2020
2020
To Our
Shareholders
Last year I closed this annual shareholder letter by observing
that uncertainty was impacting the financial services industry.
Little did I know what an understatement that would turn out to be!
As 2020 found us dealing with the financial impact of a worldwide
pandemic and the Federal response of lowering rates, we could not
know how much this would affect the economic wellbeing of our clients
or communities. As such, we had to learn quickly, practice perseverance
and embrace flexibility.
While 2020 proved to be a difficult year, in many respects it brought
out the best in our Company. We rallied in our essential role of
providing banking access in the safest way possible for our team, our
clients and our communities – helping fuel the economy throughout
the quarantines and shutdowns. We all learned the meaning of
shelter-at-home orders, social distancing and color-coded regional
economic impacts, both personally and professionally. And we
supported our territory in tangible ways, especially for those on the front
lines, like healthcare workers and first responders who selflessly managed
unprecedented volume during the pandemic and California’s wildfires.
We made physical access to banking available wherever possible and
ramped up digital education and access. Significant team resources were
invested into processing Paycheck Protection Program (PPP) loan
applications, with our team processing a total of 1,077 PPP loans
totaling $211,575,000 in 2020. Choosing to extend our PPP
participation in 2021, as of this writing we have processed an additional
405 PPP loans totaling $65,000,000. We look forward to the continued
benefits for our business clients along with improved economic
conditions throughout our territory.
Even during the toughest of economic times, our leadership team
remained true to the Mission Statement of our now 41-year-old
community bank. Our community support focused on food insecurity,
housing and social justice, and we launched a campaign to support the
Central Sierra Resiliency Fund to help the people and communities
affected by the devastating Creek Fire, the largest single fire incident
recorded in California history.
Financial Overview
While 2020 will likely be remembered for many negative reasons,
we choose to reflect on the tremendous support and compassion
demonstrated by our team for the clients and communities we serve.
Likewise, we are grateful for the confidence and support you have
shown us during this time.
Throughout 2020 we remained focused on credit quality in our loan
portfolio and made appropriate allocations to the Allowance For Loan
and Lease Losses. Our team worked closely with borrowers to
understand their unique circumstances, and assisted nearly 300 clients
with a loan deferral program. This work, along with strong capital levels,
will help ensure safety and soundness for our shareholders as we emerge
from the pandemic.
In 2020, we reached the milestone of exceeding $2 billion in assets as of
December 31, 2020. The Company reported net income for the year
ended December 31, 2020, of $20,347,000 and enjoyed strong loan
and deposit growth with loans reaching $1,102,347,000 and total
deposits reaching $1,722,710,000. In 2020 the Board of Directors
declared dividends of $0.44 per share totaling $5,530,000. And to
underscore the year’s accomplishments, the Company’s tangible book
value improved by nearly 15 percent.
Farewell, Pat… and Welcome, Pat!
Pat Carman, Executive Vice President, Chief Credit Officer, retired in
November 2020 with over 48 years of industry expertise, the last 12
with Central Valley Community Bank. Pat Carman was succeeded by
Pat Luis as the new Executive Vice President, Chief Credit Officer.
Luis joined CVCB with over 35 years of bank credit management
expertise. He oversees the Credit Administration Division and credit
quality for the Bank, and serves as a member of the Managing
Committee. Known for his extensive credit risk knowledge, agribusiness
understanding, team development acumen and business intelligence,
Luis has worked in large national banks and the farm credit association
– mostly in California and the Western US – throughout his career.
Board Member Addition
Andriana Majarian was added to the Board of Directors in December
2020. She is the Chief Operating Officer of Agrian, based in Clovis,
California, one of the world’s largest and most-profitable ag technology
companies, acquired by TELUS Agriculture in August 2020. Andriana
serves on Agrian’s executive leadership team and oversees all aspects of
the company’s global operations in 58 countries. Her experience and
leadership are focused on developing and delivering technology-driven
business services and solutions, providing outstanding client service and
expanding Agrian’s revenue growth.
1
Upgrades for Improved Client Service…
Both Online and In Person
The Bank continued to upgrade and refine our cybersecurity and
innovation initiatives in 2020, in addition to digital processes that
enabled our clients to experience improved service. This is all part of our
ongoing commitment to investing in advanced technologies to ensure
that our Company and clients are prepared for the future, no matter
what it may hold.
•
•
In the summer of 2020, Personal and Business Online Banking systems
were upgraded to an improved, intuitive system design with added
services for over 12,000 of our valued Personal and Business clients. This
was further enhanced by the launch of Digital Wallet, which enables
clients to make purchases easily and securely – with contactless safety –
using their smartphones.
Meanwhile, in the brick-and-mortar world, our Prather Banking Center
set in the Central Sierra, relocated to a temporary facility in its existing
shopping center while a new, permanent office is being constructed in its
original location. The new Banking Center is expected to be completed
in the spring of 2021.
Awards & Achievements
During 2020, the Company earned recognition in a wide range of
categories, from our robust financial performance to our talented team.
Among the highlights:
•
•
Continuing our growing impact with SCORE, a nonprofit
organization dedicated to small business advocacy. Our team provides
mentoring for new and existing businesses throughout our territory.
Achieving a Super Premier performance rating from The Findley
Reports – the highest of the three performance tiers recognized by the
firm, based upon the Bank’s 2019 operating results.
Earning a 5-Star Superior rating from Bauer Financial for all four
quarters of 2020, a rating reserved for 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 seventh consecutive year in its 2020 Best of Central Valley
Business Awards.
Stronger. Sharper. More Committed than Ever.
There’s no question that 2020 will be remembered as a year of
extraordinary change, challenge and heroism, as well as a reminder of
humanity’s unquenchable ability to adapt and endure. The year 2020
did not define us – it sharpened us. We emerged from 2020 stronger so
that, no matter the situation, our team is ready, willing and able to serve
our clients with the excellence we have long been known for.
As we entered 2021, we were mindful of the political changes brought
about by the 2020 elections, the start of the COVID-19 vaccine
rollout and the hopeful improvement of economic conditions.
No matter what 2021 may bring, we remain optimistic that our brand
of relationship banking will continue to serve our team, clients and
shareholders very well.
Thank you for your loyalty and commitment to our Company during
this unpreceded time. Our experienced leadership, dedicated local
banking professionals and committed Board of Directors will continue
to earn your trust daily as we continue to successfully serve our
communities, guided by the core values that have been at our forefront
for over 40 years.
Sincerely,
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.
F.T. “Tommy” Elliott, IV
Owner,
Wileman Bros. & Elliott, Inc.
Kaweah Container, Inc.
Robert J. Flautt
Retired Bank Executive
Gary D. Gall
Retired Bank Executive
Andriana D. Majarian
Chief Operating Officer,
Agrian
Louis C. McMurray
President,
Charles McMurray Co.
Karen A. Musson
Marketing and Media,
Gar Tootelian, Inc.
Dorothea D. Silva
Principal,
Avaunt Ltd. CPAs
and Consultants
William S. Smittcamp
President and CEO,
Wawona Frozen Foods
3
Making
History
Together
Our history is written by many hands, but with
one vision: to help our clients 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. 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.
With assets exceeding $2 billion as of December 31, 2020, 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 an engaged 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 seventh consecutive year as “Best Business Bank” in 2020.
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, client 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, CVCB
CardControl, eStatements and Financial tools. The Private Business
Banking Department ensures that businesses of all sizes benefit from
custom-tailored Cash Management services through Business Online
Banking, Remote Deposit and Merchant Card Services. 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 has consistently been ranked upon
the top SBA 504 lenders in the Central Valley from CenCal Business
Group’s Lender of the Year award in recent years.
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 its clients by increasing and enhancing its
products and services, while emphasizing needs-based consulting
within Banking Centers and Customer Service environments.
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 over 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
Trusted Leadership
Holding Company & Bank Officers
Patrick A. Luis
James M. Ford
Executive Vice President,
President and CEO
Chief Credit Officer
Bank Executive Management
James J. Kim
Executive Vice President,
Chief Operating Officer
Teresa Gilio
Executive Vice President,
Chief Administrative Officer
A. Ken Ramos
Executive Vice President,
Market Executive,
Southern Region
Dawn M. Cagle
Senior Vice President,
Human Resources
David A. Kinross
Executive Vice President,
Chief Financial Officer
Blaine C. Lauhon
Executive Vice President,
Market Executive,
Northern Region
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 A. Luis, Dawn M. Cagle, James M. Ford, James J. Kim, A. Ken Ramos, Teresa Gilio and Blaine C. Lauhon
5
Corporate
Responsibility
Mission Statement
We provide personalized
financial solutions that guide businesses
and communities to succeed and thrive.
Core Values
Teamwork, Respect, Accountability,
Integrity and Leadership
Environmental, Social and Governance (ESG)
At Central Valley Community Bank, we believe that accountable
corporate behavior is essential for a community bank, and work
diligently to ensure a more equitable, resilient future for our clients,
team members, shareholders and the communities where we live and
operate. For that reason, our executive management team annually
reviews and prioritizes the Company’s areas of focus, which include:
community and charitable giving, responsible lending practices,
economic growth, sustainable practices, vendor management and
employment practices, among others.
Since 1980, we have supported our clients with a full range of
banking and financial services, while championing initiatives that
strengthen our communities, protect our environment and promote
transparency, accountability and diversity.
In 2020, with the immense hardships brought on by the COVID-19
pandemic and California wildfires, we elevated our community
support in the areas of food insecurity, housing and social justice to
be able to help more people and communities rebuild their lives and
achieve financial balance.
Our governance structure enables us to manage all major aspects of
our business through an integrated process of financial, strategic, risk
and leadership planning. This structure and process also ensure our
compliance with laws and regulations while providing clear lines of
authority for decision-making and accountability. Guided by our core
values and high ethical standards, we strive to operate with integrity
that inspires our clients and community to confidently place their
trust in our Company.
Diversity, Equity and Inclusion (DEI)
Our Bank policy reflects our commitment to maintaining a diverse
and inclusive workplace in which all team members are supported,
valued for their unique perspectives, skills and experiences, and have
the opportunity to contribute to the Company’s success. This
commitment is evident throughout our workplace and our impact
on the communities we serve.
For more information on Corporate Responsibility, please visit the
About Us section of our website at www.cvcb.com.
6
Trend Analysis
Central Valley Community Bancorp
9
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2016 2017 2018 2019
2020
2016 2017 2018 2019 2020
2016 2017 2018 2019 2020
Net Income (In Thousands)
Diluted Earnings Per Share
Average Total Loans (In Thousands)
,
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2016 2017 2018 2019 2020
2016 2017 2018 2019 2020
2016 2017 2018 2019 2020
Average Total Deposits (In Thousands)
Return on Shareholders’ Equity
Average Total Assets (In Thousands)
7
Comparative Stock
Price Performance
Central Valley Community Bancorp
Total Return Performance
Index Value
169.03
138.65
121.31
172.83
145.97
139.08
192.45
186.36
Russell 2000
164.08
123.76
123.04
155.35
154.47
136.19
Central Valley
Community
Bancorp
132.56
SNL Bank
NASDAQ Index
100.00
100.00
100.00
2015
2016
2017
2018
2019
2020
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, 2015 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.
Source: S&P Global Market Intelligence
© 2021
8
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2020 and 2019 (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
2020
2019
$
$
34,175
36,103
70,278
710,092
7,634
Loans, less allowance for credit losses of $12,915 at December 31, 2020 and $9,130 at December 31, 2019
1,089,432
Bank premises and equipment, net
Bank owned life insurance
Federal Home Loan Bank stock
Goodwill
Core deposit intangibles
Accrued interest receivable and other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Junior subordinated deferrable interest debentures
Accrued interest payable and other liabilities
Total liabilities
Commitments and contingencies (Note 12)
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: 12,509,848 at
December 31, 2020 and 13,052,407 at December 31, 2019
Retained earnings
Accumulated other comprehensive income, net of tax
Total shareholders’ equity
24,195
28,379
52,574
470,746
7,472
934,250
7,618
30,230
6,062
53,777
1,878
32,148
8,228
28,713
5,595
53,777
1,183
29,164
$
$
2,004,096
$
1,596,755
$
824,889
897,821
1,722,710
5,155
31,210
1,759,075
—
79,416
150,749
14,856
245,021
594,627
738,658
1,333,285
5,155
30,187
1,368,627
—
89,379
135,932
2,817
228,128
Total liabilities and shareholders’ equity
$
2,004,096
$
1,596,755
The accompanying notes are an integral part of these consolidated financial statements.
9
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Income
For the Years Ended December 31, 2020, 2019, and 2018 (In thousands, except per share amounts)
2020
2019
2018
Interest income:
Interest and fees on loans
Interest on deposits in other banks
Interest and dividends on investment securities:
Taxable
Exempt from Federal income taxes
Total interest income
Interest expense:
Interest on deposits
Interest on junior subordinated deferrable interest debentures
Other
Total interest expense
Net interest income before provision for credit losses
Provision for credit losses
Net interest income after provision for credit losses
Non-interest income:
Service charges
Appreciation in cash surrender value of bank owned life insurance
Interchange fees
Loan placement fees
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
$
$
$
$
$
52,066
246
11,740
1,966
66,018
1,465
130
—
1,595
64,423
3,275
61,148
2,071
711
1,347
2,291
—
4,252
323
2,802
13,797
28,603
4,626
490
2,046
2,398
819
2,391
615
663
650
—
695
3,688
47,684
27,261
6,914
20,347
1.62
1.62
0.44
$
$
$
$
$
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
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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
10
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Comprehensive Income
For the Years Ended December 31, 2020, 2019, and 2018 (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) losses 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
2020
2019
2018
20,347
$
21,443
$
21,289
21,344
(4,252)
17,092
(5,053)
12,039
15,455
(5,199)
10,256
(3,032)
7,224
32,386
$
28,667
$
(9,159)
(1,314)
(10,473)
3,096
(7,377)
13,912
$
$
The accompanying notes are an integral part of these consolidated financial statements.
11
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Changes in Shareholders’ Equity
For the Years Ended December 31, 2020, 2019, and 2018 (In thousands, except share amounts)
Balance, January 1, 2018
Net income
Other comprehensive loss
Restricted stock granted net of forfeitures
Cash dividend ($0.31 per common share)
Stock issued under employee stock purchase plan
Stock-based compensation expense
Repurchase and retirement of common stock
Stock options exercised
Balance, December 31, 2018
Net income
Other comprehensive income
Stock issued under employee stock purchase plan
Restricted stock granted net of forfeitures
Stock awarded to employees
Stock-based compensation expense
Cash dividend ($0.43 per common share)
Repurchase and retirement of common stock
Stock options exercised
Balance, December 31, 2019
Net income
Other comprehensive income
Restricted stock granted, net of forfeitures
Stock issued under employee stock purchase plan
Stock awarded to employees
Stock-based compensation expense
Cash dividend ($0.44 per common share)
Stock options exercised
Repurchase and retirement of common stock
Balance, December 31, 2020
Common Stock
Shares
Amount
13,696,722
-
-
20,494
-
11,581
-
(47,862)
74,030
13,754,965
-
-
12,286
16,495
5,295
-
-
(768,754)
32,120
13,052,407
-
-
13,008
15,764
6,548
-
-
43,500
(621,379)
$ 103,314
-
-
-
-
211
482
(894)
738
103,851
-
-
216
-
100
555
-
(15,619)
276
89,379
-
-
-
199
141
470
-
279
(11,052)
Retained
Earnings
$ 103,275
21,289
-
-
(4,270)
-
-
-
-
120,294
21,443
-
-
-
-
-
(5,805)
-
-
135,932
20,347
-
-
-
-
-
(5,530)
-
-
Accumulated
Other
Comprehensive
Income (Loss)
(Net of Taxes)
Total
Shareholders’
Equity
$
$
2,970
-
(7,377)
-
-
-
-
-
-
(4,407)
-
7,224
-
-
-
-
-
-
-
2,817
-
12,039
-
-
-
-
-
-
(11,052)
209,559
21,289
(7,377)
-
(4,270)
211
482
(894)
738
219,738
21,443
7,224
216
-
100
555
(5,805)
(15,619)
276
228,128
20,347
12,039
-
199
141
470
(5,530)
279
12,509,848
$
79,416
$ 150,749
$
14,856
$
245,021
The accompanying notes are an integral part of these consolidated financial statements.
12
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Cash Flows
For the Years Ended December 31, 2020, 2019, and 2018 (In thousands)
2020
2019
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Net (increase) decrease in deferred loan costs
Depreciation
Accretion
Amortization
Stock-based compensation
Provision for credit losses
Net realized gains on sales and calls of available-for-sale investment securities
Net (gain) 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 gain on bank owned life insurance
Net (increase) decrease in accrued interest receivable and other assets
Net increase (decrease) in accrued interest payable and other liabilities
(Provision) benefit for deferred income taxes
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
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
Proceeds from bank owned life insurance
Proceeds from sale of premises and equipment
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
$
20,347
$
21,443
$
(4,127)
881
(1,326)
4,622
470
3,275
(4,252)
(6)
(162)
(551)
—
(1,167)
(1,128)
1,165
(1,051)
16,990
(540,362)
283,956
35,914
—
(154,331)
(1,492)
(250)
467
3,485
6
(372,607)
393,308
(3,883)
—
—
—
—
(11,052)
199
279
(5,530)
373,321
17,704
52,574
(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
$
$
$
$
$
70,278
$
52,574
$
1,706
5,120
2,240
$
$
$
— $
2,517
9,140
1,643
10,129
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
21,289
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
31,727
1,460
2,700
—
—
13
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.
Risks and Uncertainties - In December 2019, a novel strain of coronavirus,
COVID-19, was reported in Wuhan, China. COVID-19 continues to
aggressively spread globally, including all 50 states in the United States. A
prolonged COVID-19 outbreak, or any other epidemic that harms the global
economy, U.S. economy, or the economies in which we operate, could adversely
affect our operations. While the spread of COVID-19 has minimally affected our
operations as of December 31, 2020, it has caused significant economic
disruption throughout the United States as state and local governments issued
‘‘shelter at home’’ orders along with the closing of non-essential businesses. The
potential financial impact is unknown at this time. However, if these actions are
sustained, it may adversely affect several industries within our geographic
footprint and impair the ability of our customers to fulfill their contractual
obligations to the Company. This could cause the Company to experience a
material adverse effect on our business operations, asset valuations, financial
condition, and results of operations. Material adverse impacts may include all or
a combination of valuation impairments on our intangible assets, investments,
loans, or deferred tax assets.
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, 2020,
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.
14
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 48 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
15
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
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 2020. 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 20
and 40 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
16
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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
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, 2020 and at December 31,
2019.
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 determined it appropriate to perform a
quantitative goodwill impairment test in the third quarter of 2020. A third party
valuation specialist was engaged to assist with the performance of the test. Based
on this quantitative test, it was determined that the fair value of the reporting
unit exceeded the carrying value as of September 30, 2020.
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. During the fourth quarter, management
performed a qualitative assessment including an evaluation of performance trends,
market information and economic data and determined it was more likely than
not that the fair value of the reporting unit exceeded the carrying value. As such,
no quantitative goodwill impairment test was required as of December 31, 2020.
Goodwill is the only intangible asset with an indefinite life on the balance sheet.
Intangible Assets - The intangible assets at December 31, 2020 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 2020, 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
17
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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,
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 2. 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) 2016-13 - 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. The final ASU extends
the effective date for SEC filers, such as the Company, that are classified as
smaller 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 2021 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 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) 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
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. The Company adopted
this ASU effective January 1, 2020 and it did not have a material impact on the
Company’s consolidated financial statements and disclosures.
FASB Accounting Standards Update (ASU) 2020-04 - Reference Rate Reform
(Subtopic 848): Facilitation of the Effects of Reference Rate Reform on Financial
Reporting, was issued March 2020. This ASU provides optional expedients and
exceptions for contracts, hedging relationships, and other transactions that
reference LIBOR or other reference rates expected to be discontinued because of
reference rate reform. The ASU is effective for all entities as of March 12, 2020
through December 31, 2022. The Company is in the process of evaluating the
provisions of this ASU and its effects on our consolidated financial statements.
The Company believes the adoption of this guidance on activities subsequent to
December 31,2020 through December 31, 2022 will not have a material impact
on the consolidated financial statements.
In April 2020, various regulatory agencies, including the Board of Governors
of the Federal Reserve System and the Federal Deposit Insurance Corporation,
(‘‘the agencies’’) issued a revised interagency statement encouraging financial
institutions to work with customers affected by COVID-19 and providing
additional information regarding loan modifications. The revised interagency
statement clarifies the interaction between the interagency statement issued on
March 22, 2020 and the temporary relief provided by Section 4013 of the
Coronavirus Aid, Relief, and Economic Security (‘‘CARES’’) Act. Section 4013
allows financial institutions to suspend the requirements to classify certain loan
modifications as troubled debt restructurings (‘‘TDRs’’). The revised statement
also provides supervisory interpretations on past due and nonaccrual regulatory
reporting of loan modification programs and regulatory capital. This interagency
guidance is expected to reduce the number of TDRs that will be reported in
future periods; however, the amount is indeterminable and will depend on future
developments, which are highly uncertain and cannot be predicted, including the
scope and duration of the pandemic and actions taken by governmental
authorities and other third parties in response to the pandemic.
18
Notes to
Consolidated Financial Statements
2.
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. There are three levels of inputs that may be used to measure
fair values:
Level - 1 Quoted market prices (unadjusted) for identical instruments traded
in active markets that the entity has the ability to access as of the measurement
date.
Level - 2 Significant other observable inputs other than Level 1 prices such as
quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.
Level - 3 Significant unobservable inputs that reflect an entity’s own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.
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, 2020
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Amount
Financial assets:
Cash and due from
banks
$
34,175 $
34,175 $
36,103
36,103
- $
-
- $
34,175
-
36,103
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
Junior subordinated
deferrable interest
debentures
Accrued interest payable
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
-
-
-
1,253,619
-
5,155
176
-
-
-
129
3,976
47
3,976
176
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:
710,092
7,634
1,089,432
-
7,634
-
710,092
-
-
-
-
1,087,124
710,092
7,634
1,087,124
(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.
5,595
8,834
N/A
N/A
N/A
N/A
9
3,617
5,208
8,834
1,722,710
1,691,647
90,008
-
1,781,655
5,155
65
-
-
-
41
3,693
24
3,693
65
(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
19
Notes to
Consolidated Financial Statements
2.
FAIR VALUE MEASUREMENTS
(Continued)
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.
(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, 2020:
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
$
680 $
- $
680 $
379,565
216,298
83,508
30,041
7,634
-
-
-
-
7,634
379,565
216,298
83,508
30,041
-
Total assets measured at fair
value on a recurring basis
$
717,726 $
7,634 $
710,092 $
-
-
-
-
-
-
-
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,
2020, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at
December 31, 2020. Also there were no liabilities measured at fair value on a
recurring basis at December 31, 2020.
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, 2020 (in
thousands):
Fair
Value
Level 1
Level 2
Level 3
Impaired loans:
Real estate:
Real estate-construction and
other land loans
Total assets measured at fair
value on a non-recurring
basis
$
$
1,260 $
- $
- $
1,260
1,260 $
- $
- $
1,260
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, 2020.
Appraisals for collateral-dependent impaired loans are performed by certified
general appraisers (for commercial properties) or certified residential appraisers
(for residential properties) whose qualifications and licenses have been reviewed
and verified by the Company. Once received, the assumptions and approaches
utilized in the appraisal as well as the overall resulting fair value is compared with
independent data sources such as recent market data or industry-wide statistics.
Impaired loans that are measured for impairment using the fair value of the
collateral for collateral dependent loans had a principal balance of $1,528,000
with a valuation allowance of $268,000 at December 31, 2020, and a resulting
fair value of $1,260,000. The valuation allowance represents specific allocations
for the allowance for credit losses for impaired loans.
During the year ended December 31, 2020 specific allocation for the
allowance for credit losses related to loans carried at fair value was $268,000,
20
Notes to
Consolidated Financial Statements
2.
FAIR VALUE MEASUREMENTS
(Continued)
compared to $0 during the year ended December 31, 2019. There were no net
charge-offs related to loans carried at fair value at December 31, 2020 and 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, 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 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
Equity Securities
Total assets measured at
fair value on a
recurring basis
14,494 $
- $
14,494 $
91,111
196,719
159,378
9,044
7,472
-
-
91,111
196,719
-
-
7,472
159,378
9,044
-
$ 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.
There were no liabilities measured at fair value on a non-recurring basis at
December 31, 2019.
3.
INVESTMENT SECURITIES
The fair value of the available-for-sale investment portfolio reflected an unrealized
gain of $21,091,000 at December 31, 2020 compared to an unrealized gain of
$3,999,000 at December 31, 2019. The unrealized gain recorded is net of
$6,235,000 and $1,182,000 in tax liabilities as accumulated other comprehensive
income within shareholders’ equity at December 31, 2020 and 2019, 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, 2020
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
651 $
29 $
- $
680
361,734
18,170
(339)
379,565
sponsored entities and
agencies collateralized
by residential mortgage
obligations
Private label mortgage and
asset backed securities
Corporate debt securities
214,203
3,575
(1,480)
216,298
82,413
30,000
1,337
260
(242)
(219)
83,508
30,041
$ 689,001 $
23,371 $
(2,280) $ 710,092
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
Proceeds and gross realized gains (losses) on investment securities for the years
ended December 31, 2020, 2019, and 2018 are shown below (in thousands):
Years Ended December 31,
2020
2019
2018
Available-for-Sale Securities
Proceeds from sales or calls
Gross realized gains from sales or calls
Gross realized losses from sales or calls
$ 246,824
$ 281,906
$ 283,956
1,976
$
5,319
$
7,123
$
(662)
(120) $
(2,871) $
$
Losses recognized in 2020, 2019, and 2018 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 $1,257,000, $1,537,000, and
$388,000 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, 2020, 2019, and 2018, respectively.
21
Notes to
Consolidated Financial Statements
3.
INVESTMENT SECURITIES (Continued)
Investment securities with unrealized losses at December 31, 2020 and 2019
are summarized and classified according to the duration of the loss period as
follows (in thousands):
December 31, 2020
Less than 12 Months 12 Months or More
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Available-for-Sale Securities
Debt Securities:
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
Corporate debt securities
$ 36,209 $
(339) $
- $
- $ 36,209 $
(339)
30,755
(385)
77,337
(1,095)
108,092
(1,480)
25,407
12,881
(242)
(119)
-
3,900
-
(100)
25,407
16,781
(242)
(219)
$ 105,252 $
(1,085) $ 81,237 $
(1,195) $ 186,489 $
(2,280)
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)
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, 2020, 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, 2020,
and identified those that had an unrealized loss for at least a consecutive
12 month period, which had an unrealized loss at December 31, 2020 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.
There were no OTTI losses recorded during the twelve months ended
December 31, 2020, 2019, or 2018.
U.S. Government Agencies - At December 31, 2020, the Company held one U.S.
Government agency securities of which was in a gain position.
Obligations of States and Political Subdivisions - At December 31, 2020, the
Company held 106 obligations of states and political subdivision securities of
which six were in a loss position for less than 12 months. 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, 2020.
U.S. Government Sponsored Entities and Agencies Collateralized by Residential
Mortgage Obligations - At December 31, 2020, the Company held 113 U.S.
Government sponsored entity and agency securities collateralized by residential
mortgage obligation securities of which nine were in a loss position for less than
12 months and 16 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, 2020.
Private Label Mortgage and Asset Backed Securities - At December 31, 2020, the
Company had a total of 31 Private Label Mortgage and Asset Backed Securities
(PLMBS) with a remaining principal balance of $82,413,000 and a net
unrealized gain of approximately $1,095,000. Six of these securities were in a loss
position for less than 12 months and none have been in a loss position for more
than 12 months at December 31, 2020. Seven of these PLMBS with a remaining
principal balance of $812,000 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, 2020.
Corporate Debt Securities - At December 31, 2020, the Company held nine
corporate debt securities of which three were in a loss position for less than
12 months and one has been in a loss position for more than 12 months.
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, 2020.
The amortized cost and estimated fair value of available-for-sale investment
securities at December 31, 2020 and 2019 by contractual maturity are shown in
the two tables below (in thousands). Expected maturities will differ from
contractual maturities because the issuers of the securities may have the right to
call or prepay obligations with or without call or prepayment penalties.
December 31, 2020
December 31, 2019
Amortized Estimated Amortized Estimated
Fair Value
Fair Value
Cost
Cost
Within one year
After one year through five years
After five years through ten years
After ten years
Investment securities not due at a single maturity
date:
U.S. Government agencies
U.S. Government sponsored entities and
agencies collateralized by residential mortgage
obligations
Private label mortgage and asset backed
securities
Corporate debt securities
$
298 $
305 $
- $
3,254
18,330
339,852
3,631
20,644
354,985
361,734
379,565
1,561
20,280
67,733
89,574
-
1,697
21,088
68,326
91,111
651
680
14,740
14,494
214,203
216,298
198,125
196,719
82,413
30,000
83,508
30,041
155,308
9,000
159,378
9,044
$ 689,001 $ 710,092 $ 466,747 $ 470,746
Investment securities with amortized costs totaling $178,561,000 and
$89,158,000 and fair values totaling $185,053,000 and $91,677,000 were
22
Notes to
Consolidated Financial Statements
3.
INVESTMENT SECURITIES
(Continued)
pledged as collateral for borrowing arrangements, public funds and for other
purposes at December 31, 2020 and 2019, respectively.
4.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
capacity of $235,371,000 as of December 31, 2020. 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 $2,782,000, $2,116,000, and
$2,453,000 have been deferred as loan origination costs for the years ended
December 31, 2020, 2019, and 2018, respectively.
Outstanding loans are summarized as follows (in thousands):
Allowance for Credit Losses
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,
2020
% of
Total
loans
December 31,
2019
% of
Total
loans
$
273,994
21,971
295,965
24.9% $
2.0%
26.9%
102,541
23,159
125,700
10.9%
2.6%
13.5%
208,843
18.9%
197,946
21.0%
55,419
338,886
84,258
28,718
716,124
55,634
37,236
92,870
(2,612)
5.0%
30.7%
7.6%
2.6%
64.8%
5.0%
3.3%
8.3%
1,102,347
(12,915)
100.0%
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%
Total loans
$
1,089,432
$
934,250
At December 31, 2020 and 2019, loans originated under Small Business
Administration (SBA) programs totaling $24,220,000 and $21,910,000,
respectively, were included in the real estate and commercial categories. In
addition, the Company participated in the SBA Paycheck Protection Program
(PPP) to help provide loans to our business customers to provide them with
additional working capital. At December 31, 2020, PPP loans totaling
$192,916,000 were outstanding and included in the commercial and industrial
category above. Approximately $434,983,000 in loans were pledged under a
blanket lien as collateral to the FHLB for the Bank’s remaining borrowing
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 48 quarters, and qualitative
factors including economic trends in the Company’s service areas, industry
experience and trends, geographic concentrations, estimated collateral values, the
Company’s underwriting policies, the character of the loan portfolio, and
probable losses inherent in the portfolio taken as a whole.
Changes in the allowance for credit losses were as follows (in thousands):
Years Ended December 31,
2020
2019
2018
Balance, beginning of year
$
Provision charged to operations
Losses charged to allowance
Recoveries
$
$
9,130
3,275
(229)
739
9,104
1,025
(1,196)
197
8,778
50
(210)
486
Balance, end of year
$
12,915
$
9,130
$
9,104
23
Notes to
Consolidated Financial Statements
4.
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, 2020, 2019, and 2018 by
portfolio segment (in thousands):
Allowance for credit losses:
Beginning balance, January 1, 2020
Provision charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2020
Allowance for credit losses:
Beginning balance, January 1, 2019
Provision (reversal) charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2019
Allowance for credit losses:
Beginning balance, January 1, 2018
Provision (reversal) charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2018
Commercial
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
$
$
$
$
$
1,428
100
(121)
612
2,019
1,671
655
(1,032)
134
1,428
2,071
(513)
(94)
207
$
$
$
$
$
6,769
2,405
-
-
9,174
6,539
230
-
-
6,769
5,795
642
-
102
$
$
$
$
$
897
175
(108)
127
1,091
826
172
(164)
63
897
825
(60)
(116)
177
$
$
$
$
$
36
595
-
-
631
68
(32)
-
-
36
87
(19)
-
-
9,130
3,275
(229)
739
12,915
9,104
1,025
(1,196)
197
9,130
8,778
50
(210)
486
1,671
$
6,539
$
826
$
68
$
9,104
The following is a summary of the allowance for credit losses by impairment methodology and portfolio segment as of December 31, 2020 and December 31, 2019
(in thousands):
Allowance for credit losses:
Ending balance, December 31, 2020
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Ending balance, December 31, 2019
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Commercial
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
2,019
339
1,680
1,428
2
1,426
$
$
$
$
$
$
9,174
271
8,903
6,769
3
6,766
$
$
$
$
$
$
1,091
21
1,070
897
35
862
$
$
$
$
$
$
631
-
631
36
-
36
$
$
$
$
$
$
12,915
631
12,284
9,130
40
9,090
The following table shows the ending balances of loans as of December 31, 2020 and December 31, 2019 by portfolio segment and by impairment methodology (in
thousands):
Loans:
Ending balance, December 31, 2020
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance, December 31, 2019
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Commercial
Real Estate
Consumer
Total
$
$
$
$
$
$
295,965
7,402
288,563
125,700
187
125,513
$
$
$
$
$
$
716,124
2,616
713,508
708,542
2,036
706,506
$
$
$
$
$
$
92,870
$ 1,104,959
1,168
$
11,186
91,702
$ 1,093,773
107,623
1,511
106,112
$
$
$
941,865
3,734
938,131
24
Notes to
Consolidated Financial Statements
4.
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, 2020 (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
$
258,587
18,289
$
5,004
377
$
10,403
3,305
$
197,721
50,560
314,710
72,875
28,557
54,034
37,084
3,870
1,622
14,537
10,195
161
640
-
7,252
3,237
9,639
1,188
-
960
152
Total
$ 1,032,417
$
36,406
$
36,136
$
-
-
-
-
-
-
-
-
-
-
$
273,994
21,971
208,843
55,419
338,886
84,258
28,718
55,634
37,236
$ 1,104,959
The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade 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
Total
$
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
-
$
879,844
$
28,183
$
33,838
$
The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2020 (in thousands):
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
90 Days
Past Due
Total Past
Due
Current
Total
Loans
Recorded
Investment
> 90 Days
Accruing
Commercial:
Commercial and industrial
Agricultural 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
$
$
-
-
-
-
-
-
-
-
5
5
$
$
-
-
-
-
-
-
-
24
-
24
$
$
60
-
$
60
-
273,934
21,971
$
273,994
21,971
$
-
-
-
-
-
-
-
$
60
$
-
-
-
-
-
24
5
89
208,843
208,843
55,419
338,886
84,258
28,718
55,610
37,231
55,419
338,886
84,258
28,718
55,634
37,236
$ 1,104,870
$ 1,104,959
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
102,541
23,159
197,946
73,718
329,333
76,304
31,241
64,841
42,782
$
941,865
$
Non-
accrual
752
-
370
1,556
512
-
-
-
88
$
3,278
25
Notes to
Consolidated Financial Statements
4.
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, 2019 (in thousands):
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
90 Days
Past Due
Total Past
Due
Current
Total
Loans
Recorded
Investment
> 90 Days
Accruing
Non-
accrual
Commercial:
Commercial and industrial
Agricultural production
$
$
17
-
$
-
-
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
-
-
-
-
-
-
168
218
-
381
-
-
-
-
Total
$
185
$
599
$
-
-
-
-
-
-
-
-
-
-
$
17
-
218
-
381
-
-
-
168
$
102,524
23,159
$
102,541
23,159
$
197,728
197,946
73,718
328,952
76,304
31,241
64,841
42,614
73,718
329,333
76,304
31,241
64,841
42,782
$
784
$
941,081
$
941,865
$
-
-
-
-
-
-
-
-
-
-
$
187
-
416
-
381
321
-
388
-
$
1,693
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, 2020 (in thousands):
December 31, 2019 (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
$
60
$
61
$
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:
Real estate construction and other
land loans
Commercial real estate
Agricultural real estate
Total real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
Total with an allowance recorded
370
28
512
910
144
409
28
561
998
180
1,114
1,239
7,342
7,373
1,528
148
30
1,706
936
88
1,024
10,072
1,552
149
29
1,730
936
93
1,029
10,132
Total
$
11,186
$
11,371
$
-
-
-
-
-
-
-
339
268
3
-
271
9
12
21
631
631
The recorded investment in loans excludes accrued interest receivable and net
loan origination fees, due to immateriality.
With no related allowance recorded:
Commercial:
Commercial and industrial
$
163
$
432
$
Real estate:
Owner occupied
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
$
-
-
-
-
-
-
-
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
4.
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, 2020, 2019, and 2018 (in thousands):
With no related allowance recorded:
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
Total with no related allowance recorded
With an allowance recorded:
Commercial:
Commercial and industrial
Agricultural production
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
Year Ended December 31,
2020
Year Ended December 31,
2019
Year Ended December 31,
2018
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
$
1,322
104
1,426
394
8
779
146
-
1,327
216
2,969
6,139
430
6,569
586
206
27
-
819
1,001
64
1,065
8,453
$
11,422
$
$
-
-
-
-
-
-
-
-
-
12
12
582
-
582
-
11
2
-
13
55
-
55
650
662
$
214
-
214
223
1,174
1,306
25
-
2,728
593
3,535
57
-
57
-
325
42
-
367
1,139
20
1,159
1,583
5,118
$
$
-
-
-
-
45
50
-
-
95
13
108
1
-
1
-
12
2
-
14
56
-
56
71
$
179
$
311
-
311
17
2,857
1,542
1,173
702
6,291
217
6,819
55
-
55
-
200
49
86
335
1,054
3
1,057
1,447
8,266
$
-
-
-
-
85
51
159
-
295
-
295
4
-
4
-
12
3
-
15
57
-
57
76
$
371
Foregone interest on nonaccrual loans totaled $177,000, $85,000, and
$267,000 for the years ended December 31, 2020, 2019, and 2018, 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, 2020 and 2019, the Company has a recorded investment
in troubled debt restructurings of $7,908,000 and, $2,362,000, respectively. The
Company has allocated $20,000 and $38,000 of specific reserves for those loans
at December 31, 2020 and 2019, respectively. The Company has committed to
lend no additional amounts as of December 31, 2020 to customers with
outstanding loans that are classified as troubled debt restructurings.
For the years ended December 31, 2020, 2019, and 2018 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.
As discussed in Note 1 to these financial statements, Section 4013 of the
CARES Act and the ‘‘Interagency Statement on Loan Modifications and Reporting
for Financial Institutions Working with Customers Affected by the Coronavirus
(Revised)’’ provided banks an option to elect to not account for certain loan
modifications related to COVID-19 as TDRs as long as the borrowers were not
more than 30 days past due as of December 31, 2019 or at the time of
modification program implementation, respectively, and the borrowers meet other
applicable criteria. The remaining TDRs disclosed below were not related to
COVID-19 modifications. The Company executed loan deferrals on outstanding
balances of approximately $25 million resulting from the COVID-19 pandemic
that were not classified as a TDRs at December 31, 2020.
27
Notes to
Consolidated Financial Statements
4.
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, 2020 (dollars in thousands):
Troubled Debt Restructurings:
Commercial:
Commercial and industrial
Pre-
Modification
Outstanding
Recorded
Investment (1)
Number of
Loans
Principal
Modification
Post
Modification
Outstanding
Recorded
Investment (2)
Outstanding
Recorded
Investment
1
$
12,925
$
-
$
12,925
$
6,650
(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, 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.
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, 2020, 2019, and 2018.
28
Notes to
Consolidated Financial Statements
5. 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,
2020
2019
$
$
1,131
6,948
12,473
4,248
24,800
1,131
6,948
11,045
4,198
23,322
(16,572)
(15,704)
$
8,228
$
7,618
Depreciation and amortization included in occupancy and equipment expense
totaled $881,000, $1,742,000 and $1,703,000 for the years ended December 31,
2020, 2019, and 2018, 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, 2020 and determined no impairment was
necessary. Amortization expense recognized was $695,000 for 2020, $695,000 for
2019, and $455,000 for 2018.
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,
2021
2022
2023
Thereafter
Total
Estimated Core
Deposit
Intangible
Amortization
$
$
662
455
66
-
1,183
6. GOODWILL AND INTANGIBLE ASSETS
7. DEPOSITS
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, 2020 and 2019 was $53,777,000. Total goodwill at December 31,
2020 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 determined it appropriate to perform a
quantitative goodwill impairment test in the third quarter of 2020. A third party
valuation specialist was engaged to assist with the performance of the test. Based
on this quantitative test, it was determined that the fair value of the reporting
unit exceeded the carrying value as of September 30, 2020. Therefore, there was
no impairment of goodwill recorded during the nine months ended
September 30, 2020.
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. With the economic risks and
uncertainties associated with the COVID-19 pandemic continuing during the
fourth quarter of 2020, management performed a qualitative assessment
including performance trends, market information and economic data and
determined it was more likely than not that the fair value of the reporting unit
exceeded the carrying value. As such no quantitative goodwill impairment test
was required as of December 31, 2020.
The intangible assets at December 31, 2020 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, 2020, the weighted
average remaining amortization period is two years. The carrying value of
intangible assets at December 31, 2020 was $1,183,000, net of $2,569,000 in
accumulated amortization expense. The carrying value at December 31, 2019 was
$1,878,000, net of $1,874,000 in accumulated amortization expense.
Management evaluates the remaining useful lives quarterly to determine whether
Interest-bearing deposits consisted of the following (in thousands):
Savings
Money market
NOW accounts
Time, $250,000 or more
Time, under $250,000
December 31,
2020
2019
$
156,190
341,088
310,697
19,790
70,056
$
112,271
266,609
266,048
22,729
71,001
$
897,821
$
738,658
Aggregate annual maturities of time deposits are as follows (in thousands):
Years Ending December 31,
2021
2022
2023
2024
2025
Thereafter
$
76,436
8,372
2,699
760
693
886
$
89,846
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,
2020
2019
2018
$
$
$
25
542
316
582
$
28
656
538
706
37
419
414
283
1,465
$
1,928
$
1,153
29
Notes to
Consolidated Financial Statements
8. BORROWING ARRANGEMENTS
The table below summarizes the total lease cost for the period ending:
Federal Home Loan Bank Advances - As of December 31, 2020 and
December 31, 2019 , the Company had no Federal Home Loan Bank (FHLB)
of San Francisco advances. Approximately $434,983,000 in loans were pledged
under a blanket lien as collateral to the FHLB for the Bank’s remaining
borrowing capacity of $235,371,000 as of December 31, 2020. FHLB advances
are also secured by investment securities with amortized costs totaling $169,000
and $248,000 and market values totaling $178,000 and $256,000 at
December 31, 2020 and 2019, 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 $110,000,000 and $70,000,000 at
December 31, 2020 and 2019, respectively, at interest rates which vary with
market conditions. As of December 31, 2020 and 2019, the Company had no
Federal funds purchased.
Federal Reserve Line of Credit - The Bank has a line of credit in the amount of
$13,323,000 and $4,931,000 with the Federal Reserve Bank of San Francisco
(FRB) at December 31, 2020 and 2019, respectively, which bears interest at the
prevailing discount rate collateralized by investment securities with amortized
costs totaling $13,538,000 and $5,065,000 and market values totaling
$13,703,000 and $5,036,000, respectively. At December 31, 2020 and 2019, the
Bank had no outstanding borrowings with the FRB.
9. 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 undiscounted lease payments for operating leases with initial terms of
one year or more as of December 31, 2020 are as follows (in thousands):
Years Ending December 31,
2021
2022
2023
2024
2025
Thereafter
$
Total lease payments
Less: imputed interest
Present value of operating lease liabilities
$
1,753
1,843
1,721
1,383
1,023
1,944
9,667
(786)
8,881
(Dollars in thousands)
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
December 31,
2020
December 31,
2019
$
$
$
2,243
13
288
2,544
$
2,226
68
375
2,669
The table below summarizes other information related to our operating leases:
December 31,
2020
December 31,
2019
Weighted average remaining lease
term, in years
Weighted average discount rate
6
2.77%
7
2.93%
The table below shows operating lease right of use assets and operating lease
liabilities as of :
(Dollars in thousands)
December 31,
2020
December 31,
2019
Operating lease right-of-use assets
Operating lease liabilities
$
$
8,195
8,881
$
$
9,735
10,418
The right-of-use-assets and lease liabilities are included with other assets and
other liabilities on the balance sheet, respectively.
10.
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
Service 1st Capital Trust I is a Delaware business trust formed by Service 1st.
The Company succeeded to all of the rights and obligations of Service 1st in
connection with the merger with Service 1st as of November 12, 2008. The
Trust was formed on August 17, 2006 for the sole purpose of issuing trust
preferred securities fully and unconditionally guaranteed by Service 1st. Under
applicable regulatory guidance, the amount of trust preferred securities that is
eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a
pro forma basis. At December 31, 2020, all of the trust preferred securities that
have been issued qualify as Tier 1 capital. The trust preferred securities mature
on October 7, 2036, are redeemable at the Company’s option, and require
quarterly distributions by the Trust to the holder of the trust preferred securities
at a variable interest rate which will adjust quarterly to equal the three month
LIBOR plus 1.60%.
The Trust used the proceeds from the sale of the trust preferred securities to
purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s
junior subordinated notes (the Notes). The Notes bear interest at the same
variable interest rate during the same quarterly periods as the trust preferred
securities. The Notes are redeemable by the Company on any January 7, April 7,
July 7, or October 7 or at any time within 90 days following the occurrence of
certain events, such as: (i) a change in the regulatory capital treatment of the
Notes (ii) in the event the Trust is deemed an investment company or (iii) upon
the occurrence of certain adverse tax events. In each such case, the Company
may redeem the Notes for their aggregate principal amount, plus any accrued but
unpaid interest.
The Notes may be declared immediately due and payable at the election of the
trustee or holders of 25% of the aggregate principal amount of outstanding
Notes in the event that the Company defaults in the payment of any interest
following the nonpayment of any such interest for 20 or more consecutive
quarterly periods.
Holders of the trust preferred securities are entitled to a cumulative cash
distribution on the liquidation amount of $1,000 per security. For each
January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to
equal the three month LIBOR plus 1.60%. As of December 31, 2020, the rate
was 1.84%. Interest expense recognized by the Company for the years ended
30
Notes to
Consolidated Financial Statements
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
10.
(Continued)
December 31, 2020, 2019, and 2018 was $130,000, $210,000 and $199,000,
respectively.
11.
INCOME TAXES
The provision for income taxes for the years ended December 31, 2020, 2019,
and 2018 consisted of the following (in thousands):
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, 2020 and 2019.
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, 2020, 2019, and 2018 consisted of the following:
2020
Current
Deferred
Provision for income taxes
2019
Current
Deferred
Provision for income taxes
2018
Current
Deferred
Provision for income taxes
Federal
State
Total
$
$
$
$
$
$
4,915
(656)
4,259
5,747
(387)
5,360
3,995
(140)
3,855
$
$
$
$
$
$
3,050
(395)
2,655
3,351
(202)
3,149
2,689
76
2,765
$
$
$
$
$
$
7,965
(1,051)
6,914
9,098
(589)
8,509
6,684
(64)
6,620
Deferred tax assets (liabilities) consisted of the following (in thousands):
Deferred tax assets:
Allowance for credit losses
Deferred compensation
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,
2020
2019
$
$
3,818
4,729
2,148
21
303
192
851
2,625
105
674
2,638
4,490
2,266
58
374
192
1,158
3,080
200
692
Total deferred tax assets
15,466
15,148
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
(2,423)
(275)
(6,235)
(350)
(191)
(849)
(405)
(10,728)
(2,878)
(175)
(1,182)
(555)
(234)
(925)
(459)
(6,408)
Net deferred tax assets
$
4,738
$
8,740
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
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
Change in uncertain tax positions
Other
Effective tax rate
2020
2019
2018
21.0 %
21.0 %
21.0 %
7.7 %
8.3 %
7.8 %
(1.5)%
(1.2)%
(0.2)%
- %
(0.4)%
25.4 %
(0.9)%
(0.4)%
(0.2)%
- %
0.6 %
28.4 %
(2.7)%
(0.6)%
(0.6)%
(0.3)%
(0.9)%
23.7 %
As of December 31, 2020, the Company had Federal and California net
operating loss (‘‘NOL’’) carry-forwards of $7,093,000 and $7,692,000,
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 purposes and various dates between 2029 and 2036 for 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.
The Company and its subsidiary file income tax returns in the U.S. federal,
California, and Georgia 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, 2017 and by the state taxing authorities for the years ended
before December 31, 2016.
As of December 31, 2020, 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, 2020 and 2019, the Company recorded
no interest or penalties related to uncertain tax positions.
12. 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, 2020 was zero.
Correspondent Banking Agreements - The Bank maintains funds on deposit with
other federally insured financial institutions under correspondent banking
agreements. Uninsured deposits totaled $9,628,000 at December 31, 2020.
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.
31
Notes to
Consolidated Financial Statements
12. COMMITMENTS AND CONTINGENCIES
(Continued)
13. SHAREHOLDERS’ EQUITY
The following financial instruments represent off-balance-sheet credit risk (in
thousands):
Commitments to extend credit
Standby letters of credit
December 31,
2020
2019
$
$
314,774
11,405
$
$
289,465
1,717
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, 2020 and 2019. The
Company recognizes these fees as revenue over the term of the commitment or
when the commitment is used.
At December 31, 2020, commercial loan commitments represent 48% of total
commitments and are generally secured by collateral other than real estate or
unsecured. Real estate loan commitments represent 42% of total commitments
and are generally secured by property with a loan-to-value ratio not to exceed
80%. Consumer loan commitments represent the remaining 10% of total
commitments and are generally unsecured. In addition, the majority of the Bank’s
loan commitments have variable interest rates.
At December 31, 2020 and 2019, the balance of a contingent allocation for
probable loan loss experience on unfunded obligations was $250,000. The
contingent allocation for probable loan loss experience on unfunded obligations is
calculated by management using an appropriate, systematic, and consistently
applied process. While related to credit losses, this allocation is not a part of the
ALLL and is considered separately as a liability for accounting and regulatory
reporting purposes. Changes in this contingent allocation are recorded in other
non-interest expense.
Concentrations of Credit Risk - At December 31, 2020, in management’s
judgment, a concentration of loans existed in commercial loans and real-estate-
related loans, representing approximately 96.7% of total loans of which 26.9%
were commercial and 69.8% were real-estate-related.
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%
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.
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.
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 August 30, 2018, bank holding companies with consolidated assets of
$3 billion or more and banks like Central Valley Community Bank must comply
with minimum capital ratio requirements 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%; (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 requires
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 increases 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%. 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, 2020 and 2019. 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, 2020 and December 31, 2019, as well as the minimum
capital ratios for capital adequacy for the Bank.
(Dollars in thousands)
December 31, 2020
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio (CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
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
Actual Ratio
Amount
Ratio
$ 178,407
$ 173,407
$ 178,407
$ 191,572
9.28%
14.10%
14.50%
15.58%
$ 172,945
$ 167,945
$ 172,945
$ 182,325
11.38%
14.55%
14.98%
15.79%
32
Notes to
Consolidated Financial Statements
13. SHAREHOLDERS’ EQUITY
(Continued)
The following table presents the Bank’s regulatory capital ratios as of
December 31, 2020 and December 31, 2019.
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):
(Dollars in thousands)
December 31, 2020
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio
(CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
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
Actual Ratio
Minimum regulatory
requirement (1)
Amount
Ratio
Amount
Ratio
$ 177,269
9.23% $ 76,852
4.00%
$ 177,269
$ 177,269
$ 190,434
14.41% $ 55,346
14.41% $ 73,795
15.48% $ 98,394
7.00%
8.50%
10.50%
$ 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%
(1) The minimum regulatory requirement threshold includes the capital
conservation buffer of 2.50%.
Dividends - During 2020, the Bank declared and paid cash dividends to the
Company in the amount of $15,622,000 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 $5,530,000 or $0.44 per common
share cash dividend to shareholders of record during the year ended
December 31, 2020. During the year ended December 31, 2020, the Company
repurchased and retired common stock in the amount of $11,052,000.
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 the year ended December 31, 2019, the Company repurchased
and retired common stock in the amount of $15,619,000.
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 the year ended December 31, 2018, the Company repurchased
and retired common stock in the amount of $894,000.
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, 2020, $26,191,000 of the Bank’s retained earnings were
free of these restrictions.
For the Years Ended December 31,
2020
2019
2018
Basic Earnings Per Common
Share:
Net income
Weighted average shares
outstanding
$
20,347
$
21,443
$
21,289
12,534,078
13,415,118
13,699,823
Net income per common share
$
1.62
$
1.60
$
1.55
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
$
20,347
$
21,443
$
21,289
12,534,078
13,415,118
13,699,823
42,241
98,489
125,185
12,576,319
13,513,607
13,825,008
$
1.62
$
1.59
$
1.54
No outstanding options and restricted stock awards were anti-dilutive at
December 31, 2020, 2019, and 2018.
14. EQUITY-BASED COMPENSATION
On December 31, 2020, the Company had four equity-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 2005 Omnibus Incentive Plan (2005
Plan) was adopted in May 2005 and expired March 16, 2015. 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 plan
requires that the exercise price may not be less than the fair market value of the
stock at the date the option is granted, and that the option price must be paid in
full at the time it is exercised. The options and awards under the plan expire on
dates determined by the Board of Directors, but not later than ten years from
the date of grant. The vesting period for the options, restricted common stock
awards and option related stock appreciation rights is determined by the Board of
Directors and is generally over five years.
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’s common stock, 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, 768,560 shares remain
reserved for future grants as of December 31, 2020.
33
Notes to
Consolidated Financial Statements
14. EQUITY-BASED COMPENSATION (Continued)
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 percent of pay in each
pay period. Shares are purchased at the end of an offering period at a discount of
ten 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 457,928 shares available for future
purchase under the plan as of December 31, 2020.
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, 2020, 2019, and 2018, the compensation
cost recognized for share-based compensation was $470,000, $555,000, and
$482,000, respectively. The recognized tax benefit for share-based compensation
expense was $76,000, $46,000, and $142,000 for 2020, 2019, and 2018
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, 2020, 2019 and 2018 from any of the
Company’s stock based compensation plans.
A summary of the combined activity of the Plans during the years then ended
is presented below (dollars in thousands, except per-share amounts):
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Shares
Aggregate
Intrinsic Value
Options outstanding at
January 1, 2018
Options exercised
Options forfeited
Options outstanding at
December 31, 2018
Options exercised
Options forfeited
Options outstanding at
December 31, 2019
Options exercised
Options forfeited
Options outstanding at
December 31, 2020
Options vested or
expected to vest at
December 31, 2020
Options exercisable at
December 31, 2020
232,870 $
(74,030) $
(4,400) $
9.13
9.97
10.85
154,440 $
(32,120) $
(1,200) $
121,120 $
(43,500) $
(550) $
8.68
8.59
5.55
8.73
6.39
7.40
2.81 $
1,554
2.06 $
1,567
77,070 $
10.06
1.51 $
382,291
77,070 $
10.06
1.51 $
382,291
77,070 $
10.06
1.51 $
382,291
Information related to the stock option plan during each year follows (in
thousands):
2020
2019
2018
Intrinsic value of options exercised
Cash received from options
exercised
Excess tax benefit realized for option
exercises
$
$
$
433
279
76
$
$
$
366
276
46
$
$
$
767
738
142
As of December 31, 2020, 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.
34
Notes to
Consolidated Financial Statements
14. EQUITY-BASED COMPENSATION
(Continued)
The following table presents the restricted common stock activity during the
years presented:
Nonvested outstanding shares at January 1, 2018
Vested
Forfeited
Nonvested outstanding shares at December 31,
2018
Granted
Vested
Forfeited
Nonvested outstanding shares at December 31,
2019
Granted
Vested
Forfeited
Nonvested outstanding shares at December 31,
2020
Weighted
Average
Grant
Date
Fair Value
$
$
$
$
$
$
$
$
$
$
$
$
13.33
13.09
14.37
15.98
19.77
16.61
18.06
17.38
16.42
18.23
19.16
15.60
Shares
63,768
(20,733)
(1,710)
63,529
25,420
(40,159)
(3,630)
45,160
21,397
(34,703)
(1,841)
30,013
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, 2020, there were 30,013 shares of restricted stock that are
nonvested and expected to vest. Share-based compensation cost charged against
income for restricted stock awards was $449,000, $533,000, and $459,000 for
the year ended December 31, 2020, 2019, and 2018 respectively.
As of December 31, 2020, there was $225,000 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 0.85 years and will be adjusted for subsequent changes in estimated
forfeitures. Restricted common stock awards had an intrinsic value of $2,507,000
at December 31, 2020.
15. EMPLOYEE BENEFITS
401(k) and Profit Sharing Plan - The Bank has established a 401(k) and profit
sharing plan. The 401(k) plan covers substantially all employees who have
completed a one-month employment period. Participants in the profit sharing
plan are eligible to receive employer contributions after completion of 2 years of
service. Bank contributions to the profit sharing plan are determined at the
discretion of the Board of Directors. Participants are automatically vested 100%
in all employer contributions. The Bank contributed $370,000, $750,000, and
$900,000 to the profit sharing plan in 2020, 2019, and 2018, respectively.
Additionally, the Bank may elect to make a matching contribution to the
participants’ 401(k) plan accounts. The amount to be contributed is announced
by the Bank at the beginning of the plan year. For the years ended December 31,
2020 and 2019, the Bank made a 100% matching contribution on all deferred
amounts up to 5% of eligible compensation. For the year ended December 31,
2018, 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,
2020, 2019, and 2018, the Bank made matching contributions totaling
$1,008,000, $959,000, and $748,000, respectively.
Deferred Compensation Plans - The Bank has a nonqualified Deferred
Compensation Plan which provides directors with an unfunded, deferred
compensation program. Under the plan, eligible participants may elect to defer
some or all of their current compensation or director fees. Deferred amounts earn
interest at an annual rate determined by the Board of Directors (2.49% at
December 31, 2020). At December 31, 2020 and 2019, the total net deferrals
included in accrued interest payable and other liabilities were $4,292,000 and
$4,177,000, 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 $9,464,000 and $9,686,000 and at December 31,
2020 and 2019, respectively. Income recognized on these policies, net of related
expenses, for the years ended December 31, 2020, 2019, and 2018, was
$245,000, $250,000, and $249,000, respectively.
In October 2015, the Board of Directors of the Company and the Bank
adopted a board resolution to create the Central Valley Community Bank
Executive Deferred Compensation Plan (the Executive Plan). Pursuant to the
Executive Plan, all eligible executives of the Bank may elect to defer up to
50 percent of their compensation for each deferral year. Deferred amounts earn
interest at an annual rate determined by the Board of Directors (2.49% at
December 31, 2020). At December 31, 2020 and 2019, the total net deferrals
included in accrued interest payable and other liabilities were $209,000 and
$145,000, 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, 2020, 2019, and 2018,
totaled $1,624,000, $1,465,000, and $15,000, respectively. Accrued
compensation payable under the salary continuation plans totaled $11,389,000
and $10,716,000 at December 31, 2020 and 2019, 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 $19,249,000 and
$20,544,000 at December 31, 2020 and 2019, respectively. Income recognized
on these policies, net of related expense, for the years ended December 31, 2020,
2019, and 2018 totaled $466,000, $478,000, and $446,000, 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.
16. LOANS TO RELATED PARTIES
During the normal course of business, the Bank enters into loans with related
parties, including executive officers and directors. The following is a summary of
the aggregate activity involving related-party borrowers (in thousands):
Balance, January 1, 2020
Disbursements
Effects of changes in composition of related parties
Amounts repaid
Balance, December 31, 2020
Undisbursed commitments to related parties, December 31,
2020
$
$
$
11,111
240
(1)
(855)
10,495
269
35
Notes to
Consolidated Financial Statements
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 2020 and 2019
(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, net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
2020
2019
$
896
249,037
354
$
1,675
231,671
220
$
250,287
$
233,566
$
$
5,155
111
5,266
5,155
283
5,438
79,416
150,749
14,856
245,021
89,379
135,932
2,817
228,128
$
250,287
$
233,566
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2020, 2019, and 2018
(In thousands)
2020
2019
2018
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
$
15,622
4
15,626
$
20,100
6
20,106
130
283
555
968
14,658
5,328
19,986
361
20,347
32,386
$
$
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
36
Notes to
Consolidated Financial Statements
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2020, 2019, and 2018
(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
Equity-based compensation
Net (increase) decrease in other assets
Net (decrease) increase 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 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
2020
2019
2018
$
20,347
$
21,443
$
21,289
(5,328)
470
(208)
(31)
75
15,325
(1,932)
555
136
69
10
20,281
-
-
(5,530)
(11,052)
279
199
(16,104)
(779)
1,675
896
153
$
$
(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
37
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 2020
Q3 2020
Q2 2020
Q1 2020
Q4 2019
Q3 2019
Q2 2019
Q1 2019
$
$
$
$
16,777 $
(1,700)
16,043 $
600
15,574 $
3,000
16,029 $
1,375
15,786 $
500
16,205 $
250
15,946 $
300
15,835
(25)
18,477
3,083
55
12,379
2,157
15,443
2,014
57
11,728
1,442
12,574
2,105
(58)
11,499
821
14,654
2,343
4,198
12,078
2,494
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
7,079 $
4,344 $
2,301 $
6,623 $
4,449 $
5,691 $
6,087 $
5,216
0.57 $
0.35 $
0.18 $
0.52 $
0.34 $
0.43 $
0.45 $
0.57 $
0.35 $
0.18 $
0.52 $
0.34 $
0.42 $
0.45 $
0.38
0.38
38
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, 2020 and 2019, the related consolidated statements of operations, comprehensive income,
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes
(collectively referred to as the ‘‘financial statements’’). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United
States of America.
Basis for Opinions
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements 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
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or
fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits 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. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication
of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or
disclosures to which they relate.
Allowance for Credit Losses—Qualitative Factors and General Reserve Allocation
As described in Notes 1—Summary of Significant Accounting Policies and 4—Loans and Allowance for Credit Losses to the
consolidated financial statements, the allowance for credit losses is a valuation allowance for probable incurred credit losses in the
Company’s loan portfolio. At December 31, 2020, the allowance for credit losses was $12.9 million, which consists of two primary
components, $0.6 million of specific reserves related to impaired loans and $12.3 million of general reserves for probable incurred
losses related to loans that are not impaired. The determination of the allowance for credit losses involves significant assumptions
which require a high degree of judgment relating to the Company’s loan portfolio and the evaluation of the general economic
conditions and other qualitative factors, and how those assumptions impact the probable incurred losses within the loan portfolio.
39
Changes in these assumptions could have a material effect on the Company’s financial results. The qualitative factors for the general
reserve allocation include consideration of 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.
Auditing management’s determination of the qualitative factor component within the general reserve allocation was identified as a
critical audit matter because of the significant auditor judgments needed to evaluate the significant subjective and complex judgments
made by management.
The primary procedures we performed to address this critical audit matter included:
• Evaluation of the completeness and accuracy of data inputs used as a basis for the adjustments relating to qualitative general
reserve factors.
• Evaluation of the reasonableness of management’s judgments related to the data and assumptions used in the determination of
qualitative factors.
• Analytically evaluating the qualitative factors year over year for directional consistency and testing for reasonableness.
• Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.
• Analytical evaluation of the overall adequacy of the allowance for credit losses, including the qualitative factors.
Goodwill Impairment Evaluation
As described in Note 1—Summary of Significant Accounting Policies and Note 6—Goodwill and Intangible Assets to the
consolidated financial statements, the Company’s goodwill balance was $53.8 million at December 31, 2020, which is allocated to the
Company’s single reporting unit. Goodwill is assessed for impairment in the third quarter of each year, or on an interim basis if there
are conditions that could more likely than not reduce the fair value of the Company below its carrying value. The Company engaged
a third party valuation specialist to assist in performing a quantitative goodwill impairment test. The estimated fair value of the
reporting unit was calculated by weighting results from various market approaches and the income approach. Significant assumptions
inherent in the valuation methodologies for goodwill that were employed included, but were not limited to, prospective financial
information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in the Company’s
industry. The calculation to test for goodwill impairment involves significant estimates and subjective assumptions, which require a
high degree of management judgment.
Auditing the quantitative goodwill impairment test was identified as a critical audit matter as the audit procedures used to
evaluate the methodologies and assumptions used involved a high degree of auditor judgment and the level of complexity required the
use of more experienced audit personnel and valuation specialists.
The primary procedures we performed to address this critical audit matter included:
• Testing the completeness and accuracy of data inputs used in, and the mathematical accuracy of, the valuation analysis.
• Utilization of Crowe LLP employed valuation specialists to assist in the evaluation of the appropriateness of the methodologies and
assumptions utilized in management’s valuation, including the reasonableness of significant assumptions, weighting allocation and
the reasonableness of the overall fair value.
• Evaluating the sensitivity of the fair value based on various forecasted scenarios.
• Evaluating the knowledge, skill and ability of the Company’s specialist related to the analysis performed.
We have served as the Company’s auditor since 2011.
Sacramento, California
March 10, 2021
40
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
Years Ended December 31,
(In thousands, except per-share amounts)
2020
2019
2018
2017
2016
$
66,018 $
1,595
66,331 $
2,559
64,187 $
1,484
57,376 $
1,137
64,423
3,275
61,148
13,797
47,684
27,261
6,914
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
46,676
1,096
45,580
(5,850)
51,430
9,591
38,922
22,099
6,917
$
$
$
$
20,347 $
21,443 $
21,289 $
14,026 $
15,182
1.62 $
1.60 $
1.55 $
1.12 $
1.62 $
1.59 $
1.54 $
1.10 $
0.44 $
0.43 $
0.31 $
0.24 $
1.34
1.33
0.24
December 31,
(In thousands)
Balances at end of year:
2020
2019
2018
2017
2016
Investment securities, Federal funds sold and deposits in other banks
Net loans
Total deposits
Total assets
Shareholders’ equity
Earning assets
$
753,829 $
1,089,432
1,722,710
2,004,096
245,021
1,837,402
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
Average balances:
Investment securities, Federal funds sold and deposits in other banks
Net loans
Total deposits
Total assets
Shareholders’ equity
Earning assets
$
623,117 $
1,043,470
1,568,194
1,832,987
229,807
1,676,567
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
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.
41
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;
(14) the uncertainties related to the Covid-19 pandemic including, but not
limited to, the potential adverse effect of the pandemic on the economy, our
employees and customers, and our financial performance; and (15) the impact
of the federal CARES Act and the significant additional lending activities
undertaken by the Company in connection with the Small Business
Administration’s Paycheck Protection Program enacted thereunder, including
risks to the Company with respect to the uncertain application by the Small
Business Administration of new borrower and loan eligibility, forgiveness and
audit criteria. 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 2020, we focused on managing the COVID-19 affects on businesses,
customers and employees. 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, 2020, 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
For the years leading up to 2020, the economy, as evidenced by the California,
Central Valley, and Greater Sacrament Region unemployment rates, and housing
prices, were showing moderate and steady improvement.
During 2020, the outbreak of COVID-19 has adversely impacted a broad
range of industries in which the Company’s customers operate and could impair
their ability to fulfill their financial obligations to the Company. The World
Health Organization has declared COVID-19 to be a global pandemic indicating
that almost all public commerce and related business activities must be, to
varying degrees, curtailed with the goal of decreasing the rate of new infections.
The pandemic has resulted in temporary closures of many businesses and the
institution of social distancing and sheltering in place requirements in California,
including our primary market area. As a result, the demand for our products and
services has been and may continue to be significantly impacted. The spread of
the outbreak has caused significant disruptions in the U.S. economy and has
disrupted banking and other financial activity in the areas in which the Company
operates.
The Company’s business is dependent upon the willingness and ability of its
employees and customers to conduct banking and other financial transactions.
While there has been no material impact to the Company’s employees to date,
COVID-19 could also potentially create widespread business continuity issues for
the Company. If the global response to contain COVID-19 escalates further or is
unsuccessful, the Company could experience an adverse effect on its business,
financial condition and results of operations.
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.
OVERVIEW
Diluted earnings per share (EPS) for the year ended December 31, 2020 was
$1.62 compared to $1.59 and $1.54 for the years ended December 31, 2019 and
2018, respectively. Net income for 2020 was $20,347,000 compared to
$21,443,000 and $21,289,000 for the years ended December 31, 2019 and
2018, respectively. The decrease in net income for 2020 compared to 2019 was
primarily due to an increase in provision for credit losses, a decrease in net
realized gains on sales and calls of investment securities, a decrease in service
charge income, and an increase in non-interest expense, partially offset by an
increase in net interest income, an increase in loan placement fees, and a decrease
in the provision for income taxes. Total assets at December 31, 2020 were
$2,004,096,000 compared to $1,596,755,000 at December 31, 2019.
Return on average equity (‘‘ROE’’) for 2020 was 8.85% compared to 9.39%
and 10.07% for 2019 and 2018, respectively. Return on average assets (‘‘ROA’’)
for 2020 was 1.11% compared to 1.36% and 1.35% for 2019 and 2018,
respectively. Total equity was $245,021,000 at December 31, 2020 compared to
$228,128,000 at December 31, 2019. The increase in shareholders’ equity is the
result of an increase in retained earnings from our net income of $20,347,000,
42
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OVERVIEW
(Continued)
the exercise of stock options in the amount of $279,000, the effect of share-based
compensation expense of $470,000, stock issued under our employee stock
purchase plan of $199,000, and an increase in accumulated other comprehensive
income (AOCI) of $12,039,000, partially offset by the payment of common
stock cash dividends of $5,530,000 and the repurchase and retirement of
common stock of $11,052,000.
Average total loans increased $124,829,000 or 13.41% to $1,055,712,000 in
2020 compared to $930,883,000 in 2019. In 2020, we recorded a provision for
credit losses of $3,275,000 compared to a provision of $1,025,000 in 2019 and a
provision of $50,000 in 2018. The Company had nonperforming assets
consisting of $3,278,000 in nonaccrual loans at December 31, 2020. At
December 31, 2019, nonperforming assets totaled $1,693,000. Net loan loss
recoveries for 2020 were $510,000 compared to net loan loss charge-offs in the
amount of $999,000 for 2019 and net loan loss recoveries of $276,000 for 2018.
Refer to ‘‘Asset Quality’’ below for further information.
Dividend Declared
The Company declared a $0.11 per common share cash dividend, payable on
February 26, 2021 to shareholders of record on February 12, 2021.
Key Factors in Evaluating Financial Condition
and Operating Performance
In evaluating our financial condition and operating performance, we focus on
several key factors including:
accretion of the loan marks on acquired loans in the amount of $1,321,000 and
$989,000 for the year ended December 31, 2020 and 2019, respectively. In
addition, net interest income before the provision for credit losses for the year
ended December 31, 2020 benefited by approximately $805,000 in nonrecurring
income from prepayment penalties and payoff of loans, as compared to $619,000
in nonrecurring income for the year ended December 31, 2019. Excluding these
reversals and benefits, net interest income for the year ended December 31, 2020
decreased by $133,000 compared to the year ended December 31, 2019.
Non-interest income increased 3.70% in 2020 compared to 2019 primarily
due to an increase in loan placement fees of $1,313,000, an increase of
$1,059,000 in other income, partially offset by a $947,000 decrease in net
realized gains on sales and calls of investment securities, a decrease in service
charge income of $685,000, and a $132,000 decrease in Federal Home Loan
Bank dividends. The increase in other income resulted from a $1,167,000 gain
related to the collection of tax-exempt life insurance proceeds.
Non-interest expenses increased $1,584,000 or 3.44% to $47,684,000 in 2020
compared to $46,100,000 in 2019. The net increase year over year resulted from
increases in salaries and employee benefits of $1,949,000, professional services of
$1,093,000, data processing of $489,000, regulatory assessments of $239,000,
and operating losses of $40,000, offset by decreases in occupancy and equipment
expenses of $813,000, information technology of $220,000, amortization of
software of $227,000, internet banking of $166,000, credit card expenses of
$114,000, and directors’ expenses of $95,000, in 2020 compared to 2019. The
Company recorded an income tax provision of $6,914,000 for the year ended
December 31, 2020, compared to $8,509,000 for the year ended December 31,
2019, and $6,620,000 for the year ended December 31, 2018. Basic EPS was
$1.62 for 2020 compared to $1.60 and $1.55 for 2019 and 2018, respectively.
Diluted EPS was $1.62 for 2020 compared to $1.59 and $1.54 for 2019 and
2018, respectively.
• Return to our shareholders;
• Return on average assets;
• Development of revenue streams, including net interest income and
Return on Average Assets
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 8.85% for the year ended 2020 compared to
9.39% and 10.07% for the years ended 2019 and 2018, respectively.
Our net income for the year ended December 31, 2020 decreased $1,096,000
compared to 2019 and increased $154,000 in 2019 compared to 2018.
Contributing to the decrease during 2020 compared to 2019 was an increase in
provision for credit losses, a decrease in net realized gains on sales and calls of
investment securities, a decrease in service charge income, and an increase in
non-interest expense, partially offset by an increase in net interest income, an
increase in loan placement fees, and a decrease in the provision for income taxes.
During 2019, net income compared to 2018 was positively impacted by an
increase in net interest income and an increase in net realized gains on sales and
calls of investment securities. During 2018 net income was positively impacted
by the decrease in tax expense.
Net interest income increased primarily because of increases in loan and fee
income, decreases in interest expense, partially offset by decreases in interest
income on investments. The impact to interest income from the accretion of the
loan marks on acquired loans was an increase of $1,321,000 and $989,000 for
the year ended December 31, 2020 and 2019, respectively. For 2020, our net
interest margin (NIM) decreased 64 basis points to 3.87% compared to 2019 as
a result of yield changes and asset mix changes. The decrease in net interest
margin in the period-to-period comparison resulted primarily from the decrease
in the effective yield on interest-earning deposits in other banks and Federal
Funds sold, the decrease in the effective yield on average investment securities,
and the decrease in the yield on the Company’s loan portfolio. The decrease in
the loan yield was impacted by the Company’s issuance of low-interest PPP
loans. Net interest income during 2020 was positively impacted by from the
Our ROA is a ratio that measures our performance compared with other banks
and bank holding companies. Our ROA for the year ended 2020 was 1.11%
compared to 1.36% and 1.35% for the years ended December 31, 2019 and
2018, respectively. The 2020 decrease in ROA is primarily due to the decrease in
net income and an increase in average assets. Annualized ROA for our peer group
was 1.06% at December 31, 2020. Peer group information from S&P Global
Market Intelligence data includes bank holding companies in central California
with assets from $1 billion 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 3.87% for the year
ended December 31, 2020, compared to 4.51% and 4.44% for the years ended
December 31, 2019 and 2018, respectively. The decrease in 2020 net interest
margin compared to 2019, resulted from the decrease in the effective yield on
interest earning deposits in other banks and Federal Funds sold, the decrease in
the effective yield on average investment securities, and the decrease in the yield
on the Company’s loan portfolio. The effective tax equivalent yield on total
earning assets decreased 72 basis points, while the cost of total interest-bearing
liabilities decrease 15 basis points to 0.19% for the year ended December 31,
2020. Our cost of total deposits in 2020 and 2019 was 0.09% and 0.15%,
respectively, compared to 0.09% for the same period in 2018. Our net interest
income before provision for credit losses increased $651,000 or 1.02% to
$64,423,000 for the year ended 2020 compared to $63,772,000 and
$62,703,000 for the years ended 2019 and 2018, 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 2020 increased $492,000 or
3.70% to $13,797,000 compared to $13,305,000 in 2019 and $10,324,000 in
43
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OVERVIEW
(Continued)
Operating Efficiency
2018. The increase resulted primarily from an increase in loan placement fees,
and an increase in other income, partially offset by a decrease in net realized
gains on sales and calls of investment securities, a decrease in service charge
income, and a decrease in FHLB dividends compared to 2019. 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
$3,278,000 and $1,693,000 at December 31, 2020 and 2019, respectively.
Nonperforming assets totaled 0.30% of gross loans as of December 31, 2020 and
0.18% of gross loans as of December 31, 2019. Nonperforming loans were
$3,278,000 and $1,693,000 at December 31, 2020 and 2019, respectively. The
Company had no other real estate owned at December 31, 2020, or
December 31, 2019. No foreclosed assets were recorded at December 31, 2020
or December 31, 2019. 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 0.30% as of
December 31, 2020 and 0.18% as of December 31, 2019. The allowance for
credit losses as a percentage of outstanding loan balance was 1.17% as of
December 31, 2020 and 0.97% as of December 31, 2019. The ratio of net
recoveries (charge-offs) to average loans was 0.05% as of December 31, 2020 and
(0.11)% as of December 31, 2019.
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
25.51% during 2020 to $2,004,096,000 as of December 31, 2020 from
$1,596,755,000 as of December 31, 2019. Total gross loans increased 16.85% to
$1,102,347,000 as of December 31, 2020, compared to $943,380,000 at
December 31, 2019. Total investment securities increased 50.08% to
$717,726,000 as of December 31, 2020 compared to $478,218,000 as of
December 31, 2019. Total deposits increased 29.21% to $1,722,710,000 as of
December 31, 2020 compared to $1,333,285,000 as of December 31, 2019. Our
loan to deposit ratio at December 31, 2020 was 63.99% compared to 70.76% at
December 31, 2019. The loan to deposit ratio of our peers was 80.00% at
December 31, 2020. Peer group information from S&P Global Market
Intelligence data includes bank holding companies in central California with
assets from $1 billion to $3.5 billion.
Capital Adequacy
At December 31, 2020, we had a total capital to risk-weighted assets ratio of
15.58%, a Tier 1 risk-based capital ratio of 14.50%, common equity Tier 1 ratio
of 14.10%, and a leverage ratio of 9.28%. 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, 2020, on a stand-alone basis, the Bank had a total
risk-based capital ratio of 15.48%, a Tier 1 risk based capital ratio of 14.41%,
common equity Tier 1 ratio of 14.41%, and a leverage ratio of 9.23%. At
December 31, 2019, the Bank had a total risk-based capital ratio of 15.66%,
Tier 1 risk-based capital of 14.85% and a leverage ratio of 11.27%. Note 13 of
the audited Consolidated Financial Statements provides more detailed
information concerning the Company’s capital amounts and ratios. As of
January 1, 2015, 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, 2020, 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, 2020.
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
64.08% for 2020 compared to 62.77% for 2019 and 61.23% for 2018. The
slight increase in the efficiency ratios in 2020 and 2019 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 1.48% to $78,220,000 in 2020 compared to $77,077,000 in
2019 and $73,027,000 in 2018, while operating expenses increased 3.44% in
2020, 2.29% in 2019, and 1.49% in 2018.
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 $110,000,000 and secured borrowing lines of
approximately $235,371,000 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 $788,004,000 or 39.32% of total assets at December 31, 2020 and
$530,792,000 or 33.24% of total assets as of December 31, 2019.
RESULTS OF OPERATIONS
NET INCOME
Net income was $20,347,000 in 2020 compared to $21,443,000 and
$21,289,000 in 2019 and 2018, respectively. Basic earnings per share was $1.62,
$1.60, and $1.55 for 2020, 2019, and 2018, respectively. Diluted earnings per
share was $1.62, $1.59, and $1.54 for 2020, 2019, and 2018, respectively. ROE
was 8.85% for 2020 compared to 9.39% for 2019 and 10.07% for 2018. ROA
for 2020 was 1.11% compared to 1.36% for 2019 and 1.35% for 2018.
The decrease in net income for 2020 compared to 2019 was primarily due to
an increase in provision for credit losses, a decrease in net realized gains on sales
and calls of investment securities, a decrease in service charge income, and an
increase in non-interest expense, partially offset by an increase in net interest
income, an increase in loan placement fees, and a decrease in the provision for
income taxes. 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.
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.
44
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INTEREST INCOME AND EXPENSE (Continued)
10,254
4,478
14,732
15,192
49,936
65,128
451
419
283
1,153
331
1,484
1.91%
2.62%
4.04%
2.93%
2.88%
5.50%
4.54%
0.12%
0.15%
0.25%
0.15%
2.72%
0.19%
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)
479,894
66,299
546,193
623,117
1,053,450
Total interest-earning assets
1,676,567 $
Allowance for credit losses
Nonaccrual loans
Cash and due from banks
Bank premises and equipment
Other assets
(12,242)
2,262
27,575
7,476
131,349
Year Ended December 31, 2020
Interest
Income/
Expense
Average
Balance
Average
Interest Rate
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
$
76,924 $
246
0.32%
$
17,893 $
375
2.10%
$
24,095 $
460
11,740
2,489
14,229
14,475
52,066
66,541
2.45%
3.75%
2.61%
2.32%
4.94%
3.97%
13,197
1,639
14,836
15,211
51,464
66,675
3.01%
4.25%
3.11%
3.08%
5.54%
4.69%
438,042
38,520
476,562
494,455
928,560
1,423,015 $
(9,337)
2,323
25,726
7,983
124,379
391,549
110,962
502,511
526,606
908,419
1,435,025 $
(8,924)
3,709
27,199
9,148
111,253
Total average assets
$
1,832,987
$
1,574,089
$
1,577,410
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
$
433,742 $
300,603
89,610
823,955
5,155
Total interest-bearing liabilities
829,110 $
Non-interest bearing demand
deposits
Other liabilities
Shareholders’ equity
744,239
29,831
229,807
Total average liabilities and
shareholders’ equity
$
1,832,987
341
542
582
1,465
130
1,595
0.08%
0.18%
0.65%
0.18%
2.52%
0.19%
$
370,378 $
270,918
97,136
738,432
21,943
760,375 $
557,348
28,014
228,352
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
$
1,574,089
$
1,577,410
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)
$
66,541
3.97%
$
66,675
4.69%
$
65,128
4.54%
1,595
0.19%
2,559
0.34%
1,484
0.19%
$
64,946
3.87%
$
64,116
4.51%
$
63,644
4.44%
(1) Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $523, $344, and $940 in 2020, 2019,
and 2018, respectively.
(2) Loan interest income includes loan fees of $2,234 in 2020, $164 in 2019, and $397 in 2018.
(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.
45
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.
(In thousands)
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
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
For the Years Ended
December 31, 2020
Compared to 2019
For the Years Ended
December 31, 2019
Compared to 2018
Volume
Rate
Net
Volume
Rate
Net
$
1,237 $ (1,366) $
(129)
$
(118) $
34 $
(84)
1,260
1,181
(2,717)
(331)
(1,457)
850
1,218
(2,923)
1,725
84
2,943
(2,839)
2,441
6,921
(3,048)
(6,319)
(607)
602
(1,705)
1,107
1,809
421
104
1,528
10,599
(10,733)
(134)
(716)
2,264
1,548
167
(506)
(339)
(54)
(70)
(124)
113
(483)
(576)
(18)
(463)
(501)
(36)
(35)
(71)
265
388
458
846
35
352
423
775
300
(370)
(594)
(964)
194
881
1,075
Net interest income (1)
$ 10,969 $ (10,139) $
830
$
(910) $
1,383 $
473
(1) Computed on a tax equivalent basis for securities exempt from federal income
taxes.
Interest and fee income from loans increased $602,000 or 1.17% in 2020
compared to 2019. Interest and fee income from loans increased $1,528,000 or
3.06% in 2019 compared to 2018. The increase in 2020 is primarily attributable
to an increase in average total loans outstanding, offset by a decrease in the yield
on loans of 60 basis points. The decrease in the loan yield was impacted by the
Company’s issuance of low-interest PPP loans.
Average total loans for 2020 increased $124,829,000 to $1,055,712,000
compared to $930,883,000 for 2019 and $912,128,000 for 2018. The yield on
loans for 2020 was 4.94% compared to 5.54% and 5.50% for 2019 and 2018,
respectively. The impact to interest income from the accretion of the loan marks
on acquired loans was an increase of $1,321,000 and $989,000 for the years
ended December 31, 2020 and 2019, respectively.
Interest income from total investments on a non tax-equivalent basis, (total
investments include investment securities, Federal funds sold, interest-bearing
deposits in other banks, and other securities), decreased $915,000 or 6.15% in
2020 compared to 2019. The yield on average investments decreased 76 basis
points to 2.32% for the year ended December 31, 2020 from 3.08% for the year
ended December 31, 2019. Average total investments increased $128,662,000 to
$623,117,000 in 2020 compared to $494,455,000 in 2019. In 2019, total
investment income on a non tax-equivalent basis increased $616,000 or 4.32%
compared to 2018.
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, 2020,
we held $299,806,000 or 42.22% of the total market value of the investment
portfolio in MBS and CMOs with an average yield of 2.15%. We invest in
CMOs and MBS as part of our overall strategy to increase our net interest
margin. CMOs and MBS by their nature are affected by prepayments which are
impacted by changes in interest rates. In a normal declining rate environment,
prepayments from MBS and CMOs would be expected to increase and the
expected life of the investment would be expected to shorten. Conversely, if
interest rates increase, prepayments normally would be expected to decline and
the average life of the MBS and CMOs would be expected to extend. Premium
amortization and discount accretion of these investments affects our net interest
income. Our management monitors the prepayment trends of these investments
and adjusts premium amortization and discount accretion based on several
factors. These factors include the type of investment, the investment structure,
interest rates, interest rates on new mortgage loans, expectation of interest rate
changes, current economic conditions, the level of principal remaining on the
bond, the bond coupon rate, the bond origination date, and volume of available
bonds in market. The calculation of premium amortization and discount
accretion is by nature inexact, and represents management’s best estimate of
principal pay downs inherent in the total investment portfolio.
The cumulative net-of-tax effect of the change in market value of the
available-for-sale investment portfolio as of December 31, 2020 was an unrealized
gain of $14,856,000 and is reflected in the Company’s equity. At December 31,
2020, the effective duration of the investment portfolio was 4.65 years and the
market value reflected a pre-tax unrealized gain of $21,091,000. 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, 2020, 2019, and 2018, 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, 2020, an immediate rate increase of 200 basis points
would result in an estimated decrease in the market value of the investment
portfolio by approximately $72,000,000. Conversely, with an immediate rate
decrease of 200 basis points, the estimated increase in the market value of the
investment portfolio would be $66,000,000. 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 2020 decreased $313,000 to $66,018,000 compared
to $66,331,000 in 2019 and $64,187,000 in 2018, respectively. The decrease in
2020 was the result of yield changes, decrease in interest rates, and asset mix
changes. The tax-equivalent yield on interest earning assets decreased to 3.97%
for the year ended December 31, 2020 from 4.69% for the year ended
December 31, 2019. Average interest earning assets increased to $1,676,567,000
for the year ended December 31, 2020 compared to $1,423,015,000 for the year
ended December 31, 2019. Average interest-earning deposits in other banks
increased $59,031,000 in 2020 compared to 2019. Average yield on these
deposits was 0.32% compared to 2.10% on December 31, 2020 and
December 31, 2019 respectively. Average investments and interest-earning
deposits increased $128,662,000 but the tax equivalent yield on those assets
decreased 76 basis points. Average total loans increased $124,829,000 and the
yield on average loans decreased 60 basis points.
The increase in total interest income for 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 decrease 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 total loans
increased and the yield on average loans increased four basis points.
Interest expense on deposits in 2020 decreased $463,000 or 24.01% to
$1,465,000 compared to $1,928,000 in 2019 and increased $312,000 as
46
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INTEREST INCOME AND EXPENSE
(Continued)
compared to 2018. The yield on interest-bearing deposits decreased 8 basis points
to 0.18% in 2020 from 0.26% in 2019. The yield on interest-bearing deposits
increased 11 basis points to 0.26% in 2019 from 0.15% in 2018. Average
interest-bearing deposits were $823,955,000 for 2020 compared to $738,432,000
and $780,449,000 for 2019 and 2018, respectively.
Average other borrowings were $5,155,000 with an effective rate of 2.52% for
2020 compared to $21,943,000 with an effective rate of 2.88% for 2019. In
2018, the average other borrowings were $12,180,000 with an effective rate of
2.72%. 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 1.84% for 2020, 3.59% for 2019, and 4.04%
for 2018.
The cost of all interest-bearing liabilities was 0.19% and 0.34% basis points
for 2020 and 2019, respectively, compared to 0.19% for 2018. The cost of total
deposits decreased to 0.09% for the year ended December 31, 2020, compared
to 0.15% and 0.09% for the years ended December 31, 2019 and 2018,
respectively. Average demand deposits increased 33.53% to $744,239,000 in
2020 compared to $557,348,000 for 2019 and $553,305,000 for 2018. The
ratio of average non-interest demand deposits to average total deposits increased
to 47.46% for 2020 compared to 43.01% and 41.48% for 2019 and 2018,
respectively.
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
Net interest income before provision for credit losses for 2020 increased
$651,000 or 1.02% to $64,423,000 compared to $63,772,000 for 2019 and
$62,703,000 for 2018. The increase in 2020 was a result of yield changes, asset
mix changes, and an increase in average earning assets, offset by an increase in
average interest bearing liabilities. Our net interest margin (NIM) decreased 64
basis points. Yield on interest earning assets decreased 72 basis points. The
decrease in net interest margin in the period-to-period comparison resulted
primarily from the decrease in the effective yield on interest earning deposits in
other banks and Federal Funds sold, the decrease in the effective yield on average
investment securities, and the decrease in the yield on the Company’s loan
portfolio. Net interest income before provision for credit losses increased
$1,069,000 in 2019 compared to 2018, primarily due to the increase in average
earning assets, asset mix changes, and a decrease in average interest bearing
liabilities. Average interest-earning assets were $1,676,567,000 for the year ended
December 31, 2020 with a NIM of 3.87% compared to $1,423,015,000 with a
NIM of 4.51% in 2019, and $1,435,025,000 with a NIM of 4.44% in 2018.
For a discussion of the repricing of our assets and liabilities, refer to Quantitative
and Qualitative Disclosure about Market Risk.
PROVISION FOR CREDIT LOSSES
Credit risk is inherent in the business of making loans. The Company
establishes an allowance for credit losses on loans through charges to earnings,
which are presented in the statements of income as the provision for credit losses
on loans. Specifically identifiable and quantifiable known losses are promptly
charged off against the allowance.
The provision for credit losses on loans is determined by conducting a
quarterly evaluation of the adequacy of the Company’s allowance for credit losses
on loans and charging the shortfall or excess, if any, to the current quarter’s
expense. This has the effect of creating variability in the amount and frequency
of charges to the Company’s earnings. The provision for credit losses on loans
and level of allowance for each period are dependent upon many factors,
including loan growth, net charge offs, changes in the composition of the loan
portfolio, delinquencies, management’s assessment of the quality of the loan
portfolio, the valuation of problem loans and the general economic conditions in
the Company’s market area.
The establishment of an adequate credit allowance is based on an allowance
model that utilizes qualitative and quantitative factors, historical losses, loan level
risk ratings and portfolio management tools. The Board of Directors has
established initial responsibility for the accuracy of credit risk ratings with the
individual credit officer and oversight from Credit Administration who ensures
the accuracy of the risk ratings. Quarterly, the credit officers must certify the
current risk ratings of the loans in their portfolio. Credit Administration reviews
the certifications and reports to the Board of Directors Audit Committee. At
least annually the loan portfolio, including risk ratings, is reviewed by a third
party credit reviewer. Regulatory agencies also review the loan portfolio on a
periodic basis. See ‘‘Allowance for Credit Losses’’ for more information on the
Company’s Allowance for Loan Loss.
During the year ended December 31, 2020, the Company recorded a
provision for credit losses of $3,275,000 compared to a provision of $1,025,000
and $50,000 for the same periods in 2019 and 2018, respectively. The recorded
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.
During the years ended December 31, 2020, 2019 and 2018 the Company
had net charge-offs (recoveries) totaling $(510,000), $999,000, and $(276,000),
respectively. The net charge-off (recovery) ratio, which reflects net charge-offs
(recoveries) to average loans, was (0.05)%, 0.11% and (0.03)% for 2020, 2019,
and 2018, respectively.
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 business, financial performance and results of
operations. 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. Similarly, 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, 2020,
there were $36.1 million in classified loans of which $1.2 million related to
agricultural real estate, $10.4 million to commercial and industrial loans,
$7.3 million to real estate owner occupied, $3.3 million to agricultural
production, $3.2 million to real estate construction, and $9.6 million to
commercial real estate. This compares to $33.8 million in classified loans as of
December 31, 2019 of which $7.3 million related to agricultural real estate,
$1.6 million to real estate construction, $13.2 million to commercial and
industrial, $4.3 million to agricultural production, $1.1 million to commercial
real estate, and $4.7 million to real estate owner occupied.
As of December 31, 2020, 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 $61,148,000 for
2020 compared to $62,747,000 and $62,653,000 for 2019 and 2018,
respectively.
47
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
NON-INTEREST INCOME
Non-interest income is comprised of customer service charges, gains on sales
and calls of investment securities, income from appreciation in cash surrender
value of bank owned life insurance, loan placement fees, Federal Home Loan
Bank dividends, and other income. Non-interest income was $13,797,000 in
2020 compared to $13,305,000 and $10,324,000 in 2019 and 2018, respectively.
The $492,000 or 3.70% increase in non-interest income in 2020 primarily
driven by an increase in loan placement fees, and an increase in other income,
partially offset by a decrease in net realized gains on sales and calls of investment
securities, a decrease in service charge income, and a decrease in FHLB
dividends. 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
the 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.
Customer service charges decreased $685,000 to $2,071,000 in 2020
compared to $2,756,000 in 2019 and $2,986,000 in 2018. The decreases in
2020 and 2019 resulted from decreases in our NSF fees and lower analysis
service charge income.
During the year ended December 31, 2020, we realized net gains on sales and
calls of investment securities of $4,252,000, compared to $5,199,000 in 2019
and $1,314,000 in 2018. The net gains in 2020, 2019, and 2018 were the
results of partial restructuring of the investment portfolio designed to improve
the future performance of the portfolio. See Note 3 to the audited Consolidated
Financial Statements for more detail.
Income from the appreciation in cash surrender value of bank owned life
insurance (BOLI) totaled $711,000 in 2020 compared to $728,000 and
$695,000 in 2019 and 2018, 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 $1,347,000 in 2020 compared to $1,446,000 and
$1,462,000 in 2019 and 2018, respectively.
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 $1,313,000 in 2020 to $2,291,000 compared to $978,000 in 2019
and $708,000 in 2018.
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, 2020 and 2019, we held FHLB stock totaling $5,595,000 and
$6,062,000, respectively. Dividends in 2020 decreased to $323,000 compared to
$455,000 in 2019 and $590,000 in 2018.
Other income increased to $2,802,000 in 2020 compared to $1,743,000 and
$2,107,000 in 2019 and 2018, respectively. The increase in other income during
the year ended December 31, 2020 resulted from a $1,167,000 gain related to
the collection of tax-exempt life insurance proceeds. 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 $1,584,000 or 3.44% to $47,684,000 in 2020
compared to $46,100,000 in 2019, and $45,068,000 in 2018.
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 64.08% for 2020 compared to 62.77% for 2019 and
61.23% for 2018. The increase in the efficiency ratio in 2020 and 2019 was due
to the growth in non-interest expense outpacing the growth in non-interest
income.
Salaries and employee benefits increased $1,949,000 or 7.31% to $28,603,000
in 2020 compared to $26,654,000 in 2019 and $26,221,000 in 2018. Full time
equivalents were 273 for the year ended December 31, 2020 compared to 281
for the year ended December 31, 2019. The increase in salaries and employee
benefits in 2020 compared to 2019 was the result of an increase of $2,426,000
in salaries and benefits (of which $525,000 related to the payment of employee
incentive compensation), as well as an increase of $185,000 for directors’ and
officers’ expenses related to the change in the discount rate used to calculate the
liability for salary continuation, deferred compensation, and split-dollar plans;
offset by higher loan origination costs of approximately $913,000 relating to the
PPP loans processed during the second quarter of 2020.
For the years ended December 31, 2020, 2019, and 2018, the compensation
cost recognized for equity-based compensation was $470,000, $555,000 and
$482,000, respectively. As of December 31, 2020, there was $225,000 of total
unrecognized compensation cost related to non-vested equity-based compensation
arrangements granted under all plans. The cost is expected to be recognized over
a weighted average period of 0.85 years. See Notes 1 and 14 to the audited
Consolidated Financial Statements for more detail. No options to purchase shares
of the Company’s common stock were issued during the years ending
December 31, 2020 and 2019. Restricted common stock awards of 21,397 and
25,420 shares were awarded in 2020 and 2019, respectively.
Occupancy and equipment expense decreased $813,000 or 14.95% to
$4,626,000 in 2020 compared to $5,439,000 in 2019 and $5,972,000 in 2018.
The Company made no changes in its depreciation expense methodology. The
Company operated 20 full-service offices at December 31,2020 and at
December 31, 2019. The Company closed two banking offices, one in Rancho
Cordova and one in Fair Oaks, and consolidated both branches into a newly
opened banking office in Gold River during the second quarter of 2019.
Regulatory assessments were $490,000 in 2020 compared to $251,000 and
$619,000 in 2019 and 2018, respectively. The assessment base for calculating the
amount owed is based on the formula of average assets minus average tangible
equity. The 2019 lower assessments were the result of the Company receiving its
small business bank credit.
Information technology expense decreased $220,000 to $2,391,000 for the
year ended December 31, 2020 compared to $2,611,000 and $1,113,000 in
2019 and 2018, respectively. Data processing expenses were $2,046,000 in 2020
compared to $1,557,000 in 2019 and $1,666,000 in 2018. No acquisition and
integration expenses related to the Folsom Lake Bank (‘‘FLB’’) and Sierra Vista
Bank (‘‘SVB’’) mergers were recorded in 2020 or 2019, compared to $217,000 in
2018. Professional services increased $1,093,000 in 2020 compared to 2019 due
to higher legal expenses and consulting fees.
Amortization of core deposit intangibles was $695,000 for 2020, $695,000 for
2019, and $455,000 for 2018. During 2020, amortization expense related to
FLB core deposit intangibles (‘‘CDI’’) was $423,000, amortization expense related
to SVB CDI was $135,000, and amortization expense related to Visalia
Community Bank (‘‘VCB’’) CDI was $137,000. During 2019, amortization
expense related to FLB CDI was $423,000, amortization expense related to SVB
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, amortization expense related to SVB CDI was $72,000, and
amortization expense related to VCB CDI was $136,000.
ATM/Debit card expenses decreased $101,000 to $819,000 for the year ended
December 31, 2020 compared to $920,000 in 2019 and $739,000 in 2018.
Other non-interest expenses decreased $698,000 or 15.91% to $3,688,000 in
2020 compared to $4,386,000 in 2019 and $4,636,000 in 2018.
48
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.
more likely than not that the net deferred tax assets at December 31, 2020 and
2019 will be fully realized in future years.
FINANCIAL CONDITION
For the years ended December 31,
SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS
%
Other
Expense Average
Assets
2020
%
Other
Expense Average
Assets
2019
%
Other
Expense Average
Assets
2018
Stationery/supplies
Amortization of software
Telephone
Alarm
Postage
Armored courier fees
Risk management expense
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
$
228
123
193
115
191
280
149
152
161
-
156
58
171
127
142
109
1,333
(Dollars in thousands)
0.01% $
0.01%
0.01%
0.01%
0.01%
0.02%
0.01%
0.01%
0.01%
-%
0.01%
-%
0.01%
0.01%
0.01%
0.01%
0.07%
240
350
342
100
218
284
232
212
177
114
155
52
165
256
102
101
1,286
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
243
167
121
172
77
165
267
452
129
1,263
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%
$
3,688
0.20% $
4,386
0.28% $
4,636
0.29%
PROVISION FOR INCOME TAXES
Our effective income tax rate was 25.4% for 2020 compared to 28.4% for
2019 and 23.7% for 2018. The Company reported an income tax provision of
$6,914,000, $8,509,000, and $6,620,000 for the years ended December 31,
2020, 2019, and 2018, 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 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-planning strategies, and assessments of current and future economic and
business conditions.
The Company had the net deferred tax assets of $4.74 million and
$8.74 million at December 31, 2020 and 2019, respectively. After consideration
of the matters in the preceding paragraph, the Company determined that it is
Total assets were $2,004,096,000 as of December 31, 2020, compared to
$1,596,755,000 as of December 31, 2019, an increase of 25.51% or
$407,341,000. Total gross loans were $1,102,347,000 as of December 31, 2020,
compared to $943,380,000 as of December 31, 2019, an increase of
$158,967,000 or 16.85%. The total investment portfolio (including Federal
funds sold and interest-earning deposits in other banks) increased 48.80% or
$247,232,000 to $753,829,000. Total deposits increased 29.21% or
$389,425,000 to $1,722,710,000 as of December 31, 2020, compared to
$1,333,285,000 as of December 31, 2019. Shareholders’ equity increased
$16,893,000 or 7.41% to $245,021,000 as of December 31, 2020, compared to
$228,128,000 as of December 31, 2019. 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), offset by the decrease
in common stock as a result of the share repurchase program. Accrued interest
payable and other liabilities were $31,210,000 as of December 31, 2020,
compared to $30,187,000 as of December 31, 2019, an increase of $1,023,000.
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 2 of the Notes to Consolidated Financial Statements for additional
information about the level of pricing transparency associated with financial
instruments carried at fair value.
INVESTMENTS
The following table reflects the balances for each category of securities at year
end:
Available-for-Sale Securities
(In thousands)
U.S. Government agencies
Obligations of states and political subdivisions
U.S. Government sponsored entities and agencies
collateralized by residential mortgage obligations
Private label mortgage and asset backed securities
Corporate debt securities
Amortized Cost at December 31,
2020
2019
2018
$
651 $
361,734
14,740 $
89,574
21,723
79,886
214,203
82,413
30,000
198,125
155,308
9,000
239,388
129,165
—
Total Available-for-Sale Securities
$
689,001 $
466,747 $
470,162
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,
2020, investment securities with a fair value of $185,053,000, or 26.06% 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
49
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INVESTMENTS
(Continued)
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, 2020 was 63.99% compared to 70.76% at
December 31, 2019. The loan to deposit ratio of our peers was 80.00% at
December 31, 2020. Peer group information from S&P Global Market
Intelligence data includes bank holding companies in central California with
assets from $1 billion to $3.5 billion. The total investment portfolio, including
Federal funds sold and interest-earning deposits in other banks, increased 48.80%
or $247,232,000 to $753,829,000 at December 31, 2020, from $506,597,000 at
December 31, 2019. The market value of the portfolio reflected an unrealized
gain of $21,091,000 at December 31, 2020, compared to an unrealized gain of
$3,999,000 at December 31, 2019.
Losses recognized in 2020, 2019, and 2018 were incurred in order to
reposition the investment securities portfolio based on the current rate
environment. As market interest rates or risks associated with a security’s issuer
continue to change and impact the actual or perceived values of investment
securities, the Company may determine that selling these securities and using
proceeds to purchase securities that fit with the Company’s current risk profile is
appropriate and beneficial to the Company.
The Board and management have had periodic discussions about our strategy
for risk management in dealing with potential losses should interest rates begin to
rise. We have been managing the portfolio with an objective of optimizing risk
and return in various interest rate scenarios. We do not attempt to predict future
interest rates, but we analyze the cash flows of our investment portfolio in
different interest rate scenarios in connection with the rest of our balance sheet
to design an investment portfolio that optimizes performance.
INVESTMENTS
(Continued)
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, 2020, 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, 2020,
and identified those that had an unrealized loss for at least a consecutive
12 month period, which had an unrealized loss at December 31, 2020 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, 2020, 2019, or 2018.
At December 31, 2020, the Company had a total of 31 Private Label
Mortgage and Asset Backed Securities (PLMBS) with a remaining principal
balance of $82,413,000 and a net unrealized gain of approximately $1,095,000.
Seven of these PLMBS with a remaining principal balance of $812,000 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, 2020 or December 31, 2019.
The amortized cost, maturities and weighted average yield of investment securities at December 31, 2020 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)
$
-
298
-
-
$
-
3,254
-
-
$
-
18,330
-
651
$
3.68% 339,852
4.25% $
651
3.86% 361,734
4.25%
3.81%
-
47
-
-
54
4.75% 7,683
-
-
5.85% 7,062
3.99% 8,932
30,000
-
1.68% 207,087
0.86% 65,751
-
5.10%
2.16% 214,203
2.54% 82,413
30,000
-
2.15%
2.50%
5.10%
$ 345
0.65% $10,991
2.82% $64,324
3.73% $613,341
3.15% $689,001
3.20%
(1) Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or
prepayment penalties. Expected maturities will also differ from contractual maturities due to unscheduled principal pay downs.
(2) Not computed on a tax equivalent basis.
LOANS
Total gross loans increased $158,967,000 or 16.85% to $1,102,347,000 as of December 31, 2020, compared to $943,380,000 as of December 31, 2019.
50
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
LOANS
(Continued)
The following table sets forth information concerning the composition of our loan portfolio as of December 31, 2020, 2019, 2018, 2017, and 2016.
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:
2020
2019
2018
2017
2016
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
$
273,994
21,971
295,965
24.9% $
2.0%
26.9%
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
12.9%
114,161
11.7%
3.4%
15.1%
208,843
18.9%
197,946
21.0%
183,169
19.9%
204,452
22.7%
191,665
25.3%
55,419
338,886
84,258
28,718
716,124
55,634
37,236
92,870
(2,612)
1,102,347
(12,915)
1,089,432
3,278
$
$
5.0%
30.7%
7.6%
2.6%
64.8%
5.0%
3.3%
8.3%
100.0%
$
$
73,718
329,333
76,304
31,241
708,542
64,841
42,782
107,623
1,515
943,380
(9,130)
934,250
1,693
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)
909,591
2,740
11.1%
33.2%
8.4%
3.6%
76.2%
7.6%
4.2%
11.8%
100.0%
$
$
96,460
269,254
76,081
31,220
677,467
76,404
29,637
106,041
1,359
900,679
(8,778)
891,901
2,875
10.7%
29.9%
8.4%
3.5%
75.2%
8.5%
3.4%
11.9%
100.0%
$
$
69,200
184,225
86,761
18,945
550,796
64,494
25,910
90,404
1,267
756,628
(9,326)
747,302
2,180
9.1%
24.3%
11.5%
2.7%
72.9%
8.5%
3.5%
12.0%
100.0%
At December 31, 2020, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $127,186,000, of which $2,529,000 were commercial loans,
$110,616,000 were real estate loans, and $14,041,000 were consumer loans, and at December 31, 2019, the acquired loans 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.
At December 31, 2020, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately
96.7% of total loans of which 26.9% were commercial and 69.8% were real-estate-related. This level of concentration is consistent with 95.5% at December 31, 2019.
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, 2020 and 2019.
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. Contributing to the commercial and industrial loan growth was the issuance of PPP loans. As of December 31, 2020, gross loans
included $192,916,000 in PPP loans which are fully guaranteed by the SBA.
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.
51
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
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, 2020.
(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
$
$
$
$
$
243,230
12,717
85,485
6,319
347,751
64,324
283,427
347,751
46,111
$
$
$
$
$
29,128
9,431
126,413
14,256
179,228
119,241
59,987
179,228
43,401
$
$
$
$
$
23,607
33,271
448,806
72,296
$
295,965
55,419
660,704
92,871
577,980
$ 1,104,959
103,716
474,264
$
287,281
817,678
577,980
$ 1,104,959
370,460
$
459,972
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 cost recovery method 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 4 of the Company’s audited Consolidated
Financial Statements in Item 8 of this Annual Report.
At December 31, 2020, total nonperforming assets totaled $3,278,000, or
0.16% of total assets, compared to $1,693,000, or 0.11% of total assets at
December 31, 2019. Nonperforming assets totaled 0.30% of gross loans as of
December 31, 2020 and 0.18% of gross loans as of December 31, 2019. Total
nonperforming assets at December 31, 2020, included nonaccrual loans totaling
$3,278,000, no OREO, and no repossessed assets. Nonperforming assets at
December 31, 2019 consisted of $1,693,000 in nonaccrual loans, no OREO,
and no repossessed assets. At December 31, 2020, we had no loan considered a
troubled debt restructuring (‘‘TDR’’) included in nonaccrual loans compared to
one TDR totaling $322,000 at December 31, 2019. See Note 4 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,
2020, 2019, 2018, 2017, and 2016 is set forth below. The Company had no
loans past due more than 90 days and still accruing interest at December 31,
2020 and 2019. Management is not aware of any potential problem loans, which
were current and accruing at December 31, 2020, 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.
52
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):
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
2020
2019
2018
2017
2016
$
$
$
$
$
$
$
752
370
1,556
-
512
-
88
-
-
3,278
-
3,278
177
0.30%
-
7,908
25.38%
11,186
631
$
$
$
$
$
$
$
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
As of December 31, 2020 and 2019, we had impaired loans totaling
$11,186,000 and $3,734,000, 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 periodically, but generally no less than 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 net realizable
value, which is generally defined as appraised value less costs to dispose of the
collateral. We perform quarterly internal reviews on all criticized and classified
loans.
We place loans on nonaccrual status and classify them as impaired when it
becomes probable that we will not receive the full amount of 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 $177,000 for the
year ended December 31, 2020 of which none was attributable to troubled debt
restructurings. 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 for the
year ended December 31, 2018, of which $4,000 was attributable to troubled
debt restructurings.
53
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, 2020.
(In thousands)
Non-accrual loans:
Balances
December 31,
2019
Additions to
Nonaccrual
Loans
Net Pay
Downs
Transfer to
Foreclosed
Collateral
Returns to
Accrual
Status
Charge-
Offs
Balances
December 31,
2020
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
187
797
-
321
66
-
322
$
$
798
532
1,769
-
-
95
-
$
(69)
(447)
(213)
(321)
(24)
(7)
(322)
Total non-accrual
$
1,693
$
3,194
$
(1,403)
$
-
-
-
-
-
-
-
-
$
$
(164)
-
-
-
(42)
-
-
$
(206)
$
-
-
-
-
-
-
-
-
$
752
882
1,556
-
-
88
-
$
3,278
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, 2020, 2019, and 2018,
the Bank had no OREO properties. The Company held no repossessed assets at
December 31, 2020, 2019, and 2018, which is included in other assets on the
consolidated balance sheets.
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 48 quarters, and qualitative and
quantitative 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 48 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 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.
54
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
2020
2019
2018
2017
2016
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
$
$
$
$
$
$
1,104,959
1,055,712
9,130
(121)
-
-
(108)
(229)
612
-
-
-
-
127
739
510
3,275
Balance at end of year
$
12,915
$
Allowance for credit losses as a percentage of
outstanding loan balance
Net recoveries (charge-offs) to average loans
outstanding
1.17%
0.05%
941,865
930,883
9,104
(1,032)
-
-
(164)
(1,196)
134
-
-
-
-
63
197
(999)
1,025
9,130
0.97%
(0.11)%
$
$
$
$
$
$
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)
$
9,104
$
8,778
$
0.99%
0.03%
0.98%
0.08%
755,361
646,573
9,610
(621)
-
-
(262)
(883)
3,656
1,631
-
702
283
177
6,449
5,566
(5,850)
9,326
1.23%
0.86%
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.
55
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:
2020
2019
2018
2017
2016
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
1,764
255
2,128
1,204
4,781
838
223
457
634
631
24.9% $
2.0%
18.9%
5.0%
30.7%
7.6%
2.6%
5.0%
3.3%
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%
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
$
12,915
100.0% $
9,130
100.0% $
9,104
100.0% $
8,778
100.0% $
9,326
100.0%
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 quantitative factors (Q factors)
to each loan category. Q factors include reserves held for the effects of lending
policies, experience, economic trends, and portfolio trends along with other
dynamics which may cause additional stress to the portfolio.
As of December 31, 2020, the allowance for credit losses (ALLL) was
$12,915,000, compared to $9,130,000 at December 31, 2019, a net increase of
$3,785,000. The net increase in the ALLL reflected the provisioning and net
recoveries during the year ended December 31, 2020 which was necessitated by
management’s observations and assumptions about the existing credit quality of
the loan portfolio. Net recoveries totaled $510,000 while the provision for credit
losses was $3,275,000 for the year ended December 31, 2020. The Company’s
provision for credit losses during the year ended December 31, 2020 is primarily
due to an increase in qualitative factors related to the economic uncertainties
caused by the COVID-19 pandemic. The balance of classified loans and loans
graded special mention, totaled $36,136,000 and $36,406,000 at December 31,
2020 and $33,838,000 and $28,183,000 at December 31, 2019, respectively.
The balance of undisbursed commitments to extend credit on construction and
other loans and letters of credit was $326,179,000 as of December 31, 2020,
compared to $291,182,000 as of December 31, 2019. At December 31, 2020
and 2019, the balance of a contingent allocation for probable loan loss
experience on unfunded obligations was $250,000. The contingent allocation for
probable loan loss experience on unfunded obligations is calculated by
management using appropriate, systematic, and consistently applied processes.
While related to credit losses, this allocation is not a part of ALLL and is
considered separately as a liability for accounting and regulatory reporting
purposes. Risks and uncertainties exist in all lending transactions and our
management and Directors’ Loan Committee have established reserve levels based
on economic uncertainties and other risks that exist as of each reporting period.
The ALLL as a percentage of total loans was 1.17% at December 31, 2020,
and 0.97% at December 31, 2019. Total loans include FLB, SVB and VCB
loans that were recorded at fair value in connection with the acquisitions of
$127,186,000 at December 31, 2020 and $152,735,000 at December 31, 2019.
Excluding these acquired loans from the calculation, the ALLL to total gross
loans was 1.32% and 1.15% as of December 31, 2020 and 2019, respectively,
and general reserves associated with non-impaired loans to total non-impaired
loans was 1.59% and 1.16%, 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 2020 increased from 2019 through
organic growth and through participation in the PPP loan program. The PPP
loans held in the loan portfolio are backed by the SBA at 100%; thus, no
allowance is required. Management believes that the change in the allowance for
credit losses to total loans ratios is directionally consistent with the composition
of loans and the level of nonperforming and classified loans, and by the general
economic conditions experienced in the central California communities serviced
by the Company, partially offset by 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 and
quantitative 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, 2020.
Non-performing loans totaled $3,278,000 as of December 31, 2020, and
$1,693,000 as of December 31, 2019. Nonperforming loans as a percentage of
total loans were 0.30% at December 31, 2020 compared to 0.18% at
December 31, 2019. The Company had no other real estate owned at
December 31, 2020, December 31, 2019, and December 31, 2018. No
foreclosed assets were recorded at December 31, 2020, December 31, 2019, and
December 31, 2018. The allowance for credit losses as a percentage of
nonperforming loans was 393.99% and 539.28% as of December 31, 2020 and
December 31, 2019, 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, 2020 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.
56
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
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, 2020 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
FLB, SVB, VCB, 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 Company’s ability to generate net
earnings after the acquisitions and is not deductible for tax purposes. 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. A significant decline in net earnings, among other factors, 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.
During March 2020, the COVID-19 pandemic emerged and began impacting
the state and local economies in our market due to local shelter-in-place orders
and restrictions on businesses which caused many nonessential businesses to close
and workers to be temporarily unemployed. Goodwill is assessed for impairment
between annual tests if a triggering event occurs or circumstances change that
may cause the fair value of a reporting unit to decline below its carrying amount.
Management considers the entire Company to be one reporting unit.
Management considered the COVID-19 related economic downturn to be such a
triggering event and therefore performed qualitative assessments at the end of the
first and second quarters of 2020. Based upon this assessment, it was determined
that it was more likely than not that the fair value of the Company was more
than its carrying value and therefore no quantitative impairment test was
required. Given the continued economic impact of the pandemic, management
determined it appropriate to perform a quantitative test as of September 30,
2020. Management engaged a third party valuation specialist to assist with the
performance of the quantitative goodwill impairment test in the third quarter of
2020. The third party specialist estimated the fair value of the reporting unit by
weighting results from various market approaches and the income approach.
Significant assumptions inherent in the valuation methodologies for goodwill that
were employed included, but were not limited to, prospective financial
information, growth rates, terminal value, discount rates, and comparable
multiples from publicly traded companies in our industry. Based on this
quantitative test, it was determined that the fair value of the reporting unit
exceeded the carrying value as of September 30, 2020. Therefore, there was no
impairment of goodwill recorded during the nine months ended September 30,
2020. Changes in the economic environment, operations of the reporting unit or
other adverse events could result in future impairment charges which could have
a material adverse impact on the Company’s operating results.
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. With the economic risks and
uncertainties associated with the COVID-19 pandemic continuing during the
fourth quarter of 2020, management assessed qualitative factors including
performance trends and noted no factors indicating goodwill impairment as of
December 31, 2020.
The intangible assets at December 31, 2020 represent the estimated fair value
of the core deposit relationships acquired in the 2017 acquisition of FLB of
$1,879,000, the 2016 acquisition of SVB of $508,000 and the 2013 acquisition
of VCB 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, 2020 was
$1,183,000, net of $2,569,000 in accumulated amortization expense. The
carrying value at December 31, 2019 was $1,878,000, net of $1,874,000 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, 2020 and
determined no impairment was necessary. In addition, management determined
that no events had occurred between the annual evaluation date and
December 31, 2020 which would necessitate further analysis. Amortization
expense recognized was $695,000 for 2020, $695,000 for 2019 and $455,000 for
2018.
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,
2021
2022
2023
Thereafter
Total
Estimated Core
Deposit
Intangible
Amortization
$
$
662
455
66
-
1,183
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 $389,425,000 or 29.21% to $1,722,710,000 as of
December 31, 2020, compared to $1,333,285,000 as of December 31, 2019.
Interest-bearing deposits increased $159,163,000 or 21.55% to $897,821,000 as
of December 31, 2020, compared to $738,658,000 as of December 31, 2019.
Non-interest bearing deposits increased $230,262,000 or 38.72% to
$824,889,000 as of December 31, 2020, compared to $594,627,000 as of
December 31, 2019. The Company’s deposit balances for the year ended
December 31, 2020 increased through organic growth and PPP loan proceeds
retained in customer deposit accounts. Average non-interest bearing deposits to
average total deposits was 47.46% for the year ended December 31, 2020
compared to 43.01% for the same period in 2019. Based on FDIC deposit
market share information published as of June 2020, our total market share of
deposits in Fresno, Madera, San Joaquin, and Tulare counties was 3.40% in 2020
compared to 3.31% in 2019. Our total market share in the other counties we
operate in (El Dorado, Merced, Placer, Sacramento, and Stanislaus), was less than
1.00% in 2020 and 2019.
The composition of the deposits and average interest rates paid at
December 31, 2020 and December 31, 2019 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
2020
Deposits Rate
2019
Deposits Rate
$
310,697
341,088
89,846
156,190
897,821
824,889
18.0% 0.11% $
19.8% 0.18%
5.2% 0.65%
9.1% 0.02%
52.1% 0.18%
47.9%
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%
Total deposits
$
1,722,710 100.0%
$
1,333,285 100.0%
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, 2020,
2019, and 2018.
(Dollars in
thousands)
Savings and NOW
accounts
Money market
accounts
Non-interest
$
$
2020
2019
2018
Balance
Rate
Balance
Rate
Balance
Rate
433,742
0.08% $
370,378
0.15% $
383,667
0.12%
300,603
0.18% $
270,918
0.24% $
285,568
0.15%
bearing demand $
744,239
- $
557,348
- $
553,305
-
Total deposits
$
1,568,194
0.09% $
1,295,780
0.15% $
1,333,754
0.09%
57
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
DEPOSITS AND BORROWINGS
(Continued)
The following table sets forth the maturity of time certificates of deposit and
other time deposits of $100,000 or more at December 31, 2020.
(In thousands)
Three months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
$
$
28,113
10,542
15,756
8,385
62,796
As of December 31, 2020 and 2019, the Company had no short-term or
long-term Federal Home Loan Bank (FHLB) of San Francisco advances. 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 $110,000,000 and $70,000,000 at
December 31, 2020 and 2019, respectively, at interest rates which vary with
market conditions. As of December 31, 2020 and 2019, 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.
Our shareholders’ equity was $245,021,000 as of December 31, 2020,
compared to $228,128,000 as of December 31, 2019. The increase in
shareholders’ equity is the result of an increase in retained earnings from our net
income of $20,347,000, the exercise of stock options in the amount of
$279,000, the effect of share-based compensation expense of $470,000, stock
issued under our employee stock purchase plan of $199,000, and an increase in
accumulated other comprehensive income (AOCI) of $12,039,000, partially
offset by the payment of common stock cash dividends of $5,530,000 and the
repurchase and retirement of common stock of $11,052,000.
During 2020, the Bank declared and paid cash dividends to the Company in
the amount of $15,622,000 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 $5,530,000 or $0.44 per common share
cash dividend to shareholders of record during the year ended December 31,
2020. During the year ended December 31, 2020, the Company repurchased
and retired common stock in the amount of $11,052,000.
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 the year ended December 31, 2019, the Company repurchased
and retired common stock in the amount of $15,619,000.
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 the year ended December 31, 2018, the Company repurchased
and retired common stock in the amount of $894,000.
The following table sets forth certain financial ratios for the years ended
December 31, 2020, 2019, and 2018.
Net income:
To average assets
To average shareholders’ equity
Dividends declared per share to
net income per share
Average shareholders’ equity to
average assets
2020
2019
2018
1.11%
8.85%
1.36%
9.39%
1.35%
10.07%
26.99%
26.22%
20.00%
12.54%
14.51%
13.40%
Management considers capital requirements as part of its strategic planning
process. The strategic plan calls for continuing increases in assets and liabilities,
and the capital required may therefore be in excess of retained earnings. The
ability to obtain capital is dependent upon the capital markets as well as our
performance. Management regularly evaluates sources of capital and the timing
required to meet its strategic objectives.
The Board of Governors, the FDIC and other federal banking agencies have
issued risk-based capital adequacy guidelines intended to provide a measure of
capital adequacy that reflects the degree of risk associated with a banking
organization’s operations for both transactions reported on the balance sheet as
assets, and transactions, such as letters of credit and recourse arrangements, which
are reported as off-balance-sheet items.
The following table presents the Company’s regulatory capital ratios as of
December 31, 2020 and December 31, 2019.
December 31, 2020
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio (CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
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
Actual Ratio
Amount
Ratio
(Dollars in thousands)
$
$
$
$
$
$
$
$
178,407
173,407
178,407
191,572
172,945
167,945
172,945
182,325
9.28%
14.10%
14.50%
15.58%
11.38%
14.55%
14.98%
15.79%
58
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
CAPITAL RESOURCES
(Continued)
LIQUIDITY
The following table presents the Bank’s regulatory capital ratios as of
December 31, 2020 and December 31, 2019
Actual Ratio
Minimum regulatory
requirement (1)
Minimum requirement
for ‘‘Well-Capitalized’’
Institution
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2020
Tier 1 Leverage
Ratio
$ 177,269
9.23% $
76,852
4.00% $
96,065
5.00%
Common Equity
Tier 1 Ratio
(CET 1)
Tier 1 Risk-Based
Capital Ratio
Total Risk-Based
Capital Ratio
December 31, 2019
Tier 1 Leverage
$ 177,269
14.41% $
55,346
7.00% $
79,945
6.50%
$ 177,269
14.41% $
73,795
8.50% $
98,394
8.00%
$ 190,434
15.48% $
98,394
10.50% $ 122,992
10.00%
Ratio
$ 171,332
11.27% $
60,810
4.00% $
76,012
5.00%
Common Equity
Tier 1 Ratio
(CET 1)
Tier 1 Risk-Based
Capital Ratio
Total Risk-Based
Capital Ratio
$ 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%
(1) The minimum regulatory requirement threshold includes the capital conservation buffer
of 2.50%.
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,
2020, all of the trust preferred securities that have been issued qualify as Tier 1
capital. The trust preferred securities mature on October 7, 2036, are redeemable
at the Company’s option beginning five years after issuance, and require quarterly
distributions by the Trust to the holder of the trust preferred securities at a
variable interest rate which will adjust quarterly to equal the three-month LIBOR
plus 1.60%.
The Trust used the proceeds from the sale of the trust preferred securities to
purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s
junior subordinated notes (the Notes). The Notes bear interest at the same
variable interest rate during the same quarterly periods as the trust preferred
securities. The Notes are redeemable by the Company on any January 7, April 7,
July 7, or October 7 on or after October 7, 2012 or at any time within 90 days
following the occurrence of certain events, such as: (i) a change in the regulatory
capital treatment of the Notes (ii) in the event the Trust is deemed an investment
company or (iii) upon the occurrence of certain adverse tax events. In each such
case, the Company may redeem the Notes for their aggregate principal amount,
plus any accrued but unpaid interest.
The Notes may be declared immediately due and payable at the election of the
trustee or holders of 25% of the aggregate principal amount of outstanding
Notes in the event that the Company defaults in the payment of any interest
following the nonpayment of any such interest for 20 or more consecutive
quarterly periods. Holders of the trust preferred securities are entitled to a
cumulative cash distribution on the liquidation amount of $1,000 per security.
For each January 7, April 7, July 7 or October 7 of each year, the rate will be
adjusted to equal the three month LIBOR plus 1.60%. As of December 31,
2020, the rate was 1.84%. Interest expense recognized by the Company for the
years ended December 31, 2020, 2019, and 2018 was $130,000, $210,000 and
$199,000, respectively.
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, 2020, the Company had
unpledged securities totaling $532,673,000 available as a secondary source of
liquidity and total cash and cash equivalents of $70,278,000. Cash and cash
equivalents at December 31, 2020 increased 33.67% compared to December 31,
2019. 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, 2020, our available borrowing capacity
includes approximately $110,000,000 in Federal funds lines with our
correspondent banks and $235,371,000 in unused FHLB advances. At
December 31, 2020, 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, 2020 and 2019:
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,
2020
2019
$
$
$
$
$
$
$
$
$
$
110,000 $
- $
70,000
-
235,371 $
- $
435,152 $
379,831 $
304,987
-
446,742
410,788
13,323 $
- $
13,538 $
13,703 $
4,931
-
5,065
5,036
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
$326,179,000 as of December 31, 2020 compared to $291,182,000 as of
December 31, 2019. For a more detailed discussion of these financial
instruments, see Note 12 to the audited Consolidated Financial Statements in this
Annual Report.
59
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OFF-BALANCE SHEET ITEMS
(Continued)
Allowance for Credit Losses
Contractual Obligations
The contractual obligations of the Company, summarized by type of obligation
and contractual maturity at December 31, 2020, are as follows:
Less Than
One Year
One to
Three
Years
Three to
Five
Years
After
Five
Years
Total
$ 1,709,300 $ 11,071 $
1,453 $
886 $ 1,722,710
-
1,753
-
3,564
-
2,406
5,155
1,944
5,155
9,667
(In thousands)
Deposits
Subordinated
Notes
Operating leases
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 4 to the consolidated financial statements under the
heading ‘‘Allowance for Credit Losses’’.
Total
$ 1,711,053 $ 14,635 $
3,859 $
7,985 $ 1,737,532
Goodwill
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. 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. See ‘‘Capital
Resources.’’
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. see
Note 9—Leases in the financial statements included in this Form 10-K.
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.
For acquisitions, we are required to record the assets acquired, including
identified intangible assets such as goodwill, and the liabilities assumed at their
fair value. The carrying value of goodwill recorded must be reviewed for
impairment at the reporting unit level, on an annual basis, as well as on an
interim basis if events or changes indicate that the asset might be impaired.
Management has determined that the Company has one reporting unit. An
impairment loss must be recognized for any excess of carrying value over fair
value of the goodwill. The determination of fair values is based on valuations
using management’s assumptions of future growth rates, future attrition, discount
rates, multiples of earnings or other relevant factors. Changes in these factors, as
well as downturns in economic or business conditions, could have a significant
adverse impact on the carrying value of goodwill and could result in impairment
losses affecting our financial statements as a whole and our banking subsidiary in
which the goodwill resides. The Company performs its annual evaluation of
goodwill impairment in the third quarter of each year and may elect to perform
a quantitative impairment analysis or first conduct a qualitative analysis to
determine if a quantitative analysis is necessary. Additionally, the Company
evaluates goodwill impairment on an interim basis if events or changes in
circumstances between annual tests indicate additional testing may be warranted
to determine if goodwill might be impaired.
A prolonged COVID-19 outbreak, or any other epidemic that harms the
global economy, U.S. economy, or the economies in which we operate could
adversely affect our operations. In the third quarter 2020, the Company engaged
a third party valuation specialist to assist with the performance of the
quantitative goodwill impairment test in response to continued macroeconomic
deterioration and the ongoing impacts to the banking industry and markets in
which the Company operates. The third party specialist estimated the fair value
of the reporting unit by weighting results from various market approaches and
the income approach. Significant assumptions inherent in the valuation
methodologies for goodwill that were employed included, but were not limited
to, prospective financial information, growth rates, terminal value, discount rates,
and comparable multiples from publicly traded companies in our industry. Based
on this quantitative test, it was determined that the fair value of the reporting
unit exceeded the carrying value.
As of December 31, 2020, based on our qualitative assessment, it was
determined that it was more likely than not that the fair value of the reporting
unit exceeded its carrying amount, including goodwill.
See Note 6 ‘‘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, 2020, 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.
60
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, 2020,
74.00% 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, 2020, 86.06% 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, 2020. 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, 2020 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, 2020, 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,
2020
Interest Income
Rates at
2020
$
59,700 $
62,300
63,000
63,100
62,800
61,200
(3,100)
(500)
200
300
-
(1,600)
(4.94)%
(0.80)%
0.32%
0.48%
-
(2.55)%
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
61
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, 2020 and 2019:
December 31, 2020
December 31, 2019
Rate Type
(Dollars in thousands)
Balance
Percent of
Total
Balance
Percent of
Total
Variable rate
Fixed rate
$
817,678
287,281
74.00% $
26.00%
646,070
295,793
68.59%
31.41%
Total gross loans
$ 1,104,959
100.00% $
941,863
100.00%
Approximately 74.00% of our loan portfolio is tied to adjustable rate indices
and 32.79% of our loan portfolio reprices within 90 days. As of December 31,
2020, we had 1,702 commercial and real estate loans totaling $527,265,000 with
floors ranging from 3.25% to 6.75% 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, 2020 and 2019:
Repricing
(Dollars in thousands)
< 1 Year
1-3 Years
3-5 Years
> 5 Years
December 31, 2020
December 31, 2019
Balance
$
455,859
233,153
274,800
141,147
Percent of
Total
Balance
Percent of
Total
41.26% $
21.10%
24.87%
12.77%
313,922
224,591
275,342
128,008
33.33%
23.85%
29.23%
13.59%
Total gross loans
$ 1,104,959
100.00% $
941,863
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.
62
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 5, 2021, the Company had approximately
934 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, 2019
June 30, 2019
September 30, 2019
December 31, 2019
March 31, 2020
June 30, 2020
September 30, 2020
December 31, 2020
$
Sales Prices for the Company’s Common Stock
High
20.35
21.48
21.75
22.15
21.69
16.81
15.68
16.70
Low
18.10
19.08
18.97
19.24
10.68
10.59
11.51
12.25
$
The Company paid common share cash dividends of $0.44 and $0.43 per share in 2020 and 2019, respectively. The Company’s primary source of income with which to
pay cash dividends are dividends from the Bank. See Note 13 in the audited Consolidated Financial Statements in Item 8 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.
63
Investing in
Our Community
Ag Lenders Society of California
American Bankers Association
American Cancer Society
American Heart Association
American Pistachio Growers
Ann’s Kids For Christmas
Associated Students, Inc. Food Pantry - Sacramento State
Atwater Ag Boosters
Boys & Girls Club El Dorado County Western Slope
Building Industry Association of Tulare/Kings Counties
Building Owners & Managers Association of Sacramento
Business Organization of Old Town
California Agricultural Leadership Foundation
California Armenian Home
California Bankers Association
California Financial Crimes Investigators Association
California Fresh Fruit Association
California Society of Association Executives
California Society of Certified Public Accountants
California State University, Fresno – Ag One Foundation
California State University, Fresno – Bulldog Foundation
California State University, Fresno – Craig School of Business
California State University, Fresno – Maddy Institute
California Tomato Growers Association
California Women For Agriculture - Merced Chapter
Catholic Charities Diocese of Fresno
Centers For Living
Central California Food Bank
Central Sierra Historical Society
Central Sierra Resiliency Fund
Central Valley Community Foundation
Central Valley SCORE
City of Kerman
Clovis Chamber of Commerce
Community Medical Foundation
Construction Industry Education Foundation - Sacramento
Regional Builders Exchange
Clovis Rodeo Association
Doug McDonald Scholarship
Economic Development Corporation
El Dorado Hills Chamber of Commerce
Emergency Food Bank of Stockton/San Joaquin
Exeter Chamber of Commerce
Exeter Lions Club
FED Corp
Folsom Chamber of Commerce
Folsom Cordova Community Partnership
Folsom Cordova Unified School District
Folsom Garden Club
Folsom High School
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Folsom, El Dorado & Sacramento Historical Railroad Association
FoodLink For Tulare County Inc.
Fresno Association of REALTORS
Fresno Business Council
Fresno Chamber Of Commerce
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Fresno Metro Black Chamber of Commerce
Fresno Police Chaplaincy
Girl Scouts of Central California South
Greater Stockton Chamber of Commerce
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Independent Community Bankers Of America
Institute of Real Estate Management - Sacramento Valley
Kerman 4-H Club
Kerman Lions Basketball Boosters Club
Kings County Farm Bureau
Kings/Tulare Homeless Alliance
Kiwanis Club of Fresno
Kiwanis Club of Stockton
Lighthouse Counseling & Family Resource Center
Lodi Chamber of Commerce
Loel Senior Center and Gardens
Love Inc. of Fresno
Love Inc. of Merced
Madera Chamber of Commerce
Madera Community Hospital Foundation
Madera County Farm Bureau
Madera County Food Bank
Make-A-Wish Northeastern & Central California
and Northern Nevada
Marjaree Mason Center
Merced County Fair
Merced County Farm Bureau
Merced County Food Bank
Modesto Chamber of Commerce
National Association of Government Guaranteed Lenders
New Beginnings For Merced County Animals
North State Building Industry Association
64
Oakhurst Area Chamber of Commerce
Orangevale-Fair Oaks Food Bank
Placer Food Bank
Placer Society for Prevention of Cruelty to Animals
Poverello House
Radiant Church
Rancho Cordova Chamber of Commerce
Rebuilding Together Sacramento
Rodeo Tough Productions
Ronald McDonald House Charities of The Central Valley
Roseville Area Chamber of Commerce
Rotary Club of Clovis
Rotary Club of Fair Oaks
Rotary Club of Fig Garden
Rotary Club of Fresno
Rotary Club of Kerman
Rotary Club of Madera
Sacramento Food Bank & Family Services
Sacramento Master Singers
Sacramento Metro Chamber of Commerce
Sacramento Regional Builders Exchange
Sacramento Self-Help Housing Inc.
San Joaquin Farm Bureau Federation
San Joaquin River Parkway and Conservation Trust, Inc.
Second Harvest Food Bank
Self-Help Enterprises
Sequoia Council of the Boy Scouts of America
Shingle Springs Cameron Park Chamber of Commerce
Sierra Pacific High School Booster Club
Signature User Group
Spring Valley Elementary School
St. Albans Country Day School
St. Joachim Catholic Church
St. Joachim’s Catholic School
St. Jude Children’s Research Hospital
STAND Affordable Housing Program
Stanislaus County Farm Bureau
Stockton Athletic Hall Of Fame
Stockton Shelter For The Homeless
The Bank CEO Network
The Downtown Fresno Partnership
The Exeter Art Gallery & Museum
The First Tee of Greater Sacramento
The Impact Foundry
The Risk Management Association
The Salvation Army
The Salvation Army - Tulare Corps
Tulare County Farm Bureau
Twin Lakes Food Bank
Valley Children’s Healthcare Foundation
Valley Crime Stoppers
Valley Teen Ranch
Visalia Chamber of Commerce
Visalia Economic Development Corporation
West Visalia Kiwanis Club
Western Payments Alliance
65
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
Suite A
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
Commercial Lending
Agribusiness
(559) 323-3319
Real Estate
(559) 323-3346
SBA
(559) 323-3376
Greater Sacramento
(916) 859-2556
Mid-Valley
(209) 644-7824
Central Valley
(559) 323-3481
South Valley
(559) 594-9919 Ext. 6504
66
Investing In Relationships.