2021
ANNUAL REPORT
TO OUR
SHAREHOLDERS
A Year Of Resilience, Recovery And
Resounding Success
The world collectively sighed relief as 2020 ended, hoping the year’s
challenges would disappear as 2021 dawned. When that didn’t happen,
our Company remained steadfast in the strength of our relationships with
team members, clients and our communities. We were tasked to continue
developing new innovations, client solutions and expanded digital
technologies, and our people rose to the challenge with resilience, achieving
solid financial performance for the Company in every key measure.
The ability to operate confidently in a world of uncertainty is just one of
the dividends earned from over 40 years of investing in relationships.
A Year Of Highs And Lows For Our Nation,
State And Communities
The COVID-19 pandemic continued taking its toll in 2021. While
the availability of stimulus programs and vaccines brought cautious
optimism, it was often overshadowed as variants of the virus brought
new waves of infection.
The nation’s economy was strong in 2021, led by a soaring stock market,
a stable interest rate environment and an improved unemployment rate.
But this was tempered by inflation, which hit a 39-year high in November
with prices up nearly seven percent over the previous year, according to
the consumer price index. Supply chain disruptions impacted businesses
and consumers alike – an issue that remains problematic.
The Company reported assets as of December 31, 2021 of
$2,450,139,000. Net income for the year ended December 31, 2021
was $28,401,000, and we enjoyed strong growth in both loans
(reaching $1,039,111,000) and total deposits (reaching $2,122,797,000).
In 2021, the Board of Directors declared dividends for all four quarters
totaling $0.47 per share. And to underscore the year’s accomplishments,
the Company’s Tangible Book Value improved by nearly seven percent
over 2020.
A Year Of Leadership Transition With Unchanged Direction
In November 2021, James J. Kim was promoted to succeed the retiring
James M. Ford as President and CEO of the Company and CVCB – just
the fourth since 1980. On behalf of our Board, we thank Jim Ford for his
many positive contributions to the Company’s success as one of Central
California’s leading community banks.
Also in November, Blaine Lauhon was promoted to Executive Vice
President, Chief Banking Officer, and Dawn Cagle was promoted to
Executive Vice President, Chief Human Resources Officer. Blaine is an
experienced and highly-regarded community banker who leads the
strategic direction, management and profitability of CVCB’s Banking
Services division. Dawn is responsible for talent development, diversity,
equity and inclusion initiatives, team engagement and numerous Human
Resources activities.
In California, another disastrous wildfire season impacted forested and
urbanized areas, even as individuals and businesses were rebuilding from
the previous year’s fires – a recurring theme in the state’s ongoing drought
conditions. The availability of water remained a concern throughout
California, particularly in the Central Valley where low rainfall and modest
to zero water allocations had – and have – the agricultural community
deeply concerned.
A Year Of Unrivaled Commitment To Our People And Clients
In 2021, as always, the backbone of our Company’s strength was our
commitment to investing in our people, from recruitment and training to
expanded recognition programs – all with the empowerment to live our
mission and exceed expectations in every relationship. The quality of our
people and our community banking legacy are cornerstones of who we are,
enabling us to attract the highest levels of banking talent.
A Year Of Strength And Growth For CVCB
Despite 2021’s volatility, the Company achieved growth and positive fiscal
results in every key category while maintaining the excellent deposit base
and asset quality for which Central Valley Community Bank (CVCB)
is recognized. This speaks highly of our team of professional bankers who
invest in relationships and provide our clients and communities with a
service experience unmatched in our marketplace.
Additionally, our executive leadership continued to step up in 2021,
ensuring uninterrupted banking service throughout the pandemic, while
providing a safe environment for our team, clients and our communities.
This fostered an environment of further investment in client relationships,
driving our professional bankers to go above-and-beyond the expected to
help clients succeed. Our role as business advocates has resonated well with
clients, especially in the recent pandemic years.
Another factor was the second round of SBA Paycheck Protection Program
(PPP) loans in 2021 that provided 512 small business clients with
approximately $78 million. CVCB was also integral in securing forgiveness
for nearly all PPP loans. Members of our business community continue to
share their appreciation for the one-on-one assistance we provided.
Our clients also benefited from our commitment to the most enhanced
digital processes and advanced security protocols. Our Company is
constantly increasing cybersecurity measures, including educating and
testing our team on the latest security best practices and sharing that
knowledge with our clients and community through an
easily-accessible library of proven online resources.
1
A Year Of Industry And Business Recognition
CVCB celebrated a number of awards and achievements in 2021, with
highlights that included:
• Earning the Premier Performing Bank designation by The Findley Reports.
• Earning a 5-Star Superior rating from Bauer Financial.
• Being named loan guarantee Lender of the Year by the Valley Small
Business Development Corporation.
• Being honored by The Business Journal as “Best Business Bank” for
the eighth consecutive year.
Entering 2022 With Renewed Vision
While many will remember 2021 as a year of prolonged pandemic
challenges, inflation and unprecedented forest fires, we will remember it
as another of the 42 years in which we invested in relationships with our
team, clients, shareholders and communities.
A year in which our people, leadership and mission were
rightfully recognized.
A year in which we continued to demonstrate who we are through
the quality of our people, drawing even more qualified banking talent
to our ranks.
A year in which our role as a community bank was needed
and valued.
As we publish this report, a fresh challenge has emerged: a war in
Ukraine that has drawn worldwide attention, with uncertainty as to its
impact on California and our local economy. While we can’t always see
what the future holds, we can see reasons to be optimistic about our
Company thanks to a solid foundation of longstanding shareholder and
client relationships.
We believe we are well-positioned to support our mission, regardless of
what the year ahead might bring, through those who have stood alongside
us through 42 years of strength, growth and innovation.
Thank you for standing with our Company. We look forward to
demonstrating daily our commitment to standing with you.
Sincerely,
James J. Kim
President and CEO,
Central Valley Community Bancorp
Central Valley Community Bank
Daniel J. Doyle
Daniel J. Doyle
Chairman of the Board,
Chairman of the Board,
Central Valley Community Bancorp
Central Valley Community Bancorp
Central Valley Community Bank
Central Valley Community Bank
A Year Of Renewal, Relief And Re-energizing
In May 2021, CVCB celebrated the opening of our newly-rebuilt Banking
Center in Prather, completing an extensive renovation following the Creek
Fire, one of California’s largest recorded forest fires. Throughout
construction during the pandemic and Creek Fire, our team had operated
from a small, temporary location to serve our Central Sierra communities.
For serving the Central Sierra through our support of Creek Fire relief and
recovery efforts, CVCB was honored with a recognition from Fresno
County. Our impactful response to the fire also earned the People’s Choice
Award in the ICBA 2021 National Community Bank Service Awards. And
for going above-and-beyond in supporting communities impacted
by the Creek Fire, CVCB was named a Top 10 institution in the CRMNext
“Right on the Money” program.
While our Central Valley team was focused on serving clients in the
aftermath of the Creek Fire, our Greater Sacramento team also provided fire
relief support for clients displaced by the Caldor Fire in Northern California.
Since the day we opened in 1980, we have been steadfast in our
commitment to our clients and communities. We will continue to invest in
these fire-impacted areas through the rebuilding of homes and businesses
and the reseeding of forests for future generations.
A Year Of Continued Philanthropy
Investing in our communities has always been one of our guiding
principles and CVCB’s fire relief support in 2021 is a great example.
Whether through hands-on volunteerism, financial education or
participating in grant and match programs to maximize our giving,
our philanthropic involvement ranged from supporting food and
housing security to serving pandemic-impacted organizations to
providing small business financial education and more.
Highlights for the year covered several important categories, including:
Community Improvement: Federal Home Loan Bank
of San Francisco Affordable Housing Program (AHP) Grants
• CVCB helped Visionary Home Builders of California, Inc.,
based in Stockton, receive grants totaling $1,080,000 to support
advocating for healthy, vibrant and safe communities and
educational opportunities for those in need.
• The Fresno Area Hispanic Foundation (FAHF) also received
assistance with a $25,000 Access to Housing and Economic
Development (AHEAD) grant to support women entrepreneurs.
Small Business Advocacy
• Through CVCB’s nearly 20-year partnership with SCORE,
financial education and startup advice were provided to small
businesses and entrepreneurs in need.
Charitable Community Support
• Banking Center team and client fundraising drive awarded
Make-A-Wish Northeastern & Central California and Northern
Nevada Chapters funds to fulfill wishes for two deserving children
with critical illnesses.
• Hands-on volunteerism and donations supported 15 food banks
in the sixth Business Food Fund Challenge, and encouraged local
businesses to do the same.
• Team-driven support provided hundreds of holiday gifts to
deserving children through The Salvation Army’s Angel Tree
program - an 8+-year tradition.
• United Way employee giving program provided annual funds
through this 20+ year partnership.
2
BOARD OF DIRECTORS
INVESTING IN RELATIONSHIPS
Daniel J. Doyle
Chairman of the Board,
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.
James J. Kim
President and CEO,
Central Valley Community Bancorp
Central Valley Community Bank
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 by Telus
Louis C.
McMurray
President,
Charles McMurray Co.
Karen A.
Musson
Marketing and Media,
Gar Bennett
Dorothea D.
Silva
Principal,
Avaunt Ltd. CPAs
and Consultants
William S.
Smittcamp
President and CEO,
Wawona Frozen Foods
3
MAKING
HISTORY TOGETHER
The Company’s founders were a diverse group of local business
owners (including a few former bankers) who lived in the region and
knew first-hand how a true community bank would benefit this
unique area.
They envisioned a community bank that would invest in and grow
the county’s distinctive communities, with Banking Centers that
would employ service-driven professional bankers who understood
the businesses and needs of their communities. What started in Clovis
expanded to the Central Sierra communities of Shaver Lake and
Prather, then to Fresno and along the CA Highway 99 corridor to
Greater Sacramento in the north and Visalia in the south. The
founders’ vision had been fulfilled, and continues to be realized in
CVCB’s daily operations.
Driven By Community Support
As a community bank, CVCB is closely connected with its
communities where team members live, work and raise their families
and wants them to grow stronger and more successful. To achieve this,
CVCB supports a wide variety of community organizations with
leadership involvement, financial donations, volunteerism and
financial education.
Inspired By The Future
As CVCB reflects on its long history and how its legacy of service
and vision has shaped the Company to this day, there is abundant
reason to be excited about its future. Guided by the Company’s
proven leadership and Board of Directors, CVCB’s greatest days lie
ahead. The Company is honored to share those days with the team
members, clients, investors and communities whose support is
appreciated and valued.
The Company is regulated by the Federal Deposit Insurance Corporation,
Federal Reserve Board, Securities and Exchange Commission, and the
California Department of Financial Protection & Innovation.
Elevating Community Banking Since 1980
Central Valley Community Bank (CVCB) has an enviable track record of
financial strength, security and stability gained over its 42-year history.
Today’s CVCB is a well-capitalized institution with assets exceeding
$2.4 billion as of December 31, 2021. The Company is proud to receive
continued industry acclaim and national recognition for its excellent
financial performance.
CVCB is distinguished from other financial institutions by its people,
dedication to client advocacy, exemplary “relationship banking,” strong
community support and its mission to exceed expectations. The
Company has a passion for providing customized solutions to guide
businesses and communities to succeed through its personal approach
and full range of business and consumer banking products, lending and
digital services that keep pace with the industry.
Full-service Banking Centers are located in 16 communities within
California’s San Joaquin Valley and Greater Sacramento Region, as well as
Commercial Lending, Real Estate, Agribusiness, Private Business
Banking and Cash Management Departments. All are under the
umbrella of Central Valley Community Bancorp (NASDAQ: CVCY),
established in 2000 as the holding company for CVCB.
Guided By Values
Despite CVCB’s growth and success, it has remained true to its founding
vision and commitment to the core values of teamwork, caring, inclusive,
excellence, accountability and integrity. The Company believes that
accountable corporate behavior is essential for a community bank, and
works hard to contribute to a more equitable, resilient future for clients,
team members, shareholders and the communities it serves.
Shaped By History
CVCB’s history has been written by many hands, but with one vision: to
help businesses and communities succeed by exceeding expectations at
every opportunity.
The Central Valley Community Bank you see today is the product of that
history – the embodiment of the vision and values upon which it was
established in 1979. The Company opened its doors on January 10,
1980, in the Fresno County city of Clovis, with 12 professional bankers
and assets of $2,000,000.
4
TRUSTED LEADERSHIP
MIS SION
Inspire and empower our team to
enrich and invest in every relationship
by exceeding expectations.
VALUES
Teamwork, Accountability, Excellence,
Caring, Integrity and Inclusive
HOLDING COMPANY & BANK OFFICERS
James J. Kim
President and CEO
David A. Kinross
Executive Vice President,
Chief Financial Officer
Patrick A. Luis
Executive Vice President,
Chief Credit Officer
BANK EXECUTIVE MANAGEMENT
Teresa Gilio
Executive Vice President,
Chief Administrative Officer
Blaine C. Lauhon
Executive Vice President,
Chief Banking Officer
A. Ken Ramos
Executive Vice President,
Market Executive
Dawn M. Cagle
Executive Vice President,
Chief Human Resources Officer
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, Teresa Gilio, James J. Kim, A. Ken Ramos, Dawn M. Cagle and Blaine C. Lauhon
5
CORPORATE & COMMUNITY
RESPONSIBILITY
Environmental, Social And Governance (ESG)
At Central Valley Community Bank (CVCB), 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 bank’s areas of focus, which include:
community and charitable giving, responsible lending practices,
economic stability, sustainable practices, environmental and social
focuses, vendor management and employment practices, among others.
Since 1980, we have supported our clients with a full range of banking
and financial services, while supporting initiatives that provide financial
education and improve accessibility of financial solutions in our
communities, champion our environment and promote transparency,
accountability and diversity.
In 2020 and into 2021, with the immense hardships brought on by the
COVID-19 pandemic and California wildfires, we elevated our
community support to address the areas of food insecurity, housing and
social justice 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 ensures 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 operate with integrity that
inspires our clients and community to confidently place their trust in
Central Valley Community Bank.
Diversity, Equity And Inclusion (DEI)
Central Valley Community Bank’s 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 organization’s
success. This commitment is evident throughout our workplace and
our impact on the communities we serve.
2021 HIGHLIGHTS
COMMUNITY GIVING
$238,442.82
invested in Donations, Sponsorships,
Memberships and Associations
$27,000
Underwriting Food
& Housing Insecurity
2,083
2021 Service Hours
ECONOMIC STABILITY
OUTSTANDING CRA RATING
2019 – 2021
Helping Regions of Poverty
203Small Business
$52
Loans for
MILLION
2021
504
PPP Loans Totaling
$59,524,000
2020
1,042
PPP Loans Totaling
$129,348,000
RESPECTABLE
WAGES
SUSTAINABLE PRACTICES
Focus on
ENERGY
EFFICIENCY,
RECYCLING &
EDUCATION
COMPANY
RESOURCE
& DROUGHT
MANAGEMENT
ENVIRONMENTAL & SOCIAL FOCUSES
For additional information on ESG and DEI statements, visit our website at
www.cvcb.com or contact David Kinross, EVP, Chief Financial Officer
at (800) 298-1775.
CLIMATE CHANGE,
DIVERSITY,
EQUITY & INCLUSION
6
6
TREND ANALYSIS
CENTRAL VALLEY COMMUNITY BANCORP
,
1
0
4
8
2
$
.
1
3
2
$
9
8
2
,
1
2
$
3
4
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2
$
,
7
4
3
0
2
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6
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0
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1
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,
9
5
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1
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2
6
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1
$
4
5
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1
$
0
1
.
1
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5
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0
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3
5
6
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6
0
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1
$
8
2
1
,
2
1
9
$
,
3
8
8
0
3
9
$
,
3
4
3
3
9
7
$
2017 2018 2019 2020 2021
2017 2018 2019 2020 2021
2017 2018 2019 2020 2021
Net Income (In Thousands)
Diluted Earnings Per Share
Average Total Loans (In Thousands)
,
6
7
5
4
7
9
,
1
$
4
9
1
,
8
6
5
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1
$
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3
3
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$
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5
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0
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1
1
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0
0
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%
9
3
9
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%
5
8
8
.
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9
6
7
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,
7
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2
3
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1
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1
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0
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6
9
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1
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4
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1
$
,
5
1
6
7
6
2
2
$
,
2017
2018 2019 2020 2021
2017
2018 2019 2020 2021
2017
2018 2019 2020 2021
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
100.00
100.00
100.00
118.21
114.65
102.25
102.02
98.75
97.07
176.39
Russell 2000
160.89
S&P US BMI
Banks
115.10
Central Valley
Community
Bancorp
135.64
128.06
113.86
153.62
118.33
80.57
2016
2017
2018
2019
2020
2021
Note: The graph above shows the cumulative total shareholder return on Central Valley Community Bancorp common stock compared
to the cumulative total returns for the Russell 2000 Index and the S&P US BMI Banks, measured as of the last trading day of each year shown.
The graph assumes an investment of $100 on December 31, 2016 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.
In prior years, the Company used the SNL Bank NASDAQ Index as an industry index in the graph above, but due to the discontinuance of
this index, the Company began using the S&P US BMI Banks Index in 2021.
Source: S&P Global Market Intelligence
© 2022
8
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2021 and 2020 (In thousands, except share amounts)
ASSETS
Cash and due from banks
Interest-earning deposits in other banks
Total cash and cash equivalents
Available-for-sale debt securities
Equity securities
Loans, less allowance for credit losses of $9,600 at December 31, 2021 and $12,915 at December 31, 2020
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
Subordinated 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: 11,916,651 at
December 31, 2021 and 12,509,848 at December 31, 2020
Retained earnings
Accumulated other comprehensive income, net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
$
$
2021
2020
$
$
$
29,412
134,055
163,467
1,109,208
7,416
1,029,511
8,380
39,553
5,595
53,777
522
32,710
2,450,139
963,584
1,159,213
2,122,797
39,454
40,043
2,202,294
-
66,820
173,393
7,632
247,845
34,175
36,103
70,278
710,092
7,634
1,089,432
8,228
28,713
5,595
53,777
1,183
29,164
2,004,096
824,889
897,821
1,722,710
5,155
31,210
1,759,075
-
79,416
150,749
14,856
245,021
$
2,450,139
$
2,004,096
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, 2021, 2020, and 2019 (In thousands, except per share amounts)
2021
2020
2019
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 subordinated debentures
Other
Total interest expense
Net interest income before provision for credit losses
(Reversal of ) Provision for credit losses
Net interest income after provision for credit losses
Non-interest income:
Service charges
Appreciation in cash surrender value of bank owned life insurance
Interchange fees
Loan placement fees
Net realized gains on sales and calls of investment securities
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
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
$
$
$
$
$
54,077
129
14,044
5,606
73,856
1,036
266
-
1,302
72,554
(4,300)
76,854
1,901
840
1,784
1,974
501
321
1,684
9,005
28,720
4,882
831
2,394
1,665
818
2,868
422
527
320
661
3,734
47,842
38,017
9,616
28,401
2.32
2.31
0.47
$
$
$
$
$
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.
10
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Comprehensive Income
For the Years Ended December 31, 2021, 2020, and 2019 (In thousands)
Net income
Other Comprehensive (Loss) Income:
Unrealized (losses) gains on securities:
2021
2020
2019
$
28,401
$
20,347
$
21,443
Unrealized holdings (losses) gains arising during the period
Less: reclassification for net (gains) losses included in net income
Other comprehensive (loss) income, before tax
Tax benefit (expense) related to items of other comprehensive income (loss)
Total other comprehensive (loss) income
Comprehensive income
$
(9,755)
(501)
(10,256)
3,032
(7,224)
21,177
$
21,344
(4,252)
17,092
(5,053)
12,039
32,386
$
15,455
(5,199)
10,256
(3,032)
7,224
28,667
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, 2021, 2020, and 2019 (In thousands, except share amounts)
Balance, January 1, 2019
Net income
Other comprehensive income
Restricted stock granted, net of forfeitures
Cash dividend ($0.43 per common share)
Stock issued under employee stock purchase plan
Stock awarded to employees
Stock-based compensation expense
Repurchase and retirement of common stock
Stock options exercised
Balance, December 31, 2019
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 ($0.44 per common share)
Repurchase and retirement of common stock
Stock options exercised
Balance, December 31, 2020
Net income
Other comprehensive loss
Restricted stock granted, net of forfeitures
Stock issued under employee stock purchase plan
Stock awarded to employees
Stock-based compensation expense
Cash dividend ($0.47 per common share)
Stock options exercised
Repurchase and retirement of common stock
Balance, December 31, 2021
Common Stock
Shares
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
(Net of Taxes)
Total
Shareholders’
Equity
13,754,965
$ 103,851
$ 120,294
$
(4,407)
$
219,738
-
-
16,495
-
12,286
5,295
-
-
-
-
-
216
100
555
(768,754)
(15,619)
32,120
13,052,407
276
89,379
-
-
15,764
13,008
6,548
-
-
-
-
199
-
141
470
-
(621,379)
(11,052)
43,500
12,509,848
279
79,416
-
-
20,720
12,521
10,529
-
-
24,265
-
-
-
204
157
405
-
257
(661,232)
(13,619)
21,443
-
-
(5,805)
-
-
-
-
-
135,932
20,347
-
-
-
-
-
(5,530)
-
-
150,749
28,401
-
-
-
-
-
(5,757)
-
-
7,224
-
-
-
-
-
-
-
2,817
-
12,039
-
-
-
-
-
-
-
14,856
-
(7,224)
-
-
-
-
-
-
-
11,916,651
$
66,820
$ 173,393
$
7,632
$
21,443
7,224
-
(5,805)
216
100
555
(15,619)
276
228,128
20,347
12,039
199
-
141
470
(5,530)
(11,052)
279
245,021
28,401
(7,224)
-
204
157
405
(5,757)
257
(13,619)
247,845
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, 2021, 2020, and 2019 (In thousands)
2021
2020
2019
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Net decrease (increase) in deferred loan costs
Depreciation
Accretion
Amortization
Stock-based compensation
(Reversal) provision for credit losses
Net realized gains on sales and calls of available-for-sale investment securities
Net gain on sale and disposal of equipment
Net change in equity investments
Increase in bank owned life insurance, net of expenses
Net gain on bank owned life insurance
Net increase in accrued interest receivable and other assets
Net increase in accrued interest payable and other liabilities
Benefit (provision) 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
Net decrease (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 investing activities
Cash Flows From Financing Activities:
Net increase in demand, interest-bearing and savings deposits
Net increase (decrease) in time deposits
Proceeds from issuance of subordinated debt
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 financing activities
Increase in cash and cash equivalents
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes
Operating cash flows from operating leases
Non-cash investing and financing activities:
Initial recognition of operating lease right-of-use assets
$
28,401
$
20,347
$
3,483
897
(1,404)
8,102
405
(4,300)
(501)
(8)
218
(840)
-
(2,052)
8,989
1,465
42,855
(495,879)
26,222
54,822
60,738
(1,049)
(10,000)
-
-
9
(365,137)
399,903
184
34,299
-
-
-
-
(13,619)
204
257
(5,757)
415,471
93,189
70,278
163,467
1,166
8,155
2,259
-
$
$
$
$
$
(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
70,278
1,706
5,120
2,240
-
$
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
21,443
(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
52,574
2,517
9,140
1,643
10,129
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 - The ongoing novel coronavirus disease (“COVID-19”)
pandemic caused significant disruption in the local, national and global economies
and financial markets in 2020. While the economy appears to be on a track for recovery
and most COVID-19 related restrictions have been lifted, continuation and
worsening of COVID-19 could cause reductions in business activity and financial
transactions, labor shortages, supply chain interruptions and overall economic and
financial market instability. Such events could cause the Company to experience a
material adverse effect on its business operations, asset valuations, financial
condition, and results of operations. Material adverse effects may include all or a
combination of losses in operations, higher provisions for credit losses and valuation
impairments on the Company’s investments, loans, goodwill and 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.
14
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, 2021, there
were no transfers between categories.
Gains or losses on the sale of investment securities are computed on the specific
identification method. Interest earned on investment securities is reported in interest
income, net of applicable adjustments for accretion of discounts and amortization
of premiums. Premiums and discounts on securities are amortized or accreted on the
level yield method without anticipating prepayments, except for mortgage backed
securities where prepayments are anticipated.
An investment security is impaired when its carrying value is greater than its fair
value. Investment securities that are impaired are evaluated on at least a quarterly basis
and more frequently when economic or market conditions warrant such an
evaluation to determine whether such a decline in their fair value is other than
temporary. Management utilizes criteria such as the magnitude and duration of the
decline and the intent and ability of the Company to retain its investment in the
securities for a period of time sufficient to allow for an anticipated recovery in fair
value, in addition to the reasons underlying the decline, to determine whether the loss
in value is other than temporary. The term “other than temporary” is not intended
to indicate that the decline is permanent, but indicates that the prospect for a near-term
recovery of value is not necessarily favorable, or that there is a lack of evidence to
support a realizable value equal to or greater than the carrying value of the investment.
Once a decline in value is determined to be other than temporary, and management
does not intend to sell the security or it is more likely than not that the Company
will not be required to sell the security before recovery, for debt securities, only the
portion of the impairment loss representing credit exposure is recognized as a charge
to earnings, with the balance recognized as a charge to other comprehensive
income. If management intends to sell the security or it is more likely than not that
the Company will be required to sell the security before recovering its forecasted cost,
the entire impairment loss is recognized as a charge to earnings.
Loans - All loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at principal balances
outstanding net of deferred loan fees and costs, and the allowance for credit losses.
Interest is accrued daily based upon outstanding loan principal balances. However,
when a loan becomes impaired and the future collectability of interest and principal
is in serious doubt, the loan is placed on nonaccrual status and the accrual of interest
income is suspended. Any loan delinquent 90 days or more is automatically placed
on nonaccrual status. Any interest accrued but unpaid is charged against income.
Subsequent payments on these loans, or payments received on nonaccrual loans
for which the ultimate collectability of principal is not in doubt, are applied first to
principal until fully collected and then to interest.
Interest income on loans is discontinued at the time the loan is 90 days delinquent
unless the loan is well-secured and in process of collection. Consumer and credit card
loans are typically charged off no later than 90 days past due. Past due status is
based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual
or charged-off at an earlier date if collection of principal or interest is considered
doubtful. A loan placed on non-accrual status may be restored to accrual status when
principal and interest are no longer past due and unpaid, or the loan otherwise
becomes both well secured and in the process of collection. When a loan is brought
current, the Company must also have reasonable assurance that the obligor has the
ability to meet all contractual obligations in the future, that the loan will be repaid
within a reasonable period of time, and that a minimum of six months of satisfactory
repayment performance has occurred.
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 52 quarters, and qualitative factors including economic
trends in the Company’s service areas, industry experience and trends, industry and
geographic concentrations, estimated collateral values, the Company’s underwriting
policies, the character of the loan portfolio, and probable losses inherent in the
portfolio taken as a whole.
The Company segregates the allowance by portfolio segment. These portfolio
segments include commercial, real estate, and consumer loans. The relative significance
of risk considerations vary by portfolio segment. For commercial and real estate
loans, the primary risk consideration is a borrower’s ability to generate sufficient cash
flows to repay their loan. Secondary considerations include the creditworthiness of
guarantors and the valuation of collateral. In addition to the creditworthiness of a
borrower, the type and location of real estate collateral is an important risk factor
for real estate loans. The primary risk considerations for consumer loans are a
borrower’s personal cash flow and liquidity, as well as collateral value. The allowance
for credit losses attributable to each portfolio segment, which includes both
impaired loans and loans that are not impaired, is combined to determine the
Company’s overall allowance, which is included on the consolidated balance sheet.
Commercial:
Commercial and industrial - Commercial and industrial loans are generally
underwritten to existing cash flows of operating businesses. Additionally, economic
trends influenced by unemployment rates and other key economic indicators are
closely correlated to the credit quality of these loans. Past due payments may
indicate the borrower’s capacity to repay their obligations may be deteriorating.
Agricultural production - Loans secured by crop production and livestock are
especially vulnerable to two risk factors that are largely outside the control of
Company and borrowers: commodity prices and weather conditions.
Real Estate:
Owner-occupied commercial real estate - Real estate collateral secured by
commercial or professional properties with repayment arising from the owner’s
business cash flows. To meet this classification, the owner’s operation must occupy
no less than 50% of the real estate held. Financial profitability and capacity to meet
the cyclical nature of the industry and related real estate market over a significant
timeframe is essential.
Real estate construction and other land loans - Land and construction loans
generally possess a higher inherent risk of loss than other real estate portfolio
segments. A major risk arises from the necessity to complete projects within specified
costs and time lines. Trends in the construction industry significantly impact the
credit quality of these loans, as demand drives construction activity. In addition,
trends in real estate values significantly impact the credit quality of these loans, as
property values determine the economic viability of construction projects.
Agricultural real estate - Agricultural loans secured by real estate generally possess
a higher inherent risk of loss caused by changes in concentration of permanent
plantings, government subsidies, and the value of the U.S. dollar affecting the export
of commodities.
Investor commercial real estate - Investor commercial real estate loans generally
possess a higher inherent risk of loss than other real estate portfolio segments, except
land and construction loans. Adverse economic developments or an overbuilt
market impact commercial real estate projects and may result in troubled loans.
Trends in vacancy rates of commercial properties impact the credit quality of these
loans. High vacancy rates reduce operating revenues and the ability for properties to
produce sufficient cash flows to service debt obligations.
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.
15
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 2021. 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.
16
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, industry and 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 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
(“LIHTC”) partnerships is reported in other assets on the consolidated balance sheet.
The carrying value of the Company’s investments in LIHTC partnerships was
$2,551,000 and $2,462,000 at December 31, 2021 and 2020, respectively. The
unfunded commitments as of December 31, 2021 and 2020 were$203,000 and
$803,000, respectively. All commitments will be paid by the Company by 2032.
During the years ended December 31, 2021, 2020, and 2019, the Company recorded
amortization expense for the LIHTC investments totaling $511,000, $469,000,
and $390,000, respectively. The recognized tax benefits for the years ended
December 31, 2021, 2020, and 2019 totaled $415,000, $416,000, and $392,000,
respectively.
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
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2021 and at December 31, 2020.
Bank Owned Life Insurance - The Company has purchased life insurance policies
on certain key executives. Company owned life insurance is recorded at the amount
that can be realized under the insurance contract at the balance sheet date, which
is the cash surrender value adjusted for other charges or other amounts due that are
probable at settlement.
Business Combinations - The Company accounts for acquisitions of businesses
using the acquisition method of accounting. Under the acquisition method, assets
and liabilities assumed are recorded at their estimated fair values at the date of
acquisition. Management utilizes various valuation techniques included discounted
cash flow analyses to determine these fair values. Any excess of the purchase price over
amounts allocated to the acquired assets, including identifiable intangible assets,
and liabilities assumed is recorded as goodwill.
Goodwill - Business combinations involving the Bank’s acquisition of the equity
interests or net assets of another enterprise give rise to goodwill. Goodwill represents
the excess of the purchase price of acquired businesses over the net fair value of
assets, including identified intangible assets, acquired and liabilities assumed in the
transactions accounted for under the acquisition method of accounting. The value of
goodwill is ultimately derived from the Bank’s ability to generate net earnings after
the acquisitions. A decline in net earnings could be indicative of a decline in the fair
value of goodwill and result in impairment. For that reason, goodwill is assessed at
least annually for impairment.
The Company has selected September 30 as the date to perform the annual
impairment test. Management assessed qualitative factors including performance
trends and noted no factors indicating goodwill impairment. Goodwill is also tested
for impairment between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of the Company below its
carrying amount. No such events or circumstances arose during the fourth quarter of
2021, so goodwill was not required to be retested. Goodwill is the only intangible
asset with an indefinite life on the balance sheet.
Intangible Assets - The intangible assets at December 31, 2021 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,
2021 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 2021, so core
deposit intangibles were not required to be retested.
Loan Commitments and Related Financial Instruments - Financial instruments
include off-balance sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The face
amount of these items represents the exposure to loss, before considering customer
collateral or ability to repay. Such financial instruments are recorded when they are
funded.
Income Taxes - The Company files its income taxes on a consolidated basis with the
Bank. The allocation of income tax expense represents each entity’s proportionate
share of the consolidated provision for income taxes.
Income tax expense represents the total of the current year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred tax assets
and liabilities are recognized for the tax consequences of temporary differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on the date of
enactment. On the balance sheet, net deferred tax assets are included in accrued
interest receivable and other assets.
The realization of deferred income tax assets is assessed and a valuation allowance
is recorded if it is “more likely than not” that all or a portion of the deferred tax assets
will not be realized. ”More likely than not” is defined as greater than a 50%
chance. All available evidence, both positive and negative is considered to determine
whether, based on the weight of that evidence, a valuation allowance is needed.
Accounting for Uncertainty in Income Taxes - The Company uses a comprehensive
model for recognizing, measuring, presenting and disclosing in the financial statements
tax positions taken or expected to be taken on a tax return. A tax position is
recognized as a benefit only if it is more likely than not that the tax position would
be sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the more
likely than not test, no tax benefit is recorded.
Interest expense and penalties associated with unrecognized tax benefits, if any,
are classified as income tax expense in the consolidated statement of income.
Retirement Plans - Employee 401(k) plan expense is the amount of employer
matching contributions. Profit sharing plan expense is the amount of employer
contributions. Contributions to the profit sharing plan are determined at the discretion
of the Board of Directors. Deferred compensation and supplemental retirement
plan expense is allocated over years of service.
Earnings Per Common Share - Basic earnings per common share (EPS), which
excludes dilution, is computed by dividing income available to common shareholders
(net income after deducting dividends, if any, on preferred stock and accretion of
discount) by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock, such as stock options or warrants, result in
the issuance of common stock which shares in the earnings of the Company. All data
with respect to computing earnings per share is retroactively adjusted to reflect
stock dividends and splits and the treasury stock method is applied to determine the
dilutive effect of stock options in computing diluted EPS.
Comprehensive Income - Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity.
Loss Contingencies - Loss contingencies, including claims and legal actions arising
in the ordinary course of business, are recorded as liabilities when the likelihood of loss
is probable and an amount or range of loss can be reasonably estimated.
Management does not believe there are such matters that will have a material effect
on the financial statements.
Restrictions on Cash - Cash on hand or on deposit with the Federal Reserve Bank
was required to meet regulatory reserve and clearing requirements.
Share-Based Compensation - Compensation cost is recognized for stock options and
restricted stock awards issued to employees, based on the fair value of these awards
at the date of grant. A Black-Scholes-Merton model is utilized to estimate the fair
value of stock options, while the market price of the Company’s common stock at
the date of grant is used for restricted stock awards. Additionally, the compensation
expense for the Company’s employee stock ownership plan is based on the market
price of the shares as they are committed to be released to participant accounts.
Compensation cost is recognized over the required service period, generally defined
as the vesting period. For awards with graded vesting, 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
17
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 ofthe 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 allowance
for credit losses and continues to evaluate the potential impact on our consolidated
financial statements.
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
18
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.
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
activemarkets 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, 2021
Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Amount
Financial assets:
Cash and due from
banks
$
29,412 $
29,412 $
- $
- $
29,412
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
Subordinated
debentures
Accrued interest
payable
134,055
134,055
-
-
134,055
1,109,208
7,416
1,029,511
-
7,416
-
1,109,208
-
-
-
-
1,015,052
1,109,208
7,416
1,015,052
5,595
N/A
N/A
N/A
N/A
9,395
7
6,076
3,312
9,395
2,122,797
2,010,407
89,923
-
2,100,330
39,454
202
-
-
-
30
39,463
39,463
172
202
Notes to
Consolidated Financial Statements
2.
FAIR VALUE MEASUREMENTS (Continued)
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 $
- $
- $
34,175
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
Subordinated
debentures
Accrued interest
payable
36,103
36,103
-
-
36,103
710,092
7,634
1,089,432
-
7,634
-
710,092
-
-
-
-
1,087,124
710,092
7,634
1,087,124
5,595
N/A
N/A
N/A
N/A
8,834
9
3,617
5,208
8,834
1,722,710
1,691,647
90,008
-
1,781,655
5,155
65
-
-
-
41
3,693
3,693
24
65
These estimates do not reflect any premium or discount that could result from
offering the Company’s entire holdings of a particular financial instrument for sale
at one time, nor do they attempt to estimate the value of anticipated future business
related to the instruments. In addition, the tax ramifications related to the
realization of unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of these estimates.
These estimates are made at a specific point in time based on relevant market
data and information about the financial instruments. Because no market exists for a
significant portion of the Company’s financial instruments, fair value estimates are
based on judgments regarding current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly
affect the fair values presented.
The methods and assumptions used to estimate fair values are described as
follows:
(a) Cash and Cash Equivalents - The carrying amounts of cash and due from banks,
interest-earning deposits in other banks, and Federal funds sold approximate fair
values and are classified as Level 1.
(b) Investment Securities - Investment securities in Level 1 are mutual funds and fair
values are based on quoted market prices for identical instruments traded in active
markets. Fair values for investment securities classified in Level 2 are based on quoted
market prices for similar securities in active markets. For securities where quoted
prices or market prices of similar securities are not available, fair values are calculated
using discounted cash flows or other market indicators.
(c) Loans - Fair values of loans are estimated as follows:For variable rate loans that
reprice frequently and with no significant change in credit risk, fair values are based
on carrying values resulting in a Level 3 classification. Purchased credit impaired (PCI)
loans are measured at estimated fair value on the date of acquisition. Carrying
value is calculated as the present value of expected cash flows and approximates fair
value and included in Level 3. Fair values for other loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality resulting in a Level 3 classification.
Impaired loans are initially valued at the lower of cost or fair value. Impaired loans
carried at fair value generally receive specific allocations of the allowance for credit
losses. For collateral dependent real estate loans, fair value is commonly based on
recent real estate appraisals. These appraisals may utilize a single valuation approach
or a combination of approaches including comparable sales and the income
approach. Adjustments are routinely made in the appraisal process by the independent
appraisers to adjust for differences between the comparable sales and income data
available. Such adjustments are usually significant and typically result in a Level 3
classification of the inputs for determining fair value. Non-real estate collateral may
be valued using an appraisal, net book value per the borrower’s financial statements, or
aging reports, adjusted or discounted based on management’s historical knowledge,
changes in market conditions from the time of the valuation, and management’s
expertise and knowledge of the client and client’s business, resulting in a Level 3
fair value classification. Impaired loans are evaluated on a quarterly basis for additional
impairment and adjusted accordingly. The estimated fair values of financial
instruments disclosed above 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.
(g) Subordinated Debentures - 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.
(h) 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.
(i) 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, 2021 and 2020:
19
Notes to
Consolidated Financial Statements
2.
FAIR VALUE MEASUREMENTS (Continued)
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 Measurements Using
Fair Value
Level 1
Level 2
Level 3
December 31, 2021
Available-for-sale investment
securities
Debt Securities:
U.S. Treasury securities
$
9,925 $
- $
9,925 $
U.S. Government agencies
379
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
526,467
214,439
313,220
44,778
7,416
-
-
-
-
-
379
526,467
214,439
313,220
44,778
7,416
-
Total assets measured at fair
value on a recurring basis $1,116,624 $
7,416 $1,109,208 $
Fair Value Measurements Using
Fair Value
Level 1
Level 2
Level 3
December 31, 2020
Available-for-sale securities
Debt Securities:
U.S. Government agencies
$
680 $
- $
680 $
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
379,565
216,298
83,508
30,041
7,634
-
-
-
-
7,634
379,565
216,298
83,508
30,041
-
$ 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
20
liabilities or total earnings. During the years ended December 31, 2021 and 2020,
no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at
December 31, 2021 or December 31, 2020. Also there were no liabilities measured
at fair value on a recurring basis at December 31, 2021 or 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, 2021 and 2020 (in thousands):
Fair Value
Level 1
Level 2
Level 3
December 31, 2021
Impaired loans:
Real estate:
Real estate-construction
and other land loans
Total assets measured at
fair value on a
non-recurring basis
$
$
262 $
- $
- $
262
262 $
- $
- $
262
December 31, 2020
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, 2021.
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 $292,000 with a
valuation allowance of $30,000 at December 31, 2021, and a resulting fair value of
$262,000. The valuation allowance represents specific allocations for the allowance
for credit losses for impaired loans.
Notes to
Consolidated Financial Statements
2.
FAIR VALUE MEASUREMENTS (Continued)
Proceeds and gross realized gains (losses) on investment securities for the years
ended December 31, 2021, 2020, and 2019 are shown below (in thousands):
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, 2021 specific allocation for the allowance
for credit losses related to loans carried at fair value was $30,000, compared to
$268,000 during the year ended December 31, 2020. There were no net charge-offs
related to loans carried at fair value at December 31, 2021 and 2020.
3.
INVESTMENT SECURITIES
The fair value of the available-for-sale investment portfolio reflected an unrealized
gain of $10,835,000 at December 31, 2021 compared to an unrealized gain of
$21,091,000 at December 31, 2020. The unrealized gain recorded is net of $3,203,000
and $6,235,000 in tax liabilities as accumulated other comprehensive income
within shareholders’ equity at December 31, 2021 and 2020, 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, 2021
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Amortized
Cost
Available-for-Sale Securities
Debt Securities:
$
U.S. Treasury securities
U.S. Government agencies
Obligations of states and
political subdivisions
U.S. Government
9,988 $
373
- $
6
(63) $
-
9,925
379
512,952
16,703
(3,188)
526,467
sponsored entities and
agencies collateralized
by residential mortgage
obligations
Private label 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 mortgage
and asset backed
securities
Corporate debt securities
213,471
2,245
(1,277)
214,439
317,089
44,500
$ 1,098,373 $
824
595
20,373 $
(4,693)
(317)
313,220
44,778
(9,538) $ 1,109,208
December 31, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Amortized
Cost
$
651 $
29 $
- $
680
361,734
18,170
(339)
379,565
214,203
3,575
(1,480)
216,298
Years Ended December 31,
2021
2020
2019
Available-for-Sale Securities
Proceeds from sales or calls
Gross realized gains from sales or calls
Gross realized losses from sales or calls
$
$
$
26,222
$ 283,956 $ 281,906
580
$
7,123 $
5,319
(79) $
(2,871) $
(120)
Losses recognized in 2021, 2020, and 2019 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 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 $148,000, $1,257,000, and $1,537,000
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, 2021, 2020, and 2019, respectively.
Investment securities with unrealized losses at December 31, 2021 and 2020 are
summarized and classified according to the duration of the loss period as follows (in
thousands):
December 31, 2021
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:
Treasuries
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
$
9,925 $
(63) $
- $
- $
9,925 $
(63)
143,336
(2,896)
6,336
(292)
149,672
(3,188)
91,385
(905)
40,365
(372)
131,750
(1,277)
230,987
(3,661)
28,908
(1,032)
259,895
(4,693)
Corporate debt securities
21,183
(317)
-
-
21,183
(317)
$ 496,816 $ (7,842) $
75,609 $
(1,696) $ 572,425 $ (9,538)
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
$
36,209 $
(339) $
- $
- $
36,209 $
(339)
30,755
(385)
77,337
(1,095)
108,092
(1,480)
82,413
30,000
689,001 $
$
1,337
260
23,371 $
(242)
(219)
(2,280) $
83,508
30,041
710,092
Private label residential
mortgage backed securities
25,407
Corporate debt securities
12,881
(242)
(119)
-
-
25,407
3,900
(100)
16,781
(242)
(219)
$ 105,252 $ (1,085) $
81,237 $
(1,195) $ 186,489 $ (2,280)
21
Notes to
Consolidated Financial Statements
3.
INVESTMENT SECURITIES (Continued)
The Company periodically evaluates 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, 2021, 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). The Company evaluated all individual
available-for-sale investment securities with an unrealized loss at December 31,
2021 and identified those that had an unrealized loss for at least a consecutive
12 month period, which had an unrealized loss at December 31, 2021 greater than
10% of the recorded book value on that date, or which had an unrealized loss of more
than $75,000. The Company 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, 2021,
2020, or 2019.
U.S. Treasury Securities - At December 31, 2021, the Company held one U.S.
Treasury security which was in a loss position for less than 12 months.
U.S. Government Agencies - At December 31, 2021, the Company held one U.S.
Government agency security which was in a gain position.
Obligations of States and Political Subdivisions - At December 31, 2021, the
Company held 133 obligations of states and political subdivision securities of which
27 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, 2021.
U.S. Government Sponsored Entities and Agencies Collateralized by Residential
Mortgage Obligations - At December 31, 2021, the Company held 113 U.S.
Government sponsored entity and agency securities collateralized by residential
mortgage obligation securities of which 19 were in a loss position for less than
12 months and eighthave 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, 2021.
Private Label Mortgage and Asset Backed Securities - At December 31, 2021, the
Company had a total of 75 Private Label Mortgage and Asset Backed Securities
(PLMBS). 46 of these securities were in a loss position for less than 12 months and
seven have been in a loss position for more than 12 months at December 31,
2021. 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, 2021. The
Company continues to monitor these securities for changes in credit ratings or other
indications of credit deterioration.
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, 2021.
The amortized cost and estimated fair value of available-for-sale investment
securities at December 31, 2021 and 2020 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, 2021
December 31, 2020
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
Within one year
$
- $
- $
298 $
After one year through five years
3,690
4,038
3,254
305
3,631
After five years through ten years
99,615
101,498
18,330
20,644
After ten years
419,635
430,856
339,852
354,985
522,940
536,392
361,734
379,565
Investment securities not due at a single
maturity date:
U.S. Government agencies
373
379
651
680
U.S. Government sponsored entities
and agencies collateralized by
residential mortgage obligations
Private label mortgage and asset
backed securities
Corporate debt securities
213,471
214,439
214,203
216,298
317,089
313,220
44,500
44,778
82,413
30,000
83,508
30,041
$ 1,098,373 $ 1,109,208 $ 689,001 $ 710,092
Investment securities with amortized costs totaling $252,986,000 and
$178,561,000 and fair values totaling $260,325,000 and $185,053,000 were
pledged as collateral for borrowing arrangements, public funds and for other purposes
at December 31, 2021 and 2020, respectively.
4.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
Outstanding loans are summarized as follows (in thousands):
Loan Type
Commercial:
Commercial and industrial
Agricultural production
Total commercial
Real estate:
Owner occupied
Real estate construction and other
land loans
Commercial real estate
Agricultural real estate
Other real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Total consumer
Net deferred origination costs (fees)
Total gross loans
Allowance for credit losses
Total loans
December 31,
2021
% of
Total
loans
December 31,
2020
% of
Total
loans
$
136,847
40,860
177,707
13.2% $
3.9%
17.1%
273,994
21,971
295,965
24.9%
2.0%
26.9%
212,234
20.4%
208,843
18.9%
5.9%
35.6%
9.5%
2.5%
73.9%
5.4%
3.6%
9.0%
100.0%
61,586
369,529
98,481
26,084
767,914
55,620
36,999
92,619
871
1,039,111
(9,600)
$ 1,029,511
5.0%
30.7%
7.6%
2.6%
64.8%
5.0%
3.3%
8.3%
100.0%
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
Corporate Debt Securities - At December 31, 2021, the Company held 12 corporate
debt securities of which six were in a loss position for less than 12 months. The
unrealized loss on the Company’s investments in corporate debt security was caused
by interest rate changes. Because the decline in market value is attributable to
changes in interest rates and not credit quality, and because the Company does not
intend to sell, and it is more likely than not that it will not be required to sell those
At December 31, 2021 and 2020, loans originated under Small Business
Administration (SBA) programs totaling $23,024,000 and $24,220,000, 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, 2021 and 2020, PPP loans totaling $18,553,000 and
22
Notes to
Consolidated Financial Statements
4.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
$192,916,000, respectively, were outstanding and included in the commercial and
industrial category above. Approximately $481,355,000 in loans were pledged under
a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing
capacity of $277,130,000 as of December 31, 2021. 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 $1,890,000, $2,782,000, and $2,116,000
have been deferred as loan origination costs for the years ended December 31, 2021,
2020, and 2019, respectively.
Allowance for Credit Losses
The allowance for credit losses (the “allowance”) is a valuation allowance for
probable incurred credit losses in the Company’s loan portfolio. The allowance is
established through a provision for credit losses which is charged to expense. Additions
to the allowance are expected to maintain the adequacy of the total allowance after
credit losses and loan growth. Credit exposures determined to be uncollectible are
charged against the allowance. Cash received on previously charged-off credits is
recorded as a recovery to the allowance. The overall allowance consists of two primary
components, specific reserves related to impaired loans and general reserves for
probable incurred losses related to loans that are not impaired.
For all portfolio segments, the determination of the general reserve for loans that
are not impaired is based on estimates made by management, including but not
limited to, consideration of historical losses by portfolio segment (and in certain cases
peer loss data) over the most recent 52 quarters, and qualitative factors including
economic trends in the Company’s service areas, industry experience and trends,
industry and 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
2021
Balance, beginning of year
$
12,915
$
9,130
$
9,104
(Reversal) provision charged to
operations
Losses charged to allowance
Recoveries
(4,300)
(267)
1,252
3,275
(229)
739
1,025
(1,196)
197
Balance, end of year
$
9,600
$
12,915
$
9,130
The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 2021, 2020, and 2019 by portfolio
segment (in thousands):
Allowance for credit losses:
Beginning balance, January 1, 2021
Reversal charged to operations
Losses charged to allowance
Recoveries
Ending balance, December 31, 2021
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
Commercial
Real Estate
Consumer
Unallocated
Total
$
2,019
$
9,174
$
1,091
$
631
$
12,915
$
$
$
$
(663)
(46)
701
2,011
1,428
100
(121)
612
2,019
1,671
655
(1,032)
134
$
$
$
$
(2,752)
-
319
6,741
6,769
2,405
-
-
9,174
6,539
230
-
-
$
$
$
$
(534)
(221)
232
568
897
175
(108)
127
1,091
826
172
(164)
63
$
$
$
$
(351)
-
-
280
36
595
-
-
631
68
(32)
-
-
$
$
$
$
(4,300)
(267)
1,252
9,600
9,130
3,275
(229)
739
12,915
9,104
1,025
(1,196)
197
Ending balance, December 31, 2019
$
1,428
$
6,769
$
897
$
36
$
9,130
23
Notes to
Consolidated Financial Statements
4.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following is a summary of the allowance for credit losses by impairment methodology and portfolio segment as of December 31, 2021 and December 31, 2020 (in
thousands):
Allowance for credit losses:
Ending balance, December 31, 2021
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Ending balance, December 31, 2020
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Commercial
Real Estate
Consumer
Unallocated
Total
$
$
$
$
$
$
2,011
607
1,404
2,019
339
1,680
$
$
$
$
$
$
6,741
38
6,703
9,174
271
8,903
$
$
$
$
$
$
568
4
564
1,091
21
1,070
$
$
$
$
$
$
280
-
280
631
-
631
$
$
$
$
$
$
9,600
649
8,951
12,915
631
12,284
The following table shows the ending balances of loans as of December 31, 2021 and December 31, 2020 by portfolio segment and by impairment methodology (in
thousands):
Loans:
Ending balance, December 31, 2021
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance, December 31, 2020
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Commercial
Real Estate
Consumer
Total
$
$
$
$
$
$
177,707
7,086
170,621
295,965
7,402
288,563
$
$
$
$
$
$
767,914
450
767,464
716,124
2,616
713,508
$
$
$
$
$
$
92,619
$ 1,038,240
1,050
$
8,586
91,569
$ 1,029,654
92,870
$ 1,104,959
1,168
$
11,186
91,702
$ 1,093,773
The following table shows the loan portfolio by class allocated by management’s internal risk ratings at December 31, 2021 (in thousands):
Pass
Special
Mention
Substandard
Doubtful
Total
$
125,537
37,179
$
$
8,724
1,325
205,092
54,066
351,395
96,949
26,084
55,611
36,942
3,582
7,520
18,134
1,532
-
9
19
$
2,586
2,356
3,560
-
-
-
-
-
38
$
988,855
$
40,845
$
8,540
$
-
-
-
-
-
-
-
-
-
-
$
136,847
40,860
212,234
61,586
369,529
98,481
26,084
55,620
36,999
$ 1,038,240
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
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 internally assigned risk grade 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
Total
$
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
$ 1,032,417
$
36,406
$
36,136
$
The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2021 (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
$
$
1
-
-
-
-
-
-
-
79
80
$
-
-
-
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
-
-
-
$
$
1
-
-
-
-
-
-
-
79
80
$
136,846
40,860
$
136,847
40,860
$
212,234
212,234
61,586
369,529
98,481
26,084
61,586
369,529
98,481
26,084
55,620
36,920
55,620
36,999
$ 1,038,160
$ 1,038,240
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
273,994
21,971
208,843
55,419
338,886
84,258
28,718
55,634
37,236
$ 1,104,959
Non-
accrual
$
312
634
-
-
-
-
-
-
-
$
946
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, 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
Non-
accrual
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
$
-
-
-
-
-
-
-
$
60
$
-
-
-
-
-
24
5
89
208,843
55,419
338,886
84,258
28,718
55,610
37,231
$
273,994
21,971
-
208,843
55,419
338,886
84,258
28,718
-
55,634
37,236
$ 1,104,870
$ 1,104,959
$
-
-
-
-
-
-
-
-
-
-
$
752
-
370
1,556
512
-
-
-
88
$
3,278
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, 2021 (in thousands):
December 31, 2020 (in thousands):
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
With no related allowance recorded:
Consumer:
Equity loans and lines of credit
$
136
$
172
$
Total with no related allowance recorded
136
172
With an allowance recorded:
Commercial:
Commercial and industrial
Agricultural land and production
Total commercial
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
Total consumer
6,452
634
7,086
292
137
21
450
914
914
6,491
714
7,205
292
138
21
451
914
914
Total with an allowance recorded
8,450
8,570
Total
$
8,586
$
8,742
$
The recorded investment in loans excludes accrued interest receivable and net
loan origination fees, due to immateriality.
-
-
544
63
607
30
3
5
38
4
4
649
649
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
Total
$
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
11,186
$
1,552
149
29
1,730
936
93
1,029
10,132
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.
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,
2021, 2020, and 2019 (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
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
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, 2021
Year Ended
December 31, 2020
Year Ended
December 31, 2019
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
$
43
-
43
55
156
380
-
591
140
774
6,327
908
7,235
673
142
27
842
925
14
939
9,016
$
9,790
$
-
-
-
-
-
-
-
-
12
12
365
-
365
21
9
1
31
54
-
54
450
462
$
$
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
-
-
-
-
45
50
-
95
13
108
1
-
1
-
12
2
14
56
-
56
71
$
5,118
$
179
Foregone interest on nonaccrual loans totaled $99,000, $177,000, and 85,000
for the years ended December 31, 2021, 2020, and 2019, 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, 2021 and 2020, the Company has a recorded investment in
troubled debt restructurings (“TDR”) of $7,640,000 and, $7,908,000, respectively.
The Company has allocated $538,000 and $20,000 of specific reserves for those
loans at December 31, 2021 and 2020, respectively. The Company has committed
to lend no additional amounts as of December 31, 2021 to customers with outstanding
loans that are classified as troubled debt restructurings.
For the years ended December 31, 2021, 2020, and 2019 the terms of certain
loans were modified as TDRs. 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.
such guidance, during 2020 and throughout 2021 the Company offered short-term
modifications in response to COVID-19 to borrowers who were current and
otherwise not past due. As of December 31, 2021 there were no such loans remaining
on deferral.
In accordance with
27
Notes to
Consolidated Financial Statements
4.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2021 (dollars in thousands):
Troubled Debt Restructurings:
Commercial:
Commercial and industrial
Real Estate:
Real estate construction and other land loans
Total
Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment (1)
Principal
Modification
Post
Modification
Outstanding
Recorded
Investment (2)
Outstanding
Recorded
Investment
1
1
2
$
$
2,489
$
333
2,822
$
-
-
-
$
$
2,489
$
1,989
333
2,822
$
292
2,281
(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 TDRs that occurred during the year ended December 31, 2020 (dollars in thousands):
Troubled Debt Restructurings:
Commercial:
Commercial and Industrial
Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment (1)
Principal
Modification
Post
Modification
Outstanding
Recorded
Investment (2)
Outstanding
Recorded
Investment
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 TDRs that occurred during the year ended December 31, 2019 (dollars in thousands):
Troubled Debt Restructurings:
Consumer
Equity loans and line of credit
Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment (1)
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.
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, 2021, 2020, and 2019.
28
Notes to
Consolidated Financial Statements
5.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following (in thousands):
The following table summarizes the Company’s estimated core deposit intangible
amortization expense for each of the next five years (in thousands):
Land
Buildings and improvements
Furniture, fixtures and equipment
Leasehold improvements
$
December 31,
2021
2020
$
1,131
8,219
11,721
4,290
25,361
1,131
6,948
12,473
4,248
24,800
Years Ending December 31,
2022
2023
Thereafter
Total
Estimated Core
Deposit
Intangible
Amortization
$
$
454
68
-
522
Less accumulated depreciation and
amortization
(16,981)
(16,572)
7.
DEPOSITS
$
8,380
$
8,228
Interest-bearing deposits consisted of the following (in thousands):
Depreciation and amortization included in occupancy and equipment expense
totaled $897,000, $881,000 and $1,742,000 for the years ended December 31, 2021,
2020, and 2019, respectively.
6.
GOODWILL AND INTANGIBLE ASSETS
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, 2021 and 2020 was $53,777,000. Total goodwill at December 31,
2021 consisted of $13,466,000, $10,394,000, $6,340,000, $14,643,000, and
$8,934,000 representing the excess of the cost of Folsom Lake Bank, Sierra Vista
Bank, Visalia Community Bank, Service 1st Bancorp, and Bank of Madera County,
respectively, over the net of the amounts assigned to assets acquired and liabilities
assumed in the transactions accounted for under the purchase method of accounting.
The value of goodwill is ultimately derived from the Company’s ability to generate
net earnings after the acquisitions and is not deductible for tax purposes. A decline in
net earnings could be indicative of a decline in the fair value of goodwill and result
in impairment. For that reason, goodwill is assessed at least annually for impairment.
The Company has selected September 30 as the date to perform the annual
impairment test. Management assessed qualitative factors including performance
trends and noted no factors indicating goodwill impairment.
Goodwill is also tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of the
Company below its carrying amount. No such events or circumstances arose during
the fourth quarter of 2021, so goodwill was not required to be retested.
The intangible assets at December 31, 2021 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, 2021, the weighted average remaining
amortization period is a little over one year. The carrying value of intangible assets
at December 31, 2021 was $522,000, net of $3,230,000 in accumulated amortization
expense. The carrying value at December 31, 2020 was $1,183,000, net of
$2,569,000 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, 2021 and
determined no impairment was necessary. Amortization expense recognized was
$661,000 for 2021, $695,000 for 2020, and $695,000 for 2019.
Savings
Money market
NOW accounts
Time, $250,000 or more
Time, under $250,000
December 31,
2021
2020
$
197,273
$
156,190
511,448
360,462
20,131
69,899
341,088
310,697
19,790
70,056
$ 1,159,213
$
897,821
Aggregate annual maturities of time deposits are as follows (in thousands):
Years Ending December 31,
2022
2023
2024
2025
2026
Thereafter
$
77,559
7,777
1,211
638
957
1,888
$
90,030
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,
2021
2020
2019
$
$
20
661
162
193
$
25
542
316
582
28
656
538
706
$
1,036
$
1,465
$
1,928
8.
BORROWING ARRANGEMENTS
Federal Home Loan Bank Advances - As of December 31, 2021 and December 31,
2020 , the Company had no Federal Home Loan Bank (FHLB) of San Francisco
advances. Approximately $481,355,000 in loans were pledged under a blanket lien
as collateral to the FHLB for the Bank’s remaining borrowing capacity of
$277,130,000 as of December 31, 2021. FHLB advances are also secured by
investment securities with amortized costs totaling $112,000 and $169,000 and
29
Notes to
Consolidated Financial Statements
8.
BORROWING ARRANGEMENTS (Continued)
The table below summarizes other information related to our operating leases:
Weighted average remaining lease
term, in years
Weighted average discount rate
December 31,
2021
December 31,
2020
5
2.67%
6
2.77%
The table below shows operating lease right of use assets and operating lease
liabilities as of :
(Dollars in thousands)
December 31,
2021
December 31,
2020
Operating lease right-of-use assets
Operating lease liabilities
$
$
7,308
7,962
$
$
8,195
8,881
The right-of-use-assets and lease liabilities are included with other assets and
other liabilities on the balance sheet, respectively.
10.
INCOME TAXES
The provision for income taxes for the years ended December 31, 2021, 2020,
and 2019 consisted of the following (in thousands):
2021
Current
Deferred
Provision for income taxes
2020
Current
Deferred
Provision for income taxes
2019
Current
Deferred
Provision for income taxes
Federal
State
Total
$
$
$
$
$
$
4,687
1,002
5,689
4,915
(656)
4,259
5,747
(387)
5,360
$
$
$
$
$
$
3,464
463
3,927
3,050
(395)
2,655
3,351
(202)
3,149
$
$
$
$
$
$
8,151
1,465
9,616
7,965
(1,051)
6,914
9,098
(589)
8,509
market values totaling $117,000 and $178,000 at December 31, 2021 and 2020,
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 $110,000,000 at
December 31, 2021 and 2020, respectively, at interest rates which vary with market
conditions. As of December 31, 2021 and 2020, the Company had no Federal
funds purchased.
Federal Reserve Line of Credit - The Bank has a line of credit in the amount of
$9,961,000 and $13,323,000 with the Federal Reserve Bank of San Francisco (FRB)
at December 31, 2021 and 2020, respectively, which bears interest at the prevailing
discount rate collateralized by investment securities with amortized costs totaling
$10,361,000 and $13,538,000 and market values totaling $10,241,000 and
$13,703,000, respectively. At December 31, 2021 and 2020, 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, 2021 are as follows (in thousands):
$
Years Ending December 31,
2022
2023
2024
2025
2026
Thereafter
Total lease payments
Less: imputed interest
Present value of operating lease liabilities
$
The table below summarizes the total lease cost for the period ending:
1,978
1,861
1,528
1,173
1,010
977
8,527
(565)
7,962
(Dollars in thousands)
Operating lease cost
Short-term lease cost
Variable lease cost
Total lease cost
30
December 31,
2021
December 31,
2020
$
$
2,088
$
3
353
2,444
$
2,243
13
288
2,544
Notes to
Consolidated Financial Statements
10.
INCOME TAXES (Continued)
Deferred tax assets (liabilities) consisted of the following (in thousands):
As of December 31, 2021, the Company had Federal and California net
operating loss (“NOL”) carry-forwards of $6,615,000 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 2030 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 and
California 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, 2018 and
by the state taxing authorities for the years ended before December 31, 2017.
As of December 31, 2021, 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, 2021 and 2020, the Company recorded
no interest or penalties related to uncertain tax positions.
11.
SUBORDINATED DEBENTURES
The following table summarized the Company’s subordinated debentures:
December 31,
2021
2020
$
$
2,838
4,588
2,048
74
101
192
530
2,354
111
736
3,818
4,729
2,148
21
303
192
851
2,625
105
674
13,572
15,466
(Dollars in thousands)
December 31,
2021
December 31,
2020
Fixed-floating rate subordinated debentures, due
2031
$
35,000
$
Unamortized debt issuance costs
Junior subordinated deferrable interest
(3,203)
(6,235)
debentures, due October 2036
(701)
5,155
Total subordinated debentures
$
39,454
$
-
-
5,155
5,155
(2,160)
(749)
(2,423)
(275)
(154)
(191)
(450)
(360)
(350)
(191)
(849)
(405)
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
Total deferred tax assets
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
(7,267)
(10,728)
Net deferred tax assets
$
6,305
$
4,738
The determination of the amount of deferred income tax assets which are more
likely than not to be realized is primarily dependent on projections of future earnings,
which are subject to uncertainty and estimates that may change given economic
conditions and other factors. The realization of deferred income tax assets is assessed
and a valuation allowance is recorded if it is more likely than not that all or a
portion of the deferred tax asset will not be realized. More likely than not is defined
as greater than a 50% chance. All available evidence, both positive and negative is
considered to determine whether, based on the weight of the evidence, a valuation
allowance is needed. Thus, management concludes no valuation allowance is necessary
against deferred tax assets as of December 31, 2021 and 2020.
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, 2021,
2020, and 2019 consisted of the following:
Federal income tax, at statutory rate
State taxes, net of Federal tax benefit
Tax exempt investment security
income, net
Bank owned life insurance, net
Compensation—Stock
Compensation
Other
Effective tax rate
2021
2020
2019
21.0%
8.2%
(3.1)%
(0.5)%
(0.1)%
(0.2)%
25.3%
21.0%
7.7%
(1.5)%
(1.2)%
(0.2)%
(0.4)%
25.4%
21.0%
8.3%
(0.9)%
(0.4)%
(0.2)%
0.6%
28.4%
Junior Subordinated 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, 2021, 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, 2021, the rate was 1.73%.
Interest expense recognized by the Company for the years ended December 31,
2021, 2020, and 2019 was $266,000, $130,000 and $210,000, respectively.
Subordinated Debentures
On November 12, 2021, the Company completed a private placement of
$35.0 million aggregate principal amount of its fixed-to-floating rate subordinated
31
Notes to
Consolidated Financial Statements
11.
SUBORDINATED DEBENTURES (Continued)
notes (“Subordinated Debt”) due December 1, 2031. The Subordinated Debt
initially bears a fixed interest rate of 3.125% per year. Commencing on December 1,
2026, the interest rate on the Subordinated Debt will reset each quarter at a
floating interest rate equal to the then-current three month term SOFR plus 210 basis
points. The Company may at its option redeem in whole or in part the Subordinated
Debt on or after November 12, 2026 without a premium. The Subordinated
Debt is treated as Tier 2 Capital for regulatory purposes.
12.
COMMITMENTS AND CONTINGENCIES
Correspondent Banking Agreements - The Bank maintains funds on deposit with
other federally insured financial institutions under correspondent banking agreements.
Uninsured deposits totaled $14,964,000 at December 31, 2021.
Financial Instruments With Off-Balance-Sheet Risk - The Bank is a party to
financial instruments with off-balance-sheet risk in the normal course of business in
order to meet the financing needs of its customers and to reduce its own exposure
to fluctuations in interest rates. These financial instruments consist of commitments
to extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the amount
recognized on the balance sheet.
The Bank’s exposure to credit loss in the event of nonperformance by the other
party for commitments to extend credit and standby letters of credit is represented
by the contractual amount of those instruments. The Bank uses the same credit policies
in making commitments and standby letters of credit as it does for loans included
on the balance sheet.
The following financial instruments represent off-balance-sheet credit risk (in
thousands):
Commitments to extend credit
Standby letters of credit
December 31,
2021
2020
$
$
325,674
434
$
$
314,774
11,405
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, 2021 and 2020. The Company recognizes these fees as revenue over the
term of the commitment or when the commitment is used.
At December 31, 2021, commercial loan commitments represent 41% of total
commitments and are generally secured by collateral other than real estate or
unsecured. Real estate loan commitments represent 49% 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, 2021 and 2020, the balance of a contingent allocation for
probable loan loss experience on unfunded obligations was $115,000 and $250,000,
respectively. The contingent allocation for probable loan loss experience on
unfunded obligations is calculated by management using an appropriate, systematic,
and consistently applied process. While related to credit losses, this allocation is
not a part of the ALLL and is considered separately as a liability for accounting and
regulatory reporting purposes. Changes in this contingent allocation are recorded in
other non-interest expense.
Concentrations of Credit Risk - At December 31, 2021, in management’s judgment,
a concentration of loans existed in commercial loans and real-estate-related loans,
32
representing approximately 96.4% of total loans of which 17.1% were commercial
and 79.3% were real-estate-related.
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.
Management believes the loans within these concentrations have no more than
the typical risks of collectability. However, in light of the current economic
environment, additional declines in the performance of the economy in general, or a
continued decline in real estate values or drought-related decline in agricultural
business in the Company’s primary market area could have an adverse impact on
collectability, increase the level of real-estate-related nonperforming loans, or have
other adverse effects which alone or in the aggregate could have a material adverse
effect on the financial condition, results of operations and cash flows of the Company.
Contingencies - The Company is subject to legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the amount
of ultimate liability with respect to such actions will not materially affect the
consolidated financial position or consolidated results of operations of the Company.
13.
SHAREHOLDERS’ EQUITY
Regulatory Capital - The Company and the Bank are subject to certain regulatory
capital requirements administered by the Board of Governors of the Federal Reserve
System and the FDIC. Failure to meet these minimum capital requirements could
result in mandatory or, discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company’s consolidated financial statements.
The Company and the Bank each meet specific capital guidelines that involve
quantitative measures of their respective assets, liabilities and certain off-balance-
sheet items as calculated under regulatory accounting practices. 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.
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%; 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, 2021 and 2020. 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).
Notes to
Consolidated Financial Statements
13.
SHAREHOLDERS’ EQUITY (Continued)
The following table presents the Company’s and the Bank’s actual capital ratios
as of December 31, 2021 and December 31, 2020, as well as the minimum capital
ratios for capital adequacy for the Bank.
(Dollars in thousands)
December 31, 2021
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio (CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
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
Actual Ratio
Amount
Ratio
$ 189,020
$ 184,020
$ 189,020
$ 233,034
$ 178,407
$ 173,407
$ 178,407
$ 191,572
8.03%
12.48%
12.82%
15.80%
9.28%
14.10%
14.50%
15.58%
The following table presents the Bank’s regulatory capital ratios as of December 31,
2021 and December 31, 2020.
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.
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, 2021, $28,756,000 of the Bank’s retained earnings were free of these
restrictions.
A reconciliation of the numerators and denominators of the basic and diluted
earnings per common share computations is as follows (in thousands, except share
and per-share amounts):
For the Years Ended December 31,
2021
2020
2019
Basic Earnings Per Common Share:
Net income
$
28,401
$
20,347 $
21,443
Weighted average shares
outstanding
Net income per common share
Diluted Earnings Per Common
12,237,424
12,534,078
13,415,118
2.32
$
1.62 $
1.60
28,401
$
20,347 $
21,443
$
$
(Dollars in thousands)
December 31, 2021
Actual Ratio
Minimum regulatory
requirement (1)
Share:
Net income
Amount
Ratio
Amount
Ratio
Weighted average shares
Tier 1 Leverage Ratio
$ 199,329
8.47% $
94,156
4.00%
Common Equity Tier 1 Ratio
(CET 1)
$ 199,329
13.52% $
66,355
7.00%
Tier 1 Risk-Based Capital
Ratio
$ 199,329
13.52% $
88,473
8.50%
Total Risk-Based Capital
outstanding
12,237,424
12,534,078
13,415,118
Effect of dilutive stock options
and warrants
Weighted average shares of
common stock and common
stock equivalents
44,508
42,241
98,489
12,281,932
12,576,319
13,513,607
Ratio
$ 209,044
14.18% $ 117,964
10.50%
Net income per diluted common
December 31, 2020
share
$
2.31
$
1.62 $
1.59
Tier 1 Leverage Ratio
$ 177,269
9.23% $
76,852
4.00%
Common Equity Tier 1 Ratio
(CET 1)
$ 177,269
14.41% $
55,346
7.00%
Tier 1 Risk-Based Capital
Ratio
$ 177,269
14.41% $
73,795
8.50%
Total Risk-Based Capital
Ratio
$ 190,434
15.48% $
98,394
10.50%
(1) The minimum regulatory requirement threshold includes the capital conservation
buffer of 2.50%.
Dividends - During 2021, the Bank declared and paid cash dividends to the
Company in the amount of $7,679,000 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 $5,757,000 or $0.47 per common share cash
dividend to shareholders of record during the year ended December 31, 2021.
During the year ended December 31, 2021, the Company repurchased and retired
common stock in the amount of $13,619,000.
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
No outstanding options and restricted stock awards were anti-dilutive at
December 31, 2021, 2020, and 2019.
14.
EQUITY-BASED COMPENSATION
On December 31, 2021, 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
33
Notes to
Consolidated Financial Statements
14.
EQUITY-BASED COMPENSATION (Continued)
A summary of the combined activity of the Plans during the years then ended is
presented below (dollars in thousands, except per-share amounts):
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, 737,311 shares remain reserved for future grants as
of December 31, 2021.
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 445,407 shares available for future purchase under the plan
as of December 31, 2021.
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 21,120.
For the years ended December 31, 2021, 2020, and 2019, the compensation cost
recognized for share-based compensation was $405,000, $470,000, and $555,000,
respectively. The recognized tax benefit for share-based compensation expense was
$50,000, $76,000, and $46,000 for 2021, 2020, and 2019 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, 2021, 2020 and 2019 from any of the
Company’s stock based compensation plans.
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Shares
Aggregate
Intrinsic Value
Options outstanding at
January 1, 2019
Options exercised
Options forfeited
Options outstanding at
December 31, 2019
154,440 $
(32,120) $
(1,200) $
121,120 $
Options exercised
(43,500) $
Options forfeited
(550) $
8.68
8.59
5.55
8.73
6.39
7.40
2.06 $
1,567
Options outstanding at
December 31, 2020
77,070 $
10.06
1.51 $
382
Options exercised
(24,265) $
10.60
Options outstanding at
December 31, 2021
Options vested or
expected to vest at
December 31, 2021
Options exercisable at
December 31, 2021
52,805 $
9.81
0.57 $
581
52,805 $
9.81
0.57 $
52,805 $
9.81
0.57 $
581
581
Information related to the stock option plan during each year follows (in
thousands):
Intrinsic value of options exercised
Cash received from options exercised
Excess tax benefit realized for option
exercises
2021
2020
2019
$
$
$
253
257
50
$
$
$
433
279
76
$
$
$
366
276
46
As of December 31, 2021, 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, 2019
Granted
Vested
Forfeited
Nonvested outstanding shares at December 31, 2019
Granted
Vested
Forfeited
Nonvested outstanding shares at December 31, 2020
Granted
Vested
Forfeited
Nonvested outstanding shares at December 31, 2021
Weighted
Average
Grant Date
Fair Value
15.98
$
19.77
$
16.61
$
18.06
$
17.38
$
16.42
$
18.23
$
19.16
$
15.60
$
18.83
$
15.12
$
20.26
$
20.50
$
Shares
63,529
25,420
(40,159)
(3,630)
45,160
21,397
(34,703)
(1,841)
30,013
31,496
(37,085)
(247)
24,177
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, 2021, there were 24,177 shares of restricted stock that are
nonvested and expected to vest. Share-based compensation cost charged against
income for restricted stock awards was $385,000, $449,000, and $533,000 for the
year ended December 31, 2021, 2020, and 2019 respectively.
As of December 31, 2021, there was $273,000 of total unrecognized
compensation cost related to nonvested restricted common stock. Restricted stock
compensation expense is recognized on a straight-line basis over the vesting period.
This cost is expected to be recognized over a weighted average remaining period of
1.55 years and will be adjusted for subsequent changes in estimated forfeitures.
Restricted common stock awards had an intrinsic value of $3,065,000 at December 31,
2021.
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 $1,050,000, $370,000, and $750,000 to the
profit sharing plan in 2021, 2020, and 2019, 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, 2021
and 2020, 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, 2021, 2020, and 2019,
the Bank made matching contributions totaling $1,014,000, $1,008,000, and
$959,000, 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 (1.56% at December 31, 2021). At
December 31, 2021 and 2020, the total net deferrals included in accrued interest
payable and other liabilities were $4,230,000 and $4,292,000, 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 $10,637,000 and $9,464,000 and at December 31, 2021 and
2020, respectively. Income recognized on these policies, net of related expenses,
for the years ended December 31, 2021, 2020, and 2019, was $264,000, $245,000,
and $250,000, 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 (1.56% at December 31, 2021). At
December 31, 2021 and 2020, the total net deferrals included in accrued interest
payable and other liabilities were $233,000 and $209,000, 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, 2021,
2020, and 2019, totaled $377,000, $1,624,000, and $1,465,000, respectively. Accrued
compensation payable under the salary continuation plans totaled $10,881,000
and $11,389,000 at December 31, 2021 and 2020, 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 $28,916,000 and $19,249,000
at December 31, 2021 and 2020, respectively. Income recognized on these
policies, net of related expense, for the years ended December 31, 2021, 2020, and
2019 totaled $576,000, $466,000, and $478,000, 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, 2021
Disbursements
Amounts repaid
Balance, December 31, 2021
Undisbursed commitments to related parties, December 31, 2021
$
$
$
10,495
4,618
(1,803)
13,310
6,281
35
Notes to
Consolidated Financial Statements
17.
PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 2021 and 2020
(In thousands)
ASSETS
Cash and cash equivalents
Investment in Bank subsidiary
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Subordinated debentures
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
2021
2020
$
24,060
$
896
263,310
249,037
347
354
$
287,717
$
250,287
$
39,454
$
418
39,872
66,820
173,393
7,632
5,155
111
5,266
79,416
150,749
14,856
247,845
245,021
$
287,717
$
250,287
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2021, 2020, and 2019
(In thousands)
Income:
Dividends declared by Subsidiary—eliminated in consolidation
$
7,679
$
15,622
$
20,100
2021
2020
2019
Other income
Total income
Expenses:
Interest on subordinated 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
36
3
7,682
266
296
560
1,122
6,560
21,496
28,056
345
28,401
21,177
$
$
4
6
15,626
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
$
$
Notes to
Consolidated Financial Statements
17.
PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2021, 2020, and 2019
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2021
2020
2019
$
28,401
$
20,347
$
21,443
Undistributed net income of subsidiary, net of distributions
(21,496)
(5,328)
(1,932)
Equity-based compensation
Net decrease (increase) in other assets
Net increase (decrease) in other liabilities
Benefit for deferred income taxes
Net cash provided by operating activities
Cash flows used in investing activities:
Investment in subsidiary
Cash flows from financing activities:
Proceeds from issuance of subordinated debt
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
405
1
464
6
470
(208)
(31)
75
555
136
69
10
7,781
15,325
20,281
-
34,299
(5,757)
(13,619)
256
204
15,383
23,164
896
24,060
119
$
$
-
-
(5,530)
(11,052)
279
199
-
-
(5,805)
(15,619)
276
216
(16,104)
(20,932)
(779)
1,675
896
153
(651)
2,326
1,675
215
$
$
$
$
37
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
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Central Valley Community Bancorp and Subsidiary (the “Company”)
as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
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.
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 matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical
audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses (ACL)—Qualitative Factors
As described in Notes 1—Summary of Significant Accounting Policies and 4—Loans and Allowance for Credit Losses to the consolidated
financial statements, the ACL is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. The ACL consists
of two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are not
impaired. The determination of the general reserve consists a simple average of historical losses by portfolio segment and qualitative factors.
The qualitative factors include consideration of economic trends in the Company’s service areas, industry experience and trends, industry
and 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.
We have identified auditing the qualitative factors used in the ACL as a critical audit matter as management’s determination of the
qualitative factors is subjective and involves significant management judgments; and our audit procedures involved a high degree of auditor
judgment and required significant audit effort, including the need to involve more experienced audit personnel.
38
The primary procedures we performed to address this critical audit matter included:
• Evaluation of the relevance and reliability of data inputs used as a basis for the adjustments relating to the qualitative factors.
• Evaluation of the reasonableness of management’s judgments related to the assumptions used in the determination of the qualitative
factors.
• Analytically evaluating the year-over-year change of the qualitative factors for directional consistency.
• Testing the mathematical accuracy of the ACL calculation, including the application of the qualitative factors.
We have served as the Company’s auditor since 2011.
Sacramento, California
March 9, 2022
39
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 2021, we focused on asset quality and capital adequacy as well as 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, 2021, 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.
40
ECONOMIC CONDITIONS
For the years leading up to 2021, the economy, as evidenced by the California,
Central Valley, and Greater Sacramento Region unemployment rates, and housing
prices, were showing moderate and steady improvement.
During 2020 and to a lesser extent in 2021, our business has been, and continues
to be, impacted by the ongoing outbreak of COVID-19. During 2021 and 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. 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.
We only conduct business in the state of California. California placed significant
restrictions on businesses and individuals at the outset of the COVID-19 pandemic.
While many of these initial restrictions have been lifted, there is still the possibility
that certain restrictions could be re-imposed or extended to contain further spread if
the rate of infection were to surge again in any of these states, including as a result
of the Delta and Omicron variants that have recently caused an uptick in infections
particularly among non-vaccinated individuals. As a financial institution, we are
considered an essential business and we have therefore continued to operate on a
modified basis throughout the pandemic to comply with governmental restrictions
and public health authority guidelines.
We remain focused on keeping our employees safe and our bank running
effectively to serve our customers and continue to monitor the continued spread of
COVID-19 and its variants. Our branches have been reopened across our footprint.
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, 2021 was
$2.31 compared to $1.62 and $1.59 for the years ended December 31, 2020 and
2019, respectively. Net income for 2021 was $28,401,000 compared to $20,347,000
and $21,443,000 for the years ended December 31, 2020 and 2019, respectively.
The increase in net income for 2021 compared to 2020 was driven by a reversal of
provision for credit losses, an increase in net interest income, and an increase in
interchange fees, partially offset by an increase in the provision for income taxes,
an increase in non-interest expense, a decrease in net realized gains on sales and calls
of investment securities, a decrease in loan placement fees, and a decrease in
service charge income. Total assets at December 31, 2021 were $2,450,139,000
compared to $2,004,096,000 at December 31, 2020.
Return on average equity (“ROE”) for 2021 was 11.50% compared to 8.85%
and 9.39% for 2020 and 2019, respectively. Return on average assets (“ROA”) for
2021 was 1.25% compared to 1.11% and 1.36% for 2020 and 2019, respectively.
Total equity was $247,845,000 at December 31, 2021 compared to $245,021,000 at
December 31, 2020. The increase in shareholders’ equity is the result of an increase
in retained earnings from our net income of $28,401,000, the exercise of stock options
in the amount of $256,000, the effect of share-based compensation expense of
$405,000, and stock issued under our employee stock purchase plan of $204,000,
partially offset by a decrease in accumulated other comprehensive income (AOCI) of
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OVERVIEW (Continued)
$7,224,000, the payment of common stock cash dividends of $5,757,000 and the
repurchase and retirement of common stock of $13,619,000.
Average total loans (including nonaccrual) increased $13,941,000 or 1.32% to
$1,069,653,000 in 2021 compared to $1,055,712,000 in 2020. In 2021, we recorded
a reversal of provision for credit losses of $4,300,000 compared to a provision of
$3,275,000 in 2020 and a provision of $1,025,000 in 2019. The Company had
nonperforming assets consisting of $946,000 in nonaccrual loans at December 31,
2021. At December 31, 2020, nonperforming assets totaled $3,278,000. Net loan loss
recoveries for 2021 were $985,000 compared to net loan loss recoveries in the
amount of $510,000 for 2020 and net loan loss charge-offs in the amount of
$999,000 for 2019. Refer to “Asset Quality” below for further information.
Dividend Declared
The Company declared a $0.12 per common share cash dividend, payable on
February 25, 2022 to shareholders of record on February 11, 2022.
Key Factors in Evaluating Financial Condition
and Operating Performance
$317,000, and a decrease in service charge income of $170,000, partially offset by
an increase in interchange fees of $437,000 and an increase in appreciation in cash
surrender value of bank-owned life insurance of $129,000. Other income for the year
ended December 31, 2020 included a $1,167,000 gain related to the collection of
tax-exempt life insurance proceeds.
Non-interest expenses increased $158,000 or 0.33% to $47,842,000 in 2021
compared to $47,684,000 in 2020. The net increase year over year resulted from
increases in data processing of $348,000, information technology of $477,000,
regulatory assessments of $341,000, occupancy and equipment expenses of $256,000,
personnel of $213,000, salaries and employee benefits of $117,000, loan related
expenses of $75,000, donations of $45,000, education and training of $42,000
general insurance of $31,000, telephone of $31,000, alarm of $16,000, and postage
of $11,000, partially offset by decreases in professional services of $733,000,
Internet banking expenses of $330,000, directors’ expenses of $193,000, advertising
expenses of $136,000, stationary and supplies of $78,000, risk management
expenses of $55,000, amortization of software of $41,000, amortization of core
deposit intangible of $34,000, armored courier of $25,000, travel and mileage of
$24,000, and operating losses of $5,000 in 2021 compared to 2020. The Company
recorded an income tax provision of $9,616,000 for the year ended December 31,
2021, compared to $6,914,000 for the year ended December 31, 2020, and
$8,509,000 for the year ended December 31, 2019. Basic EPS was $2.32 for 2021
compared to $1.62 and $1.60 for 2020 and 2019, respectively. Diluted EPS was $2.31
for 2021 compared to $1.62 and $1.59 for 2020 and 2019, respectively.
In evaluating our financial condition and operating performance, we focus on
several key factors including:
Return on Average Assets
• Return to our shareholders;
• Return on average assets;
• Development of revenue streams, including net interest income and
non-interest income;
• Asset quality;
• Asset growth;
• Capital adequacy;
• Operating efficiency; and
• Liquidity.
Return to Our Shareholders
One measure of our return to our shareholders is the return on average equity
(ROE), which is a ratio that measures net income divided by average shareholders’
equity. Our ROE was 11.50% for the year ended 2021 compared to 8.85% and
9.39% for the years ended 2020 and 2019, respectively.
Our net income for the year ended December 31, 2021 increased $8,054,000
compared to 2020 and decreased $1,096,000 in 2020 compared to 2019.
Contributing to the increase during 2021 compared to 2020 was a reversal of
provision for credit losses, an increase in net interest income, and an increase in
interchange fees, partially offset by a decrease in net realized gains on sales and calls
of investment securities, a decrease in service charge income, an increase in non-interest
expense, a decrease in loan placement fees, and an increase in the provision for
income taxes. During 2020, net income compared to 2019 was negatively impacted
by an increase in the provision for credit losses and higher non-interest expenses.
During 2019 net income was positively impacted by an increase in net interest income
and an increase in net realized gains on sales and calls of investment securities.
Net interest income increased primarily because of increases in loan and fee income,
increases in interest income on investments, and decreases in interest expense. For
2021, our net interest margin (NIM) decreased 33 basis points to 3.54% compared to
2020 as a result of yield changes and asset mix changes. The decrease in net interest
margin in the period-to-period comparison resulted from the decrease in the effective
yield on interest earning deposits in other banks and Federal Funds sold and the
decrease in the effective yield on average investment securities, offset by the increase
in the yield on the Company’s loan portfolio. Net interest income during 2021
was positively impacted by from the accretion of the loan marks on acquired loans
in the amount of $802,000 and $1,321,000 for the year ended December 31, 2021
and 2020, respectively. In addition, net interest income before the provision for
credit losses for the year ended December 31, 2021 benefited by approximately
$676,000 in nonrecurring income from prepayment penalties and payoff of loans, as
compared to $805,000 for the year ended December 31, 2020. Excluding these
reversals and benefits, net interest income for the year ended December 31, 2021
increased by $8,779,000 compared to the year ended December 31, 2020.
Non-interest income decreased 34.73% in 2021 compared to 2020 primarily due
to a $3,751,000 decrease in net realized gains on sales and calls of investment securities,
a decrease of $1,118,000 in other income, a decrease in loan placement fees of
Our ROA is a ratio that measures our performance compared with other banks
and bank holding companies. Our ROA for the year ended 2021 was 1.25%
compared to 1.11% and 1.36% for the years ended December 31, 2020 and 2019,
respectively. The 2021 increase in ROA is primarily due to the increase in net income,
notwithstanding the increase in average assets. Annualized ROA for our peer group
was 0.93% at December 31, 2021. 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 3.54% for the year ended December 31, 2021, compared to
3.87% and 4.51% for the years ended December 31, 2020 and 2019, respectively.
The decrease in 2021 net interest margin compared to 2020, 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, offset by the
increase in the yield on the Company’s loan portfolio. The effective tax equivalent
yield on total earning assets decreased 36 basis points, while the cost of total
interest-bearing liabilities decreased 7 basis points to 0.12% for the year ended
December 31, 2021. Our cost of total deposits in 2021 and 2020 was 0.05% and
0.09%, respectively, compared to 0.15% for the same period in 2019. Our net interest
income before provision for credit losses increased $8,131,000 or 12.62% to
$72,554,000 for the year ended 2021 compared to $64,423,000 and $63,772,000
for the years ended 2020 and 2019, 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 2021 decreased $4,792,000 or 34.73% to
$9,005,000 compared to $13,797,000 in 2020 and $13,305,000 in 2019. The
decrease resulted primarily from a decrease in net realized gains on sales and calls of
investment securities, a decrease in service charge income, a decrease in loan placement
fees, a decrease in FHLB dividends, and a decrease in other income, partially offset
by an increase in interchange fees and an increase in appreciation in cash surrender
value of bank-owned life insurance compared to 2020. 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
41
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OVERVIEW (Continued)
in terms of classified and nonperforming loans, and is a key element in estimating
the future earnings of a company. Total nonperforming assets were $946,000 and
$3,278,000 at December 31, 2021 and 2020, respectively. Nonperforming assets
totaled 0.09% of gross loans as of December 31, 2021 and 0.30% of gross loans as
of December 31, 2020. Nonperforming loans were $946,000 and $3,278,000 at
December 31, 2021 and 2020, respectively. The Company had no other real
estate owned at December 31, 2021, or December 31, 2020. No foreclosed assets
were recorded at December 31, 2021 or December 31, 2020. 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 0.09% as of December 31,
2021 and 0.30% as of December 31, 2020. The allowance for credit losses as
a percentage of outstanding loan balance was 0.92% as of December 31, 2021 and
1.17% as of December 31, 2020. The ratio of net recoveries (charge-offs) to average
loans was 0.09% as of December 31, 2021 and 0.05% as of December 31, 2020.
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 22.26%
during 2021 to $2,450,139,000 as of December 31, 2021 from $2,004,096,000 as
of December 31, 2020. Total gross loans decreased 5.74% to $1,039,111,000 as of
December 31, 2021, compared to $1,102,347,000 at December 31, 2020. Total
investment securities increased 55.58% to $1,116,624,000 as of December 31, 2021
compared to $717,726,000 as of December 31, 2020. Total deposits increased
23.22% to $2,122,797,000 as of December 31, 2021 compared to $1,722,710,000
as of December 31, 2020. Our loan to deposit ratio at December 31, 2021 was
48.95% compared to 63.99% at December 31, 2020. The loan to deposit ratio of
our peers was 71.00% at December 31, 2021. 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, 2021, we had a total capital to risk-weighted assets ratio of
15.80%, a Tier 1 risk-based capital ratio of 12.82%, common equity Tier 1 ratio of
12.48%, and a leverage ratio of 8.03%. 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, 2021, on a stand-alone basis, the Bank had a total risk-based capital
ratio of 14.18%, a Tier 1 risk based capital ratio of 13.52%, common equity Tier 1
ratio of 13.52%, and a leverage ratio of 8.47%. At December 31, 2020, the Bank
had a total risk-based capital ratio of 15.48%, Tier 1 risk-based capital of 14.41% and
a leverage ratio of 9.23%. Note 13 of the audited Consolidated Financial Statements
provides more detailed information concerning the Company’s capital amounts
and ratios. As of December 31, 2021, 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, 2021.
Operating Efficiency
Operating efficiency is the measure of how efficiently earnings before taxes are
generated as a percentage of revenue. A lower ratio represents greater efficiency. The
Company’s efficiency ratio (operating expenses, excluding amortization of
intangibles and foreclosed property expense, divided by net interest income plus
non-interest income, excluding net gains and losses from sale of securities) was
57.16% for 2021 compared to 64.08% for 2020 and 62.77% for 2019. The
improvement in the efficiency ratio in 2021 was due to the growth in non-interest
income outpacing the increase in non-interest expense. The Company’s net interest
income before provision for credit losses plus non-interest income increased 4.27% to
$81,559,000 in 2021 compared to $78,220,000 in 2020 and $77,077,000 in
2019, while operating expenses increased 0.33% in 2021, 3.44% in 2020, and 2.29%
in 2019.
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
$277,130,000 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
$1,280,091,000 or 52.25% of total assets at December 31, 2021 and $788,004,000
or 39.32% of total assets as of December 31, 2020.
RESULTS OF OPERATIONS
NET INCOME
Net income was $28,401,000 in 2021 compared to $20,347,000 and
$21,443,000 in 2020 and 2019, respectively. Basic earnings per share was $2.32,
$1.62, and $1.60 for 2021, 2020, and 2019, respectively. Diluted earnings per share
was $2.31, $1.62, and $1.59 for 2021, 2020, and 2019, respectively. ROE was
11.50% for 2021 compared to 8.85% for 2020 and 9.39% for 2019. ROA for 2021
was 1.25% compared to 1.11% for 2020 and 1.36% for 2019.
The increase in net income for 2021 compared to 2020 was driven by a reversal
of provision for credit losses, an increase in net interest income, and an increase in
interchange fees, partially offset by an increase in the provision for income taxes, an
increase in non-interest expense, a decrease in net realized gains on sales and calls of
investment securities, a decrease in loan placement fees, and a decrease in service
charge income. 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.
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.
42
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INTEREST INCOME AND EXPENSE (Continued)
Total average assets
$
2,267,615
$
1,832,987
$
1,574,089
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)
Total interest-earning assets
2,088,989 $
Allowance for credit losses
Nonaccrual loans
Cash and due from banks
Bank premises and equipment
Other assets
(11,482)
2,337
38,202
8,436
141,133
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Savings and NOW accounts
$
529,043 $
Money market accounts
Time certificates of deposit
455,575
89,875
Total interest-bearing deposits
1,074,493
Other borrowed funds
9,864
Total interest-bearing liabilities
1,084,357 $
182
661
193
1,036
266
1,302
678,093
238,870
916,963
1,021,673
1,067,316
900,083
36,311
246,864
Non-interest bearing demand
deposits
Other liabilities
Shareholders’ equity
Total average liabilities and
shareholders’ equity
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)
Year Ended December 31, 2021
Year Ended December 31, 2020
Year Ended December 31, 2019
Average
Balance
Interest
Income/
Expense
Average
Interest Rate
Average
Balance
Interest
Income/
Expense
Average
Interest Rate
Average
Balance
Interest
Income/
Expense
Average
Interest Rate
$
104,710 $
129
0.12% $
76,924 $
246
0.32% $
17,893 $
375
2.10%
14,044
7,096
21,140
21,269
54,077
75,346
2.07%
2.97%
2.31%
2.08%
5.07%
3.61%
11,740
2,489
14,229
14,475
52,066
66,541
2.45%
3.75%
2.61%
2.32%
4.94%
3.97%
479,894
66,299
546,193
623,117
1,053,450
1,676,567 $
(12,242)
2,262
27,575
7,476
131,349
438,042
38,520
476,562
494,455
928,560
1,423,015 $
(9,337)
2,323
25,726
7,983
124,379
13,197
1,639
14,836
15,211
51,464
66,675
3.01%
4.25%
3.11%
3.08%
5.54%
4.69%
341
542
582
1,465
130
1,595
0.03% $
433,742 $
0.15%
0.21%
0.10%
2.70%
0.12%
300,603
89,610
823,955
5,155
829,110 $
744,239
29,831
229,807
0.08% $
370,378 $
0.18%
0.65%
0.18%
2.52%
0.19%
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%
$
2,267,615
$
1,832,987
$
1,574,089
$
75,346
3.61%
$
66,541
3.97%
$
66,675
4.69%
1,302
0.12%
1,595
0.19%
2,559
0.34%
$
74,044
3.54%
$
64,946
3.87%
$
64,116
4.51%
(1) Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $1,490, $523, and $344 in 2021, 2020, and
2019, respectively.
(2) Loan interest income includes loan fees of $6,474 in 2021, $2,234 in 2020, and $164 in 2019.
(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.
43
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INTEREST INCOME AND EXPENSE (Continued)
The following table sets forth a summary of the changes in interest income and
interest expense due to changes in average asset and liability balances (volume) and
changes in average interest rates for the periods indicated. The change in interest due
to both rate and volume has been allocated to the change in rate.
For the Years Ended
December 31, 2021
Compared to 2020
For the Years Ended
December 31, 2020
Compared to 2019
Volume
Rate
Net
Volume
Rate
Net
$
88 $
(205) $
(117)
$
1,237 $ (1,366) $
(129)
(In thousands)
Changes in Volume/Rate
Increase (decrease) due to
changes in:
Interest income:
Interest-earning
deposits in other
banks
Investment securities:
Taxable
4,848
(2,544)
2,304
1,260
(2,717)
(1,457)
Non-taxable (1)
6,478
(1,871)
4,607
1,181
(331)
850
Total investment
securities
11,326
(4,415)
6,911
2,441
(3,048)
(607)
Loans
685
1,326
2,011
6,921
(6,319)
602
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
12,099
(3,294)
8,805
10,599
(10,733)
(134)
353
(393)
(40)
167
(506)
(339)
1
(390)
(389)
(54)
(70)
(124)
354
119
(783)
(429)
17
136
113
(483)
(576)
(18)
(463)
(501)
liabilities
473
(766)
(293)
(370)
(594)
(964)
Net interest income (1)
$ 11,626 $ (2,528) $ 9,098
$ 10,969 $(10,139) $
830
(1) Computed on a tax equivalent basis for securities exempt from federal income taxes.
Interest and fee income from loans increased $2,011,000 or 3.86% in 2021
compared to 2020. Interest and fee income from loans increased $602,000 or
1.17% in 2020 compared to 2019. The increase in 2021 is primarily attributable to
an increase in average total loans outstanding as well as an increase in the yield on
loans of 13 basis points.
Average total loans for 2021 increased $13,941,000 to $1,069,653,000 compared
to $1,055,712,000 for 2020 and $930,883,000 for 2019. The yield on loans for 2021
was 5.07% compared to 4.94% and 5.54% for 2020 and 2019, respectively. The
impact to interest income from the accretion of the loan marks on acquired loans was
an increase of $802,000 and $1,321,000 for the years ended December 31, 2021
and 2020, respectively.
Interest income from total investments on a non tax-equivalent basis, (total
investments include investment securities, Federal funds sold, interest-bearing
deposits in other banks, and other securities), increased $5,827,000 or 41.76% in
2021 compared to 2020. The yield on average investments decreased 24 basis points
to 2.08% for the year ended December 31, 2021 from 2.32% for the year ended
December 31, 2020. Average total investments increased $398,556,000 to
$1,021,673,000 in 2021 compared to $623,117,000 in 2020. In 2020, total
investment income on a non tax-equivalent basis decreased $915,000 or 6.15%
compared to 2019.
44
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, 2021, we held
$527,659,000 or 47.57% of the total market value of the investment portfolio in
MBS and CMOs with an average yield of 2.08%. 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. However, in the current economic environment, prepayments
may not behave according to historical norms. Premium amortization and discount
accretion of these investments affects our net interest income. Our management
monitors the prepayment 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, 2021 was an unrealized
gain of $7,632,000 and is reflected in the Company’s equity. At December 31, 2021,
the effective duration of the investment portfolio was 4.86 years and the market
value reflected a pre-tax unrealized gain of $10,835,000. 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, 2021, 2020, and 2019, 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, 2021, an immediate rate increase of 200 basis points would result
in an estimated decrease in the market value of the investment portfolio by
approximately $117,000,000. Conversely, with an immediate rate decrease of
200 basis points, the estimated increase in the market value of the investment
portfolio would be $123,000,000. 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 2021 increased $7,838,000 to $73,856,000 compared to
$66,018,000 in 2020 and $66,331,000 in 2019, respectively. The increase in 2021
was the result of yield changes and asset mix changes. The tax-equivalent yield on
interest earning assets decreased to 3.61% for the year ended December 31, 2021
from 3.97% for the year ended December 31, 2020. Average interest earning assets
increased to $2,088,989,000 for the year ended December 31, 2021 compared to
$1,676,567,000 for the year ended December 31, 2020. Average interest-earning
deposits in other banks increased $27,786,000 in 2021 compared to 2020. Average
yield on these deposits was 0.12% compared to 0.32% on December 31, 2021 and
December 31, 2020 respectively. Average investments and interest-earning deposits
increased $398,556,000 but the tax equivalent yield on those assets decreased 24 basis
points. Average total loans increased $13,941,000 and the yield on average loans
increased 13 basis points.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INTEREST INCOME AND EXPENSE (Continued)
The decrease in total interest income for 2020 was the result of yield changes,
decrease in interest rates, and asset mix changes. The tax-equivalent yield on
interest-earning assets increased 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 total loans
increased and the yield on average loans decreased 60 basis points.
Interest expense on deposits in 2021 decreased $429,000 or 29.28% to
$1,036,000 compared to $1,465,000 in 2020 and decreased $892,000 as compared
to 2019. The yield on interest-bearing deposits decreased 8 basis points to 0.10%
in 2021 from 0.18% in 2020. The yield on interest-bearing deposits decreased 8 basis
points to 0.18% in 2020 from 0.26% in 2019. Average interest-bearing deposits
were $1,074,493,000 for 2021 compared to $823,955,000 and $738,432,000 for
2020 and 2019, respectively.
Average other borrowings were $9,864,000 with an effective rate of 2.70% for
2021 compared to $5,155,000 with an effective rate of 2.52% for 2020. In 2019,
the average other borrowings were $21,943,000 with an effective rate of 2.88%.
Included in other borrowings are the junior subordinated deferrable interest
debentures acquired from Service 1st, subordinated debt, advances on lines of credit,
advances from the Federal Home Loan Bank (FHLB), and overnight borrowings.
The junior subordinated debentures carry a floating rate based on the three month
LIBOR plus a margin of 1.60%. The rate was 1.73% for 2021, 1.84% for 2020, and
3.59% for 2019. The subordinated debt, issued in 2021, bears a fixed interest rate
of 3.125% per year.
The cost of all interest-bearing liabilities was 0.12% and 0.19% basis points for
2021 and 2020, respectively, compared to 0.34% for 2019. The cost of total deposits
decreased to 0.05% for the year ended December 31, 2021, compared to 0.09%
and 0.15% for the years ended December 31, 2020 and 2019, respectively. Average
demand deposits increased 20.94% to $900,083,000 in 2021 compared to
$744,239,000 for 2020 and $557,348,000 for 2019. The ratio of average non-interest
demand deposits to average total deposits increased to 45.58% for 2021 compared
to 47.46% and 43.01% for 2020 and 2019, respectively.
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
Net interest income before provision for credit losses for 2021 increased $8,131,000
or 12.62% to $72,554,000 compared to $64,423,000 for 2020 and $63,772,000 for
2019. The increase in 2021 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 33 basis points. Yield on
interest earning assets decreased 36 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, offset by the
increase in the yield on the Company’s loan portfolio. Net interest income before
provision for credit losses increased $651,000 in 2020 compared to 2019, primarily
due to the increase in average earning assets, yield changes, asset mix changes, offset by
an increase in average interest bearing liabilities. Average interest-earning assets
were $2,088,989,000 for the year ended December 31, 2021 with a NIM of 3.54%
compared to $1,676,567,000 with a NIM of 3.87% in 2020, and $1,423,015,000
with a NIM of 4.51% in 2019. For a discussion of the repricing of our assets and
liabilities, refer to Quantitative and Qualitative Disclosure about Market Risk.
PROVISION FOR CREDIT LOSSES
We provide for probable incurred credit losses through a charge to operating
income based upon the composition of the loan portfolio, delinquency levels,
historical losses, and nonperforming assets, economic and environmental conditions
and other factors which, in management’s judgment, deserve recognition in
estimating credit losses. Credit risk is inherent in the business of making loans.
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. Loans are charged off when they are considered uncollectible or when
continuance as an active earning bank asset is not warranted.
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/Compliance 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, 2021, the Company recorded a reversal of
provision for credit losses of $4,300,000 compared to a provision of $3,275,000 and
$1,025,000 for the same periods in 2020 and 2019, 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, 2021, 2020 and 2019 the Company had
net charge-offs (recoveries) totaling $(985,000), $(510,000), and $999,000,
respectively. The net charge-off (recovery) ratio, which reflects net charge-offs
(recoveries) to average loans, was (0.09)%, (0.05)% and 0.11% for 2021, 2020, and
2019, 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 operations 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 for 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, 2021, there were $8.5 million
in classified loans of which $2.6 million related to commercial and industrial
loans, $3.6 million to real estate owner occupied, and $2.4 million to agricultural
production. This compares to $36.1 million in classified loans as of December 31,
2020 of which $1.2 million related to agricultural real estate, $3.2 million to real
estate construction, $10.4 million to commercial and industrial, $3.3 million to
agricultural production, $9.6 million to commercial real estate, and $7.3 million to
real estate owner occupied.
45
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
PROVISION FOR CREDIT LOSSES (Continued)
As of December 31, 2021, 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 $76,854,000 for 2021
compared to $61,148,000 and $62,747,000 for 2020 and 2019, respectively.
NON-INTEREST INCOME
Non-interest income is comprised of customer service charges, gains on sales and
calls of investment securities, income from appreciation in cash surrender value of
bank owned life insurance, loan placement fees, Federal Home Loan Bank dividends,
and other income. Non-interest income was $9,005,000 in 2021 compared to
$13,797,000 and $13,305,000 in 2020 and 2019, respectively. The $4,792,000 or
34.73% decrease in non-interest income in 2021 was driven by a decrease of
$3,751,000 in net realized gains on sales and calls of investment securities, a decrease
of $1,118,000 in other income, a decrease in service charge income of $170,000,
and a decrease in loan placement fees of $317,000, partially offset by an increase in
interchange fees of $437,000 and an increase in appreciation in cash surrender value
of bank-owned life insurance of $129,000. Other income for the year ended
December 31, 2020 included a $1,167,000 gain related to the collection of
tax-exempt life insurance proceeds. The 492,000 or 3.70% increase in non-interest
income in 2020 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.
Customer service charges decreased $170,000 to $1,901,000 in 2021 compared
to $2,071,000 in 2020 and $2,756,000 in 2019. The decreases in 2021 and 2020
resulted from decreases in our NSF fees and lower analysis service charge income.
During the year ended December 31, 2021, we realized net gains on sales and
calls of investment securities of $501,000, compared to $4,252,000 in 2020 and
$5,199,000 in 2019. The net gains in 2021, 2020, and 2019 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 $840,000 in 2021 compared to $711,000 and $728,000
in 2020 and 2019, 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 $1,784,000 in 2021 compared to $1,347,000 and
$1,446,000 in 2020 and 2019, 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
decreased $317,000 in 2021 to $1,974,000 compared to $2,291,000 in 2020 and
$978,000 in 2019.
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,
2021 and 2020, we held FHLB stock totaling $5,595,000. Dividends in 2021
decreased to $321,000 compared to $323,000 in 2020 and $455,000 in 2019.
Other income decreased to $1,684,000 in 2021 compared to $2,802,000 and
$1,743,000 in 2020 and 2019, respectively. Other income for the year ended
December 31, 2020 included a $1,167,000 gain related to the collection of
tax-exempt life insurance proceeds.
NON-INTEREST EXPENSES
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
$158,000 or 0.33% to $47,842,000 in 2021 compared to $47,684,000 in 2020, and
$46,100,000 in 2019.
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 57.16% for 2021 compared to 64.08% for 2020 and 62.77% for
2019. The improvement in the efficiency ratio in 2021 and 2020 was due to the
growth in non-interest income outpacing the increase in non-interest expense.
Salaries and employee benefits increased $117,000 or 0.41% to $28,720,000 in
2021 compared to $28,603,000 in 2020 and $26,654,000 in 2019. Full time
equivalents were 256 for the year ended December 31, 2021 compared to 273 for the
year ended December 31, 2020. The increase in salaries and employee benefits in
2021 compared to 2020 was the result of an increase of approximately $535,000 in
salaries and benefits and lower loan origination costs of approximately $878,000, offset
by a decrease of $1,296,000 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.
For the years ended December 31, 2021, 2020, and 2019, the compensation cost
recognized for equity-based compensation was $405,000, $470,000 and $555,000,
respectively. As of December 31, 2021, there was $273,000 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 1.55 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, 2021 and 2020. Restricted
common stock awards of 31,496 and 21,397 shares were awarded in 2021 and
2020, respectively.
Occupancy and equipment expense increased $256,000 or 5.53% to $4,882,000
in 2021 compared to $4,626,000 in 2020 and $5,439,000 in 2019. The Company
made no changes in its depreciation expense methodology. The Company operated
20 full-service offices at December 31, 2021 and at December 31, 2020.
Regulatory assessments were $831,000 in 2021 compared to $490,000 and
$251,000 in 2020 and 2019, 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 increased $477,000 to $2,868,000 for the year
ended December 31, 2021 compared to $2,391,000 and $2,611,000 in 2020 and
2019, respectively. Data processing expenses were $2,394,000 in 2021 compared to
$2,046,000 in 2020 and $1,557,000 in 2019. Professional services decreased
$733,000 in 2021 compared to 2020 due to lower legal expenses and consulting
fees.
Amortization of core deposit intangibles was $661,000 for 2021, $695,000 for
2020, and $695,000 for 2019. During 2021, amortization expense related to FLB
core deposit intangibles (“CDI”) was $423,000, amortization expense related to
SVB CDI was $101,000, and amortization expense related to Visalia Community
Bank (“VCB”) CDI was $137,000. During 2020, 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 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.
ATM/Debit card expenses decreased $1,000 to $818,000 for the year ended
December 31, 2021 compared to $819,000 in 2020 and $920,000 in 2019. Other
non-interest expenses decreased $46,000 or 1.25% to $3,734,000 in 2021 compared
to $3,688,000 in 2020 and $4,386,000 in 2019.
Salaries and employee benefits, occupancy and equipment, regulatory assessments,
The following table describes significant components of other non-interest
acquisition and integration-related expenses, data processing expenses, ATM/Debit
expense as a percentage of average assets.
46
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
NON-INTEREST EXPENSES (Continued)
FINANCIAL CONDITION
For the years ended December 31,
SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS
Other
Expense
2021
%
Average
Assets
Other
Expense
2020
%
Average
Assets
Other
Expense
2019
%
Average
Assets
(Dollars in thousands)
Stationery/supplies
$
150
0.01% $
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
82
224
131
202
255
94
197
374
-
198
133
202
103
147
107
-%
0.01%
0.01%
0.01%
0.01%
-%
0.01%
0.02%
-%
0.01%
0.01%
0.01%
-%
0.01%
-%
228
123
193
115
191
280
149
152
161
-
0.01% $
0.01%
0.01%
0.01%
0.01%
0.02%
0.01%
0.01%
0.01%
-%
156
0.01%
58
171
127
142
109
-%
0.01%
0.01%
0.01%
0.01%
240
350
342
100
218
284
232
212
177
114
155
52
165
256
102
101
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%
Other
1,135
0.05%
1,333
0.08%
1,286
0.08%
Total other non-interest
expense
$
3,734
0.16% $
3,688
0.22% $
4,386
0.28%
PROVISION FOR INCOME TAXES
Our effective income tax rate was 25.3% for 2021 compared to 25.4% for 2020
and 28.4% for 2019. The Company reported an income tax provision of $9,616,000,
$6,914,000, and $8,509,000 for the years ended December 31, 2021, 2020, and
2019, respectively.
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 $6.31 million and $4.74 million
at December 31, 2021 and 2020, respectively. After consideration of the matters in
the preceding paragraph, the Company determined that it is more likely than not that
the net deferred tax assets at December 31, 2021 and 2020 will be fully realized in
future years.
Total assets were $2,450,139,000 as of December 31, 2021, compared to
$2,004,096,000 as of December 31, 2020, an increase of 22.26% or $446,043,000.
Total gross loans were $1,039,111,000 as of December 31, 2021, compared to
$1,102,347,000 as of December 31, 2020, a decrease of $63,236,000 or 5.74%.
The total investment portfolio (including Federal funds sold and interest-earning
deposits in other banks) increased 65.91% or $496,850,000 to $1,250,679,000. Total
deposits increased 23.22% or $400,087,000 to $2,122,797,000 as of December 31,
2021, compared to $1,722,710,000 as of December 31, 2020. Shareholders’
equity increased $2,824,000 or 1.15% to $247,845,000 as of December 31, 2021,
compared to $245,021,000 as of December 31, 2020. The increase in shareholders’
equity was driven by the retention of earnings, net of dividends paid, the decrease
in net unrealized gains on available-for-sale (AFS) securities recorded, net of estimated
taxes, in accumulated other comprehensive income (AOCI), and share repurchases.
Accrued interest payable and other liabilities were $40,043,000 as of December 31,
2021, compared to $31,210,000 as of December 31, 2020, an increase of
$8,833,000.
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)
Treasuries
Amortized Cost at December 31,
2021
2020
2019
$
9,988 $
- $
-
U.S. Government agencies
373
651
Obligations of states and political subdivisions
512,952
361,734
14,740
89,574
U.S. Government sponsored entities and agencies
collateralized by residential mortgage obligations
213,471
214,203
198,125
Private label mortgage and asset backed securities
Corporate debt securities
317,089
44,500
82,413
30,000
155,308
9,000
Total Available-for-Sale Securities
$ 1,098,373 $
689,001 $
466,747
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, 2021, investment
securities with a fair value of $260,325,000, or 23.47% of our investment securities
portfolio, were held as collateral for public funds, short and long-term borrowings,
treasury, tax, and for other purposes. Our investment policies are established by the
47
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INVESTMENTS (Continued)
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, 2021 was 48.95% compared to 63.99% at
December 31, 2020. The loan to deposit ratio of our peers was 71.00% at
December 31, 2021. 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 65.91% or $496,850,000
to $1,250,679,000 at December 31, 2021, from $753,829,000 at December 31,
2020. The market value of the portfolio reflected an unrealized gain of $10,835,000
at December 31, 2021, compared to an unrealized gain of $21,091,000 at
December 31, 2020.
Losses recognized in 2021, 2020, and 2019 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.
The Company periodically evaluates 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, 2021, 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). The Company evaluated all individual
available-for-sale investment securities with an unrealized loss at December 31,
2021 and identified those that had an unrealized loss for at least a consecutive
12 month period, which had an unrealized loss at December 31, 2021 greater than
10% of the recorded book value on that date, or which had an unrealized loss of more
than $75,000. The Company 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, 2021, 2020,
or 2019.
The amortized cost, maturities and weighted average yield of investment securities at December 31, 2021 are summarized in the following table.
(Dollars in thousands)
Available-for-Sale Securities
Debt securities (1)
U.S. Treasury securities
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
five years
After five through
ten years
After ten years
Total
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
$
$
-
-
-
-
-
-
$
-
-
3,690
-
-
-
$
9,988
1.25% $
-
-
$
9,988
1.25%
-
-
373
4.25%
373
4.25%
89,627
2.72%
419,635
3.79%
512,952
3.57%
5
4.80%
16
5.99%
6,056
1.44%
207,394
2.32%
213,471
2.26%
47
-
52
4.75%
41,890
3.70%
28,155
1.31%
246,997
2.34%
317,089
2.43%
-
-
-
44,500
4.44%
-
-
44,500
4.44%
4.85% $ 45,596
3.40% $ 178,326
2.81% $ 874,399
3.03% $1,098,373
3.01%
(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.
48
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
LOANS
Total gross loans decreased $63,236,000 or 5.74% to $1,039,111,000 as of December 31, 2021, compared to $1,102,347,000 as of December 31, 2020.
The following table sets forth information concerning the composition of our loan portfolio as of December 31, 2021, 2020, 2019, 2018, and 2017.
Loan Type
(Dollars in thousands)
Commercial:
2021
2020
2019
2018
2017
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Amount
% of Total
Loans
Commercial and industrial
$ 136,847
13.2% $ 273,994
24.9% $ 102,541
10.9% $ 101,533
11.1% $ 100,856
11.2%
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) costs, net
Total gross loans (1)
Allowance for credit losses
Total loans (1)
(1) Includes nonaccrual loans of:
40,860
3.9%
21,971
2.0%
23,159
2.6%
7,998
0.9%
14,956
1.7%
177,707
17.1%
295,965
26.9%
125,700
13.5%
109,531
12.0%
115,812
12.9%
212,234
20.4%
208,843
18.9%
197,946
21.0%
183,169
19.9%
204,452
22.7%
61,586
5.9%
55,419
5.0%
73,718
7.8%
101,606
369,529
35.6%
338,886
30.7%
329,333
34.9%
305,118
98,481
26,084
9.5%
2.5%
84,258
28,718
7.6%
2.6%
76,304
31,241
8.1%
3.3%
76,884
32,799
11.1%
33.2%
8.4%
3.6%
96,460
269,254
76,081
31,220
10.7%
29.9%
8.4%
3.5%
767,914
73.9%
716,124
64.8%
708,542
75.1%
699,576
76.2%
677,467
75.2%
55,620
36,999
92,619
871
5.4%
3.6%
9.0%
55,634
37,236
92,870
(2,612)
5.0%
3.3%
8.3%
64,841
42,782
6.9%
4.5%
69,958
38,038
7.6%
4.2%
76,404
29,637
8.5%
3.4%
107,623
11.4%
107,996
11.8%
106,041
11.9%
1,515
1,592
1,359
1,039,111
100.0% 1,102,347
100.0%
943,380
100.0%
918,695
100.0%
900,679
100.0%
(9,600)
$ 1,029,511
$
946
(12,915)
$ 1,089,432
$
3,278
(9,130)
$ 934,250
$
1,693
(9,104)
$ 909,591
$
2,740
(8,778)
$ 891,901
$
2,875
At December 31, 2021, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $93,201,000, of which $2,111,000 were commercial loans, $83,128,000
were real estate loans, and $7,962,000 were consumer loans, and at December 31, 2020, the acquired loans 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.
At December 31, 2021, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 96.4% of
total loans of which 17.1% were commercial and 79.3% were real-estate-related. This level of concentration is consistent with 96.7% at December 31, 2020. 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, 2021 and 2020.
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 in 2020 was the issuance of PPP loans. As of December 31, 2021, gross loans included $18,553,000
in PPP loans which are fully guaranteed by the SBA as compared to $192,916,000.00 as of December 31, 2020.
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.
49
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, 2021.
One Year or
Less
After One
Through Five
Years
After Five
Years
Total
$
87,847
$
63,086
$
26,774
$
177,707
52,139
45,556
5,983
191,525
67,138
124,387
191,525
62,044
$
$
$
$
5,436
160,129
13,967
242,618
149,904
92,432
242,336
78,461
$
$
$
$
4,011
500,643
72,669
604,097
137,841
466,538
604,379
406,836
61,586
706,328
92,619
1,038,240
354,883
683,357
1,038,240
547,341
$
$
$
$
$
$
$
$
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, 2021, total nonperforming assets totaled $946,000, or 0.04%
of total assets, compared to $3,278,000, or 0.16% of total assets at December 31,
2020. Nonperforming assets totaled 0.09% of gross loans as of December 31, 2021
and 0.30% of gross loans as of December 31, 2020. Total nonperforming assets at
December 31, 2021, included nonaccrual loans totaling $946,000, no OREO, and
no repossessed assets. Nonperforming assets at December 31, 2020 consisted of
$3,278,000 in nonaccrual loans, no OREO, and no repossessed assets. At
December 31, 2021 and December 31, 2020, we had no loans considered a
troubled debt restructuring (“TDR”) included in nonaccrual loans. 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,
2021, 2020, 2019, 2018, and 2017 is set forth below. The Company had no loans
past due more than 90 days and still accruing interest at December 31, 2021 and
2020. Management is not aware of any potential problem loans, which were
current and accruing at December 31, 2021, 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.
(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 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
50
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)
2021
2020
2019
2018
2017
Nonaccrual Loans:
Commercial and industrial
Agricultural production
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):
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
$
312
634
-
-
-
-
-
-
-
946
-
946
99
0.09%
-
7,640
9.85%
8,586
649
$
$
$
$
$
$
$
$
$
$
$
$
$
752
$
187
$
298
$
356
-
370
1,556
-
512
-
88
-
3,278
-
3,278
177
0.30%
-
7,908
25.38%
11,186
631
-
416
-
321
381
66
-
322
1,693
-
1,693
85
0.18%
-
2,040
18.54%
3,734
40
$
$
$
$
$
$
$
$
$
$
$
$
-
215
1,439
-
418
320
-
50
2,740
-
2,740
267
0.30%
-
3,170
30.10%
5,909
90
-
-
1,397
-
976
87
-
59
2,875
-
2,875
210
0.32%
-
3,491
32.75%
6,366
36
$
$
$
$
$
$
As of December 31, 2021 and 2020, we had impaired loans totaling $8,586,000
and $11,186,000, 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 $99,000 for the year ended December 31, 2021
of which none was attributable to troubled debt restructurings. 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.
51
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, 2021.
(In thousands)
Non-accrual loans:
Commercial and industrial
Agricultural real estate
Real estate
Real estate construction and other land loans
Consumer
Total non-accrual
Balances
December 31,
2020
Additions to
Nonaccrual
Loans
Net Pay
Downs
Transfer to
Foreclosed
Collateral
Returns to
Accrual
Status
Balances
December 31,
2021
Charge-Offs
$
752
$
-
$
(385)
$
-
882
1,556
88
2,141
17
-
-
(1,507)
(249)
(1,531)
(2)
$
3,278
$
2,158
$
(3,674)
$
-
-
-
-
-
-
$
(55)
$
-
(650)
(25)
(86)
$
(816)
$
-
-
-
-
-
-
$
312
634
-
-
-
$
946
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, 2021, 2020, and 2019, the Bank
had no OREO properties. The Company held no repossessed assets at December 31,
2021, 2020, and 2019, 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 52 quarters, and qualitative and quantitative
factors including economic trends in the Company’s service areas, industry experience
and trends, industry and 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 52 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: (i) losses accrued for on loans when they are probable of occurring and
can be reasonably estimated and (ii) losses accrued based on the differences between
the value of collateral, present value of future cash flows or values that are observable
in the secondary market and the loan balance.
Management adheres to an internal asset review system and loss allowance
methodology designed to provide for timely recognition of problem assets and
adequate valuation allowances to cover probable incurred losses. The Bank’s asset
monitoring process includes the use of asset classifications to segregate the assets,
largely loans and real estate, into various risk categories. The Bank uses the various
asset classifications as a means of measuring risk and determining the adequacy of
valuation allowances by using a nine-grade system to classify assets. In general, all
credit facilities exceeding 90 days of delinquency require classification and are placed
on nonaccrual.
52
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table summarizes the Company’s loan loss experience, as well as provisions and recoveries (charge-offs) to the allowance and certain pertinent ratios for the
periods indicated:
(Dollars in thousands)
Loans outstanding at December 31,
Average loans outstanding during the year
Allowance for credit losses:
Balance at beginning of year
Deduct loans charged off:
Commercial and industrial
Agricultural production
Owner occupied
Consumer loans
Total loans charged off
Add recoveries of loans previously charged off:
Commercial and industrial
Agricultural production
Owner occupied
Real estate construction and other land loans
Commercial real estate
Consumer loans
Total recoveries
Net (charge-offs) recoveries
(Reversal of ) Provision for credit losses
2021
2020
2019
2018
2017
$
$
$
1,038,240
1,069,653
12,915
$
$
$
1,104,959
1,055,712
9,130
$
$
$
941,865
930,883
9,104
$
$
$
917,103
912,128
8,778
$
$
$
899,320
793,343
9,326
(46)
-
-
(221)
(267)
701
-
-
319
-
232
1,252
985
(4,300)
(121)
(1,032)
-
-
(108)
(229)
612
-
-
-
-
127
739
510
3,275
-
-
(164)
(1,196)
134
-
-
-
-
63
197
(999)
1,025
(94)
-
-
(116)
(210)
207
-
21
-
81
177
486
276
50
(197)
(10)
(22)
(235)
(464)
850
10
49
-
17
140
1,066
602
(1,150)
8,778
0.98%
0.08%
Balance at end of year
$
9,600
$
12,915
$
9,130
$
9,104
$
Allowance for credit losses as a percentage of outstanding
loan balance
Net recoveries (charge-offs) to average loans outstanding
0.92%
0.09%
1.17%
0.05%
0.97%
(0.11)%
0.99%
0.03%
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.
53
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:
2021
2020
2019
2018
2017
Loan Type (Dollars in thousands)
Amount
Commercial:
Percent of
Loans in
Each
Category to
Total Loans
Percent of
Loans in
Each
Category to
Total Loans
Amount
Percent of
Loans in
Each
Category to
Total Loans
Percent of
Loans in
Each
Category to
Total Loans
Amount
Amount
Amount
Commercial and industrial
$
1,691
13.2% $
1,764
24.9% $
1,115
10.9% $
1,604
11.1% $
1,784
Agricultural production
320
3.9%
255
2.0%
313
2.6%
67
0.9%
287
Percent of
Loans in
Each
Category to
Total Loans
11.2%
1.7%
Real estate:
Owner occupied
Real estate construction and other
land loans
Commercial real estate
Agricultural real estate
Other real estate
Consumer:
Equity loans and lines of credit
Consumer and installment
Unallocated reserves
1,355
20.4%
2,128
18.9%
1,319
21.0%
1,131
19.9%
1,252
22.7%
812
3,805
697
72
256
312
280
5.9%
35.6%
9.5%
2.5%
5.4%
3.6%
1,204
4,781
838
223
457
634
631
5.0%
30.7%
7.6%
2.6%
5.0%
3.3%
932
3,453
925
140
425
472
36
7.8%
34.9%
8.1%
3.3%
6.9%
4.5%
1,271
3,017
947
173
419
407
68
11.1%
33.2%
8.4%
3.6%
7.6%
4.2%
1,004
1,958
1,441
140
464
361
87
10.7%
29.9%
8.4%
3.5%
8.5%
3.4%
Total allowance for credit losses
$
9,600
100.0% $
12,915
100.0% $
9,130
100.0% $
9,104
100.0% $
8,778
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, 2021, the allowance for credit losses (ALLL) was $9,600,000,
compared to $12,915,000 at December 31, 2020, a net decrease of $3,315,000. The
net decrease in the ALLL reflected the negative provision and net recoveries during
the year ended December 31, 2021 which was necessitated by management’s
observations and assumptions about the existing credit quality of the loan portfolio.
Net recoveries totaled $985,000 while the reversal of provision for credit losses
was $4,300,000 for the year ended December 31, 2021. The Company’s negative
provision for credit losses during the year ended December 31, 2021 is primarily due
to change 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 $8,540,000 and $40,845,000 at December 31, 2021 and
$36,136,000 and $36,406,000 at December 31, 2020, respectively. The balance of
undisbursed commitments to extend credit on construction and other loans and letters
of credit was $326,108,000 as of December 31, 2021, compared to $326,179,000
as of December 31, 2020. At December 31, 2021 and 2020, the balance of a
contingent allocation for probable loan loss experience on unfunded obligations was
$115,000 and $250,000, respectively. 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 0.92% at December 31, 2021, and
1.17% at December 31, 2020. Total loans include FLB, SVB and VCB loans that
were recorded at fair value in connection with the acquisitions of $93,201,000 at
December 31, 2021 and $127,186,000 at December 31, 2020. Excluding these
54
acquired loans from the calculation, the ALLL to total gross loans was 1.01% and
1.32% as of December 31, 2021 and 2020, respectively, and general reserves associated
with non-impaired loans to total non-impaired loans was 0.98% and 1.59%,
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. As of December 31, 2021 and 2020 gross loans included
loans related to PPP loans which are fully guaranteed by the SBA in the amount of
$18,553,000 and $192,916,000.00, respectively. Excluding PPP loans and the
acquired loans from the calculation, the allowance for credit losses to total gross loans
was 1.04% and 1.65% as of December 31, 2021 and 2020, respectively.
The Company’s loan portfolio balances in 2021 decreased from 2020. Net loans
decreased $59.9 million or 5.50%, at December 31, 2021 compared to December 31,
2020. The net loan decrease consisted of a decrease of $174.4 million in
SBA Paycheck Protection Program (PPP) loans, offset by an increase of $114.4 million
in non-PPP loan growth. 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, 2021.
Non-performing loans totaled $946,000 as of December 31, 2021, and
$3,278,000 as of December 31, 2020. Nonperforming loans as a percentage of total
loans were 0.09% at December 31, 2021 compared to 0.30% at December 31,
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
ALLOWANCE FOR CREDIT LOSSES (Continued)
2020. The Company had no other real estate owned at December 31, 2021,
December 31, 2020, and December 31, 2019. No foreclosed assets were recorded at
December 31, 2021, December 31, 2020, and December 31, 2019. The allowance
for credit losses as a percentage of nonperforming loans was 1,014.80% and 393.99%
as of December 31, 2021 and December 31, 2020, 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, 2021 is
adequate based upon its ongoing analysis of the loan portfolio, historical loss
trends and other factors. However, no assurance can be given that the Company
may not sustain charge-offs which are in excess of the allowance in any given period.
GOODWILL AND INTANGIBLE ASSETS
Business combinations involving the Bank’s acquisition of the equity interests or
net assets of another enterprise give rise to goodwill. Total goodwill at December 31,
2021 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.
Management performed an annual impairment test in the third quarter of 2021
utilizing various qualitative factors. Management believes these factors are sufficient
and comprehensive and as such, no further factors need to be assessed at this
time. Based on management’s analysis performed, no impairment was required.
Goodwill is also 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. No such events or circumstances arose during for the year
ended December 31, 2021. 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.
The intangible assets at December 31, 2021 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, 2021 was $522,000, net of
$3,230,000 in accumulated amortization expense. The carrying value at December 31,
2020 was $1,183,000, net of $2,569,000 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, 2021 and determined no impairment was necessary. In addition,
management determined that no events had occurred between the annual evaluation
date and December 31, 2021 which would necessitate further analysis. Amortization
expense recognized was $661,000 for 2021, $695,000 for 2020 and $695,000 for
2019.
Years Ending December 31,
2022
2023
Thereafter
Total
Estimated Core
Deposit
Intangible
Amortization
$
$
454
68
-
522
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 $400,087,000 or 23.22% to $2,122,797,000 as of
December 31, 2021, compared to $1,722,710,000 as of December 31, 2020.
Interest-bearing deposits increased $261,392,000 or 29.11% to $1,159,213,000 as
of December 31, 2021, compared to $897,821,000 as of December 31, 2020.
Non-interest bearing deposits increased $138,695,000 or 16.81% to $963,584,000
as of December 31, 2021, compared to $824,889,000 as of December 31, 2020. The
Company’s deposit balances for the year ended December 31, 2021 increased
through organic growth and PPP loan proceeds retained in customer deposit
accounts. Average non-interest bearing deposits to average total deposits was 45.58%
for the year ended December 31, 2021 compared to 47.46% for the same period
in 2020. Based on FDIC deposit market share information published as of June 2021,
our total market share of deposits in Fresno, Madera, San Joaquin, and Tulare
counties was 3.83% in 2021 compared to 3.40% in 2020. Our total market share in
the other counties we operate in (El Dorado, Merced, Placer, Sacramento, and
Stanislaus), was less than 1.00% in 2021 and 2020.
The composition of the deposits and average interest rates paid at December 31,
2021 and December 31, 2020 is summarized in the table below.
(Dollars in thousands)
December 31,
2021
% of
Total
Deposits
Effective
Rate
December 31,
2020
% of
Total
Deposits
Effective
Rate
NOW accounts
$
360,462
17.0% 0.05% $
310,697
18.0% 0.11%
MMA accounts
Time deposits
Savings deposits
511,448
24.1% 0.15%
341,088
19.8% 0.18%
90,030
4.2% 0.21%
89,846
5.2% 0.65%
197,273
9.3% 0.01%
156,190
9.1% 0.02%
Total interest-bearing
1,159,213
54.6% 0.10%
897,821
52.1% 0.18%
Non-interest bearing
963,584
45.4%
824,889
47.9%
Total deposits
$
2,122,797
100.0%
$
1,722,710
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, 2021, 2020,
and 2019.
(Dollars in
thousands)
Savings and NOW
accounts
Money market
accounts
Non-interest
$
$
2021
2020
2019
Balance
Rate
Balance
Rate
Balance
Rate
529,043
0.03% $
433,742
0.08% $
370,378
0.15%
455,575
0.15% $
300,603
0.18% $
270,918
0.24%
bearing demand $
900,083
-
$
744,239
-
$
557,348
-
The following table summarizes the Company’s estimated core deposit intangible
Total deposits
$ 1,974,576
0.05% $ 1,568,194
0.09% $ 1,295,780
0.15%
amortization expense for each of the next five years (in thousands):
55
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
DEPOSITS AND BORROWINGS (Continued)
The following table sets forth certain financial ratios for the years ended
December 31, 2021, 2020, and 2019.
Net income:
To average assets
To average shareholders’ equity
Dividends declared per share to net
2021
2020
2019
1.25%
11.50%
1.11%
8.85%
1.36%
9.39%
income per share
19.72%
26.99%
26.22%
Average shareholders’ equity to
average assets
10.89%
12.54%
14.51%
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, 2021 and December 31, 2020.
December 31, 2021
Tier 1 Leverage Ratio
Common Equity Tier 1 Ratio (CET 1)
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
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
Actual Ratio
Amount
Ratio
(Dollars in thousands)
$
$
$
$
$
$
$
$
189,020
184,020
189,020
233,034
178,407
173,407
178,407
191,572
8.03%
12.48%
12.82%
15.80%
9.28%
14.10%
14.50%
15.58%
The following table sets forth the maturity of time certificates of deposit and
other time deposits of $100,000 or more at December 31, 2021.
(In thousands)
Three months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
$
$
31,308
7,712
18,090
8,249
65,359
As of December 31, 2021 and 2020, 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 at December 31, 2021 and 2020, at interest
rates which vary with market conditions. As of December 31, 2021 and 2020, 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 $247,845,000 as of December 31, 2021, compared
to $245,021,000 as of December 31, 2020. The increase in shareholders’ equity is the
result of an increase in retained earnings from our net income of $28,401,000, the
exercise of stock options in the amount of $256,000, the effect of share-based
compensation expense of $405,000, and stock issued under our employee stock
purchase plan of $204,000, partially offset by a decrease in accumulated other
comprehensive income (AOCI) of $7,224,000, the payment of common stock cash
dividends of $5,757,000, and the repurchase and retirement of common stock of
$13,619,000.
During 2021, the Bank declared and paid cash dividends to the Company in the
amount of $7,679,000 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 $5,757,000 or $0.47 per common share cash dividend to
shareholders of record during the year ended December 31, 2021. During the year
ended December 31, 2021, the Company repurchased and retired common stock in
the amount of $13,619,000.
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.
56
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
$ 199,329
8.47% $
94,156
4.00% $ 117,695
5.00%
LIQUIDITY
CAPITAL RESOURCES (Continued)
The following table presents the Bank’s regulatory capital ratios as of December 31,
2021 and December 31, 2020
Actual Ratio
Minimum regulatory
requirement (1)
Minimum requirement
for “Well-Capitalized”
Institution
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2021
Tier 1 Leverage
Ratio
Common Equity
Tier 1 Ratio
(CET 1)
Tier 1 Risk-Based
Capital Ratio
Total Risk-Based
Capital Ratio
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
$ 199,329
13.52% $
66,355
7.00% $
95,846
6.50%
$ 199,329
13.52% $
88,473
8.50% $ 117,964
8.00%
$ 209,044
14.18% $ 117,964
10.50% $ 147,455
10.00%
$ 177,269
9.23% $
76,852
4.00% $
96,065
5.00%
$ 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%
(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, 2021, 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, 2021, the rate was 1.73%. Interest expense
recognized by the Company for the years ended December 31, 2021, 2020, and
2019 was $266,000, $130,000 and $210,000, respectively.
On November 12, 2021, the Company completed a private placement of
$35.0 million aggregate principal amount of its fixed-to-floating rate subordinated
notes (“Subordinated Debt”) due December 1, 2031. The Subordinated Debt initially
bears a fixed interest rate of 3.125% per year. Commencing on December 1, 2026,
the interest rate on the Subordinated Debt will reset each quarter at a floating interest
rate equal to the then-current three month term SOFR plus 210 basis points. The
Company may at its option redeem in whole or in part the Subordinated Debt on or
after November 12, 2026 without a premium. The Subordinated Debt is treated as
Tier 2 Capital for regulatory purposes.
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, 2021, the Company had unpledged securities totaling
$856,299,000 available as a secondary source of liquidity and total cash and cash
equivalents of $163,467,000. Cash and cash equivalents at December 31, 2021
increased 132.60% compared to December 31, 2020. 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, 2021, our available borrowing capacity
includes approximately $110,000,000 in Federal funds lines with our correspondent
banks and $277,130,000 in unused FHLB advances. At December 31, 2021, 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, 2021 and 2020:
Credit Lines
(In thousands)
December 31,
2021
December 31,
2020
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
$
$
$
$
$
$
$
$
$
$
110,000 $
110,000
- $
-
277,130 $
235,371
- $
-
481,437 $
435,152
435,089 $
379,831
9,961 $
13,323
- $
10,361 $
10,241 $
-
13,538
13,703
57
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
LIQUIDITY (Continued)
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.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with the accounting
principles generally accepted in the United States (“U.S. GAAP”) requires
management to make a number of judgments, estimates and assumptions that affect
the reported amount of assets, liabilities, income and expense in the financial
statements. Various elements of our accounting policies, by their nature, involve the
application of highly sensitive and judgmental estimates and assumptions. Some
of these policies and estimates relate to matters that are highly complex and contain
inherent uncertainties. It is possible that, in some instances, different estimates
and assumptions could reasonably have been made and used by management, instead
of those we applied, which might have produced different results that could have
had a material effect on the financial statements.
We have identified the following accounting policies and estimates that, due to
the inherent judgments and assumptions and the potential sensitivity of the financial
statements to those judgments and assumptions, are critical to an understanding of
our financial statements. We believe that the judgments, estimates and assumptions
used in the preparation of the Company’s financial statements are appropriate. For
a further description of our accounting policies, see Note 1—Summary of Significant
Accounting Policies in the financial statements included in this Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Allowance for Credit Losses
Our allowance for credit losses is an estimate of probable incurred losses in the
loan portfolio. Loans are charged off against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are
credited to the allowance for credit losses. Management’s methodology for estimating
the allowance balance consists of several key elements, which include specific
allowances on individual impaired loans and the formula driven allowances on pools
of loans with similar risks. The allowance is only an estimate of the inherent loss in
the loan portfolio and may not represent actual losses realized over time, either of
losses in excess of the allowance or of losses less than the allowance. Our accounting
for estimated loan losses is discussed and disclosed primarily in Note 1 and 4 to the
consolidated financial statements under the heading “Allowance for Credit Losses”.
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, 2021, 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.
58
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, 2021, 65.82% 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, 2021, 88.24% 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, 2021. 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,
2021 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.
59
Quantitative and Qualitative Disclosures about Market Risk
The results in the table below indicate the change in net interest income the
Company would expect to see as of December 31, 2021, if interest rates were to
change in the amounts set forth:
The following table shows the repricing categories of the Company’s loan
portfolio at December 31, 2021 and 2020:
December 31, 2021
December 31, 2020
Repricing
(Dollars in thousands)
Balance
Percent of
Total
Balance
Percent of
Total
< 1 Year
1-3 Years
3-5 Years
> 5 Years
$
331,374
31.92% $
455,859
208,853
294,467
203,546
20.12%
28.36%
19.60%
233,153
274,800
141,147
41.26%
21.10%
24.87%
12.77%
Total gross loans
$ 1,038,240
100.00% $ 1,104,959
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.
Sensitivity Analysis of Impact of Rate Changes on Interest Income
Hypothetical Change in Rates
(Dollars in thousands)
Projected Net
Interest Income
$ Change from
Rates at
December 31,
2021
% Change from
Rates at
December 31,
2021
Up 400 bps
Up 300 bps
Up 200 bps
Up 100 bps
Unchanged
Down 100 bps
$
68,300
$
70,600
70,400
69,400
68,800
66,600
(500)
1,800
1,600
600
-
(0.73)%
2.62%
2.33%
0.87%
-
(2,200)
(3.20)%
It is important to note that the above table is a summary of several forecasts and
actual results may vary from any of the forecasted amounts and such difference may
be material and adverse. The forecasts are based on estimates and assumptions
made by management, and that may turn out to be different, and may change over
time. Factors affecting these estimates and assumptions include, but are not limited to:
1) competitor behavior, 2) economic conditions both locally and nationally,
3) actions taken by the Federal Reserve Board, 4) customer behavior and
5) management’s responses to each of the foregoing. Factors that vary significantly
from the assumptions and estimates may have material and adverse effects on the
Company’s net interest income; therefore, the results of this analysis should not be
relied upon as indicative of actual future results.
The following table shows management’s estimates of how the loan portfolio is
segregated between variable-daily, variable other than daily, and fixed rate loans, and
estimates of re-pricing opportunities for the entire loan portfolio at December 31,
2021 and 2020:
December 31, 2021
December 31, 2020
Rate Type
(Dollars in thousands)
Balance
Percent of
Total
Balance
Percent of
Total
Variable rate
Fixed rate
$
683,357
65.82% $
817,678
354,883
34.18%
287,281
74.00%
26.00%
Total gross loans
$ 1,038,240
100.00% $ 1,104,959
100.00%
Approximately 65.82% of our loan portfolio is tied to adjustable rate indices and
20.75% of our loan portfolio reprices within 90 days. As of December 31, 2021, we
had 1,958 commercial and real estate loans totaling $585,067,000 with floors
ranging from 0.74% to 9.00% and ceilings ranging from 4.50% to 25.00%.
60
Stock Price
Information
The Company’s common stock is listed for trading on the NASDAQ Capital Market under the ticker symbol CVCY. As of March 4, 2022, the Company had approximately
918 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, 2020
June 30, 2020
September 30, 2020
December 31, 2020
March 31, 2021
June 30, 2021
September 30, 2021
December 31, 2021
$
Sales Prices for the Company’s Common Stock
High
21.69
16.81
15.68
16.70
21.35
21.75
23.83
21.95
Low
10.68
10.59
11.51
12.25
14.89
17.33
19.56
20.47
$
The Company paid common share cash dividends of $0.47 and $0.44 per share in 2021 and 2020, 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.hotline-services.com or Compliance Hotline at 1-855-252-7606.
General inquiries about the Company or the Bank should be directed to LeAnn Ruiz, Assistant Corporate Secretary at (800) 298-1775.
61
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63
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www.cvcb.com
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
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
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) 323-3472
Greater Sacramento
(916) 859-2556
Mid-Valley
(209) 956-1105
Central Valley
(559) 323-3481
South Valley
(559) 594-9919 Ext. 6504
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