Estate Team Leader
6
Mission Statement
As A Full Service Bank, We Are Committed To:
Providing a full range of financial services desired by our
customers, while providing superior customer service
delivered in a highly professional and personal manner.
Maintaining a positive work environment and investing
in each individual to “be the best they can be.”
Contributing to the quality of life in the communities
we serve.
Continuing to maximize shareholder value.
Being the “Bank of Choice” for customers and employees!
Core Values
Leadership
Caring
Integrity
Teamwork
Loyalty
Trustworthiness
Exceptional Employees
Each year Central Valley Community Bank’s top-performing
team members are recognized.
2017 President’s Award
Daniel Medina
Network Associate
Judy Silicato
Vice President,
Branch Manager
2017 Circle of Elite
Nora Andrade
Agri-Business
Administrative Loan
Coordinator
Connie Martinez
Assistant Vice President,
Account Adjustments Supervisor
Jacquie Ashjian
Vice President,
Credit Officer
Nathan Carlson
Vice President,
Branch Manager
Dalyah Davidson
Personal Banker
Jeff Foreman
Financial Services
Representative
Elayne Myers
Product Manager
Jean Ornelas
Vice President,
Residential Construction
Loan Officer
Susan Rodriguez
Accountant
LeAnn Ruiz
Assistant Vice President,
Executive Administration Assistant,
Assistant Corporate Secretary
2017 Team Awards
Community Banking Team:
Clovis Main Merchant Vault
Commercial Banking Team:
Sacramento
Support Teams:
Accounting and Consumer/Small Business Underwriting
Central Valley Community Bank Executive Management
From Left to Right: David A. Kinross, Patrick J. Carman, Dawn M. Cagle, James M. Ford, Gary D. Quisenberry, Lydia E. Shaw and James J. Kim
7
T R E N D A N A LY S I S
Central Valley Community Bancorp
2
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2013
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2013
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2017
2013
2014
2015
2016
2017
Net Income (In Thousands)
Diluted Earnings Per Share
Average Total Loans (In Thousands)
,
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2013
2014
2015
2016
2017
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
283.05
Central Valley
Community
Bancorp
234.58
SNL Bank
NASDAQ Index
193.58
Russell 2000
276.81
222.81
168.85
148.09
143.73
138.82
148.42
148.86
145.62
163.77
160.70
139.19
100.00
100.00
100.00
2012
2013
2014
2015
2016
2017
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 Bank NASDAQ Index, measured as of the last trading day of each year shown.
The graph assumes an investment of $100 on December 31, 2012 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: S&P Global Market Intelligence
© 2017
9
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2017 and 2016 (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 $538,692 at December 31, 2017 and $548,640 at
December 31, 2016)
Loans, less allowance for credit losses of $8,778 at December 31, 2017 and $9,326 at December 31, 2016
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 12)
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: 13,696,722 at
December 31, 2017 and 12,143,815 at December 31, 2016
Retained earnings
Accumulated other comprehensive (loss) income, net of tax
Total shareholders’ equity
$
$
$
2017
2016
$
38,286
62,080
17
100,383
542,704
891,901
9,398
27,807
6,843
53,777
3,027
25,815
28,185
10,368
15
38,568
547,749
747,302
9,407
23,189
5,594
40,231
1,383
29,900
1,661,655
$
1,443,323
$
585,039
840,648
1,425,687
-
5,155
21,254
495,815
760,164
1,255,979
400
5,155
17,756
1,452,096
1,279,290
-
103,314
103,419
2,826
209,559
-
71,645
92,904
(516)
164,033
Total liabilities and shareholders’ equity
$
1,661,655
$
1,443,323
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, 2017, 2016, and 2015 (In thousands, except per share amounts)
2017
2016
2015
Interest income:
Interest and fees on loans
Interest on deposits in other banks
Interest and dividends on investment securities:
Taxable
Exempt from Federal income taxes
Total interest income
Interest expense:
Interest on deposits
Interest on junior subordinated deferrable interest debentures
Other
Total interest expense
Net interest income before provision for credit losses
(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 for income taxes
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
Cash dividends per common share
$
$
$
$
$
43,534
424
6,526
6,892
57,376
969
147
21
1,137
56,239
(1,150)
57,389
3,053
621
1,458
706
2,802
-
443
1,753
10,836
24,738
5,186
652
1,740
1,509
750
818
597
638
705
1,828
234
5,011
44,406
23,819
9,793
14,026
1.12
1.10
0.24
$
$
$
$
$
34,051
289
5,876
6,460
46,676
975
121
-
1,096
45,580
(5,850)
51,430
2,849
558
1,228
1,083
1,920
(136)
630
1,459
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
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
30,504
210
4,793
6,315
41,822
948
99
-
1,047
40,775
600
40,175
2,970
596
1,197
1,042
1,495
-
580
1,507
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
11
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Comprehensive Income
For the Years Ended December 31, 2017, 2016, and 2015 (In thousands)
NET INCOME
Other Comprehensive Income (Loss):
Unrealized gains (losses) on securities:
Unrealized holdings gains (losses) 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 income (loss), before tax
Tax (expense) benefit related to items of other comprehensive income
Total other comprehensive income (loss)
Comprehensive income
2017
2016
2015
$
14,026
$
15,182
$
10,964
7,705
2,802
-
-
-
4,903
(2,062)
2,841
(9,924)
1,224
(136)
2,647
(64)
(8,429)
3,451
(4,978)
$
16,867
$
10,204
$
59
1,481
-
-
(78)
(1,500)
585
(915)
10,049
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, 2017, 2016, and 2015 (In thousands, except share amounts)
Balance, January 1, 2015
Net income
Other comprehensive loss
Restricted stock granted, forfeited and related tax benefit
Cash dividend ($0.18 per common share)
Stock-based compensation expense
Stock options exercised and related tax benefit
Balance, December 31, 2015
Net income
Other comprehensive loss
Restricted stock granted, forfeited and related tax benefit
Stock issued for acquisition
Stock-based compensation expense
Cash dividend ($0.24 per common share)
Stock options exercised and related tax benefit
Balance, December 31, 2016
Net income
Other comprehensive income
Reclassification associated with the adoption of ASU 2018-02
Stock issued for acquisition
Restricted stock granted, (forfeited) and related tax benefit
Stock issued under employee stock purchase plan
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
$
$
10,980,440
-
-
7,263
-
-
9,070
10,996,773
-
-
52,911
1,058,851
-
-
35,280
12,143,815
-
-
-
1,276,888
(2,360)
2,441
-
-
275,938
54,216
-
-
(96)
-
238
66
54,424
-
-
(2)
16,678
284
-
261
71,645
-
-
-
28,405
-
45
384
-
2,835
$
71,452
10,964
-
-
(1,979)
-
-
80,437
15,182
-
-
-
-
(2,715)
-
92,904
14,026
-
(501)
-
-
-
-
(3,010)
-
$
5,377
-
(915)
-
-
-
-
4,462
-
(4,978)
-
-
-
-
-
(516)
-
2,841
501
-
-
-
-
-
-
131,045
10,964
(915)
(96)
(1,979)
238
66
139,323
15,182
(4,978)
(2)
16,678
284
(2,715)
261
164,033
14,026
2,841
-
28,405
-
45
384
(3,010)
2,835
Balance, December 31, 2017
13,696,722
$ 103,314
$ 103,419
$
2,826
$
209,559
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, 2017, 2016, and 2015 (In thousands)
2017
2016
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Net increase 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 provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, interest-bearing and savings deposits
Net decrease in time deposits
Repayments of short-term borrowings to Federal Home Loan Bank
Proceeds of borrowings from other financial institutions
Repayments of borrowings from other financial institutions
Proceeds from stock issued under employee stock purchase plan
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
Increase (decrease) in cash and cash equivalents
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes
Non-cash investing and financing activities:
Transfer of securities from held-to-maturity to available-for-sale
Unrealized gain on transfer of securities from held-to-maturity to available-for-sale
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 acquisitions
The accompanying notes are an integral part of these consolidated financial statements.
14
$
14,026
$
15,182
$
(92)
1,429
(766)
8,519
384
-
(1,150)
-
(2,802)
-
-
-
(621)
-
(2,263)
1,370
7,184
25,218
26,279
(226,740)
228,405
-
44,956
(25,542)
-
(859)
-
-
-
-
46,499
45,672
(48,044)
(7,000)
-
(400)
45
2,835
-
(3,010)
(9,902)
61,815
38,568
(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
$
$
$
$
$
$
$
$
$
100,383
$
38,568
$
1,171
4,720
-
-
-
-
-
28,405
$
$
$
$
$
$
$
$
1,053
5,840
23,131
526
-
363
-
16,678
$
$
$
$
$
$
$
$
10,964
(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
94,617
1,059
1,865
-
-
227
-
121
-
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 24 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 the Company and the Bank 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. Intercompany 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. During the year ended December 31, 2017,
there were no transfers between categories. For the year ended December 31,
2016 management transferred $23.1 million of securities from held-to-maturity
to available-for-sale. 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 delinquent 90 days or more 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 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
collection of all contractual payments was not considered probable at the date of
acquisition. This determination is made 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
the 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 2017. 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 Company’s investment in Low Income Housing Tax Credit Funds is
reported in other assets on the consolidated balance sheet.
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 $70,000 at December 31, 2017 and $362,000 at
December 31, 2016, and is included in other assets on the consolidated balance
sheets.
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, 2017 and 2016 represents the excess of the purchase price of
acquired businesses over the net fair value of assets, including identified
intangible 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 2017, 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, 2017 represent the
estimated fair value of the core deposit relationships acquired in business
combinations. 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, 2017 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 2017, so core deposit intangibles were not
required to be retested.
Loan Commitments and Related Financial Instruments - Financial instruments
include off-balance sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The
face amount of these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded.
18
Income Taxes - The Company files its income taxes on a consolidated basis with
the Bank. 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. Additionally, the
compensation expense for the Company’s employee stock ownership plan is based
on the market price of the shares as they are committed to be released to
participant accounts. Compensation cost is recognized over the required service
period, generally defined as the vesting period. For awards with graded vesting,
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
compensation cost is recognized on a straight-line basis over the requisite service
period for the entire award.
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) 2014-09 - Revenue from Contracts
with Customers (Topic 606): Revenue from Contracts with Customers was issued in
May 2014. This ASU is the result of a joint project initiated by the FASB and
the International Accounting Standards Board (IASB) to clarify the principles for
recognizing revenue, and to develop common revenue standards and disclosure
requirements that would: (1) remove inconsistencies and weaknesses in revenue
requirements; (2) provide a more robust framework for addressing revenue issues;
(3) improve comparability of revenue recognition practices across entities,
industries, jurisdictions, and capital markets; (4) provide more useful information
to users of financial statements through improved disclosures; and (5) simplify
the preparation of financial statements by reducing the number of requirements
to which an entity must refer. The guidance affects any entity that either enters
into contracts with customers to transfer goods or services or enters into
contracts for the transfer of nonfinancial assets. The core principle is that an
entity should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. The
guidance provides steps to follow to achieve the core principle. An entity should
disclose sufficient information to enable users of financial statements to
understand the nature, amount, timing and uncertainty of revenue and cash
flows arising from contracts with customers. Qualitative and quantitative
information is required with regard to contracts with customers, significant
judgments and changes in judgments, and assets recognized from the costs to
obtain or fulfill a contract. This ASU is effective for annual reporting periods
beginning after December 15, 2017, including interim periods within that
reporting period. The amendments will be applied through the election of one of
two retrospective methods. Substantially all of the Company’s revenue is
generated from interest income related to loans and investment securities, which
are not within the scope of this guidance. The contracts that are within the
scope of this guidance include service charges and fees on deposit accounts
interchange fees, and merchant income. The Company has substantially
completed its overall assessment of revenue streams and review of related
contracts and other agreements that are within the scope of this guidance and
did not identify any material changes to the timing of revenue recognition. The
Company adopted ASU 2014-09 on its required effective date of January 1,
2018 utilizing the modified retrospective approach. Since there was no net
income impact upon adoption of the new guidance, a cumulative effect
adjustment to opening retained earnings was not deemed necessary. The
Company is completing its evaluation of the ASU’s expanded disclosure
requirement effective for the March 31, 2018 Form 10-Q. The Company expects
the expanded disclosures to be primarily qualitative in nature. The Company
does not expect material additions or revisions to our quantitative disclosures.
expedient is provided for equity securities without a readily determinable fair
value, such that these securities can be carried at cost less any impairment. ASU
No. 2016-01 is effective for interim and annual reporting periods beginning after
December 15, 2017. The Company has performed an evaluation of the
provisions of ASU No. 2016-01 and based on this evaluation, has determined
that ASU No. 2016-01 will not have a material impact on the Company’s
financial position, results of operations or its cash flows.
FASB Accounting Standards Update (ASU) 2016-02 - Leases—Overall
(Subtopic 845), was issued February 2016. The update requires all leases, with the
exception of short-term leases that have contractual terms of no greater than one
year, to be recorded on the balance sheet. Under the provisions of the update,
leases classified as operating will be reflected on the balance sheet with the
recognition of both a right-of-use asset and a lease liability. Under the update, a
distinction will exist between finance and operating type leases and the rules for
determining which classification a lease will fall into are similar to existing rules.
For public business entities, the amendments of this update are effective for
interim and annual periods beginning after December 15, 2018. The update
requires a modified retrospective transition under which comparative balance
sheets from the earliest historical period presented will be revised to reflect what
the financials would have looked like were the provisions of the update applied
consistently in all prior periods. The Company is currently evaluating the
provisions of ASU No. 2016-02 and has determined that the provisions of ASU
No. 2016-02 will 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 or cash flows.
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. Effective
January 1, 2017, the Company adopted ASU 2016-09 ‘‘Compensation-Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting’’ including the election to continue to treat option forfeitures on an
expected basis and to provide cash flow disclosures on a prospective basis. During
the year ended December 31, 2017 the adoption of this standard resulted in the
recognition of $853,000 in tax benefits related to the exercise of stock options
and vesting of restricted shares during the period.
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. The main provisions of the update
are to eliminate the available-for-sale classification of accounting for equity
securities and to adjust the fair value disclosures for financial instruments carried
at amortized costs such that the disclosed fair values represent an exit price as
opposed to an entry price. The provisions of this update will require that equity
securities be carried at fair market value on the balance sheet and any periodic
changes in value will be adjustments to the income statement. A practical
FASB Accounting Standards Update (ASU) 2016-13 - Measurement of Credit
Losses on Financial Instruments (Subtopic 326): Financial Instruments—Credit
Losses, commonly referred to as ‘‘CECL,’’ was issued June 2016. The provisions
of the update eliminate the probable initial recognition threshold under current
GAAP which requires reserves to be based on an incurred loss methodology.
Under CECL, reserves required for financial assets measured at amortized cost
will reflect an organization’s estimate of all expected credit losses over the
contractual term of the financial asset and thereby require the use of reasonable
and supportable forecasts to estimate future credit losses. Because CECL
19
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
encompasses all financial assets carried at amortized cost, the requirement that
reserves be established based on an organization’s reasonable and supportable
estimate of expected credit losses extends to held to maturity (‘‘HTM’’) debt
securities. Under the provisions of the update, credit losses recognized on
available for sale (‘‘AFS’’) debt securities will be presented as an allowance as
opposed to a write-down. In addition, CECL will modify the accounting for
purchased loans, with credit deterioration since origination, so that reserves are
established at the date of acquisition for purchased loans. Under current GAAP a
purchased loan’s contractual balance is adjusted to fair value through a credit
discount and no reserve is recorded on the purchased loan upon acquisition.
Since under CECL reserves will be established for purchased loans at the time of
acquisition, the accounting for purchased loans is made more comparable to the
accounting for originated loans. Finally, increased disclosure requirements under
CECL require organizations to present the currently required credit quality
disclosures disaggregated by the year of origination or vintage. The FASB expects
that the evaluation of underwriting standards and credit quality trends by
financial statement users will be enhanced with the additional vintage disclosures.
For public business entities that are SEC filers, the amendments of the update
will become effective beginning January 1, 2020. 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.
Management expects to recognize a one-time cumulative effect adjustment to the
allowance for loan losses as of the first reporting period in which the new
standard is effective, but cannot yet estimate the magnitude of the one-time
adjustment or the overall impact of the new guidance on the Company’s financial
position, results of operations or cash flows.
FASB Accounting Standards Update (ASU) 2017-04 - Intangibles Goodwill and
Other (Subtopic 350): Simplifying the Test for Goodwill Impairment, was issued
January 2017. The provisions of the update eliminate the existing second step of
the goodwill impairment test which provides for the allocation of reporting unit
fair value among existing assets and liabilities, with the net leftover amount
representing the implied fair value of goodwill. In replacement of the existing
goodwill impairment rule, the update will provide that impairment should be
recognized as the excess of any of the reporting unit’s goodwill over the fair value
of the reporting unit. Under the provisions of this update, the amount of the
impairment is limited to the carrying value of the reporting unit’s goodwill. For
public business entities that are SEC filers, the amendments of the update will
become effective in fiscal years beginning after December 15, 2019.
FASB Accounting Standards Update (ASU) 2017-08 - Receivables—Nonrefundable
Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased
Callable Debt Securities, was issued March 2017. The provisions of the update
require premiums recognized upon the purchase of callable debt securities to be
amortized to the earliest call date in order to avoid losses recognized upon call.
For public business entities that are SEC filers, the amendments of the update
will become effective in fiscal years beginning after December 15, 2018.
Management does not expect the requirements of this update to have a material
impact on the Company’s financial position, results of operations or cash flows.
FASB Accounting Standards Update (ASU) 2017-09 - Compensation—Stock
Compensation (Subtopic 718): Scope of Modification Accounting, was issued May
2017. The amendments in ASU 2017-09 provide guidance about which changes
to the terms or conditions of a share-based payment award require an entity to
apply modification accounting. An entity should account for the effects of a
modification unless all of the following conditions are met: the fair value of the
modified award is the same as the fair value of the original award immediately
before the original award is modified; the vesting conditions of the modified
award are the same as the vesting conditions of the original award immediately
before the original award is modified; and the classification of the modified
award as an equity instrument or a liability instrument is the same as the
classification of the original award immediately before the original award is
modified. The amendments in this Update should be applied prospectively to an
award modified on or after the adoption date. The amendments in this Update
are effective for annual periods, and interim periods within those annual periods,
beginning after December 31, 2017. Early adoption is permitted, including
adoption in any interim period. The adoption of this guidance is not expected to
have a material impact on the Company’s Consolidated Financial Statements.
FASB Accounting Standards Update (ASU) 2017-12 - Derivatives and Hedging
(Topic 815); Targeted Improvements to Accounting for Hedging Activities, was issued
August 2017. This ASU’s objectives are to (1) improve the transparency and
understandability of information conveyed to financial statement users about an
entity’s risk management activities by better aligning the entity’s financial
reporting for hedging relationships with those risk management activities; and
(2) reduce the complexity of and simplify the application of hedge accounting by
preparers. ASU No. 2017-12 is effective for interim and annual reporting periods
beginning after December 15, 2018; early adoption is permitted. The Company
currently does not designate any derivative financial instruments as formal
hedging relationships, and therefore, does not utilize hedge accounting. However,
the Company is currently evaluating this ASU to determine whether its
provisions will enhance the Company’s ability to employ risk management
strategies, while improving the transparency and understanding of those strategies
for financial statement users.
FASB Accounting Standards Update (ASU) 2018-02 - Income Statement—
Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive Income,’’ ASU 2018-02, was issued to
address the income tax accounting treatment of the stranded tax effects within
other comprehensive income due to the prohibition of backward tracing due to
an income tax rate change that was initially recorded in other comprehensive
income. This issue came about from the enactment of the Tax Cuts and Jobs Act
on December 22, 2017 that changed the Company’s income tax rate from 35%
to 21%. The ASU changed current accounting whereby an entity may elect to
reclassify the stranded tax effect from accumulated other comprehensive income
to retained earnings. The ASU is effective for periods beginning after
December 15, 2018 although early adoption is permitted. The Company adopted
ASU 2018-02 in the fourth quarter of 2017 and reclassified its stranded tax debit
of $501,000 within accumulated other comprehensive income to retained
earnings at December 31, 2017.
2. ACQUISITIONS
On October 1, 2017, the Company completed the acquisition of Folsom Lake
Bank (‘‘FLB’’) for an aggregate transaction value of $28,475,000. FLB was
merged into the Bank, and the Company issued 1,276,888 shares of common
stock to the former shareholders of FLB. The Company also assumed the
outstanding FLB stock options. With the FLB acquisition, the Company added
two full service branches, located in Folsom, and Rancho Cordova, California.
The FLB Roseville branch was consolidated with the Company’s Roseville branch
in October 2017. FLB’s assets as of October 1, 2017 totaled approximately
$196,148,000.
In accordance with GAAP guidance for business combinations, the Company
recorded $13,466,000 of goodwill and $1,879,000 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 $1,828,000 are included in the
income statement for the year ended December 31, 2017.
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 expected cost savings resulting from the combined operations.
20
Notes to
Consolidated Financial Statements
2. ACQUISITIONS
(Continued)
The following table summarizes the consideration paid for FLB and the
amounts of the assets acquired and liabilities assumed recognized at the
acquisition date (in thousands):
Merger consideration:
Common stock issued
Fair Value of Total Consideration Transferred
Recognized amounts of identifiable assets acquired and liabilities
assumed:
Cash and cash equivalents
Loans, net
Investments
Core deposit intangible
Premises and equipment
Federal Home Loan Bank stock
Deferred taxes and taxes receivable
Bank owned life insurance
Other assets
Total assets acquired
Deposits
Deposit premium
Short-term borrowings—Federal Home Loan Bank
Other liabilities
Total liabilities assumed
Total identifiable net assets
Goodwill
$ 28,475
$ 28,475
$ 26,279
117,815
41,280
1,879
561
1,559
2,186
3,997
592
196,148
171,948
132
7,000
2,059
181,139
15,009
$ 13,466
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
$117,815,000 and $121,872,000, respectively, on the date of acquisition. See
Note 5 for discussion of purchased credit impaired loans.
On 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 as of
October 1, 2016 totaled approximately $155,154,000. 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
1,058,851 shares of its common stock and cash totaling approximately
$9,468,000 to the former shareholders of Sierra Vista Bank.
In accordance with GAAP guidance for business combinations, the Company
recorded $10,314,000 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 and Folsom Lake Bank since October 1,
2017. The following table presents pro forma results of operations information
for the periods presented as if the acquisitions 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, 2017, 2016, and 2015 include the
historical accounts of the Company, Folsom Lake Bank, 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 acquisitions been completed
at the beginning of each respective year. No assumptions have been applied to
the pro forma results of operations regarding possible revenue enhancements,
21
Notes to
Consolidated Financial Statements
2. ACQUISITIONS
(Continued)
The estimated carrying and fair values of the Company’s financial instruments
expense efficiencies or asset dispositions. (In thousands, except per-share
amounts):
Net interest income
Provision for (reversal of ) 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,
2017
2016
2015
$61,059
(1,150)
11,240
51,415
22,034
9,168
$56,531
(5,800)
10,205
52,131
20,405
6,381
$52,413
570
10,063
45,692
16,214
3,669
$12,866
$14,024
$12,545
Net income available to common shareholders
$12,866
$14,024
$12,545
Basic earnings per common share
Diluted earnings per common share
$
$
1.03
1.01
$
$
1.24
1.23
$
$
1.15
1.14
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.
are as follows (in thousands):
December 31, 2017
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Amount
Financial assets:
Cash and due from
banks
$ 38,286 $ 38,286 $
- $
- $ 38,286
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
62,080
17
62,080
17
-
-
-
-
62,080
17
542,704
891,901
7,423
-
535,281
-
-
899,191
542,704
899,191
6,843
7,168
N/A
N/A
N/A
N/A
57
3,256
3,855
7,168
1,425,687 1,296,048
127,966
- 1,424,014
-
5,155
110
Carrying
Amount
-
-
-
-
-
-
-
3,550
3,550
72
38
110
December 31, 2016
Fair Value
Level 1
Level 2
Level 3
Total
Financial assets:
Cash and due from
banks
$
28,185 $
28,185 $
- $
- $
28,185
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.
Interest-earning deposits
in other banks
Federal funds sold
Available-for-sale
10,368
15
10,368
15
-
-
investment securities
547,749
7,416
540,333
-
-
-
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.
Held-to-maturity
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
-
747,302
5,594
7,885
-
-
-
-
-
761,023
N/A
N/A
N/A
N/A
26
4,517
3,342
7,885
1,255,979
400
1,099,200
-
156,711
400
-
-
1,255,911
400
5,155
144
-
-
-
111
3,235
33
3,235
144
10,368
15
547,749
-
761,023
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.
22
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) 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.
(f) Short-Term Borrowings - The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings,
generally maturing within ninety days, approximate their fair values resulting in a
Level 2 classification.
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.
(g) 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.
(h) 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, 2017:
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 and asset
backed securities
Other equity securities
66,587 $
- $
66,587 $
143,105
234,908
-
-
143,105
234,908
90,681
7,423
-
7,423
90,681
-
Total assets measured at
fair value on a
recurring basis
$ 542,704 $
7,423 $ 535,281 $
-
-
-
-
-
-
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,
2017, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at
December 31, 2017. Also there were no liabilities measured at fair value on a
recurring basis at December 31, 2017.
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
23
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS
(Continued)
recognized at fair value which was below cost at December 31, 2017 (in
thousands):
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, 2016:
Other repossessed assets
Total assets measured at fair
value on a non-recurring
basis
$
$
Fair
Value
Level 1
Level 2
Level 3
70 $
- $
- $
70
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):
70 $
- $
- $
70
Fair
Value
Level 1
Level 2
Level 3
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, 2017.
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.
As of December 31, 2017, there were no loans measured using the fair value
of the collateral for collateral dependent loans.
During the year ended December 31, 2017 specific allocation for the
allowance for credit losses related to loans carried at fair value was none,
compared to $15,000 during the year ended December 31, 2016. There were no
net charge-offs related to loans carried at fair value at December 31, 2017 and
2016.
There were no liabilities measured at fair value on a non-recurring basis at
December 31, 2017.
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 and asset
backed securities
Other equity securities
68,970 $
- $
68,970 $
290,299
178,221
-
-
290,299
178,221
2,843
7,416
-
7,416
2,843
-
Total assets measured at
fair value on a recurring
basis
$ 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.
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.
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, 2016 (in
thousands):
Fair
Value
Level 1
Level 2
Level 3
Impaired loans:
Consumer:
Equity loans and lines of
credit
Total consumer
Total impaired loans
Other repossessed assets
Total assets measured at fair
value on a non-recurring
basis
$
$
$
$
47 $
47
47 $
362 $
- $
-
- $
- $
- $
-
- $
- $
47
47
47
362
409 $
- $
- $
409
24
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS
(Continued)
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 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, 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. Fair value of other repossessed
assets is based on observable market data for other similar property as adjusted by
management for depreciation and other asset conditions impacting value.
During the year ended December 31, 2016, there was no provision for credit
losses related to loans carried at fair value. During the year ended December 31,
2016, 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, 2016.
4.
INVESTMENT SECURITIES
The fair value of the available-for-sale investment portfolio reflected an unrealized
gain of $4,012,000 at December 31, 2017 compared to an unrealized loss of
$891,000 at December 31, 2016. The unrealized gain/(loss) recorded is net of
$1,186,000 and $(375,000) in tax liabilities (benefits) as accumulated other
comprehensive income within shareholders’ equity at December 31, 2017 and
2016, respectively.
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, 2017
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 mortgage and
asset backed securities
Other equity securities
65,994 $
667 $
(74) $
66,587
136,955
6,240
(90)
143,105
237,210
91,033
7,500
601
924
-
(2,903)
234,908
(1,276)
(77)
90,681
7,423
$ 538,692 $
8,432 $
(4,420) $ 542,704
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 mortgage and
asset 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
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.
25
Notes to
Consolidated Financial Statements
4.
INVESTMENT SECURITIES (Continued)
Proceeds and gross realized gains (losses) on investment securities for the years
ended December 31, 2017, 2016, and 2015 are shown below (in thousands):
Years Ended December 31,
2017
2016
2015
Available-for-Sale Securities
Proceeds from sales or calls
Gross realized gains from sales or calls
Gross realized losses from sales or calls
$
$ 167,163
$ 228,405
2,223
4,701
$
$
$
(999) $
(1,899) $
$
93,167
1,715
(234)
Held-to-Maturity Securities
Proceeds from sales and calls
Gross realized gains from sales or calls
$
$
-
-
$
$
9,257
696
$
$
810
14
Losses recognized in 2017, 2016, and 2015 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 $1,178,000, $515,000, and
$615,000 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, 2017, 2016, and 2015, respectively.
Investment securities with unrealized losses at December 31, 2017 and 2016
are summarized and classified according to the duration of the loss period as
follows (in thousands):
December 31, 2017
Less than 12 Months 12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
8,201 $
(47) $
6,741 $
(27) $ 14,942 $
1,627
(3)
3,357
(87)
4,984
(74)
(90)
82,604
(822)
64,488
(2,081)
147,092
(2,903)
88,312
7,423
(1,276)
(77)
-
-
-
-
88,312
7,423
(1,276)
(77)
$ 188,167 $
(2,225) $ 74,586 $
(2,195) $ 262,753 $
(4,420)
December 31, 2016
Less than 12 Months 12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$ 34,586 $
(198) $ 10,438 $
(79) $ 45,024 $
(277)
122,522
(4,353)
-
-
122,522
(4,353)
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)
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 and asset
backed securities
Other equity securities
Available-for-Sale Securities
Debt Securities:
U.S. Government agencies
Obligations of states and
political subdivisions
U.S. Government sponsored
entities and agencies
collateralized by
residential mortgage
obligations
Other equity securities
26
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, 2017, 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, 2017,
and identified those that had an unrealized loss for at least a consecutive
12 month period, which had an unrealized loss at December 31, 2017 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, 2017.
U.S. Government Agencies - At December 31, 2017, the Company held 22 U.S.
Government agency securities of which two were in a loss position for less than
12 months and two 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, 2017.
Obligations of States and Political Subdivisions - At December 31, 2017, the
Company held 91 obligations of states and political subdivision securities of
which one was in a loss position for less than 12 months and one was 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, 2017.
U.S. Government Sponsored Entities and Agencies Collateralized by Residential
Mortgage Obligations - At December 31, 2017, the Company held 150 U.S.
Government sponsored entity and agency securities collateralized by residential
mortgage obligation securities of which 42 were in a loss position for less than
12 months and 27 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, 2017.
Notes to
Consolidated Financial Statements
4.
INVESTMENT SECURITIES
(Continued)
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
Private Label Mortgage and Asset Backed Securities - At December 31, 2017, the
Company had a total of 30 PLMBS with a remaining principal balance of
$91,033,000 and a gross and net unrealized loss of approximately $352,000. 17
of these securities had an unrealized loss at December 31, 2017. Ten of these
PLMBS with a remaining principal balance of $1,359,000 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,
2017 and 2016 of investment securities credit losses recorded in earnings (in
thousands). The beginning balance represents the credit loss component for
which OTTI occurred on debt securities in prior periods. Additions represent the
first time a debt security was credit impaired or when subsequent credit
impairments have occurred on securities for which OTTI credit losses have been
previously recognized.
Beginning balance of credit losses recognized
Amounts related to credit loss for which an OTTI
charge was not previously recognized
Realized losses for securities sold
Ending balance of credit losses recognized
Years ended
December 31,
2017
2016
874
$
747
-
-
874
$
136
(9)
874
$
$
The amortized cost and estimated fair value of available-for-sale investment
securities at December 31, 2017 and 2016 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.
Outstanding loans are summarized as follows (in thousands):
Loan Type
Commercial:
Commercial and
industrial
Agricultural land and
production
% of
December 31, Total
loans
2017
% of
December 31, Total
loans
2016
$
100,856
11.2% $
88,652
11.7%
14,956
1.7%
25,509
3.4%
Total commercial
115,812
12.9%
114,161
15.1%
Real estate:
Owner occupied
Real estate construction
and other land loans
Commercial real estate
Agricultural real estate
Other real estate
Consumer:
Equity loans and lines of
credit
Consumer and
installment
Total consumer
Net deferred origination
costs
Total gross loans
Allowance for credit losses
204,452
22.7%
191,665
25.3%
96,460
269,254
76,081
31,220
677,467
10.7%
29.9%
8.4%
3.5%
75.2%
69,200
184,225
86,761
18,945
550,796
9.1%
24.3%
11.5%
2.7%
72.9%
76,404
8.5%
64,494
8.5%
29,637
3.4%
106,041
11.9%
25,910
90,404
3.5%
12.0%
1,359
900,679
(8,778)
100.0%
1,267
756,628
(9,326)
100.0%
December 31, 2017
December 31, 2016
Total loans
$
891,901
$
747,302
Amortized Estimated Amortized Estimated
Fair Value
Fair Value
Cost
Cost
Within one year
After one year through five years
After five years through ten years
After ten years
Investment securities not due at a single maturity date:
U.S. Government agencies
U.S. Government sponsored entities and agencies
collateralized by residential mortgage obligations
Private label mortgage and asset backed securities
Other equity securities
$
1,893 $
7,149
22,043
105,870
1,914 $
7,316
22,696
111,179
- $
15,145
35,667
237,731
-
15,484
35,614
239,201
136,955
143,105
288,543
290,299
65,994
66,587
69,005
68,970
237,210
91,033
7,500
234,908
90,681
7,423
181,785
1,807
7,500
178,221
2,843
7,416
$ 538,692 $ 542,704 $ 548,640 $ 547,749
Investment securities with amortized costs totaling $88,930,000 and
$86,418,000 and fair values totaling $90,541,000 and $88,903,000 were pledged
as collateral for borrowing arrangements, public funds and for other purposes at
December 31, 2017 and 2016, respectively.
At December 31, 2017 and 2016, loans originated under Small Business
Administration (SBA) programs totaling $25,925,000 and $16,590,000,
respectively, were included in the real estate and commercial categories.
Approximately $356,977,000 in loans were pledged under a blanket lien as
collateral to the FHLB for the Bank’s remaining borrowing capacity of
$234,689,000 as of December 31, 2017. The Bank’s credit limit varies according
to the amount and composition of the investment and loan portfolios pledged as
collateral.
Salaries and employee benefits totaling $2,593,000, $2,344,000, and
$2,056,000 have been deferred as loan origination costs for the years ended
December 31, 2017, 2016, and 2015, respectively.
Purchased Credit Impaired Loans
The Company has 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.
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,
2017
2016
$
$
$
383
383
383
$
$
$
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
27
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
(Continued)
Allowance for Credit Losses
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.
Loans acquired during each year for which it was probable at acquisition that
all contractually required payments would not be collected are as follows (in
thousands):
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
December 31,
2017
2016
$
$
$
$
-
-
-
-
$
$
$
$
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
December 31,
2017
2016
$
$
-
383
$
$
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,
2017
2016
2015
$
9,326
$
9,610
$
8,308
(1,150)
(464)
1,066
(5,850)
(883)
6,449
600
(961)
1,663
Balance, end of year
$
8,778
$
9,326
$
9,610
The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 2017, 2016, and 2015 by
portfolio segment (in thousands):
Allowance for credit losses:
Beginning balance, January 1, 2017
(Reversal of ) Provision charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2017
Allowance for credit losses:
Beginning balance, January 1, 2016
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
28
Commercial
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
$
$
$
$
$
2,180
(762)
(207)
860
2,071
3,562
(6,048)
(621)
5,287
2,180
3,130
190
(802)
1,044
$
$
$
$
$
6,200
(449)
(22)
66
5,795
5,204
11
-
985
6,200
4,058
1,114
-
32
$
$
$
$
$
852
68
(235)
140
825
734
203
(262)
177
852
1,078
(772)
(159)
587
$
$
$
$
$
94
(7)
-
-
87
110
(16)
-
-
94
42
68
-
-
9,326
(1,150)
(464)
1,066
8,778
9,610
(5,850)
(883)
6,449
9,326
8,308
600
(961)
1,663
3,562
$
5,204
$
734
$
110
$
9,610
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following is a summary of the allowance for credit losses by impairment methodology and portfolio segment as of December 31, 2017 and December 31, 2016
(in thousands):
Allowance for credit losses:
Ending balance, December 31, 2017
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Ending balance, December 31, 2016
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Commercial
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
2,071
1
2,070
2,180
3
2,177
$
$
$
$
$
$
5,795
1
5,794
6,200
241
5,959
$
$
$
$
$
$
825
34
791
852
63
789
$
$
$
$
$
$
87
-
87
94
-
94
$
$
$
$
$
$
8,778
36
8,742
9,326
307
9,019
The following table shows the ending balances of loans as of December 31, 2017 and December 31, 2016 by portfolio segment and by impairment methodology (in
thousands):
Loans:
Ending balance, December 31, 2017
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance, December 31, 2016
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Commercial
Real Estate
Consumer
Total
$
$
$
$
$
$
115,812
377
115,435
114,161
487
113,674
$
$
$
$
$
$
677,467
4,846
672,621
550,796
4,238
546,558
$
$
$
$
$
$
106,041
1,143
104,898
90,404
544
89,860
$
$
$
$
$
$
899,320
6,366
892,954
755,361
5,269
750,092
The following table shows the loan portfolio by class allocated by management’s internal risk ratings at December 31, 2017 (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
$
84,745
10,848
$
196,838
90,927
261,746
48,274
29,867
74,535
29,634
8,217
206
4,795
1,625
4,147
1,270
1,165
483
-
$
7,894
3,902
$
2,819
3,908
3,361
26,537
188
1,386
3
Total
$
827,414
$
21,908
$
49,998
$
-
-
-
-
-
-
-
-
-
-
$
100,856
14,956
204,452
96,460
269,254
76,081
31,220
76,404
29,637
$
899,320
29
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 internally assigned risk grade 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
$
The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2017 (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
149
26
$
-
-
-
$
-
-
-
-
-
-
1,165
-
-
1,397
-
-
-
-
-
-
-
-
1,397
-
-
1,165
149
26
$
100,856
$
100,856
$
14,956
-
204,452
95,063
269,254
76,081
30,055
-
76,255
29,611
14,956
-
204,452
96,460
269,254
76,081
31,220
-
76,404
29,637
Total
$
175
$
1,165
$
1,397
$
2,737
$
896,583
$
899,320
$
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
30
$
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
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
88,652
25,509
191,665
69,200
184,225
86,761
18,945
64,494
25,910
$
755,361
Non-
accrual
$
356
-
-
1,397
976
-
-
146
-
$
2,875
$
Non-
accrual
447
-
107
-
1,082
-
-
526
18
$
2,180
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table shows information related to impaired loans by class at
December 31, 2016 (in thousands):
The following table shows information related to impaired loans by class at
December 31, 2017 (in thousands):
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
With no related allowance
recorded:
Commercial:
Commercial and industrial
$
355
$
553
$
Real estate:
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:
Agricultural real estate
Consumer:
Equity loans and lines of
credit
Total with an allowance
recorded
Total
3,023
1,772
4,795
146
5,296
22
51
3,085
2,040
5,125
206
5,884
22
51
997
1,070
6,366
$
997
1,070
6,954
$
$
-
-
-
-
-
-
1
1
34
36
36
The recorded investment in loans excludes accrued interest receivable and net
loan origination fees, due to immateriality.
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
With no related allowance
recorded:
Commercial:
Commercial and industrial
$
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
$
$
-
-
-
-
-
-
-
-
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.
31
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended
December 31, 2017, 2016, and 2015 (in thousands):
Year Ended December 31,
2017
Year Ended December 31,
2016
Year Ended December 31,
2015
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
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
$
$
404
-
404
$
-
-
-
$
115
42
157
$
-
-
-
24
1,228
1,370
-
2,622
132
6
138
-
114
53
-
167
-
-
-
162
2,393
903
173
3,631
598
41
639
-
196
55
-
251
-
-
-
Total with no related allowance recorded
3,164
167
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
Agricultural real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
Total with an allowance recorded
Total
-
38
-
38
-
1,827
470
43
2,340
239
1
240
2,618
5,782
$
1
-
1
-
-
-
-
3
3
32
-
32
36
$
203
$
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
-
-
-
231
79
-
-
310
-
-
-
310
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
254
$
12,792
$
310
Foregone interest on nonaccrual loans totaled $210,000, $245,000, and
$340,000 for the years ended December 31, 2017, 2016, and 2015, 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, 2017 and 2016, the Company has a recorded investment
in troubled debt restructurings of $3,551,000 and, $3,109,000, respectively. The
Company has allocated $36,000 and $82,000 of specific reserves for those loans
at December 31, 2017 and 2016, respectively. The Company has committed to
lend no additional amounts as of December 31, 2017 to customers with
outstanding loans that are classified as troubled debt restructurings.
For the years ended December 31, 2017, 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.
32
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
(Continued)
The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2017 (dollars in thousands):
Troubled Debt Restructurings:
Real Estate:
Agricultural real estate
Consumer:
Equity loans and line of credit
Total
Pre-
Modification
Outstanding
Recorded
Investment (1)
Number of
Loans
Principal
Modification
Post
Modification
Outstanding
Recorded
Investment (2)
Outstanding
Recorded
Investment
1
2
3
$
$
59
490
549
$
-
-
-
$
$
59
$
51
1,066
1,125
$
1,059
1,110
(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, 2016 (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
$
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
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, 2017, 2016, and 2015.
33
Notes to
Consolidated Financial Statements
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,
2017
2016
$
$
1,131
6,754
12,345
4,594
24,824
1,131
6,680
11,521
4,100
23,432
(15,426)
(14,025)
$
9,398
$
9,407
Depreciation and amortization included in occupancy and equipment expense
totaled $1,429,000, $1,320,000 and $1,392,000 for the years ended
December 31, 2017, 2016, and 2015, respectively.
7. GOODWILL AND INTANGIBLE ASSETS
net of $490,000 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, 2017 and determined no impairment was necessary. Amortization
expense recognized was $234,000 for 2017, $149,000 for 2016, and $320,000
for 2015.
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,
2018
2019
2020
2021
2022
Thereafter
Total
Estimated Core
Deposit
Intangible
Amortization
$
$
376
376
376
376
376
1,147
3,027
The change in goodwill during the years ended December 31, 2017, 2016, and
2015 is as follows (in thousands):
8. DEPOSITS
2017
2016
2015
Interest-bearing deposits consisted of the following (in thousands):
Balance, beginning of year
Acquired goodwill
Impairment
Balance, end of year
$
$
40,231
13,546
-
53,777
$
$
29,917
10,314
-
40,231
$
$
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, 2017 and 2016 was $53,777,000 and $40,231,000, respectively.
Total goodwill at December 31, 2017 consisted of $13,466,000, $10,394,000,
$6,340,000, $14,643,000, and $8,934,000 representing the excess of the cost of
Folsom Lake Bank, 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. During the year ended
December 31, 2017, the Company determined that a measurement adjustment
was appropriate to the goodwill recorded as part of the Sierra Vista Bank
acquisitions which resulted in an $80,000 increase to goodwill. 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 2017, so goodwill was not required to be retested.
The intangible assets at December 31, 2017 represent the estimated fair value
of the core deposit relationships acquired in the acquisition of Folsom Lake Bank
in 2017 of $1,879,000, 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, 2017, the weighted average
remaining amortization period is eight years. The carrying value of intangible
assets at December 31, 2017 was $3,027,000, net of $725,000 in accumulated
amortization expense. The carrying value at December 31, 2016 was $1,383,000,
34
Savings
Money market
NOW accounts
Time, $250,000 or more
Time, under $250,000
December 31,
2017
2016
$
116,534
299,638
296,406
34,441
93,629
$
105,098
250,749
247,623
39,284
117,410
$
840,648
$
760,164
Aggregate annual maturities of time deposits are as follows (in thousands):
Years Ending December 31,
2018
2019
2020
2021
2022
Thereafter
$
107,348
13,229
3,086
1,519
1,769
1,119
$
128,070
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,
2017
2016
2015
$
$
$
33
211
317
408
$
27
133
290
525
969
$
975
$
30
141
231
546
948
Notes to
Consolidated Financial Statements
9. BORROWING ARRANGEMENTS
Federal Home Loan Bank Advances - As of December 31, 2017 and 2016, the
Company had no Federal Home Loan Bank (FHLB) of San Francisco advances.
Approximately $356,977,000 in loans were pledged under a blanket lien as
collateral to the FHLB for the Bank’s remaining borrowing capacity of
$234,689,000 as of December 31, 2017. FHLB advances are also secured by
investment securities with amortized costs totaling $416,000 and $584,000 and
market values totaling $440,000 and $637,000 at December 31, 2017 and 2016,
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, 2017
and 2016, at interest rates which vary with market conditions. As of
December 31, 2017, the Company had no in Federal funds purchased. The
Company had $400,000 overnight borrowings outstanding under these credit
facilities at December 31, 2016.
Federal Reserve Line of Credit - The Bank has a line of credit in the amount of
$6,740,000 and $9,102,000 with the Federal Reserve Bank of San Francisco
(FRB) at December 31, 2017 and 2016, respectively, which bears interest at the
prevailing discount rate collateralized by investment securities with amortized
costs totaling $7,431,000 and $9,315,000 and market values totaling $7,437,000
and $9,277,000, respectively. At December 31, 2017 and 2016, the Bank had no
outstanding borrowings with the FRB.
10.
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
Service 1st Capital Trust I is a Delaware business trust formed by Service 1st.
The Company succeeded to all of the rights and obligations of Service 1st in
connection with the merger with Service 1st as of November 12, 2008. The
Trust was formed on August 17, 2006 for the sole purpose of issuing trust
preferred securities fully and unconditionally guaranteed by Service 1st. Under
applicable regulatory guidance, the amount of trust preferred securities that is
eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a
pro forma basis. At December 31, 2017, 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, 2017, the rate
was 2.96%. Interest expense recognized by the Company for the years ended
December 31, 2017, 2016, and 2015 was $147,000, $121,000 and $99,000,
respectively.
11.
INCOME TAXES
The provision for income taxes for the years ended December 31, 2017, 2016,
and 2015 consisted of the following (in thousands):
2017
Current
Deferred
Re-measurement resulting
from Tax Act
Provision for income taxes
2016
Current
Deferred
Provision for income taxes
2015
Current
Deferred
Provision for income taxes
Federal
State
Total
$
$
$
$
$
$
1,188
3,328
3,535
8,051
3,720
1,100
4,820
2,945
(1,208)
1,737
$
$
$
$
$
$
1,224
518
-
1,742
605
1,492
2,097
570
275
845
$
$
$
$
$
$
2,412
3,846
3,535
9,793
4,325
2,592
6,917
3,515
(933)
2,582
The determination of the amount of deferred income tax assets which are
more likely than not to be realized is primarily dependent on projections of
future earnings, which are subject to uncertainty and estimates that may change
given economic conditions and other factors. The realization of deferred income
tax assets is assessed and a valuation allowance is recorded if it is more likely
than not that all or a portion of the deferred tax asset will not be realized. More
likely than not is defined as greater than a 50% chance. All available evidence,
both positive and negative is considered to determine whether, based on the
weight of the evidence, a valuation allowance is needed. Thus, Management
concludes no valuation allowance is necessary against deferred tax assets.
35
Notes to
Consolidated Financial Statements
11.
INCOME TAXES
(Continued)
Deferred tax assets (liabilities) consisted of the following (in thousands):
Deferred tax assets:
Allowance for credit losses
Deferred compensation
Unrealized loss on available-for-sale
investment securities
Net operating loss carryovers
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,
2017
2016
$
2,100
4,415
-
2,549
87
386
192
1,793
-
-
68
375
3,267
5,304
375
3,816
167
338
273
1,285
209
2,438
114
297
11,965
17,883
(365)
(1,186)
(895)
(234)
(783)
(478)
(3,941)
(474)
-
(582)
(327)
(918)
(71)
(2,372)
Net deferred tax assets
$
8,024
$
15,511
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, 2017, 2016, and 2015 consisted of the following:
and certain tax-advantaged investments as reflected in other assets) resulted in an
increase to the Company’s tax provision of $3,535,000. As part of the Tax Act
for tax years beginning after December 31, 2017, alternative minimum tax credit
carryforwards are refundable and are expected to be fully refunded by 2022. As
such, they are not dependent on future taxable income to be realized and have
been classified as a current tax receivable. During the year ended December 31,
2017, the Company adopted ASU 2016-09 ‘‘Compensation-Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting’’
which due to the exercise of stock options in the current period, resulted in the
recognition of $853,000 in tax benefits.
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, 2014 and by the state and
local taxing authorities for the years ended before December 31, 2013.
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,
2017
2016
$
$
298
$
-
(215)
83
$
286
44
(32)
298
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 limitations in the taxing
jurisdictions.
During the years ended December 31, 2017 and 2016, the Company recorded
$0 and $44,000, respectively, in interest or penalties related to uncertain tax
positions.
12. COMMITMENTS AND CONTINGENCIES
2017
2016
2015
35.0 %
35.0 %
34.0 %
4.8 %
6.2 %
4.1 %
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 $2,533,000, $2,300,000 and $2,273,000
for the years ended December 31, 2017, 2016, and 2015, respectively.
Future minimum lease payments on noncancelable operating leases are as
Federal income tax, at statutory rate
State taxes, net of Federal tax
benefit
Tax exempt investment security
income, net
Bank owned life insurance, net
Compensation—Stock
Compensation
Re-measurement resulting from Tax
Act
Change in uncertain tax positions
Other
Effective tax rate
(10.1)%
(0.8)%
(10.3)%
(1.1)%
(15.9)%
(2.5)%
follows (in thousands):
(2.8)%
14.8 %
(0.9)%
1.1 %
41.1 %
- %
- %
- %
0.1 %
1.4 %
31.3 %
- %
0.8 %
(1.4)%
19.1 %
Years Ending December 31,
2018
2019
2020
2021
2022
Thereafter
$
2,511
1,804
1,638
1,357
1,095
4,316
$
12,721
As of December 31, 2017, the Company had Federal and California net
operating loss (‘‘NOL’’) carry-forwards of $8,527,000 and $8,850,000,
respectively. These NOLs were acquired through business combinations and are
subject to IRC 382 and begin expiring in 2028, for federal and California
purposes. 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.
As a result of the enactment of the Tax Cuts and Jobs Act (the ‘‘Tax Act’’) on
December 22, 2017, the federal tax rate applied to the Company’s net deferred
tax assets were re-measured to reflect the 2018 tax rates (the rates at which the
deferred tax items are expected to reverse). The change to the tax rates (including
the rate change applied to deferred taxes reflected in other comprehensive income
36
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, 2017 was
$13,823,000.
Correspondent Banking Agreements - The Bank maintains funds on deposit with
other federally insured financial institutions under correspondent banking
agreements. Uninsured deposits totaled $306,000 at December 31, 2017.
Notes to
Consolidated Financial Statements
12. COMMITMENTS AND CONTINGENCIES
(Continued)
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,
2017
2016
$
$
347,001
3,140
$
$
257,557
1,858
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, 2017 and 2016. The
Company recognizes these fees as revenue over the term of the commitment or
when the commitment is used.
At December 31, 2017, commercial loan commitments represent 50% of total
commitments and are generally secured by collateral other than real estate or
unsecured. Real estate loan commitments represent 39% 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, 2017 and 2016, the balance of a contingent allocation for
probable loan loss experience on unfunded obligations was $326,000 and
$125,000, 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, 2017, in management’s
judgment, a concentration of loans existed in commercial loans and real-estate-
related loans, representing approximately 96.6% of total loans of which 12.9%
were commercial and 83.7% were real-estate-related.
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.
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
the consolidated financial position or consolidated results of operations of the
Company.
13. SHAREHOLDERS’ EQUITY
Regulatory Capital - The Company and the Bank are subject to certain regulatory
capital requirements administered by the Board of Governors of the Federal
Reserve System and the FDIC. Failure to meet these minimum capital
requirements 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 is being phased-in between January 1, 2016 and
January 1, 2019. The capital conservation buffer as of December 31, 2017 was
1.250% and 0.625% as of December 31, 2016. 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, 2017 and 2016. 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).
37
Notes to
Consolidated Financial Statements
13. SHAREHOLDERS’ EQUITY
(Continued)
The following table presents the Company’s regulatory capital ratios as of
December 31, 2017 and December 31, 2016.
(Dollars in thousands)
December 31, 2017
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio
(CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
December 31, 2016
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio
(CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
(1) The 2017 and 2016 minimum regulatory requirement threshold includes
the capital conservation buffer of 1.250% and 0.625%, respectively. These
ratios are not reflected on a fully phased-in basis, which will occur in
January 2019.
The following table presents the Bank’s regulatory capital ratios as of
December 31, 2017 and December 31, 2016.
(Dollars in thousands)
December 31, 2017
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio
(CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
December 31, 2016
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio
(CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
$ 121,079
8.64% $ 56,064
4.00%
$ 121,079
$ 121,079
$ 130,530
12.59% $ 43,383
12.59% $ 57,845
13.57% $ 77,126
5.13%
6.63%
8.63%
(1) The 2017 and 2016 minimum regulatory requirement threshold includes
the capital conservation buffer of 1.250% and 0.625%, respectively. These
ratios are not reflected on a fully phased-in basis, which will occur in
January 2019.
Dividends - During 2017, the Bank declared and paid cash dividends to the
Company in the amount of $3,133,000 in connection with the cash dividends to
the Company’s shareholders approved by the Company’s Board of Directors. The
Bank may not pay any dividend that would cause it to be deemed not ‘‘well
capitalized’’ under applicable banking laws and regulations. The Company
declared and paid a total of $3,010,000 or $0.24 per common share cash
dividend to shareholders of record during the year ended December 31, 2017.
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 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 approved by
the Company’s Board of Directors. The Company declared and paid a total of
38
$1,979,000 or $0.18 per common share cash dividend to shareholders of record
during the year ended December 31, 2015.
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, 2017, $23,185,000 of the Bank’s retained earnings were
free of these restrictions.
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):
Actual Ratio
Minimum regulatory
requirement (1)
Amount
Ratio
Amount
Ratio
$ 153,676
9.71% $ 63,338
4.00%
$ 149,186
$ 153,676
$ 162,780
12.90% $ 52,081
13.28% $ 69,441
14.07% $ 92,588
5.75%
7.25%
9.25%
$ 122,601
8.75% $ 56,057
4.00%
$ 120,080
$ 122,601
$ 132,052
12.48% $ 43,426
12.74% $ 57,901
13.72% $ 77,202
5.13%
6.63%
8.63%
Basic Earnings Per Common
Share:
Net income
Weighted average shares
outstanding
For the Years Ended December 31,
2017
2016
2015
$
14,026
$
15,182
$
10,964
12,472,095
11,331,166
10,931,927
Net income per common share
$
1.12
$
1.34
$
1.00
Diluted Earnings Per Common
Share:
Net income
Weighted average shares
outstanding
Effect of dilutive stock options
and warrants
Weighted average shares of
common stock and common
stock equivalents
Actual Ratio
Minimum regulatory
requirement (1)
Amount
Ratio
Amount
Ratio
$ 149,779
9.46% $ 63,332
4.00%
$ 149,779
$ 149,779
$ 158,882
12.96% $ 52,040
12.96% $ 69,387
13.74% $ 92,516
5.75%
7.25%
9.25%
Net income per diluted
common share
$
14,026
$
15,182
$
10,964
12,472,095
11,331,166
10,931,927
250,255
104,283
83,836
12,722,350
11,435,449
11,015,763
$
1.10
$
1.33
$
1.00
No outstanding options and restricted stock awards were anti-dilutive at
December 31, 2017 and 2016. Outstanding options and restricted stock of
26,704 were not factored into the calculation of dilutive stock options at
December 31, 2015, because they were anti-dilutive.
14. SHARED-BASED COMPENSATION
On December 31, 2017, the Company had five 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
Notes to
Consolidated Financial Statements
14. SHARED-BASED COMPENSATION
(Continued)
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 830,760 shares
remain reserved for future grants as of December 31, 2017.
Effective June 2, 2017, the Company adopted an Employee Stock Purchase
Plan whereby our employees may purchase Company common shares through
payroll deductions of between one percent and 15 percent of pay in each pay
period. Shares are purchased at the end of an offering period at a discount of
10 percent from the closing market price on the last day of each offering period.
The plan calls for 500,000 common shares to be set aside for employee
purchases, and there were 497,559 shares available for future purchase under the
plan as of December 31, 2017.
In October 2017, the Company adopted the Folsom Lake Bank 2007 Equity
Incentive Plan (2007 Plan). The plan provides for awards in the form of
incentive stock options, non-statutory stock options, stock appreciation rights,
and restricted stock. While outstanding arrangements to issue shares under this
plan, including options, continue in force until their expiration, no new options
will be granted under this plan. 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 313,360.
For the years ended December 31, 2017, 2016, and 2015, the compensation
cost recognized for share-based compensation was $384,000, $284,000, and
$238,000, respectively. The recognized tax benefit for share-based compensation
expense was $805,000, $44,000, and $14,000 for 2017, 2016, and 2015,
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, 2017, 2016 and 2015 from any of the
Company’s stock based compensation plans.
A summary of the combined activity of the Plans during the years then ended
is presented below (dollars in thousands, except per share amounts):
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Shares
Aggregate
Intrinsic Value
368,360 $
(9,070) $
(118,595) $
8.89
6.64
13.25
240,695 $
(35,280) $
(3,200) $
6.83
6.55
8.77
4.06 $
1,251
202,215 $
6.87
3.26 $
2,647
313,360 $
(281,125) $
(1,580) $
11.79
10.47
8.11
232,870 $
9.13
2.87 $
2,574
232,870 $
9.13
2.87 $
2,574
232,870 $
9.13
2.87 $
2,574
Options outstanding at
December 31, 2014
Options exercised
Options forfeited
Options outstanding at
December 31, 2015
Options exercised
Options forfeited
Options outstanding at
December 31, 2016
Options assumed in
acquisition
Options exercised
Options forfeited
Options outstanding at
December 31, 2017
Options vested or
expected to vest at
December 31, 2017
Options exercisable at
December 31, 2017
Information related to the stock option plan during each year follows (in
thousands):
2017
2016
2015
Intrinsic value of options exercised
Cash received from options
exercised
Excess tax benefit realized for option
exercises
$
$
$
2,807
2,835
805
$
$
$
235
231
30
$
$
$
42
60
6
As of December 31, 2017, there is no unrecognized compensation cost related
to stock options granted under all Plans. All options are fully vested. The total
fair value of options vested was $170,000 and $15,220 for the years ended
December 31, 2017 and 2016, respectively.
Restricted Common Stock Awards - The 2005 Plan and 2015 Plan provide for
the issuance of shares to directors and officers. Restricted common stock grants
typically vest over a five-year period. Restricted common stock (all of which are
shares of our common stock) is subject to forfeiture if employment terminates
prior to vesting. The cost of these awards is recognized over the vesting period of
the awards based on the fair value of our common stock on the date of the
grant.
39
Notes to
Consolidated Financial Statements
14. SHARED-BASED COMPENSATION (Continued)
The following table presents the activity for restricted stock during the years
then ended:
Nonvested outstanding shares at December 31,
2014
Granted
Vested
Forfeited
Nonvested outstanding shares at December 31,
2015
Granted
Vested
Forfeited
Nonvested outstanding shares at December 31,
2016
Vested
Forfeited
Nonvested outstanding shares at December 31,
2017
Weighted
Average
Grant
Date
Fair Value
$
$
$
$
$
$
$
$
$
$
$
$
12.68
10.79
12.67
12.95
12.34
14.10
12.38
12.95
13.35
13.34
14.07
13.33
Shares
56,850
9,268
(11,085)
(2,005)
53,028
54,650
(12,438)
(1,739)
93,501
(27,373)
(2,360)
63,768
During the years ended December 31, 2017, 2016, and 2015, 0, 54,650, and
9,268 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, and $10.79 per share on the date of grant during
the years ended December 31, 2016 and 2015, respectively. These restricted
common stock awards vest 20% after the first year. 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, 2017, there were 63,768 shares of restricted stock that are
nonvested and expected to vest. Share-based compensation cost charged against
income for restricted stock awards was $349,000 for the year ended
December 31, 2017, $235,000 for the year ended December 31, 2016, and
$161,000 for the year ended December 31, 2015.
As of December 31, 2017, there was $696,000 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 2.90 years and will be adjusted for subsequent changes in estimated
forfeitures. Restricted common stock awards had an intrinsic value of $1,598,000
at December 31, 2017.
15. 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 $600,000 and $380,000 to
the profit sharing plan in 2017 and 2016, respectively. There was $270,000
contribution by the Bank to the profit sharing plan in 2015.
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,
2017, 2016, and 2015, the Bank made a 100% matching contribution on all
deferred amounts up to 3% of eligible compensation and a 50% matching
40
contribution on all deferred amounts above 3% to a maximum of 5%. For the
years ended December 31, 2017, 2016, and 2015, the Bank made matching
contributions totaling $686,000, $604,000, and $585,000, respectively.
Deferred Compensation Plans - The Bank has a nonqualified Deferred
Compensation Plan which provides directors with an unfunded, deferred
compensation program. Under the plan, eligible participants may elect to defer
some or all of their current compensation or director fees. Deferred amounts earn
interest at an annual rate determined by the Board of Directors (2.68% at
December 31, 2017). At December 31, 2017 and 2016, the total net deferrals
included in accrued interest payable and other liabilities were $3,713,000 and
$3,440,000, 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 $3,375,000 and $3,297,000 and at December 31,
2017 and 2016, respectively. Income recognized on these policies, net of related
expenses, for the years ended December 31, 2017, 2016, and 2015, was $78,000,
$83,000, and $105,000, 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 (2.68% at
December 31, 2017). At December 31, 2017 and 2016, the total net deferrals
included in accrued interest payable and other liabilities were $86,000 and
$52,000, respectively.
Salary Continuation Plans - The Board of Directors approved salary continuation
plans for certain key executives during 2002 and subsequently amended the plans
in 2006. Under these plans, the Bank is obligated to provide the executives with
annual benefits for 15 years after retirement. These benefits are substantially
equivalent to those available under split-dollar life insurance policies purchased by
the Bank on the life of the executives. The expense recognized under these plans
for the years ended December 31, 2017, 2016, and 2015, totaled $561,000,
$489,000, and $447,000, respectively. Accrued compensation payable under the
salary continuation plans totaled $5,786,000 and $5,572,000 at December 31,
2017 and 2016, respectively.
In connection with these plans, the Bank purchased single premium life
insurance policies with cash surrender values totaling $6,355,000 and $6,196,000
at December 31, 2017 and 2016, respectively. Income recognized on these
policies, net of related expense, for the years ended December 31, 2017, 2016,
and 2015 totaled $159,000, $159,000, and $167,000, respectively.
In connection with the acquisitions of Folsom Lake Bank (FLB), 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
FLB, Service 1st, and VCB . The liability relates to change in control benefits
associated with their salary continuation plans. The benefits are payable to the
individuals when they reach retirement age. At December 31, 2017 and 2016,
the total amount of the liability was $4,557,000 and $2,788,000, respectively.
Expense recognized by the Bank in 2017, 2016 and 2015 associated with these
plans was $163,000, $120,000, and $78,000, 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 $15,326,000, and $11,014,000 at December 31, 2017 and 2016,
respectively. Income recognized on these policies, net of related expenses, for the
years ended December 31, 2017, 2016, and 2015, was $315,000, $298,000, and
$194,000, respectively.
The current annual tax-free interest rate on all life insurance policies is 3.97%.
Employee Stock Purchase Plan - During 2017, the Company adopted an
Employee Stock Purchase Plan which allows employees to purchase the
Company’s stock at a discount to fair market value as of the date of purchase.
The Company bears all costs of administering the plan, including broker’s fees,
commissions, postage and other costs actually incurred.
Notes to
Consolidated Financial Statements
16. 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, 2017
Disbursements
Amounts repaid
Balance, December 31, 2017
Undisbursed commitments to related parties, December 31,
2017
$
$
$
6,482
6,654
(1,251)
11,885
1,298
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 2017 and 2016
(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
2017
2016
$
3,296
210,816
750
$
887
167,666
790
$
214,862
$
169,343
$
$
5,155
148
5,303
5,155
155
5,310
103,314
103,419
2,826
71,645
92,904
(516)
209,559
164,033
$
214,862
$
169,343
41
Notes to
Consolidated Financial Statements
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
(Continued)
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2017, 2016, and 2015
(In thousands)
Income:
Dividends declared by Subsidiary - eliminated in consolidation
Other income
Total income
Expenses:
Interest on junior subordinated deferrable interest debentures
Professional fees
Other expenses
Total expenses
Income before equity in undistributed net income of Subsidiary
Equity in undistributed net income of Subsidiary, net of distributions
Income before income tax benefit
Benefit from income taxes
Income available to common shareholders
Comprehensive income
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2017, 2016, and 2015
(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 (decrease) increase 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 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 acquisitions
42
2017
2016
2015
$
$
$
3,133
4
3,137
147
231
1,019
1,397
1,740
11,754
13,494
532
14,026
16,867
$
$
$
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
2017
2016
2015
$
14,026
$
15,182
$
10,964
(11,754)
384
-
(114)
(7)
155
2,690
(151)
(3,010)
2,880
-
(130)
2,409
887
3,296
142
28,405
$
$
$
(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
-
$
$
$
Supplementary
Financial Information
The following supplementary financial information is not a part of the Company’s financial statements.
Net interest income
Reversal of credit losses
Net interest income after provision for credit losses
Other non-interest income
Net realized (losses) gains on investment securities
Total non-interest expense
Provision for income taxes
Net income
Net income available to common shareholders
Basic earnings per share
Diluted earnings per share
Unaudited Quarterly Statement of Operations Data
(In thousands, except per share amounts)
Q4 2017
Q3 2017
Q2 2017
Q1 2017
Q4 2016
Q3 2016
Q2 2016
Q1 2016
$
15,567 $
-
15,567
1,947
(6)
13,109
4,064
13,578 $
(900)
13,786 $
(150)
13,308 $
(100)
14,478
2,385
169
10,394
2,144
13,936
1,939
2,157
10,789
2,295
13,408
1,764
482
10,113
1,291
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
$
$
$
$
335 $
4,494 $
4,948 $
4,250 $
2,606 $
3,114 $
6,058 $
3,404
335 $
4,494 $
4,948 $
4,250 $
2,606 $
3,114 $
6,058 $
3,403
0.02 $
0.37 $
0.41 $
0.35 $
0.21 $
0.28 $
0.55 $
0.02 $
0.36 $
0.40 $
0.35 $
0.21 $
0.28 $
0.55 $
0.31
0.31
The results for the fourth quarter 2017 include the results of the assets and liabilities acquired from Folsom Lake Bank in addition to the continued organic growth
of the Company. The Company recorded additional tax expense of $3.54 million in the fourth quarter of 2017 related to the Tax Cuts and Jobs Act, which required
the Company to re-measure its net deferred tax assets and resulted in a reduction in diluted earnings per share of $0.26 in the quarter and $0.28 for the year. 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.
43
Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors
Central Valley Community Bancorp and Subsidiary
Fresno, California
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Central Valley Community Bancorp and Subsidiary (the
‘‘Company’’) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in
shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes
(collectively referred to as the ‘‘financial statements’’). We also have audited the Company’s internal control over financial reporting as
of December 31, 20117, based on criteria established in Internal Control—Integrated Framework: (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control—Integrated Framework: (2013) issued by COSO.
Basis for Opinions
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 the Company’s
financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (‘‘PCAOB’’) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or
fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation
of the financial statements. 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. As permitted, the Company has excluded the operations of Folsom Lake
Bank acquired during 2017, which is described in Note 2 of the consolidated financial statements, from the scope of management’s
report on internal control over financial reporting. As such, it has also been excluded from the scope of our audit of internal control
over financial reporting. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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
44
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.
We have served as the Company’s auditor since 2011.
Sacramento, California
March 14, 2018
45
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)
2017
2016
2015
2014
2013
$
57,376 $
1,137
46,676 $
1,096
41,822 $
1,047
41,039 $
1,156
56,239
(1,150)
57,389
10,836
44,406
23,819
9,793
14,026
-
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
-
14,026 $
15,182 $
10,964 $
5,294 $
1.12 $
1.34 $
1.00 $
0.48 $
1.10 $
1.33 $
1.00 $
0.48 $
0.24 $
0.24 $
0.18 $
0.20 $
34,836
1,385
33,451
-
33,451
7,831
31,685
9,597
1,347
8,250
350
7,900
0.77
0.77
0.20
December 31,
(In thousands)
2017
2016
2015
2014
2013
604,801 $
891,901
1,425,687
1,661,655
209,559
1,505,436
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
568,426 $
784,085
1,284,305
1,491,696
182,507
1,364,839
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
$
$
$
$
$
$
Data from 2017 reflects the partial year impact of the acquisition of Folsom Lake Bank on October 1, 2017. 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.
46
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 Folsom
Lake Bank (FLB) completed a merger under which FLB was merged with and
into the Bank on October 1, 2017. With the FLB acquisition, the Company
added two full service branches, located in Folsom, and Rancho Cordova,
California 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 2017, 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, 2017, the Bank operated 24 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 FLB acquisition added total
assets, at fair value, of approximately $196.15 million, $117.82 million in loans,
at fair value, and $171.95 million in deposits, at fair value, at October 1, 2017.
FLB’s results of operations have been included in the Company’s results of
operations beginning October 1, 2017. The one-time pre-tax severance, retention,
acquisition and integration costs totaled $1.83 million for the year ended
December 31, 2017.
ECONOMIC CONDITIONS
The economy in California’s Central Valley was negatively impacted by the
economic conditions in California and in our operating markets during the
economic downturn of 2007 through 2010. 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, 2017 was
$1.10 compared to $1.33 and $1.00 for the years ended December 31, 2016 and
2015, respectively. Net income for 2017 was $14,026,000 compared to
$15,182,000 and $10,964,000 for the years ended December 31, 2016 and
2015, respectively. The decrease in net income and EPS was primarily driven by
the increase in provision for income taxes and increase in non-interest expense,
and an increase in provision for credit losses, offset by an increase in net interest
income, and an increase in non-interest income in 2017 compared to 2016.
Total assets at December 31, 2017 were $1,661,655,000 compared to
$1,443,323,000 at December 31, 2016.
Return on average equity for 2017 was 7.69% compared to 9.84% and 8.12%
for 2016 and 2015, respectively. Return on average assets for 2017 was 0.94%
compared to 1.15% and 0.90% for 2016 and 2015, respectively. Total equity was
$209,559,000 at December 31, 2017 compared to $164,033,000 at
December 31, 2016. The increase in equity in 2017 compared to 2016 was
primarily driven by the issuance of common stock in connection with the Folsom
Lake Bank acquisition, as well as the retention of earnings, net of dividends paid,
and an increase in unrealized gains on available-for-sale securities, net of tax,
recorded in accumulated other comprehensive income (AOCI).
Average total loans increased $146,770,000 or 22.70% to $793,343,000 in
2017 compared to $646,573,000 in 2016. In 2017, we recorded a reverse
provision for credit losses of $1,150,000 compared to a reverse provision of
$5,850,000 in 2016 and a provision of $600,000 in 2015. The Company had
nonperforming assets consisting of $2,875,000 in nonaccrual loans and $70,000
in repossessed assets, totaling $2,945,000 at December 31, 2017. At
December 31, 2016, nonperforming assets totaled $2,542,000. Net loan loss
recoveries for 2017 were $602,000 compared to $5,566,000 for 2016 and
$702,000 for 2015. 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;
47
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OVERVIEW
(Continued)
• Development of revenue streams, including net interest income and
non-interest income;
• Asset quality;
• Asset growth;
• Capital adequacy;
• Operating efficiency; and
• Liquidity.
Return to Our Shareholders
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 7.69% for the year ended 2017 compared to 9.84% and
8.12% for the years ended 2016 and 2015, respectively.
Our net income for the year ended December 31, 2017 decreased $1,156,000
compared to 2016 and increased $4,218,000 in 2016 compared to 2015. During
2017, net income compared to 2016 was negatively impacted by the
re-measurement of our deferred tax asset and corresponding increase in tax
expense. Also contributing to the decrease was the increase in non-interest
expenses, and an increase in the provision for credit losses. These were partially
offset by increases in net interest income and increases in non-interest income.
Net interest income increased primarily because of increases in loan and
investment income, offset by increases in interest expense on deposits. For 2017,
our net interest margin (NIM) increased 32 basis points to 4.41% compared to
2016. 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 2017 was positively
impacted by the collection of nonaccrual loans which resulted in a recovery of
interest income of approximately $1,325,000. The recovery was partially offset by
reversal of approximately $12,000 in interest income on loans placed on
nonaccrual during the year. Net interest income during 2016 was positively
impacted by the collection of nonaccrual loan which resulted in a recovery of
interest income of approximately $657,000. The recovery in 2016 was partially
offset by reversal of approximately $71,000 in interest income on loans put on
nonaccrual during the year.
Non-interest income increased 12.98% in 2017 compared to 2016 primarily
due to a $882,000 increase in net realized gains on sales and calls of investment
securities, a $230,000 increase in interchange fees, a $204,000 increase in service
charge income, and a $294,000 increase in other income, partially offset by a
decrease in loan placement fees of $377,000, and a $187,000 decrease in Federal
Home Loan Bank dividends. The Company also realized $190,000 tax-free gains
related to the collection of life insurance proceeds in 2016, which are included in
other non-interest income. In addition, the Company recorded an
other-than-temporary impairment loss of $136,000 during the period ended
December 31, 2016.
Non-interest expenses increased in 2017 compared to 2016 primarily due to
the SVB and FLB acquisitions. The net increase year over year was a result of
increases in salary and employee benefit expenses of $2,857,000, increase in
acquisition and integration expenses of $46,000, data processing expenses of
$33,000, occupancy and equipment expenses of $432,000, ATM/Debit card
expenses of $117,000, Internet banking expenses of $27,000, regulatory
assessments of $10,000, advertising fees of $62,000, professional services of
$251,000, and amortization of core deposit intangibles of $85,000. The
Company also recognized additional tax expense of $3,535,000 related to a tax
law change enacted in 2017. Basic EPS was $1.12 for 2017 compared to $1.34
and $1.00 for 2016 and 2015, respectively. Diluted EPS was $1.10 for 2017
compared to $1.33 and $1.00 for 2016 and 2015, respectively. The decrease in
EPS for 2017 is primarily due to the decrease in net income.
We experienced an increase in capital due to the issuance of common stock as
a result of the Folsom Lake Bank acquisition, as well as the retention of earnings,
net of dividends paid, and an increase in accumulated other comprehensive
income.
Return on Average Assets
Our return on average assets (ROA) is a ratio that measures our performance
compared with other banks and bank holding companies. Our ROA for the year
ended 2017 was 0.94% compared to 1.15% and 0.90% for the years ended
48
December 31, 2016 and 2015, respectively. The 2017 decrease in ROA is
primarily due to the decrease in net income. Annualized ROA for our peer group
was 1.13% at December 31, 2017. Peer group information from SNL Financial
data includes bank holding companies in central California with assets from
$600 million to $3.5 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 4.41% for the year
ended December 31, 2017, compared to 4.09% and 4.01% for the years ended
December 31, 2016 and 2015, respectively. We experienced an increase in 2017
net interest margin compared to 2016, resulting from the increase in loan and
investment yields. The effective tax equivalent yield on total earning assets
increased 32 basis points, while the cost of total interest-bearing liabilities
decreased slightly to 0.14% for the year ended December 31, 2017. Our cost of
total deposits in 2017 and 2016 was 0.08% and 0.09%, respectively, compared
to 0.09% for the same period in 2015. Our net interest income before provision
for credit losses increased $10,659,000 or 23.39% to $56,239,000 for the year
ended 2017 compared to $45,580,000 and $40,775,000 for the years ended
2016 and 2015, 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 2017 increased $1,245,000 or
12.98% to $10,836,000 compared to $9,591,000 in 2016 and $9,387,000 in
2015. The increase resulted primarily from increases in net realized gains on sales
and calls of investment securities, interchange fees, service charge income, and
appreciation in cash surrender value of bank owned life insurance, partially offset
by a decrease in loan placement fees and Federal Home Loan Bank dividends
compared to 2016. Customer service charges increased $204,000 or 7.16% to
$3,053,000 in 2017 compared to $2,849,000 and $2,970,000 in 2016 and
2015, 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
$2,945,000 and $2,542,000 at December 31, 2017 and 2016, respectively.
Nonperforming assets totaled 0.33% of gross loans as of December 31, 2017 and
0.34% of gross loans as of December 31, 2016. The nonperforming assets for
2017 includes repossessed assets of $70,000 compared to $362,000 repossessed
assets at December 31, 2016. The Company had no other real estate owned
(OREO) at December 31, 2017 or December 31, 2016. 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 0.32% as of
December 31, 2017 and 0.29% as of December 31, 2016. The allowance for
credit losses as a percentage of outstanding loan balance was 0.98% as of
December 31, 2017 and 1.23% as of December 31, 2016. The ratio of net
recoveries to average loans was 0.08% as of December 31, 2017 and 0.86% as of
December 31, 2016.
Asset Growth
As revenues from both net interest income and non-interest income are a
function of asset size, the continued growth in assets has a direct impact in
increasing net income and therefore ROE and ROA. The majority of our assets
are loans and investment securities, and the majority of our liabilities are
deposits, and therefore the ability to generate deposits as a funding source for
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OVERVIEW
(Continued)
loans and investments is fundamental to our asset growth. Total assets increased
15.13% during 2017 to $1,661,655,000 as of December 31, 2017 from
$1,443,323,000 as of December 31, 2016. Total gross loans increased 19.04% to
$900,679,000 as of December 31, 2017, compared to $756,628,000 at
December 31, 2016. Total investment securities and Federal funds sold decreased
0.92% to $542,721,000 as of December 31, 2017 compared to $547,764,000 as
of December 31, 2016. Total deposits increased 13.51% to $1,425,687,000 as of
December 31, 2017 compared to $1,255,979,000 as of December 31, 2016. Our
loan to deposit ratio at December 31, 2017 was 63.18% compared to 60.24% at
December 31, 2016. The loan to deposit ratio of our peers was 77.65% at
December 31, 2017. The growth information above includes the results of our
acquisition of Folsom Bank which added approximately $117,815,000 in net
loans and $171,948,000 in deposits during 2017.
Capital Adequacy
At December 31, 2017, we had a total capital to risk-weighted assets ratio of
14.07%, a Tier 1 risk-based capital ratio of 13.28%, common equity Tier 1 ratio
of 12.90%, and a leverage ratio of 9.71%. 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, 2017, on a stand-alone basis, the Bank had a total
risk-based capital ratio of 13.74%, a Tier 1 risk based capital ratio of 12.96%,
common equity Tier 1 ratio of 12.96%, and a leverage ratio of 9.46%. At
December 31, 2016, the Bank had a total risk-based capital ratio of 13.57%,
Tier 1 risk-based capital of 12.59% and a leverage ratio of 8.64%. Note 13 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.
As of December 31, 2017, the Company and the Bank met or exceeded all of
their capital requirements inclusive of the capital buffer. The Company 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,
2017.
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
62.03% for 2017 compared to 64.72% for 2016 and 68.46% for 2015. The
improvement in the efficiency ratio in 2017 was due to the growth in revenues
outpacing the growth in non-interest expense. The increase in the efficiency ratio
in 2016 compared to 2015 was 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 21.58% to
$67,075,000 in 2017 compared to $55,171,000 in 2016 and $50,162,000 in
2015, while operating expenses increased 14.09% in 2017, 8.07% in 2016, and
1.92% in 2015.
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 $234,689,000 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
$643,087,000 or 38.70% of total assets at December 31, 2017 and
$586,317,000 or 40.62% of total assets as of December 31, 2016.
RESULTS OF OPERATIONS
NET INCOME
Net income was $14,026,000 in 2017 compared to $15,182,000 and
$10,964,000 in 2016 and 2015, respectively. Basic earnings per share was $1.12,
$1.34, and $1.00 for 2017, 2016, and 2015, respectively. Diluted earnings per
share was $1.10, $1.33, and $1.00 for 2017, 2016, and 2015, respectively. ROE
was 7.69% for 2017 compared to 9.84% for 2016 and 8.12% for 2015. ROA
for 2017 was 0.94% compared to 1.15% for 2016 and 0.90% for 2015.
The decrease in net income for 2017 compared to 2016 can be attributed to
an increase in provision for income taxes and an increase in non-interest expense,
partially offset by an increase in the provision for credit losses, an increase in net
interest income, and an increase in non-interest income. The increase in net
income for 2016 compared to 2015 was primarily 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.
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.
49
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INTEREST INCOME AND EXPENSE (Continued)
SCHEDULE OF AVERAGE
BALANCES, AVERAGE YIELDS
AND RATES
(Dollars in thousands)
ASSETS
Interest-earning deposits in
other banks
Securities
Taxable securities
Non-taxable securities (1)
Total investment securities
Federal funds sold
Total securities and
interest-earning deposits
Loans (2) (3)
Federal Home Loan Bank stock
310,876
220,806
531,682
35
568,426
790,504
5,909
Total interest-earning assets
1,364,839 $
Allowance for credit losses
Nonaccrual loans
Cash and due from banks
Bank premises and equipment
Other non-earning assets
(9,258)
2,839
24,989
9,310
98,977
Year Ended December 31, 2017
Interest
Income/
Expense
Average
Balance
Average
Interest Rate
Year Ended December 31, 2016
Interest
Income/
Expense
Average
Balance
Average
Interest Rate
Year Ended December 31, 2015
Interest
Income/
Expense
Average
Balance
Average
Interest Rate
$
36,709 $
424
1.16%
$
53,514 $
289
0.54%
$
64,963 $
209
6,526
10,443
16,969
-
17,393
43,534
443
61,370
2.10%
4.73%
3.19%
1.50%
3.06%
5.51%
7.50%
4.50%
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%
313,006
194,224
507,230
116
560,860
644,282
4,940
1,210,082 $
(10,098)
2,291
23,840
9,053
85,839
4,793
9,569
14,362
1
14,572
30,504
580
45,656
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
0.32%
1.68%
5.37%
3.10%
0.25%
2.75%
5.27%
12.05%
4.10%
Total average assets
$
1,491,696
$
1,321,007
$
1,222,526
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
$
382,071 $
264,581
137,666
784,318
6,930
350
211
408
969
168
Total interest-bearing liabilities
791,248 $
1,137
Non-interest bearing demand
deposits
Other liabilities
Shareholders’ equity
499,987
17,954
182,507
Total average liabilities and
shareholders’ equity
$
1,491,696
0.09%
0.08%
0.30%
0.12%
2.42%
0.14%
$
337,804 $
249,620
139,656
727,080
5,157
317
133
525
975
121
732,237 $
1,096
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%
417,151
17,294
154,325
387,931
16,510
135,062
$
1,321,007
$
1,222,526
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)
$
61,370
4.50%
$
50,633
4.18%
$
45,656
4.10%
1,137
0.14%
1,096
0.15%
1,047
0.15%
$
60,233
4.41%
$
49,537
4.09%
$
44,609
4.01%
(1) Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits (at a 35% tax rate) relating to income earned on municipal bonds totaling $3,551, $3,327,
and $3,254 in 2017, 2016, and 2015, respectively.
(2) Loan interest income includes loan fees of $684 in 2017, $134 in 2016, and $255 in 2015.
(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.
50
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, 2017
Compared to 2016
For the Years Ended
December 31, 2016
Compared to 2015
Volume
Rate
Net
Volume
Rate
Net
(In thousands)
$
(90) $
225 $
135 $
(36) $
116 $
80
(39)
1,339
689
(683)
650
656
460
857
623
(639)
1,083
218
1,300
-
7,728
123
6
-
1,755
(310)
1,306
-
9,483
(187)
1,317
(1)
3,446
16
(16)
-
101
34
1,301
(1)
3,547
50
9,061
1,676
10,737
4,742
235
4,977
49
62
111
46
(7)
(110)
(117)
(36)
42
41
83
(48)
6
(42)
(6)
47
41
10
-
10
2
14
16
22
38
48
(22)
26
22
48
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)
$
8,978 $
1,718 $ 10,696 $
4,732 $
197 $
4,929
(1) Computed on a tax equivalent basis for securities exempt from federal income
taxes.
Interest and fee income from loans increased $9,483,000 or 27.85% in 2017
compared to 2016. Interest and fee income from loans increased $3,547,000 or
11.63% in 2016 compared to 2015. The increase in 2017 is primarily
attributable to an increase in average total loans outstanding, as well as an
increase in the yield on loans by 22 basis points. The net interest income during
2017 was positively impacted by the FLB and SVB acquisitions in addition to
the collection of nonaccrual loans which resulted in a recovery of interest income
of approximately $1,325,000. The recovery was partially offset by reversal of
approximately $12,000 in interest income on loans placed on nonaccrual status
during the year. 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 status
during the year.
Average total loans for 2017 increased $146,770,000 to $793,343,000
compared to $646,573,000 for 2016 and $586,762,000 for 2015. Of the
increase in 2017, approximately $116.7 million was attributed to organic growth
and approximately $30.1 million from the acquisition of FLB. The yield on
loans for 2017 was 5.51% compared to 5.29% and 5.27% for 2016 and 2015,
respectively. The impact to interest income from the accretion of the loan marks
on acquired loans was an increase of $1,048,000 and $1,143,000 for the years
ended December 31, 2017 and 2016, 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 $1,217,000 or 9.64% in
2017 compared to 2016. The yield on average investments increased 22 basis
points to 3.06% for the year ended December 31, 2017 from 2.84% for the year
ended December 31, 2016. Average total investments increased $7,566,000 to
$568,426,000 in 2017 compared to $560,860,000 in 2016. In 2016, total
investment income on a non tax-equivalent basis increased $1,307,000 or
11.55% compared to 2015.
Our investment portfolio consists primarily of securities issued by U.S.
Government sponsored entities and agencies collateralized by mortgage backed
obligations and obligations of states and political subdivision securities. However,
a significant portion of the investment portfolio is mortgage-backed securities
(MBS) and collateralized mortgage obligations (CMOs). At December 31, 2017,
we held $325,589,000 or 59.99% of the total market value of the investment
portfolio in MBS and CMOs with an average yield of 2.89%. We invest in
CMOs and 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. Premium
amortization and discount accretion of these investments affects our net interest
income. Our management monitors the prepayment trends 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, 2017 was an unrealized
gain of $2,826,000 and is reflected in the Company’s equity. At December 31,
2017, the average life of the investment portfolio was 5.69 years and the market
value reflected a pre-tax unrealized gain of $4,012,000. Management reviews
market value declines on individual investment securities to determine whether
they represent other-than-temporary impairment (OTTI). For the years ended
December 31, 2017 and 2015, no OTTI was recorded. For the year ended
December 31, 2016, OTTI was recorded in the amount of $136,000. Future
deterioration in the market values of our investment securities may require the
Company to recognize additional OTTI losses.
A component of the Company’s strategic plan has been to use its investment
portfolio to offset, in part, its interest rate risk relating to variable rate loans.
Measured at December 31, 2017, an immediate rate increase of 200 basis points
would result in an estimated decrease in the market value of the investment
portfolio by approximately $36,360,000. Conversely, with an immediate rate
decrease of 200 basis points, the estimated increase in the market value of the
investment portfolio would be $36,325,000. 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 2017 increased $10,700,000 to $57,376,000
compared to $46,676,000 in 2016 and $41,822,000 in 2015. The increase was
the result of yield changes, asset mix changes, and an increase in average earning
assets. The tax equivalent yield on interest earning assets increased to 4.50% for
the year ended December 31, 2017 from 4.18% for the year ended
December 31, 2016. Average interest earning assets increased to $1,364,839,000
for the year ended December 31, 2017 compared to $1,210,082,000 for the year
ended December 31, 2016. Average interest-earning deposits in other banks
decreased $16,805,000 comparing 2017 to 2016. Average yield on these deposits
was 1.16% compared to 0.54% on December 31, 2017 and December 31, 2016
respectively. Average investments and interest-earning deposits increased
51
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INTEREST INCOME AND EXPENSE
(Continued)
$7,566,000 but the tax equivalent yield on those assets increased 22 basis points.
Average total loans increased $146,770,000 and the yield on average loans
increased 22 basis points.
The increase in total interest income for 2016 was the result of yield changes,
asset mix changes, and an increase in average earning assets. The 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.
Interest expense on deposits in 2017 decreased $6,000 or 0.62% to $969,000
compared to $975,000 in 2016 and increased as compared to $948,000 in 2015.
The yield on interest-bearing deposits decreased 1 basis point to 0.12% in 2017
from 0.13% in 2016. The increase in interest expense in 2016 compared to
2015 was the result of the deposits acquired. The yield on interest-bearing
deposits decreased 1 basis point to 0.13% in 2016 from 0.14% in 2015. Average
interest-bearing deposits were $784,318,000 for 2017 compared to $727,080,000
and $677,867,000 for 2016 and 2015, respectively. The increases in average
interest-bearing deposits in 2017 and 2016 was the result of organic growth and
the FLB and SVB acquisitions in 2017 and 2016.
Average other borrowings were $6,930,000 with an effective rate of 2.42% for
2017 compared to $5,157,000 with an effective rate of 2.35% for 2016. In
2015, the average other borrowings were $5,156,000 with an effective rate of
1.89%. 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 carry a floating rate based on the three month LIBOR plus a
margin of 1.60%. The rate was 2.96% for 2017, 2.48% for 2016, and 1.92%
for 2015.
The cost of all interest-bearing liabilities was 0.14% and 0.15% basis points
for 2017 and 2016, respectively, compared to 0.15% for 2015. The cost of total
deposits decreased to 0.08% for the year ended December 31, 2017, compared
to 0.09% for the years ended December 31, 2016 and 2015. Average demand
deposits increased 19.86% to $499,987,000 in 2017 compared to $417,151,000
for 2016 and $387,931,000 for 2015. The ratio of average non-interest demand
deposits to average total deposits increased to 38.93% for 2017 compared to
36.46% and 36.40% for 2016 and 2015, respectively.
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
Net interest income before provision for credit losses for 2017 increased
$10,659,000 or 23.39% to $56,239,000 compared to $45,580,000 for 2016 and
$40,775,000 for 2015. The increase in 2017 was due to the increase in average
earning assets while the yield on interest bearing liabilities decreased 1 basis
point. Our net interest margin (NIM) increased 32 basis points. Yield on interest
earning assets increased 32 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 $4,805,000 in 2016 compared to 2015,
primarily due to the increase in average earning assets. Average interest-earning
assets were $1,364,839,000 for the year ended December 31, 2017 with a NIM
of 4.41% compared to $1,210,082,000 with a NIM of 4.09% in 2016, and
$1,112,758,000 with a NIM of 4.01% in 2015. 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 change in balance and 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
52
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,
2017
December 31,
2016
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
$
1,784
287
1,252
1,004
1,958
1,441
140
464
361
87
1,884
296
1,408
698
1,969
1,969
156
483
369
94
Total allowance for credit losses
$
8,778
$
9,326
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 high-risk 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. 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, 2017, the Company recorded a reverse
provision for credit losses of $1,150,000 compared to a reverse provision of
$5,850,000 and a provision of $600,000 for the same periods in 2016 and 2015,
respectively. The reversal from the allowance for credit losses is primarily the
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
PROVISION FOR CREDIT LOSSES
(Continued)
result of $602,000 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, 2017, 2016 and 2015 the Company
had net recoveries totaling $602,000, $5,566,000, and $702,000, respectively.
The net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to
average loans, was (0.08)%, (0.86)% and (0.12)% for 2017, 2016, and 2015,
respectively.
Nonperforming loans were $2,875,000 and $2,180,000 at December 31, 2017
and 2016, respectively. Nonperforming loans as a percentage of total loans were
0.32% at December 31, 2017 compared to 0.29% at December 31, 2016. The
Company had no other real estate owned at December 31, 2017, December 31,
2016, and December 31, 2015. The carrying value of foreclosed assets was
$70,000 at December 31, 2017 and $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. We had $1,281,000 loans past due, not
including nonaccrual loans at December 31, 2017 compared to none at
December 31, 2016.
Economic pressures may negatively impact the financial condition of borrowers
to whom the Company has extended credit and as a result when negative
economic conditions are anticipated, we may be required to make significant
provisions to the allowance for credit losses. For example, 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. However, 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 losses. As of
December 31, 2017, there were $50.0 million in classified loans of which
$26.5 million related to agricultural real estate, $7.9 million to commercial and
industrial loans, $2.8 million to real estate owner occupied, $3.9 million to real
estate construction, and $3.4 million to commercial real estate. This compares to
$49.5 million in classified loans as of December 31, 2016 of which
$27.1 million related to agricultural real estate, $1.4 million to real estate
construction, $12.5 million to commercial and industrial, $0.3 million to
agricultural production, and $2.7 million to commercial real estate.
As of December 31, 2017, 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 $57,389,000 for
2017 compared to $51,430,000 and $40,175,000 for 2016 and 2015,
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 $10,836,000 in
2017 compared to $9,591,000 and $9,387,000 in 2016 and 2015, respectively.
The $1,245,000 or 12.98% increase in non-interest income in 2017 was due to
increases in net realized gains on sales and calls of investment securities, service
charge income, interchange fees, and other income compared to 2016, partially
offset by a decrease in Federal Home Loan Bank dividends and loan placement
fees. The $204,000 or 2.17% increases in non-interest income in 2016 compared
to 2015 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, partially offset by a decrease in service charge income, gain
on other real estate owned, appreciation in cash surrender value of bank owned
life insurance, and other income.
Customer service charges increased $204,000 to $3,053,000 in 2017 compared
to $2,849,000 in 2016 and $2,970,000 in 2015. The increase in 2017 from
2016 resulted from increase in customer base from the SVB and FLB
acquisitions. The decrease in 2016 from 2015 was the result of lower NSF fees
and lower analyzed service charge fee income.
During the year ended December 31, 2017, we realized net gains on sales and
calls of investment securities of $2,802,000. In 2016, we realized a net gain of
$1,920,000 compared to a net gain of $1,495,000 in 2015 from sales and calls
of investment securities. In 2016, we recorded an other-than-temporary
impairment loss of $136,000 as compared to none during the year ended
December 31, 2017, and 2015. The net gains in 2017, 2016, and 2015 were the
results of partial restructuring of the investment portfolio designed to improve
the future performance of the portfolio. See Note 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 $621,000 in 2017 compared to $558,000 and
$596,000 in 2016 and 2015, 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 $1,458,000 in 2017 compared to $1,228,000 and
$1,197,000 in 2016 and 2015, respectively. Part of the increases in 2017 and
2016 was attributable to the FLB and SVB acquisitions.
We earn loan placement fees from the brokerage of single-family residential
mortgage loans provided for the convenience of our customers. Loan placement
fees decreased $377,000 in 2017 to $706,000 compared to $1,083,000 in 2016
and $1,042,000 in 2015.
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, 2017, we held $6,843,000 in FHLB stock compared to
$5,594,000 at December 31, 2016. Dividends in 2017 decreased to $443,000
compared to $630,000 in 2016 and $580,000 in 2015.
Other income increased to $1,753,000 in 2017 compared to $1,459,000 and
$1,507,000 in 2016 and 2015, respectively. The period-to-period increase in
2017 compared to 2016 was a result of recoveries on favorable legal settlements.
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 $5,484,000 or 14.09% to $44,406,000 in 2017 compared to
$38,922,000 in 2016, and $36,016,000 in 2015. The net increase
period-over-period is primarily due to the FLB and SVB acquisitions. Various
items are 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 62.03% for 2017 compared to 64.72% for 2016 and
68.46% for 2015. The improvement in the efficiency ratio in 2017 and 2016 is
due to the growth in revenues outpacing the growth in non-interest expense.
Salaries and employee benefits increased $2,857,000 or 13.06% to
$24,738,000 in 2017 compared to $21,881,000 in 2016 and $20,836,000 in
2015. Full time equivalents were 334 for the year ended December 31, 2017
compared to 277 for the year ended December 31, 2016. The increase in salaries
and employee benefits in 2017 compared to 2016 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 2017 compared to
2016. The FLB acquisition attributed to approximately $413,000 of the increase
in 2017.
For the years ended December 31, 2017, 2016, and 2015, the compensation
cost recognized for share based compensation was $384,000, $284,000 and
$238,000, respectively. As of December 31, 2017, there was $696,000 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 2.90 years. See Notes 1 and 14 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. No restricted stock shares were awarded in 2017.
Restricted stock awards of 54,650 shares were awarded in 2016.
53
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
NON-INTEREST EXPENSES (Continued)
Occupancy and equipment expense increased $432,000 or 9.09% to
$5,186,000 in 2017 compared to $4,754,000 in 2016 and $4,669,000 in 2015.
The addition of five new branches from the FLB and SVB acquisitions resulted
in an approximately $338,000 increase in rent expense in 2017 as compared to
2016. The Company made no changes in its depreciation expense methodology.
Regulatory assessments were $652,000 in 2017 compared to $642,000 and
$1,059,000 in 2016 and 2015, 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.
Data processing expenses were $1,740,000 in 2017 compared to $1,707,000 in
2016 and $1,139,000 in 2015. The $33,000 or 1.93% increase in 2017 is from
the addition of additional branches from the acquisition. Acquisition and
integration expenses related to the FLB and SVB mergers were $1,828,000 in
2017 compared to $1,782,000 in 2016. Professional services increased $251,000
in 2017 compared to 2016.
Amortization of core deposit intangibles was $234,000 for 2017, $149,000 for
2016, and $320,000 for 2015. During 2017, amortization expense related to
FLB core deposit intangible (CDI) was $47,000, amortization expense related to
SVB core deposit intangible (CDI) was $50,000, and amortization expense
related to VCB CDI was $137,000. During 2016, amortization expense related
to SVB 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.
ATM/Debit card expenses increased $117,000 to $750,000 for the year ended
December 31, 2017 compared to $633,000 in 2016 and $548,000 in 2015.
License and maintenance contracts increased $287,000 to $818,000 for the year
ended December 31, 2017 compared to $531,000 and $520,000 in 2016 and
2015, respectively. Other non-interest expenses increased $1,210,000 or 31.83%
to $5,011,000 in 2017 compared to $3,801,000 in 2016 and $3,665,000 in
2015.
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
2017
%
Other
Expense Average
Assets
2016
%
Other
Expense Average
Assets
2015
$
Stationery/supplies
Amortization of software
Telephone
Alarm
Postage
Armored courier fees
Risk management expense
Loss on sale or write-down
of assets
Donations
Personnel other
Credit card expense
Education/training
Loan related expenses
General insurance
Mileage Expense
Operating losses
Other
Total other non-interest
expense
(Dollars in thousands)
292
289
265
130
205
266
207
187
249
259
245
174
132
159
138
187
1,627
0.02% $
0.02%
0.02%
0.01%
0.01%
0.02%
0.01%
0.01%
0.02%
0.02%
0.02%
0.01%
0.01%
0.01%
0.01%
0.01%
0.11%
247
257
357
103
200
227
150
4
171
161
196
154
35
159
88
175
1,117
0.02% $
0.02%
0.03%
0.01%
0.02%
0.02%
0.01%
-%
0.01%
0.01%
0.02%
0.01%
-%
0.01%
0.01%
0.01%
0.09%
269
240
292
108
212
218
163
6
185
173
124
148
41
150
114
56
1,166
0.02%
0.02%
0.02%
0.01%
0.01%
0.01%
0.01%
-%
0.01%
0.01%
0.01%
0.01%
-%
0.01%
0.01%
-%
0.08%
$
5,011
0.34% $
3,801
0.30% $
3,665
0.25%
PROVISION FOR INCOME TAXES
Our effective income tax rate was 41.1% for 2017 compared to 31.3% for
2016 and 19.1% for 2015. The Company reported an income tax provision of
54
$9,793,000, $6,917,000, and $2,582,000 for the years ended December 31,
2017, 2016, and 2015, respectively. As a result of the enactment of the Tax Cuts
and Jobs Act (the ‘‘Act’’) on December 22, 2017, the federal tax rate applied to
the Company’s deferred taxes was adjusted to reflect the 2018 tax rates (the rates
at which the deferred tax items are expected to reverse). The change to the tax
rates (including the rate change applied to deferred taxes reflected in other
comprehensive income and certain tax-advantaged investments as reflected in
other assets) resulted in an increase to the Company’s tax provision of
$3,535,000. As part of the Act for tax years beginning after December 31, 2017,
alternative minimum tax credit carryforwards are refundable and are expected to
be fully refunded by 2022. As such, they are not dependent on future taxable
income to be realized and have been classified as an other receivable. During the
year ended December 31, 2017, the Company adopted ASU 2016-09
‘‘Compensation-Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting’’ which due to the exercise of stock options in
the current period, resulted in the recognition of $853,000 in excess tax benefits.
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.
FINANCIAL CONDITION
SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS
Total assets were $1,661,655,000 as of December 31, 2017, compared to
$1,443,323,000 as of December 31, 2016, an increase of 15.13% or
$218,332,000. Total gross loans were $900,679,000 as of December 31, 2017,
compared to $756,628,000 as of December 31, 2016, an increase of
$144,051,000 or 19.04%. The total investment portfolio (including Federal
funds sold and interest-earning deposits in other banks) increased 8.36% or
$46,669,000 to $604,801,000. Total deposits increased 13.51% or $169,708,000
to $1,425,687,000 as of December 31, 2017, compared to $1,255,979,000 as of
December 31, 2016. Shareholders’ equity increased $45,526,000 or 27.75% to
$209,559,000 as of December 31, 2017, compared to $164,033,000 as of
December 31, 2016. The increase in shareholders’ equity was due to the issuance
of common stock in connection with the Folsom Lake Bank acquisition, as well
as the retention of earnings, net of dividends paid, and an increase in unrealized
gains on available-for-sale securities recorded, net of taxes, in accumulated other
comprehensive income (AOCI). Accrued interest payable and other liabilities
were $21,254,000 as of December 31, 2017, compared to $17,756,000 as of
December 31, 2016, an increase of $3,498,000.
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.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
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 mortgage and asset backed
securities
Other equity securities
Amortized Cost at December 31,
2017
2016
2015
$
65,994 $
69,005 $
52,803
136,955
288,543
181,785
237,210
181,785
225,636
91,033
7,500
1,807
7,500
2,356
7,500
Total Available-for-Sale Securities
$ 538,692 $ 548,640 $ 470,080
Held-to-Maturity Securities
(In thousands)
Obligations of states and political
subdivisions
2017
2016
2015
$
- $
- $
31,712
Our investment portfolio consists primarily of U.S. Government sponsored
entities and agencies collateralized by 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,
2017, investment securities with a fair value of $90,541,000, or 16.68% of our
investment securities portfolio, were held as collateral for public funds, short and
long-term borrowings, treasury, tax, and for other purposes. Our investment
policies are established by the Board of Directors and implemented by our
Investment/Asset Liability Committee. They are designed primarily to provide
and maintain liquidity, to enable us to meet our pledging requirements for public
money and borrowing arrangements, to generate a favorable return on
investments without incurring undue interest rate and credit risk, and to
complement our lending activities.
Our investment portfolio as a percentage of total assets is generally higher than
our peers due primarily to our comparatively low loan-to-deposit ratio. Our
loan-to-deposit ratio at December 31, 2017 was 63.18% compared to 60.24% at
December 31, 2016. The loan to deposit ratio of our peers was 77.65% at
December 31, 2017. Peer group information from SNL Financial data includes
bank holding companies in central California with assets from $600 million to
$3.5 billion. The total investment portfolio, including Federal funds sold and
interest-earning deposits in other banks, increased 8.36% or $46,669,000 to
$604,801,000 at December 31, 2017, from $558,132,000 at December 31,
2016. The market value of the portfolio reflected an unrealized gain of
$4,012,000 at December 31, 2017, compared to an unrealized loss of $891,000
at December 31, 2016.
Losses recognized in 2017, 2016, and 2015 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 strategically several years ago in view of the rate environment
at that time. The Company is addressing risks in the security portfolio by selling
these securities and using proceeds to purchase securities that meet 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.
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, 2017, 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, 2017,
and identified those that had an unrealized loss for at least a consecutive
12 month period, which had an unrealized loss at December 31, 2017 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 securities that met the evaluation criteria, management obtained and
reviewed the most recently published national credit ratings for those securities.
For those securities 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, 2017.
At December 31, 2017, the Company had a total of 30 private label mortgage
backed securities (PLMBS) with a remaining principal balance of $91,033,000
and a net unrealized loss of approximately $352,000. Ten of these PLMBS with a
remaining principal balance of $1,359,000 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 PLMBS were recorded during the year ended December 31,
2017.
55
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, 2017 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
Private label residential mortgage and asset backed securities
Other equity securities
In one year or
less
After one through After five through
five years
ten years
After ten years
Total
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
$
-
1,893
-
$
-
2.06% 7,149
-
$ 8,492
4.71% 22,043
5.18% $ 57,502
4.11% 105,870
5.05% $ 65,994
4.83% 136,955
5.07%
4.67%
7
5
7,500
4.65%
1.00%
2.13%
887
79
-
4.80%
4.75%
-
421
-
-
4.99% 235,895
90,949
-
-
-
3.80% 237,210
3.68% 91,033
7,500
-
3.81%
3.68%
2.13%
$9,405
2.12% $ 8,115
4.72% $30,956
4.41% $490,216
4.15% $538,692
4.16%
(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 $144,051,000 or 19.04% to $900,679,000 as of December 31, 2017, compared to $756,628,000 as of December 31, 2016.
The following table sets forth information concerning the composition of our loan portfolio as of December 31, 2017, 2016, 2015, 2014, and 2013.
Loan Type
(Dollars in thousands)
Commercial:
Commercial and industrial
Agricultural land and production
$
Total commercial
Real estate:
Owner occupied
Real estate-construction and other
land loans
Commercial real estate
Agricultural real estate
Other real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
Deferred loan fees, net
Total gross loans (1)
Allowance for credit losses
Total loans (1)
(1) Includes nonaccrual loans of:
$
$
2017
2016
2015
2014
2013
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
100,856
14,956
115,812
11.2% $
1.7%
88,652
25,509
11.7% $
3.4%
12.9%
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
22.2%
128,147
22.3%
118,731
17.0%
6.1%
23.1%
204,452
22.7%
191,665
25.3%
168,910
28.2%
176,804
30.9%
156,781
30.6%
96,460
269,254
76,081
31,220
677,467
76,404
29,637
106,041
1,359
900,679
(8,778)
891,901
2,875
10.7%
29.9%
8.4%
3.5%
75.2%
8.5%
3.4%
11.9%
100.0%
$
$
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%
56
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
LOANS
(Continued)
The FLB acquisition added approximately $117,815,000 in net loans on the
acquisition date, of which $114,275,000 in net loans remained as of
December 31, 2017 due to payoffs and pay down of principal in the normal
course of operations. At December 31, 2017, loans acquired in the FLB, SVB
and VCB acquisitions had a balance of $243,712,000, of which $12,554,000
were commercial loans, $197,004,000 were real estate loans, and $34,154,000
were consumer loans. At December 31, 2016, loans acquired in the SVB and
VCB acquisition 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, 2017, in management’s judgment, a concentration of loans
existed in commercial loans and real-estate-related loans, representing
approximately 96.6% of total loans of which 12.9% were commercial and 83.7%
were real-estate-related. This level of concentration is consistent with 96.5% at
December 31, 2016. Although we believe the loans within this concentration
LOAN MATURITIES
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, 2017 and 2016.
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.
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, 2017.
(In thousands) (net of deferred costs)
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
$
$
$
$
$
62,919
87,124
45,190
9,822
205,055
79,586
125,469
205,055
9,838
$
$
$
$
$
23,060
5,347
86,795
12,023
127,225
79,802
47,423
127,225
13,768
$
$
$
$
$
29,833
3,989
449,022
84,196
567,040
105,032
462,008
567,040
276,408
$
$
$
$
$
115,812
96,460
581,007
106,041
899,320
264,420
634,900
899,320
300,014
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, 2017, total nonperforming assets totaled $2,945,000, or
0.18% of total assets, compared to $2,542,000, or 0.18% of total assets at
December 31, 2016. Total nonperforming assets at December 31, 2017, included
nonaccrual loans totaling $2,875,000, no OREO, and $70,000 in repossessed
assets. Nonperforming assets at December 31, 2016 consisted of $2,180,000 in
nonaccrual loans, no OREO, and $362,000 in repossessed assets. At
December 31, 2017, we had one loan considered a troubled debt restructuring
(‘‘TDR’’) totaling $59,000 which is included in nonaccrual loans compared to
one TDR totaling $20,000 at December 31, 2016. 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,
2017, 2016, 2015, 2014, and 2013 is set forth below. The Company had no
loans past due more than 90 days and still accruing interest at December 31,
2017 and 2016. Management is not aware of any potential problem loans, which
were current and accruing at December 31, 2017, 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.
57
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
NONPERFORMING ASSETS (Continued)
Composition of Nonaccrual, Past Due and Restructured Loans
(As of December 31, Dollars in thousands)
Nonaccrual Loans:
Commercial and industrial
Owner occupied real estate
Real estate construction and other land loans
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
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
2017
2016
2015
2014
2013
$
$
$
$
$
$
$
356
-
1,397
-
976
87
-
-
-
-
59
-
2,875
-
2,875
210
0.32%
-
3,491
32.75%
6,366
36
$
$
$
$
$
$
$
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
As of December 31, 2017 and 2016, we had impaired loans totaling
$6,366,000 and $5,269,000, 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 $210,000 for the year ended December 31,
2017 of which $17,000 was attributable to troubled debt restructurings. Foregone
interest on nonaccrual loans totaled $245,000 and $340,000 for the years ended
December 31, 2016 and 2015, respectively of which $2,000 and $104,000 was
attributable to troubled debt restructurings, respectively.
58
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, 2017.
(In thousands)
Non-accrual loans:
Commercial and industrial
Real estate
Real estate construction and land
development
Equity loans and lines of credit
Consumer
Restructured loans (non-accruing):
Real estate
Equity loans and lines of credit
Balances
December 31,
2016
Additions to
Nonaccrual
Loans
Net Pay
Downs
Transfer to
Foreclosed
Collateral
Returns to
Accrual
Status
Charge
Offs
Balances
December 31,
2017
$
447
1,169
$
$
17
-
-
526
18
20
-
1,494
50
-
-
65
$
(98)
(193)
(97)
(102)
(13)
(1)
(6)
-
-
-
-
-
-
-
-
$
$
-
-
$
(10)
-
-
(240)
-
-
-
-
(147)
(5)
(19)
-
356
976
1,397
87
-
-
59
$
(240)
$
(181)
$
2,875
Total non-accrual
$
2,180
$
1,626
$
(510)
$
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, 2017 and December 31,
2016, the Bank had no OREO properties. The carrying value of foreclosed assets
was $70,000 at December 31, 2017 and $362,000 at December 31, 2016, and is
included in other assets on the consolidated balance sheets.
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/
Compliance 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.
59
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
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
2017
2016
2015
2014
2013
$
$
$
$
$
$
899,320
793,343
9,326
(197)
(10)
(22)
-
(235)
(464)
850
10
49
-
17
140
1,066
602
(1,150)
$
$
$
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)
-
9,208
Balance at end of year
$
8,778
$
9,326
$
9,610
$
8,308
$
Allowance for credit losses as a percentage of
outstanding loan balance
Net recoveries (charge offs) to average loans outstanding
0.98%
0.08%
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.
60
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:
2017
2016
2015
2014
2013
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
1,784
287
1,252
1,004
1,958
1,441
140
464
361
87
11.2% $
1.7%
22.7%
10.7%
29.9%
8.4%
3.5%
8.5%
3.4%
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%
10.0%
1.2%
8.3%
1.8%
1,928
516
1,697
1,289
1,406
672
110
874
294
422
17.0%
6.1%
30.6%
8.3%
16.8%
8.6%
0.9%
9.5%
2.2%
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
$
8,778
100% $
9,326
100% $
9,610
100% $
8,308
100% $
9,208
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, 2017, the allowance for credit losses (ALLL) stood at
$8,778,000, compared to $9,326,000 at December 31, 2016, a net decrease of
$548,000. The decrease in the ALLL was due to net recoveries and a reverse
provision for credit losses during the year ended December 31, 2017 which was
necessitated by management’s observations and assumptions about the existing
credit quality of the loan portfolio. Net recoveries totaled $602,000 while the
reversal of provision for credit losses was $1,150,000. The balance of classified
loans and loans graded special mention, totaled $49,998,000 and $21,908,000 at
December 31, 2017 and $49,464,000 and $29,911,000 at December 31, 2016.
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 $350,141,000 as of December 31, 2017, compared to
$259,415,000 as of December 31, 2016. At December 31, 2017 and 2016, the
balance of a contingent allocation for probable loan loss experience on unfunded
obligations was $326,000 and $125,000, 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 0.97% at December 31, 2017,
and 1.23% at December 31, 2016. Total loans include FLB, SVB and VCB
loans that were recorded at fair value in connection with the acquisitions of
$243,712,000 at December 31, 2017 and $168,296,000 at December 31, 2016.
Excluding these acquired loans from the calculation, the ALLL to total gross
loans was 1.34% and 1.59% as of December 31, 2017 and 2016, respectively,
and general reserves associated with non-impaired loans to total non-impaired
loans was 1.34% and 1.55%, 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 2017 increased through organic
growth and the acquisition of FLB. 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, 2017.
Non-performing loans totaled $2,875,000 as of December 31, 2017, and
$2,180,000 as of December 31, 2016. The allowance for credit losses as a
percentage of nonperforming loans was 305.32% and 427.80% as of
December 31, 2017 and December 31, 2016, 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, 2017 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, 2017 was $53,777,000 consisting of $13,466,000, $10,394,000,
$6,340,000, $14,643,000 and $8,934,000 representing the excess of the cost of
Folsom Lake Bank, 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 of accounting. The value of goodwill is
61
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
GOODWILL AND INTANGIBLE ASSETS
(Continued)
DEPOSITS AND BORROWINGS
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 2017; therefore, goodwill was not required to be
retested.
The intangible assets at December 31, 2017 represent the estimated fair value
of the core deposit relationships acquired in the 2017 acquisition of Folsom Lake
Bank of $1,879,000, 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, 2017 was $3,027,000, net of $725,000 in accumulated
amortization expense. The carrying value at December 31, 2016 was $1,383,000,
net of $490,000 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, 2017 and determined no impairment was necessary. In addition,
management determined that no events had occurred between the annual
evaluation date and December 31, 2017 which would necessitate further analysis.
Amortization expense recognized was $234,000 for 2017, $149,000 for 2016 and
$320,000 for 2015.
The following table summarizes the Company’s estimated core deposit
intangible amortization expense for each of the next five years (in thousands):
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 $169,708,000 or 13.51% to $1,425,687,000 as of
December 31, 2017, compared to $1,255,979,000 as of December 31, 2016.
Interest-bearing deposits increased $80,484,000 or 10.59% to $840,648,000 as of
December 31, 2017, compared to $760,164,000 as of December 31, 2016.
Non-interest bearing deposits increased $89,224,000 or 18.00% to $585,039,000
as of December 31, 2017, compared to $495,815,000 as of December 31, 2016.
In conjunction with the acquisition of Folsom Lake Bank the Company acquired
total interest bearing deposits of $101,029,000, consisting of $5,432,000,
$73,477,000, $19,288,000 and $2,832,000 in NOW, MMA, Time and Savings
deposits, respectively, and $70,919,000 in non-interest bearing deposits. Average
non-interest bearing deposits to average total deposits was 38.93% for the year
ended December 31, 2017 compared to 36.46% for the same period in 2016.
Our total market share of deposits in Fresno, Madera, San Joaquin, and Tulare
counties was 3.69% in 2017 compared to 3.76% in 2016 based on FDIC
deposit market share information published as of June 2017.
The composition of the deposits and average interest rates paid at
December 31, 2017 and December 31, 2016 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
2017
Deposits Rate
2016
Deposits Rate
$
296,406
299,638
128,070
116,534
840,648
585,039
20.8% 0.12% $
21.0% 0.08%
9.0% 0.30%
8.2% 0.03%
59.0% 0.12%
41.0%
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%
Total deposits
$
1,425,687 100.0%
$
1,255,979 100.0%
Years Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
Estimated Core
Deposit
Intangible
Amortization
$
$
376
376
376
376
376
1,147
3,027
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, 2017, 2016, and 2015.
2017
2016
2015
Balance
Rate
Balance
Rate
Balance
Rate
$
$
$
$
$
271,456
264,581
137,666
499,987
0.12% $
246,770
0.12% $
222,839
0.08% $
249,620
0.05% $
227,743
0.30% $
139,656
0.38% $
149,383
-
$
417,151
-
$
387,931
1,284,305
0.08% $
1,144,231
0.09% $
1,065,798
0.10%
0.06%
0.37%
-
0.09%
(Dollars in thousands)
NOW accounts
Money market accounts
Time certificates of deposit
Non-interest bearing demand
Total deposits
62
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, 2017, 2016, and 2015.
The following table sets forth the maturity of time certificates of deposit and
other time deposits of $100,000 or more at December 31, 2017.
(In thousands)
Three months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
$
$
30,844
19,024
24,593
12,699
87,160
Net income:
To average assets
To average shareholders’ equity
Dividends declared per share to net
income per share
Average shareholders’ equity to
average assets
2017
2016
2015
0.94%
7.69%
1.15%
9.84%
0.90%
8.12%
23.53%
19.20%
18.00%
12.23%
11.68%
11.05%
There were no short-term or long-term FHLB borrowings as of December 31,
2017 or December 31, 2016. 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, 2017 and 2016, at interest rates which vary with market
conditions. As of December 31, 2017, the Company had no overnight
borrowings outstanding under these credit facilities. The Company had $400,000
in Federal funds purchased at December 31, 2016.
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 $209,559,000 as of December 31, 2017,
compared to $164,033,000 as of December 31, 2016. The increase in
shareholders’ equity is the result of an increase in retained earnings from our net
income of $14,026,000, the issuance of stock in connection with the Folsom
Lake Bank acquisition in the amount of $28,405,000, the exercise of stock
options, including the related tax benefit of $2,835,000, the effect of share-based
compensation expense of $384,000, and an increase in accumulated other
comprehensive income (AOCI) of $3,342,000 partially offset by common stock
cash dividends of $3,010,000.
During 2017, the Bank declared and paid cash dividends to the Company in
the amount of $3,133,000 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 $3,010,000 or $0.24 per common share
cash dividend to shareholders of record during the year ended December 31,
2017.
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 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.
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 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.
The following table presents the Company’s regulatory capital ratios as of
December 31, 2017 and December 31, 2016.
Actual Ratio
Minimum regulatory
requirement (1)
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
December 31, 2017
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio (CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
$ 153,676
$ 149,186
$ 153,676
$ 162,780
9.71% $
12.90% $
13.28% $
14.07% $
63,338
52,081
69,441
92,588
December 31, 2016
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio (CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
$ 122,601
$ 120,080
$ 122,601
$ 132,052
8.75% $
12.48% $
12.74% $
13.72% $
56,057
43,426
57,901
77,202
4.00%
5.75%
7.25%
9.25%
4.00%
5.13%
6.63%
8.63%
(1) The 2017 and 2016 minimum regulatory requirement threshold includes the capital
conservation buffer of 1.250% and 0.625%, respectively. These ratios are not reflected
on a fully phased-in basis, which will occur in January 2019.
The following table presents the Bank’s regulatory capital ratios as of
December 31, 2017 and December 31, 2016
Actual Ratio
Minimum regulatory
requirement (1)
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$ 149,779
$ 149,779
$ 149,779
$ 158,882
$ 121,079
$ 121,079
$ 121,079
$ 130,530
9.46% $
12.96% $
12.96% $
13.74% $
8.64% $
12.59% $
12.59% $
13.57% $
63,332
52,040
69,387
92,516
56,064
43,383
57,845
77,126
4.00%
5.75%
7.25%
9.25%
4.00%
5.13%
6.63%
8.63%
December 31, 2017
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio (CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
December 31, 2016
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio (CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
(1) The 2017 and 2016 minimum regulatory requirement threshold includes the capital
conservation buffer of 1.250% and 0.625%, respectively. These ratios are not reflected
on a fully phased-in basis, which will occur in January 2019.
63
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
CAPITAL RESOURCES
(Continued)
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,
2017, 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,
2017, the rate was 2.96%. Interest expense recognized by the Company for the
years ended December 31, 2017, 2016, and 2015 was $147,000, $121,000 and
$99,000, 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, 2017, the Company had
unpledged securities totaling $452,163,000 available as a secondary source of
liquidity and total cash and cash equivalents of $100,383,000. Cash and cash
equivalents at December 31, 2017 increased 160.28% compared to
December 31, 2016. 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.
To augment our liquidity, we have established Federal funds lines with various
correspondent banks. At December 31, 2017, our available borrowing capacity
includes approximately $40,000,000 in Federal funds lines with our
correspondent banks and $234,689,000 in unused FHLB advances. At
December 31, 2017, we were not aware of any information that was reasonably
likely to have a material effect on our liquidity position.
The following table reflects the Company’s credit lines, balances outstanding,
and pledged collateral at December 31, 2017 and 2016:
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,
2017
2016
$
$
$
$
$
$
$
$
$
40,000 $
- $
40,000
400
234,689
- $
357,393 $
316,160 $
174,576
-
271,123
237,879
6,740 $
- $
7,431 $
7,437 $
9,102
-
9,315
9,277
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 state and federal
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
$350,141,000 as of December 31, 2017 compared to $259,415,000 as of
December 31, 2016. For a more detailed discussion of these financial
instruments, see Note 12 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, 2017, are as follows:
Less Than
One Year
One to
Three
Years
Three to
Five
Years
After
Five
Years
Total
$ 1,404,965 $ 16,315 $
3,288 $
1,119 $ 1,425,687
-
2,511
-
3,442
-
2,452
5,155
4,316
5,155
12,721
(In thousands)
Deposits
Subordinated
debentures
Operating leases
Total
$ 1,407,476 $ 19,757 $
5,740 $ 10,590 $ 1,443,563
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
64
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OFF-BALANCE SHEET ITEMS
(Continued)
Impairment of Investment Securities
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.
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.
Use of Estimates
Goodwill
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amount of assets, liabilities,
revenues and expenses. On an ongoing basis, management evaluates the estimates
used. Estimates are based upon historical experience, current economic conditions
and other factors that management considers reasonable under the circumstances.
These estimates result in judgments regarding the carrying values of assets and
liabilities when these values are not readily available from other sources, as well as
assessing and identifying the accounting treatments of contingencies and
commitments. These estimates and assumptions affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
may differ from these estimates under different assumptions.
Accounting Principles Generally Accepted in the United States of America
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP).
We follow accounting policies typical to the commercial banking industry and
in compliance with various regulation and guidelines as established by the Public
Company Accounting Oversight Board (PCAOB), Financial Accounting
Standards Board (FASB), the American Institute of Certified Public Accountants
(AICPA), and the Bank’s primary federal regulator, the FDIC. The following is a
brief description of our current accounting policies involving significant
management judgments.
Allowance for Credit Losses
Our most significant management accounting estimate is the appropriate level
for the allowance for credit losses. The allowance for credit losses is an estimate
of probable incurred credit losses in the Company’s loan portfolio. The adequacy
of the allowance is monitored on an on-going basis and is based on our
management’s evaluation of numerous factors. These factors include the quality
of the current loan portfolio, the trend in the loan portfolio’s risk ratings, current
economic conditions, loan concentrations, loan growth rates, past-due and
nonperforming trends, evaluation of specific loss estimates for all significant
problem loans, historical charge-off and recovery experience and other pertinent
information. See Note 1 to the audited Consolidated Financial Statements in this
Annual Report for more detail regarding our allowance for credit losses.
The calculation of the allowance for credit losses is by nature inexact, as the
allowance represents our management’s best estimate of the probable losses
inherent in our credit portfolios at the reporting date. These credit losses will
occur in the future, and as such cannot be determined with absolute certainty at
the reporting date.
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
65
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
CRITICAL ACCOUNTING POLICIES
(Continued)
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.
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, 2017, 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.
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
66
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.
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.
We realize income principally from the differential or spread between the
The fundamental objective of the Company’s management of its assets and
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, 2017,
70.60% 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, 2017, 78.25% of our time deposits mature 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.
Our management and Board of Directors’ Asset/Liability Committees (ALCO)
are responsible for managing our assets and liabilities in a manner that balances
profitability, IRR and various other risks including liquidity. The ALCO operates
under policies and within risk limits prescribed, reviewed, and approved by the
Board of Directors.
The ALCO seeks to stabilize our NII by matching rate-sensitive assets and
liabilities through maintaining the maturity and repricing of these assets and
liabilities at appropriate levels given the interest rate environment. When the
amount of rate-sensitive liabilities exceeds rate-sensitive assets within specified
time periods, NII generally will be negatively impacted by an increasing interest
rate environment and positively impacted by a decreasing interest rate
environment. Conversely, when the amount of rate-sensitive assets exceeds the
amount of rate-sensitive liabilities within specified time periods, net interest
income will generally be positively impacted by an increasing interest rate
environment and negatively impacted by a decreasing interest rate environment.
Our mix of assets consists primarily of loans and 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
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
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.
The Company seeks to control interest rate risk exposure in a manner that will
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, 2017. 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, 2017 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, 2017, 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,
2017
Interest Income
Rates at
2017
$
71,988 $
69,499
67,711
66,229
64,179
61,173
7,809
5,320
3,532
2,050
-
(3,006)
12.17%
8.29%
5.50%
3.19%
-
(4.68)%
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
67
Quantitative and Qualitative Disclosures About Market Risk
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, 2017 and 2016:
Rate Type
(Dollars in thousands)
Variable rate
Fixed rate
December 31, 2017
December 31, 2016
Balance
Percent of
Total
Balance
Percent of
Total
$ 634,900
264,420
70.60% $ 571,325
29.40% 184,036
75.64%
24.36%
Total gross loans
$ 899,320
100.00% $ 755,361
100.00%
Approximately 70.60% of our loan portfolio is tied to adjustable rate indices
and 28.97% of our loan portfolio reprices within 90 days. As of December 31,
2017, we had 2,232 commercial and real estate loans totaling $579,652,000 with
floors ranging from 3.25% to 7.50% and ceilings ranging from 6.00% to
30.00%.
The following table shows the repricing categories of the Company’s loan
portfolio at December 31, 2017 and 2016:
Repricing
(Dollars in thousands)
< 1 Year
1-3 Years
3-5 Years
> 5 Years
December 31, 2017
December 31, 2016
Balance
$ 318,985
177,545
200,471
202,319
Percent of
Total
Balance
Percent of
Total
35.47% $ 309,397
19.74% 153,680
22.29% 183,834
22.50% 108,450
40.95%
20.35%
24.34%
14.36%
Total gross loans
$ 899,320
100.00% $ 755,361
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.
68
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 8, 2018, the Company had approximately
1,077 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, 2016
June 30, 2016
September 30, 2016
December 31, 2016
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
$
$
Sales Prices for the Company’s Common Stock
High
12.49
14.64
16.42
20.00
22.44
23.94
23.28
22.75
Low
9.45
10.78
13.30
13.75
18.42
17.62
18.57
19.06
The Company paid $0.24 per year in common share cash dividends in 2017 and 2016. The Company’s primary source of income with which to pay cash dividends are
dividends from the Bank. See Note 13 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 LeAnn Ruiz, Assistant Corporate Secretary at (800) 298-1775.
69
GIVING BACK. TO KEEP OUR COMMUNITIES GROWING STRONG.
At Central Valley Community Bank, we think growth is meant to be shared. The stronger we grow, the more we’re
able to give back to help our communities grow strong. That’s why we make it a priority to financially support
worthwhile nonprofit organizations, events and causes that benefit the quality of life we all enjoy. It’s why we invest
in addressing the challenges that impact our region - and why our team members go above and beyond our financial
support by volunteering their time and expertise to help local causes and strengthen area businesses. Growth and
giving are both generously shared at Central Valley Community Bank.
59 Days of Code
Ag Lenders Society of California
American Bankers Association
American Cancer Society
American Heart Association
American Red Cross
Association of Commercial Real Estate
Boys & Girls Clubs of El Dorado County
Boys & Girls Clubs of Merced County
Boys & Girls Clubs of Tracy
Building Industry Association of Tulare and Kings County
Business Organization of Old Town
California Association of Mortgage Professionals
California Association of School Business Officials
California Bankers Association
California Chamber of Commerce
California Farm Bureau Federation
California Financial Crime Investigators Association
California Medical Group Management Association
California Society of Certified Public Accountants
California State University, Fresno
California State University, Fresno – Ag One Foundation
California State University, Fresno – Alumni Association
California State University, Fresno – Craig School of Business
California State University, Fresno – Foundation
California State University, Fresno – Student Cupboard
California State University, Fresno – Maddy Institute
California State University, Fresno – Bulldog Foundation
Cappuccino Cruisers Classic Car Club
Celebrant Singers
Center for Land-Based Learning
Central California Society for Human Resource Management
Central California Society for Prevention of Cruelty to Animals
Central California Women’s Conference
Central Sierra Historical Society
Central Valley Afterschool Foundation
Central Valley Christian Schools
Central Valley Recovery Services
Central Valley SCORE
Chest of Hope
Children’s Musical Theaterworks
Chowchilla Rotary Club International
Clovis American Legion Post #147
Clovis Chamber of Commerce
Clovis Community Foundation
Clovis Rodeo Association
Coarsegold Chamber of Commerce
College of the Sequoias Foundation
Community Food Bank
Community Medical Foundation
Community Partnership For Families of San Joaquin
Court Appointed Special Advocates of Fresno & Madera Counties
Commercial Real Estate Women Network Foundation
Commercial Real Estate Women Sacramento
Delta Humane Society
70
Doug McDonald Scholarship
Downtown Visalia Foundation
Dress For Success Fresno
Economic Development Corporation
El Diamante High School Band
El Dorado Food Bank
El Dorado Hills Chamber Of Commerce
El Dorado Park Community Development Corporation
Emergency Food Bank of Greater Stockton
EVERFI
Exceptional Parents Children’s Center Unlimited
Executives Association of Tulare County
Exeter Chamber of Commerce
Exeter High School Ag Boosters
Exeter Lions Club
Exeter Community Service Guild
Exeter Eels Swim Team
Exeter Sober Graduation Inc.
Exeter Youth Football League
Fair Oaks Chamber of Commerce
Fair Oaks Historical Society
Fair Oaks Recreation & Park District
FEDCorp
Financial Credit Networks, Inc.
Financial Services Information Sharing and Analysis Center
Folsom Chamber of Commerce
Folsom Cordova Education Foundation
Folsom Economic Development Corporation
Folsom, El Dorado & Sacramento Historical Railroad Association
Folsom Historic Society
Folsom Police Foundation
Folsom Rotary Foundation
Foundation for Clovis Schools
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 Food Expo
Fresno Philharmonic
Fresno Metro Black Chamber of Commerce
Fresno Police Officers’ Association
Fresno Rescue Mission
Fresno Temple Church of God in Christ
Fresno Women’s Trade Club
Fresno’s Leading Young Professionals
Golden State YMCA
Golden West High School Future Farmers of America Alumni
Goldenrod Elementary Parent Faculty Club
Grand Theatre Center for the Arts
Greater Fresno Area Chamber of Commerce
Greater Merced Chamber of Commerce
Greater Stockton Chamber of Commerce
Habitat for Humanity
Hands in the Community
Hands on Central California
ImagineU Children’s Museum
Independent Community Bankers of America
Junior League of San Joaquin County
Kaweah Delta Hospital Foundation
Kerman Boys Basketball Boosters
Kerman Chamber of Commerce
Kerman High School Booster Club
Kerman Youth Soccer League
Kids for Christmas
Kings & Tulare County Homeless Alliance
Kings County Farm Bureau
Kings View Skills4Success
Kiwanis Club of Citrus Heights
Kiwanis Club of Placerville
Knights of Columbus
Let’s Face It Together Foundation
Leukemia & Lymphoma Society Central California Chapter
LifeSTEPS
Lodi Chamber of Commerce
Lodi Police Foundation
Lodi Tokay Rotary Club
LOEL Center & Gardens
Luso American Youth Council
Madera Babe Ruth Baseball League
Madera Chamber of Commerce
Madera County Ag Boosters
Madera County Farm Bureau
Madera Community Hospital Foundation
Madera County Food Bank
Madera National Little League
Marjaree Mason Center
McHenry House Tracy Family Shelter
Merced County Association of REALTORS
Merced County Chamber of Commerce
Merced County Fair
Merced County Farm Bureau
Merced County Food Bank
Modesto Chamber of Commerce
National Association of Government Guaranteed Lenders
North American Pole Vault Association
North Fork Children’s Summer Program
North State Building Industry Association
Oak Valley Elementary School
Oakdale Educational Foundation
Oakhurst Area Chamber of Commerce
Oakhurst Community Center
Opening Doors Inc.
Optimal Hospice Foundation
Parenting Network
Park of the Sierras
Pine Ridge Elementary Boosters
Placer Food Bank
Placer Society for Prevention of Cruelty to Animals
Placerville Kiwanis Club
Ponderosa Lions Club
Poverello House
Powerhouse Ministries
ProYouth
Purposed II Praise School of Dance
Real Authentic Women Wellness
Roseville Area Chamber of Commerce
Rotary Club of Clovis
Rotary Club of Fair Oaks
Rotary Club of Folsom
Rotary Club of Fresno
Rotary Club of Historic Folsom
Rotary Club of Kerman
Rotary Club of Madera
Rotary Club of Orangevale
Rotary Club of Sacramento
Rotary International
Sacramento Food Bank & Family Services
Sacramento Master Singers
Sacramento Medical Group Management Association
Sacramento Metropolitan Chamber of Commerce
Sacramento Professional Advisors Network
Sacramento Regional Builders Exchange
Sacramento Self-Help Housing Incorporated
San Joaquin Asparagus Festival
San Joaquin County Farm Bureau
San Joaquin River Parkway and Conservation Trust, Inc.
Second Harvest Food Bank
Shingle Springs Cameron Park Chamber of Commerce
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
Society for Human Resource Management
Soroptimist International of Madera
Soroptimist International of the Sierras Inc.
Southeast Fresno Community Economic Development Association
St. Hope Academy
St. Joachim Catholic Church
St. Vincent de Paul Society of Placer County
Stanislaus County Farm Bureau
Stockton Athletic Hall of Fame
Stockton Shelter for the Homeless
Stone Ridge Christian School
Sutter Roseville Medical Center
The Bank CEO Network
The Buddhist Church of Stockton
The Downtown Fresno Partnership
The Exeter Art Gallery and Museum
The National Association of Stock Plan Professionals
The Risk Management Association
The Risk Management Association – Fresno Chapter
The Risk Management Association – Sacramento Chapter
The Roman Catholic Diocese of Fresno
The Salvation Army
Theatre Productions and Technical Academy
Tracy African American Association
Tracy Chamber of Commerce
Tracy City Center Association
Tracy Sunrise Rotary
Tulare Baseball Association
Tulare County Economic Development Corporation
Tulare County Farm Bureau
Turlock Chamber of Commerce
Twilight Haven
Twin Lakes Food Bank
University of California San Francisco Foundation
United Cerebral Palsy Association
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
Valley Children’s Healthcare Alegria Guild
Valley Crime Stoppers
Valley Public Television
Visalia Arts Consortium
Visalia Breakfast Lions Club
Visalia Chamber of Commerce
Visalia Economic Development Corporation
Visalia Parks and Recreation
Visalia Runners – Road Runners Club of America
Visalia Youth Baseball Incorporated
West Fresno Family Resource Center
West Visalia Kiwanis Club
Western Payments Alliance
Yosemite Badgers Youth Cheer
Yosemite High School
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
Rancho Cordova
2865 Sunrise Boulevard
Rancho Cordova, CA 95742
(916) 235-4588
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
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
7100 N. Financial Drive,
Suite 101
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
905 Sutter Street,
Suite 100
Folsom, CA 95630
(916) 985-8700
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