20192019
2019
To Our
Shareholders
We’re In This Together,
Forty Years
and Counting
As we celebrate our 40th anniversary of service to California’s
San Joaquin Valley and Greater Sacramento regions, 2019 was another
year of strength and success. From our humble beginnings in Clovis
in January 1980, we have grown to a community business bank with
$1.6 billion in assets as of December 31, 2019, that now serves nine
contiguous counties from Greater Sacramento in the north to Tulare
in the south. The achievements of our team and the consistent support
of our clients and community make us all the more grateful for the
40 years of confidence that you have placed in us.
The Company enjoyed improved earnings and strong capital levels in
2019. We reported net income for the year ended December 31, 2019,
of $21,443,000. Measured growth in loans and deposits led to total
loans reaching $934,250,000 and total deposits reaching
$1,333,285,000.
With a focus on shareholder return our Directors declared dividends
of $0.43 for 2019, an increase from $0.31 in 2018. During 2019, we
also executed on a second announced share repurchase program and
successfully repurchased 768,754 shares.
New Roles For Familiar Faces
The financial services industry continues to evolve and our 40-year-old
bank remains committed to change as appropriate. For example, to
provide more attentive service to our clients, we combined the
Commercial and Community Banking divisions under one leader and
two Market Executives – an organizational shift facilitated by the 2019
retirements of two executives: Gary Quisenberry and Lydia Shaw, who
laid the foundation for these changes.
This leadership team, led by James Kim, Executive Vice President
and Chief Operating Officer, manages the Bank’s regions creating
one dynamic client service and revenue structure that supports the
Company’s growing footprint and strategic vision.
Kim focused on expanding both deposit and lending production with
reorganized relationship banking teams, as well as developing the next
generation branch model for the Bank.
Reporting to Kim are two new Market Executives, Ken Ramos and
Blaine Lauhon. They each lead a team of professionals committed to
serving clients in dedicated regions within our territory. Their
tremendous experience and regional leadership is allowing us to increase
the unique brand of service to which our clients have become
accustomed, as well as drive market expansion and open opportunities
for existing team members and the recruitment of new professional
bankers into our Company.
Kim’s new role gave us the opportunity to promote Teresa Gilio to fill
his former position as Executive Vice President and Chief Administrative
Officer. Gilio manages our support and administration functions.
New Vision On Board
In December 2019, the Company was pleased to add Dorothea Silva to
our Board of Directors. The relationships and trust of our clients are of
paramount importance to us, and it is equally important that Board
members exemplify the core tenets that we collectively value. We are
fortunate to be able to attract individuals such as Silva, an accomplished
leader in her industry who brings new perspectives and strength as a
financial expert to our well-established Board and Audit Committee.
Our Board will change again in 2020 as we say farewell to Ed Darden,
who retires after capably serving for nearly 20 years. While we know that
Darden will not be in the Board room, he will be close by and will
continue to provide support for our growing organization.
Banking Centers Consolidate, Online Features Expand
After extensive analysis and review of our Greater Sacramento Banking
Centers, in light of the continued acceptance and popularity of online
and mobile banking, we consolidated our Rancho Cordova and Fair
Oaks offices into a new Gold River Banking Center. This consolidation
improved our effectiveness in serving our clients in these areas.
In early 2019, Personal Online Loan applications were launched on the
Bank’s website, enabling current and potential clients to conveniently
submit applications for Home Equity Lines of Credit, Vehicle Loans
and Personal Loans. Another new feature – External Transfers – was added
for Personal Online Banking clients, who can now transfer funds from
their Central Valley Community Bank checking, savings and money
market accounts to accounts with other financial institutions.
1
In The Spotlight
During 2019, the Company earned recognition in a wide range of
categories, from our robust financial performance to our talented team.
Among the highlights:
•
Improving financial literacy in the communities we serve. From
reaching students of all ages through sponsored programs with the
Better Business Bureau, lecturing in high school classrooms in
underprivileged regions, to guest lecturing at community centers, our
team members are committed to leading the way in our territory.
•
•
•
•
Continuing our growing impact with SCORE, a nonprofit
organization dedicated to small business advocacy. Our team mentors,
guides and educates both new and existing businesses.
Achieving a “Super Premier” performance rating from The Findley
Reports – the highest of the three performance tiers recognized by the
firm. This achievement is based upon the Bank’s 2018 operating
results.
Earning the 5-Star Superior rating from Bauer Financial for all four
quarters of 2019, a rating that denotes financial institutions that are
among the nation’s strongest and safest, operating above regulatory
capital requirements.
Being honored by The Business Journal as “Best Business Bank” for
the sixth straight year in its 2019 Best of Central Valley Business
Awards.
Our Community support extended through programs such as:
•
Contributing nearly $340,000 to 292 different nonprofit and
membership organizations in our local communities.
•
•
Continuing our commitment to privacy and security. In addition to
client and community cybersecurity seminars, for the 13th
consecutive year, the Bank hosted its Free Document Shredding
events at the height of tax season. The events were held at 19 Bank
branch and neighboring locations where over 2,250 individuals and
businesses were able to shred over 114,000 pounds of sensitive
documents safely and securely at no charge. Identity protection and
cybersecurity education were provided at events, through public
service messaging and through social media engagement, which
helped the pubic become more aware of helpful tips to protect
themselves and businesses from fraud.
Extending our commitment to cybersecurity education, culminating
with a thirty minute public service program that aired on six top radio
stations featuring Jim Ford and the Western Bankers Association
President and CEO. This recorded program and a custom-developed
Cybersecurity Guide were then shared with the memberships of local
Chambers of Commerce throughout the Bank’s territory to increase
educational outreach.
•
•
•
Assisting with an Affordable Housing Program (AHP) grant of
$520,000 which was awarded to Self-Help Enterprises, a Fresno
County nonprofit that works with low-income, special needs and
homeless families to build and sustain healthy homes and
communities in eight Central Valley counties.
Assisting with an Affordable Housing Program (AHP) grant of
$615,000 which was awarded to the Housing Authority of
Fresno County, which develops new affordable housing for low
income families and seniors, manages public housing developments,
partners in creating mixed-income developments, and preserves
affordable housing.
Sponsoring an AHEAD Program grant of $35,000 which was
awarded to the Fresno Area Hispanic Foundation, which develops
strategies and policies to better serve business owners interested in the
welfare of the Fresno-area Hispanic community.
Our 2020 Vision
Against the backdrop of economic uncertainty in 2019 due to the
Federal Reserve interest rate policy, trade disputes and political discord,
our Company still performed well. The biggest impact to the financial
services industry was the mid-year Federal Reserve policy reversal
reducing short term rates. The current yield curve impacts our ability to
expand our Net Interest Margin and has a larger impact on the earnings
capability of community banks like ours. While 2020 began with
further rate cuts, with our new Market Executives and focused
relationship bankers in place with more emphasis on client revenue
growth, we believe we have established the foundation for success in
the future.
We enter 2020 with solid capital levels to help navigate the changes of
the external interest rate environment, and believe our historic brand of
relationship banking will continue to be a contributor to the success of
our clients and the communities we serve.
Even so, 2020 will certainly present challenges, from interest rate policy,
global economic volatility and the unknown impacts of the COVID-19
infection. However, on behalf of our experienced leadership, dedicated
bankers and committed Board of Directors, we are fully prepared and
passionate about leading this Company to fulfill our mission of serving
our clients and communities with personalized financial solutions that
result in positive shareholder value.
We value your investment and thank you for the trust and confidence
you have placed in our 40-year-old Company.
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
2
Board of Directors
Investing In Relationships
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
Vice Chairman,
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 CEO,
Wawona Frozen Foods
Louis C. McMurray
President,
Charles McMurray Co.
Edwin S. Darden, Jr.
Principal Emeritus,
Darden Architects, Inc.
Karen A. Musson
Marketing and Media,
Gar Tootelian, Inc.
F.T. “Tommy” Elliott, IV
Owner,
Wileman Bros. & Elliott, Inc.
Kaweah Container, Inc.
Dorothea D. Silva
Principal,
Avaunt Ltd. CPAs
and Consultants
Gary D. Gall
Retired Bank Executive
Robert J. Flautt
Retired Bank Executive
3
Making History
Together
Our history is written by many hands, but with
one vision: to help our customers and communities
succeed. We are proud of our legacy of success, and just
as proud that our story is still being written today.
A History of Strength - A Heart of Service
Central Valley Community Bank (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.
Central Valley Community Bancorp (Company), was established on
November 15, 2000, as the holding company for Central Valley
Community 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.” The Company is regulated by the Federal Deposit Insurance
Corporation, Federal Reserve Board, Securities and Exchange
Commission, and the California Department of Business Oversight.
The Bank operates full-service offices in 16 communities within the
San Joaquin Valley and Greater Sacramento Region, and employs nearly
300 team members organized by market. Banking Centers are located in
Cameron Park, Clovis, Exeter, Folsom, Fresno, Gold River, Kerman, Lodi,
Madera, Merced, Modesto, Oakhurst, Prather, Roseville, Stockton, and
Visalia. Additionally, the Bank operates Commercial, Real Estate, SBA and
Agribusiness Lending Departments. Central Valley Investment Services
provide a full suite of wealth management services by Raymond James
Financial, Inc.
With assets of nearly $1.6 billion as of December 31, 2019, 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” and committed to its core values of teamwork, respect,
accountability, integrity and leadership.
Central Valley Community Bank distinguishes itself from other financial
institutions through its strength, client advocacy, exemplary service to
clients and communities, and the values that have guided the Bank since its
opening. The Bank’s unique brand of personalized service is demonstrated
daily by professional bankers who live its mission of providing
personalized financial solutions that guide businesses and communities
to succeed and thrive.
Guided by a hands-on Board of Directors and a seasoned Executive
Management Team, the Bank continues to focus on personalized
service, client referrals and team member 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.
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, all 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 sixth consecutive year as “Best Business Bank” in 2019.
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 and business services
are available through Online Banking with Bill Pay, Mobile Banking,
Mobile Deposit, CardValet and eStatements. Popmoney (person-to-person
payments) is available for personal accounts. The Private Business Banking
Department ensures that businesses of all sizes benefit from custom-tailored
Cash Management services through Business Online Banking. In addition,
ATMs are located throughout the Bank’s territory, and clients are able
to access ATMs nationwide for free through the MoneyPass network.
BankLine provides 24-hour telephone banking and convenient banking
hours are offered at the Bank’s offices.
A Proud Reputation Built On Personal Relationships
Central Valley Community Bank has built a reputation for superior banking
service by offering personalized “relationship banking” for businesses,
professionals and individuals. Serving the business community has always
been a primary focus for the Bank, which continues to expand its
commercial banking team to serve even more satisfied clients.
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. Central Valley Community
Bank received the honor of CenCal Business Group’s Lender of the Year
award, as the number one SBA 504 lender in the Central Valley for 2018.
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 manufacturing 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 clients by increasing and enhancing its products and services, while
emphasizing needs-based consulting within the Banking Center
environment. Serving both new and long-time customers continues to
be an important factor in the Bank’s growth, as demonstrated in ongoing
client referrals. Dependable values and security are important to banking
clients, and the Bank is well-positioned to provide them with an ongoing
emphasis on privacy, safety and convenience.
A Firm Foundation For Building A Strong Future
Thanks to the vision of the Company’s leadership and Board of Directors,
the Bank has grown steadily and sensibly for four decades, keeping pace
with the needs of its clients and the communities it serves, all while
retaining the local values that formed the Bank’s firm foundation.
4
Diverse in Talent.
United in Mission.
Mission Statement
We provide personalized
financial solutions that guide businesses
and communities to succeed and thrive.
Core Values
Teamwork, Respect, Accountability,
Integrity and Leadership
Holding Company & Bank Officers
James M. Ford
President and CEO
Patrick J. Carman
Executive Vice President,
Chief Credit Officer
David A. Kinross
Executive Vice President,
Chief Financial Officer
Bank Executive Management
James J. Kim
Executive Vice President,
Chief Operating Officer
Teresa Gilio
Executive Vice President,
Chief Administrative Officer
Blaine C. Lauhon
Executive Vice President,
Market Executive, Northern Region
A. Ken Ramos
Executive Vice President,
Market Executive, Southern Region
Dawn M. Cagle
Senior Vice President,
Human Resources
Independent Auditors
Crowe LLP,
Sacramento, CA
Counsel
Buchalter, A Professional Corporation,
Sacramento, CA
Central Valley Community Bank Executive Management
From Left to Right: David A. Kinross, Patrick J. Carman, Dawn M. Cagle, James M. Ford, James J. Kim, A. Ken Ramos, Teresa Gilio and Blaine C. Lauhon
5
Trend Analysis
Central Valley Community Bancorp
9
8
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2
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4
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9
7
$
2015
2016
2017
2018
2019
2015 2016 2017 2018 2019
2015 2016 2017 2018 2019
Net Income (In Thousands)
Diluted Earnings Per Share
Average Total Loans (In Thousands)
,
0
8
7
5
9
2
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4
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9
2015 2016 2017 2018 2019
2015 2016 2017 2018 2019
2015 2016 2017 2018 2019
Average Total Deposits (In Thousands)
Return on Shareholders’ Equity
Average Total Assets (In Thousands)
6
Comparative Stock
Price Performance
Central Valley Community Bancorp
Total Return Performance
Index Value
212.35
Central Valley
Community
Bancorp
166.75
SNL Bank
NASDAQ Index
148.49
Russell 2000
190.70
186.51
181.04
157.58
132.94
132.82
118.30
149.68
115.95
100.00
100.00
100.00
110.34
107.95
95.59
2014
2015
2016
2017
2018
2019
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, 2014 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
© 2020
7
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2019 and 2018 (In thousands, except share amounts)
ASSETS
Cash and due from banks
Interest-earning deposits in other banks
Total cash and cash equivalents
Available-for-sale debt securities
Equity securities
Loans, less allowance for credit losses of $9,130 at December 31, 2019 and $9,104 at December 31, 2018
Bank premises and equipment, net
Bank owned life insurance
Federal Home Loan Bank stock
Goodwill
Core deposit intangibles
Accrued interest receivable and other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Short-term borrowings
Junior subordinated deferrable interest debentures
Accrued interest payable and other liabilities
Total liabilities
Commitments and contingencies (Note 13)
Shareholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized, none issued and outstanding
Common stock, no par value; 80,000,000 shares authorized; issued and outstanding: 13,052,407 at
December 31, 2019 and 13,754,965 at December 31, 2018
Retained earnings
Accumulated other comprehensive income (loss), net of tax
Total shareholders’ equity
$
$
$
2019
2018
$
24,195
28,379
52,574
470,746
7,472
934,250
7,618
30,230
6,062
53,777
1,878
32,148
24,954
6,773
31,727
463,905
7,254
909,591
8,484
28,502
6,843
53,777
2,572
25,181
1,596,755
$
1,537,836
$
594,627
738,658
1,333,285
—
5,155
30,187
550,657
731,641
1,282,298
10,000
5,155
20,645
1,368,627
1,318,098
—
89,379
135,932
2,817
228,128
—
103,851
120,294
(4,407)
219,738
Total liabilities and shareholders’ equity
$
1,596,755
$
1,537,836
The accompanying notes are an integral part of these consolidated financial statements.
8
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Income
For the Years Ended December 31, 2019, 2018, and 2017 (In thousands, except per share amounts)
2019
2018
2017
Interest income:
Interest and fees on loans
Interest on deposits in other banks
Interest and dividends on investment securities:
Taxable
Exempt from Federal income taxes
Total interest income
Interest expense:
Interest on deposits
Interest on junior subordinated deferrable interest debentures
Other
Total interest expense
Net interest income before provision for credit losses
Provision for (reversal of ) 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 gain on sale of credit card portfolio
Net realized gains on sales and calls of investment securities
Federal Home Loan Bank dividends
Other income
Total non-interest income
Non-interest expenses:
Salaries and employee benefits
Occupancy and equipment
Regulatory assessments
Data processing expense
Professional services
ATM/Debit card expenses
Information technology
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
Basic earnings per common share
Diluted earnings per common share
Cash dividends per common share
$
$
$
$
$
51,464
375
13,197
1,295
66,331
1,928
210
421
2,559
63,772
1,025
62,747
2,756
728
1,446
978
—
5,199
455
1,743
13,305
26,654
5,439
251
1,557
1,305
920
2,611
710
756
816
—
695
4,386
46,100
29,952
8,509
21,443
1.60
1.59
0.43
$
$
$
$
$
49,936
459
10,254
3,538
64,187
1,153
199
132
1,484
62,703
50
62,653
2,986
695
1,462
708
462
1,314
590
2,107
10,324
26,221
5,972
619
1,666
1,475
739
1,113
465
758
732
217
455
4,636
45,068
27,909
6,620
21,289
1.55
1.54
0.31
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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
9
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Comprehensive Income
For the Years Ended December 31, 2019, 2018, and 2017 (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
Other comprehensive income (loss), before tax
Tax (expense) benefit related to items of other comprehensive income
Total other comprehensive income (loss)
Comprehensive income
2019
2018
2017
21,443
$
21,289
$
14,026
15,455
5,199
10,256
(3,032)
7,224
(9,159)
1,314
(10,473)
3,096
(7,377)
28,667
$
13,912
$
7,705
2,802
4,903
(2,062)
2,841
16,867
$
$
The accompanying notes are an integral part of these consolidated financial statements.
10
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Changes in Shareholders’ Equity
For the Years Ended December 31, 2019, 2018, and 2017 (In thousands, except share amounts)
Balance, January 1, 2017
Net income
Other comprehensive income
Reclassification associated with the adoption of ASU 2018-02
Restricted stock granted net of forfeitures
Cash dividend ($0.24 per common share)
Stock issued under employee stock purchase plan
Stock issued for acquisition
Stock-based compensation expense
Stock options exercised and related tax benefit
Balance, December 31, 2017
Cumulative effect of equity securities gains reclassified
Adjusted Balance, January 1, 2018
Net income
Other comprehensive loss
Stock issued under employee stock purchase plan
Restricted stock granted net of forfeitures
Stock-based compensation expense
Cash dividend ($0.31 per common share)
Repurchase and retirement of common stock
Stock options exercised and related tax benefit
Balance, December 31, 2018
Net income
Other comprehensive income
Restricted stock granted net of forfeitures
Stock issued under employee stock purchase plan
Stock-based compensation expense
Cash dividend ($0.43 per common share)
Stock options exercised and related tax benefit
Repurchase and retirement of common stock
Balance, December 31, 2019
Common Stock
Shares
Amount
Retained
Earnings
12,143,815
-
-
-
(2,360)
-
2,441
1,276,888
-
275,938
13,696,722
-
13,696,722
-
-
11,581
20,494
-
-
(47,862)
74,030
13,754,965
-
-
21,790
12,286
-
-
32,120
(768,754)
$
71,645
-
-
-
-
-
45
28,405
384
2,835
103,314
-
103,314
-
-
211
-
482
-
(894)
738
103,851
-
-
100
216
555
-
276
(15,619)
$
92,904
14,026
-
(501)
-
(3,010)
-
-
-
-
103,419
(144)
103,275
21,289
-
-
-
(4,270)
-
-
120,294
21,443
-
-
-
-
(5,805)
-
Accumulated
Other
Comprehensive
Income (Loss)
(Net of Taxes)
Total
Shareholders’
Equity
$
$
(516)
-
2,841
501
-
-
-
-
-
-
2,826
144
2,970
-
(7,377)
-
-
-
-
-
(4,407)
-
7,224
-
-
-
-
-
-
164,033
14,026
2,841
-
-
(3,010)
45
28,405
384
2,835
209,559
-
209,559
21,289
(7,377)
211
-
482
(4,270)
(894)
738
219,738
21,443
7,224
100
216
555
(5,805)
276
(15,619)
13,052,407
$
89,379
$ 135,932
$
2,817
$
228,128
The accompanying notes are an integral part of these consolidated financial statements.
11
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Cash Flows
For the Years Ended December 31, 2019, 2018, and 2017 (In thousands)
2019
2018
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Net decrease (increase) in deferred loan costs
Depreciation
Accretion
Amortization
Stock-based compensation
Provision for (reversal of ) credit losses
Net realized gains on sales and calls of available-for-sale investment securities
Net loss on sale and disposal of equipment
Net change in equity investments
Increase in bank owned life insurance, net of expenses
Net gain on sale of credit card portfolio
Net (increase) decrease in accrued interest receivable and other assets
Net increase (decrease) in accrued interest payable and other liabilities
(Provision) benefit for deferred income taxes
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash and cash equivalents acquired in acquisitions
Purchases of available-for-sale investment securities
Proceeds from sales or calls of available-for-sale investment securities
Proceeds from maturity and principal repayment of available-for-sale investment
securities
Proceeds from sale of credit card portfolio
Net increase in loans
Purchases of premises and equipment
Purchases of bank owned life insurance
FHLB stock redeemed
Net cash (used in) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, interest-bearing and savings deposits
Net decrease in time deposits
Proceeds from short-term borrowings from Federal Home Loan Bank
Repayments of short-term borrowings to Federal Home Loan Bank
Proceeds of borrowings from other financial institutions
Repayments of borrowings from other financial institutions
Purchase and retirement of common stock
Proceeds from stock issued under employee stock purchase plan
Proceeds from exercise of stock options
Cash dividend payments on common stock
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes
Operating cash flows from operating leases
Non-cash investing and financing activities:
Initial recognition of operating lease right-of-use assets
Common stock issued in acquisitions
The accompanying notes are an integral part of these consolidated financial statements.
$
21,443
$
21,289
$
(77)
1,742
(917)
4,564
555
1,025
(5,199)
—
(218)
(728)
—
(9,521)
9,641
(589)
21,721
—
(301,254)
281,906
25,120
—
(25,606)
(876)
(1,000)
781
(20,929)
54,074
(3,087)
725,500
(735,500)
2,870
(2,870)
(15,619)
216
276
(5,805)
20,055
20,847
31,727
233
1,703
(898)
6,457
482
50
(1,314)
2
42
(695)
(462)
3,218
(599)
403
29,911
—
(225,970)
246,824
36,495
2,954
(20,477)
(791)
—
—
39,035
(112,134)
(31,253)
568,500
(558,500)
19,705
(19,705)
(894)
211
738
(4,270)
(137,602)
(68,656)
100,383
$
$
$
$
$
$
52,574
$
31,727
$
2,517
9,140
1,643
$
$
$
10,129
$
— $
1,460
2,700
$
$
— $
— $
— $
14,026
(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
100,383
1,171
4,720
—
—
28,405
12
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 20 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, 2019,
there were no transfers between categories.
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.
13
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
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 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.
14
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 other open ended unsecured consumer loans.
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. 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 2019. 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
15
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 $0 at December 31, 2019 and at December 31,
2018.
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. Goodwill
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 acquisition 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 2019, 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, 2019 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 five to 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, 2019 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 2019, so core deposit intangibles were not
required to be retested.
Loan Commitments and Related Financial Instruments - Financial instruments
include off-balance sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The
face amount of these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded.
Income Taxes - The Company files its income taxes on a consolidated basis with
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,
16
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) 2016-02 - Leases—Overall (Subtopic
845), was issued February 2016. ASU 2016-02 will, among other things, require
lessees to recognize a lease liability, which is a lessee’s obligation to make lease
payments arising from a lease, measured on a discounted basis; and a right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use
of, a specified asset for the lease term. ASU 2016-02 does not significantly
change lease accounting requirements applicable to lessors; however, certain
changes were made to align, where necessary, lessor accounting with the lessee
accounting model and ASC Topic 606, ‘‘Revenue from Contracts with Customers.’’
ASU 2016-02 was effective for us on January 1, 2019 and initially required
transition using a modified retrospective approach for leases existing at, or
entered into after, the beginning of the earliest comparative period presented in
the financial statements. In July 2018, the FASB issued ASU 2018-11, ‘‘Leases
(Topic 842)—Targeted Improvements,’’ which, among other things, provides an
additional transition method that would allow entities to not apply the guidance
in ASU 2016-02 in the comparative periods presented in the financial statements
and instead recognize a cumulative-effect adjustment to the opening balance of
retained earnings in the period of adoption. In December 2018, the FASB also
issued ASU 2018-20, ‘‘Leases (Topic 842)—Narrow-Scope Improvements for
Lessors,’’ which provides for certain policy elections and changes lessor accounting
for sales and similar taxes and certain lessor costs. As of January 1, 2019, the
Company adopted ASU 2016-02 and has recorded a right-of-use asset and lease
liability of approximately $10 million on the balance sheet for its operating leases
where it is a lessee. The Company elected to apply certain practical expedients
provided under ASU 2016-02 whereby the Company will not reassess(i) whether
any expired or existing contracts are or contain leases, (ii) the lease classification
for any expired or existing leases and (iii) initial direct costs for any existing
leases. The Company also did not apply the recognition requirements of ASU
2016-02 to any short-term leases (as defined by related accounting guidance).
The Company accounts for lease and non-lease components separately because
such amounts are readily determinable under the Company’s lease contracts and
because the Company expects this election will result in a lower impact on our
balance sheet.
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
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.
On August 15, 2019, the FASB issued a proposed Accounting Standards Update
(ASU), ‘‘Financial Instruments-Credit Losses (Topic 326), Derivatives and
Hedging (Topic 815), and Leases (Topic 842): Effective Dates,’’ that would
provide private entities and certain small public companies additional time to
implement the standards of CECL, leases, and hedging. On October 16, 2019,
the FASB affirmed this proposal and directed the staff to draft a final ASU. The
final ASU extended the effective date for SEC filers, such as the Company, that
are classified as small reporting companies to January 1, 2023.
The Company has formed an internal task force that is responsible for
oversight of the Company’s implementation strategy for compliance with
provisions of the new standard. The Company has also established a project
management governance process to manage the implementation across affected
disciplines. An external provider specializing in community bank loss driver and
CECL reserving model design as well as other related consulting services has
been retained, and we have begun to evaluate potential CECL modeling
alternatives. As part of this process, the Company has determined potential loan
pool segmentation and sub-segmentation under CECL, as well as begun to
evaluate the key economic loss drivers for each segment. Further, the Company
has begun developing internal controls around the CECL process, data,
calculations and implementation. The Company presently plans to generate and
evaluate model scenarios under CECL in tandem with its current reserving
processes for interim and annual reporting periods during 2020 due to the fact
the Company elected to delay implementation of the CECL process as allowed
by FASB. While the Company is currently unable to reasonably estimate the
impact of adopting this new guidance, management expects the impact of
adoption will be significantly influenced by the composition and quality of the
Company’s loans as well as the economic conditions as of the date of adoption.
The Company also anticipates significant changes to the processes and procedures
for calculating the reserve for credit losses and continues to evaluate the potential
impact on our consolidated financial statements.
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. The
Company adopted ASU 2017-04 during the first quarter of 2019 and it did not
have a material impact on the Company’s financial position, results of operations
or cash flows.
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
are effective in fiscal years beginning after December 15, 2018. The Company
adopted this ASU effective January 1, 2019 and it did not have a material
impact on the Company’s financial position, results of operations or cash flows.
FASB Accounting Standards Update (ASU) 2018-13 - Fair Value Measurement
(Subtopic 820): Disclosure Framework—Changes to the Disclosure Requirements for
Fair Value Measurement, was issued August 2018. The primary focus of ASU
2018-13 is to improve the effectiveness of the disclosure requirements for fair
value measurements. The changes affect all companies that are required to
17
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
include fair value measurement disclosures. In general, the amendments in ASU
2018-13 are effective for all entities for fiscal years and interim periods within
those fiscal years, beginning after December 15, 2019. An entity is permitted to
early adopt the removed or modified disclosures upon the issuance of ASU
2018-13 and may delay adoption of the additional disclosures, which are
required for public companies only, until their effective date. Management is
currently evaluating the impact these changes will have on the Company’s
consolidated financial statements and disclosures. Upon adoption, the Company
expects that it will have a slight change in presentation, and an immaterial
impact to its results of operations, financial position, and liquidity.
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
five 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 $0 and $217,000 are included in the
income statement for the years ended December 31, 2019 and 2018, respectively.
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.
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.
Pro Forma Results of Operations
The accompanying consolidated financial statements include the accounts of
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, 2017 after giving effect to certain
adjustments. The unaudited pro forma results of operations for the year ended
December 31, 2017 include the historical accounts of the Company, Folsom
Lake 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, expense efficiencies or asset dispositions. (In
thousands, except per-share amounts):
For the Year Ended
December 31,
2017
$61,059
(1,150)
11,240
51,415
22,034
9,168
$12,866
$12,866
$
$
1.03
1.01
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
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
3.
FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
Fair value is the exchange price that would be received for an asset or paid to
transfer a liability (exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants on the
measurement date. In accordance with applicable guidance, the Company groups
its assets and liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of the
assumptions used to determine fair value. Valuations within these levels are based
upon:
Level - 1 Quoted market prices (unadjusted) for identical instruments traded
in active exchange markets that the Company has the ability to access as of the
measurement date.
Level - 2 Quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which all significant assumptions are
observable or can be corroborated by observable market data.
18
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS (Continued)
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.
The estimated carrying and fair values of the Company’s financial instruments
are as follows (in thousands):
December 31, 2019
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Amount
Financial assets:
Cash and due from
banks
$
24,195 $
24,195 $
Interest-earning deposits
in other banks
Available-for-sale
investment securities
Equity 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
28,379
28,379
- $
-
- $
24,195
-
28,379
470,746
7,472
934,250
6,062
5,591
-
7,472
-
470,746
-
-
-
-
928,807
470,746
7,472
928,807
N/A
N/A
N/A
N/A
33
1,798
3,760
5,591
1,333,285
-
1,160,224
-
93,395
5,000
-
-
1,253,619
5,000
5,155
176
-
-
-
129
3,976
47
3,976
176
December 31, 2018
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Amount
Financial assets:
Cash and due from
banks
$
24,954 $
24,954 $
Interest-earning deposits
in other banks
Available-for-sale
investment securities
Equity 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
- $
-
- $
24,954
-
6,773
463,905
-
-
-
-
899,214
463,905
7,254
899,214
6,773
-
7,254
-
N/A
N/A
N/A
N/A
32
2,323
4,074
6,429
6,773
463,905
7,254
909,591
6,843
6,429
1,282,298
10,000
1,031,369
-
95,633
10,000
-
-
1,127,002
10,000
5,155
134
-
-
-
81
4,114
53
4,114
134
These estimates do not reflect any premium or discount that could result from
offering the Company’s entire holdings of a particular financial instrument for
sale at one time, nor do they attempt to estimate the value of anticipated future
business related to the instruments. In addition, the tax ramifications related to
the realization of unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in any of these estimates.
These estimates are made at a specific point in time based on relevant market
data and information about the financial instruments. Because no market exists
for a significant portion of the Company’s financial instruments, fair value
estimates are based on judgments regarding current economic conditions, risk
characteristics of various financial instruments and other factors. These estimates
are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the fair values presented.
The methods and assumptions used to estimate fair values are described as
follows:
(a) Cash and Cash Equivalents - The carrying amounts of cash and due from
banks, interest-earning deposits in other banks, and Federal funds sold
approximate fair values and are classified as Level 1.
(b) 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 and included in Level 3. 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 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. Impaired loans are
evaluated on a quarterly basis for additional impairment and adjusted accordingly.
The estimated fair values of financial instruments disclosed above a follow the
guidance in ASU 2016-01 which prescribes an ‘‘exit price’’ approach in
estimating and disclosing fair value of financial instruments incorporating
discounts for credit, liquidity, and marketability factors.
(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.
19
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS
(Continued)
(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, 2019:
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 mortgage and
asset backed securities
Corporate debt securities
Equity Securities
$
14,494 $
- $
14,494 $
91,111
196,719
159,378
9,044
7,472
-
-
-
-
7,472
91,111
196,719
159,378
9,044
-
Total assets measured at fair
value on a recurring basis
$
478,218 $
7,472 $
470,746 $
-
-
-
-
-
-
-
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,
2019, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at
December 31, 2019. Also there were no liabilities measured at fair value on a
recurring basis at December 31, 2019.
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. As of December 31, 2019
there were no impaired loans or assets that were measured at the lower of cost or
fair value.
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, 2019.
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, 2019, there were no loans measured using the fair value
of the collateral for collateral dependent loans.
During the year ended December 31, 2019 specific allocation for the
allowance for credit losses related to loans carried at fair value was $0, compared
to $27,000 during the year ended December 31, 2018. There were no net
charge-offs related to loans carried at fair value at December 31, 2019 and 2018.
There were no liabilities measured at fair value on a non-recurring basis at
December 31, 2019.
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, 2018:
Recurring Basis
The Company is required or permitted to record the following assets at fair
value on a recurring basis under other accounting pronouncements (in
thousands):
Fair
Value
Level 1
Level 2
Level 3
Available-for-sale securities
Debt Securities:
U.S. Government agencies
Obligations of states and
political subdivisions
U.S. Government sponsored
entities and agencies
collateralized by residential
mortgage obligations
Private label residential
mortgage and asset backed
securities
Other equity securities
$
21,321 $
- $
21,321 $
81,504
234,930
126,150
7,254
-
-
81,504
234,930
-
7,254
126,150
-
Total assets measured at fair
value on a recurring basis
$
471,159 $
7,254 $
463,905 $
-
-
-
-
-
-
20
Notes to
Consolidated Financial Statements
3.
FAIR VALUE MEASUREMENTS
(Continued)
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,
2018, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at
December 31, 2018. Also there were no liabilities measured at fair value on a
recurring basis at December 31, 2018.
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, 2018 (in
thousands):
Fair
Value
Level 1
Level 2
Level 3
Impaired loans:
Real estate:
Commercial real estate
Total assets measured at fair
value on a non-recurring
basis
$
$
134 $
- $
- $
134
134 $
- $
- $
134
As of December 31, 2018, impaired loans that are measured for impairment
using the fair value of the collateral for collateral dependent loans in which the
collateral value did not exceed the loan balance had a principal balance of
$161,000 with a valuation allowance of $27,000 at December 31, 2018, resulting
in a fair value of $134,000. The valuation allowance represent specific allocation
for the allowance for credit losses for impaired loans. During the year ended
December 31, 2018, 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, 2018.
4.
INVESTMENT SECURITIES
The fair value of the available-for-sale investment portfolio reflected an unrealized
gain of $3,999,000 at December 31, 2019 compared to an unrealized loss of
$(6,257,000) at December 31, 2018. The unrealized gain/(loss) recorded is net of
$1,182,000 and $(1,850,000) in tax liabilities (benefits) as accumulated other
comprehensive income within shareholders’ equity at December 31, 2019 and
2018, 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, 2019
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
14,740 $
12 $
(258) $
14,494
89,574
2,965
(1,428)
91,111
sponsored entities and
agencies collateralized
by residential mortgage
obligations
Private label mortgage and
asset backed securities
Corporate debt securities
198,125
1,409
(2,815)
196,719
155,308
9,000
4,223
79
(153)
(35)
159,378
9,044
$ 466,747 $
8,688 $
(4,689) $ 470,746
December 31, 2018
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
21,723 $
- $
(402) $
21,321
79,886
2,205
(587)
81,504
239,388
129,165
253
756
(4,711)
234,930
(3,771)
126,150
$ 470,162 $
3,214 $
(9,471) $ 463,905
Proceeds and gross realized gains (losses) on investment securities for the years
ended December 31, 2019, 2018, and 2017 are shown below (in thousands):
Years Ended December 31,
2019
2018
2017
Available-for-Sale Securities
Proceeds from sales or calls
Gross realized gains from sales or calls
Gross realized losses from sales or calls
$ 228,405
$ 246,824
$ 281,906
4,701
1,976
5,319
$
$
$
(1,899)
(662) $
(120) $
$
Losses recognized in 2019, 2018, and 2017 were incurred in order to
reposition the investment securities portfolio based on the current rate
environment. The securities which were sold at a loss were acquired when the
rate environment was not as volatile. The securities which were sold were
primarily purchased several years ago to serve a purpose in the rate environment
in which the securities were purchased. The Company addressed risks in the
security portfolio by selling these securities and using the proceeds to purchase
securities that fit with the Company’s current risk profile.
The provision for income taxes includes $1,537,000, $388,000, and
$1,178,000 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, 2019, 2018, and 2017, respectively.
21
Notes to
Consolidated Financial Statements
4.
INVESTMENT SECURITIES (Continued)
Investment securities with unrealized losses at December 31, 2019 and 2018
are summarized and classified according to the duration of the loss period as
follows (in thousands):
December 31, 2019
Less than 12 Months 12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
- $
- $ 13,713 $
(258) $ 13,713 $
(258)
65,606
(1,428)
-
-
65,606
(1,428)
71,650
(932)
69,518
(1,883)
141,168
(2,815)
17,811
3,965
(81)
(35)
5,624
-
(72)
-
23,435
3,965
(153)
(35)
$ 159,032 $
(2,476) $ 88,855 $
(2,213) $ 247,887 $
(4,689)
December 31, 2018
Less than 12 Months 12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$ 14,891 $
(254) $
6,430 $
(148) $ 21,321 $
(402)
10,056
(99)
22,945
(488)
33,001
(587)
61,866
(424)
124,673
(4,287)
186,539
(4,711)
31,325
(195)
84,784
(3,576)
116,109
(3,771)
$ 118,138 $
(972) $ 238,832 $
(8,499) $ 356,970 $
(9,471)
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
Corporate debt 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
Private label residential
mortgage backed securities
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, 2019, 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, 2019,
and identified those that had an unrealized loss for at least a consecutive
12 month period, which had an unrealized loss at December 31, 2019 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 that no credit related impairment existed.
There were no OTTI losses recorded during the twelve months ended
December 31, 2019, 2018, or 2017.
U.S. Government Agencies - At December 31, 2019, the Company held six U.S.
Government agency securities of which none were in a loss position for less than
12 months and five 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, 2019.
Obligations of States and Political Subdivisions - At December 31, 2019, the
Company held 41 obligations of states and political subdivision securities of
which 15 were in a loss position.
U.S. Government Sponsored Entities and Agencies Collateralized by Residential
Mortgage Obligations - At December 31, 2019, the Company held 119 U.S.
Government sponsored entity and agency securities collateralized by residential
mortgage obligation securities of which 22 were in a loss position for less than
12 months and 18 have been 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, 2019.
Private Label Mortgage and Asset Backed Securities - At December 31, 2019, the
Company had a total of 41 PLMBS with a remaining principal balance of
$155,308,000 and a gross and net unrealized loss of approximately $4,070,000.
Four of these securities were in a loss position for less than 12 months and one
has been in a loss position for more than 12 months at December 31, 2019.
Seven of these PLMBS with a remaining principal balance of $1,593,000 had
credit ratings below investment grade. The Company continues to monitor these
securities for changes in credit ratings or other indications of credit deterioration.
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, 2019.
Corporate Debt Securities - At December 31, 2019, the Company held two
corporate debt securities of which one was in a loss position.
The following table provides a rollforward for the years ended December 31,
2019 and 2018 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,
2019
2018
874
$
874
-
-
-
-
874
$
874
The amortized cost and estimated fair value of available-for-sale investment
securities at December 31, 2019 and 2018 by contractual maturity are shown in
the two tables below (in thousands). Expected maturities will differ from
22
Notes to
Consolidated Financial Statements
4.
INVESTMENT SECURITIES
(Continued)
contractual maturities because the issuers of the securities may have the right to
call or prepay obligations with or without call or prepayment penalties.
December 31, 2019
December 31, 2018
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:
Treasuries
U.S. Government agencies
U.S. Government sponsored entities and
agencies collateralized by residential mortgage
obligations
Private label mortgage and asset backed
securities
Corporate debt securities
$
- $
- $
- $
1,561
20,280
67,733
89,574
1,697
21,088
68,326
91,111
2,769
21,831
55,286
79,886
-
2,899
22,278
56,327
81,504
-
14,740
-
14,494
-
21,723
-
21,321
198,125
196,719
239,388
234,930
155,308
9,000
159,378
9,044
129,165
-
126,150
-
$ 466,747 $ 470,746 $ 470,162 $ 463,905
Investment securities with amortized costs totaling $89,158,000 and
$80,001,000 and fair values totaling $91,677,000 and $79,662,000 were pledged
as collateral for borrowing arrangements, public funds and for other purposes at
December 31, 2019 and 2018, respectively.
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
Outstanding loans are summarized as follows (in thousands):
At December 31, 2019 and 2018, loans originated under Small Business
Administration (SBA) programs totaling $21,910,000 and $22,297,000,
respectively, were included in the real estate and commercial categories.
Approximately $446,494,000 in loans were pledged under a blanket lien as
collateral to the FHLB for the Bank’s remaining borrowing capacity of
$304,987,000 as of December 31, 2019. 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 $2,116,000, $2,453,000, and
$2,593,000 have been deferred as loan origination costs for the years ended
December 31, 2019, 2018, and 2017, respectively.
Allowance for Credit Losses
The allowance for credit losses (the ‘‘allowance’’) is a valuation allowance for
probable incurred credit losses in the Company’s loan portfolio. The allowance is
established through a provision for credit losses which is charged to expense.
Additions to the allowance are expected to maintain the adequacy of the total
allowance after credit losses and loan growth. Credit exposures determined to be
uncollectible are charged against the allowance. Cash received on previously
charged-off credits is recorded as a recovery to the allowance. The overall
allowance consists of two primary components, specific reserves related to
impaired loans and general reserves for probable incurred losses related to loans
that are not impaired.
For all portfolio segments, the determination of the general reserve for loans
that are not impaired is based on estimates made by management, including but
not limited to, consideration of historical losses by portfolio segment (and in
certain cases peer loss data) over the most recent 20 quarters, and qualitative
factors including economic trends in the Company’s service areas, industry
experience and trends, geographic concentrations, estimated collateral values, the
Company’s underwriting policies, the character of the loan portfolio, and
probable losses inherent in the portfolio taken as a whole.
Changes in the allowance for credit losses were as follows (in thousands):
Loan Type
Commercial:
Commercial and industrial
Agricultural production
Total commercial
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
December 31,
2019
% of
Total
loans
December 31,
2018
% of
Total
loans
$
102,541
23,159
125,700
10.9% $
2.6%
13.5%
101,533
7,998
109,531
11.1%
0.9%
12.0%
197,946
21.0%
183,169
19.9%
Balance, beginning of year
Provision (reversal) charged to
operations
Losses charged to allowance
Recoveries
Years Ended December 31,
2019
2018
2017
$
9,104
$
8,778
$
9,326
1,025
(1,196)
197
50
(210)
486
(1,150)
(464)
1,066
Balance, end of year
$
9,130
$
9,104
$
8,778
73,718
329,333
76,304
31,241
708,542
64,841
42,782
107,623
1,515
943,380
(9,130)
7.8%
34.9%
8.1%
3.3%
75.1%
6.9%
4.5%
11.4%
100.0%
101,606
305,118
76,884
32,799
699,576
69,958
38,038
107,996
1,592
918,695
(9,104)
11.1%
33.2%
8.4%
3.6%
76.2%
7.6%
4.2%
11.8%
100.0%
Total loans
$
934,250
$
909,591
23
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 2019, 2018, and 2017 by
portfolio segment (in thousands):
Allowance for credit losses:
Beginning balance, January 1, 2019
(Reversal) provision charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2019
Allowance for credit losses:
Beginning balance, January 1, 2018
(Reversal) provision charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2018
Allowance for credit losses:
Beginning balance, January 1, 2017
(Reversal) provision charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2017
Commercial
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
$
$
$
$
$
1,671
655
(1,032)
134
1,428
2,071
(513)
(94)
207
1,671
2,180
(762)
(207)
860
$
$
$
$
$
6,539
230
-
-
6,769
5,795
642
-
102
6,539
6,200
(449)
(22)
66
$
$
$
$
$
826
172
(164)
63
897
825
(60)
(116)
177
826
852
68
(235)
140
$
$
$
$
$
68
(32)
-
-
36
87
(19)
-
-
68
94
(7)
-
-
9,104
1,025
(1,196)
197
9,130
8,778
50
(210)
486
9,104
9,326
(1,150)
(464)
1,066
2,071
$
5,795
$
825
$
87
$
8,778
The following is a summary of the allowance for credit losses by impairment methodology and portfolio segment as of December 31, 2019 and December 31, 2018
(in thousands):
Allowance for credit losses:
Ending balance, December 31, 2019
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Ending balance, December 31, 2018
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Commercial
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
1,428
2
1,426
1,671
9
1,662
$
$
$
$
$
$
6,769
3
6,766
6,539
27
6,512
$
$
$
$
$
$
897
35
862
826
54
772
$
$
$
$
$
$
36
-
36
68
-
68
$
$
$
$
$
$
9,130
40
9,090
9,104
90
9,014
The following table shows the ending balances of loans as of December 31, 2019 and December 31, 2018 by portfolio segment and by impairment methodology (in
thousands):
Loans:
Ending balance, December 31, 2019
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance, December 31, 2018
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Commercial
Real Estate
Consumer
Total
$
$
$
$
$
$
125,700
187
125,513
109,531
348
109,183
$
$
$
$
$
$
708,542
2,036
706,506
699,576
4,215
695,361
$
$
$
$
$
$
107,623
1,511
106,112
107,996
1,346
106,650
$
$
$
$
$
$
941,865
3,734
938,131
917,103
5,909
911,194
24
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
(Continued)
The following table shows the loan portfolio by class allocated by management’s internal risk ratings at December 31, 2019 (in thousands):
Pass
Special
Mention
Substandard
Doubtful
Total
Commercial:
Commercial and industrial
Agricultural 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
$
86,705
18,814
$
2,635
-
$
13,201
4,345
$
186,370
72,142
310,982
68,032
31,241
62,776
42,782
6,881
-
17,202
946
-
519
-
4,695
1,576
1,149
7,326
-
1,546
-
Total
$
879,844
$
28,183
$
33,838
$
-
-
-
-
-
-
-
-
-
-
$
102,541
23,159
197,946
73,718
329,333
76,304
31,241
64,841
42,782
$
941,865
The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2018 (in thousands):
Pass
Special
Mention
Substandard
Doubtful
Total
Commercial:
Commercial and industrial
Agricultural production
Real Estate:
Owner occupied
Real estate construction and other land loans
Commercial real estate
Agricultural real estate
Other real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total
$
86,876
5,955
$
12,072
2,043
$
2,585
-
$
179,214
95,301
298,714
57,544
32,799
68,016
38,036
3,056
3,270
5,268
165
-
380
-
899
3,035
1,136
19,175
-
1,562
2
$
862,455
$
26,254
$
28,394
$
The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2019 (in thousands):
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
90 Days
Past Due
Commercial:
Commercial and industrial
Agricultural 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
17
-
-
-
-
-
-
-
-
168
$
$
-
-
218
-
381
-
-
-
-
Total
$
185
$
599
$
-
-
-
-
-
-
-
-
-
-
Recorded
Investment
> 90 Days
Accruing
$
Total Past
Due
Current
Total
Loans
$
17
-
218
-
381
-
-
-
168
$
102,524
23,159
-
197,728
73,718
328,952
76,304
31,241
-
64,841
42,614
$
102,541
23,159
-
197,946
73,718
329,333
76,304
31,241
-
64,841
42,782
$
784
$
941,081
$
941,865
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
101,533
7,998
183,169
101,606
305,118
76,884
32,799
69,958
38,038
$
917,103
Non-
accrual
$
187
-
416
-
381
321
-
388
-
$
1,693
25
Notes to
Consolidated Financial Statements
5.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2018 (in thousands):
30-59 Days
Past Due
60-89 Days
Past Due
Commercial:
Commercial and industrial
Agricultural 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
$
255
-
-
215
-
-
-
-
953
7
Total
$
1,430
$
-
-
-
-
-
-
-
-
-
-
Recorded
Investment
> 90 Days
Accruing
$
Greater
Than
90 Days
Past Due
$
$
-
-
-
1,439
-
-
-
-
-
Total Past
Due
Current
Total
Loans
255
-
215
1,439
-
-
-
953
7
$
101,278
7,998
$
182,954
100,167
305,118
76,884
32,799
69,005
38,031
101,533
7,998
-
183,169
101,606
305,118
76,884
32,799
-
69,958
38,038
$
1,439
$
2,869
$
914,234
$
917,103
$
$
Non-
accrual
298
-
215
1,439
418
-
-
370
-
$
2,740
-
-
-
-
-
-
-
-
-
-
The following table shows information related to impaired loans by class at
The following table shows information related to impaired loans by class at
December 31, 2019 (in thousands):
December 31, 2018 (in thousands):
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
With no related allowance recorded:
Commercial:
Commercial and industrial
$
163
$
432
$
Real estate:
Owner occupied
Real estate construction and other
land loans
Commercial real estate
Agricultural real estate
Total real estate
Consumer:
Equity loans and lines of credit
Total with no related allowance
recorded
With an allowance recorded:
Commercial:
Commercial and industrial
Real estate:
Commercial real estate
Agricultural real estate
Total real estate
Consumer:
Equity loans and lines of credit
Total with an allowance recorded
416
-
1,110
321
1,847
220
426
-
1,361
321
2,108
256
2,230
2,796
24
152
37
189
1,291
1,504
27
153
37
190
1,292
1,509
Total
$
3,734
$
4,305
$
With no related allowance recorded:
Commercial:
Commercial and industrial
$
259
$
493
$
Real estate:
Owner occupied
Real estate construction and other
land loans
Commercial real estate
Total real estate
Consumer:
Equity loans and lines of credit
Total with no related allowance
recorded
With an allowance recorded:
Commercial:
Commercial and industrial
Real estate:
Commercial real estate
Agricultural real estate
Consumer:
Equity loans and lines of credit
Total with an allowance recorded
215
2,613
1,182
4,010
248
4,517
89
161
44
1,098
1,392
215
2,676
1,414
4,305
285
5,083
90
162
44
1,103
1,399
Total
$
5,909
$
6,482
$
-
-
-
-
-
-
-
9
27
-
54
90
90
The recorded investment in loans excludes accrued interest receivable and net
loan origination fees, due to immateriality.
-
-
-
-
-
-
-
-
2
3
-
3
35
40
40
The recorded investment in loans excludes accrued interest receivable and net
loan origination fees, due to immateriality.
26
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, 2019, 2018, and 2017 (in thousands):
With no related allowance recorded:
Commercial:
Commercial and industrial
Total commercial
Real estate:
Owner occupied
Real estate construction and other land loans
Commercial real estate
Agricultural real estate
Other real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
Year Ended December 31,
2019
Year Ended December 31,
2018
Year Ended December 31,
2017
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
$
214
214
223
1,174
1,306
25
-
2,728
593
-
593
-
-
-
45
50
-
-
95
13
-
13
$
$
311
311
$
-
-
$
404
404
17
2,857
1,542
1,173
702
6,291
217
-
217
-
85
51
159
-
295
-
-
-
24
1,228
1,370
-
-
2,622
132
6
138
-
-
-
114
53
-
-
167
-
-
-
Total with no related allowance recorded
3,535
108
6,819
295
3,164
167
With an allowance recorded:
Commercial:
Commercial and industrial
Total commercial
Real estate:
Real estate construction and other land loans
Commercial real estate
Agricultural real estate
Other real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
Total with an allowance recorded
Total
57
57
-
325
42
-
367
1,139
20
1,159
1,583
5,118
$
1
1
-
12
2
-
14
56
-
56
71
$
179
$
55
55
-
200
49
86
335
1,054
3
1,057
1,447
8,266
4
4
-
12
3
-
15
57
-
57
76
$
371
$
38
38
1,827
470
43
-
2,340
239
1
240
2,618
5,782
1
1
-
-
3
-
3
32
-
32
36
$
203
Foregone interest on nonaccrual loans totaled $85,000, $267,000, and
$210,000 for the years ended December 31, 2019, 2018, and 2017, 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, 2019 and 2018, the Company has a recorded investment
in troubled debt restructurings of $2,362,000 and, $3,220,000, respectively. The
Company has allocated $38,000 and $50,000 of specific reserves for those loans
at December 31, 2019 and 2018, respectively. The Company has committed to
lend no additional amounts as of December 31, 2019 to customers with
outstanding loans that are classified as troubled debt restructurings.
For the years ended December 31, 2019, 2018, and 2017 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.
27
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, 2019 (dollars in thousands):
Troubled Debt Restructurings:
Consumer:
Equity loans and line of credit
Pre-
Modification
Outstanding
Recorded
Investment (1)
Number of
Loans
Principal
Modification
Post
Modification
Outstanding
Recorded
Investment (2)
Outstanding
Recorded
Investment
3
$
532
$
-
$
532
$
446
(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, 2018 (dollars in thousands):
Troubled Debt Restructurings:
Commercial:
Commercial and Industrial
Real Estate:
Commercial real estate
Total
Pre-
Modification
Outstanding
Recorded
Investment (1)
Number of
Loans
Principal
Modification
Post
Modification
Outstanding
Recorded
Investment (2)
Outstanding
Recorded
Investment
1
1
2
$
$
$
38
166
204
$
$
$
-
-
-
$
$
$
38
166
204
$
$
$
30
161
191
(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, 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
$
1,066
1,125
$
51
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.
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, 2019, 2018, and 2017.
28
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,
2019
2018
$
$
1,131
6,948
11,045
4,198
23,322
1,131
6,753
12,665
4,369
24,918
(15,704)
(16,434)
$
7,618
$
8,484
Depreciation and amortization included in occupancy and equipment expense
totaled $1,742,000, $1,703,000 and $1,429,000 for the years ended
December 31, 2019, 2018, and 2017, respectively.
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, 2019 and determined no impairment was
necessary. Amortization expense recognized was $695,000 for 2019, $455,000 for
2018, and $234,000 for 2017.
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,
2020
2021
2022
2023
Thereafter
Total
Estimated Core
Deposit
Intangible
Amortization
$
$
696
661
455
66
-
1,878
7. GOODWILL AND INTANGIBLE ASSETS
8. DEPOSITS
The change in goodwill during the years ended December 31, 2019, 2018,
and 2017 is as follows (in thousands):
Interest-bearing deposits consisted of the following (in thousands):
2019
2018
2017
Balance, beginning of year
Acquired goodwill
Impairment
Balance, end of year
$
$
53,777
-
-
53,777
$
$
53,777
-
-
53,777
$
$
40,231
13,546
-
53,777
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, 2019 and 2018 was $53,777,000. Total goodwill at December 31,
2019 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. 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 2019, so goodwill was not required to be retested.
The intangible assets at December 31, 2019 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 five
to ten years from the date of acquisition. At December 31, 2019, the weighted
average remaining amortization period is three years. The carrying value of
intangible assets at December 31, 2019 was $1,878,000, net of $1,874,000 in
accumulated amortization expense. The carrying value at December 31, 2018 was
$2,572,000, net of $1,180,000 in accumulated amortization expense.
Management evaluates the remaining useful lives quarterly to determine whether
Savings
Money market
NOW accounts
Time, $250,000 or more
Time, under $250,000
December 31,
2019
2018
$
$
112,271
266,609
266,048
22,729
71,001
114,565
267,820
252,439
30,902
65,915
$
738,658
$
731,641
Aggregate annual maturities of time deposits are as follows (in thousands):
Years Ending December 31,
2020
2021
2022
2023
2024
Thereafter
$
77,864
11,091
2,192
1,016
752
815
$
93,730
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,
2019
2018
2017
$
$
$
28
656
538
706
$
37
419
414
283
1,928
$
1,153
$
33
211
317
408
969
29
Notes to
Consolidated Financial Statements
9. BORROWING ARRANGEMENTS
Federal Home Loan Bank Advances - As of December 31, 2019, the Company
had no Federal Home Loan Bank (FHLB) of San Francisco advances. As of
December 31, 2018, the Company had $10,000,000 FHLB advances.
Approximately $446,494,000 in loans were pledged under a blanket lien as
collateral to the FHLB for the Bank’s remaining borrowing capacity of
$304,987,000 as of December 31, 2019. FHLB advances are also secured by
investment securities with amortized costs totaling $248,000 and $326,000 and
market values totaling $256,000 and $337,000 at December 31, 2019 and 2018,
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 $70,000,000 and $40,000,000 at
December 31, 2019 and 2018, respectively, at interest rates which vary with
market conditions. As of December 31, 2019 and 2018, the Company had no
Federal funds purchased.
Federal Reserve Line of Credit - The Bank has a line of credit in the amount of
$4,931,000 and $4,364,000 with the Federal Reserve Bank of San Francisco
(FRB) at December 31, 2019 and 2018, respectively, which bears interest at the
prevailing discount rate collateralized by investment securities with amortized
costs totaling $5,065,000 and $4,498,000 and market values totaling $5,036,000
and $4,475,000, respectively. At December 31, 2019 and 2018, the Bank had no
outstanding borrowings with the FRB.
10. LEASES
Leases - The Bank leases certain of its branch facilities and administrative offices
under noncancelable operating leases with terms extending through 2028. Leases
with an initial term of twelve months or less are not recorded on the balance
sheet. Operating lease cost is comprised of lease expense recognized on a
straight-line basis, the amortization of the right-of-use asset and the implicit
interest accreted on the operating lease liability. Operating lease cost is included
in occupancy and equipment expense on our consolidated statements of income.
We evaluate the lease term by assuming the exercise of options to extend that are
reasonably assured and those option periods covered by an option to terminate
the lease, if deemed not reasonably certain to be exercised. The lease term is used
to determine the straight-line expense and limits the depreciable life of any
related leasehold improvements. Certain leases require us to pay real estate taxes,
insurance, maintenance and other operating expenses associated with the leased
premises. These expenses are classified in occupancy and equipment expense on
our consolidated statements of income, consistent with similar costs for owned
locations, but is not included in operating lease cost below. We calculate the lease
liability using a discount rate that represents our incremental borrowing rate at
the lease commencement date.
Future minimum lease payments on noncancelable operating leases are as
follows (in thousands):
Years Ending December 31,
2020
2021
2022
2023
2024
Thereafter
$
Total lease payments
Less: imputed interest
Present value of operating lease liabilities
$
2,103
1,984
1,655
1,539
1,296
2,880
11,457
(1,039)
10,418
Minimum future rental payments under noncancelable operating leases as of
December 31, 2018, prior to adoption of ASU 2016-02, are as follows (in
thousands):
2019
2021
2022
2023
2024
Thereafter
The table below summarizes the total lease cost:
(Dollars in thousands)
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
Minimum future
rental payments
$
$
$
$
2,384
2,078
1,805
1,552
1,448
4,334
13,601
For the Twelve
Months ended
December 31,
2019
2,226
68
375
2,669
The table below summarizes other information related to our operating leases:
Weighted average remaining lease term, in years
Weighted average discount rate
For the Twelve
Months ending
December 31,
2019
7
2.93%
The table below shows operating lease right of use assets and operating lease
liabilities as of December 31, 2019:
(Dollars in thousands)
Operating lease right-of-use assets
Operating lease liabilities
$
$
9,735
10,418
11.
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
Service 1st Capital Trust I is a Delaware business trust formed by Service 1st.
The Company succeeded to all of the rights and obligations of Service 1st in
connection with the merger with Service 1st as of November 12, 2008. The
Trust was formed on August 17, 2006 for the sole purpose of issuing trust
preferred securities fully and unconditionally guaranteed by Service 1st. Under
applicable regulatory guidance, the amount of trust preferred securities that is
eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a
pro forma basis. At December 31, 2019, 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
30
Notes to
Consolidated Financial Statements
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
11.
(Continued)
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, 2019, the rate
was 3.59%. Interest expense recognized by the Company for the years ended
December 31, 2019, 2018, and 2017 was $210,000, $199,000 and $147,000,
respectively.
12.
INCOME TAXES
The provision for income taxes for the years ended December 31, 2019, 2018,
and 2017 consisted of the following (in thousands):
2019
Current
Deferred
Provision for income taxes
2018
Current
Deferred
Provision for income taxes
2017
Current
Deferred
Re-measurement resulting
from Tax Act
Provision for income taxes
Federal
State
Total
$
$
$
$
$
$
5,747
(387)
5,360
3,995
(140)
3,855
1,188
3,328
3,535
8,051
$
$
$
$
$
$
$
$
$
$
$
3,351
(202)
3,149
2,689
76
2,765
1,224
518
-
1,742
$
9,098
(589)
8,509
6,684
(64)
6,620
2,412
3,846
3,535
9,793
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 tax assets
Other-than-temporary impairment
Loan and investment impairment
Operating lease liabilities
Partnership income
State taxes
December 31,
2019
2018
$
$
2,638
4,490
-
2,266
58
374
192
1,158
3,080
200
692
2,380
4,347
1,850
2,407
53
445
192
1,450
-
55
575
Total deferred tax assets
15,148
13,754
Deferred tax liabilities:
Operating lease right-of-use assets
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
(2,878)
(175)
(1,182)
(555)
(234)
(925)
(459)
(6,408)
-
(173)
-
(760)
(234)
(891)
(513)
(2,571)
Net deferred tax assets
$
8,740
$
11,183
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 as of
December 31, 2019 and 2018.
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, 2019, 2018, and 2017 consisted of the following:
Federal income tax, at statutory rate
State taxes, net of Federal tax
benefit
Tax exempt investment security
income, net
Bank owned life insurance, net
Compensation—Stock
Compensation
Re-measurement resulting from Tax
Act
Change in uncertain tax positions
Other
Effective tax rate
2019
2018
2017
21.0 %
21.0 %
35.0 %
8.3 %
7.8 %
4.8 %
(0.9)%
(0.4)%
(2.7)%
(0.6)%
(10.1)%
(0.8)%
(0.2)%
(0.6)%
(2.8)%
- %
- %
0.6 %
28.4 %
- %
(0.3)%
(0.9)%
23.7 %
14.8 %
(0.9)%
1.1 %
41.1 %
31
Notes to
Consolidated Financial Statements
12.
INCOME TAXES
(Continued)
As of December 31, 2019, the Company had Federal and California net
operating loss (‘‘NOL’’) carry-forwards of $7,571,000 and $7,893,000,
respectively. These NOLs were acquired through business combinations and are
subject to IRC 382 will begin expiring at various dates between 2029 and 2035,
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 before they expire.
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
and certain tax-advantaged investments as reflected in other assets) resulted in an
increase to the Company’s 2017 tax provision of $3,535,000.
The Company and its subsidiary file income tax returns in the U.S. federal,
California, and Utah jurisdictions. The Company conducts all of its business
activities in the State of California. There are no pending U.S. federal or state
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, 2016 and by the state taxing authorities for the years ended
before December 31, 2015.
As of December 31, 2019, the Company has no unrecognized tax benefits and
does not expect any material changes in the next 12 months.
During the years ended December 31, 2019 and 2018, the Company recorded
no interest or penalties related to uncertain tax positions.
13. COMMITMENTS AND CONTINGENCIES
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, 2019 was
$17,392,000.
Correspondent Banking Agreements - The Bank maintains funds on deposit with
other federally insured financial institutions under correspondent banking
agreements. Uninsured deposits totaled $327,000 at December 31, 2019.
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,
2019
2018
$
$
289,465
1,717
$
$
309,824
2,450
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 and residential 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 fully 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, 2019 and 2018. The
Company recognizes these fees as revenue over the term of the commitment or
when the commitment is used.
At December 31, 2019, commercial loan commitments represent 53% of total
commitments and are generally secured by collateral other than real estate or
unsecured. Real estate loan commitments represent 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 8% of total
commitments and are generally unsecured. In addition, the majority of the Bank’s
loan commitments have variable interest rates.
At December 31, 2019 and 2018, the balance of a contingent allocation for
probable loan loss experience on unfunded obligations was $250,000 and
$225,000, 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, 2019, in management’s
judgment, a concentration of loans existed in commercial loans and real-estate-
related loans, representing approximately 95.5% of total loans of which 13.5%
were commercial and 82.0% were real-estate-related.
At December 31, 2018, in management’s judgment, a concentration of loans
existed in commercial loans and real-estate-related loans, representing
approximately 95.8% of total loans of which 12% were commercial and 83.8%
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.
14. SHAREHOLDERS’ EQUITY
Regulatory Capital - The Company and the Bank are subject to certain regulatory
capital requirements administered by the Board of Governors of the Federal
Reserve System and the FDIC. Failure to meet these minimum capital
requirements could result in mandatory or, discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company’s
consolidated financial statements.
The Company and the Bank each meet specific capital guidelines that involve
quantitative measures of their respective assets, liabilities and certain off-balance-
sheet items as calculated under regulatory accounting practices. The Company’s
and the Bank’s 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.
32
Notes to
Consolidated Financial Statements
14. SHAREHOLDERS’ EQUITY
(Continued)
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 ($3 Billion or more effective August 30, 2018) 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 was phased-in between January 1, 2016 and January 1,
2019. The capital conservation buffer as of December 31, 2019 was 2.5% and
1.875% as of December 31, 2018. 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, 2019 and 2018. 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).
The following table presents the Company’s and the Bank’s actual capital ratios
as of December 31, 2019 and December 31, 2018, as well as the minimum
capital ratios for capital adequacy for the Bank.
Actual Ratio
Minimum regulatory
requirement (1)
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
December 31, 2019
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio
(CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
December 31, 2018
$ 172,945
11.38%
$ 167,945
$ 172,945
$ 182,325
14.55%
14.98%
15.79%
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio
(CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
$ 171,149
11.48%
$ 166,149
$ 171,149
$ 180,478
15.13%
15.59%
16.44%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1) Effective August 30, 2018 the minimum regulatory requirements were
eliminated for bank holding companies with less than $3 billion of assets
The following table presents the Bank’s regulatory capital ratios as of
December 31, 2019 and December 31, 2018.
(Dollars in thousands)
December 31, 2019
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio
(CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
December 31, 2018
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio
(CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
Actual Ratio
Minimum regulatory
requirement (1)
Amount
Ratio
Amount
Ratio
$ 171,332
11.27% $ 60,810
4.00%
$ 171,332
$ 171,332
$ 180,712
14.85% $ 51,930
14.85% $ 69,240
15.66% $ 92,320
7.00%
8.50%
10.50%
$ 168,770
11.32% $ 59,639
4.00%
$ 168,770
$ 168,770
$ 178,099
15.38% $ 49,388
15.38% $ 65,850
16.23% $ 87,800
6.38%
7.88%
9.88%
(1) The 2019 and 2018 minimum regulatory requirement threshold includes
the capital conservation buffer of 2.50% and 1.250%, respectively.
Dividends - During 2019, the Bank declared and paid cash dividends to the
Company in the amount of $20,100,000 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 $5,805,000 or $0.43 per common
share cash dividend to shareholders of record during the year ended
December 31, 2019.
During 2018, the Bank declared and paid cash dividends to the Company in
the amount of $2,850,000, 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 $4,270,000 or $0.31 per common share
cash dividend to shareholders of record during the year ended December 31,
2018.
During 2017, the Bank declared and paid cash dividends to the Company in
the amount of $3,133,000, in connection with the SVB acquisition, and cash
dividends 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.
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, 2019, $32,116,000 of the Bank’s retained earnings were
free of these restrictions.
33
Notes to
Consolidated Financial Statements
14. SHAREHOLDERS’ EQUITY
(Continued)
A reconciliation of the numerators and denominators of the basic and diluted
earnings per common share computations is as follows (in thousands, except
share and per-share amounts):
For the Years Ended December 31,
2019
2018
2017
Basic Earnings Per Common
Share:
Net income
Weighted average shares
outstanding
$
21,443
$
21,289
$
14,026
13,415,118
13,699,823
12,472,095
Net income per common share
$
1.60
$
1.55
$
1.12
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
Net income per diluted
common share
$
21,443
$
21,289
$
14,026
13,415,118
13,699,823
12,472,095
98,489
125,185
250,255
13,513,607
13,825,008
12,722,350
$
1.59
$
1.54
$
1.10
No outstanding options and restricted stock awards were anti-dilutive at
December 31, 2019, 2018, and 2017.
15. SHARED-BASED COMPENSATION
On December 31, 2019, 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
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 over one to 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, 788,166 shares remain
reserved for future grants as of December 31, 2019.
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 lower of the closing market price on the Offering Date (first
trading day of each offering period) or the Investment Date (last trading day of
each offering period). The plan calls for 500,000 common shares to be set aside
for employee purchases, and there were 473,692 shares available for future
purchase under the plan as of December 31, 2019.
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 38,400.
For the years ended December 31, 2019, 2018, and 2017, the compensation
cost recognized for share-based compensation was $555,000, $482,000, and
$384,000, respectively. The recognized tax benefit for share-based compensation
expense was $46,000, $142,000, and $805,000 for 2019, 2018, and 2017
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, 2019, 2018 and 2017 from any of the
Company’s stock based compensation plans.
34
Notes to
Consolidated Financial Statements
15. SHARED-BASED COMPENSATION (Continued)
The following table presents the restricted common stock activity during the
A summary of the combined activity of the Plans during the years then ended
is presented below (dollars in thousands, except per-share amounts):
years presented:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Shares
Aggregate
Intrinsic Value
202,215 $
6.87
313,360 $
(281,125) $
(1,580) $
11.79
10.47
8.11
232,870 $
9.13
2.87 $
2,574
Options outstanding at
January 1, 2017
Options assumed in
acquisition
Options exercised
Options forfeited
Options outstanding at
December 31, 2017
Options exercised
Options forfeited
(74,030) $
(4,400) $
9.97
10.85
Nonvested outstanding shares at January 1, 2017
Vested
Forfeited
Nonvested outstanding shares at December 31,
2017
Granted
Vested
Forfeited
Nonvested outstanding shares at December 31,
2018
Granted
Vested
Forfeited
2.81 $
1,554
2019
Nonvested outstanding shares at December 31,
Weighted
Average
Grant
Date
Fair Value
$
$
$
$
$
$
$
$
$
$
$
$
13.35
13.34
14.07
13.33
20.76
13.09
14.37
15.98
19.77
16.61
18.06
17.38
Shares
93,501
(27,373)
(2,360)
63,768
22,204
(20,733)
(1,710)
63,529
25,420
(40,159)
(3,630)
45,160
Options outstanding at
December 31, 2018
Options exercised
Options forfeited
Options outstanding at
December 31, 2019
Options vested or
expected to vest at
December 31, 2019
Options exercisable at
December 31, 2019
154,440 $
(32,120) $
(1,200) $
8.68
8.59
5.55
121,120 $
8.73
2.06 $
1,567
121,120 $
8.73
2.06 $
1,567
121,120 $
8.73
2.06 $
1,567
Information related to the stock option plan during each year follows (in
thousands):
2019
2018
2017
Intrinsic value of options exercised
Cash received from options
exercised
Excess tax benefit realized for option
exercises
$
$
$
366
276
46
$
$
$
767
738
142
$
$
$
2,807
2,835
805
As of December 31, 2019, there is no unrecognized compensation cost related
to stock options granted under all Plans. All options are fully vested.
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 one to 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.
During the years ended December 31, 2019 and 2018, 25,420, and 22,204
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 $19.77 and $20.76 per share on the date of grant during the years
ended December 31, 2019 and 2018, respectively. The shares awarded to
employees and directors under the restricted stock agreements vest on applicable
vesting dates only to the extent the recipient of the shares is then an employee or
a director of the Company or one of its subsidiaries, and each recipient will
forfeit all of the shares that have not vested on the date his or her employment
or service is terminated.
As of December 31, 2019, there were 45,160 shares of restricted stock that are
nonvested and expected to vest. Share-based compensation cost charged against
income for restricted stock awards was $533,000, $459,000, and $349,000 for
the year ended December 31, 2019, 2018, and 2017 respectively.
As of December 31, 2019, there was $490,000 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 1.57 years and will be adjusted for subsequent changes in estimated
forfeitures. Restricted common stock awards had an intrinsic value of $815,000
at December 31, 2019.
16. EMPLOYEE BENEFITS
401(k) and Profit Sharing Plan - The Bank has established a 401(k) and profit
sharing plan. The 401(k) plan covers substantially all employees who have
completed a one-month employment period. Participants in the profit sharing
plan are eligible to receive employer contributions after completion of 2 years of
service. Bank contributions to the profit sharing plan are determined at the
discretion of the Board of Directors. Participants are automatically vested 100%
in all employer contributions. The Bank contributed $750,000, $900,000, and
$600,000 to the profit sharing plan in 2019, 2018, and 2017, respectively.
Additionally, the Bank may elect to make a matching contribution to the
participants’ 401(k) plan accounts. The amount to be contributed is announced
by the Bank at the beginning of the plan year. For the year ended December 31,
2019, the Bank made a 100% matching contribution on all deferred amounts up
to 5% of eligible compensation. For the years ended December 31, 2018 and
2017, the Bank made a 100% matching contribution on all deferred amounts up
to 3% of eligible compensation and a 50% matching contribution on all deferred
amounts above 3% to a maximum of 5%. For the years ended December 31,
2019, 2018, and 2017, the Bank made matching contributions totaling
$959,000, $748,000, and $686,000, respectively.
35
Notes to
Consolidated Financial Statements
16. EMPLOYEE BENEFITS
(Continued)
Deferred Compensation Plans - The Bank has a nonqualified Deferred
Compensation Plan which provides directors with an unfunded, deferred
compensation program. Under the plan, eligible participants may elect to defer
some or all of their current compensation or director fees. Deferred amounts earn
interest at an annual rate determined by the Board of Directors (3.12% at
December 31, 2019). At December 31, 2019 and 2018, the total net deferrals
included in accrued interest payable and other liabilities were $4,177,000 and
$3,842,000, 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 $9,686,000 and $9,436,000 and at December 31,
2019 and 2018, respectively. Income recognized on these policies, net of related
expenses, for the years ended December 31, 2019, 2018, and 2017, was
$250,000, $249,000, and $255,000, respectively.
In October 2015, the Board of Directors of the Company and the Bank
adopted a board resolution to create the Central Valley Community Bank
Executive Deferred Compensation Plan (the Executive Plan). Pursuant to the
Executive Plan, all eligible executives of the Bank may elect to defer up to
50 percent of their compensation for each deferral year. Deferred amounts earn
interest at an annual rate determined by the Board of Directors (3.12% at
December 31, 2019). At December 31, 2019 and 2018, the total net deferrals
included in accrued interest payable and other liabilities were $145,000 and
$129,000, respectively.
Salary Continuation Plans - The Board of Directors has approved salary
continuation plans for certain key executives. Under these plans, the Bank is
obligated to provide the executives with annual benefits for 10-15 years after
retirement. 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. 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, 2019, 2018, and 2017,
totaled $1,465,000, $15,000, and $561,000, respectively. Accrued compensation
payable under the salary continuation plans totaled $10,716,000 and $9,816,000
at December 31, 2019 and 2018, respectively. These benefits are substantially
equivalent to those available under split-dollar life insurance policies acquired.
In connection with these plans, the Bank purchased single-premium life
insurance policies with cash surrender values totaling $20,544,000 and
$19,066,000 at December 31, 2019 and 2018, respectively. Income recognized
on these policies, net of related expense, for the years ended December 31, 2019,
2018, and 2017 totaled $478,000, $446,000, and $366,000, respectively.
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.
17. LOANS TO RELATED PARTIES
During the normal course of business, the Bank enters into loans with related
parties, including executive officers and directors. The following is a summary of
the aggregate activity involving related-party borrowers (in thousands):
Balance, January 1, 2019
Disbursements
Effects of changes in composition of related parties
Amounts repaid
Balance, December 31, 2019
Undisbursed commitments to related parties, December 31,
2019
$
$
$
11,738
1,752
(74)
(2,305)
11,111
1,454
36
Notes to
Consolidated Financial Statements
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 2019 and 2018
(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 income (loss), net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
2019
2018
$
1,675
231,671
220
$
2,326
222,514
367
$
233,566
$
225,207
$
$
5,155
283
5,438
5,155
314
5,469
89,379
135,932
2,817
228,128
103,851
120,294
(4,407)
219,738
$
233,566
$
225,207
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2019, 2018, and 2017
(In thousands)
2019
2018
2017
Income:
Dividends declared by Subsidiary - eliminated in consolidation
Other income
Total income
Expenses:
Interest on junior subordinated deferrable interest debentures
Professional fees
Other expenses
Total expenses
Income before equity in undistributed net income of Subsidiary
Equity in undistributed net income of Subsidiary, net of distributions
Income before income tax benefit
Benefit from income taxes
Net income
Comprehensive income
$
$
$
20,100
6
20,106
210
209
437
856
19,250
1,932
21,182
261
21,443
28,667
$
$
$
2,850
6
2,856
199
217
548
964
1,892
19,075
20,967
322
21,289
13,912
$
$
$
3,133
4
3,137
147
231
1,019
1,397
1,740
11,754
13,494
532
14,026
16,867
37
Notes to
Consolidated Financial Statements
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2019, 2018, and 2017
(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
Net decrease (increase) in other assets
Net increase (decrease) in other liabilities
Benefit for 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
Purchase and retirement of common stock
Proceeds from exercise of stock options
Proceeds from stock issued under employee stock purchase plan
Net cash used in financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest
Non-cash investing and financing activities:
Common stock issued in acquisitions
2019
2018
2017
$
21,443
$
21,289
$
14,026
(1,932)
555
136
69
10
20,281
-
(5,805)
(15,619)
276
216
(20,932)
(651)
2,326
1,675
215
-
$
$
$
(19,075)
482
372
166
11
3,245
-
(4,270)
(894)
738
211
(4,215)
(970)
3,296
2,326
185
-
$
$
$
(11,754)
384
(114)
(7)
155
2,690
(151)
(3,010)
-
2,880
-
(130)
2,409
887
3,296
142
28,405
$
$
$
38
Supplementary
Financial Information
The following supplementary financial information is not a part of the Company’s financial statements.
Net interest income
Provision for (Reversal of ) credit losses
Net interest income after provision for credit losses
Other non-interest income
Net realized gains on investment securities
Total non-interest expense
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
Unaudited Quarterly Statement of Operations Data
(In thousands, except per share amounts)
Q4 2019
Q3 2019
Q2 2019
Q1 2019
Q4 2018
Q3 2018
Q2 2018
Q1 2018
$
$
$
$
15,786 $
500
16,205 $
250
15,946 $
300
15,835 $
(25)
15,286
2,006
3
11,127
1,719
15,955
2,037
1,685
11,534
2,452
15,646
2,139
2,459
11,772
2,385
15,860
1,924
1,052
11,667
1,953
15,973 $
15,907 $
-
15,973
2,367
37
11,410
1,686
-
15,907
2,083
380
10,791
1,827
15,397 $
50
15,347
2,604
82
11,499
1,569
15,426
-
15,426
1,956
815
11,368
1,538
4,449 $
5,691 $
6,087 $
5,216 $
5,281 $
5,752 $
4,965 $
5,291
0.34 $
0.43 $
0.45 $
0.38 $
0.38 $
0.42 $
0.36 $
0.34 $
0.42 $
0.45 $
0.38 $
0.38 $
0.42 $
0.36 $
0.39
0.39
39
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, 2019 and 2018, 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, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2019 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, 2019, 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. 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
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.
40
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 6, 2020
41
Selected
Consolidated Financial Data
Statements of Income
Total interest income
Total interest expense
Net interest income before provision for credit losses
Provision for (reversal of ) credit losses
Net interest income after provision for credit losses
Non-interest income
Non-interest expenses
Income before provision for income taxes
Provision for income taxes
Net income
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)
2019
2018
2017
2016
2015
$
66,331 $
2,559
64,187 $
1,484
57,376 $
1,137
46,676 $
1,096
63,772
1,025
62,747
13,305
46,100
29,952
8,509
62,703
50
62,653
10,324
45,068
27,909
6,620
56,239
(1,150)
57,389
10,836
44,406
23,819
9,793
45,580
(5,850)
51,430
9,591
38,922
22,099
6,917
41,822
1,047
40,775
600
40,175
9,387
36,016
13,546
2,582
$
$
$
$
$
$
21,443 $
21,289 $
14,026 $
15,182 $
10,964
1.60 $
1.55 $
1.12 $
1.34 $
1.59 $
1.54 $
1.10 $
1.33 $
0.43 $
0.31 $
0.24 $
0.24 $
1.00
1.00
0.18
December 31,
(In thousands)
2019
2018
2017
2016
2015
506,597 $
934,250
1,333,285
1,596,755
228,128
1,450,347
477,932 $
909,591
1,282,298
1,537,836
219,738
1,406,987
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
494,455 $
921,546
1,295,780
1,574,089
228,352
1,423,015
526,606 $
903,204
1,333,754
1,577,410
211,324
1,435,025
568,426 $
784,085
1,284,305
1,491,696
182,507
1,358,930
560,860 $
636,475
1,144,231
1,321,007
154,325
1,205,142
529,046
577,784
1,065,798
1,222,526
135,062
1,112,758
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.
42
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 and the Greater
Sacramento Region; (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 in quality of the Company’s earning assets; (7) a 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; (13) political
developments, uncertainties or instability, catastrophic events, acts of war or
terrorism, or natural disasters, such as earthquakes, drought, pandemic diseases
or extreme weather events, any of which may affect services we use or affect
our customers, employees or third parties with which we conduct business.
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’s market area
includes the central valley area from Sacramento, California to Bakersfield,
California.
During 2019, we focused on asset quality and capital adequacy. 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, 2019, the Bank operated 20 full-service offices.
Additionally, the Bank maintains a Commercial Real Estate Division, an
Agribusiness Center and a SBA Lending Division. The Real Estate Division
processes or assists in processing the majority of the Bank’s real estate related
transactions, including interim construction loans for single family residences and
commercial buildings. We offer permanent single family residential loans through
our mortgage broker services.
ECONOMIC CONDITIONS
Over the last several years the economy, as evidenced by the California,
Central Valley, and Greater Sacrament Region 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 or adverse weather issues, 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.
An additional negative affect on the agricultural industry is the ‘‘Tariff War’’,
especially with China. The increased tariffs on agricultural products by China has
an adverse effect on demand potentially causing financial difficulty for farmers.
We are closely monitoring how the agricultural industry is adapting through
developing new markets for their products.
In December 2019, a novel strain of Coronavirus was reported in Wuhan,
China. The World Health Organization has declared the outbreak to constitute a
‘‘Public Health Emergency of International Concern.’’ The coronavirus outbreak
is disrupting supply chains and affecting production and sales across a range of
industries. The extent of the impact of the Coronavirus on our operational and
financial performance will depend on certain developments, including the
duration and spread of the outbreak, impact on our customers, employees and
vendors all of which are uncertain and cannot be predicted. At this point, the
extent to which the Coronavirus may impact our financial condition or results of
operations is uncertain.
OVERVIEW
Diluted earnings per share (EPS) for the year ended December 31, 2019 was
$1.59 compared to $1.54 and $1.10 for the years ended December 31, 2018 and
2017, respectively. Net income for 2019 was $21,443,000 compared to
$21,289,000 and $14,026,000 for the years ended December 31, 2018 and
2017, respectively. The increase in net income and EPS was primarily driven by
an increase in net interest income and an increase in net realized gains on sales
and calls of investment securities, partially offset by an increase in non-interest
expense, an increase in the provision for credit losses, and an increase in the
provision for income taxes in 2019 compared to 2018. Total assets at
December 31, 2019 were $1,596,755,000 compared to $1,537,836,000 at
December 31, 2018.
Return on average equity for 2019 was 9.39% compared to 10.07% and
7.69% for 2018 and 2017, respectively. Return on average assets for 2019 was
1.36% compared to 1.35% and 0.94% for 2018 and 2017, respectively. Total
equity was $228,128,000 at December 31, 2019 compared to $219,738,000 at
December 31, 2018. The increase in equity in 2019 compared to 2018 was
primarily driven by the retention of earnings, net of dividends paid, and an
increase in net unrealized gains on available-for-sale (AFS) securities recorded, net
of estimated taxes, in accumulated other comprehensive income (AOCI).
Average total loans increased $18,755,000 or 2.06% to $930,883,000 in 2019
compared to $912,128,000 in 2018. In 2019, we recorded a provision for credit
losses of $1,025,000 compared to a provision of $50,000 in 2018 and a reverse
provision of $1,150,000 in 2017. The Company had nonperforming assets
consisting of $1,693,000 in nonaccrual loans at December 31, 2019. At
December 31, 2018, nonperforming assets totaled $2,740,000. Net loan loss
charge-offs for 2019 were $999,000 compared to net loan loss recoveries in the
amount of $276,000 for 2018 and $602,000 for 2017. Refer to ‘‘Asset Quality’’
below for further information.
43
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OVERVIEW
(Continued)
Dividend Declared
The Company declared a $0.11 per common share cash dividend, payable on
February 21, 2020 to shareholders of record on February 7, 2020.
Key Factors in Evaluating Financial Condition
and Operating Performance
In evaluating our financial condition and operating performance, we focus on
several key factors including:
• Return to our shareholders;
• Return on average assets;
• Development of revenue streams, including net interest income and
non-interest income;
• 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), which is a ratio that measures net income divided by average
shareholders’ equity. Our ROE was 9.39% for the year ended 2019 compared to
10.07% and 7.69% for the years ended 2018 and 2017, respectively.
Our net income for the year ended December 31, 2019 increased $154,000
compared to 2018 and increased $7,263,000 in 2018 compared to 2017.
Contributing to the increase during 2019 was an increase in net interest income
and an increase in net realized gains on sales and calls of investment securities,
partially offset by an increase in non-interest expense, an increase in the provision
for credit losses, and an increase in the provision for income taxes. During 2018,
net income compared to 2017 was positively impacted by the decrease in tax
expense. During 2017 net income was negatively impacted by the
re-measurement of our deferred tax asset and corresponding increase in tax
expense.
Net interest income increased primarily because of increases in loan and
investment income, partially offset by increases in interest expense on deposits.
The impact to interest income from the accretion of the loan marks on acquired
loans was an increase of $989,000 and $1,158,000 for the year ended
December 31, 2019 and 2018, respectively. For 2019, our net interest margin
(NIM) increased seven basis points to 4.51% compared to 2018 as a result of
yield changes and asset mix changes. The increase in net interest margin in the
period-to-period comparison resulted primarily from the increase in the effective
yield on interest-earning deposits in other banks and Federal Funds sold, the
increase in the effective yield on average investment securities, and the increase in
the yield on the Company’s loan portfolio. Net interest income during 2019 was
positively impacted by the collection of nonaccrual loans which resulted in a
recovery of interest income of approximately $1,156,000. The recovery was
partially offset by reversal of approximately $377,000 in interest income on loans
placed on nonaccrual during the year. Net interest income during 2018 was
positively impacted by the collection of nonaccrual loans which resulted in a net
recovery of interest income of approximately $720,000. The recovery in 2018
was partially offset by reversal of approximately $222,000 in interest income on
loans placed on nonaccrual during the year.
Non-interest income increased 28.87% in 2019 compared to 2018 primarily
due to a $3,885,000 increase in net realized gains on sales and calls of
investment securities and an increase in loan placement fees of $270,000,
partially offset by decrease in gain on sale of credit card portfolio of $462,000, a
decrease in service charge income of $230,000, a decrease of $364,000 in other
income, and a $135,000 decrease in Federal Home Loan Bank dividends.
Non-interest expenses increased $1,032,000 or 2.29% to $46,100,000 in 2019
compared to $45,068,000 in 2018. The net increase year over year was
attributable to increases in information technology of $1,498,000, salaries and
employee benefits of $433,000, directors’ expenses of $245,000, amortization of
core deposit intangibles of $240,000, and telephone expenses of $125,000,
partially offset by a decrease in occupancy and equipment expenses of $533,000,
a decrease of $368,000 in regulatory assessments, a decrease in operating losses of
$350,000, a decrease in acquisition and integration expenses of $217,000, a
decrease of $170,000 in professional services ,and a decrease of $109,000 in data
processing expenses, in 2019 compared to 2018. The Company recorded an
income tax provision of $8,509,000 for the year ended December 31, 2019,
compared to $6,620,000 for the year ended December 31, 2018, and $9,793,000
for the year ended December 31, 2017. The Company recognized additional tax
expense in 2017 in the amount of $3,535,000 related to a tax law change
enacted in 2017. Basic EPS was $1.60 for 2019 compared to $1.55 and $1.12
for 2018 and 2017, respectively. Diluted EPS was $1.59 for 2019 compared to
$1.54 and $1.10 for 2018 and 2017, respectively. The increase in EPS for 2019
is primarily due to the increase in net income.
Return on Average Assets
Our return on average assets (ROA) is a ratio that measures our performance
compared with other banks and bank holding companies. Our ROA for the year
ended 2019 was 1.36% compared to 1.35% and 0.94% for the years ended
December 31, 2018 and 2017, respectively. The 2019 increase in ROA is
primarily due to the increase in net income. Annualized ROA for our peer group
was 1.37% at December 31, 2019. Peer group information from S&P Global
Market Intelligence 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 changes on
our net interest margin by focusing on core deposits and managing our cost of
funds. Our net interest margin (fully tax equivalent basis) was 4.51% for the year
ended December 31, 2019, compared to 4.44% and 4.40% for the years ended
December 31, 2018 and 2017, respectively. The increase in 2019 net interest
margin compared to 2018, resulted from the increase in the effective yield on
interest earning deposits in other banks and Federal Funds sold, the increase in
the effective yield on average investment securities, and the increase in the yield
on the Company’s loan portfolio. The effective tax equivalent yield on total
earning assets increased 15 basis points, while the cost of total interest-bearing
liabilities increased 15 basis points to 0.34% for the year ended December 31,
2019. Our cost of total deposits in 2019 and 2018 was 0.15% and 0.09%,
respectively, compared to 0.08% for the same period in 2017. Our net interest
income before provision for credit losses increased $1,069,000 or 1.70% to
$63,772,000 for the year ended 2019 compared to $62,703,000 and
$56,239,000 for the years ended 2018 and 2017, 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 2019 increased $2,981,000 or
28.87% to $13,305,000 compared to $10,324,000 in 2018 and $10,836,000 in
2017. The increase resulted primarily from increases in net realized gains on sales
and calls of investment securities, appreciation in cash surrender value of
bank-owned life insurance, and loan placement fees, partially offset by a decrease
in service charge income, a net gain on the sale of the Company’s credit card
portfolio, interchange fees, and Federal Home Loan Bank dividends compared to
2018. 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
$1,693,000 and $2,740,000 at December 31, 2019 and 2018, respectively.
Nonperforming assets totaled 0.18% of gross loans as of December 31, 2019 and
44
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OVERVIEW
(Continued)
0.30% of gross loans as of December 31, 2018. Nonperforming loans were
$1,693,000 and $2,740,000 at December 31, 2019 and 2018, respectively. The
Company had no other real estate owned at December 31, 2019, or
December 31, 2018. No foreclosed assets were recorded at December 31, 2019
or December 31, 2018. 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 0.18% as of
December 31, 2019 and 0.30% as of December 31, 2018. The allowance for
credit losses as a percentage of outstanding loan balance was 0.97% as of
December 31, 2019 and 0.99% as of December 31, 2018. The ratio of net
(charge-offs) recoveries to average loans was (0.11)% as of December 31, 2019
and 0.03% as of December 31, 2018.
Asset Growth
As revenues from both net interest income and non-interest income are a
function of asset size, the continued growth in assets has a direct impact in
increasing net income and therefore ROE and ROA. The majority of our assets
are loans and investment securities, and the majority of our liabilities are
deposits, and therefore the ability to generate deposits as a funding source for
loans and investments is fundamental to our asset growth. Total assets increased
3.83% during 2019 to $1,596,755,000 as of December 31, 2019 from
$1,537,836,000 as of December 31, 2018. Total gross loans increased 2.69% to
$943,380,000 as of December 31, 2019, compared to $918,695,000 at
December 31, 2018. Total investment securities increased 1.50% to
$478,218,000 as of December 31, 2019 compared to $471,159,000 as of
December 31, 2018. Total deposits increased 3.98% to $1,333,285,000 as of
December 31, 2019 compared to $1,282,298,000 as of December 31, 2018. Our
loan to deposit ratio at December 31, 2019 was 70.76% compared to 71.64% at
December 31, 2018. The loan to deposit ratio of our peers was 82.00% at
December 31, 2019. Peer group information from S&P Global Market
Intelligence data includes bank holding companies in central California with
assets from $600 million to $3.5 billion.
Capital Adequacy
At December 31, 2019, we had a total capital to risk-weighted assets ratio of
15.79%, a Tier 1 risk-based capital ratio of 14.98%, common equity Tier 1 ratio
of 14.55%, and a leverage ratio of 11.38%. At December 31, 2018, we had a
total capital to risk-weighted assets ratio of 16.44%, a Tier 1 risk-based capital
ratio of 15.59%, common equity Tier 1 ratio of 15.13%, and a leverage ratio of
11.48%. At December 31, 2019, on a stand-alone basis, the Bank had a total
risk-based capital ratio of 15.66%, a Tier 1 risk based capital ratio of 14.85%,
common equity Tier 1 ratio of 14.85%, and a leverage ratio of 11.27%. At
December 31, 2018, the Bank had a total risk-based capital ratio of 16.23%,
Tier 1 risk-based capital of 15.38% and a leverage ratio of 11.32%. Note 14 of
the audited Consolidated Financial Statements provides more detailed
information concerning the Company’s capital amounts and ratios. As of
January 1, 2015, bank holding companies with consolidated assets of $1 billion
or more ($3 Billion or more effective August 30, 2018) and banks like Central
Valley Community Bank became subject to new capital requirements, and certain
provisions of the new rules were phased in through 2019 under the Dodd-Frank
Act and Basel III. As of December 31, 2019, the Bank met or exceeded all of
their capital requirements inclusive of the capital buffer. The Bank’s capital ratios
exceeded the regulatory guidelines for a well-capitalized financial institution
under the Basel III regulatory requirements at December 31, 2019.
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
62.77% for 2019 compared to 61.23% for 2018 and 62.03% for 2017. The
slight increase in the efficiency ratios in 2019 and 2018 was due to the growth
in non-interest expense outpacing the growth in non-interest income. The
Company’s net interest income before provision for credit losses plus non-interest
income increased 5.55% to $77,077,000 in 2019 compared to $73,027,000 in
2018 and $67,075,000 in 2017, while operating expenses increased 2.29% in
2019, 1.49% in 2018, and 14.09% in 2017.
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 $70,000,000 and secured borrowing lines of
approximately $304,987,000 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, equity securities, and available-for-sale securities)
totaling $530,792,000 or 33.24% of total assets at December 31, 2019 and
$502,886,000 or 32.70% of total assets as of December 31, 2018.
RESULTS OF OPERATIONS
NET INCOME
Net income was $21,443,000 in 2019 compared to $21,289,000 and
$14,026,000 in 2018 and 2017, respectively. Basic earnings per share was $1.60,
$1.55, and $1.12 for 2019, 2018, and 2017, respectively. Diluted earnings per
share was $1.59, $1.54, and $1.10 for 2019, 2018, and 2017, respectively. ROE
was 9.39% for 2019 compared to 10.07% for 2018 and 7.69% for 2017. ROA
for 2019 was 1.36% compared to 1.35% for 2018 and 0.94% for 2017.
The increase in net income for 2019 compared to 2018 was primarily due to
an increase in net interest income and an increase in net realized gains on sales
and calls of investment securities, partially offset by an increase in non-interest
expense, an increase in the provision for credit losses, and an increase in the
provision for income taxes. The increase in net income for 2018 compared to
2017 was primarily due to a decrease in provision for income taxes and an
increase in net interest income, partially offset by an increase in the provision for
credit losses, an increase in noninterest expense and a decrease in non-interest
income.
INTEREST INCOME AND EXPENSE
Net interest income is the most significant component of our income from
operations. Net interest income (the interest rate spread) is the difference between
the gross interest and fees earned on the loan and investment portfolios and the
interest paid on deposits and other borrowings. Net interest income depends on
the volume of and interest rate earned on interest-earning assets and the volume
of and interest rate paid on interest-bearing liabilities.
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.
45
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INTEREST INCOME AND EXPENSE (Continued)
Year Ended December 31, 2019
Interest
Income/
Expense
Average
Balance
Average
Interest Rate
Year Ended December 31, 2018
Interest
Income/
Expense
Average
Balance
Average
Interest Rate
Year Ended December 31, 2017
Interest
Income/
Expense
Average
Balance
Average
Interest Rate
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
Total securities and
interest-earning deposits
Loans (2) (3)
$
17,893 $
375
2.10%
$
24,095 $
460
1.91%
$
36,744 $
424
438,042
38,520
476,562
494,455
928,560
13,197
1,639
14,836
15,211
51,464
66,675
3.01%
4.25%
3.11%
3.08%
5.54%
4.69%
10,254
4,478
14,732
15,192
49,936
65,128
2.62%
4.04%
2.93%
2.88%
5.50%
4.54%
391,549
110,962
502,511
526,606
908,419
1,435,025 $
(8,924)
3,709
27,199
9,148
111,253
6,526
10,443
16,969
17,393
43,534
60,927
310,876
220,806
531,682
568,426
790,504
1,358,930 $
(9,258)
2,839
24,989
9,310
104,886
Total interest-earning assets
1,423,015 $
Allowance for credit losses
Nonaccrual loans
Cash and due from banks
Bank premises and equipment
Other assets
(9,337)
2,323
25,726
7,983
124,379
Total average assets
$
1,574,089
$
1,577,410
$
1,491,696
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
$
370,378 $
270,918
97,136
738,432
21,943
Total interest-bearing liabilities
760,375 $
Non-interest bearing demand
deposits
Other liabilities
Shareholders’ equity
557,348
28,014
228,352
Total average liabilities and
shareholders’ equity
$
1,574,089
566
656
706
1,928
631
2,559
0.15%
0.24%
0.73%
0.26%
2.88%
0.34%
$
383,667 $
285,568
111,214
780,449
12,180
792,629 $
553,305
20,152
211,324
451
419
283
1,153
331
1,484
0.12%
0.15%
0.25%
0.15%
2.72%
0.19%
$
382,071 $
264,581
137,666
784,318
6,930
350
211
408
969
168
791,248 $
1,137
499,987
17,954
182,507
$
1,577,410
$
1,491,696
1.15%
2.10%
4.73%
3.19%
3.06%
5.51%
4.48%
0.09%
0.08%
0.30%
0.12%
2.42%
0.14%
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)
$
66,675
4.69%
$
65,128
4.54%
$
60,927
4.48%
2,559
0.34%
1,484
0.19%
1,137
0.14%
$
64,116
4.51%
$
63,644
4.44%
$
59,790
4.40%
(1) Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $344, $940, and $3,551 in 2019,
2018, and 2017, respectively.
(2) Loan interest income includes loan fees of $164 in 2019, $397 in 2018, and $684 in 2017.
(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.
46
(716)
2,264
1,548
2,846
1,355
4,201
The cumulative net-of-tax effect of the change in market value of the
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, 2019
Compared to 2018
For the Years Ended
December 31, 2018
Compared to 2017
Volume
Rate
Net
Volume
Rate
Net
(In thousands)
$
(118) $
34 $
(84) $
(145) $
181 $
36
1,218
(2,923)
1,725
84
2,943
(2,839)
1,694
(5,196)
2,034
(769)
3,728
(5,965)
(1,705)
1,107
—
1,809
421
—
104
1,528
—
(3,502)
6,493
—
1,265
(91)
—
(2,237)
6,402
—
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
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
(36)
(35)
(71)
265
388
458
846
35
352
423
775
300
17
292
309
(78)
(47)
(125)
(61)
127
245
36
184
163
194
881
1,075
66
281
347
Net interest income (1)
$
(910) $
1,383 $
473 $
2,780 $
1,074 $
3,854
(1) Computed on a tax equivalent basis for securities exempt from federal income
taxes.
Interest and fee income from loans increased $1,528,000 or 3.06% in 2019
compared to 2018. Interest and fee income from loans increased $6,402,000 or
14.71% in 2018 compared to 2017. The increase in 2019 is primarily
attributable to an increase in average total loans outstanding and a slight increase
in the yield on loans by four basis points. The net interest income during 2019
was positively impacted by the collection of nonaccrual loans which resulted in a
recovery of interest income of approximately $1,156,000. The recovery was
partially offset by reversal of approximately $377,000 in interest income on loans
placed on nonaccrual status during the year. Net interest income during 2018
was positively impacted by the collection of nonaccrual loans which resulted in a
recovery of interest income of approximately $720,000. The recovery was
partially offset by reversal of approximately $222,000 in interest income on loans
placed on nonaccrual status during the year.
Average total loans for 2019 increased $18,755,000 to $930,883,000 compared
to $912,128,000 for 2018 and $793,343,000 for 2017. The yield on loans for
2019 was 5.54% compared to 5.50% and 5.51% for 2018 and 2017,
respectively. The impact to interest income from the accretion of the loan marks
on acquired loans was an increase of $989,000 and $1,158,000 for the year
ended December 31, 2019 and 2018, 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 $616,000 or 4.32% in
2019 compared to 2018. The yield on average investments increased 20 basis
points to 3.08% for the year ended December 31, 2019 from 2.88% for the year
ended December 31, 2018. Average total investments decreased $32,151,000 to
$494,455,000 in 2019 compared to $526,606,000 in 2018. In 2018, total
investment income on a non tax-equivalent basis increased $409,000 or 2.95%
compared to 2017.
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, 2019,
we held $356,097,000 or 75.65% of the total market value of the investment
portfolio in MBS and CMOs with an average yield of 3.06%. 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.
available-for-sale investment portfolio as of December 31, 2019 was an unrealized
gain of $2,817,000 and is reflected in the Company’s equity. At December 31,
2019, the effective duration of the investment portfolio was 4 years and the
market value reflected a pre-tax unrealized gain of $3,999,000. 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, 2019, 2018, and 2017, no OTTI was recorded. Future
deterioration in the market values of our investment securities may require the
Company to recognize additional OTTI losses.
A component of the Company’s strategic plan has been to use its investment
portfolio to offset, in part, its interest rate risk relating to variable rate loans.
Measured at December 31, 2019, an immediate rate increase of 200 basis points
would result in an estimated decrease in the market value of the investment
portfolio by approximately $37,000,000. Conversely, with an immediate rate
decrease of 200 basis points, the estimated increase in the market value of the
investment portfolio would be $35,000,000. 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 2019 increased $2,144,000 to $66,331,000 compared
to $64,187,000 in 2018 and $57,376,000 in 2017, respectively. The increase in
2019 was the result of yield changes and asset mix changes. The tax-equivalent
yield on interest earning assets increased to 4.69% for the year ended
December 31, 2019 from 4.54% for the year ended December 31, 2018. Average
interest earning assets decreased to $1,423,015,000 for the year ended
December 31, 2019 compared to $1,435,025,000 for the year ended
December 31, 2018. Average interest-earning deposits in other banks decreased
$6,202,000 comparing 2019 to 2018. Average yield on these deposits was 2.10%
compared to 1.91% on December 31, 2019 and December 31, 2018 respectively.
Average investments and interest-earning deposits decreased $32,151,000 but the
tax equivalent yield on those assets increased 20 basis points. Average total loans
increased $18,755,000 and the yield on average loans increased four basis points.
The increase in total interest income for 2018 was the result of yield changes,
increase in interest rates, asset mix changes, and an increase in average earning
assets. The yield on interest-earning assets increased to 4.54% for the year ended
47
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INTEREST INCOME AND EXPENSE
(Continued)
December 31, 2018 from 4.48% for the year ended December 31, 2017. Average
interest-earning assets increased to $1,435,025,000 for the year ended
December 31, 2018 compared to $1,358,930,000 for the year ended
December 31, 2017.
Interest expense on deposits in 2019 increased $775,000 or 67.22% to
$1,928,000 compared to $1,153,000 in 2018 and increased $959,000 as
compared to 2017. The yield on interest-bearing deposits increased 11 basis
points to 0.26% in 2019 from 0.15% in 2018. The yield on interest-bearing
deposits increased three basis points to 0.15% in 2018 from 0.12% in 2017.
Average interest-bearing deposits were $738,432,000 for 2019 compared to
$780,449,000 and $784,318,000 for 2018 and 2017, respectively.
Average other borrowings were $21,943,000 with an effective rate of 2.88%
for 2019 compared to $12,180,000 with an effective rate of 2.72% for 2018. In
2017, the average other borrowings were $6,930,000 with an effective rate of
2.42%. 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 3.59% for 2019, 4.04% for 2018, and 2.96%
for 2017.
The cost of all interest-bearing liabilities was 0.34% and 0.19% basis points
for 2019 and 2018, respectively, compared to 0.14% for 2017. The cost of total
deposits increased to 0.15% for the year ended December 31, 2019, compared to
0.09% and 0.08% for the years ended December 31, 2018 and 2017,
respectively. Average demand deposits increased 0.73% to $557,348,000 in 2019
compared to $553,305,000 for 2018 and $499,987,000 for 2017. The ratio of
average non-interest demand deposits to average total deposits increased to
43.01% for 2019 compared to 41.48% and 38.93% for 2018 and 2017,
respectively.
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
Net interest income before provision for credit losses for 2019 increased
$1,069,000 or 1.70% to $63,772,000 compared to $62,703,000 for 2018 and
$56,239,000 for 2017. The increase in 2019 was due to the increase in yields on
average earning assets, asset mix changes, and a decrease in average interest
bearing liabilities. Our net interest margin (NIM) increased seven basis points.
Yield on interest earning assets increased 15 basis points. The increase in net
interest margin in the period-to-period comparison resulted primarily from the
increase in the effective yield on interest earning deposits in other banks and
Federal Funds sold, the increase in the effective yield on average investment
securities, and the increase in the yield on the Company’s loan portfolio. Net
interest income before provision for credit losses increased $6,464,000 in 2018
compared to 2017, primarily due to the increase in average earning assets.
Average interest-earning assets were $1,423,015,000 for the year ended
December 31, 2019 with a NIM of 4.51% compared to $1,435,025,000 with a
NIM of 4.44% in 2018, and $1,358,930,000 with a NIM of 4.40% in 2017.
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 of
Directors have established initial responsibility for the accuracy of credit risk
grades with the individual credit officer. The Credit Review Officer (CRO) will
review loans to ensure the accuracy of the risk grade and is empowered to change
any risk grade, as appropriate. The CRO is not involved in loan originations.
Quarterly, the credit officers must certify the current risk grade of the loans in
their portfolio. The CRO reviews the certifications. At least quarterly the CRO
reports his activities to the Board of Directors Audit Committee; and at least
annually the loan portfolio is reviewed by a third party credit reviewer and by
various regulatory agencies.
Quarterly, the Chief Credit Officer (CCO) sets the specific reserve for all
impaired credits. Additionally, the CCO is responsible to ensure that the general
reserves on non-impaired loans are properly set each quarter. 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.
The allowance for credit losses is reviewed at least quarterly by the Board of
Directors Audit Committee and by the Board of Directors. General 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 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,
2019
December 31,
2018
Commercial and industrial
Agricultural 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
$
1,115
313
1,319
932
3,453
925
140
425
472
36
1,604
67
1,131
1,271
3,017
947
173
419
407
68
Total allowance for credit losses
$
9,130
$
9,104
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, 2019, the Company recorded a
provision for credit losses of $1,025,000 compared to a provision of $50,000 and
a reverse provision of $1,150,000 for the same periods in 2018 and 2017,
respectively. The recorded provision and reverse provisions to the allowance for
credit losses are primarily the result of our assessment of the overall adequacy of
the allowance for credit losses considering a number of factors as discussed in the
‘‘Allowance for Credit Losses’’ section.
48
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
PROVISION FOR CREDIT LOSSES
(Continued)
NON-INTEREST INCOME
During the years ended December 31, 2019, 2018 and 2017 the Company
had net charge-offs (recoveries) totaling $999,000, $(276,000), and $(602,000),
respectively. The net charge-off (recovery) ratio, which reflects net charge-offs
(recoveries) to average loans, was 0.11%, (0.03)% and (0.08)% for 2019, 2018,
and 2017, respectively.
Nonperforming loans were $1,693,000 and $2,740,000 at December 31, 2019
and 2018, respectively. Nonperforming loans as a percentage of total loans were
0.18% at December 31, 2019 compared to 0.30% at December 31, 2018. The
Company had no other real estate owned at December 31, 2019, December 31,
2018, and December 31, 2017. No foreclosed assets were recorded at
December 31, 2019 or December 31, 2018. The carrying value of foreclosed
assets was $70,000 at December 31, 2017, and is included in other assets on the
consolidated balance sheets. At December 31, 2019, we had $183,000 loans past
due, not including nonaccrual loans compared to $1,208,000 loans past due at
December 31, 2018.
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. The Bank conducts banking
operation principally in California’s Central Valley. The Central Valley is largely
dependent on agriculture. The agricultural economy in the Central Valley is
therefore important to our financial performance, results of operations and cash
flows. We are also dependent in a large part upon the business activity,
population growth, income levels and real estate activity in this market area. A
downturn in agriculture and the agricultural related businesses could have a
material adverse effect our business, results of operations and financial condition.
The agricultural industry has been affected by declines in prices and the changes
in yields on various crops and other agricultural commodities. Weaker prices
could reduce the cash flows generated by farms and the value of agricultural land
in our local markets and thereby increase the risk of default by our borrowers or
reduce the foreclosure value of agricultural land and equipment that serve as
collateral of our loans. Further declines in commodity prices or collateral values
may increase the incidence of default by our borrowers. Moreover, weaker prices
might threaten farming operations in the Central Valley, reducing market
demand for agricultural lending. In particular, farm income has seen recent
declines, and in line with the downturn in farm income, farmland prices are
coming under pressure.
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, 2019,
there were $33.8 million in classified loans of which $7.3 million related to
agricultural real estate, $13.2 million to commercial and industrial loans,
$4.7 million to real estate owner occupied, $4.3 million to agricultural
production, $1.6 million to real estate construction, and $1.1 million to
commercial real estate. This compares to $28.4 million in classified loans as of
December 31, 2018 of which $19.2 million related to agricultural real estate,
$3.0 million to real estate construction, $2.6 million to commercial and
industrial, $1.1 million to commercial real estate, and $0.9 million to real estate
owner occupied.
As of December 31, 2019, 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 $62,747,000 for
2019 compared to $62,653,000 and $57,389,000 for 2018 and 2017,
respectively.
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 $13,305,000 in
2019 compared to $10,324,000 and $10,836,000 in 2018 and 2017, respectively.
The $2,981,000 or 28.87% increase in non-interest income in 2019 resulted
primarily from increases in net realized gains on sales and calls of investment
securities, loan placement fees, appreciation in cash surrender value of bank
owned life insurance, partially offset by a decrease in service charge income, net
gain on the sale of the Company’s credit card portfolio, interchange fees, and
Federal Home Loan Bank dividends compared to 2018. The $512,000 or 4.72%
decrease in non-interest income in 2018 resulted primarily from decreases in net
realized gains on sales and calls of investment securities and service charge
income, partially offset by a increase in loan placement fees, net gain on the sale
of the Company’s credit card portfolio, interchange fees, appreciation in cash
surrender value of bank owned life insurance, and Federal Home Loan Bank
dividends compared to 2017.
Customer service charges decreased $230,000 to $2,756,000 in 2019
compared to $2,986,000 in 2018 and $3,053,000 in 2017. The decreases in
2019 and 2018 resulted from decreases in our NSF fees and lower analysis
service charge income.
During the year ended December 31, 2019, we realized net gains on sales and
calls of investment securities of $5,199,000, compared to $1,314,000 in 2018
and $2,802,000 in 2017. The net gains in 2019, 2018, and 2017 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 $728,000 in 2019 compared to $695,000 and
$621,000 in 2018 and 2017, respectively. The Bank’s salary continuation and
deferred compensation plans and the related BOLI are used as retention tools for
directors and key executives of the Bank.
Interchange fees totaled $1,446,000 in 2019 compared to $1,462,000 and
$1,458,000 in 2018 and 2017, respectively. Part of the increases in 2018 and
2017 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 increased $270,000 in 2019 to $978,000 compared to $708,000 in 2018
and $706,000 in 2017.
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, 2019 and 2018, we held FHLB stock totaling $6,062,000 and
$6,843,000, respectively. Dividends in 2019 decreased to $455,000 compared to
$590,000 in 2018 and $443,000 in 2017.
Other income decreased to $1,743,000 in 2019 compared to $2,107,000 and
$1,753,000 in 2018 and 2017, respectively. A net gain of $462,000 on the sale
of the Company’s credit card portfolio was recorded during the year ended
December 31, 2018.
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,
information technology, and professional services (consisting of audit, accounting,
consulting and legal fees) are the major categories of non-interest expenses.
Non-interest expenses increased $1,032,000 or 2.29% to $46,100,000 in 2019
compared to $45,068,000 in 2018, and $44,406,000 in 2017.
49
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
NON-INTEREST EXPENSES (Continued)
The following table describes significant components of other non-interest
expense as a percentage of average assets.
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 62.77% for 2019 compared to 61.23% for 2018 and
62.03% for 2017. The slight increase in the efficiency ratio in 2019 and 2018 is
due to the growth in non-interest expense outpacing the growth in revenues.
Salaries and employee benefits increased $433,000 or 1.65% to $26,654,000
in 2019 compared to $26,221,000 in 2018 and $24,738,000 in 2017. Full time
equivalents were 281 for the year ended December 31, 2019 compared to 316
for the year ended December 31, 2018. The increase in salaries and employee
benefits in 2019 compared to 2018 is a result of normal cycles and salary
increases and higher deferred compensation interest expense, offset by a decrease
of full time equivalent employees and lower compensation expense.
For the years ended December 31, 2019, 2018, and 2017, the compensation
cost recognized for share based compensation was $555,000, $482,000 and
$384,000, respectively. As of December 31, 2019, there was $490,000 of total
unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under all plans. The cost is expected to be recognized over
a weighted average period of 1.57 years. See Notes 1 and 15 to the audited
Consolidated Financial Statements for more detail. No options to purchase shares
of the Company’s common stock were issued during the years ending
December 31, 2019 and 2018. Restricted common stock awards of 25,420 and
22,204 shares were awarded in 2019 and 2018, respectively.
Occupancy and equipment expense decreased $533,000 or 8.92% to
$5,439,000 in 2019 compared to $5,972,000 in 2018 and $5,186,000 in 2017.
The Company made no changes in its depreciation expense methodology.
Regulatory assessments were $251,000 in 2019 compared to $619,000 and
$652,000 in 2018 and 2017, 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. 2017 and 2016
were higher as compared to 2018 due to the additional assessments on the
acquired institutions.
Data processing expenses were $1,557,000 in 2019 compared to $1,666,000 in
2018 and $1,740,000 in 2017. The $109,000 or 6.54% decrease in 2019 is
from the consolidation of processes after the conversion of the acquired
institutions was completed in 2018. No acquisition and integration expenses
related to the FLB and SVB mergers was recorded in 2019 compared to
$217,000 in 2018 and $1,828,000 in 2017. Professional services decreased
$170,000 in 2019 compared to 2018.
Amortization of core deposit intangibles was $695,000 for 2019, $455,000 for
2018, and $234,000 for 2017. During 2019, amortization expense related to
FLB core deposit intangible (CDI) was $423,000, amortization expense related to
SVB core deposit intangible (CDI) was $135,000, and amortization expense
related to VCB CDI was $137,000. During 2018, amortization expense related
to FLB CDI was $247,000, SVB CDI was $72,000 and amortization expense
related to VCB CDI was $136,000. During 2017, amortization expense related
to FLB CDI was $47,000, amortization expense related to SVB CDI was
$50,000, and amortization expense related to VCB CDI was $137,000.
ATM/Debit card expenses increased $181,000 to $920,000 for the year ended
December 31, 2019 compared to $739,000 in 2018 and $750,000 in 2017.
Information technology expenses increased $1,498,000 to $2,611,000 for the
year ended December 31, 2019 compared to $1,113,000 and $818,000 in 2018
and 2017, respectively. The increase in the information technology expenses was
a result of the Company outsourcing its network maintenance and IT support
during the fourth quarter of 2018. Other non-interest expenses decreased
$250,000 or 5.39% to $4,386,000 in 2019 compared to $4,636,000 in 2018
and $5,011,000 in 2017.
For the years ended December 31,
%
Other
Expense Average
Assets
2019
%
Other
Expense Average
Assets
2018
%
Other
Expense Average
Assets
2017
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
Travel and mileage Expense
Operating losses
Shareholder services
Other
Total other non-interest
expense
$
240
350
342
100
218
284
232
-
212
177
114
155
52
165
256
102
101
1,286
(Dollars in thousands)
0.02% $
0.02%
0.02%
0.01%
0.01%
0.02%
0.01%
-%
0.01%
0.01%
0.01%
0.01%
-%
0.01%
0.02%
0.01%
0.01%
0.08%
281
303
217
101
209
274
195
2
243
167
121
172
77
165
267
452
129
1,261
0.02% $
0.02%
0.01%
0.01%
0.01%
0.02%
0.01%
-%
0.02%
0.01%
0.01%
0.01%
-%
0.01%
0.02%
0.03%
0.01%
0.08%
292
289
265
130
205
266
207
187
249
259
245
174
132
159
211
150
102
1,489
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%
0.01%
0.10%
$
4,386
0.28% $
4,636
0.29% $
5,011
0.34%
PROVISION FOR INCOME TAXES
Our effective income tax rate was 28.4% for 2019 compared to 23.7% for
2018 and 41.1% for 2017. The Company reported an income tax provision of
$8,509,000, $6,620,000, and $9,793,000 for the years ended December 31,
2019, 2018, and 2017, respectively. With the Tax Cuts and Jobs Act (the ‘‘Act’’)
enacted on December 22, 2017, the Company’s federal income tax rate changed
from 35% to 21% effective as of the beginning of 2018. The decrease in the
2018 effective tax rate was the result of the change in the federal rate offset by a
sizable decrease in tax exempt interest. As a result of the enactment of the Act
the federal tax rate applied to the Company’s deferred taxes was adjusted as of
December 31, 2017 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 in 2017. 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.
Some items of income and expense are recognized in different years for tax
purposes than when applying generally accepted accounting principles leading to
timing differences between the Company’s actual tax liability, and the amount
accrued for this liability based on book income. These temporary differences
comprise the ‘‘deferred’’ portion of the Company’s tax expense or benefit, which
is accumulated on the Company’s books as a deferred tax asset or deferred tax
liability until such time as they reverse.
Realization of the Company’s deferred tax assets is primarily dependent upon
the Company generating sufficient future taxable income to obtain benefit from
the reversal of net deductible temporary differences and the utilization of tax
credit carryforwards and the net operating loss carryforwards for Federal and
California state income tax purposes. The amount of deferred tax assets
considered realizable is subject to adjustment in future periods based on estimates
of future taxable income. Under generally accepted accounting principles a
valuation allowance is required to be recognized if it is ‘‘more likely than not’’
that the deferred tax assets will not be realized. The determination of the
realization of the deferred tax assets is highly subjective and dependent upon
judgment concerning management’s evaluation of both positive and negative
evidence, including forecasts of future income, cumulative losses, applicable tax
50
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
PROVISION FOR INCOME TAXES
(Continued)
planning strategies, and assessments of current and future economic and business
conditions.
The Company had the net deferred tax assets of $8.74 million and
$11.183 million at December 31, 2019 and 2018, respectively. After
consideration of the matters in the preceding paragraph, the Company
determined that it is more likely than not that the net deferred tax assets at
December 31, 2019 and 2018 will be fully realized in future years.
FINANCIAL CONDITION
SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS
Total assets were $1,596,755,000 as of December 31, 2019, compared to
$1,537,836,000 as of December 31, 2018, an increase of 3.83% or $58,919,000.
Total gross loans were $943,380,000 as of December 31, 2019, compared to
$918,695,000 as of December 31, 2018, an increase of $24,685,000 or 2.69%.
The total investment portfolio (including Federal funds sold and interest-earning
deposits in other banks) increased 6.00% or $28,665,000 to $506,597,000. Total
deposits increased 3.98% or $50,987,000 to $1,333,285,000 as of December 31,
2019, compared to $1,282,298,000 as of December 31, 2018. Shareholders’
equity increased $8,390,000 or 3.82% to $228,128,000 as of December 31,
2019, compared to $219,738,000 as of December 31, 2018. The increase in
shareholders’ equity was driven by the retention of earnings, net of dividends
paid, and an increase in net unrealized gains on available-for-sale (AFS) securities
recorded, net of estimated taxes, in accumulated other comprehensive income
(AOCI). Accrued interest payable and other liabilities were $30,187,000 as of
December 31, 2019, compared to $20,645,000 as of December 31, 2018, an
increase of $9,542,000.
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.
INVESTMENTS
The following table reflects the balances for each category of securities at year
end:
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,
2019, investment securities with a fair value of $91,677,000, or 19.47% 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, 2019 was 70.76% compared to 71.64% at
December 31, 2018. The loan to deposit ratio of our peers was 82.00% at
December 31, 2019. Peer group information from S&P Global Market
Intelligence 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 6.00% or $28,665,000 to $506,597,000 at December 31, 2019, from
$477,932,000 at December 31, 2018. The market value of the portfolio reflected
an unrealized gain of $3,999,000 at December 31, 2019, compared to an
unrealized loss of $6,257,000 at December 31, 2018.
Losses recognized in 2019, 2018, and 2017 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.
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, 2019, 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, 2019,
and identified those that had an unrealized loss for at least a consecutive
12 month period, which had an unrealized loss at December 31, 2019 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 that no credit related impairment existed.
There were no OTTI losses recorded during the twelve months ended
December 31, 2019, 2018, or 2017.
Amortized Cost at December 31,
At December 31, 2019, the Company had a total of 41 private label mortgage
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
Corporate debt securities
2019
2018
2017
$
14,740 $
89,574
21,723 $
79,886
65,994
136,955
198,125
155,308
9,000
239,388
129,165
-
237,210
91,033
-
Total Available-for-Sale Securities
$
466,747 $
470,162 $
531,192
backed securities (PLMBS) with a remaining principal balance of $155,308,000
and a net unrealized gain of approximately $4,070,000. Seven of these PLMBS
with a remaining principal balance of $1,593,000 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 years ended
December 31, 2019 or December 31, 2018.
51
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, 2019 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
Corporate debt 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)
$
$
-
-
-
47
-
47
-
-
$
-
1,561
-
-
$ 3,993
20,280
5.90% $ 10,747
4.94% 67,733
5.31% $ 14,740
3.29% 89,574
5.47%
3.61%
-
4.75%
-
110
-
-
5.82% 20,206
13
9,000
-
-
2.34% 177,809
7.22% 155,248
-
5.38%
3.22% 198,125
3.71% 155,308
9,000
-
3.13%
3.71%
5.38%
4.75% $ 1,671
0.38% $53,492
4.10% $411,537
3.47% $466,747
3.53%
(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 $24,685,000 or 2.69% to $943,380,000 as of December 31, 2019, compared to $918,695,000 as of December 31, 2018.
The following table sets forth information concerning the composition of our loan portfolio as of December 31, 2019, 2018, 2017, 2016, and 2015.
Loan Type
(Dollars in thousands)
Commercial:
Commercial and industrial
Agricultural 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:
2019
2018
2017
2016
2015
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
$
102,541
23,159
125,700
10.9% $
2.6%
13.5%
101,533
7,998
109,531
11.1% $
0.9%
12.0%
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%
22.2%
197,946
21.0%
183,169
19.9%
204,452
22.7%
191,665
25.3%
168,910
28.2%
73,718
329,333
76,304
31,241
708,542
64,841
42,782
107,623
1,515
7.8%
34.9%
8.1%
3.3%
75.1%
6.9%
4.5%
11.4%
101,606
305,118
76,884
32,799
699,576
69,958
38,038
107,996
1,592
11.1%
33.2%
8.4%
3.6%
76.2%
7.6%
4.2%
11.8%
96,460
269,254
76,081
31,220
677,467
76,404
29,637
106,041
1,359
10.7%
29.9%
8.4%
3.5%
75.2%
8.5%
3.4%
11.9%
69,200
184,225
86,761
18,945
550,796
64,494
25,910
90,404
1,267
9.1%
24.3%
11.5%
2.7%
72.9%
8.5%
3.5%
12.0%
38,685
117,244
74,867
10,520
410,226
42,296
12,503
54,799
417
6.5%
19.6%
12.5%
1.8%
68.6%
7.1%
2.1%
9.2%
943,380
100.0%
918,695
100.0%
900,679
100.0%
756,628
100.0%
598,111
100.0%
(9,130)
934,250
1,693
$
$
(9,104)
909,591
2,740
$
$
(8,778)
891,901
2,875
$
$
(9,326)
747,302
2,180
$
$
(9,610)
588,501
2,413
$
$
52
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
LOANS
(Continued)
At December 31, 2019, loans acquired in the FLB, SVB and VCB acquisitions
had a balance of $152,735,000, of which $4,009,000 were commercial loans,
$130,656,000 were real estate loans, and $18,070,000 were consumer loans, and
at December 31, 2018, the acquired loans acquired had a balance of
$189,719,000, of which $5,875,000 were commercial loans, $158,025,000 were
real estate loans, and $25,819,000 were consumer loans.
At December 31, 2019, in management’s judgment, a concentration of loans
existed in commercial loans and real-estate-related loans, representing
approximately 95.5% of total loans of which 13.5% were commercial and 82.0%
were real-estate-related. This level of concentration is consistent with 95.8% at
December 31, 2018. Although we believe the loans within this concentration
have no more than the normal risk of collectability, a substantial decline in the
performance of the economy in general or a decline in real estate values in our
primary market areas, in particular, could have an adverse impact on
collectability, increase the level of real estate-related nonperforming loans, or have
other adverse effects which alone or in the aggregate could have a material
adverse effect on our business, financial condition, results of operations and cash
flows. The Company was not involved in any sub-prime mortgage lending
activities during the years ended December 31, 2019 and 2018.
We believe that our commercial real estate loan underwriting policies and
practices result in prudent extensions of credit, but recognize that our lending
activities result in relatively high reported commercial real estate lending levels.
Commercial real estate loans include certain loans which represent low to
moderate risk and certain loans with higher risks.
The Board of Directors review and approve concentration limits and
exceptions to limitations of concentration are reported to the Board of Directors
at least quarterly.
LOAN MATURITIES
The following table presents information concerning loan maturities and sensitivity to changes in interest rates of the indicated categories of our loan portfolio, as well
as loans in those categories maturing after one year that have fixed or floating interest rates at December 31, 2019.
(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
$
$
$
$
$
68,812
9,486
109,599
7,446
195,343
72,578
122,765
195,343
51,826
$
$
$
$
$
38,990
17,774
114,211
18,333
189,308
118,254
71,054
189,308
24,155
$
$
$
$
$
17,898
46,458
411,012
81,844
557,212
104,961
452,251
557,212
330,634
$
$
$
$
$
125,700
73,718
634,822
107,623
941,863
295,793
646,070
941,863
406,615
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, 2019, total nonperforming assets totaled $1,693,000, or
0.11% of total assets, compared to $2,740,000, or 0.18% of total assets at
December 31, 2018. Nonperforming assets totaled 0.18% of gross loans as of
December 31, 2019 and 0.30% of gross loans as of December 31, 2018. Total
nonperforming assets at December 31, 2019, included nonaccrual loans totaling
$1,693,000, no OREO, and no repossessed assets. Nonperforming assets at
December 31, 2018 consisted of $2,740,000 in nonaccrual loans, no OREO,
and no repossessed assets. At December 31, 2019, we had one loan considered a
troubled debt restructuring (‘‘TDR’’) totaling $322,000 which is included in
nonaccrual loans compared to one TDR totaling $50,000 at December 31, 2018.
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,
2019, 2018, 2017, 2016, and 2015 is set forth below. The Company had no
loans past due more than 90 days and still accruing interest at December 31,
2019 and 2018. Management is not aware of any potential problem loans, which
were current and accruing at December 31, 2019, 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.
53
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
Equity loans and line of credit
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
2019
2018
2017
2016
2015
$
$
$
$
$
$
$
187
416
-
321
381
66
-
-
-
322
1,693
-
1,693
85
0.18%
-
2,040
18.54%
3,734
40
$
$
$
$
$
$
$
298
215
1,439
-
418
320
-
-
-
50
2,740
-
2,740
267
0.30%
-
3,170
30.10%
5,909
90
$
$
$
$
$
$
$
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
As of December 31, 2019 and 2018, we had impaired loans totaling
$3,734,000 and $5,909,000, 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 $85,000 for the year ended December 31,
2019 of which none was attributable to troubled debt restructurings. Foregone
interest on nonaccrual loans totaled $267,000 and $210,000 for the years ended
December 31, 2018 and 2017, respectively of which $4,000 and $17,000 was
attributable to troubled debt restructurings, respectively.
54
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, 2019.
Balances
December 31,
2018
Additions to
Nonaccrual
Loans
Net Pay
Downs
Transfer to
Foreclosed
Collateral
Returns to
Accrual
Status
Charge
Offs
Balances
December 31,
2019
(In thousands)
Non-accrual loans:
Commercial and industrial
Real estate
Real estate construction and other land
loans
Agricultural real estate
Equity loans and lines of credit
Consumer
Restructured loans (non-accruing):
Equity loans and lines of credit
$
$
298
633
$
-
777
$
(111)
(92)
1,439
-
198
-
172
329
321
1,002
37
331
(1,768)
-
(941)
(23)
(24)
Total non-accrual
$
2,740
$
2,797
$
(2,959)
$
-
-
-
-
-
-
-
-
$
-
(521)
-
-
(193)
-
(157)
$
$
-
-
-
-
-
(14)
-
187
797
-
321
66
-
322
$
(871)
$
(14)
$
1,693
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, 2019 and December 31,
2018, the Bank had no OREO properties. The Company held no repossessed
assets at December 31, 2019 or at December 31, 2018, which is included in
other assets on the consolidated balance sheets.
As of December 31, 2017 the Bank had no OREO properties. The carrying
vale of foreclosed assets was $70,000 at December 31, 2017.
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 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.
55
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
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 (charge-offs) recoveries
Provision (reversal) charged to credit losses
Balance at end of year
Allowance for credit losses as a percentage of
outstanding loan balance
Net (charge-offs) recoveries to average loans outstanding
2019
2018
2017
2016
2015
$
$
$
$
941,865
930,883
9,104
(1,032)
-
-
(164)
(1,196)
134
-
-
-
-
63
197
(999)
1,025
9,130
$
$
$
$
$
$
917,103
912,128
8,778
(94)
-
-
(116)
(210)
207
-
21
-
81
177
486
276
50
$
$
$
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)
$
9,104
$
8,778
$
9,326
$
0.97%
(0.11)%
0.99%
0.03%
0.98%
0.08%
1.23%
0.86%
597,694
586,762
8,308
(802)
-
-
(159)
(961)
954
90
-
32
-
587
1,663
702
600
9,610
1.61%
0.12%
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.
56
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:
2019
2018
2017
2016
2015
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
1,115
313
1,319
932
3,453
925
140
425
472
36
10.9% $
2.6%
21.0%
7.8%
34.9%
8.1%
3.3%
6.9%
4.5%
1,604
67
1,131
1,271
3,017
947
173
419
407
68
11.1% $
0.9%
19.9%
11.1%
33.2%
8.4%
3.6%
7.6%
4.2%
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%
Loan Type (Dollars in thousands)
Commercial:
Commercial and industrial
Agricultural production
Real estate:
Owner occupied
Real estate construction and other land
$
loans
Commercial real estate
Agricultural real estate
Other real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Unallocated reserves
Total allowance for credit losses
$
9,130
100% $
9,104
100.0% $
8,778
100% $
9,326
100% $
9,610
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, 2019, the allowance for credit losses (ALLL) was
$9,130,000, compared to $9,104,000 at December 31, 2018, a net increase of
$26,000. The increase in the ALLL was due to a provision for credit losses, offset
by net charge-offs. during the year ended December 31, 2019 which was
necessitated by management’s observations and assumptions about the existing
credit quality of the loan portfolio. Net charge-offs totaled $999,000 while the
provision for credit losses was $1,025,000 for the year ended December 31,
2019. The balance of classified loans and loans graded special mention, totaled
$33,838,000 and $28,183,000 at December 31, 2019 and $28,394,000 and
$26,254,000 at December 31, 2018, respectively. The balance of undisbursed
commitments to extend credit on construction and other loans and letters of
credit was $291,182,000 as of December 31, 2019, compared to $312,274,000
as of December 31, 2018. At December 31, 2019 and 2018, the balance of a
contingent allocation for probable loan loss experience on unfunded obligations
was $250,000 and $225,000, 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, 2019,
and 0.99% at December 31, 2018. Total loans include FLB, SVB and VCB
loans that were recorded at fair value in connection with the acquisitions of
$152,735,000 at December 31, 2019 and $189,719,000 at December 31, 2018.
Excluding these acquired loans from the calculation, the ALLL to total gross
loans was 1.15% and 1.25% as of December 31, 2019 and 2018, respectively,
and general reserves associated with non-impaired loans to total non-impaired
loans was 1.16% and 1.25%, 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 2019 increased from 2018 through
organic growth. Management believes that the change in the allowance for credit
losses to total loans ratios is 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.
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,
2019.
Non-performing loans totaled $1,693,000 as of December 31, 2019, and
$2,740,000 as of December 31, 2018. The allowance for credit losses as a
percentage of nonperforming loans was 539.28% and 332.26% as of
December 31, 2019 and December 31, 2018, 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, 2019 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, 2019 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 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.
57
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
GOODWILL AND INTANGIBLE ASSETS (Continued)
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 2019; therefore, goodwill was not required to be
retested.
The intangible assets at December 31, 2019 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 five to ten years from the date of acquisition. The carrying value of
intangible assets at December 31, 2019 was $1,878,000, net of $1,874,000 in
accumulated amortization expense. The carrying value at December 31, 2018 was
$2,572,000, net of $1,180,000 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, 2019 and determined no impairment was
necessary. In addition, management determined that no events had occurred
between the annual evaluation date and December 31, 2019 which would
necessitate further analysis. Amortization expense recognized was $695,000 for
2019, $455,000 for 2018 and $234,000 for 2017.
The following table summarizes the Company’s estimated core deposit
intangible amortization expense for each of the next five years (in thousands):
Estimated Core
Deposit
Intangible
Amortization
The composition of the deposits and average interest rates paid at
December 31, 2019 and December 31, 2018 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
2019
Deposits Rate
2018
Deposits Rate
$
266,048
266,609
93,730
112,271
738,658
594,627
20.0% 0.21% $
20.0% 0.24%
7.0% 0.73%
8.4% 0.02%
55.4% 0.26%
44.6%
252,439
267,820
96,817
114,565
731,641
550,657
19.7% 0.16%
20.9% 0.15%
7.6% 0.25%
8.9% 0.03%
57.1% 0.15%
42.9%
Total deposits
$
1,333,285 100.0%
$
1,282,298 100.0%
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, 2019,
2018, and 2017.
(Dollars in
thousands)
Savings and NOW
accounts
Money market
accounts
Non-interest
$
$
2019
2018
2017
Balance
Rate
Balance
Rate
Balance
Rate
370,378
0.15% $
383,667
0.12% $
382,071
0.09%
270,918
0.24% $
285,568
0.15% $
264,581
0.08%
bearing demand $
557,348
- $
553,305
- $
499,987
-
Total deposits
$
1,295,780
0.15% $
1,333,754
0.09% $
1,284,305
0.08%
The following table sets forth the maturity of time certificates of deposit and
other time deposits of $100,000 or more at December 31, 2019.
Years Ending December 31,
2020
2021
2022
2023
Thereafter
Total
$
$
696
661
455
66
-
1,878
(In thousands)
Three months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
$
$
21,715
9,544
21,808
9,542
62,609
DEPOSITS AND BORROWINGS
The Bank’s deposits are insured by the Federal Deposit Insurance Corporation
(FDIC) up to applicable legal limits. All of a depositor’s accounts at an insured
depository institution, including all non-interest bearing transactions accounts,
will be insured by the FDIC up to the standard maximum deposit insurance
amount of $250,000 for each deposit insurance ownership category.
Total deposits increased $50,987,000 or 3.98% to $1,333,285,000 as of
December 31, 2019, compared to $1,282,298,000 as of December 31, 2018.
Interest-bearing deposits increased $7,017,000 or 0.96% to $738,658,000 as of
December 31, 2019, compared to $731,641,000 as of December 31, 2018.
Non-interest bearing deposits increased $43,970,000 or 7.99% to $594,627,000
as of December 31, 2019, compared to $550,657,000 as of December 31, 2018.
Average non-interest bearing deposits to average total deposits was 43.01% for
the year ended December 31, 2019 compared to 41.48% for the same period in
2018. Based on FDIC deposit market share information published as of June
2019, our total market share of deposits in Fresno, Madera, San Joaquin, and
Tulare counties was 3.31% in 2019 compared to 3.42% in 2018. Our total
market share in the other counties we operate in (El Dorado, Merced, Placer,
Sacramento, and Stanislaus), was less than 1.00% in 2019 and 2018.
As of December 31, 2019, the Company had no short-term Federal Home
Loan Bank (FHLB) of San Francisco advances. As of December 31, 2018, the
Company had $10,000,000 short-term or long-term FHLB borrowings. 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 $70,000,000 and $40,000,000 at
December 31, 2019 and 2018, respectively, at interest rates which vary with
market conditions. As of December 31, 2019 and 2018, the Company had no
overnight borrowings outstanding under these credit facilities.
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.
58
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
CAPITAL RESOURCES
(Continued)
Our shareholders’ equity was $228,128,000 as of December 31, 2019,
compared to $219,738,000 as of December 31, 2018. The increase in
shareholders’ equity is the result of an increase in retained earnings from our net
income of $21,443,000, the exercise of stock options, including the related tax
benefit of $276,000, the effect of share-based compensation expense of $555,000,
stock issued under employee stock purchase plan of $216,000, and an increase in
accumulated other comprehensive income (AOCI) of $7,224,000, offset by
payment of common stock cash dividends of $5,805,000 and repurchase and
retirement of common stock of $15,619,000.
During 2019, the Bank declared and paid cash dividends to the Company in
the amount of $20,100,000 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 $5,805,000 or $0.43 per common share
cash dividend to shareholders of record during the year ended December 31,
2019.
During 2018, the Bank declared and paid cash dividends to the Company in
the amount of $2,850,000 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 $4,270,000 or $0.31 per common share
cash dividend to shareholders of record during the year ended December 31,
2018.
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.
The following table sets forth certain financial ratios for the years ended
December 31, 2019, 2018, and 2017.
The following table presents the Company’s regulatory capital ratios as of
December 31, 2019 and December 31, 2018.
Actual Ratio
Minimum regulatory
requirement (1)
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
December 31, 2019
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio (CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
$ 172,945
$ 167,945
$ 172,945
$ 182,325
December 31, 2018
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio (CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
$ 171,149
$ 166,149
$ 171,149
$ 180,478
11.38%
14.55%
14.98%
15.79%
11.48%
15.13%
15.59%
16.44%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1) Effective August 30, 2018 the minimum regulatory requirements were eliminated for
bank holding companies with less than $3 billion of assets
The following table presents the Bank’s regulatory capital ratios as of
December 31, 2019 and December 31, 2018.
Actual Ratio
Minimum regulatory
requirement (1)
Minimum requirement
for ‘‘Well-Capitalized’’
Institution
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
December 31, 2019
Tier 1 Leverage
2019
2018
2017
Ratio
$ 171,332
11.27% $
60,810
4.00% $
76,012
5.00%
Net income:
To average assets
To average shareholders’ equity
Dividends declared per share to
net income per share
Average shareholders’ equity to
average assets
1.36%
9.39%
1.35%
10.07%
0.94%
7.69%
26.22%
20.00%
23.53%
14.51%
13.40%
12.23%
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.
Common Equity
Tier 1 Ratio
(CET 1)
Tier 1 Risk-Based
Capital Ratio
Total Risk-Based
Capital Ratio
December 31, 2018
Tier 1 Leverage
$ 171,332
14.85% $
51,930
7.00% $
75,010
6.50%
$ 171,332
14.85% $
69,240
8.50% $
92,320
8.00%
$ 180,712
15.66% $
92,320
10.50% $ 115,400
10.00%
Ratio
$ 168,770
11.32% $
59,639
4.00% $
74,549
5.00%
Common Equity
Tier 1 Ratio
(CET 1)
Tier 1 Risk-Based
Capital Ratio
Total Risk-Based
Capital Ratio
$ 168,770
15.38% $
49,388
6.38% $
71,338
6.50%
$ 168,770
15.38% $
65,850
7.88% $
87,800
8.00%
$ 178,099
16.23% $
87,800
9.88% $ 109,750
10.00%
(1) The 2019 and 2018 minimum regulatory requirement threshold includes the capital
conservation buffer of 2.50% and 1.250%, respectively.
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,
2019, 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
59
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
CAPITAL RESOURCES
(Continued)
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,
2019, the rate was 3.59%. Interest expense recognized by the Company for the
years ended December 31, 2019, 2018, and 2017 was $210,000, $199,000 and
$147,000, 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 Directors’ 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, 2019, the Company had
unpledged securities totaling $386,541,000 available as a secondary source of
liquidity and total cash and cash equivalents of $52,574,000. Cash and cash
equivalents at December 31, 2019 increased 65.71% compared to December 31,
2018. 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, 2019, our available borrowing capacity
includes approximately $70,000,000 in Federal funds lines with our
correspondent banks and $304,987,000 in unused FHLB advances. At
December 31, 2019, 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, 2019 and 2018:
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,
2019
2018
$
$
$
$
$
$
$
$
$
$
70,000 $
- $
40,000
-
304,987 $
- $
446,742 $
410,788 $
286,934
10,000
448,083
399,027
4,931 $
- $
5,065 $
5,036 $
4,364
-
4,498
4,475
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
$291,182,000 as of December 31, 2019 compared to $312,274,000 as of
December 31, 2018. For a more detailed discussion of these financial
instruments, see Note 13 to the audited Consolidated Financial Statements in this
Annual Report.
Contractual Obligations
The contractual obligations of the Company, summarized by type of obligation
and contractual maturity, at December 31, 2019, are as follows:
Less Than
One Year
One to
Three
Years
Three to
Five
Years
After
Five
Years
Total
$ 1,317,419 $ 13,283 $
1,768 $
815 $ 1,333,285
-
2,103
-
3,639
-
2,835
5,155
2,880
5,155
11,457
(In thousands)
Deposits
Subordinated
notes
Operating leases
Total
$ 1,319,522 $ 16,922 $
4,603 $
8,850 $ 1,349,897
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 notes issued to a capital trust which was formed solely for the
purpose of issuing trust preferred securities. These subordinated notes 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 trust preferred securities mature
on October 7, 2036, and are redeemable quarterly at the Company’s option.
60
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OFF-BALANCE SHEET ITEMS
(Continued)
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 preparation of financial statements in accordance with the accounting
principles generally accepted in the United States (‘‘U.S. GAAP’’) requires
management to make a number of judgments, estimates and assumptions that
affect the reported amount of assets, liabilities, income and expense in the
financial statements. Various elements of our accounting policies, by their nature,
involve the application of highly sensitive and judgmental estimates and
assumptions. Some of these policies and estimates relate to matters that are
highly complex and contain inherent uncertainties. It is possible that, in some
instances, different estimates and assumptions could reasonably have been made
and used by management, instead of those we applied, which might have
produced different results that could have had a material effect on the financial
statements.
We have identified the following accounting policies and estimates that, due to
the inherent judgments and assumptions and the potential sensitivity of the
financial statements to those judgments and assumptions, are critical to an
understanding of our financial statements. We believe that the judgments,
estimates and assumptions used in the preparation of the Company’s financial
statements are appropriate. For a further description of our accounting policies,
see Note 1—Summary of Significant Accounting Policies in the financial statements
included in this Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Allowance for Credit Losses
Our allowance for credit losses is an estimate of probable incurred losses in the
loan portfolio. Loans are charged off against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries,
if any, are credited to the allowance for credit losses. Management’s methodology
for estimating the allowance balance consists of several key elements, which
include specific allowances on individual impaired loans and the formula driven
allowances on pools of loans with similar risks. The allowance is only an estimate
of the inherent loss in the loan portfolio and may not represent actual losses
realized over time, either of losses in excess of the allowance or of losses less than
the allowance. Our accounting for estimated loan losses is discussed and disclosed
primarily in Note 1 and 5 to the consolidated financial statements under the
heading ‘‘Allowance for Credit Losses’’.
Business Combinations
The Company accounts for acquisitions of businesses using the acquisition
method of accounting. Under the acquisition method, assets acquired and
liabilities assumed are recorded at their estimated fair values at the date of
acquisition. This fair value may differ from the cost basis recorded on the
acquired institution’s financial statements. Management performs an initial
assessment to determine which assets and liabilities must be designated for fair
value analysis. Management typically engages experts in the field of valuation to
perform the valuation of significant assets and liabilities and, after assessing the
resulting fair value computation, will utilize such value in computing the initial
purchase accounting adjustments for the acquired assets. It is possible that these
values could be viewed differently through alternative valuation approaches or if
performed by different experts. Management is responsible for determining that
the values derived by experts are reasonable. Any excess of the purchase price over
amounts allocated to the acquired assets, including identifiable intangible assets,
and liabilities assumed is recorded as goodwill. The fair values of assets acquired
and liabilities assumed are subject to adjustment during the first twelve months
after the acquisition date if additional information becomes available to indicate a
more accurate or appropriate value for an asset or liability. See Note 1—under the
heading ‘‘Business Combinations’’, and Note 7- Goodwill and Intangible Assets in the
financial statements in this Form 10-K.
Goodwill and Other Intangible Assets
Goodwill and intangible assets are evaluated at least annually for impairment
or more frequently if events or circumstances, such as changes in economic or
market conditions, indicate that impairment may exist. When required, the
goodwill impairment test involves a two-step process. The first test for goodwill
impairment is done by comparing the reporting unit’s aggregate fair value to its
carrying value. Absent other indicators of impairment, if the aggregate fair value
exceeds the carrying value, goodwill is not considered impaired and no additional
analysis is necessary. If the carrying value of the reporting unit were to exceed the
aggregate fair value, a second test would be performed to measure the amount of
impairment loss, if any. To measure any impairment loss, the implied fair value
would be determined in the same manner as if the reporting unit were being
acquired in a business combination. If the implied fair value of goodwill is less
than the recorded goodwill, an impairment charge would be recorded for the
difference.
During 2011, the Financial Accounting Standards Board issued Accounting
Standards Update (‘‘ASU’’) 2011-08, Intangibles-Goodwill and Other
(Topic 350). Under the ASU, an entity is not required to calculate the fair value
of a reporting unit unless the entity determines that it is more likely than not
that its fair value is less than its carrying amount. Thus, before the first step of
goodwill impairment, the entity has the option to first assess qualitative factors to
determine whether the existence of events or circumstances leads to a
determination that the fair value of goodwill is less than carrying value. The
qualitative assessment includes, but is not limited to, macroeconomic and State
of California economic conditions, industry and market conditions and trends,
the Company’s financial performance, market capitalization, stock price, and any
Company-specific events relevant to the assessment. If after assessing the totality
of events or circumstances, an entity determines it is not more likely than not
that the fair value of a reporting unit is less than its carrying amount, then
performing the two-step process is unnecessary. As of December 31, 2019, based
on our qualitative assessment, there were no reporting units where we believed
that it was more likely than not that the fair value of a reporting unit was less
than its carrying amount, including goodwill. As a result, we had no reporting
units where there was a reasonable possibility of failing Step 1 of the goodwill
impairment test.
See Note 7 ‘‘Goodwill and Intangible Assets’’ in the financial statements in this
Form 10-K 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
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, 2019, 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.
61
Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk (IRR) and credit risk constitute the two greatest sources of
financial exposure for insured financial institutions that operate like we do. IRR
represents the impact that changes in absolute and relative levels of market
interest rates may have upon our net interest income (NII). Changes in the NII
are the result of changes in the net interest spread between interest-earning assets
and interest-bearing liabilities (timing risk), the relationship between various rates
(basis risk), and changes in the shape of the yield curve.
We realize income principally from the differential or spread between the
interest earned on loans, investments, other interest-earning assets and the interest
incurred on deposits and borrowings. The volumes and yields on loans, deposits
and borrowings are affected by market interest rates. As of December 31, 2019,
68.59% 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. 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, 2019, 83.93% 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
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 notes issued by the Company’s subsidiary, Service
1st Capital Trust I. As a result, all significant interest rate risk procedures are
performed at the Bank level.
The fundamental objective of the Company’s management of its assets and
liabilities is to maximize the Company’s economic value while maintaining
adequate liquidity and an exposure to interest rate risk deemed by management
to be acceptable. Management believes an acceptable degree of exposure to
interest rate risk results from the management of assets and liabilities through
maturities, pricing and mix to attempt to neutralize the potential impact of
changes in market interest rates. The Company’s profitability is dependent to a
large extent upon its net interest income, which is the difference between its
interest income on interest earning assets, such as loans and investments, and its
interest expense on interest bearing liabilities, such as deposits and borrowings.
The Company is subject to interest rate risk to the degree that its interest
earning assets re-price differently than its interest bearing liabilities. The
Company manages its mix of assets and liabilities with the goals of limiting its
exposure to interest rate risk, ensuring adequate liquidity, and coordinating its
sources and uses of funds.
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, 2019. 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, 2019 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, 2019, 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,
2019
Interest Income
Rates at
2019
$
64,900 $
64,400
63,700
63,100
62,100
57,700
2,800
2,300
1,600
1,000
-
(4,400)
4.51%
3.70%
2.58%
1.61%
-
(7.09)%
It is important to note that the above table is a summary of several forecasts
and actual results may vary from any of the forecasted amounts and such
difference may be material and adverse. The forecasts are based on estimates and
62
Quantitative and Qualitative Disclosures About Market Risk
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, 2019 and 2018:
Rate Type
(Dollars in thousands)
Variable rate
Fixed rate
December 31, 2019
December 31, 2018
Balance
Percent of
Total
Balance
Percent of
Total
$ 646,070
295,793
68.59% $ 664,313
31.41% 252,790
72.44%
27.56%
Total gross loans
$ 941,863
100.00% $ 917,103
100.00%
Approximately 68.59% of our loan portfolio is tied to adjustable rate indices
and 30.52% of our loan portfolio reprices within 90 days. As of December 31,
2019, we had 1,845 commercial and real estate loans totaling $537,446,000 with
floors ranging from 3.75% to 7.50% and ceilings ranging from 5.00% to
25.00%.
The following table shows the repricing categories of the Company’s loan
portfolio at December 31, 2019 and 2018:
Repricing
(Dollars in thousands)
< 1 Year
1-3 Years
3-5 Years
> 5 Years
December 31, 2019
December 31, 2018
Balance
$ 313,922
224,591
275,342
128,008
Percent of
Total
Balance
Percent of
Total
33.33% $ 334,910
23.85% 199,004
29.23% 261,299
13.59% 121,890
36.52%
21.70%
28.49%
13.29%
Total gross loans
$ 941,863
100.00% $ 917,103
100.00%
Assumptions are inherently uncertain, and, consequently, the model cannot
precisely measure net interest income or precisely predict the impact of changes
in interest rates on net interest income. Actual results will differ from simulated
results due to timing, magnitude and frequency of interest rate changes, as well
as changes in market conditions and management strategies which might
moderate the negative consequences of interest rate deviations.
63
Stock Price
Information
The Company’s common stock is listed for trading on the NASDAQ Capital Market under the ticker symbol CVCY. As of March 2, 2020, the Company had approximately
969 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, 2018
June 30, 2018
September 30, 2018
December 31, 2018
March 31, 2019
June 30, 2019
September 30, 2019
December 31, 2019
$
Sales Prices for the Company’s Common Stock
High
21.70
22.34
22.14
21.89
20.35
21.48
21.75
22.15
Low
18.05
19.02
20.82
15.66
18.10
19.08
18.97
19.24
$
The Company paid common share cash dividends of $0.43 and $0.31 per share in 2019 and 2018, respectively. The Company’s primary source of income with which to
pay cash dividends are dividends from the Bank. See Note 14 in the audited Consolidated Financial Statements of this Annual Report.
SHAREHOLDER INQUIRIES
Inquiries regarding Central Valley Community Bancorp’s accounting, internal accounting controls or auditing concerns should be directed to Steven D. McDonald,
chairman of the Board of Directors’ Audit Committee, at steve.mcdonald@cvcb.com, anonymously at www.ethicspoint.com or by calling Ethics Point, Inc. at (866) 294-9588.
General inquiries about the Company or the Bank should be directed to LeAnn Ruiz, Assistant Corporate Secretary at (800) 298-1775.
64
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65
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Visalia Runners – Road Runners Club of America
Visalia Youth Baseball Inc
Visalia Youth Baseball Inc
Vistage Worldwide
Vistage Worldwide
West Hills Community College Foundation
West Hills Community College Foundation
West Visalia Kiwanis Club
West Visalia Kiwanis Club
Western Payments Alliance
Western Payments Alliance
Wings Advocacy Fresno
Wings Advocacy Fresno
Yosemite Badger Youth Football
Yosemite Badger Youth Football
Youth Orchestras of Fresno
Youth Orchestras of Fresno
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Investing In Relationships.
www.cvcb.com
River Park
8375 North Fresno Street
Fresno, CA 93720
(559) 447-3350
Gold River
11230 Gold Express Drive,
Suite 311
Gold River, CA 95670
(916) 235-4588
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
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
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
Fresno Downtown
2404 Tulare Street
Fresno, CA 93721
(559) 268-6806
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
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) 323-3346
SBA Lending
7100 N. Financial Drive,
Suite 105
Fresno, CA 93720
(559) 323-3416
67
Investing In Relationships.