7690 N. Palm Avenue, Fresno, California 93711
559.439.0200
WWW.FRESNOFIRSTBANK.COM
Message from the Chairman
When Fresno First Bank opened in December 2005 the Board of
Director’s goal was to focus on serving the business needs in
the greater Fresno area. We wanted to create an unparalleled
model of client services with a foundational culture of shared employee
ownership.
In 2013, we believe our vision has taken root, thanks in great part to
the associates at the Bank who have embraced the direction set by the
Board and continue to guide it every day. In the last several years, our
culture has also continued to evolve, with commitment to our clients
and creating value for our shareholders, remaining at the forefront of
everything we do.
Since opening the Bank, we have faced many challenges, especially with the decline in the
economy, which has had a direct impact on the banking industry, as well as our community as a
whole. However, we have continued to support Fresno-area business throughout the economic
downturn and are confident that, as we move forward, we will see the results of our culture at work
at Fresno First Bank, in the increase in shareholder value.
The Board, Management, and Associates at Fresno First Bank stand firm in our vision and
have resolved to deliver long-term value to our shareholders; and we would like to express our
appreciation to our shareholders for their continued support.
David N. Price
Chairman of the Board
Mission Statement
The mission of Fresno First Bank is to become the Bank of choice for business owners,
professionals, entrepreneurs and individuals that value a high touch approach, or “relationship”
approach to their banking needs. We will accomplish this by:
• Developing an ownership culture that fosters a working environment which encourages professional
and financial growth and entrepreneurial freedom.
• Committing to exceed customer service expectations for quality, responsiveness and professional
excellence.
• Generating a superior return for our shareholders while investing in the communities we serve.
Values Statement
Fresno First Bank will be the Bank of choice for successful businesses and individuals who
value superior service and a relationship approach to their banking and financing needs.
Our group of experienced professional bankers will help clients navigate through complex
financial choices which will ultimately assist in stimulating economic growth in our community.
Our commitment to an ownership culture will foster an exceptional work environment that generates
a fair return for our shareholders.
We Value:
Core Values
• The highest standard of ethical behavior and professional integrity.
• An owner-orientated working environment dedicated to teamwork that encourages respect and
dignity, while recognizing and rewarding innovation and exceptional performance.
• Proactive, solutions-orientated recommendations that consistently exceed client expectations.
• The loyalty of our client relationships gained by knowing, understanding and placing their
needs first.
Message from the President & CEO
Iam pleased to report that Fresno First Bank has finished its fourth
consecutive year with an impressive financial score card.
Fresno First Bank reported net income for the year of $1,171,000.
Total assets increased to $210.3 million up $32.6 million or 18.3%,
and total deposits reached $186.4 million for an increase of 17.4%.
Although after tax earnings were down $745,000 from 2011, it was the
result of 2012’s tax expense of $812,000 coupled with a tax benefit of
$344,000 in 2011. On a pre-tax comparison of 2012 vs. 2011 we made
$1,983,000 in 2012 vs. $1,572,000 in 2011, a 26.1% increase year
over year. In addition, we were successful in completing our Preferred
Stock offering, raising $6.1 million, enabling us to pay back TRAP
funds, pay our shareholders a 5% stock dividend and build our capital
reserves to continue our growth strategy.
Through the efforts of our staff and the Board, we were successful in continuing both our asset
and earnings growth. In the second half of the year, we saw a significant increase in deposit
clients and balances. Loan growth was impressive and the additions to our loan staff, including
an experienced Agricultural lender, will support expanded loan volume in 2013. With the
continued pressure on our net interest margin, we have made major investments to diversify and
improve other income streams. The areas of focus have been our SBA department, Residential
Mortgage Services and our Merchant Services department. I am pleased to report that our
investments are paying off.
Non-interest income for the year increased to $1,299,000 vs. $788,000 for 2011 representing a
64.8% increase. During the year we saw impressive growth in both the Mortgage Originations
and Merchant Services department. In addition, we expanded our SBA staff to support addition-
al growth in the government guaranteed loan area and support our efforts to continue to grow
other non-interest income.
Looking forward, we are well positioned to continue our growth. We have the capital, the team
and culture to successfully execute our strategic plan, improving earnings and shareholder return.
Richard “Rick” Whitsell
President & CEO
Board of Directors
Jack Holt,
Director / President
of Holt Lumber
Company, Inc.
Dr. Robert Kubo,
Director/Orthodontist,
Kubo Orthodontic
Group
Lorrie Lorenz,
Director / Principal of
Lorenz & Associates
Jared Martin,
Director / Realtor,
Keller Williams Realty
David Price,
Chairman of the
Board / President and
CEO of David N. Price
& Associates
Mark Saleh,
Director / President
of Wm. B. Saleh &
Company
Joel Slonski,
Director / CPA with
Slonski & Sailors
Al Smith,
Director / President
and CEO of the
Greater Fresno Area
Chamber of Commerce
Dr. Daniel Suchy,
Director / Retired
Physician
Richard Whitsell,
Director / President
and CEO of Fresno
First Bank
Since the founding of our Bank in 2005, our dedicated Board of Directors has provided
leadership and an unwavering commitment to the strength of the Bank and the communities
we serve.
At Fresno First Bank we believe that corporate governance begins with a well educated and informed
Board, Management and Staff. Our Directors participate in a rigorous education program and
actively participate in conferences conducted by the Western Independent Bankers, the National
Association of Corporate Directors, the California Bankers Association and various regulatory
compliance courses throughout the year. The Bank’s Chairman, David Price is also a member of
the WIB Advisory Committee for the Annual Bank Chairman’s Forum and a regular participant in
the Annual Corporate Governance Conference.
Our Board of Directors and the employees of Fresno First Bank also actively support a number
of non-profit organizations throughout the year. Some of which include the American Heart
Association, American Red Cross, Community Food Bank, Habitat for Humanity, United
Cerebral Palsy, Valley Crime Stoppers, Exceptional Parents Unlimited, Salvation Army and
many other local non-profit organizations.
Report =
Rows = Master-BS
Columns = BS-Annual_5_Yrs_Cur
Level = 5
Fresno First Bank
Total Assets
(Dollar Values in Whole $)
4/2/13
2:10 PM
Total Assets ( Values in Millions)
103.5
122.4
143.1
177.7
210.3
2008
2009
2010
2011
2012
Over the last four years total assets have more than doubled from $103 million to more than
$210 million at December 31, 2012. As our assets grow so does our ability to generate
additional interest income which will increase earnings and shareholder value.
!"!#$%#&&'!&
!"#$%&'(()#(&*&+$%,)(&-.&/-%%-".(0
220
200
180
160
140
120
100
80
60
40
20
0
2008
2009
2010
2011
2012
To benchmark our
growth compared to
similar banks, we
use data gathered
from regulatory
reports filed with
the FDIC and
provided by SNL
Financial. Peer
information below
consists of data
from 30 banks
geographically
located in markets
similar to Fresno
First’s. These
banks range geographically from Bakersfield to Sacramento and from the Central Coast to the
Sierra Nevada Mountains. The banks range in size from $91 million to $983 million in total
assets with a median size of $185 million. In comparison to the peer group, Fresno First Bank’s
growth rate has
consistently exceeded
the average of our
peers. Our ability
to grow during
troubled economic
times is a testament
to our associates and
their ability to offer
quality relationship
banking that has
been well received
within our market.
Performance Graphs t#5A03F3.xls
Total Assets
FFB - Confidential
Page 1 of 1
Deposit growth is the catalyst
for our growth in assets.
Obtaining low cost local core
deposits one relationship at a
time is what we do every day.
Over the last four years our
deposits have increased 105%,
from $91 million to more than
$186 million at December 31,
2012.
With more than 34% of our
deposits held in zero interest
checking accounts, our overall
cost of funds is a relatively low
.28%. This has allowed our Bank
to maintain a superior net interest
margin compared to peers. Over
the past four years, we have been
able to grow our deposit base at
nearly twice the average of peer
banks.
During a time when other banks
have ceased to lend and in some
cases shrunk their loan portfolios,
our loan portfolio has grown from
$65 million at December 31, 2008 to
$109 million today. Our portfolio is
well diversified and our credit quality
ratios rank Fresno First Bank above
peer banks. We pride ourselves in
taking a consultative approach with
our borrowing customers, tailoring
lending solutions to meet client
credit needs which will allow their
business to flourish.
In comparison to peer banks
our growth has far exceeded the
average. While our percentage
loan growth year-over-year has
declined as our loan portfolio has
grown in dollars outstanding, our
growth has continued to exceed our
peer banks.
In 2009 we reached profitability and
have now recorded four consecutive
profitable years. In 2012 net
income after tax was down from
2011 as a result of a tax expense of
$812,000 compared to a tax benefit
of $344,000 in 2011. The chart
below displays a more apples-to-
apples comparison (income before
tax expense or tax benefit) of the
trend of income growth the bank has
experienced over the last four years.
In addition to our superior net
interest margin we have focused on
diversifying the Bank’s non-interest
income through new initiatives.
Over the last three years we have
started a government guaranteed
lending department, a mortgage
department and a merchant services
department within the Bank. All
three initiatives are profitable and
adding to the Bank’s bottom line.
In the years to come, our goal is to continue to expand these business lines while implementing
new and innovative services to enhance the overall profitability of the Bank.
FSNF
SNL U.S. Bank Pink $100M-$500M
SNL U.S. Bank Pink
Historical Stock Performance
160%
150%
To the right we compare our
return on average assets to the
peer bank group. Fresno First
Bank’s performance compared
to industry peers is very
positive but Management, the
Board and our Associates are
seeking ever higher financial
120%
performance.
110%
140%
130%
80%
90%
100%
In 2007/2008 the broad
stock market declines hit the
financial services industry
hard. While Fresno First
Bank’s stock has posted more
than a 40% gain over the last
five years larger bank indices
have yet to fully recover. The chart below illustrates the relative performance of Fresno First
Bank’s stock vs. a broad index of banks of similar size and market.
70%
Historical Stock Performance
FSNF
SNL U.S. Bank Pink $100M-$500M
SNL U.S. Bank Pink
160%
150%
140%
130%
120%
110%
100%
90%
80%
70%
Use This Graph for Proxy
Historical Index Values
Pricing Date
$100M-$500M
Bank Pink
FSNF % Change
SNL U.S.
Bank Pink
SNL U.S.
$100M-
US Bank
$500M %
Pink %
Change
Change
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255.99
255.82
255.66
255.56
255.34
254.61
253.79
253.53
253.27
253.32
253.06
252.49
252.21
252.00
251.40
248.77
248.90
249.20
248.90
247.69
247.60
247.63
246.90
246.37
246.34
245.97
245.52
244.86
244.68
243.70
243.81
244.62
243.69
242.73
243.40
241.46
240.88
241.27
240.46
240.58
240.00
239.18
238.29
237.82
237.74
237.61
237.44
237.44
236.95
236.32
235.57
235.18
234.66
234.46
235.23
233.94
233.00
233.35
233.96
234.49
234.50
234.34
234.35
234.67
235.01
235.26
235.35
235.30
235.58
235.45
235.29
235.07
235.07
234.53
234.56
234.91
234.71
235.39
235.40
235.65
236.18
236.09
235.87
236.31
236.03
236.24
235.86
235.90
236.03
235.88
235.86
235.72
236.05
236.60
236.60
236.15
236.54
235.40
235.25
234.77
235.20
234.97
235.16
234.61
234.43
234.63
234.65
234.41
234.70
234.80
235.39
235.01
234.98
234.98
234.47
234.29
234.77
234.46
233.63
232.73
232.68
232.61
232.80
232.78
232.39
231.66
231.76
231.76
231.50
230.81
230.89
230.56
230.59
230.65
230.39
230.48
230.34
229.71
229.61
229.57
230.04
230.00
229.81
226.32
226.21
225.93
225.83
225.33
224.91
224.56
225.15
224.91
224.84
224.50
224.07
223.96
223.95
223.77
222.80
222.60
222.66
221.90
221.10
221.18
221.07
220.46
220.05
219.83
219.56
219.39
218.86
218.83
218.05
218.01
218.25
217.86
217.79
217.73
216.75
216.41
216.04
215.61
215.02
214.58
213.91
213.41
212.92
212.75
212.62
212.44
212.44
212.15
211.66
211.42
210.80
210.44
209.87
209.75
208.99
208.54
208.52
208.72
209.25
209.22
209.45
209.30
209.41
209.66
209.71
209.61
209.25
209.66
209.13
209.65
209.10
209.42
209.24
209.44
209.80
209.30
209.90
210.07
210.02
210.48
210.24
210.14
209.43
209.96
210.42
210.59
210.62
210.64
210.76
210.58
210.88
211.80
212.10
211.98
211.73
211.60
210.36
210.08
210.17
210.29
210.29
210.29
209.96
209.68
209.20
209.43
209.42
209.19
209.52
209.65
209.57
209.62
209.29
209.11
209.20
209.58
210.02
208.34
208.34
208.42
208.45
209.27
209.26
208.82
208.54
208.44
208.37
208.33
208.06
208.13
208.37
208.61
208.41
208.35
208.88
208.79
208.16
208.07
207.57
207.79
207.53
207.38
94.35% 94.83%
94.29% 94.79%
94.23% 94.67%
94.19% 94.63%
94.11% 94.42%
93.84% 94.24%
93.54% 94.10%
93.44% 94.34%
93.35% 94.24%
93.37% 94.21%
93.27% 94.07%
93.06% 93.89%
92.96% 93.84%
92.88% 93.84%
92.66% 93.76%
91.69% 93.36%
91.74% 93.27%
91.85% 93.30%
91.74% 92.98%
91.29% 92.65%
91.26% 92.68%
91.27% 92.63%
91.00% 92.38%
90.80% 92.21%
90.79% 92.11%
90.66% 92.00%
90.49% 91.93%
90.25% 91.71%
90.18% 91.69%
89.82% 91.37%
89.86% 91.35%
90.16% 91.45%
89.82% 91.29%
89.46% 91.26%
89.71% 91.23%
88.99% 90.82%
88.78% 90.68%
88.92% 90.53%
88.63% 90.35%
88.67% 90.10%
88.46% 89.91%
88.15% 89.63%
87.83% 89.42%
87.65% 89.22%
87.62% 89.15%
87.58% 89.09%
87.51% 89.02%
87.51% 89.02%
87.33% 88.90%
87.10% 88.69%
86.82% 88.59%
86.68% 88.33%
86.49% 88.18%
86.41% 87.94%
86.70% 87.89%
86.22% 87.57%
85.88% 87.38%
86.01% 87.37%
86.23% 87.46%
86.43% 87.68%
86.43% 87.67%
86.37% 87.76%
86.37% 87.70%
86.49% 87.75%
86.62% 87.85%
86.71% 87.87%
86.74% 87.83%
86.72% 87.68%
86.83% 87.85%
86.78% 87.63%
86.72% 87.85%
86.64% 87.62%
86.64% 87.75%
86.44% 87.68%
86.45% 87.76%
86.58% 87.91%
86.51% 87.70%
86.76% 87.95%
86.76% 88.02%
86.85% 88.00%
87.05% 88.20%
87.02% 88.10%
86.93% 88.05%
87.10% 87.76%
86.99% 87.98%
87.07% 88.17%
86.93% 88.24%
86.95% 88.25%
86.99% 88.26%
86.94% 88.31%
86.93% 88.24%
86.88% 88.36%
87.00% 88.75%
87.20% 88.87%
87.20% 88.82%
87.04% 88.72%
87.18% 88.67%
86.76% 88.15%
86.71% 88.03%
86.53% 88.07%
86.69% 88.12%
86.60% 88.12%
86.67% 88.12%
86.47% 87.98%
86.40% 87.86%
86.48% 87.66%
86.48% 87.76%
86.40% 87.75%
86.50% 87.66%
86.54% 87.79%
86.76% 87.85%
86.62% 87.81%
86.61% 87.84%
86.61% 87.70%
86.42% 87.62%
86.35% 87.66%
86.53% 87.82%
86.41% 88.00%
86.11% 87.30%
85.78% 87.30%
85.76% 87.33%
85.73% 87.35%
85.80% 87.69%
85.80% 87.68%
85.65% 87.50%
85.38% 87.38%
85.42% 87.34%
85.42% 87.31%
85.32% 87.30%
85.07% 87.18%
85.10% 87.21%
84.98% 87.31%
84.99% 87.41%
85.01% 87.33%
84.91% 87.30%
84.95% 87.53%
84.90% 87.49%
84.66% 87.22%
84.63% 87.19%
84.61% 86.98%
84.79% 87.07%
84.77% 86.96%
84.70% 86.90%
10.50
10.50
10.50
10.35
10.25
9.76
9.76
10.25
10.25
10.00
10.00
10.00
10.00
10.50
10.50
10.50
10.50
10.50
9.15
9.15
9.15
9.15
9.15
9.20
9.50
9.50
9.50
9.30
9.30
9.30
9.30
9.30
9.30
9.30
9.30
9.30
9.30
9.30
9.30
9.49
9.35
9.35
9.35
9.35
9.35
9.35
9.35
9.75
9.75
9.75
9.50
9.69
9.69
9.69
9.69
9.69
9.69
9.10
9.69
9.69
9.69
9.00
8.30
8.30
8.50
8.50
8.50
8.50
8.50
8.50
8.86
8.86
9.24
9.24
8.57
8.57
8.57
8.57
8.52
8.52
8.52
8.52
8.52
8.57
8.57
8.57
8.57
8.57
8.57
8.57
8.57
9.29
9.29
9.29
9.29
9.29
9.29
9.29
8.81
8.81
8.81
8.81
8.81
9.29
9.05
9.05
9.05
8.33
8.57
8.57
8.57
8.57
8.57
8.57
8.57
8.57
8.57
8.57
9.29
8.95
8.81
9.29
9.29
9.29
9.29
9.29
9.29
9.52
9.19
9.19
9.19
8.57
8.81
8.81
8.62
8.62
8.62
8.62
8.62
8.62
8.62
8.62
8.81
144.70%
144.70%
144.70%
142.64%
141.26%
134.50%
134.50%
141.26%
141.26%
137.81%
137.81%
137.81%
137.81%
144.70%
144.70%
144.70%
126.10%
126.10%
126.10%
126.10%
126.10%
126.79%
130.92%
130.92%
144.70%
144.70%
130.92%
128.17%
128.17%
128.17%
128.17%
128.17%
128.17%
128.17%
128.17%
128.17%
128.17%
128.17%
128.17%
130.78%
128.85%
128.85%
128.85%
128.85%
128.85%
128.85%
128.85%
134.37%
134.37%
134.37%
130.92%
133.54%
133.54%
133.54%
133.54%
133.54%
133.54%
125.41%
133.54%
133.54%
133.54%
124.03%
114.38%
114.38%
117.14%
117.14%
117.14%
117.14%
117.14%
117.14%
122.06%
122.06%
127.31%
127.31%
118.13%
118.13%
118.13%
118.13%
117.47%
117.47%
117.47%
117.47%
117.47%
118.13%
118.13%
118.13%
118.13%
118.13%
118.13%
118.13%
118.13%
127.97%
127.97%
127.97%
127.97%
127.97%
127.97%
127.97%
121.41%
121.41%
121.41%
121.41%
121.41%
127.97%
124.69%
124.69%
124.69%
114.84%
118.13%
118.13%
118.13%
118.13%
118.13%
118.13%
118.13%
118.13%
118.13%
118.13%
127.97%
123.37%
121.41%
127.97%
127.97%
127.97%
127.97%
127.97%
127.97%
131.25%
126.66%
126.66%
126.66%
118.13%
121.41%
121.41%
118.78%
118.78%
118.78%
118.78%
118.78%
118.78%
118.78%
118.78%
121.41%
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Copyright 2012, SNL Financial LC
1
Report of Independent Auditors
and Financial Statements
Fresno First Bank
December 31, 2012 and 2011
CONTENTS
REPORT OF INDEPENDENT AUDITORS
FINANCIAL STATEMENTS
Balance sheets
snoitarepo fo stnemetatS
emocni evisneherpmoc fo stnemetatS
Statements of changes in shareholders’ equity
swolf hsac fo stnemetatS
stnemetats laicnanif ot setoN
PAGE
1
3
4
5
6
9–8
34–10
REPORT OF INDEPENDENT AUDITORS
Fresno First Bank
To the Board of Directors and Shareholders
Report on Financial Statements
as of
We have audited the accompanying financial statements of Fresno First Bank, which comprise the balance sheets
December 31, 2012 and 2011, and the related statements of operations, comprehensive income, changes in
shareholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with
accounting principles generally accepted in the United States of America; this includes the design, implementation, and
maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free
from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits
in accordance with auditing standards generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material
misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates
made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of
Fresno First Bank as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years
then ended in accordance with accounting principles generally accepted in the United States of America.
Stockton, California
March 15, 2013
1
1See accompanying notes
FRESNO FIRST BANK
2See accompanying notes
FRESNO FIRST BANK
BALANCE SHEETS
ASSETS
Cash and due from banks
Federal funds sold
Interest bearing deposits in banks
DECEMBER 31,
2012
2011
$
11,033,163
18,575,000
3,250,000
$
10,591,802
6,070,000
3,001,970
Total cash and cash equivalents
32,858,163
19,663,772
FRESNO FIRST BANK
Certificates of deposit
Securities available‐for‐sale
Loans, net
Federal Home Loan Bank stock, at cost
Premises and equipment
Other real estate owned
Interest receivable and other assets
747,000
63,921,698
106,464,501
941,600
471,806
2,223,493
2,653,934
LIABILITIES AND SHAREHOLDERS’ EQUITY
$
210,282,195
‐
56,409,131
97,348,521
781,300
600,437
‐
2,892,931
$
177,696,092
Deposits
Interest payable and other liabilities
Total liabilities
$
186,447,327
567,095
$
158,774,338
701,084
187,014,422
159,475,422
Commitments and contingencies (Notes 4 and 11)
Shareholders’ equity:
Preferred stock – 5,000,000 shares authorized,
$1,000 par value Series A shares and Series B shares,
2,066 issued and outstanding in 2011
$100 par value Series C shares 61,000 issued and
outstanding in 2012
Common stock – 5,000,000 shares authorized,
no par value; 1,857,893 and 1,766,010 shares issued
and outstanding in 2012 and 2011, respectively
Additional paid‐in capital
Accumulated deficit
Accumulated other comprehensive income, net
‐
2,063,278
5,715,038
‐
18,384,665
1,626,381
(3,092,670)
634,359
17,599,944
1,563,586
(3,405,470)
399,332
Total shareholders’ equity
23,267,773
18,220,670
Total liabilities and shareholders’ equity
$
210,282,195
$
177,696,092
See accompanying notes
3
2
See accompanying notes
FRESNO FIRST BANK
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
2012
2011
$
6,550,149
1,136,171
47,987
7,734,307
221,879
347,834
11
569,724
7,164,583
783,000
6,381,583
452,056
297,302
100,615
324,114
67,476
57,753
1,299,316
3,261,374
555,995
139,497
381,240
189,755
272,453
211,799
686,098
5,698,211
1,982,688
812,000
$
6,260,604
1,093,999
30,303
7,384,906
220,955
497,229
4
718,188
6,666,718
500,000
6,166,718
319,556
389,321
‐
‐
‐
79,602
788,479
2,937,830
556,974
279,926
347,921
247,366
251,470
194,987
566,551
5,383,025
1,572,172
(344,000)
$
1,170,688
$
1,916,172
INTEREST INCOME
Interest and fees on loans
Interest on investment securities
Interest on federal funds sold and other
Total interest income
INTEREST EXPENSE
Interest on savings deposits, NOW,
and money market accounts
Interest on time deposits
Interest on other borrowings
Total interest expense
Net interest income
PROVISION FOR LOAN LOSSES
Net interest income after provision for loan losses
NON‐INTEREST INCOME
Service charges on deposits
Mortgage fee income
Gain on sale of investment securities
Gain on sale of loans held‐for‐sale
Gain on sale of other real estate owned
Other operating income
Total non‐interest income
NON‐INTEREST EXPENSES
Salaries and employee benefits
Occupancy and equipment expenses
Regulatory assessments
Data processing fees
Professional fees
Marketing and business promotion
Director fees and stock‐based compensation
Other expenses
Income before income taxes
Provision (benefit) for income taxes
Net income
Preferred stock dividends and accretion
$
105,772
$
139,887
Net income available to common shareholders
$
1,064,916
$
1,776,285
Net income per share – basic
Net income per share – diluted
See accompanying notes
4
$
0.60
$
0.95
$
0.44
$
0.95
3
See accompanying notes
FRESNO FIRST BANK
STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31,
2012
2011
Net income
$
1,170,688
$
1,916,172
Available‐for‐sale securities:
Unrealized holding gains (losses) during the year
498,986
(111,762)
Reclassification adjustment for gains realized
in net income
(100,615)
‐
Net unrealized gains (losses)
398,371
(111,762)
Income tax expense
(163,344)
(9,380)
Other comprehensive income (loss)
235,027
(121,142)
Total comprehensive income
$
1,405,715
$
1,795,030
4
See accompanying notes
5
See accompanying notes
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STATEMENTS OF CASH FLOWS
1See accompanying notes
FRESNO FIRST BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
2012
2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
1,170,688
$
1,916,172
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization of premises
and equipment
203,900
182,879
Amortization and accretion of premiums and
discounts on securities available‐for‐sale, net
Provision for loan losses
Gain on sale of investment securities
Gain on sale of loans held‐for‐sale
Gain on sale of other real estate owned
Proceeds from sale of loans held‐for‐sale
Originations of loans held‐for‐sale
Stock‐based compensation
Decrease (increase) in deferred taxes
(Decrease) increase in interest payable and
391,446
783,000
(100,615)
(324,114)
(67,476)
12,555,757
(12,231,643)
62,795
256,000
253,924
500,000
‐
‐
‐
‐
‐
77,384
(862,000)
other liabilities
(133,989)
122,851
(Increase) decrease in interest receivable and
other assets
(180,347)
150,471
Net cash from operating activities
2,385,402
2,341,681
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificates of deposit
Purchase of available‐for‐sale securities
Proceeds from maturities of available‐for‐sale securities
Proceeds from sale of available‐for‐sale securities
Net increase in loans
Purchase of Federal Home Loan Bank stock
Proceeds from sale of other real estate owned
Purchases of premises and equipment
(747,000)
‐
(48,177,128)
(49,061,210)
39,241,916
1,530,185
33,236,512
‐
(12,392,460)
(10,260,528)
(160,300)
337,463
(75,269)
(145,000)
‐
(94,694)
Net cash from investing activities
(20,442,593)
(26,324,920)
6
8
See accompanying notes
FRESNO FIRST BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
2012
2011
33,271,619
(5,598,630)
5,715,038
(2,066,000)
(2,339)
(103,050)
34,944
30,091,936
2,575,838
‐
‐
(726)
(107,220)
33,130
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits and savings accounts
Net (decrease) increase in time deposits
Net proceeds from issuance of Series C preferred stock
Redemption of Series A and B preferred stocks
Cash paid in lieu of fractional shares
Payment of dividends on Series A and B preferred stocks
Common stock issued
Net cash from financing activities
31,251,582
32,592,958
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
13,194,391
19,663,772
8,609,719
11,054,053
CASH AND CASH EQUIVALENTS, end of period
$
32,858,163
$
19,663,772
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid
Taxes paid
$
573,320
$
722,192
$
529,000
$
552,000
NON‐CASH INVESTING ACTIVITIES:
Transfer of loans to other real estate owned
$
2,493,480
$
‐
See accompanying notes
7
9
See accompanying notes
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Fresno First Bank (the Bank) conform to generally accepted
accounting principles and general practices within the banking industry. A summary of the significant
accounting policies applied in the preparation of the accompanying financial statements follows.
Nature of operations –
The Bank is incorporated in the state of California and organized as a single
operating segment that operates one full‐service office in Fresno, California. The Bank’s primary source of
revenue is providing loans to customers, who are predominately small and middle‐market businesses and
individuals.
Estimates –
In preparing financial statements in conformity with generally accepted accounting principles,
management is required to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reported period. Actual results could differ from those estimates.
The allowance for loan losses is the most significant accounting estimate reflected in the Bank’s financial
statements. The allowance for loan losses includes charges to reduce the recorded balances of loans
receivable to their estimated net realizable value, as appropriate. The allowance is based on estimates, and
ultimate losses may vary from current estimates. These estimates for losses are based on individual assets
and their related cash flow forecasts, sales values, independent appraisals, the volatility of certain real estate
markets, and concern for disposing of real estate in distressed markets. Although management of the Bank
believes the estimates underlying the calculation of specific allowances are reasonable, there can be no
assurances that the Bank could ultimately realize these values. In addition to providing valuation allowances
on specific assets where a decline in value has been estimated, the Bank establishes general valuation
allowances for losses based on the overall portfolio composition, general market conditions, concentrations,
and prior loss experience.
Other significant management judgments and accounting estimates reflected in the Bank’s financial
statements include:
• Decisions regarding the timing and placement of loans on non‐accrual;
• Determination, recognition, and measurement of impaired loans;
• Recognition and measurement of asset servicing rights;
• Determination and evaluation of deferred tax assets and liabilities;
• Determination of the fair value of other real estate owned;
• Determination of the fair value of stock option awards; and
• Determination of the fair value of financial instruments.
8
10
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations of credit risk –
Assets and liabilities that subject the Bank to concentrations of credit risk
consist of cash balances at other banks, loans, and deposits. Most of the Bank’s customers are located within
Fresno County and the surrounding areas. The Bank’s primary lending products are discussed in Note 3 to
the financial statements. The Bank did not have any significant concentrations in its business with any one
customer or industry. The Bank obtains what it believes to be sufficient collateral to secure potential losses
on loans. The extent and value of collateral varies based on the details underlying each loan agreement.
As of December 31, 2012 and 2011, the Bank has cash deposits at other financial institutions in excess of
FDIC insured limits. However, as the Bank places these deposits with major financial institutions and
monitors the financial condition of these institutions, management believes the risk of loss to be minimal.
Banking regulations require that banks maintain a percentage of their deposits as reserves in cash or on
deposit with the Federal Reserve Bank. The Bank complied with the reserve requirements as of
December 31, 2012 and 2011.
–
Cash and cash equivalents
For purposes of reporting cash flows, cash equivalents include cash, due from
banks, interest‐bearing deposits in financial institutions with maturities of 90 days or less, and federal funds
sold. Generally, federal funds are sold for one‐day periods and interest‐bearing deposits are for periods of 90
days or less.
Securities available‐for‐sale –
Available‐for‐sale securities consist of U.S. Treasury securities, U.S. Agency
securities, obligations of states and political subdivisions, obligations of U.S. Corporations, mortgage‐backed
securities, and other securities not classified as trading securities or held‐to‐maturity securities. These
securities are carried at estimated fair value with unrealized holding gains and losses, net of tax, reported as
a separate component of accumulated other comprehensive income, until realized. Gains and losses on the
sale of available‐for‐sale securities are determined using the specific identification method. The
amortization of premiums and accretion of discounts are recognized as adjustments to interest income using
the interest method over the period to call or maturity.
Investments with fair values that are less than amortized cost are considered impaired. Impairment may
result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate
investments, from rising interest rates. At each financial statement date, management assesses each
investment to determine if impaired investments are temporarily impaired or if the impairment is other
than temporary. This assessment includes a determination of whether the Bank intends to sell the security,
or if it is more likely than not that the Bank will be required to sell the security before recovery of its
amortized cost basis less any current‐period credit losses. For debt securities that are considered other than
temporarily impaired and that the Bank does not intend to sell and will not be required to sell prior to
recovery of the amortized cost basis, the amount of impairment is separated into the amount that is credit
related (credit loss component) and the amount due to all other factors.
The credit loss component is recognized in earnings and is calculated as the difference between the
security’s amortized cost basis and the present value of its expected future cash flows. The remaining
difference between the security’s fair value and the present value of the future expected cash flows is
deemed to be due to factors that are not credit related and is recognized in other comprehensive income.
9
11
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans –
Loans are reported at the principal amount outstanding, net of deferred loan fees and costs and the
allowance for loan losses. Unearned discounts on installment loans are recognized as income over the terms
of the loans. Interest on other loans is calculated by using the simple interest method on the daily balance of
the principal amount outstanding.
Loan fees, net of certain direct costs of origination, are deferred and amortized over the contractual term of the
loan as an adjustment to the interest yield. During the years ended December 31, 2012 and 2011, salaries and
employee benefits expense totaling $51,954 and $49,536, respectively, were deferred as loan origination costs.
Loans on which the accrual of interest has been discontinued are designated as non‐accrual loans. Accrual of
interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of
interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest
or principal. When a loan is placed on non‐accrual status, all interest previously accrued, but not collected, is
reversed against current period interest income. Income on such loans is then recognized only to the extent
that cash is received and where the future collection of principal is probable. Interest accruals are resumed on
such loans only when they are brought fully current with respect to interest and principal and when, in the
judgment of management, the loans are estimated to be fully collectible as to both principal and interest.
Allowance for loan losses –
The allowance for loan losses is established through a provision for loan losses
charged to operations. Loan losses are charged against the allowance for loan losses when management
believes that the collectability of the principal is unlikely. Subsequent recoveries of previously charged off
amounts, if any, are credited to the allowance.
Management employs a systematic methodology for determining the allowance for loan losses. On a regular
basis, management reviews the credit quality of the loan portfolio and considers problem loans, delinquent
loans, existing general economic conditions affecting the key lending areas of the Bank, credit quality trends,
collateral values, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions,
recent loss experience, duration of the current business cycle, bank regulatory examination results, and
findings of the Bank's internal credit examiners. The allowance for loan losses at December 31, 2012 and 2011
reflects management's estimate of probable losses in the portfolio. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general, and unallocated components. The specific component relates to
loans that are classified as impaired. Impaired loans, as defined, are measured based on the present value of
expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the
loan is collateral dependent. The general component relates to non‐impaired loans and is based on historical
loss experience and loss history experienced by the Bank’s peers when the Bank did not have losses in a
particular loan class, adjusted for qualitative factors impacting the loan portfolio. An unallocated component is
maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated
component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in
the methodologies for estimating specific and general losses in the portfolio.
10
12
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for loan losses (continued) –
The Bank considers a loan impaired when it is probable that all
amounts of principal and interest due will not be collected according to the contractual terms of the loan
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, current credit worthiness, and the
amount of the shortfall in relation to the principal and interest owed.
Troubled debt restructuring
– In situations where, for economic or legal reasons related to a borrower’s
financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider, the
related loan is classified as a troubled debt restructuring. The Bank measures any loss on the troubled debt
restructuring in accordance with the guidance concerning impaired loans set forth above. Additionally,
loans modified in troubled debt restructurings are generally placed on non‐accrual status at the time of
restructuring. These loans are returned to accrual status after the borrower demonstrates performance with
the modified terms for a sustained period of time (generally six months) and has the capacity to continue to
perform in accordance with the modified terms of the restructured debt.
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 the ultimate recovery of par value. Both cash and stock dividends are reported as
income.
Premises and equipment
–
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight‐line method over the estimated useful lives, which
range from three to seven years for computer equipment, equipment, and furniture. Leasehold improvements
are amortized using the straight‐line method over the estimated useful lives of the improvements or the
remaining lease term, whichever is shorter. Expenditures for betterments or major repairs are capitalized and
those for ordinary repairs and maintenance are charged to operations as incurred.
Advertising costs
–
was $170,121 and $121,449 for the years ended December 31, 2012 and 2011, respectively.
Other real estate owned
–
The Bank expenses the costs of advertising in the period incurred. Advertising expense
Real estate acquired by foreclosure, or deed in lieu of foreclosure is recorded at
fair value at the date of foreclosure, establishing a new cost basis by a charge to the allowance for loan
losses, if necessary. Fair value is based on current appraisals less estimated selling costs. Any subsequent
write‐downs are charged against operating expenses and recognized as a valuation allowance. Operating
expenses of such properties, net of related income, and gains and losses on their disposition are included in
other operating expenses. During 2012, the Bank foreclosed on two loans and transferred $2,493,480 to
other real estate owned. The Bank sold one property with proceeds of $337,463 and recognized gain on sale
of $67,476 in 2012. There were no foreclosures or sales of other real estate owned in 2011.
11
13
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes –
The Bank uses the asset and liability method to account for income taxes. Under such
method, deferred tax assets and liabilities are recognized for the future tax consequences of differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax
basis (temporary differences). Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes in the period of enactment.
A valuation allowance against net deferred tax assets is established to the extent that it is more likely than
not that the benefits associated with the deferred tax assets will not be fully realized.
In accordance with accounting standards, the Bank has assessed its tax positions and has concluded there
are no unrecognized tax benefits at December 31, 2012 and 2011.
The Bank recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense.
During the years ended December 31, 2012 and 2011, the Bank recognized no interest and penalties.
The Bank files income tax returns in the U.S. federal jurisdiction and with the state of California. The Bank is
subject to U.S. federal or state income tax examinations by tax authorities for years beginning 2008.
Comprehensive income
–
only component of accumulated other comprehensive income for the Bank.
Fair value measurement
–
Changes in unrealized gains and losses on available‐for‐sale securities are the
Fair value is the exchange price that would be received for an asset or paid to
transfer a liability (an 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. Current accounting guidance
establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of
inputs that may be used to measure fair value:
Level 1
Quoted prices (unadjusted) for identical assets or liabilities 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 a Bank’s own assumptions about the
assumptions that market participants would use in pricing an asset or a liability.
See Note 14 for more information and disclosures relating to the Bank’s fair value measurements.
12
14
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes –
Financial instruments –
The Bank uses the asset and liability method to account for income taxes. Under such
method, deferred tax assets and liabilities are recognized for the future tax consequences of differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax
basis (temporary differences). Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes in the period of enactment.
A valuation allowance against net deferred tax assets is established to the extent that it is more likely than
not that the benefits associated with the deferred tax assets will not be fully realized.
In accordance with accounting standards, the Bank has assessed its tax positions and has concluded there
are no unrecognized tax benefits at December 31, 2012 and 2011.
The Bank recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense.
During the years ended December 31, 2012 and 2011, the Bank recognized no interest and penalties.
The Bank files income tax returns in the U.S. federal jurisdiction and with the state of California. The Bank is
subject to U.S. federal or state income tax examinations by tax authorities for years beginning 2008.
Comprehensive income
–
only component of accumulated other comprehensive income for the Bank.
Fair value measurement
–
Changes in unrealized gains and losses on available‐for‐sale securities are the
Fair value is the exchange price that would be received for an asset or paid to
transfer a liability (an 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. Current accounting guidance
establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of
inputs that may be used to measure fair value:
Level 1
Quoted prices (unadjusted) for identical assets or liabilities 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 a Bank’s own assumptions about the
assumptions that market participants would use in pricing an asset or a liability.
See Note 14 for more information and disclosures relating to the Bank’s fair value measurements.
In the ordinary course of business, the Bank has entered into off‐balance sheet
financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby
letters of credit as described in Note 15. Such financial instruments are recorded in the financial statements
when they are funded or related fees are incurred or received.
Earnings per share (EPS)
–
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted‐average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
stock, such as stock options, were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. The treasury stock method is applied to
determine the dilutive effect of stock options when computing diluted earnings per share.
Stock‐based compensation
–
The Bank recognizes the cost of employee services received in exchange for
awards of stock options, or other equity instruments, based on the grant‐date fair value of those awards.
This cost is recognized over the period that an employee is required to provide services in exchange for the
award, generally the vesting period. See Note 12 for additional information on the Bank’s stock option plan.
Transfers of financial assets –
Transfers of financial assets are accounted for as sales when control over
the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the
assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the
Bank does not maintain effective control over the transferred assets through an agreement to repurchase
them before their maturity.
Servicing rights –
The Bank sells or transfers loans, including the guaranteed portion of United States
Department of Agriculture (USDA) loans (with servicing retained) for cash proceeds equal to the principal
amount of loans, as adjusted to yield interest to the investor based upon the current market rates. The Bank
records an asset representing the right to service a loan for others when it sells a loan and retains the
servicing rights. The carrying value of the loan is allocated between the loan and the servicing rights, based
on their relative fair values. The fair value of servicing rights is estimated by discounting estimated future
cash flows from servicing using discount rates that approximate current market rates and estimated
prepayment rates.
The servicing rights are initially measured at fair value and amortized in proportion to and over the period
of the estimated net servicing income assuming prepayments. Additionally, management assesses the
servicing rights for impairment as of each financial reporting date. For purposes of evaluating and
measuring impairment, servicing rights are based on a discounted cash flow methodology, current
prepayment speeds, and market discount rates. Any impairment is measured as the amount by which the
carrying value of servicing rights for a stratum exceeds its fair value. The carrying value of servicing rights at
December 31, 2012 and 2011 were $44,087 and $50,311, respectively. No impairment charges were
recorded for the years ended December 31, 2012 or 2011 related to servicing assets.
12
13
15
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications –
Certain reclassifications have been made to the 2011 financial statements to conform to
Comprehensive
the classifications used in 2012.
Adoption of new accounting standards
Income
–
Presentation of Comprehensive Income
In June 2011, the FASB issued ASU No. 2011‐05,
(Topic 220),
. The ASU improves the comparability,
consistency, and transparency of financial reporting and increases the prominence of items reported in
other comprehensive income. The amendments to Topic 220 require entities to present the total of
comprehensive income, the components of net income, and the components of other comprehensive income
either in a single continuous statement of comprehensive income or in two separate but consecutive
statements. Entities are no longer permitted to present components of other comprehensive income as part
of the statement of changes in stockholders’ equity. Any adjustments for items that are reclassified from
other comprehensive income to net income are to be presented on the face of the entities’ financial
statement regardless of the method of presentation for comprehensive income. The amendments do not
change items to be reported in comprehensive income or when an item of other comprehensive income
must be reclassified to net income, nor do the amendments change the option to present the components of
other comprehensive income either net of related tax effects or before related tax effects. ASU 2011‐05 is
Presentation of Comprehensive
effective for fiscal years and interim periods beginning on or after December 15, 2011. In December 2011,
Income,
the FASB issued ASU No. 2011‐12,
Comprehensive Income
(Topic 220),
to effectively defer only those changes in Update 2011‐05 that relate to the presentation of
reclassification adjustments out of accumulated other comprehensive income. The amendments will be
temporary to allow the Board time to redeliberate the presentation requirements for reclassifications out of
accumulated other comprehensive income for annual and interim financial statements for public, private,
and non‐profit entities. The amendments in this ASU are effective at the same time as the amendments in
ASU No. 2011‐05 so that entities will not be required to comply with the presentation requirements in
ASU No. 2011‐05 that this ASU is deferring. We have adopted these ASUs in 2012 and provided the
applicable disclosure in the Statements of Comprehensive Income.
Comprehensive Income (Topic 220): Reporting Amounts
Reclassified Out of Accumulated Other Comprehensive Income.
In February 2013, the FASB issued ASU No. 2013‐02,
The ASU requires entities to provide enhanced
disclosures to present separately by component, reclassifications out of accumulated other comprehensive
income. An entity is required to disclose in the notes to the financial statements or parenthetically on the
face of the financial statements, the effect of significant items reclassified out of accumulated other
comprehensive income on the respective line items of net income, but only if the item reclassified is
required under U.S. GAAP to be reclassified to net income in its entirety. ASU No. 2013‐02 is effective for
fiscal years beginning on or after December 15, 2012. The Bank does not expect this ASU to have an impact
on its financial condition or results of operations as it affects presentation only.
14
16
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
–
(Topic 820),
Amendments to Achieve Common Fair Value Measurement and
In May 2011, the FASB issued ASU No. 2011‐04,
Adoption of new accounting standards (continued)
Fair Value Measurement
Disclosure Requirements in U.S. GAAP and IFRSs
Reclassifications –
Certain reclassifications have been made to the 2011 financial statements to conform to
Comprehensive
the classifications used in 2012.
Adoption of new accounting standards
–
Income
Presentation of Comprehensive Income
In June 2011, the FASB issued ASU No. 2011‐05,
(Topic 220),
. The ASU improves the comparability,
consistency, and transparency of financial reporting and increases the prominence of items reported in
other comprehensive income. The amendments to Topic 220 require entities to present the total of
comprehensive income, the components of net income, and the components of other comprehensive income
either in a single continuous statement of comprehensive income or in two separate but consecutive
statements. Entities are no longer permitted to present components of other comprehensive income as part
of the statement of changes in stockholders’ equity. Any adjustments for items that are reclassified from
other comprehensive income to net income are to be presented on the face of the entities’ financial
statement regardless of the method of presentation for comprehensive income. The amendments do not
change items to be reported in comprehensive income or when an item of other comprehensive income
must be reclassified to net income, nor do the amendments change the option to present the components of
other comprehensive income either net of related tax effects or before related tax effects. ASU 2011‐05 is
Comprehensive Income
Presentation of Comprehensive
effective for fiscal years and interim periods beginning on or after December 15, 2011. In December 2011,
Income,
the FASB issued ASU No. 2011‐12,
(Topic 220),
to effectively defer only those changes in Update 2011‐05 that relate to the presentation of
reclassification adjustments out of accumulated other comprehensive income. The amendments will be
temporary to allow the Board time to redeliberate the presentation requirements for reclassifications out of
accumulated other comprehensive income for annual and interim financial statements for public, private,
and non‐profit entities. The amendments in this ASU are effective at the same time as the amendments in
ASU No. 2011‐05 so that entities will not be required to comply with the presentation requirements in
ASU No. 2011‐05 that this ASU is deferring. We have adopted these ASUs in 2012 and provided the
applicable disclosure in the Statements of Comprehensive Income.
Comprehensive Income (Topic 220): Reporting Amounts
Reclassified Out of Accumulated Other Comprehensive Income.
In February 2013, the FASB issued ASU No. 2013‐02,
The ASU requires entities to provide enhanced
disclosures to present separately by component, reclassifications out of accumulated other comprehensive
income. An entity is required to disclose in the notes to the financial statements or parenthetically on the
face of the financial statements, the effect of significant items reclassified out of accumulated other
comprehensive income on the respective line items of net income, but only if the item reclassified is
required under U.S. GAAP to be reclassified to net income in its entirety. ASU No. 2013‐02 is effective for
fiscal years beginning on or after December 15, 2012. The Bank does not expect this ASU to have an impact
on its financial condition or results of operations as it affects presentation only.
. The ASU improves the comparability of fair value
measurements presented and disclosed in accordance with U.S. generally accepted accounting principles
(GAAP) and International Financial Reporting Standards (IFRSs) by changing the wording used to describe
many of the requirements in U.S GAAP for measuring fair value and disclosure of information. The
amendments to this ASU provide explanations on how to measure fair value, but do not require any
additional fair value measurements and do not establish valuation standards or affect valuation practices
outside of financial reporting. The amendments clarify existing fair value measurements and disclosure
requirements to include application of the highest and best use and valuation premises concepts; measuring
fair value of an instrument classified in a reporting entity’s shareholders’ equity; and disclosure
requirements regarding quantitative information about unobservable inputs categorized within Level 3 of
the fair value hierarchy. In addition, clarification is provided for measuring the fair value of financial
instruments that are managed in a portfolio and the application of premiums and discounts in a fair value
measurement. For non‐public entities, ASU No. 2011‐04 is effective for annual periods beginning after
December 15, 2011. Our adoption of this ASU in 2012 did not have a significant impact on the Bank’s
financial statements.
14
15
17
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available‐for‐sale are as follows:
Available‐for‐sale:
U.S. government and
agency securities
Mortgage‐backed securities
State and municipal agencies
Corporate debt securities
2012
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
34,959,031
12,858,751
11,041,561
3,987,149
$
772,279
292,015
127,097
39,243
$
(5,401)
(39,061)
(107,324)
(3,642)
$
35,725,909
13,111,705
11,061,334
4,022,750
$
62,846,492
$
1,230,634
$
(155,428)
$
63,921,698
2011
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Available‐for‐sale:
U.S. government and
agency securities
Mortgage‐backed securities
State and municipal agencies
Corporate debt securities
$
43,692,819
8,463,114
1,097,560
2,478,803
$
627,822
279,936
‐
‐
$
(16,151)
(104)
(2,314)
(212,354)
$
44,304,490
8,742,946
1,095,246
2,266,449
$
55,732,296
$
907,758
$
(230,923)
$
56,409,131
The amortized cost and estimated fair value of all investment securities as of December 31, 2012 by
expected maturities are shown below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Due in one year or less
Due after one year to five years
Due from five years to ten years
Due after ten years
16
18
Amortized
Cost
Estimated
Fair
Value
$
219,955
6,286,278
17,252,173
39,088,086
$
220,926
6,366,730
17,499,562
39,834,480
$
62,846,492
$
63,921,698
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – INVESTMENT SECURITIES
NOTE 2 – INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair values of securities available‐for‐sale are as follows:
The gross unrealized loss and related estimated fair value of investment securities that have been in a
continuous loss position for less than twelve months and over twelve months are as follows:
Amortized
Unrealized
Unrealized
Cost
Losses
Fair
Value
Gross
Estimated
2012
Gross
Gains
Available‐for‐sale:
U.S. government and
agency securities
$
34,959,031
$
772,279
$
(5,401)
$
35,725,909
Mortgage‐backed securities
State and municipal agencies
Corporate debt securities
12,858,751
11,041,561
3,987,149
292,015
127,097
39,243
(39,061)
(107,324)
(3,642)
13,111,705
11,061,334
4,022,750
$
62,846,492
$
1,230,634
$
(155,428)
$
63,921,698
Amortized
Unrealized
Unrealized
Cost
Losses
Fair
Value
Gross
Estimated
2011
Gross
Gains
Available‐for‐sale:
U.S. government and
agency securities
$
43,692,819
$
627,822
$
(16,151)
$
44,304,490
Mortgage‐backed securities
State and municipal agencies
Corporate debt securities
8,463,114
1,097,560
2,478,803
279,936
‐
‐
(104)
(2,314)
(212,354)
8,742,946
1,095,246
2,266,449
$
55,732,296
$
907,758
$
(230,923)
$
56,409,131
The amortized cost and estimated fair value of all investment securities as of December 31, 2012 by
expected maturities are shown below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Due in one year or less
Due after one year to five years
Due from five years to ten years
Due after ten years
16
Amortized
Cost
Estimated
Fair
Value
$
219,955
$
220,926
6,286,278
17,252,173
39,088,086
6,366,730
17,499,562
39,834,480
$
62,846,492
$
63,921,698
U.S. government and
agency securities
Mortgage‐backed
securities
State and municipal
agencies
Corporate debt
securities
2012
Less than 12 months
Over 12 Months
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
$
2,127,899
$
(2,568)
$
2,232,125
$
(2,833)
$
4,360,024
$
(5,401)
3,411,626
(39,061)
6,207,056
(107,324)
‐
‐
‐
‐
3,411,626
(39,061)
6,207,056
(107,324)
‐
‐
492,570
(3,642)
492,570
(3,642)
$
11,746,581
$
(148,953)
$
2,724,695
$
(6,475)
$
14,471,276
$
(155,428)
2011
Less than 12 months
Over 12 Months
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
U.S. government and
agency securities
Mortgage‐backed
securities
State and municipal
agencies
Corporate debt
securities
$
10,771,367
$
(16,151)
$
‐
$
‐
$
10,771,367
$
(16,151)
46,521
(104)
1,095,245
(2,314)
2,266,449
(212,354)
‐
‐
‐
‐
‐
‐
46,521
(104)
1,095,245
(2,314)
2,266,449
(212,354)
$
14,179,582
$
(230,923)
$
‐
$
‐
$
14,179,582
$
(230,923)
Certain investment securities shown in the previous table currently have fair values less than amortized cost
and therefore contain unrealized losses. The Bank considers a number of factors including, but not limited
to: (a) the length of time and the extent to which the fair value has been less than the amortized cost, (b) the
financial condition and near‐term prospects of the issuer, (c) the intent and ability of the Bank to retain its
investment for a period of time sufficient to allow for an anticipated recovery in value, (d) whether the
debtor is current on interest and principal payments, and (e) general market conditions and the industry‐ or
sector‐specific outlook. Management has evaluated all securities at December 31, 2012 and 2011, and has
determined that no securities are other than temporarily impaired.
17
19
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – INVESTMENT SECURITIES (CONTINUED)
The Bank does not have the intent to sell the investments that are impaired, and it is more likely than not
that the Bank will not be required to sell those investments before recovery of the amortized cost basis. The
Bank has evaluated these securities and has determined that the decline in value is temporary and is related
to the change in market interest rates since purchase. The decline in value is not related to any issuer‐ or
industry‐specific event. These temporary unrealized losses relate principally to current interest rates for
similar types of securities. In analyzing an issuer’s financial condition, management considers whether the
securities are issued by the federal government or its agencies, whether downgrades by bond rating
agencies have occurred, and the results of reviews of the issuer’s financial condition. At December 31, 2012,
there were 22 investment securities with unrealized losses. The Bank anticipates full recovery of amortized
cost with respect to these securities at maturity or sooner in the event of a more favorable market interest
rate environment.
Proceeds from the sales of investment securities totaled $1,530,185 during the year ended December 31,
2012. Gross realized gains totaled $100,615 during 2012. There were no realized losses during 2012. No
investment securities were sold during 2011.
Investment securities carried at approximately $1,242,000 and $2,055,000 at December 31, 2012 and 2011,
respectively, were pledged to secure public deposits or other purposes as permitted or required by law.
NOTE 3 – LOANS
Major classifications of loans are as follows:
DECEMBER 31,
2012
2011
$
35,442,291
40,838,323
6,482,128
15,288,968
10,636,805
157,366
$
31,624,476
36,021,259
8,389,230
14,360,561
9,560,586
436,656
108,845,881
(2,498,139)
116,759
100,392,768
(2,792,619)
(251,628)
$
106,464,501
$
97,348,521
Commercial and industrial
Commercial real estate
Land and construction
Residential real estate
Agriculture
Consumer
Allowance for loan losses
Deferred loan fees and costs, net
18
20
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 2 – INVESTMENT SECURITIES (CONTINUED)
NOTE 3 – LOANS (CONTINUED)
The Bank does not have the intent to sell the investments that are impaired, and it is more likely than not
that the Bank will not be required to sell those investments before recovery of the amortized cost basis. The
Bank has evaluated these securities and has determined that the decline in value is temporary and is related
to the change in market interest rates since purchase. The decline in value is not related to any issuer‐ or
industry‐specific event. These temporary unrealized losses relate principally to current interest rates for
similar types of securities. In analyzing an issuer’s financial condition, management considers whether the
securities are issued by the federal government or its agencies, whether downgrades by bond rating
agencies have occurred, and the results of reviews of the issuer’s financial condition. At December 31, 2012,
there were 22 investment securities with unrealized losses. The Bank anticipates full recovery of amortized
cost with respect to these securities at maturity or sooner in the event of a more favorable market interest
rate environment.
Proceeds from the sales of investment securities totaled $1,530,185 during the year ended December 31,
2012. Gross realized gains totaled $100,615 during 2012. There were no realized losses during 2012. No
investment securities were sold during 2011.
Investment securities carried at approximately $1,242,000 and $2,055,000 at December 31, 2012 and 2011,
respectively, were pledged to secure public deposits or other purposes as permitted or required by law.
NOTE 3 – LOANS
Major classifications of loans are as follows:
Commercial and industrial
Commercial real estate
Land and construction
Residential real estate
Agriculture
Consumer
Allowance for loan losses
Deferred loan fees and costs, net
DECEMBER 31,
2012
2011
$
35,442,291
$
31,624,476
40,838,323
6,482,128
15,288,968
10,636,805
157,366
36,021,259
8,389,230
14,360,561
9,560,586
436,656
108,845,881
100,392,768
(2,498,139)
116,759
(2,792,619)
(251,628)
$
106,464,501
$
97,348,521
The Bank’s loan portfolio consists primarily of loans to borrowers within Fresno County, California.
Although the Bank seeks to avoid concentrations of loans to a single industry or based upon a single class of
collateral, real estate and real estate associated businesses are among the principal industries in the Bank’s
market area and, as a result, the Bank’s loan and collateral portfolios are, to some degree, concentrated in
those industries.
All of the Bank’s loans are underwritten after evaluating the borrower’s character and, for commercial and
business loans, managerial and operational experience. Underwriting standards are designed to promote
relationship banking rather than transactional banking.
Commercial and industrial loans are primarily made to commercial and business entities for working
capital, equipment purchases, growth and expansion, and any other permissible purposes. The Bank’s
management examines current and projected cash flows to determine the ability of the borrower to repay
its obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the
borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of
borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.
Most commercial loans are secured by the assets being financed or other business assets such as equipment,
accounts receivable, or inventory and may incorporate personal guarantees or personal assets as collateral;
however, some loans may be made on an unsecured basis.
Commercial real estate loans are primarily made to owner‐users of the property or investors with current
tenants in the property. Commercial real estate loans are subject to underwriting standards and processes
similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans
secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and
the repayment of these loans is generally largely dependent on the successful operation of the property
securing the loan or the business conducted on the property securing the loan. Commercial real estate loans
may be more adversely affected by conditions in the real estate markets or in the general economy. The
properties securing the Bank’s commercial real estate portfolio are diverse in terms of type and industries
operating within the properties. This diversity helps reduce the Bank’s exposure to adverse economic events
that affect any single market or industry. Management monitors and evaluates commercial real estate loans
based on collateral type, geography, industry, and risk grade criteria.
Land and construction loans are primarily made to borrowers who are using the property for their own
purposes. The Bank does not make speculative land loans where repayment will be from the eventual sale of
the property to unknown parties. Land loans are made with amortizing repayment terms to borrowers with
proven, historic cash flow sufficient to repay the loan. Collateral values are based on the current “as is”
market value of the property. Construction loans are made based on the borrower’s historic and projected
cash flow. The Bank does not engage in speculative construction loans where repayment will come from the
sale or lease of the property to unknown parties.
18
19
21
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – LOANS (CONTINUED)
Residential real estate loans are made to individuals for the purchase or refinance of residential 1‐to‐4
family properties or for other consumer purposes. Residential real estate loans are underwritten based
upon income, credit history, and collateral. The Bank does not generate residential real estate loans for sale.
To monitor and manage residential loan risk, policies and procedures are developed and modified, as
needed. Underwriting standards for home loans are heavily influenced by statutory requirements, which
include, but are not limited to, a determination and verification of borrower’s ability to repay the loan,
maximum loan‐to‐value percentage, collection remedies, and documentation requirements.
Agricultural loans are primarily made to producers of agricultural products. Agricultural loans are subject
to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as
cash flow loans and secondarily as loans secured by real estate and/or agricultural commodities.
Agricultural real estate lending typically involves higher loan principal amounts and the repayment of these
loans is generally largely dependent on the successful operation of the property securing the loan or the
business conducted on the property securing the loan. Agricultural crop loans may be more adversely
affected by conditions in the weather or in the general economy. The properties securing the Bank’s
agricultural portfolio are diverse in terms of type of crop. This diversity helps reduce the Bank’s exposure to
adverse economic events that affect any single commodity. Management monitors and evaluates agricultural
real estate loans based on collateral, crop type, geography, and risk grade criteria.
Consumer loans are made to individuals for personal, household, and family expenditures and consist of
term loans and lines of credit. The Bank does not offer credit card plans. Consumer loans are subject to
underwriting standards and processes similar to residential real estate loans and are based primarily on
income, credit history, and collateral; however, some consumer loans are unsecured. To monitor and
manage consumer loan risk, policies and procedures are developed and modified, as needed. This activity
coupled with relatively small loan amounts that are spread across many individual borrowers minimizes
risk.
The Bank utilizes an independent third party loan review consultant to review and validate the credit risk
program on a periodic basis. Results of these reviews are presented to management and the Bank’s Board of
Directors. The loan review process complements and reinforces the risk identification and assessment
decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures.
20
22
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – LOANS (CONTINUED)
Information related to impaired loans as of December 31, 2012 and for the year ended consisted of the
following:
Recorded investment in impaired loans:
Commercial
and
Industrial
Commercial
Real Estate
Land and
Construction
Residential
Real Estate
Agriculture
Consumer
Total
With no specific allowance recorded
With a specific allowance recorded
$
‐
1,309,585
$
‐
1,080,545
‐
$
‐
$
74,746
‐
‐
$
‐
‐
$
‐
$
74,746
2,390,130
Total recorded investment in impaired loans
Unpaid principal balance of impaired loans:
$
1,309,585
$
1,080,545
$
‐
$
74,746
$
‐
$
‐
$
2,464,876
With no specific allowance recorded
With a specific allowance recorded
$
‐
1,309,585
$
‐
1,080,545
‐
$
‐
$
74,746
‐
‐
$
‐
‐
$
‐
$
74,746
2,390,130
Total unpaid principal balance of impaired loans
$
1,309,585
$
1,080,545
$
‐
$
74,746
$
‐
$
‐
$
2,464,876
Specific allowance
$
523,834
$
36,051
$
‐
$
‐
$
‐
$
‐
$
559,885
Average recorded investment in impaired loans during
the year
$
454,846
$
1,355,294
$
1,933,508
$
155,046
$
‐
$
‐
$
3,898,694
Interest income recognized on impaired loans during
the year
$
95,545
$
34,351
$
71,536
$
11,051
$
‐
$
‐
$
212,483
Information related to impaired loans as of December 31, 2011 and for the year ended consisted of the
following:
Recorded investment in impaired loans:
Commercial
and
Industrial
Commercial
Real Estate
Land and
Construction
Residential
Real Estate
Agriculture
Consumer
Total
With no specific allowance recorded
With a specific allowance recorded
‐
$
‐
$
‐
2,026,462
$
‐
2,561,418
$
90,323
294,848
‐
$
‐
‐
$
‐
$
90,323
4,882,728
Total recorded investment in impaired loans
Unpaid principal balance of impaired loans:
$
‐
$
2,026,462
$
2,561,418
$
385,171
$
‐
$
‐
$
4,973,051
With no specific allowance recorded
With a specific allowance recorded
‐
$
‐
$
‐
2,026,462
$
‐
2,561,418
$
90,323
294,848
‐
$
‐
‐
$
‐
$
90,323
4,882,728
Total unpaid principal balance of impaired loans
$
‐
$
2,026,462
$
2,561,418
$
385,171
$
‐
$
‐
$
4,973,051
Specific allowance
$
‐
$
434,597
$
47,494
$
75,248
$
‐
$
‐
$
557,339
Average recorded investment in impaired loans during
the year
$
‐
$
2,351,021
$
1,286,563
$
392,273
$
237,826
$
‐
$
4,267,683
Interest income recognized on impaired loans during
the year
$
‐
$
42,252
$
140,110
$
11,023
$
23,988
$
‐
$
217,373
21
23
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – LOANS (CONTINUED)
NOTE 3 – LOANS (CONTINUED)
The Bank has established a loan risk rating system to measure and monitor the quality of the loan portfolio.
All loans are assigned a risk rating from the inception of the loan until the loan is paid off. The primary loan
grades are as follows:
Loans rated Pass –
These are loans to borrowers with satisfactory financial support, repayment capacity,
and credit strength. Borrowers in this category demonstrate fundamentally sound financial positions,
repayment capacity, credit history, and management expertise. Loans in this category must have an
identifiable and stable source of repayment and meet the Bank’s policy regarding debt service coverage
ratios. These borrowers are capable of sustaining normal economic, market, or operational setbacks without
significant financial impacts. Financial ratios and trends are acceptable. Negative external industry factors
are generally not present. The loan may be secured, unsecured, or supported by non‐real estate collateral for
which the value is more difficult to determine and/or marketability is more uncertain. These loans carry a
normal degree of risk. The borrowers have the capacity to perform according to terms; any deviation from
historic performance is limited and temporary.
Loans rated Special Mention –
These are loans that have potential weaknesses that deserve management’s
close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment
prospects for the asset or in the Bank’s credit position at some future date. Special Mention assets are not
adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. These
loans exhibit a more weakened condition than Pass loans, but not to the degree where they would be
considered substandard. These loans show definite signs of deterioration or weakness, and the likelihood of
correction is somewhat questionable. Weaknesses might include significant earnings decline, collection of
accounts receivable is slowing, delayed accounts payable, greater dependency on‐line usage, covenants not
being met, and/or waived for short periods.
Loans rated Substandard –
These are loans that are inadequately protected by the current sound worth
and paying capacity of the borrower or by the collateral pledged, if any. These loans have a well‐defined
weakness, or weaknesses that jeopardize the liquidation of the loan. They are characterized by the distinct
possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Loans rated Doubtful –
These are loans that have all the weaknesses inherent in a loan classified as
Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on
the basis of currently known facts, conditions and values, highly questionable, and improbable. These loans
have a high probability of loss due to significant deterioration in financial condition of the borrower and
collateral value pledged, if any. The borrower is unable to demonstrate the ability to strengthen their
financial condition within a reasonable time; therefore, close supervision is required and the loan is placed
on non‐accrual. The risk of loss is measured by an impairment analysis; any loss exposure determined
through this analysis is to be charged off.
The following table summarizes the loan portfolio by credit quality and product and/or collateral type as of
December 31, 2012:
Special
Pass
Mention
Substandard
Doubtful
Total
Commercial and industrial
$
32,493,477
$
‐
$
2,948,814
$
‐
$
35,442,291
Commercial real estate
36,935,852
3,373,615
Land and construction
Residential real estate
Agriculture
Consumer
6,456,230
14,919,461
10,636,805
157,366
528,856
25,898
369,507
40,838,323
6,482,128
15,288,968
10,636,805
157,366
$
101,599,191
$
3,373,615
$
3,873,075
$
‐
$
108,845,881
The following table summarizes the loan portfolio by credit quality and product and/or collateral type as of
December 31, 2011:
Special
Pass
Mention
Substandard
Doubtful
Total
Grade:
Grade:
Commercial and industrial
$
28,842,637
$
194,000
$
2,587,839
$
‐
$
31,624,476
Commercial real estate
29,761,942
3,448,964
Land and construction
Residential real estate
Agriculture
Consumer
5,797,670
13,627,890
9,560,586
436,656
2,810,353
2,591,560
732,671
36,021,259
8,389,230
14,360,561
9,560,586
436,656
$
88,027,381
$
3,642,964
$
8,722,423
$
‐
$
100,392,768
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
22
24
23
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – LOANS (CONTINUED)
The following table summarizes the loan portfolio by credit quality and product and/or collateral type as of
December 31, 2012:
Special
Pass
Mention
Substandard
Doubtful
Total
Grade:
Commercial and industrial
$
32,493,477
$
‐
$
2,948,814
$
‐
$
35,442,291
Commercial real estate
36,935,852
3,373,615
Land and construction
Residential real estate
Agriculture
Consumer
6,456,230
14,919,461
10,636,805
157,366
‐
‐
‐
‐
528,856
25,898
369,507
‐
‐
‐
‐
‐
‐
‐
40,838,323
6,482,128
15,288,968
10,636,805
157,366
$
101,599,191
$
3,373,615
$
3,873,075
$
‐
$
108,845,881
The following table summarizes the loan portfolio by credit quality and product and/or collateral type as of
December 31, 2011:
Special
Pass
Mention
Substandard
Doubtful
Total
Grade:
Commercial and industrial
$
28,842,637
$
194,000
$
2,587,839
$
‐
$
31,624,476
Commercial real estate
29,761,942
3,448,964
Land and construction
Residential real estate
Agriculture
Consumer
5,797,670
13,627,890
9,560,586
436,656
‐
‐
‐
‐
2,810,353
2,591,560
732,671
‐
‐
‐
‐
‐
‐
‐
36,021,259
8,389,230
14,360,561
9,560,586
436,656
$
88,027,381
$
3,642,964
$
8,722,423
$
‐
$
100,392,768
23
25
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – LOANS (CONTINUED)
The following table is an aging analysis of loans, segregated by class of loans, as of December 31, 2012:
30‐59
Days
60‐89
Days
Greater
Than
Past Due
Past Due
90 Days
Total
Past
Due
Current
Total
Loans
Recorded
Investment >
90 Days and
Accruing
Commercial and industrial
$
10,441
$
249,551
$
282,572
$
542,564
$
34,899,727
$
35,442,291
$
282,572
Commercial real estate
Land and construction
Residential real estate
Agriculture
Consumer
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
40,838,323
40,838,323
6,482,128
6,482,128
15,288,968
15,288,968
10,636,805
10,636,805
157,366
157,366
‐
‐
‐
‐
‐
Total
$
10,441
$
249,551
$
282,572
$
542,564
$
108,303,317
$
108,845,881
$
282,572
The following table is an aging analysis of loans, segregated by class of loans, as of December 31, 2011:
30‐59
Days
60‐89
Days
Greater
Than
Past Due
Past Due
90 Days
Total
Past
Due
Current
Total
Loans
Recorded
Investment >
90 Days and
Accruing
Commercial and industrial
$
43,740
$
‐
$
‐
$
43,740
$
31,580,736
$
31,624,476
$
‐
Commercial real estate
‐
795,299
Land and construction
30,142
Residential real estate
Agriculture
Consumer
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
795,299
35,225,960
36,021,259
30,142
8,359,088
8,389,230
‐
‐
‐
14,360,561
14,360,561
9,560,586
9,560,586
436,656
436,656
‐
‐
‐
‐
‐
Total
$
73,882
$
795,299
$
‐
$
869,181
$
99,523,587
$
100,392,768
$
‐
24
26
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – LOANS (CONTINUED)
The following tables summarize loans to customers whose loan terms were modified in troubled debt
restructurings during the following years ended December 31:
Troubled Debt Restructurings
Commercial and industrial
Commercial real estate
Land and construction
Residential real estate
Agriculture
Consumer
Troubled Debt Restructurings
Commercial and industrial
Commercial real estate
Land and construction
Residential real estate
Agriculture
Consumer
Year Ended December 31, 2012
Number of
Contracts
Pre‐Modification
Outstanding Recorded
Investment
Post‐Modification
Outstanding Recorded
Investment
2
‐
‐
‐
‐
‐
2
$
1,309,585
‐
‐
‐
‐
‐
$
1,309,585
‐
‐
‐
‐
‐
$
1,309,585
$
1,309,585
Year Ended December 31, 2011
Number of
Contracts
Pre‐Modification
Outstanding Recorded
Investment
Post‐Modification
Outstanding Recorded
Investment
‐
‐
2
‐
‐
‐
2
‐
$
‐
2,105,388
‐
‐
‐
‐
$
‐
2,105,388
‐
‐
‐
$
2,105,388
$
2,105,388
The loans outlined above are considered troubled debt restructuring because the Bank granted a concession
to a borrower experiencing financial difficulties that it would not otherwise consider. During 2012, there
were two loans to one borrower that were modified and considered troubled debt restructurings because
specific payment term concessions were granted to the borrower. The two troubled debt restructurings for
the borrower subsequently defaulted after restructuring and were placed on non‐accrual as of December 31,
2012. During 2011, there were two loans to one borrower that were modified and considered troubled debt
restructurings because specific interest rate concessions were granted to the borrower.
25
27
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – LOANS (CONTINUED)
In 2012, two troubled debt restructurings from 2011 defaulted after restructuring and were subsequently
transferred to other real estate owned. In 2011, one troubled debt restructuring from 2010 with a principal
balance of $795,299 defaulted. The Bank has not committed to lend any additional amounts to customers
with outstanding loans that are classified as troubled debt restructurings.
Year end non‐accrual loans, segregated by class, are as follows:
Commercial and industrial
Commercial real estate
Land and construction
Residential real estate
Agriculture
Consumer
DECEMBER 31,
2012
2011
$
1,309,585
‐
‐
74,746
‐
‐
$
‐
795,299
‐
90,323
‐
‐
$
1,384,331
$
885,622
26
28
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 3 – LOANS (CONTINUED)
In 2012, two troubled debt restructurings from 2011 defaulted after restructuring and were subsequently
transferred to other real estate owned. In 2011, one troubled debt restructuring from 2010 with a principal
balance of $795,299 defaulted. The Bank has not committed to lend any additional amounts to customers
with outstanding loans that are classified as troubled debt restructurings.
Year end non‐accrual loans, segregated by class, are as follows:
Commercial and industrial
Commercial real estate
Land and construction
Residential real estate
Agriculture
Consumer
DECEMBER 31,
2012
2011
$
1,309,585
$
‐
795,299
74,746
90,323
‐
‐
‐
‐
‐
‐
‐
$
1,384,331
$
885,622
26
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2See accompanying notes
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 4 – PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31 follows:
Leasehold improvements
Furniture, fixtures, and equipment
Computer equipment
Less accumulated depreciation and amortization
DECEMBER 31,
2012
2011
$
1,123,897
469,958
630,536
$
1,123,897
469,958
555,726
2,224,391
(1,752,585)
2,149,581
(1,549,144)
$
471,806
$
600,437
The Bank has entered into a ten‐year lease for its main banking and administrative offices. The Bank is
responsible for common area maintenance, taxes, and insurance to the extent they exceed the base year
amounts. The lease expires on January 31, 2016.
At December 31, 2012, the future lease rental payable under non‐cancellable operating lease commitments
for the Banks’ main and administrative offices were as follows:
2013
2014
2015
2016
Thereafter
$
303,676
312,028
321,388
26,848
‐
$
963,940
The minimum rental payments shown above are given for the existing lease obligations and are not a
forecast of future rental expense. Total rental expense was approximately $277,000 and $301,000 for the
years ended December 31, 2012 and 2011, respectively.
29
31
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 5 – DEPOSITS
Customer deposits were as follows:
Non‐interest‐bearing demand
Savings, NOW, and money market accounts
Time deposits under $100,000
Time deposits $100,000 and over
DECEMBER 31,
2012
2011
$
64,385,021
79,469,098
13,786,217
28,806,991
$
48,155,031
62,427,469
15,484,463
32,707,375
$
186,447,327
$
158,774,338
At December 31, 2012, the scheduled maturities of time deposits are as follows:
2013
2014
2015
2016
2017 and beyond
NOTE 6 – BORROWING ARRANGEMENTS
$
37,176,372
3,150,977
1,783,240
233,619
249,000
$
42,593,208
The Bank may borrow up to $12,000,000 overnight on an unsecured basis from three correspondent banks.
The Bank may also borrow up to approximately $29,256,000 from the Federal Home Loan Bank of San
Francisco, subject to providing collateral and fulfilling other conditions of the credit facility. The Bank has
pledged investment securities of approximately $1,242,000 for the credit facility at Federal Home Loan Bank
of San Francisco. The Bank may also borrow from the Federal Reserve Bank of San Francisco, subject to
fulfilling other conditions of the credit facility and providing collateral. As of December 2012 and 2011, no
amounts were outstanding under these arrangements.
30
32
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 7 – EMPLOYEE BENEFITS
The Bank sponsors an employee stock ownership plan (ESOP) for eligible employees. Eligibility begins after
an employee has attained the age of 21 and completed one year of service, as defined in the ESOP
documents. Under the ESOP, the Bank contributes a discretionary amount to the ESOP for the purchase of
the Bank’s stock, to be held in trust for each participant to later be distributed in accordance with the ESOP.
For the years ended December 31, 2012 and 2011, contributions to the ESOP were $152,928 and $150,000,
respectively.
The Bank sponsors a 401(k) plan for the benefit of its employees. The Bank can match employee
contributions and make additional contributions as determined by the Board of Directors annually. The
Bank made no contributions for the years ended December 31, 2012 and 2011.
NOTE 8 – INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31 consists of the following:
Current
Federal
State
Deferred
Federal
State
2012
2011
$
494,000
62,000
$
358,000
151,000
556,000
509,000
89,000
167,000
(729,000)
(124,000)
256,000
(853,000)
$
812,000
$
(344,000)
Deferred taxes are a result of differences between income tax accounting and generally accepted accounting
principles with respect to income and expense recognition.
31
33
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES (CONTINUED)
The following is a summary of the components of the net deferred tax asset accounts recognized in the
accompanying statements of financial condition at December 31:
Deferred tax assets:
Pre‐operating expenses
Depreciation differences
Allowance for loan losses due to tax limitations
Stock‐based compensation
Operating loss carryforwards
Other
Deferred tax liabilities:
Accrual to cash
Unrealized gains on available‐for‐sale securities
Other
Valuation allowance
2012
2011
$
137,000
214,000
772,000
274,000
294,000
163,000
$
154,000
170,000
1,008,000
274,000
383,000
135,000
1,854,000
2,124,000
(52,000)
(441,000)
(100,000)
(593,000)
(66,000)
(104,000)
(278,000)
(62,000)
(444,000)
(66,000)
Net deferred income tax asset
$
1,195,000
$
1,614,000
As of December 31, 2012 and 2011, a valuation allowance of $66,000 was recorded for both years equal to
the amount of deferred tax assets for certain non‐qualified stock options the Bank determined are more
likely than not unable to be realized before those options expire. The Bank reduced the valuation allowance
by approximately $929,000 in 2011. The Bank has net operating loss carryforwards of approximately
$2,243,000 for California franchise tax purposes. California net operating loss carryforwards, to the extent
not used, will begin to expire in 2028.
The Bank is subject to federal income tax and franchise tax of the state of California. Income tax returns for
the years ended December 31, 2012, 2011, and 2010 are open to audit by the federal authorities and income
tax returns for the years ended December 31, 2012, 2011, 2010, 2009, and 2008 are open to audit by state
authorities. Unrecognized tax benefits are not expected to significantly increase or decrease within the next
twelve months.
32
34
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 9 – RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain directors and their related interests
with which they are associated. The balance of these loans outstanding was approximately $1,238,000 and
$1,479,000 at December 31, 2012 and 2011, respectively.
Deposits from certain directors, officers, and their related interests with which they are associated, held by
the Bank at December 31, 2012 and 2011 amounted to approximately $2,672,000 and $2,853,000,
respectively.
NOTE 10 – EARNINGS PER SHARE (EPS)
Earnings per share for the years ended December 31 were computed as follows:
2012
2011
Basic earnings per share:
Net income
Accretion of Series A and B preferred stocks
Dividends paid on Series A and B preferred stocks
$
1,170,688
(2,722)
(103,050)
$
1,916,172
(32,667)
(107,220)
Net income available to common shareholders
$
1,064,916
$
1,776,285
Weighted average common shares outstanding
1,779,748
1,860,111
Basic earnings per share
Diluted earnings per share:
$
0.60
$
0.95
Net income
Accretion of Series A and B preferred stocks
Dividends paid on Series A and B preferred stocks
$
1,170,688
(2,722)
(103,050)
$
1,916,172
(32,667)
(107,220)
Net income available to common shareholders
$
1,064,916
$
1,776,285
Weighted average common shares outstanding
1,779,748
1,860,111
Effect of dilutive stock options
Incremental shares from assumed conversion of
Series C convertible preferred stock
Adjusted weighted average common shares outstanding
1,467
640,500
2,421,715
639
‐
1,860,750
Diluted earnings per share
$
0.44
$
0.95
At December 31, 2012 and 2011, there were 502,659 and 454,701 stock options, respectively, that could
potentially dilute earnings per share in the future that were not included in the computation of diluted
earnings per share because to do so would have been antidilutive. All income per share amounts have been
retroactively adjusted for the effect of stock dividends.
33
35
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 11– COMMITMENTS
In the ordinary course of business, the Bank enters into financial commitments to meet the financing needs
of its customers. These financial commitments include commitments to extend credit and standby letters of
credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk not
recognized in the Bank’s financial statements.
The Bank’s exposure to loan loss in the event of non‐performance on 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 as it does for loans reflected in the financial statements.
As of December 31, 2012 and 2011, the Bank had the following outstanding financial commitments whose
contractual amount represents credit risk:
Commitments to extend credit
Letters of credit
2012
2011
$
30,760,000
‐
$
21,380,000
‐
$
30,760,000
$
21,380,000
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Since many of the commitments are expected to expire without being
drawn upon, the total amounts do not necessarily represent future cash requirements. The Bank evaluates
each client’s credit worthiness on a case‐by‐case basis. The amount of collateral obtained if deemed
necessary by the Bank is based on management’s credit evaluation of the customer. The majority of the
Bank’s commitments to extend credit and standby letters of credit are secured by real estate.
NOTE 12 – STOCK OPTION PLAN
The Bank’s 2005 Equity Based Compensation Plan (the Plan) was approved by its shareholders in February
2006. Under the terms of the 2005 the Plan, officers and key employees may be granted both non‐qualified,
incentive stock options and restricted stock awards and directors, who are not also an officer or employee,
may only be granted nonqualified stock options and restricted stock awards. The Plan provides for a
maximum number of shares that may be awarded to eligible employees and directors not to exceed 495,000
shares. In July 2012, the shareholders approved an additional 183,000 shares to be added to the Plan
increasing the total to 678,000 shares. Stock options are granted at a price not less than 100% of the fair
market value of the stock on the date of grant. Stock options expire no later than ten years from the date of
the grant and all equity‐based awards generally vest over three years. The Plan provides for accelerated
vesting if there is a change of control, as defined in the Plan. The Bank recognized stock based compensation
cost of $62,795 and $77,384 in 2012 and 2011, respectively. The Bank recognized tax expense related to
stock‐based compensation of $‐0‐ and $11,859 in 2012 and 2011, respectively.
34
36
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 12 – STOCK OPTION PLAN (CONTINUED)
The following table shows weighted average assumptions used in valuing stock options granted for the
years ended December 31:
Expected volatility
Expected term
Expected dividends
Risk free rate
Grant date fair value
2012
2011
25.30%
6.5 years
None
1.07%
1.32
$
36.43%
6.5 years
None
1.98%
2.62
$
Since the Bank has a limited amount of historical stock activity, the expected volatility is based on the
historical volatility of similar banks that have a longer trading history. The expected term represents the
estimated average period of time that the options remain outstanding. Since the Bank does not have
sufficient historical data on the exercise of stock options, the expected term is based on the “simplified”
method that measures the expected term as the average of the vesting period and the contractual term. The
risk free rate of return reflects the grant date interest rate offered for U.S. Treasury bonds over the expected
term of the options.
A summary of the status of stock options that have been granted by the Bank as of December 31, 2012, and
changes during the year ending thereon is presented below:
Weighted‐
Average
Exercise
Price
Weighted‐
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Shares
Outstanding at beginning of year
Granted
Exercised
Forfeited or expired
478,076
29,400
(3,859)
(97)
$ 9.65
$ 8.71
$ 6.85
$ 7.71
Outstanding at end of year
503,520
$ 9.61
4.8 years
None
Options exercisable
447,404
$ 9.73
4.0 years
None
As of December 31, 2012, there was approximately $73,000 of total unrecognized compensation cost related
to the outstanding stock options that will be recognized over a weighted average period of 1.7 years.
35
37
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 13 – REGULATORY MATTERS
NOTE 13 – REGULATORY MATTERS (CONTINUED)
The Bank is subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet these minimum capital requirements can initiate certain mandatory – and possibly
additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the
Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the
Bank’s assets, liabilities, and certain off‐balance‐sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk‐weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain
minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk‐weighted assets (as defined), and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of December 31, 2012, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 2012, the most recent notification from the FDIC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action (there are no conditions or events
since that notification that management believes have changed the Bank’s category). To be categorized as
well capitalized, the Bank must maintain minimum ratios as set forth in the table below. The following table
also sets forth the Bank’s actual capital amounts and ratios (dollar amounts in thousands):
For capital
To be well‐
capitalized under
prompt corrective
Actual
adequacy purposes
action provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2012:
Total Capital
(to Risk‐Weighted Assets)
$
23,999
22.2%
$
8,644
Tier I Capital
(to Risk‐Weighted Assets)
$
22,634
20.9%
$
4,322
Tier I Capital
(to Average Assets)
$
22,634
10.8%
$
8,349
December 31, 2011:
Total Capital
(to Risk‐Weighted Assets)
$
18,797
19.5%
$
7,695
Tier I Capital
(to Risk‐Weighted Assets)
$
17,574
18.3%
$
3,848
Tier I Capital
(to Average Assets)
$
17,574
10.2%
$
6,909
>
>
>
>
>
>
8.0%
$
10,805
> 10.0%
4.0%
$
6,483
4.0%
$
10,436
>
>
6.0%
5.0%
8.0%
$
9,619
> 10.0%
4.0%
$
5,771
4.0%
$
8,636
>
>
6.0%
5.0%
The California Financial Code provides that a bank may not make a cash distribution to its shareholders in
excess of the lessor of the bank’s undivided profits or the bank’s net income for its last three fiscal years less
any distributions made to shareholders during the same period without the approval in advance of the
Commissioner of the California Department of Financial Institutions. Pursuant to the terms of the Bank’s
participation in the Troubled Assets Relief Program (TARP) Capital Purchase Program (see Note 16), the
Bank’s ability to declare or pay dividends on any of their shares is limited by the U.S. Treasury. See Note 10
for payment of dividends on the preferred stock related to the Bank’s participation in the TARP Capital
Purchase Program. The Bank redeemed the preferred shares that were part of the TARP Capital Purchase
Program (see Note 16). With the redemption of the preferred shares from the U.S. Treasury, the Bank
concluded its participation in the TARP Capital Purchase Program.
NOTE 14 – FAIR VALUE MEASUREMENT
The following is a description of valuation methodologies used for assets and liabilities recorded at fair
value:
Securities
–
The fair values of securities available‐for‐sale are determined by obtaining quoted prices on
nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique
used widely in the industry to value debt securities without relying exclusively on quoted prices for specific
securities, but rather by relying on the securities’ relationship to other benchmark securities (Level 2).
Collateral‐dependent impaired loans
–
The Bank does not record loans at fair value on a recurring basis.
However, from time to time, fair value adjustments are recorded on these loans to reflect: (1) partial write‐
downs, through charge offs or specific reserve allowances, that are based on the current appraised or
market‐quoted value of the underlying collateral or (2) the full charge off of the loan carrying value. In some
cases, the properties for which market quotes or appraisal values have been obtained are located in areas
where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral‐
dependent impaired loans are obtained from real estate brokers or other third‐party consultants (Level 3).
Other real estate owned –
arrive at the estimate of fair value for all other real estate owned (Level 3).
The Bank utilizes current appraisals discounted for estimated selling costs to
36
38
37
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 13 – REGULATORY MATTERS (CONTINUED)
The California Financial Code provides that a bank may not make a cash distribution to its shareholders in
excess of the lessor of the bank’s undivided profits or the bank’s net income for its last three fiscal years less
any distributions made to shareholders during the same period without the approval in advance of the
Commissioner of the California Department of Financial Institutions. Pursuant to the terms of the Bank’s
participation in the Troubled Assets Relief Program (TARP) Capital Purchase Program (see Note 16), the
Bank’s ability to declare or pay dividends on any of their shares is limited by the U.S. Treasury. See Note 10
for payment of dividends on the preferred stock related to the Bank’s participation in the TARP Capital
Purchase Program. The Bank redeemed the preferred shares that were part of the TARP Capital Purchase
Program (see Note 16). With the redemption of the preferred shares from the U.S. Treasury, the Bank
concluded its participation in the TARP Capital Purchase Program.
NOTE 14 – FAIR VALUE MEASUREMENT
The following is a description of valuation methodologies used for assets and liabilities recorded at fair
value:
Securities
–
The fair values of securities available‐for‐sale are determined by obtaining quoted prices on
nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique
used widely in the industry to value debt securities without relying exclusively on quoted prices for specific
securities, but rather by relying on the securities’ relationship to other benchmark securities (Level 2).
Collateral‐dependent impaired loans
–
The Bank does not record loans at fair value on a recurring basis.
However, from time to time, fair value adjustments are recorded on these loans to reflect: (1) partial write‐
downs, through charge offs or specific reserve allowances, that are based on the current appraised or
market‐quoted value of the underlying collateral or (2) the full charge off of the loan carrying value. In some
cases, the properties for which market quotes or appraisal values have been obtained are located in areas
where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral‐
dependent impaired loans are obtained from real estate brokers or other third‐party consultants (Level 3).
Other real estate owned –
arrive at the estimate of fair value for all other real estate owned (Level 3).
The Bank utilizes current appraisals discounted for estimated selling costs to
37
39
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 14 – FAIR VALUE MEASUREMENT (CONTINUED)
The following table summarizes the Bank’s assets that were measured at fair value on a recurring and non‐
recurring basis at December 31, 2012:
Quoted Prices
in
Significant
Active Markets
Other
Significant
for Identical
Observable
Unobservable
Assets
Inputs
Inputs
Description of Assets
2012
(Level 1)
(Level 2)
(Level 3)
December 31,
Securities available‐for‐sale (recurring)
U.S. government and
agency securities
Mortgage‐backed securities
State and municipal agencies
Corporate debt securities
Other real estate owned (non‐recurring)
$
35,725,909
$
‐
$
35,725,909
13,111,705
11,061,334
4,022,750
2,223,493
‐
‐
‐
‐
13,111,705
11,061,334
4,022,750
$
‐
‐
‐
‐
‐
2,223,493
Total
$
66,145,191
$
‐
$
63,921,698
$
2,223,493
The following table summarizes the Bank’s assets that were measured at fair value on a recurring and non‐
recurring basis at December 31, 2011:
Quoted Prices
in
Significant
Active Markets
Other
Significant
for Identical
Observable
Unobservable
Assets
Inputs
Inputs
Description of Assets
2011
(Level 1)
(Level 2)
(Level 3)
December 31,
Securities available‐for‐sale (recurring)
U.S. government and
agency securities
Mortgage‐backed securities
State and municipal agencies
Corporate debt securities
Impaired loans (non‐recurring)
$
44,304,490
$
‐
$
44,304,490
8,742,946
1,095,246
2,266,449
745,875
‐
‐
‐
‐
8,742,946
1,095,246
2,266,449
$
‐
‐
‐
‐
‐
745,875
Total
$
57,155,006
$
‐
$
56,409,131
$
745,875
38
40
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 15 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in
a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates
are made at a specific point in time based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount that could result from offering
for sale at one time the entire holdings of a particular financial instrument. Because no market value exists
for a significant portion of the financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters
of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates are based on financial instruments both on and off the balance sheet without
attempting to estimate the value of anticipated future business and the value of assets and liabilities that are
not considered financial instruments. Additionally, tax consequences related to the realization of the
unrealized gains and losses can have a potential effect on fair value estimates and have not been considered
in many of the estimates.
The following methods and assumptions were used by the Bank in estimating fair values of financial
instruments:
Financial assets
–
The carrying amounts of cash, short‐term investments, due from customers on
acceptances, and bank acceptances outstanding are considered to approximate fair value. Short‐term
investments include federal funds sold, securities purchased under agreements to resell, and interest
bearing deposits with banks. The fair values of investment securities, including available for sale and held to
maturity, are generally based on quoted market prices. The fair value of variable loans that reprice
frequently and that have experienced no significant change in credit risk is based on carrying values. The fair
values for all other loans are estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers with similar credit quality. Loans are generally
expected to be held to maturity and any unrealized gains or losses are not expected to be realized. Fair value
for Federal Home Loan Bank stock and interest receivable approximates its carrying value.
Financial liabilities
–
The carrying amounts of deposit liabilities payable on demands, commercial paper,
and other borrowed funds are considered to approximate fair value. For fixed maturity deposits, fair value is
estimated by discounting estimated future cash flows using currently offered rates for deposits of similar
remaining maturities. The fair value of interest payable approximates its carrying amount.
39
41
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 15 – FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Off‐balance sheet financial instruments
–
The fair value of commitments to extend credit and standby
letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the credit standing of the counterparties.
The estimated fair value of financial instruments at December 31 is summarized as follows (in thousands):
Financial assets:
Carrying
Amount
2012
Estimated
Fair Value
Fair Value
Hierarchy
Carrying
Amount
2011
Estimated
Fair Value
Fair Value
Hierarchy
Cash and cash equivalents
Securities available‐for‐sale
Loans, net
Federal Home Loan Bank stock
Interest receivable
Financial liabilities:
$
32,858
63,922
106,465
942
886
$
32,858
63,922
111,282
942
886
Level 1
Level 2
Level 3
Level 2
Level 2
$
19,664
56,409
97,349
781
724
$
19,664
56,409
101,533
781
724
Level 1
Level 2
Level 3
Level 2
Level 2
Deposits
Interest payable
Off‐balance‐sheet liabilities:
186,447
31
186,860
31
Level 2
Level 2
158,774
35
159,218
35
Level 2
Level 2
Commitments to extend credit
and letters of credit
‐
308
Level 3
‐
214
Level 3
NOTE 16 – PREFERRED STOCK
On January 23, 2009, the Bank, in connection with the Troubled Assets Relief Program (TARP) Capital
Purchase Program, entered into a Purchase Agreement with the United States Department of the Treasury
(the Treasury), pursuant to which the Bank issued 1,968 shares of the Bank’s Preferred Stock as Fixed Rate
Non‐cumulative Perpetual Preferred Stock, Series A (the Series A Preferred Stock) and 98 shares of Fixed
Rate Non‐cumulative Perpetual Warrant Preferred Stock, Series B (the Series B Preferred Stock) for an
aggregate purchase price of $1,968,000 in cash. Series A Preferred Stock pays non‐cumulative dividends at a
rate of 5% per annum for the first five years and 9% per annum thereafter. Series B Preferred Stock pays
non‐cumulative dividends at a rate of 9% per annum. In November 2012, the Bank redeemed 1,968 shares
of Series A Preferred Stock for $1,000 per share and 98 shares of Series B Preferred Stock for $1,000 per
share from the U.S Treasury. The total redemption price was $2,066,000. With the redemption of all
outstanding shares of its Series A and Series B Preferred Stocks from the U.S. Treasury, the Bank concluded
its participation in the TARP Capital Purchase Program (see Note 13).
40
42
FRESNO FIRST BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 16 – PREFERRED STOCK (CONTINUED)
During 2012, the Bank issued 61,000 shares of Series C mandatorily convertible non‐cumulative perpetual
Preferred Stock at a price of $100.00 per share. Series C Preferred Stock pays non‐cumulative dividends at
5% per annum and is mandatorily convertible to shares of common stock at a conversion price of $10.00 per
share the day after the third anniversary of the issuance of the Series C Preferred Stock. This will result in
the receipt of 10 shares of common stock for each share of Series C Preferred Stock. Prior to that time, the
Series C Preferred Stock is convertible into the Bank’s common stock at the election of the holder at the
same $10.00 per share conversion price. In the event of a stock split, reverse stock split, stock dividend,
reorganization, or recapitalization affecting the number of shareholders of the common stock outstanding,
the conversion ratio shall be proportionately revised to preserve the conversion rights of the Series C
Preferred Stock. Offering costs associated with this capital campaign totaled $384,962. Total proceeds, net of
related offering costs, totaled $5,715,038.
NOTE 17 – SUBSEQUENT EVENTS
The Bank has evaluated the effects of subsequent events that have occurred after the period ending
December 31, 2012 and through March 15, 2013, which is the date the financial statements were issued.
41
43
Corporate Information
Annual Meeting of Shareholders
Tuesday, June 18, 2013 at 5:30 pm
Fort Washington Country Club
10272 N. Millbrook
Fresno, CA 93730
Corporate Office:
Fresno First Bank
7690 N. Palm Avenue, Suite 101
Fresno, CA 93711
559.439.0200
Transfer Agent:
Continental Stock Transfer & Trust Co.
17 Battery Place
New York, NY
212.509.4000
Independent Auditors:
Moss Adams, LLP
3121 West March Lane, Suite 100
Stockton, CA 95219
209.955.6100
Legal Counsel:
Stuart & Moore
641 Higuera Street, Suite 302
San Luis Obispo, CA 93401
805.545.8590
Stock Facilitators:
Michael Natzic - Crowell, Weedon & Co
800.288.2811
Gray Medlin – Monroe Securities
415.321.3388
Joey Warmerhoven – McAdams Wright Ragen Inc.
866.662.0351
Tom Weil – RBC Dain Rauscher
888.883.8207
Robert Cook - Fig Partners, LLC
866.344.2657
7690 N. Palm Avenue, Fresno, California 93711
559.439.0200
WWW.FRESNOFIRSTBANK.COM