TO OUR
Shareholders
Investing in Relationships and
Building Stronger Communities
˙e year 2022 may be remembered for continuing the ongoing spiral of
economic uncertainty, but despite this challenging environment, Central
Valley Community Bancorp (Company) ended the year with remarkable
overall ÿnancial performance.
With assets of $2.42 billion as of December 31, 2022, the Company
achieved success across all key objectives, including growth in loans,
pristine asset quality and strong earnings. ˙ese positive results
can be attributed, in part, to our loyal clients, who understand that
CVCB is not just their bank, but their partner, regardless of the
economic environment.
˙e Company’s ÿnancial results re°ect the impact of signiÿcant interest
rate increases throughout 2022, as evidenced by improved earnings and a
decrease in value of earning assets on the balance sheet. ˙e resilience of
the Company’s core deposit base shines, as the industry endures liquidity
stress in 2023.
As we re°ect on the past year, it is with thanks to our hard-working
team whose advocacy and service to clients and communities has been
remarkable, especially considering the ever-changing nature of the ÿscal
landscape. We are also grateful to the clients that joined us in 2022,
entrusting us with the honor of advocating for their ÿnancial success.
We remain steadfast in our commitment to build short- and long-term
Company value, including a strong core deposit base, ample liquidity
and solid capital position, while continuing to prioritize exceptional
client service.
2022 Financial Performance
˙e Company reported assets as of December 31, 2022, of
$2.4 billion. Net income for the year ended December 31, 2022, was
$26.6 million. Loan growth was strong, reaching $1.26 billion by
year-end 2022, and total deposits remained robust at $2.1 billion
˙e Board of Directors declared dividends for all four quarters of 2022
totaling $0.48 per share. ˙e Company’s cost of average total deposits
barely increased to 0.06% for the year ended December 31, 2022,
compared to 0.05% for the same period in 2021.
2022 Economic Overview
From record-setting in°ation to stock market volatility, interest rate
hikes to the persistent threat of recession, 2022 was rife with challenges
to be navigated.
Nationally in 2022, the Federal Reserve raised interest rates 7 times
totaling 4.25% in an e˜ort to slow the skyrocketing in°ation rate which
hit 9.1%. Led by the S&P’s plummet of 500 points – 19% of its total
value – the stock market declined each quarter in 2022, seeing some of
its lowest returns since the 1970s.
On a positive note, the nation’s unemployment rate fell to a historic low
of 3.5% by year-end 2022. And gains in healthcare, leisure, hospitality
and construction jobs helped America’s workforce recover from the high
unemployment of the pandemic.
In California, sales of existing homes dropped more than 40% in
November 2022 from the year prior, and median home prices declined.
Additionally, Central Valley farmers were notiÿed of reduced water
allocations, as the state had received just 76% of its average rainfall by
year-end.
However, 2023’s precipitation has already improved the outlook for
California farmers. In other good news, the pandemic’s decline spurred
a rebound in the travel and tourism industries, while average wages and
family income rose in 2022.
2022 Leadership Transitions
In April 2022, Je˜ M. Martin joined the Company as Executive
Vice President, Market Executive. Je˜ leads CVCB’s Northern region,
which encompasses Greater Sacramento, San Joaquin, Stanislaus and
Merced Counties.
In September 2022, Dawn P. Crusinberry, Senior Vice President,
Controller, was appointed as the Company’s Interim Executive Vice
President, Chief Financial O˝cer. Shannon R. Avrett was named
Executive Vice President, Chief Financial O˝cer in February 2023,
bringing a wealth of expertise, ÿnancial acumen and strategic leadership to
the executive management team. Dawn Crusinberry will remain with the
Company as Executive Vice President through the completion of a smooth
transition. She then plans to retire after an exemplary 40-plus year career,
23 years with CVCB.
Founding Director and Director Emeritus since 2016, Sidney (Sid) B.
Cox, passed away in August 2022. Sid represented the vision of
CVCB’s founders through his passion for serving the community and
our Company with excellence, and inspiring those around him to do
the same. We are forever grateful for his contributions to our
Company and the region.
1
Coming Soon: Banking Centers of the Future
In 2022, CVCB announced its intent to expand further into
Sacramento with a new Commercial Banking Center in the Point West
area. Scheduled to open later in 2023, the location serves as CVCB’s new
°agship Banking Center model, designed to elevate the “relationship
banking” experience in a comfortable, contemporary and private setting.
Looking ahead, the Company will continue to advance its commitment
to exceptional client service and impact by investing in both physical
facilities and banking technologies. Plans are currently underway to
relocate the Modesto and Visalia Downtown Banking Centers to new,
modern facilities in 2023 to better serve the growing business clientele in
these communities.
Financial Education Impacts Communities
Investing in communities has been integral to the Company’s
mission for 43 years, inspiring a long history of service to
nonproÿts and community organizations. Sharing resources from
ÿnancial donations to volunteer leadership, the Company’s support
helps meet a wide range of community needs including ÿnancial
education, food and housing security, healthcare, regional
revitalization and more.
In 2022, the Company invested approximately $230 thousand in
ÿnancial support to 174 worthy organizations and shared over
2,000 volunteer hours to various groups, exceeding the team’s goals
for the year.
Providing ÿnancial literacy training is one area of impact in which
the Company invests, to empower children, young adults and small
business entrepreneurs to achieve a successful future. In 2022, team
members provided ÿnancial literacy to high school students and
children’s service clubs, both independently and through training
partnerships with the Better Business Bureau and EVERFI.
˙e students, majority from low- to moderate-income families in
the Central Valley, learned practical skills to help them manage their
ÿnancial goals, establish good spending habits and prepare them for
adulthood. ˙e team continues to receive positive feedback on the
training which will continue into 2023.
Additionally, ÿnancial education was provided to small businesses,
university student entrepreneurs, startups and minority-owned
businesses through our team volunteers as well as SCORE and
other regional business workshops. Subjects included the challenges
of running a business, navigating funding, securing their operation
against cybercrime and preparing themselves for success.
Every year, the Company is honored to impact our communities in
this important way, mentoring the next generation, helping to grow
businesses, advocating sound practices, recruiting interest in
banking careers and, perhaps most important: demonstrating how
giving back pays dividends for the future and the community.
2022 Awards & Achievements
From robust ÿnancial performance to our talented team, many factors
contributed to the recognition earned by the Company in 2022.
Among the honors:
• Earning a 5-Star Superior rating from Bauer Financial for all quarters in
2022 based on ÿnancial results.
• Being honored by ˙e Business Journal as “Best Business Bank” for the
ninth straight year at the 2022 Best of Central Valley Business Awards.
Our 2023 Vision: Reenergized and Recommitted
As the Company emerges from the third consecutive challenging year of
economic uncertainty, we are driven by the one value that remains
consistent no matter the environment: our commitment to relationships.
˙e trust placed in CVCB inspires and energizes our team to serve the
needs of our clients and communities with even greater attention. We are
honored to be our clients’ ÿnancial advocate and Bank of Choice,
especially considering the number of other options available.
˙at commitment extends to every community the Company is proud
to call home. ˙e importance of community banking has never been
clearer, and we are proud to fulÿll that role with an extraordinary and
diverse team that is passionate about exceeding the expectations of every
client, every community. All led by a highly capable executive team and
strategic plan, balanced by the °exibility to respond to the ever-changing
economic landscape.
We close this letter with our deepest thanks for the support of our clients,
shareholders and communities. You are the backbone of this Company,
the driving force behind its ongoing success, and we are truly grateful.
Sincerely,
James J. Kim
Daniel J. Doyle
President and CEO,
Chairman of the Board,
Central Valley Community Bancorp
Central Valley Community Bancorp
Central Valley Community Bank
Central Valley Community Bank
2
BOARD OF Directors
Daniel J. Doyle
Chairman of the Board,
Central Valley Community Bancorp
Central Valley Community Bank
James J. Kim
President and CEO,
Central Valley Community Bancorp
Central Valley Community Bank
Gary D. Gall
Retired Bank Executive
Karen A.
Musson
Marketing and Media,
Gar Bennett, LLC
Daniel N.
Cunningham
Vice Chairman,
Central Valley Community Bancorp
Central Valley Community Bank
Director, Quinn Group, Inc.
F.T. “Tommy”
Elliott, IV
Owner,
Wileman Bros. & Elliott, Inc.
Kaweah Container, Inc.
Andriana D.
Majarian
Global Head of
Customer Success,
Agrian by Telus
Dorothea D.
Silva
Partner,
BPM, LLP
Steven D.
McDonald
Secretary of the Board,
Central Valley Community Bancorp
Central Valley Community Bank
President, McDonald Properties, Inc.
Robert J.
Flautt
Retired Bank Executive
Louis C.
McMurray
President,
Charles McMurray Co.
William S.
Smittcamp
President and CEO,
Wawona Frozen Foods
3
A PROUD HISTORY
A Promising Future
Elevating Community Banking Since 1980
Central Valley Community Bank (CVCB) has an enviable track record
of ÿnancial strength, security and stability gained over its 43-year history.
Today’s CVCB is a well-capitalized institution with assets exceeding
$2.4 billion as of December 31, 2022. ˙e Company is proud to receive
continued industry acclaim and national recognition for its excellent
ÿnancial performance.
CVCB is distinguished from other ÿnancial institutions by its people,
dedication to client advocacy, exemplary “relationship banking,” strong
community support and its mission to exceed expectations. ˙e
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 15 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. ˙e 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.
Driven By Our Mission
At its heart, Central Valley Community Bank’s Mission Statement has
always been about relationships, fostering a culture designed to:
“Inspire and empower our team to enrich and invest in every relationship
by exceeding expectations.” Since opening its doors in 1980, CVCB’s
competitive advantage has been its people. People who deliver an
exceptional service experience at every interaction. People guided by a
Mission Statement and Core Values that re°ect the timeless ideals upon
which CVCB was founded.
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. ˙e 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. ˙e
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.
˙e Company’s founders were a diverse group of local business owners
(including a few former bankers) who lived in the region and knew
ÿrst-hand how a true community bank would beneÿt this unique area.
˙ey 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. ˙e
founders’ vision had been fulÿlled, 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, ÿnancial donations, volunteerism and
ÿnancial education.
Inspired By The Future
As CVCB re°ects 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. ˙e Company is honored to share those days with the team
members, clients, investors and communities whose support is
appreciated and valued.
˜e Company is regulated by the Federal Deposit Insurance Corporation, Federal Reserve Board, Securities and Exchange Commission, and
the California Department of Financial Protection ° Innovation.
4
TRUSTED Leadership
MISSION
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
Patrick A. Luis
President and CEO
Executive Vice President,
Chief Credit Officer
Shannon R. Avrett, CPA
Executive Vice President
Chief Financial Ofÿcer
BANK EXECUTIVE MANAGEMENT
Dawn M. Cagle
Jeffrey M. Martin
Executive Vice President,
Executive Vice President,
Chief Human Resources Ofÿcer
Market Executive
Teresa Gilio
A. Ken Ramos
Executive Vice President,
Executive Vice President,
Chief Administrative Ofÿcer
Market Executive
Blaine C. Lauhon
Executive Vice President,
Chief Banking Ofÿcer
INDEPENDENT AUDITORS
Crowe LLP
Sacramento, CA
COUNSEL
Buchalter, A Professional Corporation
Sacramento, CA
CENTRAL VALLEY COMMUNITY BANK EXECUTIVE MANAGEMENT
From Left to Right: Patrick A. Luis, Shannon R. Avrett, Dawn M. Cagle, Blaine C. Lauhon, James J. Kim, Teresa Gilio, A. Ken Ramos,
and Je˜rey M. Martin
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 Company’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 ÿnancial services, while supporting initiatives that provide ÿnancial
education and improve accessibility of ÿnancial solutions in our
communities, champion our environment and promote transparency,
accountability and diversity.
Our governance structure enables us to manage all major aspects of our
business through an integrated process of ÿnancial, strategic, risk and
leadership planning. ˙is 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 strive to operate with integrity that
inspires our clients and community to conÿdently place their trust in
Central Valley Community Bank.
Diversity, Equity And Inclusion (DEI)
Central Valley Community Bank’s policy re°ects 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. ˙is commitment is evident throughout our workplace and our
impact on the communities we serve.
For additional information on ESG and DEI statements, visit our website at
www.cvcb.com/corporate-responsibility or contact Shannon Avrett, EVP,
Chief Financial O˛cer at (800) 298-1775.
2022 Highlights
COMMUNITY GIVING
$229,057
Invested in partnerships
2,161
$96,855
Underwriting for Food
2022 Service Hours
& Housing Insecurity
PROVIDED
COMMUNITY
SUPPORT TO 174 ORGANIZATIONS
ECONOMIC STABILITY
OUTSTANDING CRA RATING
2019 – 2021 Helping Regions of Poverty
SMALL
BUSINESS
192
$49
LOANS FOR MILLION
RESPECTABLE
WAGES
SUSTAINABLE PRACTICES
Focus on
ENERGY
COMPANY
EFFICIENCY,
RESOURCE
RECYCLING &
& DROUGHT
EDUCATION
MANAGEMENT
ENVIRONMENTAL & SOCIAL FOCUSES
CLIMATE CHANGE,
DIVERSITY,
EQUITY & INCLUSION
6
$1,333,754
$21,289
$1,295,780
$21,443
$1,568,194
$20,347
$1,974,576
$28,401
$2,156,092
$26,645
10.07%
$1.54
9.39%
$1.59
8.85%
$1.62
11.50%
$2.31
14.25%
$2.27
$1,557,410
$912,128
$1,574,089
$930,883
$1,832,987
$1,055,712
$2,267,615
$1,069,653
$2,439,394
$1,133,919
TREND Analysis
CENTRAL VALLEY COMMUNITY BANCORP
2018
2019
2020
2021
2022
2018
2019
2020
2021
2022
2018
2019
2020
2021
2022
Net Income (In ˙ousands)
Diluted Earnings Per Share
Average Total Loans (In ˙ousands)
2018
2019
2020
2021
2022
2018
2019
2020
2021
2022
2018
2019
2020
2021
2022
Average Total Deposits (In ˙ousands)
Return on Shareholders’ Equity
Average Total Assets (In ˙ousands)
7
COMPARATIVE STOCK
Price Performance
CENTRAL VALLEY COMMUNITY BANCORP
TOTAL RETURN PERFORMANCE
Index Value
100.00
100.00
100.00
94.93
88.99
83.54
136.10
153.85
112.57
134.00
78.80
100.10
114.74
111.70
111.35
122.41
Russell 2000
117.74
S&P US BMI
Banks
112.89
Central Valley
Community
Bancorp
2017
2018
2019
2020
2021
2022
Note: ˙e 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.
˙e graph assumes an investment of $100 on December 31, 2017 and reinvestment of dividends on the date of payment without commissions.
˙e 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 2022.
Source: S&P Global Market Intelligence
© 2023
8
-
-
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
December 31, 2022 and 2021 (In thousands, except share amounts)
31,170
163,467
648,825
1,109,208
305,107
6,558
7,416
Loans, less allowance for credit losses of $10,848 at December 31, 2022 and $9,600 at December 31, 2021
1,245,456
1,029,511
7,987
8,380
40,537
39,553
6,169
5,595
53,777
53,777
68
522
76,865
32,710
Consolidated Balance Sheets
ASSETS
Cash and due from banks
Interest-earning deposits in other banks
Total cash and cash equivalents
Available-for-sale investment securities
Held-to-maturity investment securities
Equity securities
Bank premises and equipment, net
Bank owned life insurance
Federal Home Loan Bank stock
Goodwill
Core deposit intangibles
Accrued interest receivable and other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Short-term borrowings
Senior debt and 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: 11,735,291 at
December 31, 2022 and 11,916,651 at December 31, 2021
Retained earnings
Accumulated other comprehensive (loss) income, net of tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
2022
2021
$
25,485
$
29,412
5,685
134,055
$
2,422,519
$
2,450,139
$
1,056,567
$
963,584
1,043,082
1,159,213
2,099,649
2,122,797
46,000
69,599
39,454
32,611
40,043
2,247,859
2,202,294
61,487
66,820
194,400
173,393
(81,227)
7,632
174,660
247,845
$
2,422,519
$
2,450,139
9
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Income
For the Years Ended December 31, 2022, 2021, and 2020 (In thousands, except per share amounts)
2022
2021
2020
Interest income:
Interest and fees on loans
$
55,907
$
54,077
$
52,066
Interest on deposits in other banks
391
129
246
Interest and dividends on investment securities:
Taxable
20,011
14,044
11,740
Exempt from Federal income taxes
6,679
5,606
1,966
Total interest income
82,988
73,856
66,018
Interest expense:
Interest on deposits
1,197
1,036
1,465
Interest on subordinated debentures and borrowings
2,225
266
130
Total interest expense
3,422
1,302
1,595
Net interest income before provision for credit losses
79,566
72,554
64,423
Provision for (reversal of) credit losses
1,000
(4,300)
3,275
Net interest income after provision for credit losses
78,566
76,854
61,148
Non-interest income:
Service charges
2,014
1,901
2,071
Appreciation in cash surrender value of bank owned life insurance
985
840
711
Interchange fees
1,847
1,784
1,347
Loan placement fees
899
1,974
2,291
Net realized (losses) gains on sales and calls of investment securities
(1,730)
501
4,252
Federal Home Loan Bank dividends
367
321
323
Other income
672
1,684
2,802
Total non-interest income
5,054
9,005
13,797
Non-interest expenses:
Salaries and employee benefits
28,917
28,720
28,603
Occupancy and equipment
5,131
4,882
4,626
Regulatory assessments
851
831
490
Data processing expense
2,245
2,394
2,046
Professional services
1,519
1,665
2,398
ATM/Debit card expenses
809
818
819
Information technology
3,344
2,868
2,391
Directors’ expenses
282
422
615
Advertising
557
527
663
Internet banking expenses
134
320
650
Amortization of core deposit intangibles
454
661
695
Other expense
4,236
3,734
3,688
Total non-interest expenses
48,479
47,842
47,684
Income before provision for income taxes
35,141
38,017
27,261
Provision for income taxes
8,496
9,616
6,914
Net income
$
26,645
$
28,401
$
20,347
Basic earnings per common share
$
2.27
$
2.32
$
1.62
Diluted earnings per common share
$
2.27
$
2.31
$
1.62
Cash dividends per common share
$
0.48
$
0.47
$
0.44
The accompanying notes are an integral part of these consolidated financial statements.
10
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Comprehensive (Loss) Income
For the Years Ended December 31, 2022, 2021, and 2020 (In thousands)
2022
2021
2020
Net income
Other Comprehensive (Loss) Income:
Unrealized (losses) gains on securities:
Unrealized holdings (losses) gains arising during the period
Less: reclassification for net losses (gains) included in net income
Amortization of net unrealized losses transferred
Other comprehensive (loss) income, before tax
Tax benefit (expense) related to items of other comprehensive income (loss)
Total other comprehensive (loss) income
Comprehensive (loss) income
$
26,645
(129,527)
1,730
1,651
(126,146)
37,287
(88,859)
$
(62,214)
$
28,401
(9,755)
(501)
-
(10,256)
3,032
(7,224)
$
21,177
$
$
20,347
21,344
(4,252)
-
17,092
(5,053)
12,039
32,386
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, 2022, 2021, and 2020 (In thousands, except share amounts)
Common Stock
Retained
Earnings
Shares
Amount
Balance, January 1, 2020
13,052,407
$
89,379
$ 135,932
Net income
-
-
20,347
Other comprehensive income
-
-
-
Restricted stock granted, net of forfeitures
13,008
-
-
Stock issued under employee stock purchase plan
15,764
199
-
Stock awarded to employees
6,548
141
-
Stock-based compensation expense
-
470
-
Cash dividend ($0.44 per common share)
-
-
(5,530)
Stock options exercised
43,500
279
-
Repurchase and retirement of common stock
(621,379)
(11,052)
-
Balance, December 31, 2020
12,509,848
79,416
150,749
Net income
-
-
28,401
Other comprehensive loss
-
-
-
Restricted stock granted, net of forfeitures
20,720
-
-
Stock issued under employee stock purchase plan
12,521
204
-
Stock awarded to employees
10,529
157
-
Stock-based compensation expense
-
405
-
Cash dividend ($0.47 per common share)
-
-
(5,757)
Stock options exercised
24,265
257
-
Repurchase and retirement of common stock
(661,232)
(13,619)
-
Balance, December 31, 2021
11,916,651
66,820
173,393
Net income
-
-
26,645
Other comprehensive loss
-
-
-
Restricted stock granted, net of forfeitures
42,399
-
-
Stock issued under employee stock purchase plan
13,351
216
-
Stock awarded to employees
13,446
279
-
Stock-based compensation expense
-
497
-
Cash dividend ($0.48 per common share)
-
-
(5,638)
Stock options exercised
50,205
489
-
Repurchase and retirement of common stock
(300,761)
(6,814)
-
Balance, December 31, 2022
11,735,291
$
61,487
$ 194,400
The accompanying notes are an integral part of these consolidated financial statements.
12
Accumulated
Other
Comprehensive
Total
Income (Loss)
Shareholders’
(Net of Taxes)
Equity
$
2,817
$
228,128
-
20,347
12,039
12,039
-
199
-
141
-
470
-
(5,530)
-
279
-
(11,052)
14,856
245,021
-
28,401
(7,224)
(7,224)
-
204
-
157
-
405
-
(5,757)
-
257
-
(13,619)
7,632
247,845
-
26,645
(88,859)
(88,859)
-
216
-
279
-
497
-
(5,638)
-
489
-
(6,814)
$
(81,227)
$
174,660
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statements
of Cash Flows
For the Years Ended December 31, 2022, 2021, and 2020 (In thousands)
2022
2021
2020
Cash flows from operating activities:
Net income
$
26,645
$
28,401
$
20,347
Adjustments to reconcile net income to net cash provided by operating activities:
Net (increase) decrease in deferred loan costs
(422)
3,483
(4,127)
Depreciation
755
897
881
Accretion
(1,520)
(1,404)
(1,326)
Amortization
9,662
8,102
4,622
Stock-based compensation
497
405
470
Provision (reversal) for credit losses
1,000
(4,300)
3,275
Net realized losses (gains) on sales and calls of available-for-sale investment securities
1,730
(501)
(4,252)
Net gain on sale and disposal of equipment
(15)
(8)
(6)
Net change in equity investments
858
218
(162)
Increase in bank owned life insurance, net of expenses
(985)
(840)
(551)
Net gain on bank owned life insurance
-
-
(1,167)
Net increase in accrued interest receivable and other assets
(7,082)
(2,052)
(1,128)
Net (decrease) increase in accrued interest payable and other liabilities
(7,153)
8,989
1,165
Benefit (provision) for deferred income taxes
224
1,465
(1,051)
Net cash provided by operating activities
24,194
42,855
16,990
Cash flows from investing activities:
Purchases of available-for-sale investment securities
(301,699)
(495,879)
(540,362)
Proceeds from sales or calls of available-for-sale investment securities
252,331
26,222
283,956
Proceeds from maturity and principal repayment of available-for-sale investment securities
67,795
54,822
35,914
Proceeds from principal repayments of held-to-maturity investment securities
1,421
-
-
Net (increase) decrease in loans
(216,523)
60,738
(154,331)
Purchases of premises and equipment
(362)
(1,049)
(1,492)
Purchases of bank owned life insurance
-
(10,000)
(250)
FHLB stock (purchased) redeemed
(574)
-
467
Proceeds from bank owned life insurance
-
-
3,485
Proceeds from sale of premises and equipment
15
9
6
Net cash used in investing activities
(197,596)
(365,137)
(372,607)
Cash flows from financing activities:
Net (decrease) increase in demand, interest-bearing and savings deposits
(1,041)
399,903
393,308
Net (decrease) increase in time deposits
(22,107)
184
(3,883)
Proceeds from issuance of subordinated debt
-
34,299
-
Proceeds from short-term borrowings from Federal Home Loan Bank
2,452,826
-
-
Repayments of short-term borrowings to Federal Home Loan Bank
(2,406,826)
-
-
Proceeds of issuance of senior debt
30,000
-
-
Purchase and retirement of common stock
(6,814)
(13,619)
(11,052)
Proceeds from stock issued under employee stock purchase plan
216
204
199
Proceeds from exercise of stock options
489
257
279
Cash dividend payments on common stock
(5,638)
(5,757)
(5,530)
Net cash provided by financing activities
41,105
415,471
373,321
(Decrease) increase in cash and cash equivalents
(132,297)
93,189
17,704
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
163,467
70,278
52,574
CASH AND CASH EQUIVALENTS AT END OF YEAR
$
31,170
$
163,467
$
70,278
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
$
2,831
$
1,166
$
1,706
Income taxes
$
8,314
$
8,155
$
5,120
Operating cash flows from operating leases
$
2,221
$
2,259
$
2,240
Non-cash investing and financing activities:
Transfer of securities from held-to-maturity to available-for-sale
$
332,007
$
-
$
-
Transfer of unrealized loss on securities from available-for-sale to held-to-maturity
$
(25,328)
$
-
$
-
The accompanying notes are an integral part of these consolidated financial statements.
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 19 full service offices throughout California’s San Joaquin
Valley and Greater Sacramento Region. The Bank’s primary source of revenue is
providing loans to customers who are predominately small and middle-market
businesses and individuals.
The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation (FDIC) up to applicable legal limits. Depositors’ accounts at an insured
depository institution, including all non-interest bearing transactions accounts, will
be insured by the FDIC up to the standard maximum deposit insurance amount of
$250,000 for each deposit insurance ownership category.
The accounting and reporting policies of the Company and the Bank conform
with accounting principles generally accepted in the United States of America and
prevailing practices within the banking industry.
Management has determined that because all of the banking products and
services offered by the Company are available in each branch of the Bank, all
branches are located within the same economic environment and management does
not allocate resources based on the performance of different lending or transaction
activities, it is appropriate to aggregate the Bank branches and report them as a single
operating segment. No customer accounts for more than 10 percent of revenues for
the Company or the Bank.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and the consolidated accounts of its wholly-owned
subsidiary, the Bank. Intercompany transactions and balances are eliminated in
consolidation.
For financial reporting purposes, Service 1st Capital Trust I, is a wholly-owned
subsidiary acquired in the merger of Service 1st Bancorp and formed for the exclusive
purpose of issuing trust preferred securities. The Company is not considered the
primary beneficiary of this trust (variable interest entity), therefore the trust is not
consolidated in the Company’s financial statements, but rather the subordinated
debentures are shown as a liability on the Company’s consolidated financial statements.
The Company’s investment in the common stock of the Trust is included in
accrued interest receivable and other assets on the consolidated balance sheet.
Use of Estimates - The preparation of these financial statements in accordance with
U.S. generally accepted accounting principles requires management to make estimates
and judgments that affect the reported amount of assets, liabilities, revenues and
expenses. On an ongoing basis, management evaluates the estimates used. Estimates
are based upon historical experience, current economic conditions and other
factors that management considers reasonable under the circumstances.
These estimates result in judgments regarding the carrying values of assets and
liabilities when these values are not readily available from other sources, as well as
assessing and identifying the accounting treatments of contingencies and
commitments. These estimates and assumptions affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results may differ
from these estimates under different assumptions.
Cash and Cash Equivalents - For the purpose of the statement of cash flows, cash,
due from banks with maturities less than 90 days, interest-earning deposits in other
banks, and Federal funds sold are considered to be cash equivalents. Generally, Federal
funds are sold and purchased for one-day periods. Net cash flows are reported for
customer loan and deposit transactions, interest-bearing deposits in other banks, and
Federal funds purchased.
Investment Securities - Investments are classified into the following categories:
• Available-for-sale securities, reported at fair value, with unrealized gains and
losses excluded from earnings and reported, net of taxes, as accumulated other
comprehensive income (loss) within shareholders’ equity.
• Held-to-maturity securities, which management has the positive intent and
ability to hold to maturity, reported at amortized cost, adjusted for the accretion
of discounts and amortization of premiums.
Management determines the appropriate classification of its investments at the
time of purchase and may only change the classification in certain limited
circumstances. All transfers between categories are accounted for at fair value in the
period which the transfer occurs.
Gains or losses on the sale of investment securities are computed on the specific
identification method. Interest earned on investment securities is reported in interest
income, net of applicable adjustments for accretion of discounts and amortization
of premiums. Premiums and discounts on securities are amortized or accreted on the
level yield method without anticipating prepayments, except for mortgage backed
securities where prepayments are anticipated.
An investment security is impaired when its carrying value is greater than its fair
value. Investment securities that are impaired are evaluated on at least a quarterly basis
and more frequently when economic or market conditions warrant such an
evaluation to determine whether such a decline in their fair value is other than
temporary. Management utilizes criteria such as the magnitude and duration of the
decline and the intent and ability of the Company to retain its investment in the
securities for a period of time sufficient to allow for an anticipated recovery in fair
value, in addition to the reasons underlying the decline, to determine whether the loss
in value is other than temporary. The term “other than temporary” is not intended
to indicate that the decline is permanent, but indicates that the prospect for a near-term
recovery of value is not necessarily favorable, or that there is a lack of evidence to
support a realizable value equal to or greater than the carrying value of the investment.
Once a decline in value is determined to be other than temporary, and management
does not intend to sell the security or it is more likely than not that the Company
will not be required to sell the security before recovery, for debt securities, only the
portion of the impairment loss representing credit exposure is recognized as a charge
to earnings, with the balance recognized as a charge to other comprehensive
income. If management intends to sell the security or it is more likely than not that
the Company will be required to sell the security before recovering its forecasted cost,
the entire impairment loss is recognized as a charge to earnings.
Loans - All loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at principal balances
outstanding net of deferred loan fees and costs, and the allowance for credit losses.
Interest is accrued daily based upon outstanding loan principal balances. However,
when a loan becomes impaired and the future collectability of interest and principal
is in serious doubt, the loan is placed on nonaccrual status and the accrual of interest
income is suspended. Any loan delinquent 90 days or more is automatically placed
on nonaccrual status. Any interest accrued but unpaid is charged against income.
Subsequent payments on these loans, or payments received on nonaccrual loans
for which the ultimate collectability of principal is not in doubt, are applied first to
principal until fully collected and then to interest.
Interest income on loans is discontinued at the time the loan is 90 days delinquent
unless the loan is well-secured and in process of collection. Consumer and credit card
loans are typically charged off no later than 90 days past due. Past due status is
based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual
or charged-off at an earlier date if collection of principal or interest is considered
doubtful. A loan placed on non-accrual status may be restored to accrual status when
principal and interest are no longer past due and unpaid, or the loan otherwise
becomes both well secured and in the process of collection. When a loan is brought
current, the Company must also have reasonable assurance that the obligor has the
ability to meet all contractual obligations in the future, that the loan will be repaid
within a reasonable period of time, and that a minimum of six months of satisfactory
repayment performance has occurred.
Substantially all loan origination fees, commitment fees, direct loan origination
costs and purchase premiums and discounts on loans are deferred and recognized as
an adjustment of yield, and amortized to interest income over the contractual
term of the loan. The unamortized balance of deferred fees and costs is reported as a
component of net loans.
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.
14
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.
overall allowance, which is included on the consolidated balance sheet.
personal cash flow and liquidity, as well as collateral value. The allowance for
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.
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
Commercial:
Notes to
Consolidated Financial Statements
loans and loans that
credit losses attributable to each portfolio segment, which includes both impaired
real estate loans. The primary risk considerations for consumer loans are a borrower’s
a borrower, the type and location of real estate collateral is an important risk factor for
of guarantors and the
repay their loan. Secondary considerations include the creditworthiness
to
cash flows
loans, the primary risk consideration is
valuation of collateral. In addition to the creditworthiness of
are not impaired, is combined to determine the Company’s
ability to generate sufficient
borrower’s
a
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. Real estate loans where agricultural vertical integration exists in
packing and shipping of commodities and risk is primarily based on the liquidity of
the borrower to sustain payment during the development period.
Consumer:
Equity loans and lines of credit - The degree of risk in residential real estate
lending depends primarily on the loan amount in relation to collateral value, the
interest rate and the borrower’s ability to repay in an orderly fashion. These loans
generally possess a lower inherent risk of loss than other real estate portfolio segments.
Economic trends determined by unemployment rates and other key economic
indicators are closely correlated to the credit quality of these loans. Weak economic
trends may indicate that the borrowers’ capacity to repay their obligations may be
deteriorating.
Installment and other consumer loans - An installment loan portfolio is usually
comprised of a large number of small loans scheduled to be amortized over a specific
period. Most installment loans are made directly for consumer purchases. Other
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 56 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
15
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 2022. These risk ratings are also
subject to examination by independent specialists engaged by the Company, and the
Company’s regulators. During these internal reviews, management monitors and
analyzes the financial condition of borrowers and guarantors, trends in the industries
in which borrowers operate and the fair values of collateral securing these loans.
These credit quality indicators are used to assign a risk rating to each individual loan.
The risk ratings can be grouped into five major categories, defined as follows:
Pass - A pass loan is a strong credit with no existing or known potential weaknesses
deserving of management’s close attention.
Special Mention - A special mention loan has potential weaknesses that deserve
management’s close attention. If left uncorrected, these potential weaknesses may
result in deterioration of the repayment prospects for the loan or in the Company’s
credit position at some future date. Special Mention loans are not adversely classified
and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard - A substandard loan is not adequately protected by the current
sound worth and paying capacity of the borrower or the value of the collateral
pledged, if any. Loans classified as substandard have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses
include a project’s lack of marketability, inadequate cash flow or collateral support,
failure to complete construction on time, or the project’s failure to fulfill economic
expectations. They are characterized by the distinct possibility that the Company
will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified doubtful have all the weaknesses inherent in those
classified as substandard with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently known facts, conditions
and values, highly questionable and improbable. The possibility of loss is extremely
high, but because of certain important and reasonably specific pending factors, which
may work to the advantage and strengthening of the asset, its classification as an
estimated loss is deferred until its more exact status may be determined. Pending
factors include proposed merger, acquisition, or liquidation procedures, capital
injection, perfecting liens on additional collateral, and refinancing plans. Doubtful
classification is considered temporary and short term.
Loss - Loans classified as loss are considered uncollectible and charged off
immediately.
The general reserve component of the allowance for credit losses also consists of
reserve factors that are based on management’s assessment of the following for each
portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other qualitative
factors including economic trends in the Company’s service areas, industry
experience and trends, 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.
Other Real Estate Owned - Other real estate owned (OREO) is comprised of
property acquired through foreclosure proceedings or acceptance of deeds-in-lieu of
foreclosure. Losses recognized at the time of acquiring property in full or partial
satisfaction of debt are charged against the allowance for credit losses. OREO, when
acquired, is initially recorded at fair value less estimated disposition costs,
establishing a new cost basis. Fair value of OREO is generally based on an
independent appraisal of the property. Subsequent to initial measurement, OREO is
carried at the lower of the recorded investment or fair value less disposition costs.
If fair value declines subsequent to foreclosure, a valuation allowance is recorded
through noninterest expense. Revenues and expenses associated with OREO are
reported as a component of noninterest expense when incurred.
Foreclosed Assets - Assets acquired through or instead of loan foreclosure are initially
recorded at fair value less costs to sell when acquired, establishing a new cost basis.
If fair value declines subsequent to foreclosure, a valuation allowance is recorded
through operations. Operating costs after acquisition are expensed. Gains and
losses on disposition are included in noninterest expense. There was no carrying
value for foreclosed assets at December 31, 2022 and at December 31, 2021.
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
16
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
carrying amount. No such events or circumstances arose during the fourth quarter of
2022, so goodwill was not required to be retested. Goodwill is the only intangible
asset with an indefinite life on the balance sheet.
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
components of equity.
Notes to
Consolidated Financial Statements
effect of stock options in computing diluted EPS.
dilutive
dividends and splits and the treasury stock method is applied to determine the
respect to computing earnings per share
with
issuance of common
other contracts to issue common stock, such as stock options or warrants, result in the
period. Diluted EPS
discount) by the weighted-average number of common shares outstanding for the
reflects the potential dilution that could occur if securities or
stock which shares in the earnings of the Company. All data
is retroactively adjusted to reflect stock
Loss Contingencies - Loss contingencies, including claims and legal actions arising
in the ordinary course of business, are recorded as liabilities when the likelihood of loss
is probable and an amount or range of loss can be reasonably estimated.
Management does not believe there are such matters that will have a material effect
on the financial statements.
Restrictions on Cash - Cash on hand or on deposit with the Federal Reserve Bank
was required to meet regulatory reserve and clearing requirements.
Share-Based Compensation - Compensation cost is recognized for stock options and
restricted stock awards issued to employees, based on the fair value of these awards
at the date of grant. A Black-Scholes-Merton model is utilized to estimate the fair
value of stock options, while the market price of the Company’s common stock at
the date of grant is used for restricted stock awards. Additionally, the compensation
expense for the Company’s employee stock ownership plan is based on the market
price of the shares as they are committed to be released to participant accounts.
Compensation cost is recognized over the required service period, generally defined
as the vesting period. For awards with graded vesting, compensation cost is recognized
on a straight-line basis over the requisite service period for the entire award.
Dividend Restriction - Banking regulations require maintaining certain capital levels
and may limit the dividends paid by the Bank to the Company or by the Company
to shareholders.
Fair Value of Financial Instruments - Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in Note 2. Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in assumptions
or in market conditions could significantly affect these estimates.
Recently Issued Accounting Standards:
FASB Accounting Standards Update (ASU) 2016-13 - Measurement of Credit Losses
on Financial Instruments (Subtopic 326): Financial Instruments—Credit Losses,
commonly referred to as “CECL,” was issued June 2016. The provisions of the
update eliminate the probable initial recognition threshold under current GAAP
which requires reserves to be based on an incurred loss methodology. Under CECL,
reserves required for financial assets measured at amortized cost will reflect an
organization’s estimate of all expected credit losses over the contractual term of the
financial asset and thereby require the use of reasonable and supportable forecasts to
estimate future credit losses. Because CECL encompasses all financial assets
carried at amortized cost, the requirement that reserves be established based on an
organization’s reasonable and supportable estimate of expected credit losses extends to
held to maturity (“HTM”) debt securities. Under the provisions of the update,
credit losses recognized on available for sale (“AFS”) debt securities will be presented
as an allowance as opposed to a write-down. In addition, CECL will modify the
accounting for purchased loans, with credit deterioration since origination, so that
reserves are established at the date of acquisition for purchased loans. Under current
GAAP a purchased loan’s contractual balance is adjusted to fair value through a
credit discount and no reserve is recorded on the purchased loan upon acquisition.
Since under CECL, reserves will be established for purchased loans at the time of
acquisition, the accounting for purchased loans is made more comparable to the
accounting for originated loans. Finally, increased disclosure requirements under
CECL require organizations to present the currently required credit quality disclosures
disaggregated by the year of origination or vintage. The FASB expects that the
evaluation of underwriting standards and credit quality trends by financial statement
users will be enhanced with the additional vintage disclosures. On August 15,
2019, the FASB issued a proposed Accounting Standards Update (ASU), “Financial
Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815),
Intangible Assets - The intangible assets at December 31, 2022 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,
2022 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 2022, 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
17
Notes to
Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 continue
to evaluate CECL modeling factors. As part of this process, the Company has
determined potential loan pool segmentation and sub-segmentation under CECL,
as well as evaluated 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 has generated and continues to
evaluate model scenarios under CECL in tandem with its current reserving processes
for interim and annual reporting periods during 2022 due to the fact the Company
elected to delay implementation of the CECL process as allowed by FASB. While the
Company is currently unable to reasonably estimate the impact of adopting this
new guidance, management expects the impact of adoption will be significantly
influenced by the composition and quality of the Company’s loan and held-to
maturity investment portfolios, 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 an additional allowance for held-to
maturity investments. The Company’s evaluation is nearing completion, however
we continue to review the full impact and the changes to internal controls required.
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,
2022 will not have a material impact on the consolidated financial statements.
FASB Accounting Standards Update (ASU) 2022-02 - Financial Instruments-Credit
Losses (Subtopic 326). Troubled Debt Restructurings and Vintage Disclosures, was issued
March 2022. The amendments in this update eliminate the accounting guidance
for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40,
Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure
requirements for certain loan refinancings and restructurings by creditors when a
borrower is experiencing financial difficulty. Specifically, rather than applying the
recognition and measurement guidance for TDRs, an entity must apply the loan
refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to
determine whether a modification results in a new loan or a continuation of an
existing loan. Additionally, for public business entities, the amendments in this
Update require that an entity disclose current-period gross write-offs by year of
origination for financing receivables and net investments in leases within the scope of
Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized
Cost in the vintage disclosures required by paragraph 326-20-50-6. The guidance is
effective for the Corporation upon the adoption of ASU 2016-13, January 1,
2023. The Company is currently assessing the impact of ASU 2022-02 on its
disclosures and control structure; however, the Company does not expect the
adoption of this standard to 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
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:
the number of TDRs that will be reported in future periods; however, the amount
response to the
actions taken by governmental authorities and other third parties in
and cannot be predicted, including the scope and duration of the pandemic and
is indeterminable and will depend on future developments, which are highly uncertain
pandemic.
2.
FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
Level 1 - Quoted market prices (unadjusted) for identical instruments traded in
active markets that the entity has the ability to access as of the measurement date.
Level 2 - Significant other observable inputs other than Level 1 prices such as
quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market
data.
Level 3 - Significant unobservable inputs that reflect an entity’s own assumptions
about the assumptions that market participants would use in pricing an asset or
liability.
Management monitors the availability of observable market data to assess the
appropriate classification of financial instruments within the fair value hierarchy.
Changes in economic conditions or model-based valuation techniques may require
the transfer of financial instruments from one fair value level to another. In such
instances, we report the transfer at the beginning of the reporting period.
The estimated carrying and fair values of the Company’s financial instruments
are as follows (in thousands):
December 31, 2022
Fair Value
Carrying
Amount
Level 1
Level 2
Level 3
Total
Financial assets:
Cash and due from
banks
$
25,485 $
25,485 $
- $
- $
25,485
Interest-earning
deposits in other
banks
5,685
5,685
-
-
5,685
Available-for-sale
investment securities
648,825
-
648,825
-
648,825
Held-to-maturity
investment securities
305,107
-
271,249
-
271,249
Equity securities
6,558
6,558
-
-
6,558
Loans, net
1,245,456
-
-
1,113,849
1,113,849
Federal Home Loan
Bank stock
6,169
N/A
N/A
N/A
N/A
Accrued interest
receivable
10,547
-
6,035
4,512
10,547
Financial liabilities:
Deposits
2,099,649
2,034,928
67,047
-
2,101,975
Short-term borrowings
46,000
-
46,000
-
46,000
Senior debt and
subordinated
debentures
69,599
-
-
62,504
62,504
Accrued interest
payable
794
-
83
711
794
18
Available-for-sale
2.
FAIR VALUE MEASUREMENTS (Continued)
December 31, 2021
Carrying
Amount
Fair Value
Level 1
Financial assets:
Cash and due from
banks
$
29,412 $
29,412 $
Interest-earning
deposits in other
banks
134,055
134,055
Notes to
Consolidated Financial Statements
Level 2
Level 3
Total
- $
- $
29,412
-
-
134,055
investment securities
1,109,208
-
1,109,208
-
1,109,208
Equity securities
7,416
7,416
-
-
7,416
Loans, net
1,029,511
-
-
1,015,052
1,015,052
Federal Home Loan
Bank stock
5,595
N/A
N/A
N/A
N/A
Accrued interest
receivable
9,395
7
6,076
3,312
9,395
Financial liabilities:
Deposits
2,122,797
2,010,407
89,923
-
2,100,330
Senior debt and
subordinated
debentures
39,454
-
-
39,463
39,463
Accrued interest
payable
202
-
30
172
202
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 and Senior Debt - 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, 2022 and 2021:
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, 2022
Available-for-sale investment
securities
Debt Securities:
U.S. Treasury securities
$
8,707 $
- $
8,707 $
-
U.S. Government agencies
98
-
98
-
Obligations of states and
political subdivisions
174,985
-
174,985
-
U.S. Government sponsored
entities and agencies
collateralized by residential
mortgage obligations
109,493
-
109,493
-
Private label mortgage and
asset backed securities
355,542
-
355,542
-
Equity Securities
6,558
6,558
-
-
Total assets measured at fair
value on a recurring basis
$ 655,383 $
6,558 $ 648,825 $
-
Fair Value Measurements Using
Fair Value
Level 1
Level 2
Level 3
December 31, 2021
Available-for-sale securities
Debt Securities:
U.S. Treasury securities
$
9,925 $
- $
9,925 $
-
U.S. Government agencies
379
-
379
-
Obligations of states and
political subdivisions
526,467
-
526,467
-
U.S. Government sponsored
entities and agencies
collateralized by residential
mortgage obligations
214,439
-
214,439
-
Private label residential
mortgage and asset backed
securities
313,220
-
313,220
-
Corporate debt securities
44,778
-
44,778
-
Equity Securities
7,416
7,416
-
-
Total assets measured at fair
value on a recurring basis $1,116,624 $
7,416 $1,109,208 $
-
Securities in Level 1 are mutual funds and fair values are based on quoted market
prices for identical instruments traded in active markets. Fair values for available-for
sale investment securities in Level 2 are based on quoted market prices for similar
securities in active markets. For securities where quoted prices or market prices of
similar securities are not available, fair values are calculated using discounted cash
flows or other market indicators.
Management evaluates the significance of transfers between levels based upon the
nature of the financial instrument and size of the transfer relative to total assets, total
liabilities or total earnings. During the years ended December 31, 2022 and 2021,
no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at
December 31, 2022 or December 31, 2021. Also there were no liabilities measured
at fair value on a recurring basis at December 31, 2022 or December 31, 2021.
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, 2022 and 2021. As of December 31,
2022, there were no impaired loans measured for impairment using the fair value.
Those measured at December 31, 2021 were (in thousands):
Fair Value
Level 1
Level 2
Level 3
December 31, 2021
Real estate:
Real estate-construction
and other land loans
$
262 $
- $
- $
262
Total assets measured at
fair value on a
non-recurring basis
$
262 $
- $
- $
262
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, 2022.
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.
There were no impaired loans that were measured for impairment using the fair
value of the collateral for collateral dependent loans at December 31, 2022. 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.
During the year ended December 31, 2022 the specific allocation of the
allowance for credit losses related to loans carried at fair value was zero, compared to
$30,000 during the year ended December 31, 2021. There were no net charge-offs
related to loans carried at fair value at December 31, 2022 and 2021.
3.
INVESTMENT SECURITIES
The following tables summarize the amortized cost and fair value of securities
available-for-sale and securities held-for-maturity at December 31, 2022 and 2021
and the corresponding amounts of gross unrealized gains and losses recognized in
accumulated other comprehensive (loss) income and gross unrecognized gains and
losses:
20
Notes to
Consolidated Financial Statements
3.
INVESTMENT SECURITIES (Continued)
December 31, 2022
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
Available-for-Sale Securities
Debt Securities:
U.S. Treasury securities
$
9,990 $
- $
(1,283) $
8,707
U.S. Government agencies
107
-
(9)
98
Obligations of states and
political subdivisions
201,638
-
(26,653)
174,985
U.S. Government
sponsored entities and
agencies collateralized
by residential mortgage
obligations
117,292
4
(7,803)
109,493
Private label mortgage and
asset backed securities
411,441
14
(55,913)
355,542
$ 740,468 $
18 $ (91,661) $ 648,825
December 31, 2022
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
Held to Maturity
Debt Securities:
Obligations of states and
political subdivisions
$ 192,004 $
67 $ (23,166) $ 168,905
U.S. Government
sponsored entities and
agencies collateralized
by residential mortgage
obligations
10,430
-
(1,762)
8,668
Private label mortgage
and asset backed
securities
56,691
-
(5,931)
50,760
Corporate debt securities
45,982
-
(3,066)
42,916
$ 305,107 $
67 $ (33,925) $ 271,249
December 31, 2021
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
Available-for-Sale Securities
Debt Securities:
U.S. Treasury securities
$
9,988 $
- $
(63) $
9,925
U.S. Government
agencies
373
6
-
379
Obligations of states and
political subdivisions
512,952
16,703
(3,188)
526,467
U.S. Government
sponsored entities and
agencies collateralized
by residential mortgage
obligations
213,471
2,245
(1,277)
214,439
Private label mortgage
and asset backed
securities
317,089
824
(4,693)
313,220
Corporate debt securities
44,500
595
(317)
44,778
`
$ 1,098,373 $
20,373 $
(9,538) $ 1,109,208
Proceeds and gross realized (losses)/gains on investment securities for the years
ended December 31, 2022, 2021, and 2020 are shown below (in thousands):
Years Ended December 31,
2022
2021
2020
Available-for-Sale Securities
Proceeds from sales or calls
$ 252,331 $
26,222 $ 283,956
Gross realized gains from sales or calls
$
5,235 $
580 $
7,123
Gross realized losses from sales or calls
$
(6,965) $
(79) $
(2,871)
During the second quarter of 2022, the Company re-designated certain securities
previously classified as available-for-sale to the held-to-maturity classification. The
securities re-designated consisted of obligations of states and political subdivision
securities, U.S. Government sponsored entity and agency securities collateralized
by residential mortgage obligations, private label mortgage and asset backed securities,
and corporate debt securities with a total carrying value of $306.7 million at
April 1, 2022. At the time of re-designation, the securities included $25.3 million of
pretax unrealized losses in other comprehensive income; which is being amortized
over the remaining life of the securities in a manner consistent with the amortization
of a premium or discount.
As market interest rates or risks associated with an available-for-sale 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.
Losses recognized in 2022, 2021, and 2020 were incurred in order to reposition
the investment securities portfolio based on the current rate environment. The
securities sold at a loss were acquired when the rate environment was not as volatile.
The securities 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 fall within the Company’s current risk profile.
The provision for income taxes includes $(511,000), $148,000, and $1,257,000
income (benefit)/tax impact from the reclassification of unrealized net (losses)/gains
on available-for-sale securities to realized net (losses)/gains on available-for-sale
securities for the years ended December 31, 2022, 2021, and 2020, respectively.
Investment securities with unrealized losses at December 31, 2022 and 2021 are
summarized and classified according to the duration of the loss period as follows (in
thousands):
December 31, 2022
Less than 12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
Available-for-Sale Securities
Debt Securities:
U.S. Treasury securities
$
- $
- $
8,707 $ (1,283) $
8,707 $ (1,283)
U.S. Government agencies
-
-
98
(9)
98
(9)
Obligations of states and
political subdivisions
90,808
(12,208)
84,177
(14,445)
174,985
(26,653)
U.S. Government sponsored
entities and agencies
collateralized by residential
mortgage obligations
20,825
(1,058)
88,520
(6,745)
109,345
(7,803)
Private label residential
mortgage and asset backed
securities
126,284
(14,529)
229,152
(41,384)
355,436
(55,913)
$ 237,917 $ (27,795) $ 410,654 $ (63,866) $ 648,571 $ (91,661)
21
Notes to
Consolidated Financial Statements
3.
INVESTMENT SECURITIES (Continued)
December 31, 2022
Less than 12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
Held-to-Maturity Securities
Debt Securities:
Obligations of states and
political subdivisions
$
48,311 $ (5,505) $ 118,026 $ (17,661) $ 166,337 $ (23,166)
U.S. Government sponsored
entities and agencies
collateralized by residential
mortgage obligations
-
-
8,668
(1,762)
8,668
(1,762)
Private label residential
mortgage and asset backed
securities
19,393
(1,916)
31,367
(4,015)
50,760
(5,931)
Corporate debt securities
23,997
(1,561)
18,919
(1,505)
42,916
(3,066)
$
91,701 $ (8,982) $ 176,980 $ (24,943) $ 268,681 $ (33,925)
December 31, 2021
Less than 12 Months
12 Months or More
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
Available-for-Sale Securities
Debt Securities:
U.S. Treasury securities
$
9,925 $
(63) $
- $
- $
9,925 $
(63)
Obligations of states and
political subdivisions
143,336
(2,896)
6,336
(292)
149,672
(3,188)
U.S. Government sponsored
entities and agencies
collateralized by residential
mortgage obligations
91,385
(905)
40,365
(372)
131,750
(1,277)
Private label residential
mortgage backed securities
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)
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, 2022, 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,
2022 and identified those that had an unrealized loss for at least a consecutive 12
month period, which had an unrealized loss at December 31, 2022 greater than 10%
of the recorded book value on that date, or which had an unrealized loss of more
than $250,000. 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, 2022,
2021, or 2020.
U.S. Treasury Securities - At December 31, 2022, the Company held one U.S.
Treasury security which was in a loss position for more than 12 months. The
unrealized losses on the Company’s investments in U.S. Treasury securities were
caused by interest rate changes. Because the decline in market value is attributable to
changes in interest rates and not credit quality, and because the Company does not
intend to sell, and it is more likely than not that it will not be required to sell those
investments until a recovery of fair value, which may be maturity, the Company
does not consider those investments to be other-than-temporarily impaired at
December 31, 2022.
U.S. Government Agencies - At December 31, 2022, the Company held one U.S.
Government agency security which was in a loss position for more than 12 months.
The unrealized losses on the Company’s investments in U.S. Government agency
securities were caused by interest rate changes. Because the decline in market value is
attributable to changes in interest rates and not credit quality, and because the
Company does not intend to sell, and it is more likely than not that it will not be
required to sell those investments until a recovery of fair value, which may be maturity,
the Company does not consider those investments to be other-than-temporarily
impaired at December 31, 2022.
Obligations of States and Political Subdivisions - At December 31, 2022, the
Company held 43 obligations of states and political subdivision securities of which
25 were in a loss position for less than 12 months, and 18 have 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, 2022.
U.S. Government Sponsored Entities and Agencies Collateralized by Residential
Mortgage Obligations - At December 31, 2022, the Company held 66 U.S.
Government sponsored entity and agency securities collateralized by residential
mortgage obligation securities of which 40 were in a loss position for less than
12 months and 26 have been in a loss position for more than 12 months. The
unrealized losses on the Company’s investments in U.S. Government sponsored entity
and agencies collateralized by residential mortgage obligations were caused by
interest rate changes. The contractual cash flows of those investments are guaranteed
or supported by an agency or sponsored entity of the U.S. Government.
Accordingly, it is expected that the securities would not be settled at a price less than
the amortized cost of the Company’s investment. Because the decline in market
value is attributable to changes in interest rates and not credit quality, and because
the Company does not intend to sell, and it is more likely than not that it will not be
required to sell those investments until a recovery of fair value, which may be
maturity, the Company does not consider those investments to be other-than
temporarily impaired at December 31, 2022.
Private Label Mortgage and Asset Backed Securities - At December 31, 2022, the
Company had a total of 82 Private Label Mortgage and Asset Backed Securities
(PLMBS). 27 of these securities were in a loss position for less than 12 months and 55
have been in a loss position for more than 12 months at December 31, 2022.
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, 2022. The Company
continues to monitor these securities for changes in credit ratings or other indications
of credit deterioration.
The amortized cost and estimated fair value of available-for-sale and held-to
maturity investment securities at December 31, 2022 and 2021 by contractual
maturity are shown in the two tables below (in thousands). Expected maturities will
22
Notes to
Consolidated Financial Statements
3.
INVESTMENT SECURITIES (Continued)
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, 2022
December 31, 2021
Amortized
Estimated
Amortized
Estimated
Available-for-Sale Securities
Cost
Fair Value
Cost
Fair Value
Within one year
$
- $
- $
- $
-
After one year through five years
-
-
3,690
4,038
After five years through ten years
45,918
38,383
99,615
101,498
After ten years
165,710
145,309
419,635
430,856
211,628
183,692
522,940
536,392
Investment securities not due at a single
maturity date:
U.S. Government agencies
107
98
373
379
U.S. Government sponsored entities
and agencies collateralized by
residential mortgage obligations
117,292
109,493
213,471
214,439
Private label mortgage and asset
backed securities
411,441
355,542
317,089
313,220
Corporate debt securities
-
-
44,500
44,778
$ 740,468 $ 648,825 $ 1,098,373 $ 1,109,208
December 31, 2022
December 31, 2021
Amortized
Estimated
Amortized
Estimated
Held-to-Maturity Securities
Cost
Fair Value
Cost
Fair Value
Within one year
$
- $
- $
- $
-
After one year through five years
132
129
-
-
After five years through ten years
51,424
46,143
-
-
After ten years
140,448
122,633
-
-
192,004
168,905
-
-
Investment securities not due at a single
maturity date:
U.S. Government sponsored entities
and agencies collateralized by
residential mortgage obligations
10,430
8,668
-
-
Private label mortgage and asset
backed securities
56,691
50,760
-
-
Corporate debt securities
45,982
42,916
-
-
$ 305,107 $ 271,249 $
- $
-
Investment securities with amortized costs totaling $214,579,000 and
$252,986,000 and fair values totaling $190,814,000 and $260,325,000 were
pledged as collateral for borrowing arrangements, public funds and for other purposes
at December 31, 2022 and 2021, respectively.
4.
LOANS AND ALLOWANCE FOR CREDIT LOSSES
Outstanding loans are summarized as follows (in thousands):
Loan Type
December 31,
2022
% of
Total
loans
December 31,
2021
% of
Total
loans
Commercial:
Commercial and industrial
$
141,197
11.2% $
136,847
13.2%
Agricultural production
39,007
3.1%
40,860
3.9%
Total commercial
180,204
14.3%
177,707
17.1%
Real estate:
Owner occupied
194,663
15.5%
212,234
20.4%
Real estate construction and other
land loans
109,175
8.7%
61,586
5.9%
Commercial real estate
464,809
37.1%
369,529
35.6%
Agricultural real estate
117,648
9.4%
98,481
9.5%
Other real estate
24,586
2.0%
26,084
2.5%
910,881
72.7%
767,914
73.9%
Consumer:
Equity loans and lines of credit
123,581
9.8%
55,620
5.4%
Consumer and installment
40,252
3.2%
36,999
3.6%
Total consumer
163,833
13.0%
92,619
9.0%
Net deferred origination costs (fees)
1,386
871
Total gross loans
1,256,304 100.0%
1,039,111 100.0%
Allowance for credit losses
(10,848)
(9,600)
Total loans
$ 1,245,456
$ 1,029,511
At December 31, 2022 and 2021, loans originated under Small Business
Administration (SBA) programs totaling $19,947,000 and $23,024,000, 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, 2022 and 2021, PPP loans totaling $333,000 and
$18,553,000, respectively, were outstanding and included in the commercial and
industrial category above. Approximately $665,612,000 in loans were pledged under
a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing
capacity of $319,309,000 as of December 31, 2022. 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 $1,745,000, $1,890,000, and $2,782,000
have been deferred as loan origination costs for the years ended December 31, 2022,
2021, and 2020, 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.
23
Notes to
Consolidated Financial Statements
4.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Changes in the allowance for credit losses were as follows (in thousands):
Years Ended December 31,
For all portfolio segments, the determination of the general reserve for loans that
2022
2021
2020
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
Balance, beginning of year
$
9,600
$
12,915
$
9,130
peer loss data) over the most recent 56 quarters, and qualitative factors including
Provision (reversal) charged to
economic trends in the Company’s service areas, industry experience and trends,
operations
1,000
(4,300)
3,275
industry and geographic concentrations, estimated collateral values, the Company’s
Losses charged to allowance
(178)
(267)
(229)
underwriting policies, the character of the loan portfolio, and probable losses inherent
Recoveries
426
1,252
739
in the portfolio taken as a whole.
Balance, end of year
$
10,848
$
9,600
$
12,915
The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 2022, 2021, and 2020 by portfolio
segment (in thousands):
Commercial
Real Estate
Consumer
Unallocated
Total
Allowance for credit losses:
Beginning balance, January 1, 2022
$
2,011
$
6,741
$
568
$
280
$
9,600
Provision (reversal) charged to operations
(531)
1,062
409
60
1,000
Losses charged to allowance
(27)
-
(151)
-
(178)
Recoveries
367
-
59
-
426
Ending balance, December 31, 2022
$
1,820
$
7,803
$
885
$
340
$
10,848
Allowance for credit losses:
Beginning balance, January 1, 2021
$
2,019
$
9,174
$
1,091
$
631
$
12,915
Reversal of provision charged to operations
(663)
(2,752)
(534)
(351)
(4,300)
Losses charged to allowance
(46)
-
(221)
-
(267)
Recoveries
701
319
232
-
1,252
Ending balance, December 31, 2021
$
2,011
$
6,741
$
568
$
280
$
9,600
Allowance for credit losses:
Beginning balance, January 1, 2020
$
1,428
$
6,769
$
897
$
36
$
9,130
Provision charged to operations
100
2,405
175
595
3,275
Losses charged to allowance
(121)
-
(108)
-
(229)
Recoveries
612
-
127
-
739
Ending balance, December 31, 2020
$
2,019
$
9,174
$
1,091
$
631
$
12,915
The following is a summary of the allowance for credit losses by impairment methodology and portfolio segment as of December 31, 2022 and December 31, 2021 (in
thousands):
Commercial
Real Estate
Consumer
Unallocated
Total
Allowance for credit losses:
Ending balance, December 31, 2022
$
1,820
$
7,803
$
885
$
340
$
10,848
Ending balance: individually evaluated for impairment
$
309
$
5
$
-
$
-
$
314
Ending balance: collectively evaluated for impairment
$
1,511
$
7,798
$
885
$
340
$
10,534
Ending balance, December 31, 2021
$
2,011
$
6,741
$
568
$
280
$
9,600
Ending balance: individually evaluated for impairment
$
607
$
38
$
4
$
-
$
649
Ending balance: collectively evaluated for impairment
$
1,404
$
6,703
$
564
$
280
$
8,951
24
Notes to
Consolidated Financial Statements
4.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table shows the ending balances of loans as of December 31, 2022 and December 31, 2021 by portfolio segment and by impairment methodology (in
thousands):
Commercial
Real Estate
Consumer
Total
Loans:
Ending balance, December 31, 2022
$
180,204
$
910,881
$
163,833
$ 1,254,918
Ending balance: individually evaluated for impairment
$
1,240
$
139
$
993
$
2,372
Ending balance: collectively evaluated for impairment
$
178,964
$
910,742
$
162,840
$ 1,252,546
Loans:
Ending balance, December 31, 2021
$
177,707
$
767,914
$
92,619
$ 1,038,240
Ending balance: individually evaluated for impairment
$
7,086
$
450
$
1,050
$
8,586
Ending balance: collectively evaluated for impairment
$
170,621
$
767,464
$
91,569
$ 1,029,654
The following table shows the loan portfolio by class allocated by management’s internal risk ratings at December 31, 2022 (in thousands):
Special
Pass
Mention
Substandard
Doubtful
Total
Commercial:
Commercial and industrial
$
130,835
$
8,706
$
1,656
$
-
$
141,197
Agricultural production
26,894
6,714
5,399
-
39,007
Real Estate:
Owner occupied
189,211
3,282
2,170
-
194,663
Real estate construction and other land loans
94,151
-
15,024
-
109,175
Commercial real estate
458,957
3,440
2,412
-
464,809
Agricultural real estate
107,945
8,879
824
-
117,648
Other real estate
24,586
-
-
-
24,586
Consumer:
Equity loans and lines of credit
123,315
-
266
-
123,581
Consumer and installment
40,216
2
34
-
40,252
Total
$ 1,196,110
$
31,023
$
27,785
$
-
$ 1,254,918
The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2021 (in thousands):
Special
Pass
Mention
Substandard
Doubtful
Total
Commercial:
Commercial and industrial
$
125,537
$
8,724
$
2,586
$
-
$
136,847
Agricultural production
37,179
1,325
2,356
-
40,860
Real Estate:
Owner occupied
205,092
3,582
3,560
-
212,234
Real estate construction and other land loans
54,066
7,520
-
-
61,586
Commercial real estate
351,395
18,134
-
-
369,529
Agricultural real estate
96,949
1,532
-
-
98,481
Other real estate
26,084
-
-
-
26,084
Consumer:
Equity loans and lines of credit
55,611
9
-
-
55,620
Consumer and installment
36,942
19
38
-
36,999
Total
$
988,855
$
40,845
$
8,540
$
-
$ 1,038,240
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, 2022 (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
$
392 $
-
$
-
$
392 $
140,805 $
141,197 $
-
$
Agricultural production
-
-
-
-
39,007
39,007
-
Real estate:
Owner occupied
249
-
-
249
194,414
194,663
-
Real estate construction and other land
loans
-
-
-
-
109,175
109,175
-
Commercial real estate
4,507
-
-
4,507
460,302
464,809
-
Agricultural real estate
-
-
-
-
117,648
117,648
-
Other real estate
-
-
-
-
24,586
24,586
-
Consumer:
Equity loans and lines of credit
465
-
-
465
123,116
123,581
-
Consumer and installment
237
-
-
237
40,015
40,252
-
Total
$
5,850 $
-
$
-
$
5,850 $ 1,249,068 $ 1,254,918 $
-
$
The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2021 (in thousands):
Greater
Recorded
60-89
Than
Investment
30-59 Days
Days Past
90 Days
Total Past
Total
> 90 Days
Non-
Past Due
Due
Past Due
Due
Current
Loans
Accruing
accrual
Commercial:
Commercial and industrial
Agricultural production
Real estate:
$
1
-
$
-
-
$
-
-
$
1
-
$
136,846
40,860
$
136,847
40,860
$
-
-
$
312
634
Owner occupied
Real estate construction and other land
-
-
-
-
212,234
212,234
-
-
loans
Commercial real estate
Agricultural real estate
Other real estate
Consumer:
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
61,586
369,529
98,481
26,084
61,586
369,529
98,481
26,084
-
-
-
-
-
-
-
-
-
Equity loans and lines of credit
Consumer and installment
-
79
-
-
-
-
-
79
55,620
36,920
55,620
36,999
-
-
-
-
Total
$
80 $
-
$
-
$
80 $ 1,038,160 $ 1,038,240 $
-
$
946
26
Notes to
Consolidated Financial Statements
4.
LOANS AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The following table shows information related to impaired loans by class at
December 31, 2022 (in thousands):
Unpaid
Recorded
Principal
Related
Investment
Balance
Allowance
With no related allowance recorded:
Consumer:
Equity loans and lines of credit
$
993
$
1,007
$
Total with no related allowance recorded
993
1,007
With an allowance recorded:
Commercial:
Commercial and industrial
1,240
1,240
309
Real estate:
Commercial real estate
126
126
2
Agricultural real estate
13
13
3
Total real estate
139
139
5
Total with an allowance recorded
1,379
1,379
314
Total
$
2,372
$
2,386
$
314
The recorded investment in loans excludes accrued interest receivable and net
loan origination fees, due to immateriality.
The following table shows information related to impaired loans by class at
December 31, 2021 (in thousands):
Unpaid
Recorded
Principal
Related
Investment
Balance
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
6,452
6,491
544
Agricultural land and production
634
714
63
Total commercial
7,086
7,205
607
Real estate:
Real estate construction and other
land loans
292
292
30
Commercial real estate
137
138
3
Agricultural real estate
21
21
5
Total real estate
450
451
38
Consumer:
Equity loans and lines of credit
914
914
4
Total consumer
914
914
4
Total with an allowance recorded
8,450
8,570
649
Total
$
8,586 $
8,742 $
649
The recorded investment in loans excludes accrued interest receivable and net
loan origination fees, due to immateriality.
27
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,
2022, 2021, and 2020 (in thousands):
Year Ended
Year Ended
Year Ended
December 31, 2022
December 31, 2021
December 31, 2020
Average
Interest
Average
Interest
Average
Interest
Recorded
Income
Recorded
Income
Recorded
Income
Investment
Recognized
Investment
Recognized
Investment
Recognized
With no related allowance recorded:
Commercial:
Commercial and industrial
$
81
$
-
$
43
$
-
$
1,322
$
Agricultural production
25
-
-
-
104
Total commercial
106
-
43
-
1,426
Real estate:
Owner occupied
-
-
55
-
394
Real estate construction and other land loans
-
-
156
-
8
Commercial real estate
-
-
380
-
779
Agricultural real estate
-
-
-
-
146
Total real estate
-
-
591
-
1,327
Consumer:
Equity loans and lines of credit
750
71
140
12
216
12
Total with no related allowance recorded
856
71
774
12
2,969
12
With an allowance recorded:
Commercial:
Commercial and industrial
2,296
129
6,327
365
6,139
582
Agricultural production
49
-
908
-
430
Total commercial
2,345
129
7,235
365
6,569
582
Real estate:
Real estate construction and other land loans
88
-
673
21
586
Commercial real estate
132
8
142
9
206
11
Agricultural real estate
19
2
27
1
27
2
Total real estate
239
10
842
31
819
13
Consumer:
Equity loans and lines of credit
280
-
925
54
1,001
55
Consumer and installment
-
-
14
-
64
Total consumer
280
-
939
54
1,065
55
Total with an allowance recorded
2,864
139
9,016
450
8,453
650
Total
$
3,720
$
210
$
9,790
$
462
$
11,422
$
662
Foregone interest on nonaccrual loans totaled $132,000, $99,000, and $177,000
an extension of the maturity date at a stated rate of interest lower than the current
for the years ended December 31, 2022, 2021, and 2020, respectively. Interest income
market rate for new debt with similar risk. During the same periods, there were no
recognized on cash basis during the years presented above was not considered
troubled debt restructurings in which the amount of principal or accrued interest
significant for financial reporting purposes.
owed from the borrower were forgiven.
Section 4013 of the CARES Act and the “Interagency Statement on Loan
Modifications and Reporting for Financial Institutions Working with Customers Affected
Troubled Debt Restructurings:
by the Coronavirus (Revised)” provided banks an option to elect to not account for
As of December 31, 2022 and 2021, the Company has a recorded investment in
certain loan modifications related to COVID-19 as TDRs as long as the borrowers
troubled debt restructurings (“TDR”) of $2,372,000 and, $7,640,000, respectively.
were not more than 30 days past due as of December 31, 2019 or at the time of
The Company has allocated $314,000 and $538,000 of specific reserves for those
modification program implementation, respectively, and the borrowers meet other
loans at December 31, 2022 and 2021, respectively. The Company has committed to
applicable criteria. In accordance with such guidance, during 2020 and throughout
lend no additional amounts as of December 31, 2022 to customers with outstanding
2021 the Company offered short-term modifications in response to COVID-19
loans that are classified as troubled debt restructurings.
to borrowers who were current and otherwise not past due. As of December 31, 2022,
For the years ended December 31, 2021, and 2020 the terms of certain loans
there were no such loans remaining on deferral.
were modified as TDRs. The modification of the terms of such loans included one
During the year ended December 31, 2022, no loans were modified as troubled
or a combination of the following: a reduction of the stated interest rate of the loan or
debt restructuring.
28
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):
Post
Pre-Modification
Modification
Outstanding
Outstanding
Outstanding
Number of
Recorded
Principal
Recorded
Recorded
Loans
Investment (1)
Modification
Investment (2)
Investment
Troubled Debt Restructurings:
Commercial:
Commercial and Industrial
1
$
2,489
$
-
$
2,489
$
1,989
Real Estate:
Real estate construction and other land loans
1
333
-
333
292
Total
2
$
2,822
$
-
$
2,822
$
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):
Post
Pre-Modification
Modification
Outstanding
Outstanding
Outstanding
Number of
Recorded
Principal
Recorded
Recorded
Loans
Investment (1)
Modification
Investment (2)
Investment
Troubled Debt Restructurings:
Commercial:
Commercial and Industrial
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.
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, 2022, 2021, and 2020.
5.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following (in thousands):
December 31,
2022
2021
Land
$
1,131
$
1,131
Buildings and improvements
8,360
8,219
Furniture, fixtures and equipment
11,885
11,721
Leasehold improvements
4,305
4,290
25,681
25,361
Less accumulated depreciation and
amortization
(17,694)
(16,981)
$
7,987
$
8,380
Depreciation and amortization included in occupancy and equipment expense
totaled $755,000, $897,000 and $881,000 for the years ended December 31, 2022,
2021, and 2020, 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, 2022 and 2021 was $53,777,000. Total goodwill at December 31,
2022 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 2022, so goodwill was not required to be retested.
The intangible assets at December 31, 2022 represent the estimated fair value of
the core deposit relationships acquired in 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, 2022, the weighted average remaining amortization period is less
than one year. The carrying value of intangible assets at December 31, 2022 was
$68,000, net of $1,297,000 in accumulated amortization expense. The carrying
value at December 31, 2021 was $522,000, net of $3,230,000 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. Amortization expense recognized was $454,000 for 2022,
$661,000 for 2021, and $695,000 for 2020. The remaining $68,000 core deposit
intangible will be amortized during 2023.
29
Notes to
Consolidated Financial Statements
7.
DEPOSITS
Interest-bearing deposits consisted of the following (in thousands):
December 31,
2022
2021
Savings
$
215,287
$
197,273
Money market
435,783
511,448
NOW accounts
324,089
360,462
Time, $250,000 or more
13,338
20,131
Time, under $250,000
54,585
69,899
$ 1,043,082
$ 1,159,213
Aggregate annual maturities of time deposits are as follows (in thousands):
Years Ending December 31,
2023
$
59,467
2024
5,107
2025
1,660
2026
981
2027
708
Thereafter
$
67,923
Interest expense recognized on interest-bearing deposits consisted of the
following (in thousands):
Years Ended December 31,
2022
2021
2020
Savings
$
25
$
20
$
25
Money market
848
661
542
NOW accounts
207
162
316
Time certificates of deposit
117
193
582
$
1,197
$
1,036
$
1,465
8.
BORROWING ARRANGEMENTS
Federal Home Loan Bank Advances - As of December 31, 2022, the Company had
$46,000,000 Federal Home Loan Bank (“FHLB”) of San Francisco advances with an
interest rate of 4.65% as compared to no advance at December 31, 2021.
Approximately $665,612,000 in loans were pledged under a blanket lien as collateral
to the FHLB for the Bank’s remaining borrowing capacity of $319,309,000 as of
December 31, 2022. FHLB advances are also secured by investment securities with
amortized costs totaling $21,745,000 and $112,000 and market values totaling
$28,961,000 and $117,000 at December 31, 2022 and 2021, 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, 2022 and 2021, respectively, at interest rates which vary with market
conditions. As of December 31, 2022 and 2021, the Company had no Federal
funds purchased.
Federal Reserve Line of Credit - The Bank has a line of credit in the amount of
$4,702,000 and $9,961,000 with the Federal Reserve Bank of San Francisco (FRB)
at December 31, 2022 and 2021, respectively, which bears interest at the prevailing
discount rate collateralized by investment securities with amortized costs totaling
$5,508,000 and $10,361,000 and market values totaling $4,893,000 and
$10,241,000, respectively. At December 31, 2022 and 2021, 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 2033. 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, 2022 are as follows (in thousands):
Years Ending December 31,
2023
$
2,479
2024
2,208
2025
1,715
2026
1,535
2027
1,306
Thereafter
2,585
Total lease payments
11,828
Less: imputed interest
(379)
Present value of operating lease liabilities
$
11,449
The table below summarizes the total lease cost for the period ending:
December 31,
December 31,
(Dollars in thousands)
2022
2021
Operating lease cost
$
2,187
$
2,088
Short-term lease cost
-
3
Variable lease cost
307
353
Total lease cost
$
2,494
$
2,444
The table below summarizes other information related to our operating leases:
December 31,
December 31,
2022
2021
Weighted average remaining lease
term, in years
6
5
Weighted average discount rate
1.50%
2.67%
The table below shows operating lease right of use assets and operating lease
liabilities as of :
December 31,
December 31,
(Dollars in thousands)
2022
2021
Operating lease right-of-use assets
$
10,629
$
7,308
Operating lease liabilities
$
11,449
$
7,962
The right-of-use-assets and lease liabilities are included with other assets and
other liabilities on the balance sheet, respectively.
30
Notes to
Consolidated Financial Statements
10.
INCOME TAXES
The provision for income taxes for the years ended December 31, 2022, 2021,
and 2020 consisted of the following (in thousands):
Federal
State
Total
2022
Current
$
4,827
$
3,445
$
8,272
Deferred
80
144
224
Provision for income taxes
$
4,907
$
3,589
$
8,496
2021
Current
$
4,687
$
3,464
$
8,151
Deferred
1,002
463
1,465
Provision for income taxes
$
5,689
$
3,927
$
9,616
2020
Current
$
4,915
$
3,050
$
7,965
Deferred
(656)
(395)
(1,051)
Provision for income taxes
$
4,259
$
2,655
$
6,914
Deferred tax assets (liabilities) consisted of the following (in thousands):
December 31,
2022
2021
Deferred tax assets:
Allowance for credit losses
$
3,207
$
2,838
Deferred compensation
4,204
4,588
Unrealized loss on available-for-sale
investment securities
34,093
Net operating loss carryovers
1,907
2,048
Mark-to-market adjustment
497
74
Other deferred tax assets
84
101
Other-than-temporary impairment
30
192
Loan and investment impairment
376
530
Operating lease liabilities
3,385
2,354
Partnership income
52
111
State taxes
777
736
Total deferred tax assets
48,612
13,572
Deferred tax liabilities:
Operating lease right-of-use assets
(3,142)
(2,160)
Finance leases
(668)
(749)
Unrealized gain on available-for-sale
investment securities
-
(3,203)
Core deposit intangible
(20)
(154)
FHLB stock
(191)
(191)
Loan origination costs
(829)
(450)
Bank premises and equipment
(385)
(360)
Total deferred tax liabilities
(5,235)
(7,267)
Net deferred tax assets
$
43,377
$
6,305
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, 2022 and 2021.
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, 2022,
2021, and 2020 consisted of the following:
2022
2021
2020
Federal income tax, at statutory rate
21.0%
21.0%
21.0%
State taxes, net of Federal tax benefit
8.1%
8.2%
7.7%
Tax exempt investment security
income, net
(4.0)%
(3.1)%
(1.5)%
Bank owned life insurance, net
(0.8)%
(0.5)%
(1.2)%
Compensation—Stock
Compensation
(0.2)%
(0.1)%
(0.2)%
Other
0.1%
(0.2)%
(0.4)%
Effective tax rate
24.2%
25.3%
25.4%
As of December 31, 2022, the Company had Federal and California net
operating loss (“NOL”) carry-forwards of $6,137,000 and $7,214,000, 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, 2019 and
by the state taxing authorities for the years ended before December 31, 2018.
As of December 31, 2022, 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, 2022 and 2021, the Company recorded
no interest or penalties related to uncertain tax positions.
11.
SENIOR DEBT AND SUBORDINATED DEBENTURES
The following table summarizes the Company’s subordinated debentures:
December 31,
December 31,
(Dollars in thousands)
2022
2021
Fixed - floating rate subordinated debentures,
due 2031
$
35,000
$
35,000
Unamortized debt issuance costs
(556)
(701)
Floating rate senior debt bank loan, due 2032
30,000
-
Junior subordinated deferrable interest
debentures, due October 2036
5,155
5,155
Total subordinated debentures
$
69,599
$
39,454
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, 2022, 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
31
Notes to
Consolidated Financial Statements
11.
SENIOR DEBT AND SUBORDINATED DEBENTURES (Continued)
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, 2022, the rate was 5.68%.
Interest expense recognized by the Company for the years ended December 31,
2022, 2021, and 2020 was $188,000, $93,000 and $130,000, 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
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.
Senior Debt
On September 15, 2022, the Company entered into a $30.0 million loan
agreement with Bell Bank. Initially, payments of interest only are payable in 12
quarterly payments commencing December 31, 2022. Commencing December 31,
2025, 27 equal quarterly principal and interest payments are payable based on the
outstanding balance of the loan on August 30, 2025 and an amortization of 48
quarters. A final payment of outstanding principal and accrued interest is due at
maturity on September 30, 2032. Variable interest is payable at the Prime Rate
(published by the Wall Street Journal) less 50 basis points. The loan is secured by the
assets of the Company and a pledge of the outstanding common stock of Central
Valley Community Bank, the Company’s banking subsidiary. The Company may
prepay the loan without penalty with one exception. If the loan is prepaid prior to
August 30, 2025 with funds received from a financing source other than Bell
Bank, the Company will incur a 2% prepayment penalty. The loan contains
customary representations, covenants, and events of default.
Interest expense recognized by the Company for the Subordinated and Senior
Debt for the twelve months ended December 31, 2022 and 2021 was $1,783,000
and $173,000, respectively.
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 $1,696,000 at December 31, 2022.
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):
December 31,
2022
2021
Commitments to extend credit
$
286,925
$
325,674
Standby letters of credit
$
1,216
$
434
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, 2022 and 2021. The Company recognizes these fees as revenue over the
term of the commitment or when the commitment is used.
At December 31, 2022, commercial loan commitments represent 45% of total
commitments and are generally secured by collateral other than real estate or
unsecured. Real estate loan commitments represent 45% 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, 2022 and 2021, the balance of a contingent allocation for
probable loan loss experience on unfunded obligations was $110,000 and $115,000,
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 allowance for credit losses 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, 2022, in management’s judgment,
a concentration of loans existed in commercial loans and real-estate-related loans,
representing approximately 96.8% of total loans of which 14.3% were commercial
and 82.5% were real-estate-related.
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.
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.
Investments in Low Income Housing Tax Credit Funds - The unfunded
commitments as of December 31, 2022 and 2021 in low income housing tax credit
funds were $4,949,000 and $203,000, respectively. All commitments will be paid
by the Company by 2038.
32
Notes to
Consolidated Financial Statements
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 conservation 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, 2022 and 2021. There are no conditions
or events since those notifications that management believes have changed those
categories. The capital ratios for the Company and the Bank are presented in the table
below (exclusive of the capital conservation buffer).
The following table presents the Company’s and the Bank’s actual capital ratios
as of December 31, 2022 and December 31, 2021, as well as the minimum capital
ratios for capital adequacy for the Bank.
Actual Ratio
(Dollars in thousands)
December 31, 2022
Amount
Ratio
Tier 1 Leverage Ratio
$ 205,154
8.37%
Common Equity Tier 1 Ratio (CET 1)
$ 200,154
11.92%
Tier 1 Risk-Based Capital Ratio
$ 205,154
12.22%
Total Risk-Based Capital Ratio
$ 250,556
14.92%
December 31, 2021
Tier 1 Leverage Ratio
$ 189,020
8.03%
Common Equity Tier 1 Ratio (CET 1)
$ 184,020
12.48%
Tier 1 Risk-Based Capital Ratio
$ 189,020
12.82%
Total Risk-Based Capital Ratio
$ 233,034
15.80%
The following table presents the Bank’s regulatory capital ratios as of December 31,
2022 and December 31, 2021.
Minimum regulatory
(Dollars in thousands)
Actual Ratio
requirement (1)
December 31, 2022
Amount
Ratio
Amount
Ratio
Tier 1 Leverage Ratio
$ 266,373
10.86%
$ 98,075
4.00%
Common Equity Tier 1 Ratio
(CET 1)
$ 266,373
15.87%
$ 75,516
7.00%
Tier 1 Risk-Based Capital
Ratio
$ 266,373
15.87%
$ 100,688
8.50%
Total Risk-Based Capital
Ratio
$ 277,331
16.53%
$ 134,251
10.50%
December 31, 2021
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
Ratio
$ 209,044
14.18%
$ 117,964
10.50%
(1) The minimum regulatory requirement threshold includes the capital conservation
buffer of 2.50%.
Dividends - During 2022, the Company paid dividends to the Bank in the amount
of $38,000,000 in connection with the senior and subordinated debt proceeds
approved by the Company’s Board of Directors. The Company declared and paid a
total of $5,638,000 or $0.48 per common share cash dividend to shareholders of
record during the year ended December 31, 2022. During the year ended
December 31, 2022, the Company repurchased and retired common stock in the
amount of $6,814,000.
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.
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, 2022, $69,699,000 of the Bank’s retained earnings were free of these
restrictions.
33
Notes to
Consolidated Financial Statements
13.
SHAREHOLDERS’ EQUITY (Continued)
A reconciliation of the numerators and denominators of the basic and diluted
earnings per common share computations is as follows (in thousands, except share
and per-share amounts):
For the Years Ended December 31,
2022
2021
2020
Basic Earnings Per Common Share:
Net income
$
26,645 $
28,401 $
20,347
Weighted average shares
outstanding
11,715,376
12,237,424
12,534,078
Net income per common share
$
2.27 $
2.32 $
1.62
Diluted Earnings Per Common
Share:
Net income
$
26,645 $
28,401 $
20,347
Weighted average shares
outstanding
11,715,376
12,237,424
12,534,078
Effect of dilutive stock options
and warrants
23,698
44,508
42,241
Weighted average shares of
common stock and common
stock equivalents
11,739,074
12,281,932
12,576,319
Net income per diluted common
share
$
2.27 $
2.31 $
1.62
No outstanding options and restricted stock awards were anti-dilutive at
December 31, 2022, 2021, and 2020.
14.
EQUITY-BASED COMPENSATION
On December 31, 2022, the Company had two 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.
In May 2015, the Company adopted the Central Valley Community Bancorp
2015 Omnibus Incentive Plan (2015 Plan). The plan provides for awards in the
form of incentive stock options, non-statutory stock options, stock appreciation
rights, and restricted stock. The plan also allows for performance awards that may be
in the form of cash or shares of the Company’s common stock, including restricted
stock. The 2015 plan requires that the exercise price may not be less than the fair
market value of the stock at the date the option is granted, and that the option
price must be paid in full at the time it is exercised. The options and awards under
the plan expire on dates determined by the Board of Directors, but not later than
ten years from the date of grant. The vesting period for the options, restricted
common stock awards and option related stock appreciation rights is determined by
the Board of Directors and is over one to five years. The maximum number of
shares that can be issued with respect to all awards under the plan is 875,000.
Currently under the 2015 Plan, 737,311 shares remain reserved for future grants as
of December 31, 2022.
Effective June 2, 2017, the Company adopted an Employee Stock Purchase Plan
whereby our employees may purchase Company common shares through payroll
deductions of between one percent and 15 percent of pay in each pay period. Shares
are purchased at the end of an offering period at a discount of 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 432,056 shares available for future purchase under the plan as of
December 31, 2022.
For the years ended December 31, 2022, 2021, and 2020, the compensation cost
recognized for share-based compensation was $497,000, $405,000, and $470,000,
respectively. The recognized tax benefit for share-based compensation expense was
$87,000, $50,000, and $76,000 for 2022, 2021, and 2020 respectively.
No options to purchase shares of the Company’s common stock were granted
during the years ending December 31, 2022, 2021 and 2020 from any of the
Company’s stock based compensation plans.
A summary of the combined activity of the Plans during the years then ended is
presented below (dollars in thousands, except per-share amounts):
Weighted
Weighted
Average
Average
Remaining
Exercise
Contractual
Aggregate
Shares
Price
Term (Years)
Intrinsic Value
Options outstanding at
January 1, 2020
121,120 $
8.73
Options exercised
(43,500) $
6.39
Options forfeited
(550) $
7.40
Options outstanding at
December 31, 2020
77,070 $
10.06
1.51 $
382
Options exercised
(24,265) $
10.6
Options outstanding at
December 31, 2021
52,805 $
9.81
0.57 $
581
Options exercised
(50,205) $
9.74
Options forfeited
(2,600) $
11.12
Options outstanding at
December 31, 2022
- $
-
0.00 $
Information related to the stock option plan during each year follows (in
thousands):
2022
2021
2020
Intrinsic value of options exercised
$
496
$
253
$
433
Cash received from options exercised
$
489
$
257
$
279
Excess tax benefit realized for option
exercises
$
87
$
50
$
76
As of December 31, 2022, there is no unrecognized compensation cost related to
stock options granted under all Plans. All options are fully vested.
Restricted Common Stock Awards - The 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.
The following table presents the restricted common stock activity during
the years presented:
Weighted
Average
Grant Date
Shares
Fair Value
Nonvested outstanding shares at January 1, 2020
45,160
$
17.38
Granted
21,397
$
16.42
Vested
(34,703)
$
18.23
Forfeited
(1,841)
$
19.16
Nonvested outstanding shares at December 31, 2020
30,013
$
15.60
Granted
31,496
$
18.83
Vested
(37,085)
$
15.12
Forfeited
(247)
$
20.26
Nonvested outstanding shares at December 31, 2021
24,177
$
20.50
Granted
56,089
$
17.75
Vested
(33,316)
$
20.39
Forfeited
(244)
$
20.50
Nonvested outstanding shares at December 31, 2022
46,706
$
17.28
34
Notes to
Consolidated Financial Statements
14.
EQUITY-BASED COMPENSATION (Continued)
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, 2022, there were 46,706 shares of restricted stock that are
nonvested and expected to vest. Share-based compensation cost charged against
income for restricted stock awards was $474,000, $385,000, and $449,000 for the
year ended December 31, 2022, 2021, and 2020 respectively.
As of December 31, 2022, there was $505,000 of total unrecognized
compensation cost related to nonvested restricted common stock. Restricted stock
compensation expense is recognized on a straight-line basis over the vesting period.
This cost is expected to be recognized over a weighted average remaining period of
2.01 years and will be adjusted for subsequent changes in estimated forfeitures.
Restricted common stock awards had an intrinsic value of $3,825,000 at December 31,
2022.
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 two 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 $1,000,000, $1,050,000, and $370,000 to the
profit sharing plan in 2022, 2021, and 2020, 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, 2022
2021 and 2020, the Bank made a 100% matching contribution on all deferred
amounts up to 5% of eligible compensation. For the years ended December 31, 2022,
2021, and 2020, the Bank made matching contributions totaling $1,046,000,
$1,014,000, and $1,008,000, respectively.
Deferred Compensation Plans - The Bank has a nonqualified Deferred Compensation
Plan which provides directors with an unfunded, deferred compensation program.
Under the plan, eligible participants may elect to defer some or all of their current
compensation or director fees. Deferred amounts earn interest at an annual rate
determined by the Board of Directors (2.26% at December 31, 2022). At
December 31, 2022 and 2021, the total net deferrals included in accrued interest
payable and other liabilities were $4,023,000 and $4,230,000, 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 $10,915,000 and $10,637,000 and at December 31, 2022 and
2021, respectively. Income recognized on these policies, net of related expenses, for
the years ended December 31, 2022, 2021, and 2020, was $278,000, $264,000, and
$245,000, respectively.
In October 2015, the Board of Directors of the Company and the Bank adopted
a board resolution to create the Central Valley Community Bank Executive Deferred
Compensation Plan (the Executive Plan). Pursuant to the Executive Plan, all
eligible executives of the Bank may elect to defer up to 50 percent of their
compensation for each deferral year. Deferred amounts earn interest at an annual
rate determined by the Board of Directors (2.26% at December 31, 2022). At
December 31, 2022 and 2021, the total net deferrals included in accrued interest
payable and other liabilities were $300,000 and $233,000, 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 (benefit)/expense recognized under these plans for the years ended December 31,
2022, 2021, and 2020, totaled $(430,000), $377,000, and $1,624,000,
respectively. Note, the expense is effected by the changing discount rate used to
calculate the liability. Accrued compensation payable under the salary continuation
plans totaled $9,554,000 and $10,881,000 at December 31, 2022 and 2021,
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 $29,622,000 and $28,916,000
at December 31, 2022 and 2021, respectively. Income recognized on these
policies, net of related expense, for the years ended December 31, 2022, 2021, and
2020 totaled $706,000, $576,000, and $466,000, 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, 2022
$
13,310
Disbursements
12,913
Amounts repaid
(2,496)
Balance, December 31, 2022
$
23,727
Undisbursed commitments to related parties, December 31, 2022
$
1,707
35
Notes to
Consolidated Financial Statements
17.
PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 2022 and 2021
(In thousands)
2022
2021
ASSETS
Cash and cash equivalents
$
3,202
$
24,060
Investment in Bank subsidiary
241,034
263,310
Other assets
834
347
Total assets
$
245,070
$
287,717
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Senior debt and subordinated debentures
$
69,599
$
39,454
Other liabilities
811
418
Total liabilities
70,410
39,872
Shareholders’ equity:
Common stock
61,487
66,820
Retained earnings
194,400
173,393
Accumulated other comprehensive income, net of tax
(81,227)
7,632
Total shareholders’ equity
174,660
247,845
Total liabilities and shareholders’ equity
$
245,070
$
287,717
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE (LOSS) INCOME
For the Years Ended December 31, 2022, 2021, and 2020
(In thousands)
2022
2021
2020
Income:
Dividends declared by (Company) Subsidiary—eliminated in consolidation
$
(38,000)
$
7,679
$
15,622
Other income
6
3
4
Total income
(37,994)
7,682
15,626
Expenses:
Interest on subordinated debentures and borrowings
1,971
266
130
Professional fees
239
296
283
Other expenses
601
560
555
Total expenses
2,811
1,122
968
(Loss) income before equity in undistributed net income of Subsidiary
(40,805)
6,560
14,658
Equity in undistributed net income of Subsidiary, net of distributions
66,583
21,496
5,328
Income before income tax benefit
25,778
28,056
19,986
Benefit from income taxes
867
345
361
Net income
$
26,645
$
28,401
$
20,347
Comprehensive (loss) income
$
(62,214)
$
21,177
$
32,386
36
Notes to
Consolidated Financial Statements
17.
PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2022, 2021, and 2020
(In thousands)
2022
2021
2020
Cash flows from operating activities:
Net income
$
26,645
$
28,401
$
20,347
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed net income of subsidiary, net of distributions
(66,583)
(21,496)
(5,328)
Equity-based compensation
497
405
470
Amortization of unamortized issuance cost
145
-
-
Net (increase) decrease in other assets
(499)
1
(208)
Net increase (decrease) in other liabilities
669
464
(31)
Benefit for deferred income taxes
15
6
75
Net cash (used in) provided by operating activities
(39,111)
7,781
15,325
Cash flows used in investing activities:
Investment in subsidiary
-
-
-
Cash flows from financing activities:
Proceeds from issuance of subordinated and senior debt
30,000
34,299
-
Cash dividend payments on common stock
(5,638)
(5,757)
(5,530)
Purchase and retirement of common stock
(6,814)
(13,619)
(11,052)
Proceeds from exercise of stock options
489
256
279
Proceeds from stock issued under employee stock purchase plan
216
204
199
Net cash used in financing activities
18,253
15,383
(16,104)
(Decrease) increase in cash and cash equivalents
(20,858)
23,164
(779)
Cash and cash equivalents at beginning of year
24,060
896
1,675
Cash and cash equivalents at end of year
$
3,202
$
24,060
$
896
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest
$
1,431
$
119
$
153
37
Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors of
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, 2022 and 2021, the related consolidated statements of income, comprehensive (loss) income, changes in shareholders’
equity, and cash flows for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2022, 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 general reserve consists of 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.
Given the significance of the qualitative factors to the overall allowance for credit losses, that management’s determination of the
qualitative factors is subjective and involves significant management judgments, we have identified auditing the qualitative factors used in
the ACL as a critical audit matter. 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 the internal and external data used and its appropriateness and sensitivity as a basis for the
adjustments relating to the qualitative factors.
• Evaluation of the reasonableness of management’s significant judgments and assumptions used in the determination of the qualitative
factors.
• Analytically evaluating the directional consistency and magnitude of the change of the qualitative factors to trends in the loan portfolio
and other economic data for reasonableness, which included a comparison to the prior period end and evaluating the reasonableness
of the qualitative factors as of period end.
• Testing the mathematical accuracy of the qualitative factors.
We have served as the Company’s auditor since 2011.
Sacramento, California
March 9, 2023
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. 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 2022, we focused on asset quality, loan growth, and capital adequacy. We
also focused on assuring that competitive products and services were made available
to our clients while adjusting to the many new laws and regulations that affect the
banking industry.
As of December 31, 2022, the Bank operated 19 full-service offices. Additionally,
the Bank maintains a Commercial Real Estate Division, an Agribusiness Center and
a SBA Lending Division. The Real Estate Division processes or assists in processing
the majority of the Bank’s real estate related transactions, including interim
construction loans for single family residences and commercial buildings. We offer
permanent single family residential loans through our mortgage broker services.
ECONOMIC CONDITIONS
Recent economics within California, the Central Valley, and Greater Sacramento
Region, including unemployment rates and housing prices are showing moderate and
steady improvement. We only conduct business in the state of California.
Agriculture and agricultural-related businesses remain a critical part of the Central
Valley’s economy. The Valley’s agricultural production is widely diversified, producing
nuts, vegetables, fruit, cattle, dairy products, and cotton. The continued future
success of agriculture related businesses is highly dependent on the availability of
water and is subject to fluctuation in worldwide commodity prices, currency
exchanges, and demand. From time to time, California experiences severe droughts
or adverse weather issues, which could significantly harm the business of our customers
and the credit quality of the loans to those customers. Despite a good start to the
current rainy season, California has been experiencing significant drought conditions
for many years which impacts surface water deliveries to customers. In reaction to
these conditions, we closely monitor the surface water availability with customer
specific budgeting and third party information and surveys. There are also certain
regulatory impacts that limit the water than can be pumped from underground
sources. Both sources are closely considered and monitored in the granting and
monitoring of our loan exposures, along with related issues affecting our customers.
We closely monitor the water resources and the related issues affecting our
customers, and we will remain vigilant for identifying signs of deterioration within
the loan portfolio in an effort to manage credit quality and work with borrowers where
possible to mitigate any losses.
As a whole, the loan portfolio may be subject to the impact of changes in interest
rates, a decline in economic conditions in the Central Valley and the Greater
Sacramento Region, and inflation.
OVERVIEW
Diluted earnings per share (EPS) for the year ended December 31, 2022 was
$2.27 compared to $2.31 and $1.62 for the years ended December 31, 2021 and
2020, respectively. Net income for 2022 was $26,645,000 compared to $28,401,000
and $20,347,000 for the years ended December 31, 2021 and 2020, respectively.
The decrease in net income for 2022 compared to 2021 was driven by a reversal of
provision for credit losses in 2021 compared to a provision in 2022, an increase in net
realized losses on sales and calls of investment securities, compared to net gains in
2021, a decrease in loan placement fees, and an increase in non-interest expense. This
was offset by an increase in net interest income, an increase in interchange fees, a
decrease in the provision for income taxes, and an increase in service charge income.
Total assets at December 31, 2022 were $2,422,519,000 compared to $2,450,139,000
at December 31, 2021.
Return on average equity (“ROE”) for 2022 was 14.25% compared to 11.50%
and 8.85% for 2021 and 2020, respectively. Return on average assets (“ROA”) for
2022 was 1.09% compared to 1.25% and 1.11% for 2021 and 2020, respectively.
Total equity was $174,660,000 at December 31, 2022 compared to $247,845,000 at
December 31, 2021. The decrease in shareholders’ equity is the result of a decrease
in accumulated other comprehensive income (AOCI) of $88,859,000, the payment of
common stock cash dividends of $5,638,000 and the repurchase and retirement of
common stock of $6,814,000, offset primarily by an increase in retained earnings
from our net income of $26,645,000. The decrease in AOCI was the result of an
increase in the unrealized loss on the Company’s investment portfolio.
Average total loans (including nonaccrual) increased $64,266,000 or 6.01% to
$1,133,919,000 in 2022 compared to $1,069,653,000 in 2021. In 2022 we recorded
a provision for credit losses of $1,000,000, compared to a reversal of provision of
$4,300,000 in 2021, and a provision of $3,275,000 in 2020. The Company had no
nonperforming assets at December 31, 2022. At December 31, 2021, nonperforming
assets totaled $946,000. Net loan loss recoveries for 2022 were $248,000 compared to
net loan loss recoveries in the amount of $985,000 for 2021 and net loan loss
recoveries in the amount of $510,000 for 2020. Refer to “Asset Quality” below for
further information.
Dividend Declared
The Company declared a $0.12 per common share cash dividend, payable on
February 24, 2023 to shareholders of record on February 10, 2023.
Key Factors in Evaluating Financial Condition
and Operating Performance
In evaluating our financial condition and operating performance, we focus on
several key factors including:
• Return to our shareholders;
• Return on average assets;
• Development of revenue streams, including net interest income and non-
interest income;
• Asset quality;
40
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OVERVIEW (Continued)
• 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 14.25% for the year ended 2022 compared to 11.50% and
8.85% for the years ended 2021 and 2020, respectively.
Our net income for the year ended December 31, 2022 decreased $1,756,000
compared to 2021 and increased $8,054,000 in 2021 compared to 2020. Contributing
to the decrease during 2022, compared to 2021, was a provision for credit losses,
compared to a reversal in 2021, an increase in net realized losses on sales and calls of
investment securities, compared to net gains in 2021, a decrease in loan placement
fees, and an increase in non-interest expense. These were partially offset by an increase
in net interest income, an increase in interchange fees, a decrease in the provision
for income taxes, and an increase in service charge income. During 2021, net income
compared to 2020 was impacted by a reversal in the provision for credit losses and
an increase in net interest income.
Net interest income increased because of increases in loan and fee income and
increases in interest income on investments, offset by an increase in interest expense.
For 2022, our net interest margin (NIM) decreased 2 basis points to 3.52%
compared to 2021 as a result of yield changes and asset mix changes. Net interest
income was positively impacted by the accretion of the loan marks on acquired loans
in the amount of $521,000 and $802,000 for the year ended December 31, 2022
and 2021, respectively. In addition, net interest income before the provision for credit
losses for the year ended December 31, 2022 benefited by approximately $649,000
in nonrecurring income from prepayment penalties and payoff of loans, as compared
to $676,000 for the year ended December 31, 2021. Excluding these reversals and
benefits, net interest income for the year ended December 31, 2022 increased by
$7,320,000 compared to the year ended December 31, 2021.
Non-interest income decreased 43.88% in 2022 compared to 2021 primarily due
to a $2,231,000 increase in net realized losses on sales and calls of investment securities,
a decrease of $1,012,000 in other income, and a decrease in loan placement fees of
$1,075,000, partially offset by an increase in service charge income of $113,000, an
increase in interchange fees of $63,000, and an increase in appreciation in cash
surrender value of bank-owned life insurance of $145,000.
Non-interest expenses increased $637,000 or 1.33% to $48,479,000 in 2022
compared to $47,842,000 in 2021. The net increase year over year resulted from
increases in information technology of $476,000, salaries and employee benefits of
$197,000, regulatory assessments of $20,000, occupancy and equipment expenses of
$249,000, donations of $28,000, general insurance of $35,000, telephone of
$152,000, armored courier of $2,000, travel and mileage of $67,000, risk management
expenses of $5,000, operating losses of $113,000, and advertising expenses of
$30,000, partially offset by decreases in alarm expenses of $10,000, postage of
$46,000, personnel of $51,000, professional services of $146,000, loan related
expenses of $16,000, Internet banking expenses of $186,000, directors’ expenses of
$140,000, stationary and supplies of $5,000, amortization of software of $15,000,
and amortization of core deposit intangible of $207,000, in 2022 compared to
2021.
The Company recorded an income tax provision of $8,496,000 for the year
ended December 31, 2022, compared to $9,616,000 for the year ended December 31,
2021, and $6,914,000 for the year ended December 31, 2020. Basic EPS was
$2.27 for 2022 compared to $2.32 and $1.62 for 2021 and 2020, respectively.
Diluted EPS was $2.27 for 2022 compared to $2.31 and $1.62 for 2021 and 2020,
respectively.
Return on Average Assets
Our ROA is a ratio that measures our performance compared with other banks
and bank holding companies. Our ROA for the year ended 2022 was 1.09%
compared to 1.25% and 1.11% for the years ended December 31, 2021 and 2020,
respectively. The 2022 decrease in ROA is primarily due to the decrease in net income,
and the increase in average assets. Annualized ROA for our peer group was 1.10%
at December 31, 2022. 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 3.52% for the year ended December 31, 2022, compared to
3.54% and 3.87% for the years ended December 31, 2021 and 2020, respectively.
The decrease in 2022 net interest margin compared to 2021, resulted from the decrease
in the yield on the Company’s loan portfolio, and an increase in the balance of
average interest earning assets. The effective tax equivalent yield on total earning
assets increased 5 basis points, while the cost of total interest-bearing liabilities
increased 16 basis points to 0.28% for the year ended December 31, 2022. Our cost
of total deposits in 2022 and 2021 was 0.06% and 0.05%, respectively, compared
to 0.09% for the same period in 2020. Our net interest income before provision for
credit losses increased $7,012,000 or 9.66% to $79,566,000 for the year ended
2022 compared to $72,554,000 and $64,423,000 for the years ended 2021 and 2020,
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 or losses from sales and calls of
investment securities. Non-interest income in 2022 decreased $3,951,000 or
43.88% to $5,054,000 compared to $9,005,000 in 2021 and $13,797,000 in 2020.
The decrease resulted primarily from an increase in net realized losses on sales and
calls of investment securities, compared to a gain in 2021, a decrease in loan placement
fees, and a decrease in other income, partially offset by an increase in service charge
income, an increase in interchange fees, an increase in FHLB dividends, and an
increase in appreciation in cash surrender value of bank-owned life insurance compared
to 2021. Further detail on non-interest income is provided below.
Asset Quality
For all banks and bank holding companies, asset quality has a significant impact
on the overall financial condition and results of operations. Asset quality is measured
in terms of classified and nonperforming loans, and is a key element in estimating
the future earnings of a company. There were no nonperforming assets or
nonperforming loans at December 31, 2022, compared to $946,000 in
nonperforming assets, which were nonperforming loans, at December 31, 2021.
Nonperforming assets totaled 0.09% of gross loans as of December 31, 2021. The
ratio of nonperforming loans to total loans was 0.09% as of December 31, 2021.
The Company had no other real estate owned at December 31, 2022, or
December 31, 2021. No foreclosed assets were recorded at December 31, 2022 or
December 31, 2021. 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 allowance for credit losses as a percentage of outstanding loan balance was
0.86% as of December 31, 2022 and 0.92% as of December 31, 2021. The ratio of
net recoveries to average loans was 0.02% as of December 31, 2022 and 0.09% as
of December 31, 2021.
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 decreased 1.13% during
2022 to $2,422,519,000 as of December 31, 2022 from $2,450,139,000 as of
December 31, 2021. Total gross loans increased 20.90% to $1,256,304,000 as of
December 31, 2022, compared to $1,039,111,000 at December 31, 2021. Total
investment securities decreased 13.98% to $960,490,000 as of December 31, 2022
compared to $1,116,624,000 as of December 31, 2021. Total deposits decreased
1.09% to $2,099,649,000 as of December 31, 2022 compared to $2,122,797,000
as of December 31, 2021. Our loan to deposit ratio at December 31, 2022 was 59.83%
compared to 48.95% at December 31, 2021. The loan to deposit ratio of our peers
was 77.00% at December 31, 2022. 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.
41
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
OVERVIEW (Continued)
Capital Adequacy
At December 31, 2022, we had a total capital to risk-weighted assets ratio of
14.92%, a Tier 1 risk-based capital ratio of 12.22%, common equity Tier 1 ratio of
11.92%, and a leverage ratio of 8.37%. 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, 2022, on a stand-alone basis, the Bank had a total risk-based capital
ratio of 16.53%, a Tier 1 risk based capital ratio of 15.87%, common equity Tier 1
ratio of 15.87%, and a leverage ratio of 10.86%. At December 31, 2021, the
Bank had a total risk-based capital ratio of 14.18%, Tier 1 risk-based capital of
13.52% and a leverage ratio of 8.47%. Note 13 of the audited Consolidated Financial
Statements provides more detailed information concerning the Company’s capital
amounts and ratios. As of December 31, 2022, 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, 2022.
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 54.51%
for 2022 compared to 57.16% for 2021 and 64.08% for 2020. The improvement in
the efficiency ratio in 2022 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 3.75% to $84,620,000
in 2022 compared to $81,559,000 in 2021 and $78,220,000 in 2020, while
operating expenses increased 1.33% in 2022, 0.33% in 2021, and 3.44% in 2020.
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
$319,309,000 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
$686,553,000 or 28.34% of total assets at December 31, 2022 and $1,280,091,000
or 52.25% of total assets as of December 31, 2021.
RESULTS OF OPERATIONS
NET INCOME
Net income was $26,645,000 in 2022 compared to $28,401,000 and
$20,347,000 in 2021 and 2020, respectively. Basic earnings per share was $2.27,
$2.32, and $1.62 for 2022, 2021, and 2020, respectively. Diluted earnings per share
was $2.27, $2.31, and $1.62 for 2022, 2021, and 2020, respectively. ROE was
14.25% for 2022 compared to 11.50% for 2021 and 8.85% for 2020. ROA for 2022
was 1.09% compared to 1.25% for 2021 and 1.11% for 2020.
The decrease in net income for 2022 compared to 2021 was driven by a
provision for credit losses compared to a reversal of provision for credit losses in
2021, an increase in non-interest expense, an increase in net realized losses on sales
and calls of investment securities, compared to a gain in 2021, an increase in non-
interest expense, and a decrease in loan placement fees, partially offset by an
increase in net interest income, an increase in interchange fees, a decrease in the
provision for income taxes, and an increase in service charge income. The increase in
net income for 2021 compared to 2020 was primarily due to 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.
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)
Year Ended December 31, 2022
SCHEDULE OF AVERAGE
BALANCES, AVERAGE YIELDS
Interest
Average
AND RATES
Average
Income/
Interest
(Dollars in thousands)
Balance
Expense
Rate
ASSETS
Interest-earning deposits in other
banks
$
48,032 $
391
0.81%
Securities
Taxable securities
862,079
20,011
2.32%
Non-taxable securities (1)
270,014
8,454
3.13%
Total investment securities
1,132,093
28,465
2.51%
Total securities and
interest-earning deposits
1,180,125
28,856
2.45%
Loans (2) (3)
1,133,641
55,907
4.93%
Total interest-earning assets
2,313,766 $
84,763
3.66%
Allowance for credit losses
(10,005)
Nonaccrual loans
278
Cash and due from banks
36,491
Bank premises and equipment
8,092
Other assets
90,772
Total average assets
$
2,439,394
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Savings and NOW accounts
$
581,285 $
232
0.04%
Money market accounts
486,823
848
0.17%
Time certificates of deposit
81,473
117
0.14%
Total interest-bearing deposits
1,149,581
1,197
0.10%
Other borrowed funds
63,752
2,225
3.49%
Total interest-bearing liabilities
1,213,333 $
3,422
0.28%
Non-interest bearing demand
deposits
1,006,511
Other liabilities
32,532
Shareholders’ equity
187,018
Total average liabilities and
shareholders’ equity
$
2,439,394
Interest income and rate earned on
average earning assets
$
84,763
3.66%
Interest expense and interest cost
related to average interest-bearing
liabilities
3,422
0.28%
Net interest income and net interest
margin (4)
$
81,341
3.52%
Year Ended December 31, 2021
Interest
Average
Average
Income/
Interest
Balance
Expense
Rate
$
104,710 $
129
0.12%
678,093
14,044
2.07%
238,870
7,096
2.97%
916,963
21,140
2.31%
1,021,673
21,269
2.08%
1,067,316
54,077
5.07%
2,088,989 $
75,346
3.61%
(11,482)
2,337
38,202
8,436
141,133
$
2,267,615
$
529,043 $
182
0.03%
455,575
661
0.15%
89,875
193
0.21%
1,074,493
1,036
0.10%
9,864
266
2.70%
1,084,357 $
1,302
0.12%
900,083
36,311
246,864
$
2,267,615
$
75,346
3.61%
1,302
0.12%
$
74,044
3.54%
Year Ended December 31, 2020
Interest
Average
Average
Income/
Interest
Balance
Expense
Rate
$
76,924 $
246
0.32%
479,894
11,740
2.45%
66,299
2,489
3.75%
546,193
14,229
2.61%
623,117
14,475
2.32%
1,053,450
52,066
4.94%
1,676,567 $
66,541
3.97%
(12,242)
2,262
27,575
7,476
131,349
$
1,832,987
$
433,742 $
341
0.08%
300,603
542
0.18%
89,610
582
0.65%
823,955
1,465
0.18%
5,155
130
2.52%
829,110 $
1,595
0.19%
744,239
29,831
229,807
$
1,832,987
$
66,541
3.97%
1,595
0.19%
$
64,946
3.87%
(1) Interest income is calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $1,775, $1,490, and $523 in 2022, 2021,
and 2020, respectively.
(2) Loan interest income includes loan fees of $274 in 2022, $6,474 in 2021, and $2,234 in 2020.
(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.
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, 2022, we held
$465,035,000 or 48.75% of the total market value of the investment portfolio in
MBS and CMOs with an average yield of 4.42%. We invested 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. However, as interest rates have increased, prepayments
likely have decline and therefore the average life of the MBS and CMOs are 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. 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 its 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, 2022 was an unrealized loss of
$81,227,000 and is reflected in the Company’s equity. At December 31, 2022, the
effective duration of the investment portfolio was 4.85 years and the market value
reflected a pre-tax unrealized loss of $91,643,000. 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,
2022, 2021, and 2020, no OTTI was recorded. Future deterioration in the market
values of our investment securities may require the Company to recognize 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, 2022, an immediate rate increase of 200 basis points would result
in an estimated decrease in the market value of the investment portfolio by
approximately $61,000. Conversely, with an immediate rate decrease of 200 basis
points, the estimated increase in the market value of the investment portfolio would
be $60,000. 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 2022 increased $9,132,000 to $82,988,000 compared to
$73,856,000 in 2021 and $66,018,000 in 2020, respectively. The increase in 2022
was the result of yield changes and asset mix changes. The tax-equivalent yield on
interest earning assets increased to 3.66% for the year ended December 31, 2022
from 3.61% for the year ended December 31, 2021. Average interest earning assets
increased to $2,313,766,000 for the year ended December 31, 2022 compared to
$2,088,989,000 for the year ended December 31, 2021. Average interest-earning
deposits in other banks decreased $56,678,000 in 2022 compared to 2021. Average
yield on these deposits was 0.81% compared to 0.12% on December 31, 2022
and December 31, 2021 respectively. Average investments and interest-earning
deposits increased $158,452,000 and the tax equivalent yield on those assets increased
37 basis points. Average total loans increased $64,266,000 but the yield on average
loans decreased 14 basis points.
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, 2022
Compared to 2021
(In thousands)
Changes in Volume/Rate
Volume
Rate
Net
Increase (decrease) due to
changes in:
Interest income:
Interest-earning
deposits in other
banks
$
(69) $
331 $
262
Investment securities:
Taxable
3,811
2,154
5,965
Non-taxable (1)
925
433
1,358
Total investment
securities
4,736
2,587
7,323
Loans
3,360
(1,530)
1,830
Total earning
assets (1)
8,027
1,388
9,415
Interest expense:
Deposits:
Savings, NOW and
MMA
62
174
236
Time certificate of
deposits
(18)
(58)
(76)
Total interest-
bearing deposits
44
116
160
Other borrowed funds
1,453
506
1,959
Total interest bearing
liabilities
1,497
622
2,119
Net interest income (1)
$ 6,530 $
766 $
7,296
(1) Computed on a tax equivalent basis for securities exempt from federal income taxes.
Interest and fee income from loans increased $1,830,000 or 3.38% in 2022
compared to 2021. Interest and fee income from loans increased $2,011,000 or
3.86% in 2021 compared to 2020. The increase in 2022 is primarily attributable to
an increase in average total loans outstanding.
Average total loans, including nonaccrual loans, for 2022 increased $64,266,000
to $1,133,919,000 compared to $1,069,653,000 for 2021 and $1,055,712,000 for
2020. The yield on loans for 2022 was 4.93% compared to 5.07% and 4.94% for
2021 and 2020, respectively. The impact to interest income from the accretion of
the loan marks on acquired loans was an decrease to $521,000 from $802,000 for
the years ended December 31, 2022 and 2021, respectively. Additionally, 2021
included $6,205,000 in commercial loan fees from PPP activity compared to $120,000
in 2022.
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 $7,302,000 or 36.92% in
2022 compared to 2021. The yield on average investments increased 37 basis points
to 2.45% for the year ended December 31, 2022 from 2.08% for the year ended
December 31, 2021. Average total investments increased $158,452,000 to
$1,180,125,000 in 2022 compared to $1,021,673,000 in 2021. In 2021, total
investment income on a non tax-equivalent basis increased $5,827,000 or 41.76%
compared to 2020.
For the Years Ended
December 31, 2021
Compared to 2020
Volume
Rate
Net
$
88 $
(205) $
(117)
4,848
(2,544)
2,304
6,478
(1,871)
4,607
11,326
(4,415)
6,911
685
1,326
2,011
12,099
(3,294)
8,805
353
(393)
(40)
1
(390)
(389)
354
(783)
(429)
119
17
136
473
(766)
(293)
$ 11,626 $ (2,528) $ 9,098
44
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INTEREST INCOME AND EXPENSE (Continued)
The increase in total interest income for 2021 was the result of yield changes, the
decrease in interest rates being offset by 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 total loans
increased and the yield on average loans increased 13 basis points.
Interest expense on deposits in 2022 increased $161,000 or 15.54% to $1,197,000
compared to $1,036,000 in 2021 and decreased $268,000 as compared to 2020. The
yield on interest-bearing deposits remained unchanged at 0.10% in 2022 and
2021. The yield on interest-bearing deposits decreased 8 basis points to 0.10% in
2021 from 0.18% in 2020. Average interest-bearing deposits were $1,149,581,000
for 2022 compared to $1,074,493,000 and $823,955,000 for 2021 and 2020,
respectively.
Average other borrowings were $63,752,000 with an effective rate of 3.49% for
2022 compared to $9,864,000 with an effective rate of 2.70% for 2021. In 2020,
the average other borrowings were $5,155,000 with an effective rate of 2.52%.
Included in other borrowings are the junior subordinated deferrable interest
debentures acquired from Service 1st, subordinated debt, senior debit, 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 5.68% for 2022, 1.73%
for 2021, and 1.84% for 2020. The subordinated debt, issued in 2021, bears a
fixed interest rate of 3.125% per year. The senior debt secured from Bell Bank has
an interest rate cap of 6.75% which was reached in 2022.
The cost of all interest-bearing liabilities was 0.28% and 0.12% basis points for
2022 and 2021, respectively, compared to 0.19% for 2020. The cost of total deposits
was 0.06% for the year ended December 31, 2022, compared to 0.05% and
0.09% for the years ended December 31, 2021 and 2020, respectively. Average
demand deposits increased 11.82% to $1,006,511,000 in 2022 compared to
$900,083,000 for 2021 and $744,239,000 for 2020. The ratio of average non-
interest demand deposits to average total deposits increased to 46.68% for 2022
compared to 45.58% and 47.46% for 2021 and 2020, respectively.
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES
Net interest income before provision for credit losses for 2022 increased $7,012,000
or 9.66% to $79,566,000 compared to $72,554,000 for 2021 and $64,423,000 for
2020. The increase in 2022 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 2 basis points. Yield on
interest earning assets increased 5 basis points. The decrease in net interest margin in
the period-to-period comparison resulted primarily from the increase in interest
expense. Net interest income before provision for credit losses increased $8,131,000
in 2021 compared to 2020, primarily due yield changes and asset mix changes.
Average interest-earning assets were $2,313,766,000 for the year ended December 31,
2022 with a NIM of 3.52% compared to $2,088,989,000 with a NIM of 3.54%
in 2021, and $1,676,567,000 with a NIM of 3.87% in 2020. 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, 2022, the Company recorded a provision
for credit losses of $1,000,000 compared to a reversal of provision of $4,300,000 in
2021. A provision of $3,275,000 was recorded for 2020. 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, 2022, 2021 and 2020 the Company had
net recoveries totaling $248,000, $985,000, and $510,000, respectively. The net
recovery ratio, which reflects net recoveries to average loans, was 0.02%, 0.09% and
0.05% for 2022, 2021, and 2020, 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, 2022, there were $27.8 million
in classified loans of which $1.7 million related to commercial and industrial
loans, $2.2 million to real estate owner occupied, and $5.4 million to agricultural
production. This compares to $8.5 million in classified loans as of December 31, 2021
of which $2.6 million related to commercial and industrial, $2.4 million to
agricultural production, and $3.6 million to real estate owner occupied.
As of December 31, 2022, 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.
45
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
Net interest income, after the provision for credit losses was $78,566,000 for 2022
compared to $76,854,000 and $61,148,000 for 2021 and 2020, 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 $5,054,000 in 2022 compared to
$9,005,000 and $13,797,000 in 2021 and 2020, respectively. The $3,951,000 or
43.88% decrease in non-interest income in 2022 was driven by an increase of
$2,231,000 in net realized losses on sales and calls of investment securities, a decrease
of $1,012,000 in other income, and a decrease in loan placement fees of $1,075,000,
partially offset by an increase in service charge income of $113,000, an increase in
interchange fees of $63,000 and an increase in appreciation in cash surrender value of
bank-owned life insurance of $145,000. 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.
Customer service charges increased $113,000 to $2,014,000 in 2022 compared
to $1,901,000 in 2021. Service charges were $2,071,000 in 2020. The decrease in
2021 resulted from decreases in our NSF fees and lower analysis service charge income.
During the year ended December 31, 2022, we realized net losses on sales and
calls of investment securities of $1,730,000, compared to net gains of $501,000 in
2021 and $4,252,000 in 2020. The net gains in 2021, and 2020 were the results of
partial restructuring of the investment portfolio designed to improve the future
performance of the portfolio. Realized loss recorded in 2022 was the result of strategic
decisions to reduce the overall impact of the Company’s investment 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 $985,000 in 2022 compared to $840,000 and $711,000 in 2021 and
2020, 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 $1,847,000 in 2022 compared to $1,784,000 and
$1,347,000 in 2021 and 2020, 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 $1,075,000 in 2022 to $899,000 compared to $1,974,000 in 2021 and
$2,291,000 in 2020.
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,
2022 and 2021, we held FHLB stock totaling $6,169,000 and $5,595,000,
respectively. Dividends in 2022 increased to $367,000 compared to $321,000 in
2021 and $323,000 in 2020.
Other income decreased to $672,000 in 2022 compared to $1,684,000 and
$2,802,000 in 2021 and 2020, 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
Salaries and employee benefits, occupancy and equipment, regulatory assessments,
acquisition and integration-related expenses, data processing expenses, ATM/Debit
card expenses, license and maintenance contract expenses, information technology,
and professional services (consisting of audit, accounting, consulting and legal
fees) are the major categories of non-interest expenses. Non-interest expenses
increased $637,000 or 1.33% to $48,479,000 in 2022 compared to $47,842,000 in
2021, and $47,684,000 in 2020.
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 54.51% for 2022 compared to 57.16% for 2021 and 64.08% for
2020. The improvement in the efficiency ratio in 2022 and 2021 was due to the
growth in non-interest income outpacing the increase in non-interest expense.
Salaries and employee benefits increased $197,000 or 0.69% to $28,917,000 in
2022 compared to $28,720,000 in 2021 and $28,603,000 in 2020. Full time
equivalents were 248 for the year ended December 31, 2022 compared to 256 for the
year ended December 31, 2021. The increase in salaries and employee benefits in
2022 compared to 2021 was the result of an increase in salaries and benefits and lower
loan origination costs.
For the years ended December 31, 2022, 2021, and 2020, the compensation cost
recognized for equity-based compensation was $497,000, $405,000 and $470,000,
respectively. As of December 31, 2022, there was $505,000 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 2.01 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, 2022 and 2021. Restricted
common stock awards of 56,089 and 31,496 shares were awarded in 2022 and
2021, respectively.
Occupancy and equipment expense increased $249,000 or 5.10% to $5,131,000
in 2022 compared to $4,882,000 in 2021 and $4,626,000 in 2020. The Company
made no changes in its depreciation expense methodology. The Company operated 19
full-service offices at December 31, 2022 and 20 full-service offices at December 31,
2020.
Regulatory assessments were $851,000 in 2022 compared to $831,000 and
$490,000 in 2021 and 2020, respectively. The assessment base for calculating the
amount owed is based on the formula of average assets minus average tangible equity.
Information technology expense increased $476,000 to $3,344,000 for the year
ended December 31, 2022 compared to $2,868,000 and $2,391,000 in 2021 and
2020, respectively. Data processing expenses were $2,245,000 in 2022 compared to
$2,394,000 in 2021 and $2,046,000 in 2020. Professional services decreased
$146,000 in 2022 compared to 2021 due to lower legal expenses and consulting
fees.
Amortization of core deposit intangibles was $454,000 for 2022, $661,000 for
2021, and $695,000 for 2020. During 2022, amortization expense related to FLB
core deposit intangibles (“CDI”) was $317,000, and amortization expense related to
Visalia Community Bank (“VCB”) CDI was $137,000. During 2021, amortization
expense related to FLB CDI was $423,000, amortization expense related to SVB CDI
was $101,000, and amortization expense related to 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.
ATM/Debit card expenses decreased $9,000 to $809,000 for the year ended
December 31, 2022 compared to $818,000 in 2021 and $819,000 in 2020. Other
non-interest expenses decreased $502,000 or 13.44% to $4,236,000 in 2022
compared to $3,734,000 in 2021 and $3,688,000 in 2020.
The following table describes significant components of other non-interest
expense as a percentage of average assets.
46
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
NON-INTEREST EXPENSES (Continued)
For the years ended December 31,
Other
%
Other
%
Other
%
Expense
Average
Expense
Average
Expense
Average
2022
Assets
2021
Assets
2020
Assets
(Dollars in thousands)
Stationery/supplies
$
155
0.01% $
150
0.01% $
228
0.01%
Amortization of software
67
-%
82
-%
123
0.01%
Telephone
376
0.02%
224
0.01%
193
0.01%
Alarm
121
-%
131
0.01%
115
0.01%
Postage
156
0.01%
202
0.01%
191
0.01%
Armored courier fees
257
0.01%
255
0.01%
280
0.02%
Risk management expense
99
-%
94
-%
149
0.01%
Donations
225
0.01%
197
0.01%
152
0.01%
Personnel other
323
0.01%
374
0.02%
161
0.01%
Education/training
191
0.01%
198
0.01%
156
0.01%
Loan related expenses
341
0.01%
357
0.02%
293
0.02%
General insurance
237
0.01%
202
0.01%
171
0.01%
Travel and mileage expense
170
0.01%
103
-%
127
0.01%
Operating losses
260
0.01%
147
0.01%
142
0.01%
Shareholder services
110
-%
107
-%
109
0.01%
Other
1,148
0.05%
911
0.04%
1,098
0.06%
Total other non-interest
expense
$
4,236
0.17% $
3,734
0.17% $
3,688
0.22%
PROVISION FOR INCOME TAXES
Our effective income tax rate was 24.2% for 2022 compared to 25.3% for 2021
and 25.4% for 2020. The Company reported an income tax provision of $8,496,000,
$9,616,000, and $6,914,000 for the years ended December 31, 2022, 2021, and
2020, 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 $43.38 million and $6.31 million
at December 31, 2022 and 2021, 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, 2022 and 2021 will be fully realized in
future years.
FINANCIAL CONDITION
SUMMARY OF CHANGES IN CONSOLIDATED BALANCE SHEETS
Total assets were $2,422,519,000 as of December 31, 2022, compared to
$2,450,139,000 as of December 31, 2021, a decrease of 1.13% or $27,620,000.
Total gross loans were $1,256,304,000 as of December 31, 2022, compared to
$1,039,111,000 as of December 31, 2021, an increase of $217,193,000 or 20.90%.
The total investment portfolio (including Federal funds sold and interest-earning
deposits in other banks) decreased 22.75% or $284,504,000 to $966,175,000. Total
deposits decreased 1.09% or $23,148,000 to $2,099,649,000 as of December 31,
2022, compared to $2,122,797,000 as of December 31, 2021. Shareholders’ equity
decreased $73,185,000 or 29.53% to $174,660,000 as of December 31, 2022,
compared to $247,845,000 as of December 31, 2021. The decrease in shareholders’
equity was driven by the increase in net unrealized losses on the investment
portfolio, net of estimated taxes, in accumulated other comprehensive income
(AOCI), and share repurchases, partially offset by the retention of earnings, net of
dividends paid. Accrued interest payable and other liabilities were $32,611,000 as of
December 31, 2022, compared to $40,043,000 as of December 31, 2021, a
decrease of $7,432,000.
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 (in thousands):
Amortized Cost at December 31,
Available-for-Sale Securities
2022
2021
2020
U.S. Treasury securities
$ 9,990
$
9,988
$
-
U.S. Government agencies
107
373
651
Obligations of states and political subdivisions
201,638
512,952
361,734
U.S. Government sponsored entities and agencies
collateralized by residential mortgage obligations
117,292
213,471
214,203
Private label mortgage and asset backed securities
411,441
317,089
82,413
Corporate debt securities
-
44,500
30,000
Total Available-for-Sale Securities
$740,468
$1,098,373
$689,001
47
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INVESTMENTS (Continued)
Amortized Cost at December 31,
Held-to-Maturity Securities
2022
2021
2020
Obligations of states and political
subdivisions
$192,004
$
-
$
-
U.S. Government sponsored entities
and agencies collateralized by
residential mortgage obligations
10,430
-
-
Private label mortgage and asset
backed securities
56,691
-
-
Corporate debt securities
45,982
-
-
Total Held-to-Maturity Securities
$305,107
$
-
$
-
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, 2022, investment
securities with a fair value of $201,261,000, or 21.10% of our investment securities
portfolio, were held as collateral for public funds, short and long-term borrowings,
treasury, tax, and for other purposes. Our investment policies are established by the
Board of Directors and implemented by our Investment/Asset Liability Committee.
They are designed primarily to provide and maintain liquidity, to enable us to meet
our pledging requirements for public money and borrowing arrangements, to
generate a favorable return on investments without incurring undue interest rate and
credit risk, and to complement our lending activities.
Our investment portfolio as a percentage of total assets is generally higher than
our peers due primarily to our comparatively low loan-to-deposit ratio. Our loan-to
deposit ratio at December 31, 2022 was 59.83% compared to 48.95% at
December 31, 2021. The loan to deposit ratio of our peers was 77.00% 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, decreased 22.75% or $284,504,000
to $966,175,000 at December 31, 2022, from $1,250,679,000 at December 31,
2021. The market value of the portfolio reflected an unrealized loss of $91,643,000
at December 31, 2022, compared to an unrealized gain of $10,835,000 at
December 31, 2021.
Losses recognized in 2022, 2021, and 2020 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 as interest rates 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.
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, 2022, 2021,
or 2020.
The amortized cost, maturities and weighted average yield of investment securities at December 31, 2022 are summarized in the following table.
In one year or
After one through
After five through
(Dollars in thousands)
less
five years
ten years
After ten years
Total
Available-for-Sale Securities
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
Debt securities (1)
U.S. Treasury securities
$
-
-%
$
-
-%
$
9,990
1.25%
$
-
-%
$
9,990
1.25%
U.S. Government agencies
-
-
-
-
-
-
107
4.25%
107
4.25%
Obligations of states and political subdivisions (2)
-
-
-
-
35,927
3.53%
165,711
4.17%
201,638
4.06%
U.S. Government sponsored entities and agencies
collateralized by residential mortgage obligations
-
-
35
5.92%
9,196
3.53%
108,061
4.53%
117,292
4.38%
Private label residential mortgage and asset backed
securities
12,600
7.16%
51,825
5.50%
18,048
2.12%
328,968
2.85%
411,441
3.28%
$ 12,600
7.16%
$ 51,860
5.50%
$ 73,161
3.18%
$ 602,847
3.51%
$ 740,468
3.68%
48
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
INVESTMENTS (Continued)
After one through
In one year or
five
After five through
(Dollars in thousands)
less
years
ten years
After ten years
Total
Held-to-Maturity Securities
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
Amount
Yield (1)
Debt securities (1)
Obligations of states and political subdivisions (2)
$
-
-%
$
132
-%
$ 51,424
2.48%
$ 140,448
3.62%
$ 192,004
3.31%
U.S. Government sponsored entities and agencies
collateralized by residential mortgage obligations
-
-
-
-
-
-
10,430
3.00%
10,430
3.00%
Private label residential mortgage and asset backed
securities
-
-
-
-
-
-
56,691
2.81%
56,691
2.81%
Corporate debt securities
-
-
-
-
45,982
4.40%
-
-
45,982
4.40%
$
-
-%
$
132
-%
$ 97,406
3.38%
$ 207,569
3.36%
$ 305,107
3.37%
(1) Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment
penalties. Expected maturities will also differ from contractual maturities due to unscheduled principal pay downs.
(2) Not computed on a tax equivalent basis.
LOANS
Total gross loans increased $217,193,000 or 20.90% to $1,256,304,000 as of December 31, 2022, compared to $1,039,111,000 as of December 31, 2021.
The following table sets forth information concerning the composition of our loan portfolio as of December 31, 2022, 2021, 2020, 2019, and 2018.
2022
2021
2020
2019
2018
Loan Type
% of Total
% of Total
% of Total
% of Total
% of Total
(Dollars in thousands)
Amount
Loans
Amount
Loans
Amount
Loans
Amount
Loans
Amount
Loans
Commercial:
Commercial and industrial
$ 141,197
11.2% $ 136,847
13.2% $ 273,994
24.9% $ 102,541
10.9% $ 101,533
11.1%
Agricultural production
39,007
3.1%
40,860
3.9%
21,971
2.0%
23,159
2.6%
7,998
0.9%
Total commercial
180,204
14.3%
177,707
17.1%
295,965
26.9%
125,700
13.5%
109,531
12.0%
Real estate:
Owner occupied
194,663
15.5%
212,234
20.4%
208,843
18.9%
197,946
21.0%
183,169
19.9%
Real estate-construction and other land
loans
109,175
8.7%
61,586
5.9%
55,419
5.0%
73,718
7.8%
101,606
11.1%
Commercial real estate
464,809
37.1%
369,529
35.6%
338,886
30.7%
329,333
34.9%
305,118
33.2%
Agricultural real estate
117,648
9.4%
98,481
9.5%
84,258
7.6%
76,304
8.1%
76,884
8.4%
Other real estate
24,586
2.0%
26,084
2.5%
28,718
2.6%
31,241
3.3%
32,799
3.6%
Total real estate
910,881
72.7%
767,914
73.9%
716,124
64.8%
708,542
75.1%
699,576
76.2%
Consumer:
Equity loans and lines of credit
123,581
9.8%
55,620
5.4%
55,634
5.0%
64,841
6.9%
69,958
7.6%
Consumer and installment
40,252
3.2%
36,999
3.6%
37,236
3.3%
42,782
4.5%
38,038
4.2%
Total consumer
163,833
13.0%
92,619
9.0%
92,870
8.3%
107,623
11.4%
107,996
11.8%
Deferred loan (fees) costs, net
1,386
871
(2,612)
1,515
1,592
Total gross loans (1)
1,256,304
100.0%
1,039,111
100.0%
1,102,347
100.0%
943,380
100.0%
918,695
100.0%
Allowance for credit losses
(10,848)
(9,600)
(12,915)
(9,130)
(9,104)
Total loans (1)
$1,245,456
$1,029,511
$1,089,432
$ 934,250
$ 909,591
(1) Includes nonaccrual loans of:
$
-
$
946
$
3,278
$
1,693
$
2,740
At December 31, 2022, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $73,456,000, of which $2,049,000 were commercial loans, $66,583,000
were real estate loans, and $4,824,000 were consumer loans, and at December 31, 2021, the acquired loans 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.
49
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
LOANS (Continued)
At December 31, 2022, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 96.8% of
total loans of which 14.3% were commercial and 82.5% were real-estate-related. This level of concentration is consistent with 96.4% at December 31, 2021. 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, 2022 and 2021.
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, 2022, gross loans included $333,000 in PPP
loans which are fully guaranteed by the SBA as compared to $18,553,000 as of December 31, 2021.
The Board of Directors review and approve concentration limits and exceptions to limitations of concentration are reported to the Board of Directors at least quarterly.
LOAN MATURITIES
The following table presents information concerning loan maturities and sensitivity to changes in interest rates of the indicated categories of our loan portfolio, as well as
loans in those categories maturing after one year that have fixed or floating interest rates at December 31, 2022.
After One
One Year or
Through Five
After Five
(In thousands) (net of deferred costs)
Less
Years
Years
Total
Loan Maturities:
Commercial and agricultural
$
83,818
$
77,526
$
18,963
$
180,307
Real estate construction and other land loans
105,782
327
3,066
109,175
Other real estate
80,020
153,989
568,824
802,833
Consumer and installment
68,306
14,403
81,170
163,879
$
337,926
$
246,245
$
672,023
$
1,256,194
Sensitivity to Changes in Interest Rates:
Loans with fixed interest rates
$
116,806
$
154,319
$
213,533
$
484,658
Loans with floating interest rates (1)
142,979
121,384
507,172
771,535
$
259,785
$
275,703
$
720,705
$
1,256,193
(1) Includes floating rate loans which are currently at their floor rate in accordance with their
respective loan agreement
$
667
$
37,774
$
378,449
$
416,890
NONPERFORMING ASSETS
Nonperforming assets consist of nonperforming loans, other real estate owned
(OREO), and repossessed assets. Nonperforming loans are those loans which have
(i) been placed on nonaccrual status; (ii) been classified as doubtful under our asset
classification system; or (iii) become contractually past due 90 days or more with
respect to principal or interest and have not been restructured or otherwise placed
on nonaccrual status. A loan is classified as nonaccrual when 1) it is maintained on a
cost recovery method because of deterioration in the financial condition of the
borrower; 2) payment in full of principal or interest under the original contractual
terms is not expected; or 3) principal or interest has been in default for a period of
90 days or more unless the loan is both well secured and in the process of collection.
We measure all loans placed on nonaccrual status for impairment based on the fair
value of the underlying collateral or the net present value of the expected cash
flows.
Our consolidated financial statements are prepared on the accrual basis of
accounting, including the recognition of interest income on loans. Interest income
from nonaccrual loans is recorded only if collection of principal in full is not in doubt
and when cash payments, if any, are received.
Loans are placed on nonaccrual status and any accrued but unpaid interest
income is reversed and charged against income when the payment of interest or
principal is 90 days or more past due. Loans in the nonaccrual category are treated
as nonaccrual loans even though we may ultimately recover all or a portion of the
interest due. These loans return to accrual status when the loan becomes contractually
current, future collectability of amounts due is reasonably assured, and a minimum
of six months of satisfactory principal repayment performance has occurred. See Note 4
of the Company’s audited Consolidated Financial Statements in Item 8 of this
Annual Report.
At December 31, 2022, there were no nonperforming assets, compared to
$946,000, or 0.04% of total assets at December 31, 2021. Nonperforming assets
totaled 0.09% of gross loans as of December 31, 2021. Total nonperforming assets
at December 31, 2022, included no nonaccrual loans, no OREO, and no repossessed
assets. Nonperforming assets at December 31, 2021 consisted of $946,000 in
nonaccrual loans, no OREO, and no repossessed assets. At December 31, 2022 and
December 31, 2021, 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,
2022, 2021, 2020, 2019, and 2018 is set forth below. The Company had no loans
past due more than 90 days and still accruing interest at December 31, 2022 and
2021. Management is not aware of any potential problem loans, which were
current and accruing at December 31, 2022, 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.
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)
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
As of December 31, 2022 and 2021, we had impaired loans totaling $2,372,000
and $8,586,000, 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
2022
2021
2020
2019
2018
$
-
$
312
$
752
$
187
$
298
-
634
-
-
-
-
-
370
416
215
-
-
-
-
1,556
-
-
321
1,439
-
-
-
512
381
418
-
-
-
66
320
-
-
88
-
-
-
-
-
322
50
-
946
3,278
1,693
2,740
-
-
-
-
-
$
-
$
946
$
3,278
$
1,693
$
2,740
$
132
$
99
$
177
$
85
$
267
-%
0.09%
0.30%
0.18%
0.30%
$
-
$
-
$
-
$
-
$
-
$
2,386
$
7,640
$
7,908
$
2,040
$
3,170
-%
9.85%
25.38%
18.54%
30.10%
$
2,372
$
8,586
$
11,186
$
3,734
$
5,909
$
314
$
649
$
631
$
40
$
90
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 $132,000 for the year ended December 31, 2022
of which none was attributable to troubled debt restructurings. 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.
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, 2022.
Balances
Additions to
December 31,
Nonaccrual
(In thousands)
2021
Loans
Non-accrual loans:
Commercial and industrial
$
312
$
Agricultural real estate
634
Total non-accrual
$
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, 2022, 2021, and 2020, the Bank
had no OREO properties. The Company held no repossessed assets at December 31,
2022, 2021, and 2020, 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 56 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 56 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
Net Pay
Downs
Transfer to
Foreclosed
Collateral
Returns to
Accrual
Status
Charge-Offs
Balances
December 31,
2022
$
$
(80)
(634)
(714)
$
$
-
-
-
$
$
(232)
-
(232)
$
$
-
-
-
$
$
-
-
-
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)
2022
2021
2020
2019
2018
Loans outstanding at December 31,
$
1,254,918
$
1,038,240
$
1,104,959
$
941,865
$
917,103
Average loans outstanding during the year
$
1,133,919
$
1,069,653
$
1,055,712
$
930,883
$
912,128
Allowance for credit losses:
Balance at beginning of year
$
9,600
$
12,915
$
9,130
$
9,104
$
8,778
Deduct loans charged off:
Commercial and industrial
(27)
(46)
(121)
(1,032)
(94)
Consumer loans
(151)
(221)
(108)
(164)
(116)
Total loans charged off
(178)
(267)
(229)
(1,196)
(210)
Add recoveries of loans previously charged off:
Commercial and industrial
367
701
612
134
207
Owner occupied
-
-
-
-
21
Real estate construction and other land loans
-
319
-
-
-
Commercial real estate
-
-
-
-
81
Consumer loans
59
232
127
63
177
Total recoveries
426
1,252
739
197
486
Net recoveries (charge-offs)
248
985
510
(999)
276
Provision (Reversal of ) for credit losses
1,000
(4,300)
3,275
1,025
50
Balance at end of year
$
10,848
$
9,600
$
12,915
$
9,130
$
9,104
Allowance for credit losses as a percentage of outstanding
loan balance
0.86%
0.92%
1.17%
0.97%
0.99%
Net recoveries (charge-offs) to average loans outstanding
0.02%
0.09%
0.05%
(0.11)%
0.03%
Managing credits identified through the risk evaluation methodology includes
economic, competitive and environmental factors. We have adopted the specific
developing a business strategy with the customer to mitigate our losses. Our
reserve approach to allocate reserves to each impaired asset for the purpose of
management continues to monitor these credits with a view to identifying as early as
estimating potential loss exposure. Although the allowance for credit losses is allocated
possible when, and to what extent, additional provisions may be necessary.
to various portfolio categories, it is general in nature and available for the loan
The allowance for credit losses is reviewed at least quarterly by the Bank’s and
portfolio in its entirety. Additions may be required based on the results of independent
our Board of Directors’ Audit/Compliance Committee. Reserves are allocated to
loan portfolio examinations, regulatory agency examinations, or our own internal
loan portfolio segments using percentages which are based on both historical risk
review process. Additions are also required when, in management’s judgment, the
elements such as delinquencies and losses and predictive risk elements such as
reserve does not properly reflect the potential loss exposure.
53
respectively.
construction and other loans and letters of credit was $288,141,000 as of
December 31, 2022, compared to $326,108,000 as of December 31, 2021. At
December 31, 2022 and 2021, the balance of a contingent allocation for probable
loan loss experience on unfunded obligations was $110,000 and $115,000,
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 ACL 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 ACL as a percentage of total loans was 0.86% at December 31, 2022, and
0.92% at December 31, 2021. Total loans include FLB, SVB and VCB loans that were
recorded at fair value in connection with the acquisitions of $73,456,000 at
December 31, 2022 and $93,201,000 at December 31, 2021. Excluding these
acquired loans from the calculation, the ACL to total gross loans was 0.92% and
1.01% as of December 31, 2022 and 2021, respectively, and general reserves associated
with non-impaired loans to total non-impaired loans was 0.89% and 0.98%,
Assumptions regarding the collateral value of various under-performing loans
may affect the level and allocation of the allowance for credit losses in future
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
above considerations and given recent changes in historical charge-off rates included
in the ACL modeling and the changes in other factors, management determined
that the ACL was appropriate as of December 31, 2022.
There were no non-performing loans as of December 31, 2022, compared to
$946,000 as of December 31, 2021. Nonperforming loans as a
loans were 0.09% at December 31, 2021. The Company had
owned at December 31, 2022, December 31, 2021, and December 31, 2020. No
foreclosed assets were recorded at December 31, 2022, December 31, 2021, and
December 31, 2020. The allowance for credit losses as a percentage of nonperforming
loans was 10,848.00% and 1,014.80% as of December 31, 2022 and December 31,
2021, respectively. In addition, management believes
54
ALLOWANCE FOR CREDIT LOSSES (Continued)
The allocation of the allowance for credit losses is set forth below:
2022
2021
2020
2019
Loan Type (Dollars in thousands)
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Commercial:
Commercial and industrial
$
1,591
11.2%
$
1,691
13.2%
$
1,764
24.9%
$
1,115
10.9%
Agricultural production
229
3.1%
320
3.9%
255
2.0%
313
2.6%
Real estate:
Owner occupied
814
15.5%
1,355
20.4%
2,128
18.9%
1,319
21.0%
Real estate construction and other
land loans
1,678
8.7%
812
5.9%
1,204
5.0%
932
7.8%
Commercial real estate
4,388
37.1%
3,805
35.6%
4,781
30.7%
3,453
34.9%
Agricultural real estate
863
9.4%
697
9.5%
838
7.6%
925
8.1%
Other real estate
60
2.0%
72
2.5%
223
2.6%
140
3.3%
Consumer:
Equity loans and lines of credit
607
9.8%
256
5.4%
457
5.0%
425
6.9%
Consumer and installment
278
3.2%
312
3.6%
634
3.3%
472
4.5%
Unallocated reserves
340
280
631
36
Total allowance for credit losses
$
10,848
100.0%
$
9,600
100.0%
$
12,915
100.0%
$
9,130
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, 2022, the allowance for credit losses (ACL) was $10,848,000,
compared to $9,600,000 at December 31, 2021, a net increase of $1,248,000. The
net increase in the ACL was primarily attributed to loan growth, with additional
consideration reflected in the net recoveries during the year ended December 31,
2022. Net recoveries totaled $248,000 while the provision for credit losses was
$1,000,000 for the year ended December 31, 2022. The balance of classified loans
and loans graded special mention, totaled $27,785,000 and $31,023,000 at
December 31, 2022 and $8,540,000 and $40,845,000 at December 31, 2021,
The balance of undisbursed commitments to extend credit on
respectively. The loan portfolio acquired in the mergers was booked at fair value
with no associated allocation in the ACL. As of December 31, 2022 and 2021 gross
loans included loans related to PPP loans which are fully guaranteed by the SBA
in the amount of $333,000 and $18,553,000, respectively. Excluding PPP loans and
the acquired loans from the calculation, the allowance for credit losses to total
gross loans was 0.92% and 1.04% as of December 31, 2022 and 2021, respectively.
The Company’s loan portfolio balances in 2022 increased from 2021. Net loans
increased $215.9 million or 20.98%, at December 31, 2022 compared to
December 31, 2021. The net loan increase consisted of a decrease of $18.2 million
in SBA Paycheck Protection Program (PPP) loans, offset by an increase of
$234.2 million in non-PPP loan growth. 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.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
2018
Amount
$
1,604
67
1,131
1,271
3,017
947
173
419
407
68
$
9,104
Percent
of Loans
in Each
Category
to Total
Loans
11.1%
0.9%
19.9%
11.1%
33.2%
8.4%
3.6%
7.6%
4.2%
100.0%
periods.
on the
percentage of total
no other real estate
that the likelihood of
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
ALLOWANCE FOR CREDIT LOSSES (Continued)
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, 2022 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,
2022 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 2022
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, 2022. 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, 2022 represent the estimated fair value of
the core deposit relationships acquired in 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, 2022 was $68,000, net of $1,297,000 in
accumulated amortization expense. The carrying value at December 31, 2021 was
$522,000, net of $3,230,000 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 life was required. Amortization
expense recognized was $454,000 for 2022, $661,000 for 2021 and $695,000 for
2020. The remaining $68,000 core deposit intangible will be amortized during 2023.
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 decreased $23,148,000 or 1.09% to $2,099,649,000 as of
December 31, 2022, compared to $2,122,797,000 as of December 31, 2021. Interest-
bearing deposits decreased $116,131,000 or 10.02% to $1,043,082,000 as of
December 31, 2022, compared to $1,159,213,000 as of December 31, 2021. Non-
interest bearing deposits increased $92,983,000 or 9.65% to $1,056,567,000 as
of December 31, 2022, compared to $963,584,000 as of December 31, 2021. The
Company’s deposit balances for the year ended December 31, 2022 decreased through
normal customer deposit related activity. Average non-interest bearing deposits to
average total deposits was 46.68% for the year ended December 31, 2022 compared
to 45.58% for the same period in 2021. Based on FDIC deposit market share
information published as of June 2022, our total market share of deposits in Fresno,
Madera, San Joaquin, and Tulare counties was 3.66% in 2022 compared to 3.83%
in 2021. Our total market share in the other counties as of June 2022 and 2021 we
operate in (Merced, Placer, Sacramento, and Stanislaus), was less than 1.00%.
The composition of the deposits and average interest rates paid at December 31,
2022 and December 31, 2021 is summarized in the table below.
% of
% of
December 31,
Total
Effective December 31,
Total
Effective
(Dollars in thousands)
2022
Deposits
Rate
2021
Deposits
Rate
NOW accounts
$
324,089
15.4% 0.06% $
360,462
17.0% 0.05%
MMA accounts
435,783
20.8% 0.17%
511,448
24.1% 0.15%
Time deposits
67,923
3.2% 0.14%
90,030
4.2% 0.21%
Savings deposits
215,287
10.3% 0.01%
197,273
9.3% 0.01%
Total interest-bearing
1,043,082
49.7% 0.10%
1,159,213
54.6% 0.10%
Non-interest bearing
1,056,567
50.3%
963,584
45.4%
Total deposits
$
2,099,649 100.0%
$
2,122,797 100.0%
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, 2022, 2021,
and 2020.
2022
2021
2020
(Dollars in
thousands)
Balance
Rate
Balance
Rate
Balance
Rate
Savings and NOW
accounts
$ 581,285
0.04% $ 529,043
0.03% $ 433,742
0.08%
Money market
accounts
$ 486,823
0.17% $ 455,575
0.15% $ 300,603
0.18%
Non-interest
bearing demand
$1,006,511
-
$ 900,083
-
$ 744,239
Total deposits
$2,156,092
0.06% $1,974,576
0.05% $1,568,194
0.09%
The following table sets forth the maturity of time certificates of deposit and
other time deposits of $100,000 or more at December 31, 2022.
(In thousands)
Three months or less
$
20,931
Over 3 through 6 months
8,348
Over 6 through 12 months
12,411
Over 12 months
5,697
$
47,387
As of December 31, 2022, the Company had $46,000,000 in short-term Federal
Home Loan Bank (FHLB) of San Francisco advances. There was no short-term FHLB
advances as of December 31, 2021. 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, 2022 and 2021, at interest rates which vary with market conditions.
As of December 31, 2022 and 2021, 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
55
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
CAPITAL RESOURCES (Continued)
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 $174,660,000 as of December 31, 2022, compared
to $247,845,000 as of December 31, 2021. The decrease in shareholders’ equity is the
result of decrease in accumulated other comprehensive income (AOCI) of
$88,859,000, an increase in the unrealized loss recorded on the Company’s
investment portfolio, the payment of common stock cash dividends of $5,638,000,
and the repurchase and retirement of common stock of $6,814,000. These decreases
were partially offset by an increase in retained earnings from our net income of
$26,645,000, the exercise of stock options in the amount of $489,000, the effect of
share-based compensation expense of $497,000, and stock issued under our
employee stock purchase plan of $216,000.
During 2022, the Company made a capital contribution to the Bank in the
amount of $38,000,000 in connection with the senior and subordinated debt
proceeds approved by the Company’s Board of Directors. The Company declared
and paid a total of $5,638,000 or $0.48 per common share cash dividend to
shareholders of record during the year ended December 31, 2022. During the year
ended December 31, 2022, the Company repurchased and retired common stock in
the amount of $6,814,000.
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.
The following table sets forth certain financial ratios for the years ended
December 31, 2022, 2021, and 2020.
2022
2021
2020
Net income:
To average assets
1.09%
1.25%
1.11%
To average shareholders’ equity
14.25%
11.50%
8.85%
Dividends declared per share to net
income per share
21.14%
19.75%
26.99%
Average shareholders’ equity to
average assets
7.67%
10.89%
12.54%
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, 2022 and December 31, 2021.
Actual Ratio
Amount
Ratio
(Dollars in thousands)
December 31, 2022
Amount
Ratio
Tier 1 Leverage Ratio
$
205,154
8.37%
Common Equity Tier 1 Ratio (CET 1)
$
200,154
11.92%
Tier 1 Risk-Based Capital Ratio
$
205,154
12.22%
Total Risk-Based Capital Ratio
$
250,556
14.92%
December 31, 2021
Tier 1 Leverage Ratio
$
189,020
8.03%
Common Equity Tier 1 Ratio (CET 1)
$
184,020
12.48%
Tier 1 Risk-Based Capital Ratio
$
189,020
12.82%
Total Risk-Based Capital Ratio
$
233,034
15.80%
The following table presents the Bank’s regulatory capital ratios as of December 31,
2022 and December 31, 2021.
Minimum requirement
Minimum regulatory
for “Well-Capitalized”
Actual Ratio
requirement (1)
Institution
(Dollars in
thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2022
Tier 1 Leverage
Ratio
$ 266,373
10.86% $ 98,075
4.00% $ 122,594
5.00%
Common Equity
Tier 1 Ratio
(CET 1)
$ 266,373
15.87% $ 75,516
7.00% $ 109,079
6.50%
Tier 1 Risk-Based
Capital Ratio
$ 266,373
15.87% $ 100,688
8.50% $ 134,251
8.00%
Total Risk-Based
Capital Ratio
$ 277,331
16.53% $ 134,251
10.50% $ 167,814
10.00%
December 31, 2021
Tier 1 Leverage
Ratio
$ 199,329
8.47% $ 94,156
4.00% $ 117,695
5.00%
Common Equity
Tier 1 Ratio
(CET 1)
$ 199,329
13.52% $ 66,355
7.00% $ 95,846
6.50%
Tier 1 Risk-Based
Capital Ratio
$ 199,329
13.52% $ 88,473
8.50% $ 117,964
8.00%
Total Risk-Based
Capital Ratio
$ 209,044
14.18% $ 117,964
10.50% $ 147,455
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, 2022, all of the trust
56
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
CAPITAL RESOURCES (Continued)
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, 2022, the rate was 5.68%. Interest expense recognized
by the Company for the years ended December 31, 2022, 2021, and 2020 was
$188,000, $93,000 and $130,000, 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.
On September 15, 2022, the Company entered into a $30 million loan
agreement with Bell Bank. Initially, payments of interest only are payable in 12
quarterly payments commencing December 31, 2022. As of December 31, 2022 the
rate had reached its interest rate cap of 6.75%. Commencing December 31, 2025,
27 equal quarterly principal and interest payments are payable based on the
outstanding balance of the loan on August 30, 2025 and an amortization of 48
quarters. A final payment of outstanding principal and accrued interest is due at
maturity on September 30, 2032. Variable interest is payable at the Prime Rate
(published by the Wall Street Journal) less 50 basis points. The loan is secured by the
assets of the Company and a pledge of the outstanding common stock of Central
Valley Community Bank, the Company’s banking subsidiary. The Company may
prepay the loan without penalty with one exception. If the loan is prepaid prior to
August 30, 2025 with funds received from a financing source other than Bell
Bank, the Company will incur a 2% prepayment penalty. The loan contains
customary representations, covenants, and events of default.
LIQUIDITY
Liquidity management involves our ability to meet cash flow requirements
arising from fluctuations in deposit levels and demands of daily operations, which
include funding of securities purchases, providing for customers’ credit needs and
ongoing repayment of borrowings. Our liquidity is actively managed on a daily basis
and reviewed periodically by our management and Directors’ Asset/Liability
Committees. This process is intended to ensure the maintenance of sufficient funds
to meet our needs, including adequate cash flows for off-balance sheet commitments.
Our primary sources of liquidity are derived from financing activities which
include the acceptance of customer and, to a lesser extent, broker deposits, Federal
funds facilities and advances from the Federal Home Loan Bank of San Francisco
(FHLB). These funding sources are augmented by payments of principal and
interest on loans, the routine maturities and pay downs of securities from the securities
portfolio, the stability of our core deposits and the ability to sell investment
securities. As of December 31, 2022, the Company had unpledged securities totaling
$759,229,000 available as a secondary source of liquidity and total cash and cash
equivalents of $31,170,000. Cash and cash equivalents at December 31, 2022
decreased 80.93% compared to December 31, 2021. 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, 2022, our available borrowing capacity
includes approximately $110,000,000 in Federal funds lines with our correspondent
banks and $319,309,000 in unused FHLB advances. At December 31, 2022, 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, 2022 and 2021:
Credit Lines
December 31, December 31,
(In thousands)
2022
2021
Unsecured Credit Lines (interest rate varies with
market):
Credit limit
$110,000
$110,000
Balance outstanding
$
-
$
-
Federal Home Loan Bank (interest rate at prevailing
interest rate):
Credit limit
$319,309
$277,130
Balance outstanding
$ 46,000
$
-
Collateral pledged
$687,357
$481,437
Fair value of collateral
$565,869
$435,089
Federal Reserve Bank (interest rate at prevailing
discount interest rate):
Credit limit
$ 4,702
$ 9,961
Balance outstanding
$
-
$
-
Collateral pledged
$ 5,508
$ 10,361
Fair value of collateral
$ 4,893
$ 10,241
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
57
Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
CRITICAL ACCOUNTING POLICIES (Continued)
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, 2022, 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. Higher inflation rates may
increase operating expenses or have other adverse effects on our borrowers, making
collection on extensions of credit more difficult for us. 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, 2022, 61.42% 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, 2022, 84.77% 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, 2022. 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,
2022 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, 2022, if interest rates were to
change in the amounts set forth:
Sensitivity Analysis of Impact of Rate Changes on Interest Income
$ Change from
% Change from
Rates at
Rates at
Hypothetical Change in Rates
Projected Net
December 31,
December 31,
(Dollars in thousands)
Interest Income
2022
2022
Up 400 bps
$
95,957 $
(4,094)
(4.09)%
Up 300 bps
96,748
(3,303)
(3.30)%
Up 200 bps
97,520
(2,531)
(2.53)%
Up 100 bps
98,589
(1,462)
(1.46)%
Unchanged
100,051
-
-
Down 100 bps
95,904
(4,147)
(4.14)%
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,
2022 and 2021:
December 31, 2022
December 31, 2021
Rate Type
Percent of
Percent of
(Dollars in thousands)
Balance
Total
Balance
Total
Variable rate
$
771,535
61.42%
$
683,357
65.82%
Fixed rate
484,658
38.58%
354,883
34.18%
Total gross loans
$ 1,256,193
100.00%
$ 1,038,240
100.00%
Approximately 61.42% of our loan portfolio is tied to adjustable rate indices and
18.42% of our loan portfolio reprices within 90 days. As of December 31, 2022, we
had 1,146 commercial and real estate loans totaling $578,407,341 with floors
ranging from 0.50% to 9.00% and ceilings ranging from 4.50% to 25.00%.
The following table shows the repricing categories of the Company’s loan
portfolio at December 31, 2022 and 2021:
December 31, 2022
December 31, 2021
Repricing
Percent of
Percent of
(Dollars in thousands)
Balance
Total
Balance
Total
< 1 Year
$
353,383
28.13%
$
331,374
31.92%
1-3 Years
125,304
9.97%
208,853
20.12%
3-5 Years
149,196
11.88%
294,467
28.36%
> 5 Years
628,310
50.02%
203,546
19.60%
Total gross loans
$ 1,256,193
100.00%
$ 1,038,240
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.
60
Stock Price
Information
˙e Company’s common stock is listed for trading on the NASDAQ Capital Market under the ticker symbol CVCY. As of March 6, 2023, the Company had approximately
918 shareholders of record.
˙e following table shows the high and low sales prices for the common stock for each quarter as reported by NASDAQ.
Sales Prices for the Company’s Common Stock
Quarter Ended
Low
High
March 31, 2021
$ 14.89
$ 21.35
June 30, 2021
17.33
21.75
September 30, 2021
December 31, 2021
19.56
20.47
23.83
21.95
March 31, 2022
20.70
23.99
June 30, 2022
14.16
23.94
September 30, 2022
December 31, 2022
14.46
17.49
19.07
21.54
˙e Company paid common share cash dividends of $0.48 and $0.47 per share in 2022 and 2021, respectively. ˙e 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
INVESTING AND BUILDING
Stronger Communities
Ag Lenders Society of California
Clovis Chamber of Commerce
American Bankers Association
Clovis Rodeo Association
American Institute of Certified Public Accountants
Coarsegold Chamber of Commerce
American Pistachio Growers
Construction Financial Management Association Sacramento Chapter
American Retirement Association
Construction Industry Education Foundation – Sacramento Regional
Assistance League of Fresno
Builders Exchange
Association of Certified Anti-Money Laundering Specialists
Court Appointed Special Advocates of Fresno & Madera Counties
Association of Commercial Real Estate
Commercial Real Estate Women Network Foundation
Association of International Certified Professional Accountants
Doug McDonald Scholarship
Atwater Ag Boosters Organization
Downtown Visalia Foundation
Better Business Bureau (Central California & Sacramento)
Economic Development Corporation
Boys & Girls Club (El Dorado & Fresno Counties)
Education and Agriculture Together Foundation
Bread of Life Center
El Dorado Hills Chamber of Commerce
Building Owners & Managers Association of Sacramento
Exceptional Parents Unlimited Children’s Center
Building Industry Association of Tulare/Kings Counties
Executives Association of Tulare County
Business Organization of Old Town
Exeter Art Gallery & Museum Association
California 9/11 Memorial
Exeter Chamber of Commerce
California Bankers Association
Exeter Community Preschool
California Chamber of Commerce
Financial Credit Network Inc. – Kids For Christmas
California Farm Bureau Federation
Financial Services Information Sharing and Analysis Center
California Fresh Fruit Association
Folsom Chamber of Commerce
California Future Farmers of America Foundation
Folsom Garden Club
California Medical Group Management Association
Folsom High School
California Society of Certified Public Accountants
Folsom Historic District Association
California State University, Fresno
Folsom Police Foundation
California Women For Agriculture – Merced Chapter
Folsom, El Dorado & Sacramento Historical Railroad Association
Castle Air Museum Foundation Inc.
Foundation For Clovis Schools
Central California Food Bank
Foundation For Firebaugh-Las Deltas Unified Schools
Central California Society For Human Resource Management
Fresno Area Community Enterprises
Central California Women’s Conference
Fresno Area Hispanic Foundation
Central Valley Community Foundation
Fresno Athletic Hall of Fame
Central Valley Community Resources
Fresno Chamber Of Commerce
Central Valley Hispanic Chamber of Commerce
Fresno City College Women’s Soccer
Citrus Heights Chamber of Commerce
Fresno County Farm Bureau
62
Fresno Metro Black Chamber of Commerce
Fresno Mission
Friends of the Auberry Library
Friends of the Merced County Fair
Garfield Elementary Parent Teacher Club
Girl Scouts of Central California South
Greater Folsom Partnership
Greater Stockton Chamber of Commerce
Habitat For Humanity (Greater Fresno & Greater Sacramento)
Haven Women’s Center of Stanislaus
Health Education Council
Highway City Community Development Inc.
Human Resources Certification Institute
Independent Community Bankers of America
Independent Insurance Agents & Brokers of Sacramento
Institute of Real Estate Management – Sacramento Valley
International Soap Box Derby
Kaweah Delta Hospital Foundation
Kerman Chamber of Commerce
Kiwanis International (Greater Madera & Placerville)
Latina Empowerment
LifeLine Community Development Corporation
Lifetime Healthy Way of Life
Lighthouse Counseling & Family Resource Center
Lodi Chamber of Commerce
Lodi Police Foundation
Love Inc. of Merced
Lowell Community Development Corporation
Madera Chamber of Commerce
Madera Community College
Madera County Food Bank
Make-A-Wish
Marjaree Mason Center
Merced College Foundation
Merced County Community Law Enforcement Organization
Modesto Chamber of Commerce
National Association for Industrial and Office Parks
National Association of Government Guaranteed Lenders
Nationwide Multistate Licensing System & Registry
Neighborhood Industries
New Beginnings For Merced County Animals
Noceti Group Inc.
Oakhurst Area Chamber of Commerce
Oakhurst Sierra Sunrise Rotary Club Foundation
Patient Safety Coaches Academy LLC
Placer Society for Prevention of Cruelty to Animals
Poverello House
Professionals In Human Resources Association
Prominent Premier Partners
Promotores Unidas Para La Educacion Nacional Tecnologias
Sostenibles
Risk Management Association – Sacramento Chapter
Ronald McDonald House Charities of the Central Valley
Roseville Area Chamber of Commerce
Rotary Club of Fresno
Rotary Club of Madera
Sacramento Association of REALTORS
Sacramento Master Singers
Sacramento Metropolitan Chamber of Commerce
Sacramento National Association of Residential Property Managers
Sacramento Regional Builders Exchange
Sacramento Self-Help Housing Inc.
San Joaquin Farm Bureau Federation
San Joaquin Valley Manufacturing Alliance
San Joaquin Valley Town Hall
SCORE
Sequoia Council of the Boy Scouts of America
Shaver Lake Visitor’s Bureau
Shingle Springs Cameron Park Chamber of Commerce
Sierra High School
Sierra Pacific High School
Signature User Group
Society For Human Resource Management
Southwest Fresno Development Corporation
St. Vincent de Paul Roseville
Stockton Athletic Hall of Fame
Stockton Shelter For The Homeless
The American Legion Cecil Cox Post #147
The Bank CEO Network
The Downtown Fresno Partnership
The First Tee˛of˛Greater Sacramento˛
The Leukemia & Lymphoma Society
The Risk Management Association
The Salvation Army (Greater Sacramento & San Joaquin Valley)
Trauma Intervention Programs Inc.
Tricorp Group Inc.
Tulare Chamber of Commerce
Tulare County Historical Society
United Way
Valley Children’s Healthcare Foundation
Valley Children’s Hospital Kings Guild
Valley Crime Stoppers
Valley Teen Ranch
Visalia Chamber of Commerce
Visalia County Center Rotary Club
Visalia Economic Development Corporation
Vistage Worldwide Inc.
Western States User Group
West Hills College Coalinga
West Visalia Kiwanis Club
Western Payments Alliance
WorldatWork Total Rewards Association
63
THE CVCB
Di˜erence
Inspired By Relationships
Investment is essential for growth. But not all
investments are alike. At CVCB, our most important
investment is in our relationship with you:
the individuals, businesses, shareholders and
communities we’ve served for over 40 years.
It’s a distinction we call the “CVCB Difference.”
To deliver that difference every day,
we are…
• Guided by our values and driven by our mission
to exceed expectations
• Leading by example as business advocates
• Deeply committed to our communities
• Consistently exceeding client expectations
• Dedicated to being your trusted business partners
• Composed of knowledgeable problem-solvers
• Providing customized solutions from proven
financial specialists
Experience the CVCB Difference!
64
INVESTING IN RELATIONSHIPS
LOCATIONS
CUSTOMER SERVICE
(800) 298-1775
(559) 298-1775
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
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
SACRAMENTO
Sacramento Point West
1435 River Park Drive,
Suite 100
Sacramento, CA 95815
(Coming 2023)
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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INVESTING IN RELATIONSHIPS
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