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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED March 31, 2011

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                        TO                       

 

COMMISSION FILE NUMBER: 000—31977

 

CENTRAL VALLEY COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)

 

California

 

77-0539125

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

7100 N. Financial Dr, Suite 101, Fresno, California

 

93720

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number (559) 298-1775

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  x

 

As of April 30, 2011 there were 9,500,016 shares of the registrant’s common stock outstanding.

 

 

 



Table of Contents

 

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

 

2011 QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

PART 1: FINANCIAL INFORMATION

 

3

 

 

 

ITEM 1: FINANCIAL STATEMENTS

 

3

 

 

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

25

 

 

 

ITEM 4: CONTROLS AND PROCEDURES

 

43

 

 

 

PART II: OTHER INFORMATION

 

44

 

 

 

ITEM 1: LEGAL PROCEEDINGS

 

44

 

 

 

ITEM 1A: RISK FACTORS

 

44

 

 

 

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

 

44

`

 

 

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

 

44

 

 

 

ITEM 4: REMOVED AND RESERVED

 

44

 

 

 

ITEM 5: OTHER INFORMATION

 

44

 

 

 

ITEM 6: EXHIBITS

 

44

 

 

 

SIGNATURES

 

45

 

2



Table of Contents

 

PART 1: FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS

 

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share amounts)

 

March 31, 2011

 

December 31, 2010

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

15,274

 

$

11,357

 

Interest-earning deposits in other banks

 

68,296

 

89,042

 

Federal funds sold

 

861

 

600

 

Total cash and cash equivalents

 

84,431

 

100,999

 

Available-for-sale investment securities (Amortized cost of $205,605 at March 31, 2011 and $189,682 at December 31, 2010)

 

207,403

 

191,325

 

Loans, less allowance for credit losses of $11,019 at March 31, 2011 and $11,014 at December 31, 2010

 

411,023

 

420,583

 

Bank premises and equipment, net

 

5,591

 

5,843

 

Other real estate owned

 

257

 

1,325

 

Bank owned life insurance

 

11,487

 

11,390

 

Federal Home Loan Bank stock

 

3,050

 

3,050

 

Goodwill

 

23,577

 

23,577

 

Core deposit intangibles

 

1,094

 

1,198

 

Accrued interest receivable and other assets

 

18,777

 

18,304

 

Total assets

 

$

766,690

 

$

777,594

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing

 

$

165,753

 

$

173,867

 

Interest bearing

 

478,424

 

476,628

 

Total deposits

 

644,177

 

650,495

 

Short-term borrowings

 

 

10,000

 

Long-term debt

 

4,000

 

4,000

 

Junior subordinated deferrable interest debentures

 

5,155

 

5,155

 

Accrued interest payable and other liabilities

 

13,815

 

10,553

 

Total liabilities

 

667,147

 

680,203

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, no par value, $1,000 per share liquidation preference; 10,000,000 shares authorized; Series A, no par value, 7,000 issued and outstanding

 

6,875

 

6,864

 

Common stock, no par value; 80,000,000 authorized; issued and outstanding 9,232,654 at March 31, 2011 and 9,109,154 at December 31, 2010

 

38,987

 

38,428

 

Non-voting common stock, 1,000,000 authorized; issued and outstanding 258,862 at March 31, 2011 and at December 31, 2010

 

1,317

 

1,317

 

Retained earnings

 

51,306

 

49,815

 

Accumulated other comprehensive income, net of tax

 

1,058

 

967

 

Total shareholders’ equity

 

99,543

 

97,391

 

Total liabilities and shareholders’ equity

 

$

766,690

 

$

777,594

 

 

See notes to unaudited consolidated financial statements.

 

3



Table of Contents

 

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

For the Three Months

 

 

 

Ended March 31,

 

(In thousands, except earnings per share amounts) 

 

2011

 

2010

 

INTEREST INCOME:

 

 

 

 

 

Interest and fees on loans

 

$

6,462

 

$

6,778

 

Interest on deposits in other banks

 

50

 

23

 

Interest on Federal funds sold

 

1

 

 

Interest and dividends on investment securities:

 

 

 

 

 

Taxable

 

1,097

 

1,630

 

Exempt from Federal income taxes

 

800

 

757

 

Total interest income

 

8,410

 

9,188

 

INTEREST EXPENSE:

 

 

 

 

 

Interest on deposits

 

717

 

1,053

 

Interest on junior subordinated deferrable interest debentures

 

25

 

23

 

Other

 

70

 

126

 

Total interest expense

 

812

 

1,202

 

Net interest income before provision for credit losses

 

7,598

 

7,986

 

PROVISION FOR CREDIT LOSSES

 

100

 

600

 

Net interest income after provision for credit losses

 

7,498

 

7,386

 

NON-INTEREST INCOME:

 

 

 

 

 

Service charges

 

699

 

861

 

Appreciation in cash surrender value of bank owned life insurance

 

97

 

97

 

Loan placement fees

 

57

 

28

 

Gain on sale of other real estate owned

 

545

 

 

Net realized (loss) gains on sales and calls of investment securities

 

(16

)

21

 

Total impairment on investment securities

 

23

 

 

Decrease in fair value recognized in other comprehensive income

 

(54

)

 

Net impairment loss recognized in earnings

 

(31

)

 

Federal Home Loan Bank dividends

 

2

 

2

 

Other income

 

395

 

325

 

Total non-interest income

 

1,748

 

1,334

 

NON-INTEREST EXPENSES:

 

 

 

 

 

Salaries and employee benefits

 

4,078

 

3,747

 

Occupancy and equipment

 

934

 

926

 

Regulatory assessments

 

289

 

300

 

Data processing expense

 

276

 

286

 

Advertising

 

184

 

192

 

Audit and accounting fees

 

112

 

114

 

Legal fees

 

93

 

122

 

Other real estate owned

 

9

 

314

 

Amortization of core deposit intangibles

 

104

 

104

 

Other expense

 

1,074

 

1,099

 

Total non-interest expenses

 

7,153

 

7,204

 

Income before provision for income taxes

 

2,093

 

1,516

 

PROVISION FOR INCOME TAXES

 

505

 

224

 

Net income

 

$

1,588

 

$

1,292

 

 

 

 

 

 

 

Net income

 

$

1,588

 

$

1,292

 

Preferred stock dividends and accretion

 

99

 

99

 

Net income available to common shareholders

 

$

1,489

 

$

1,193

 

Net income per common share:

 

 

 

 

 

Basic earnings per common share

 

$

0.16

 

$

0.13

 

Weighted average common shares used in basic computation

 

9,475,444

 

8,969,687

 

Diluted earnings per common share

 

$

0.16

 

$

0.13

 

Weighted average common shares used in diluted computation

 

9,503,313

 

9,082,070

 

 

See notes to unaudited consolidated financial statements.

 

4



Table of Contents

 

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

 

 

 

For the Three Months
Ended March 31,

 

 

 

2011

 

2010

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

1,588

 

$

1,292

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Net increase (decrease) in deferred loan fees

 

135

 

(1

)

Depreciation

 

309

 

323

 

Accretion

 

(186

)

(369

)

Amortization

 

710

 

474

 

Stock-based compensation

 

50

 

56

 

Tax benefit from exercise of stock options

 

(81

)

(2

)

Provision for credit losses

 

100

 

600

 

Net other than temporary impairment losses on investment securities

 

31

 

 

Net realized losses (gains) on sales and calls of available-for-sale investment securities

 

16

 

(21

)

Net loss on sale and disposal of equipment

 

 

(5

)

Net gain on sale of other real estate owned

 

(545

)

 

Write down of other real estate owned and other property

 

 

283

 

Increase in bank owned life insurance, net of expenses

 

(97

)

(97

)

Net (increase) decrease in accrued interest receivable and other assets

 

(698

)

677

 

Net decrease in prepaid FDIC assessments

 

252

 

226

 

Net increase (decrease) in accrued interest payable and other liabilities

 

3,096

 

(50

)

Provision for deferred income taxes

 

(9

)

(876

)

Net cash provided by operating activities

 

4,671

 

2,510

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of available-for-sale investment securities

 

(25,383

)

(3,010

)

Proceeds from sales or calls of available-for-sale investment securities

 

594

 

3,183

 

Proceeds from maturity and principal repayments of available-for-sale investment securities

 

8,398

 

6,998

 

Net decrease in loans

 

9,230

 

7,113

 

Proceeds from sale of other real estate owned

 

1,876

 

 

Purchases of premises and equipment

 

(57

)

(39

)

Proceeds from sale of premises and equipment

 

 

5

 

Net cash (used in) provided by investing activities

 

(5,342

)

14,250

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net (decrease) increase in demand, interest bearing and savings deposits

 

(1,339

)

11,202

 

Net decrease in time deposits

 

(4,979

)

(15,076

)

Repayments of short-term borrowings to Federal Home Loan Bank

 

(10,000

)

(5,000

)

Proceeds from exercise of stock options

 

428

 

444

 

Tax benefit from exercise of stock options

 

81

 

2

 

Cash paid for preferred stock dividends

 

(88

)

(88

)

Net cash used in financing activities

 

(15,897

)

(8,516

)

(Decrease) increase in cash and cash equivalents

 

(16,568

)

8,244

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

100,999

 

48,680

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

84,431

 

$

56,924

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest

 

$

959

 

$

1,414

 

Income taxes

 

$

385

 

$

 

Non-Cash Investing Activities:

 

 

 

 

 

Net pre-tax change in unrealized gain on available-for-sale investment securities

 

$

155

 

$

2,051

 

Non-Cash Financing Activities:

 

 

 

 

 

Transfer of loans to other real estate owned

 

$

95

 

$

 

Accrued preferred stock dividends

 

$

44

 

$

44

 

 

See notes to unaudited consolidated financial statements.

 

5



Table of Contents

 

CENTRAL VALLEY COMMUNITY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.  Basis of Presentation

 

The interim unaudited consolidated financial statements of Central Valley Community Bancorp and subsidiary have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). These interim consolidated financial statements include the accounts of Central Valley Community Bancorp and its wholly owned subsidiary Central Valley Community Bank (the Bank) (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation.  Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The Company believes that the disclosures are adequate to make the information presented not misleading. These interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2010 Annual Report to Shareholders on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position at March 31, 2011 and December 31, 2010, and the results of its operations for the three month interim periods ended March 31, 2011 and March 31, 2010 and its cash flows for the three month interim periods ended March 31, 2011 and March 31, 2010 have been included. Certain reclassifications have been made to prior year amounts to conform to the 2011 presentation. The results of operations for interim periods are not necessarily indicative of results for the full year.

 

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.

 

Recent Accounting Pronouncements

 

Determination of Whether a Restructuring is a Troubled Debt Restructuring

 

In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.  This ASU provides for a more consistent application of the accounting guidance for troubled debt restructurings.  This ASU clarified guidance on a creditor’s evaluation of whether it has granted a concession to a borrower, and clarified guidance to determine if a borrower is experiencing financial difficulties.  This ASU also finalized the disclosures required in a creditor’s financial statements related to troubled debt restructurings.  This standard is effective for interim or annual periods beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption.  Early adoption is permitted.  Management does not expect the adoption of this standard will have a significant impact on the Company’s financial position, results of operations or cash flows.

 

Impact of New Financial Accounting Standards

 

Fair Value Measurements and Disclosures

 

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (“Topic 820”): Improving Disclosures about Fair Value Measurements (“ASU 10-06”). ASU 10-06 revises two disclosure requirements concerning fair value measurements and clarifies two others. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements.  The Company’s disclosures about fair value measurements are presented in Note 5: Fair Value Measurements.  These new disclosure requirements were adopted by the Company in the first quarter of 2010, and they did not have a material impact on the Company’s financial position, results of operations, cash flows, or disclosures.

 

6



Table of Contents

 

Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses

 

In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This standard expands disclosures about credit quality of financing receivables and the allowance for loan losses. The standard will require the Company to expand disclosures about the credit quality of our loans and the related reserves against them. The extra disclosures will include disaggregated matters related to our past due loans, credit quality indicators, and modifications of loans. The Company adopted the provisions of this standard on January 1, 2011, and they did not have a material impact on the Company’s financial position or results of operations.

 

Business Combinations

 

In December 2010, FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations.  This ASU reflects the decision reached in EITF Issue No. 10-G. The amendments in this ASU affect any public entity as defined by Topic 805, Business Combinations that enters into business combinations that are material on an individual or aggregate basis.  The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.  The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted this standard on January 1, 2011, and it did not have a material impact on the Company’s financial position or results of operations.

 

Note 2.  Share-Based Compensation

 

For the three month periods ended March 31, 2011 and 2010, the compensation cost recognized for stock option compensation was $50,000 and $56,000, respectively.  The recognized tax benefit for stock option compensation expense was $9,000 and $13,000, for the three month periods ended March 31, 2011 and 2010, respectively.

 

The Company bases the fair value of the options granted on the date of grant using a Black-Scholes Merton option pricing model that uses assumptions based on expected option life and the level of estimated forfeitures, expected stock volatility, risk free interest rate, and dividend yield.  The expected term of the Company’s option s was determined under the applicable guidance for estimating expected term of options.  Stock volatility is based on the historical volatility of the Company’s stock.  The risk-free rate is based on the U. S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of grant.  The compensation cost for options granted is based on the weighted average grant date fair value per share.

 

No options to purchase shares of the Company’s common stock were issued in the first quarters of 2011 or 2010 from any of the Company’s stock based compensation plans.

 

A summary of the combined activity of the Company’s Stock Based Compensation Plans for the three month period ended March 31, 2011 follows:

 

 

 

Shares

 

Weighted
Average
Exercise Price

 

Weighted
Average
Remaining
Contractual
Term (Years)

 

Aggregate
Intrinsic Value

 

Options outstanding at January 1, 2011

 

707,129

 

 

 

 

 

 

 

Options exercised

 

(123,500

)

$

3.46

 

 

 

 

 

Options canceled

 

(8,750

)

$

6.40

 

 

 

 

 

Options outstanding at March 31, 2011

 

574,879

 

$

8.15

 

4.26

 

$

179

 

 

 

 

 

 

 

 

 

 

 

 

 

Options vested or expected to vest at March 31, 2011

 

554,224

 

$

8.22

 

5.90

 

$

174

 

Options exercisable March 31, 2011

 

447,491

 

$

8.75

 

3.11

 

$

141

 

 

No options were granted during the three month periods ended March 31, 2011 or 2010.

 

The total intrinsic value of 123,500 options exercised in the three months ended March 31, 2011 was $296,000.

 

Cash received from options exercised for the three months ended March 31, 2011 was $428,000.  The actual tax benefit realized for the tax deductions from options exercised totaled $81,000 for three months ended March 31, 2011.

 

As of March 31, 2011, there was $340,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all plans.  The cost is expected to be recognized over a weighted average period of 2.9 years.

 

7



Table of Contents

 

Note 3. Earnings per share

 

Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options or warrants, stock appreciation rights settled in stock or restricted stock awards, result in the issuance of common stock which shares in the earnings of the Company.  There was no difference in the net income used in the calculation of basic earnings per share and diluted earnings per share for the three month periods ended March 31, 2011 or 2010.

 

A reconciliation of the numerators and denominators of the basic and diluted EPS computations is as follows:

 

Basic Earnings Per Share

 

Three Months Ended
March 31,

 

In thousands (except share and per share amounts)

 

2011

 

2010

 

Net income

 

$

1,588

 

$

1,292

 

Less: Preferred stock dividends and accretion

 

99

 

99

 

Income available to common shareholders

 

$

1,489

 

$

1,193

 

Weighted average shares outstanding

 

9,475,444

 

8,969,687

 

Net income per common share

 

$

0.16

 

$

0.13

 

 

Diluted Earnings Per Share

 

Three Months Ended
March 31,

 

In thousands (except share and per share amounts)

 

2011

 

2010

 

Net income

 

$

1,588

 

$

1,292

 

Less: Preferred stock dividends and accretion

 

99

 

99

 

Income available to common shareholders

 

$

1,489

 

$

1,193

 

Weighted average shares outstanding

 

9,475,444

 

8,969,687

 

Effect of dilutive stock options

 

27,869

 

112,383

 

Weighted average shares of common stock and common stock equivalents

 

9,503,313

 

9,082,070

 

Net income per diluted common share

 

$

0.16

 

$

0.13

 

 

Note 4.  Investments

 

The investment portfolio consists primarily of agency securities, mortgage backed securities, and municipal securities all of which are classified available-for-sale.  As of March 31, 2011, $128,118,000 was held as collateral for borrowing arrangements, public funds, and for other purposes.

 

The fair value of the available-for-sale investment portfolio reflected an unrealized gain of $1,798,000 at March 31, 2011 compared to an unrealized gain of $1,643,000 at December 31, 2010.

 

The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands):

 

 

 

March 31, 2011

 

 

 

Amortized Cost

 

Gross
Unrealized

Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

Available-for-Sale Securities

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

175

 

$

5

 

$

 

$

180

 

Obligations of states and political subdivisions

 

76,475

 

2,673

 

(1,115

)

78,033

 

U.S. Government agencies collateralized by mortgage obligations

 

103,831

 

1,649

 

(648

)

104,832

 

Other collateralized mortgage obligations

 

17,528

 

539

 

(1,355

)

16,712

 

Other equity securities

 

7,596

 

50

 

 

7,646

 

 

 

$

205,605

 

$

4,916

 

$

(3,118

)

$

207,403

 

 

 

 

December 31, 2010

 

 

 

Amortized Cost

 

Gross
Unrealized

Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

Available-for-Sale Securities

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

190

 

$

5

 

$

 

$

195

 

Obligations of states and political subdivisions

 

74,598

 

1,884

 

(1,432

)

75,050

 

U.S. Government agencies collateralized by mortgage obligations

 

88,105

 

2,092

 

(120

)

90,077

 

Other collateralized mortgage obligations

 

18,661

 

506

 

(1,329

)

17,838

 

Corporate debt securities

 

500

 

4

 

 

504

 

Other equity securities

 

7,628

 

33

 

 

7,661

 

 

 

$

189,682

 

$

4,524

 

$

(2,881

)

$

191,325

 

 

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Table of Contents

 

Investment securities with unrealized losses as of the dates indicated are summarized and classified according to the duration of the loss period as follows (in thousands):

 

 

 

March 31, 2011

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Available-for-Sale Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

$

16,516

 

$

(570

)

$

3,185

 

$

(545

)

$

19,701

 

$

(1,115

)

U.S. Government agencies collateralized by mortgage obligations

 

27,468

 

(648

)

 

 

27,468

 

(648

)

Other collateralized mortgage obligations

 

 

 

9,416

 

(1,355

)

9,416

 

(1,355

)

 

 

$

43,984

 

$

(1,218

)

$

12,601

 

$

(1,900

)

$

56,585

 

$

(3,118

)

 

 

 

December 31, 2010

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Available-for-Sale Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

$

24,782

 

$

(904

)

$

3,168

 

$

(528

)

$

27,950

 

$

(1,432

)

U.S. Government agencies collateralized by mortgage obligations

 

9,131

 

(120

)

 

 

9,131

 

(120

)

Other collateralized mortgage obligations

 

286

 

(2

)

10,136

 

(1,327

)

10,422

 

(1,329

)

 

 

$

34,199

 

$

(1,026

)

$

13,304

 

$

(1,855

)

$

47,503

 

$

(2,881

)

 

As of March 31, 2011, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all available-for-sale investment securities with an unrealized loss at March 31, 2011 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at March 31, 2011 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000.  In addition, management reviewed all private label residential mortgage backed securities (PLRMBS) at March 31, 2011.

 

For those bonds that met the evaluation criteria management obtained and reviewed the most recently published national credit ratings for those bonds.  For those bonds that were municipal debt securities with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded that no credit related impairment existed.

 

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Table of Contents

 

The evaluation for PLRMBS also includes estimating projected cash flows that the Company is likely to collect based on an assessment of all available information about the applicable security on an individual basis, the structure of the security, and certain assumptions, such as the remaining payment terms for the security, prepayment speeds, default rates, loss severity on the collateral supporting the security based on underlying loan-level borrower and loan characteristics, expected housing price changes, and interest rate assumptions, to determine whether the Company will recover the entire amortized cost basis of the security.  In performing a detailed cash flow analysis, the Company identified the best estimate of the cash flows expected to be collected.  If this estimate results in a present value of expected cash flows (discounted at the security’s effective yield) that is less than the amortized cost basis of the security, an OTTI is considered to have occurred.

 

To assess whether it expects to recover the entire amortized cost basis of its PLRMBS, the Company performed a cash flow analysis for all of its PLRMBS as of March 31, 2011.  In performing the cash flow analysis for each security, the Company uses a third-party model. The model considers borrower characteristics and the particular attributes of the loans underlying the Company’s securities, in conjunction with assumptions about future changes in home prices and other assumptions, to project prepayments, default rates, and loss severities.

 

The month-by-month projections of future loan performance are allocated to the various security classes in each securitization structure in accordance with the structure’s prescribed cash flow and loss allocation rules.  When the credit enhancement for the senior securities in a securitization is derived from the presence of subordinated securities, losses are allocated first to the subordinated securities until their principal balance is reduced to zero.  The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations.  The scenario of cash flows determined based on the model approach described above reflects a best-estimate scenario.

 

At each quarter end, the Company compares the present value of the cash flows expected to be collected on its PLRMBS to the amortized cost basis of the securities to determine whether a credit loss exists.

 

The unrealized losses associated with private residential PLRMBS are primarily driven by higher projected collateral losses, wider credit spreads, and changes in interest rates.  The Company assesses for credit impairment using a discounted cash flow model.  The key assumptions include default rates, severities, discount rates and prepayment rates.  Losses are estimated to a security by forecasting the underlying mortgage loans in each transaction.  The forecasted loan performance is used to project cash flows to the various tranches in the structure.  Based upon management’s assessment of the expected credit losses of the security given the performance of the underlying collateral compared with our credit enhancement (which occurs as a result of credit loss protection provided by subordinated tranches), the Company expects to recover the entire amortized cost basis of these securities, with the exception of certain securities for which OTTI was recorded.

 

U.S. Government Agencies

 

At March 31, 2011, the Company held one U.S. Government agency security and it was not in a loss position.

 

Obligations of States and Political Subdivisions

 

At March 31, 2011, the Company held 163 obligations of states and political subdivision securities of which 36 were in a loss position for less than 12 months and seven were in a loss position and have been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

 

U.S. Government Agencies Collateralized by Mortgage Obligations

 

At March 31, 2011, the Company held 140 U.S. Government agency securities collateralized by mortgage obligation securities of which 15 were in a loss position for less than 12 months. The unrealized losses on the Company’s investments in U.S. government agencies collateralized by mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

 

Other Collateralized Mortgage Obligations

 

At March 31, 2011, the Company had a total of 36 PLRMBS with a remaining principal balance of $17,528,000 and a net unrealized loss of approximately $816,000.  Eight of these securities account for $1,355,000 of the unrealized loss at March 31, 2011 offset by 28 of these securities with gains totaling $539,000.  11 of these PLRMBS with a remaining principal balance of $11,084,000 had credit ratings below investment grade.  The Company continues to perform extensive analyses on these securities as well as all whole loan CMOs.

 

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Table of Contents

 

Several of these investment securities continue to demonstrate cash flows and credit support as expected and the expected cash flows of the security discounted at the security’s effective yield are greater than the book value of the security, therefore management does not consider these securities to be other than temporarily impaired.   No OTTI charges related to PLRMBS were recorded during the first quarter of 2011.

 

Investment securities as of March 31, 2011 with credit ratings below investment grade are summarized in the table below (dollars in thousands):

 

Description 

 

Book
Value

 

Market Value

 

Unrealized
Gain
(Loss)

 

Rating

 

Agency

 

12 Month
Historical
Prepayment
Rates %

 

Projected
Default
Rates %

 

Projected
Severity
Rates %

 

Original
Purchase
Price %

 

Current
Credit
Enhancement
%

 

PHHAM

 

$

2,786

 

$

2,516

 

$

(270

)

C

 

Fitch

 

13.56

 

24.29

 

60.00

 

97.25

 

2.70

 

RAST

 

2,107

 

1,990

 

(117

)

D

 

Fitch

 

14.61

 

25.09

 

76.95

 

98.50

 

-0.49

 

CWALT 1

 

842

 

696

 

(146

)

C

 

Fitch

 

10.02

 

28.21

 

68.21

 

100.73

 

6.18

 

CWALT 2

 

387

 

292

 

(95

)

C

 

Fitch

 

9.79

 

30.49

 

42.04

 

101.38

 

4.95

 

CWALT 3

 

1,715

 

1,437

 

(278

)

CCC

 

S&P

 

10.69

 

26.05

 

71.13

 

100.25

 

9.75

 

FHAMS

 

2,432

 

2,111

 

(321

)

C

 

Fitch

 

11.74

 

21.23

 

66.74

 

95.00

 

1.12

 

CMFG

 

220

 

222

 

2

 

CC

 

Fitch

 

21.02

 

20.81

 

45.00

 

93.25

 

3.91

 

CWHL

 

21

 

22

 

1

 

BB-

 

S&P

 

20.22

 

12.98

 

29.33

 

97.42

 

7.14

 

BAALT

 

172

 

127

 

(45

)

CCC

 

Fitch

 

7.90

 

10.41

 

60.00

 

97.24

 

5.25

 

ABFS

 

331

 

246

 

(85

)

D

 

S&P

 

6.70

 

25.0

 

75.00

 

97.46

 

0.00

 

CONHE

 

71

 

79

 

8

 

B3

 

Moodys

 

2.90

 

10.00

 

60.00

 

86.39

 

0.064

 

TOTALS

 

$

11,084

 

$

9,738

 

$

(1,346

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following tables provide a roll forward for the three month periods ended March 31, 2011 and 2010 of investment securities credit losses recorded in earnings. The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods.  Additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred on securities for which OTTI credit losses have been previously recognized.

 

(Dollars in thousands)

 

For the Three
Months
Ended March
31, 2011

 

For the Three
Months
Ended March
31, 2010

 

Beginning balance

 

$

1,387

 

$

300

 

Amounts related to credit loss for which an OTTI charge was not previously recognized

 

31

 

 

Increases to the amount related to credit loss for which OTTI was previously recognized

 

 

 

Realized losses for securities sold

 

 

(300

)

Ending balance

 

$

1,418

 

$

 

 

Other Equity Securities

 

At March 31, 2011, the Company had a total of two mutual fund equity investments, one of which had been in an unrealized loss position for more than 12 months.  Based on management’s evaluation of the nature of the decline in net asset value on this mutual fund, the Company recorded an OTTI charge of $31,000 during the three month period ended March 31, 2011.

 

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Table of Contents

 

The amortized cost and estimated fair value of investment securities at March 31, 2011 and December 31, 2010 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

March 31, 2011 (in thousands)

 

Amortized Cost

 

Estimated Fair
Value

 

 

 

 

 

 

 

Within one year

 

$

175

 

$

180

 

After one year through five years

 

7,030

 

7,586

 

After five years through ten years

 

18,513

 

18,885

 

After ten years

 

50,932

 

51,562

 

 

 

76,650

 

78,213

 

 

 

 

 

 

 

Investment securities not due at a single maturity date:

 

 

 

 

 

U.S. Government agencies collateralized by mortgage obligations

 

103,831

 

104,832

 

Other collateralized mortgage obligations

 

17,528

 

16,712

 

Other equity securities

 

7,596

 

7,646

 

 

 

$

205,605

 

$

207,403

 

 

December 31, 2010

 

Amortized Cost

 

Estimated Fair
Value

 

 

 

 

 

 

 

Within one year

 

$

500

 

$

504

 

After one year through five years

 

6,350

 

6,819

 

After five years through ten years

 

18,274

 

18,664

 

After ten years

 

50,164

 

49,762

 

 

 

75,288

 

75,749

 

Investment securities not due at a single maturity date:

 

 

 

 

 

U.S. Government agencies collateralized by mortgage obligations

 

88,105

 

90,077

 

Other collateralized mortgage obligations

 

18,661

 

17,838

 

Other equity securities

 

7,628

 

7,661

 

Total

 

$

189,682

 

$

191,325

 

 

12



Table of Contents

 

Note  5.  Fair Value Measurements

 

The estimated carrying and fair values of the Company’s financial instruments are as follows (in thousands):

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

 

 

(In thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

15,274

 

$

15,274

 

$

11,357

 

$

11,357

 

Interest-earning deposits in other banks

 

68,296

 

68,296

 

89,042

 

89,042

 

Federal funds sold

 

861

 

861

 

600

 

600

 

Available-for-sale investment securities

 

207,403

 

207,403

 

191,325

 

191,325

 

Loans, net

 

411,023

 

396,576

 

420,583

 

405,876

 

Bank owned life insurance

 

11,487

 

11,487

 

11,390

 

11,390

 

Federal Home Loan Bank stock

 

3,050

 

3,050

 

3,050

 

3,050

 

Accrued interest receivable

 

3,079

 

3,079

 

3,467

 

3,467

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Deposits

 

$

644,177

 

$

645,055

 

$

650,495

 

$

651,668

 

Short-term borrowings

 

 

 

10,000

 

10,000

 

Long-term debt

 

4,000

 

4,204

 

4,000

 

4,256

 

Junior subordinated deferrable interest debentures

 

5,155

 

2,320

 

5,155

 

2,320

 

Accrued interest payable

 

328

 

328

 

475

 

475

 

 

These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments.  In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

 

These estimates are made at a specific point in time based on relevant market data and information about the financial instruments.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the fair values presented.

 

The following methods and assumptions were used to estimate the fair value of financial instruments.  For cash and due from banks, interest-earning deposits in other banks, Federal funds sold, variable-rate loans, bank owned life insurance, accrued interest receivable and payable, FHLB stock, demand deposits and short-term borrowings, the carrying amount is estimated to be fair value.  For investment securities, fair values are based on quoted market prices, quoted market prices for similar securities and indications of value provided by brokers.  The fair values for fixed-rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness. Fair values for fixed-rate certificates of deposit are estimated using discounted cash flow analyses using interest rates offered at each reporting date by the Company for certificates with similar remaining maturities.  The fair value of long-term debt and subordinated debentures was determined based on the current market for like-kind instruments of a similar maturity and structure.  The fair values of commitments are estimated using the fees currently charged to enter into similar agreements and are not significant and, therefore, not included in the above table.

 

Fair Value Hierarchy

 

In accordance with applicable guidance, the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  Valuations within these levels are based upon:

 

Level 1 — Quoted market prices for identical instruments traded in active exchange markets.

 

Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

 

Level 3 — Model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability.  Valuation techniques include management judgment and estimation which may be significant.

 

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Table of Contents

 

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, we report the transfer at the beginning of the reporting period.

 

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the three months ended March 31, 2011, no transfers between levels occurred.

 

Assets Recorded at Fair Value

 

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2011:

 

Recurring Basis

 

The Company is required or permitted to record the following assets at fair value on a recurring basis under other accounting pronouncements as of March 31, 2011 (in thousands).

 

Description

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

180

 

$

 

$

180

 

$

 

Obligations of states and political subdivisions

 

78,033

 

 

78,033

 

 

U.S. Government agencies collateralized by mortgage obligations

 

104,832

 

 

104,832

 

 

Other collateralized mortgage obligations

 

16,712

 

 

16,712

 

 

Other equity securities

 

7,646

 

7,646

 

 

 

Total assets and liabilities measured at fair value

 

$

207,403

 

$

7,646

 

$

199,757

 

$

 

 

Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets.  Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities.

 

The balance of Level 3 assets measured at fair value on a recurring basis was zero for the year ended December 31, 2010.  No changes occurred in the first three months of 2011.

 

There were no liabilities measured at fair value on a recurring basis at March 31, 2011.

 

Non-recurring Basis

 

The Company may be required, from time to time, to measure certain assets at fair value on a non-recurring basis.  These include assets that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at March 31, 2011 (in thousands).

 

Description

 

Fair
Value

 

Level 1

 

Level 2

 

Level 3

 

Total
Losses in
the Year

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

178

 

$

 

$

 

$

178

 

$

(1

)

Agricultural production

 

 

 

 

 

 

Total commercial

 

178

 

 

 

178

 

(1

)

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

876

 

 

 

876

 

(188

)

Real estate-construction and other land loans

 

4,698

 

 

 

4,698

 

(835

)

Commercial real estate

 

 

 

 

 

 

Agricultural real estate

 

 

 

 

 

 

Other

 

1,900

 

 

 

1,900

 

(658

)

Total real estate

 

7,474

 

 

 

7,474

 

(1,681

)

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

 

 

 

 

 

Consumer and installment

 

62

 

 

 

62

 

(20

)

Total consumer

 

62

 

 

 

62

 

(20

)

Lease financing receivable

 

 

 

 

 

 

Total impaired loans

 

7,714

 

 

 

7,714

 

(1,702

)

Other real estate owned

 

257

 

 

 

257

 

 

Other

 

 

 

 

 

 

Total assets and liabilities measured at fair value on a non-recurring basis

 

$

7,971

 

$

 

$

 

$

7,971

 

$

(1,702

)

 

14



Table of Contents

 

The fair value of impaired loans and other real estate owned is based on the fair value of the collateral for all collateral dependent loans and for other impaired loans is estimated using a discounted cash flow model.  Impaired loans and other real estate owned were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements.  There were no changes in valuation techniques used during the three months ended March 31, 2011 or the year ended December 31, 2010.

 

Impaired loans with a carrying value of $9,416,000 were written down to their fair value of $7,714,000, resulting in a related valuation allowance of $1,702,000 at March 31, 2011.  The valuation allowance represents specific allocations of the allowance for credit losses for impaired loans.

 

The fair value of real estate is based on property appraisals at the time of transfer and as appropriate thereafter, less estimated costs to sell.  Other real estate owned is periodically reviewed to determine whether the property continues to be carried at the lower of its recorded book value or estimated fair value, net of estimated selling costs.  During the three months ended March 31, 2011, no other real estate properties were written down.

 

There were no liabilities measured at fair value on a non-recurring basis at March 31, 2011.

 

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2010:

 

Recurring Basis

 

The Company is required or permitted to record the following assets at fair value on a recurring basis under other accounting pronouncements (in thousands).

 

Description

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

195

 

$

 

$

195

 

$

 

Obligations of states and political subdivisions

 

75,050

 

 

75,050

 

 

U.S. Government agencies collateralized by mortgage obligations

 

90,077

 

 

90,077

 

 

Other collateralized mortgage obligations

 

17,838

 

 

17,838

 

 

Corporate debt securities

 

504

 

 

504

 

 

Other equity securities

 

7,661

 

7,661

 

 

 

Total assets measured at fair value

 

$

191,325

 

$

7,661

 

$

183,664

 

$

 

 

Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets.  Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities.

 

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows for the year ended December 31, 2010 (in thousands).

 

 

 

Balance,
beginning
of year

 

Net
income

 

Other
comprehensive
income

 

Purchases,
sales, and
principal
payments

 

Transfers
into
Level 3

 

Transfers
out of
Level 3

 

Balance,
end of year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other collateralized mortgage obligations

 

$

5,724

 

$

13

 

$

93

 

$

(2,752

)

$

 

$

(3,078

)

$

 

Corporate debt securities

 

785

 

235

 

 

(1,020

)

 

 

 

Other equity securities

 

7,588

 

 

 

 

 

(7,588

)

 

Total assets and liabilities measured at fair value

 

$

14,097

 

$

248

 

$

93

 

$

(3,772

)

$

 

$

(10,666

)

$

 

 

15



Table of Contents

 

Gains and losses (realized and unrealized) included in earnings (or changes in net assets) for the year ended December 31, 2010 totaled $248,000 and were included in non-interest income.

 

There were no liabilities measured at fair value on a recurring basis at December 31, 2010.

 

Non-recurring Basis

 

The Company may be required, from time to time, to measure certain assets at fair value on a non-recurring basis.  These include assets that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at December 31, 2010 (in thousands).

 

Description

 

Fair
Value

 

Level 1

 

Level 2

 

Level 3

 

Total
Losses in
the Year

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

980

 

$

 

$

 

$

980

 

$

(248

)

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

1,016

 

 

 

1,016

 

(261

)

Real estate-construction and other land loans

 

4,773

 

 

 

4,773

 

(1,170

)

Commercial real estate

 

679

 

 

 

679

 

(47

)

Other real estate

 

1,865

 

 

 

1,865

 

(420

)

Total impaired loans

 

9,313

 

 

 

9,313

 

(2,146

)

Other real estate owned

 

1,325

 

 

 

1,325

 

(309

)

Other

 

98

 

 

 

98

 

 

Total assets measured at fair value on a non-recurring basis

 

$

10,736

 

$

 

$

 

$

10,736

 

$

(2,455

)

 

The fair value of impaired loans and other real estate owned is based on the fair value of the collateral for all collateral dependent loans and for other impaired loans is estimated using a discounted cash flow model.  Impaired loans and other real estate owned were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements.  There were no changes in valuation techniques used during the year ended December 31, 2010.

 

In accordance with the provisions of ASC 360-10, impaired loans with a carrying value of $11,436,000 were written down to their fair value of $9,313,000, resulting in an impairment charge of $2,124,000.  The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans.

 

The fair value of real estate is based on property appraisals at the time of transfer and as appropriate thereafter, less estimated costs to sell.  Other real estate owned is periodically reviewed to determine whether the property continues to be carried at the lower of its recorded book value or estimated fair value, net of estimated selling costs.  In 2010, other real estate properties were written down $309,000 to their estimated fair values of $1,325,000. In 2010, other repossessed assets were recorded at their estimated realizable value of $98,000.

 

There were no liabilities measured at fair value on a non-recurring basis at December 31, 2010.

 

16



Table of Contents

 

Note 6.  LOANS

 

Outstanding loans are summarized as follows:

 

Loan Type

 

March 31, 2011

 

% of Total
loans

 

December 31, 2010

 

% of Total
loans

 

 

 

(Dollars in thousands)

 

Commercial:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

99,236

 

23.5

%

$

104,387

 

24.1

%

Agricultural production

 

44,024

 

10.4

%

38,787

 

9.0

%

Total commercial

 

143,260

 

33.9

%

143,174

 

33.1

%

Real estate:

 

 

 

 

 

 

 

 

 

Owner occupied

 

111,754

 

26.4

%

111,888

 

25.9

%

Real estate-construction and other land loans

 

31,865

 

7.5

%

32,039

 

7.4

%

Commercial real estate

 

60,892

 

14.4

%

63,627

 

14.7

%

Agricultural real estate

 

18,201

 

4.3

%

22,100

 

5.1

%

Other

 

16,464

 

3.9

%

16,254

 

3.8

%

Total real estate

 

239,176

 

56.5

%

245,908

 

56.9

%

Consumer:

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

31,950

 

7.6

%

34,521

 

8.0

%

Consumer and installment

 

8,289

 

2.0

%

8,493

 

2.0

%

Total consumer

 

40,239

 

9.6

%

43,014

 

10.0

%

Deferred loan fees, net

 

(633

)

 

 

(499

)

 

 

Total gross loans

 

422,042

 

100.0

%

431,597

 

100.0

%

Allowance for credit losses

 

(11,019

)

 

 

(11,014

)

 

 

Total loans

 

$

411,023

 

 

 

$

420,583

 

 

 

 

At March 31, 2011 and December 31, 2010, loans originated under Small Business Administration (SBA) programs totaling $30,242,000 and $30,775,000, respectively, were included in the real estate and commercial categories.

 

Note 7.   ALLOWANCE FOR CREDIT LOSSES

 

Changes in the allowance for credit losses were as follows (in thousands):

 

 

 

For the Three
Months Ended
March 31, 2011

 

For the Three
Months Ended
March 31, 2010

 

 

 

 

 

 

 

Balance, beginning of year

 

$

11,014

 

$

10,200

 

Provision charged to operations

 

100

 

600

 

Losses charged to allowance

 

(321

)

(476

)

Recoveries

 

226

 

271

 

Balance, end of year

 

$

11,019

 

$

10,595

 

 

17



Table of Contents

 

The following table shows the allocation of the allowance for loan losses as of and for the period ended March 31, 2011 by class of loan and by impairment methodology (in thousands):

 

 

 

Commercial

 

Real Estate

 

Consumer

 

Unallocated

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,830

 

$

6,767

 

$

1,179

 

$

238

 

$

11,014

 

Charge-offs

 

(156

)

(26

)

(102

)

(37

)

(321

)

Recoveries

 

174

 

23

 

14

 

15

 

226

 

Provision

 

112

 

(228

)

(93

)

309

 

100

 

Ending balance

 

$

2,960

 

$

6,536

 

$

998

 

$

525

 

$

11,019

 

Ending balance: individually evaluated for impairment

 

$

1

 

$

1,681

 

$

20

 

$

 

$

1,702

 

Ending balance: collectively evaluated for impairment

 

$

2,959

 

$

4,856

 

$

978

 

$

525

 

$

9,318

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

143,260

 

$

239,176

 

$

40,239

 

$

 

$

422,675

 

Ending balance: individually evaluated for impairment

 

$

1,404

 

$

13,581

 

$

604

 

$

 

$

15,589

 

Ending balance: collectively evaluated for impairment

 

$

141,856

 

$

225,595

 

$

39,635

 

$

 

$

407,086

 

 

The following table shows the allocation of the allowance for loan losses at December 31, 2010 by class of loan and by impairment methodology (in thousands):

 

 

 

Commercial

 

Real Estate

 

Consumer

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

2,830

 

$

6,767

 

$

1,179

 

$

238

 

$

11,014

 

Ending balance: individually evaluated for impairment

 

$

226

 

$

1,898

 

$

 

$

 

$

2,124

 

Ending balance: collectively evaluated for impairment

 

$

2,604

 

$

4,869

 

$

1,179

 

$

238

 

$

8,890

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

143,174

 

$

245,908

 

$

43,014

 

$

 

$

432,096

 

Ending balance: individually evaluated for impairment

 

$

2,356

 

$

15,717

 

$

488

 

$

 

$

18,561

 

Ending balance: collectively evaluated for impairment

 

$

140,818

 

$

230,191

 

$

42,526

 

$

 

$

413,535

 

 

The following table shows the loan portfolio allocated by management’s internal risk ratings at March 31, 2011 (in thousands):

 

Commercial Credit Exposure

Credit Risk Profile by Internally Assigned Grade

 

 

 

Commercial
and Industrial

 

Agricultural
Production

 

Owner
Occupied

 

Real Estate
Construction
and Other 
Land Loans

 

Commercial 
Real Estate

 

Agricultural 
Real Estate

 

Other Real 
Estate

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

87,282

 

$

44,020

 

$

103,870

 

$

10,464

 

$

46,129

 

$

15,799

 

$

12,445

 

Special Mention

 

4,650

 

4

 

3,554

 

7,118

 

4,320

 

2,402

 

1,758

 

Substandard

 

7,304

 

 

4,330

 

14,283

 

10,443

 

 

2,261

 

Doubtful

 

 

 

 

 

 

 

 

Total

 

$

99,236

 

$

44,024

 

$

111,754

 

$

31,865

 

$

60,892

 

$

18,201

 

$

16,464

 

 

18



Table of Contents

 

Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

 

 

 

Equity 
Loans and 
Lines of 
Credit

 

Consumer 
and 
Installment

 

Grade:

 

 

 

 

 

Pass

 

$

30,323

 

$

7,016

 

Special mention

 

 

 

Substandard

 

1,627

 

227

 

Doubtful

 

 

 

Total

 

$

31,950

 

$

7,243

 

 

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

 

 

 

Credit 
Cards

 

Grade:

 

 

 

Performing

 

$

1,046

 

Non-Performing

 

 

Total

 

$

1,046

 

 

The following table shows the loan portfolio allocated by management’s internal risk ratings at December 31, 2010 (in thousands):

Commercial Credit Exposure

Credit Risk Profile by Internally Assigned Grade

 

 

 

Commercial and
Industrial

 

Agricultural
Production

 

Owner 
Occupied

 

Real Estate 
Construction 
and Other 
Land Loans

 

Commercial 
Real Estate

 

Agricultural 
Real Estate

 

Other Real 
Estate

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

92,237

 

$

37,683

 

$

100,278

 

$

10,287

 

$

49,294

 

$

17,494

 

$

9,713

 

Special Mention

 

4,305

 

 

6,336

 

6,330

 

3,118

 

1,903

 

1,308

 

Substandard

 

7,845

 

1,104

 

5,274

 

15,422

 

11,215

 

2,703

 

5,233

 

Doubtful

 

 

 

 

 

 

 

 

Total

 

$

104,387

 

$

38,787

 

$

111,888

 

$

32,039

 

$

63,627

 

$

22,100

 

$

16,254

 

 

Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

 

 

 

Equity 
Loans and 
Lines of 
Credit

 

Consumer 
and 
Installment

 

Grade:

 

 

 

 

 

Pass

 

$

33,228

 

$

7,269

 

Special mention

 

 

 

Substandard

 

1,293

 

135

 

Doubtful

 

 

 

Total

 

$

34,521

 

$

7,404

 

 

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

 

 

 

Credit 
Cards

 

Grade:

 

 

 

Performing

 

$

1,089

 

Non-Performing

 

 

Total

 

$

1,089

 

 

19



Table of Contents

 

The following table shows an aging analysis of the loan portfolio by the time past due at March 31, 2011 (in thousands):

 

 

 

30-59 Days 
Past Due

 

60-89 
Days Past 
Due

 

Greater 
Than

90 Days 
(nonaccrual)

 

Total Past 
Due

 

Current

 

Total 
Loans

 

Recorded 
Investment 
> 90 Days 
Accruing

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

101

 

$

85

 

$

46

 

$

232

 

$

99,004

 

$

99,236

 

$

 

Agricultural land and production

 

 

 

 

 

44,024

 

44,024

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

476

 

316

 

165

 

957

 

110,797

 

111,754

 

 

Real estate construction and other land loans

 

1,004

 

 

5,533

 

6,537

 

25,328

 

31,865

 

 

Commercial real estate

 

4,113

 

 

 

4,113

 

56,779

 

60,892

 

 

Agricultural real estate

 

 

 

 

 

 

 

 

 

18,201

 

18,201

 

 

 

Other

 

 

 

 

 

16,464

 

16,464

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

3,255

 

249

 

 

3,504

 

28,446

 

31,950

 

 

Consumer and installment

 

109

 

 

 

109

 

8,180

 

8,289

 

 

Total

 

$

9,058

 

$

650

 

$

5,744

 

$

15,452

 

$

407,223

 

$

422,675

 

$

 

 

The following table shows an aging analysis of the loan portfolio by the time past due at December 31, 2010 (in thousands):

 

 

 

30-59 Days 
Past Due

 

60-89 
Days Past 
Due

 

Greater 
Than

90 Days 
(nonaccrual)

 

Total Past 
Due

 

Current

 

Total 
Loans

 

Recorded 
Investment 
> 90 Days 
Accruing

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

164

 

$

 

$

180

 

$

344

 

$

104,043

 

$

104,387

 

$

 

Agricultural land and production

 

 

 

 

 

38,787

 

38,787

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

863

 

 

 

863

 

111,025

 

111,888

 

 

Real estate construction and other land loans

 

 

 

5,634

 

5,634

 

26,405

 

32,039

 

 

Commercial real estate

 

2,316

 

 

726

 

3,042

 

60,585

 

63,627

 

 

Other

 

 

 

 

 

38,354

 

38,354

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

 

 

 

 

34,521

 

34,521

 

 

Consumer and installment

 

78

 

 

 

78

 

8,415

 

8,493

 

 

Total

 

$

3,421

 

$

 

$

6,540

 

$

9,961

 

$

422,135

 

$

432,096

 

$

 

 

20



Table of Contents

 

The following table shows information related to impaired loans at and for the three months ended March 31, 2011 (in thousands):

 

 

 

 

 

Unpaid

 

 

 

Average

 

Interest

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,225

 

$

1,263

 

$

 

$

1,225

 

$

 

Agricultural land and production

 

 

 

 

 

 

Total commercial

 

1,225

 

1,263

 

 

1,225

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

763

 

810

 

 

763

 

 

Real estate construction and other land loans

 

1,852

 

2,056

 

 

1,852

 

 

Commercial real estate

 

1,811

 

1,823

 

 

1,811

 

 

Agricultural real estate

 

 

 

 

 

 

Other

 

 

 

 

 

 

Total real estate

 

4,426

 

4,689

 

 

4,426

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

522

 

535

 

 

522

 

 

Consumer and installment

 

 

 

 

 

 

Total consumer

 

522

 

535

 

 

522

 

 

Total with no related allowance recorded

 

$

6,173

 

$

6,487

 

$

 

$

6,173

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

179

 

$

205

 

$

1

 

$

179

 

$

 

Agricultural land and production

 

 

 

 

 

 

Total commercial

 

179

 

205

 

1

 

179

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

1,064

 

1,086

 

188

 

1,064

 

 

Real estate construction and other land loans

 

5,830

 

6,288

 

835

 

5,830

 

 

Commercial real estate

 

 

 

 

 

 

Agricultural real estate

 

 

 

 

 

 

Other

 

2,261

 

2,300

 

658

 

2,261

 

 

Total real estate

 

9,155

 

9,674

 

1,681

 

9,155

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

 

 

 

 

 

Consumer and installment

 

82

 

82

 

20

 

82

 

 

Total consumer

 

82

 

82

 

20

 

82

 

 

Total with an allowance recorded

 

$

9,416

 

$

9,961

 

$

1,702

 

$

9,416

 

$

 

Total

 

$

15,589

 

$

16,448

 

$

1,702

 

$

15,589

 

$

 

 

The following table shows information related to impaired loans at and for the year ended December 31, 2010 (in thousands):

 

 

 

 

 

Unpaid

 

 

 

Average

 

Interest

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,150

 

$

1,174

 

$

 

$

865

 

$

 

Agricultural land and production

 

 

 

 

 

 

Total commercial

 

1,150

 

1,174

 

 

865

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

1,775

 

2,147

 

 

1,125

 

 

Real estate construction and other land loans

 

1,885

 

2,056

 

 

2,653

 

 

 

Commercial real estate

 

1,828

 

1,834

 

 

1,520

 

 

Other

 

 

 

 

 

 

Total real estate

 

5,488

 

6,037

 

 

5,298

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

488

 

506

 

 

284

 

 

 

Consumer and installment

 

 

 

 

 

 

Total consumer

 

488

 

506

 

 

284

 

 

Total with no related allowance recorded

 

$

7,126

 

$

7,717

 

$

 

$

6,447

 

$

 

 

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With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,206

 

$

1,299

 

$

227

 

$

1,664

 

$

 

Agricultural land and production

 

 

 

 

 

 

Total commercial

 

1,206

 

1,299

 

227

 

1,664

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

1,276

 

1,284

 

260

 

1,672

 

 

 

Real estate construction and other land loans

 

5,942

 

6,290

 

1,170

 

5,995

 

 

Commercial real estate

 

726

 

824

 

47

 

243

 

 

Other

 

2,285

 

2,300

 

420

 

1,165

 

 

Total real estate

 

10,229

 

10,698

 

1,897

 

9,075

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

 

 

 

214

 

 

Consumer and installment

 

 

 

 

251

 

 

Total consumer

 

 

 

 

465

 

 

Total with an allowance recorded

 

$

11,435

 

$

11,997

 

$

2,124

 

$

11,204

 

$

 

Total

 

$

18,561

 

$

19,714

 

$

2,124

 

$

17,651

 

$

 

 

Nonaccrual loans totaled 15,589,000 and $18,561,000 at March 31, 2011 and December 31, 2010, respectively.  Foregone interest on nonaccrual loans totaled $288,000 and $385,000 for the three month periods ended March 31, 2011 and 2010, respectively.  There were no accruing loans past due 90 days or more at March 31, 2011 and December 31, 2010.

 

Included in the impaired and nonaccrual loans above at March 31, 2011 are 13 loans considered troubled debt restructurings totaling $8,290,000.  Included in the impaired and nonaccrual loans above are seven loans in the amount of $6,180,000 that were considered to be troubled debt restructurings at December 31, 2010.  There are no outstanding commitments to lend additional funds to any of these borrowers.

 

Note 8.  Goodwill and Intangible Assets

 

Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill.  Total goodwill at March 31, 2011 was $23,577,000 consisting of $14,643,000 and $8,934,000 representing the excess of the cost of Service 1st Bank and Bank of Madera County, respectively, over the net amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting.  The value of goodwill is ultimately derived from the Bank’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes.  A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment.  For that reason, goodwill is assessed at least annually for impairment. We engaged an independent valuation specialist to perform our annual impairment test in the third quarter of 2010 and no impairment was required.

 

Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount.  No such events or circumstances arose during the first quarter of 2011, so goodwill was not required to be retested.

 

The intangible assets at March 31, 2011 represent the estimated fair value of the core deposit relationships acquired in the acquisition of Service 1st Bank in 2008 of $1,400,000 and the 2005 acquisition of Bank of Madera County of $1,500,000.  Core deposit intangibles are being amortized by the straight-line method over an estimated life of seven years from the date of acquisition.  The carrying value of intangible assets at March 31, 2011 was $1,094,000 net of $1,806,000 in accumulated amortization expense.  Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization.  Based on the evaluation, no changes to the remaining useful lives was required in the first quarter of 2011.  Management engaged an independent valuation specialist to perform our annual impairment test on core deposit intangibles as of September 30, 2010 and determined no impairment was necessary.  Amortization expense recognized was $104,000 for the three month periods ended March 31, 2011 and 2010.

 

Note 9. Comprehensive Income

 

Total comprehensive income is comprised of unrealized gains, net of taxes, on available-for-sale investment securities, which is the Company’s only source of other comprehensive income.  Total comprehensive income was $1,679,000 and $2,523,000 for the three months ended March 31, 2011 and 2010, respectively.

 

At March 31, 2011 and December 31, 2010, accumulated other comprehensive income totaled $1,058,000 and $967,000, respectively, and is reflected, net of taxes, as a component of shareholders’ equity.

 

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Note 10.  Commitments and Contingencies

 

In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for loans.

 

Commitments to extend credit amounting to $129,595,000 and $123,676,000 were outstanding at March 31, 2011 and December 31, 2010, respectively. 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 unless waived by the bank. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

 

Included in commitments to extend credit are undisbursed lines of credit totaling $129,230,000 and $123,311,000 at March 31, 2011 and December 31, 2010, respectively.  Undisbursed lines of credit are revolving lines of credit whereby customers can repay principal and request principal advances during the term of the loan at their discretion and most expire between one and 12 months.

 

The Company has undisbursed portions of construction loans totaling $4,055,000 and $2,380,000 as of March 31, 2011 and December 31, 2010, respectively. These commitments are agreements to lend to a customer, subject to meeting certain construction progress requirements established in the contract. The underlying construction loans have fixed expiration dates.

 

Standby letters of credit and financial guarantees amounting to $365,000 were outstanding at March 31, 2011 and December 31, 2010. Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. Most standby letters of credit and guarantees carry a one year term or less. The fair value of the liability related to these standby letters of credit, which represents the fees received for their issuance, was not significant at March 31, 2011 and December 31, 2010.  The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used.

 

The Company generally requires collateral or other security to support financial instruments with credit risk. Management does not anticipate any material loss will result from the outstanding commitments to extend credit, standby letters of credit and financial guarantees.

 

The Company is subject to legal proceedings and claims which arise in the ordinary course of business.  In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or consolidated results of operations of the Company.

 

Note 11.  Income Taxes

 

The Company files its income taxes on a consolidated basis with its subsidiary.  The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes.  Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  On the consolidated balance sheets, net deferred tax assets are included in accrued interest receivable and other assets. The Company establishes a tax valuation allowance when it is more likely than not that a recorded tax benefit is not expected to be fully realized. The expense to create the tax valuation is recorded as an additional income tax expense in the period the tax valuation allowance is created.  Based on management’s analysis as of March 31, 2011, no deferred tax valuation allowance was deemed necessary.

 

Accounting for uncertainty in income taxes - The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.  The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense in the consolidated statements of income.  During the three months ended March 31, 2011, the Company increased its reserve for uncertain tax positions attributable to tax credits and deductions related to enterprise zone activities in California.

 

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Note 12.  Borrowing Arrangements

 

Federal Home Loan Bank Advances:  Advances from the Federal Home Loan Bank (FHLB) of San Francisco consisted of the following:

 

2011

 

Amount

 

Rate

 

Maturity Date

 

(Dollars in thousands)

 

 

 

 

 

 

 

$

4,000

 

3.59

%

February 12, 2013

 

 

 

 

 

 

 

 

 

 

 

 

4,000

 

 

 

 

 

 

 

 

 

 

 

 —

 

Less short-term portion

 

 

 

$

4,000

 

 

 

 

 

 

 

 

 

 

 

2010

 

Amount

 

Rate

 

Maturity Date

 

(Dollars in thousands)

 

 

 

 

 

 

 

$

5,000

 

3.00

%

February 7, 2011

 

5,000

 

3.10

%

February 14, 2011

 

4,000

 

3.59

%

February 12, 2013

 

14,000

 

 

 

 

 

 

 

 

 

 

 

(10,000

)

Less short-term portion

 

 

 

$

4,000

 

 

 

 

 

 

FHLB advances are secured by investment securities with amortized costs totaling $30,005,000 and $31,918,000, and market values totaling $31,090,000 and $33,214,000 at March 31, 2011 and December 31, 2010, respectively.  The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral.

 

As of March 31, 2011 and December 31, 2010, the Company had no Federal funds purchased.

 

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Table of Contents

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements contained herein that are not historical facts, such as statements regarding the Company’s current business strategy and the Company’s plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties.  Such risks and uncertainties include, but are not limited to (1) significant increases in competitive pressure in the banking industry; (2) the impact of changes in interest rates, a decline in economic conditions at the international, national or local level on the Company’s results of operations, the Company’s ability to continue its internal growth at historical rates, the Company’s ability to maintain its net interest margin, and the quality of the Company’s earning assets; (3) changes in the regulatory environment; (4) fluctuations in the real estate market; (5) changes in business conditions and inflation; (6) changes in securities markets; and (7) risks associated with acquisitions, relating to difficulty in integrating combined operations and related negative impact on earnings, and incurrence of substantial expenses.  Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company.

 

When the Company uses in this Quarterly Report on Form 10-Q the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe”“ and similar expressions, the Company intends to identify forward-looking statements.  Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report on Form 10-Q.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.  The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements.  Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict.  For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

The Securities and Exchange Commission (SEC) maintains a web site which contains reports, proxy statements, and other information pertaining to registrants that file electronically with the SEC, including the Company. The internet address is: www.sec.gov. In addition, our periodic and current reports are available free of charge on our website at www.cvcb.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the Company’s most critical accounting policies are those which the Company’s financial condition depends upon, and which involve the most complex or subjective decisions or assessments.

 

There have been no material changes to the Company’s critical accounting policies during 2011.  Please refer to the Company’s 2010 Annual Report to Shareholders on Form 10-K for a complete listing of critical accounting policies.

 

This discussion should be read in conjunction with our unaudited consolidated financial statements, including the notes thereto, appearing elsewhere in this report.

 

OVERVIEW

 

First Quarter of 2011

 

In the first quarter of 2011, our consolidated net income was $1,588,000 compared to net income of $1,292,000 for the same period in 2010.  Diluted EPS was $0.16 for the first quarter of 2011 compared to $0.13 for the same period in 2010.  The increase in net income is attributed to decreases in the provision for credit losses and an increase in non-interest income, offset by a decrease in net interest income before provision for credit losses.  The provision for credit losses was $100,000 for the first quarter of 2011 compared to $600,000 for the first quarter of 2010, a decrease of $500,000.  Net interest income before provision for credit losses decreased $388,000 or 4.86%.  The yield on average total interest-earning assets decreased 55 basis points comparing the three month period ended March 31, 2011 to the same period in 2010 while interest rates on deposits decreased 22 basis points resulting in a 31 basis point decrease in net interest margin.  Net interest margin was 4.67% for the three months ended March 31, 2011 compared to 4.98% for the same period in 2010.  Non-interest income increased $414,000 or 31.03% primarily due to a gain on sale of other real estate owned, and non-interest expense decreased $51,000 or 0.71% in the three months ended March 31, 2011 compared to the same period in 2010.

 

Annualized return on average equity for the first quarter of 2011 was 6.41% compared to 5.53% for the same period in 2010.  Total average equity was $99,118,000 for the first quarter of 2011 compared to $93,333,000 for the first quarter of 2010.

 

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Table of Contents

 

Our average total assets increased $11,833,000 or 1.56% in the three months ended March 31, 2011 compared to the same period of 2010.  Total average interest-earning assets increased $13,330,000 or 1.98% comparing the three month period ended March 31, 2011 to the same period of 2010.  Average total loans decreased $28,011,000 or 6.17% while average total investments increased $39,617,000 or 16.92% in the three month period ended March 31, 2011 compared to the same period in 2010.  Average interest-bearing liabilities decreased $10,993,000 or 2.26% over the same period.

 

Our net interest margin for the three months ended March 31, 2011 was 4.67% compared to 4.98% for the same period in 2010.  The margin decreased principally due to the decrease in yields on interest-earning assets outpacing the decrease in rates on interest-bearing liabilities.  The effective yield on interest earning assets decreased 55 basis points to 5.14% for the three month period ended March 31, 2011 compared to 5.69% for the same period in 2010.  For the three months ended March 31, 2011, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks decreased 133 basis points while the effective yield on loans increased 9 basis points.  The cost of total interest-bearing liabilities decreased 29 basis points to 0.67% compared to 0.96% for the same period in 2010. The cost of total deposits, including noninterest bearing accounts decreased 22 basis points to 0.45% for the three months ended March 31, 2011 compared to 0.67% for the same period in 2010.

 

Net interest income before the provision for credit losses for the three months ended March 31, 2011 was $7,598,000 compared to $7,986,000 for the same period in 2010, a decrease of $388,000 or 4.86%.  Net interest income before the provision for credit losses decreased as a result of the decrease in net interest margin as discussed above and a decrease in average loan balances.  The Bank had non-accrual loans totaling $15,586,000 at March 31, 2011, compared to $18,561,000 at December 31, 2010 and $18,053,000 at March 31, 2011.  The Company had other real estate owned at March 31, 2011 totaling $257,000, compared to $1,325,000 at December 31, 2010, and $2,549,000 at March 31, 2010.

 

Central Valley Community Bancorp (Company)

 

We are a central California-based bank holding company for a one-bank subsidiary, Central Valley Community Bank (Bank).  We provide traditional commercial banking services to small and medium-sized businesses and individuals in the communities along the Highway 99 corridor in the Fresno, Madera, Merced, Sacramento, Stanislaus, and San Joaquin Counties of central California.  Additionally, we have a private banking office in Sacramento County.  As a bank holding company, the Company is subject to supervision, examination and regulation by the Federal Reserve Bank.

 

At March 31, 2011, we had total loans of $422,042,000, total assets of $766,690,000, total deposits of $644,177,000, and shareholders’ equity of $99,543,000.

 

Central Valley Community Bank (Bank)

 

The Bank commenced operations in January 1980 as a state-chartered bank.  As a state-chartered bank, the Bank is subject to primary supervision, examination and regulation by the Department of Financial Institutions.  The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the applicable limits thereof, and the Bank is subject to supervision, examination and regulations of the FDIC.

 

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act permanently raises the current standard maximum deposit insurance amount to $250,000 and extended unlimited FDIC deposit insurance to qualifying noninterest-bearing transaction accounts through December 31, 2012.

 

Coverage under the TAG is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules.  As a participant in TAG, the Bank is assessed an annual fee of 10 basis points for all deposit amounts exceeding the existing deposit insurance limit of $250,000.

 

The Bank operates 17 branches which serve the communities of Clovis, Fresno, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Sacramento, Stockton, and Tracy, California.  Additionally the Bank operates Real Estate, Agribusiness and SBA departments that originate loans in California.  According to the June 30, 2010 FDIC data, the Bank’s branches in Fresno, Madera and San Joaquin Counties had a 3.38% combined deposit market share of all insured depositories.

 

Key Factors in Evaluating Financial Condition and Operating Performance

 

As a publicly traded community bank holding company, we focus on several key factors including:

 

·

 

Return to our stockholders;

·

 

Return on average assets;

·

 

Development of core earnings, including net interest income and non-interest income;

·

 

Asset quality;

·

 

Asset growth;

·

 

Capital adequacy;

·

 

Operating efficiency; and

·

 

Liquidity

 

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Table of Contents

 

Return to Our Stockholders

 

Our return to our stockholders is measured in a ratio that measures the return on average equity (ROE).  Our annualized ROE was 6.41% for the three months ended March 31, 2011 compared to 3.41% for the year ended December 31, 2010 and 5.53% for the three months ended March 31, 2010.  Our net income for the three months ended March 31, 2011 increased $296,000 or 22.91% to $1,588,000 compared to $1,292,000 for the three months ended March 31, 2010.  Net income increased due to decreases in the provision for credit losses and an increase in non-interest income and a decrease in non-interest expenses partially offset by a decrease in net interest income before provision for credit losses.  Net interest margin (NIM) decreased 31 basis points comparing the three month periods ended March 31, 2011 and 2010.  Diluted EPS was $0.16 for the three months ended March 31, 2011 and $0.13 for the same period in 2010.

 

Return on Average Assets

 

Our return on average assets (ROA) is a ratio that measures our performance compared with other banks and bank holding companies.  Our annualized ROA for the three months ended March 31, 2011 was 0.82% compared to 0.43% for the year ended December 31, 2010 and 0.68% for the three months ended March 31, 2010.  The increase in ROA compared to December 2010 is due to the increase in net income relative to total average assets.  Average assets for the three months ended March 31, 2011 were $770,729,000 compared to $758,852,000 for the year ended December 31, 2010.  ROA for our peer group was 0.31% for the quarter ended December 31, 2010.  Peer group from SNL Financial data includes certain bank holding companies in central California with assets from $300 million to $1 billion that are not subchapter S corporations.

 

Development of Core Earnings

 

Over the past several years, we have focused on not only improving net income, but improving the consistency of our revenue streams in order to create more predictable future earnings and reduce the effect of changes in our operating environment on our net income.  Specifically, we have focused on net interest income through a variety of processes, including increases in average interest earning assets as a result of loan generation and retention, and minimizing the effects of the recent interest rate decline on our net interest margin by focusing on core deposits and managing the cost of funds.  The Company’s net interest margin (fully tax equivalent basis) was 4.67% for the three months ended March 31, 2011, compared to 4.98% for the same period in 2010.  The decrease in net interest margin is principally due to a decrease in the yield on earning assets which was greater than the decrease in our rates on interest-bearing liabilities.  In comparing the two periods, the effective yield on total earning assets decreased 55 basis points, while the cost of total interest bearing liabilities decreased 29 basis points and the cost of total deposits decreased 22 basis points.  The Company’s total cost of deposits for the three months ended March 31, 2011 was 0.45% compared to 0.67% for the same period in 2010.  At March 31, 2011, 26.64% of the Company’s average deposits were non-interest bearing compared to 21.6% for the Company’s peer group as of December 31, 2010.  Net interest income for the three month period ended March 31, 2011 was $7,598,000 compared to $7,986,000 for the same period in 2010.

 

Our non-interest income is generally made up of service charges and fees on deposit accounts, fee income from loan placements and other services, and gains from sales of investment securities offset by other-than-temporary impairment losses.  Non-interest income for the three months ended March 31, 2011 increased $414,000 or 31.03% to $1,748,000 compared to $1,334,000 for the three months ended March 31, 2010.  The increase is mainly due to a $545,000 gain on the sale of other real estate owned.  Further detail of non-interest income is provided below.

 

Asset Quality

 

For all banks and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations.  Asset quality is measured in terms of non-performing assets as a percentage of total assets, and is a key element in estimating the future earnings of a company.  The Company had non-performing loans totaling $15,589,000 or 3.69% of total loans as of March 31, 2011 and $18,561,000 or 4.30% of total loans at December 31, 2010.  Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on non-accrual status until such time as management has determined that the loans are likely to remain current in future periods and collectability has been reasonably assured.  The Company had $257,000 in other real estate owned at March 31, 2011 and $1,325,000 at December 31, 2010.

 

Asset Growth

 

As revenues from both net interest income and non-interest income are a function of asset size, the growth in assets has a direct impact in increasing net income and therefore ROE and ROA.  The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth.  Total assets decreased by $10,904,000 during the three months ended March 31, 2011 to $766,690,000 compared to $777,594,000 as of December 31, 2010.  Total gross loans decreased $9,555,000 to $422,042,000 as of March 31, 2011 compared to $431,597,000 as of December 31, 2010.  Total deposits decreased 0.97% to $644,177,000 as of March 31, 2011 compared to $650,495,000 as of December 31, 2010.  Our loan to deposit ratio at March 31, 2011 was 65.52% compared to 66.35% at December 31, 2010.  The loan to deposit ratio of our peers was 80.53% at December 31, 2010.  Further discussion of loans and deposits is below.

 

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Table of Contents

 

Capital Adequacy

 

Capital serves as a source of funds and helps protect depositors and shareholders against potential losses.  The Company has historically maintained substantial levels of capital.  The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions.  Maintenance of adequate capital levels is integral to providing stability to the Company.  The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions.

 

At March 31, 2011, we had a total risk-based capital to risk-weighted assets ratio of 16.08%, a Tier 1 risk-based capital ratio of 14.81% and a Tier 1 leverage ratio of 9.87%.  At December 31, 2010, we had a total risk-based capital to risk-weighted assets ratio of 15.42%, a Tier 1 risk-based capital ratio of 14.16% and a Tier 1 leverage ratio of 9.48%.  At March 31, 2011, on a stand-alone basis, the Bank had a total risk-based capital ratio of 15.78%, a Tier 1 risk based capital ratio of 14.51% and a Tier 1 leverage ratio of 9.67%.  At December 31, 2010, the Bank had a total risk-based capital ratio of 15.19%, a Tier 1 risk based capital ratio of 13.92% and a Tier 1 leverage ratio of 9.32%.   The improvement in 2011 is due to an increase in risk adjusted capital coupled with a decrease in risk weighted assets and average assets.

 

Operating Efficiency

 

Operating efficiency is the measure of how efficiently earnings before provision for credit losses and taxes are generated as a percentage of revenue.  A lower ratio is more favorable.  The Company’s efficiency ratio (operating expenses, excluding amortization of intangibles and foreclosed property expense divided by net interest income plus non-interest income, excluding gains from sales of securities and OREO related gains and expenses) was 79.6% for the first three months of 2011 compared to 73.0% for the three months of 2010.  The deterioration in the efficiency ratio is primarily due to a decrease in net interest income.  After the elimination of OREO related gains and expenses, non-interest income decreased and operating expenses increased.

 

The Company’s net interest income before provision for credit losses plus non-interest income, net of OREO related gains, decreased 5.57% to $8,801,000 for the three months of 2011 compared to $9,320,000 for the same period in 2010, while operating expenses, net of OREO related expenses, increased 3.69% to $7,144,000 from $6,890,000 for the same period in 2010.

 

Liquidity

 

Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers’ credit needs, funding of securities purchases, and ongoing repayment of borrowings.  Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors’ Asset/Liability Committee.  This process is intended to ensure the maintenance of sufficient liquidity to meet our funding needs, including adequate cash flow for off-balance sheet commitments.  Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco (FHLB).  We have available unsecured lines of credit with correspondent banks totaling approximately $39,000,000 and secured borrowing lines of approximately $113,308,000 with the FHLB.  These funding sources are augmented by collection of principal and interest on loans, the routine maturities and pay downs of securities from our investment securities portfolio, the stability of our core deposits, and the ability to sell investment securities.  Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses.

 

RESULTS OF OPERATIONS

 

Net Income for the Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010:

 

Net income increased to $1,588,000 for the three months ended March 31, 2011 compared to $1,292,000 for the three months ended March 31, 2010.  Basic earnings per share were $0.16 and $0.13 for the three months ended March 31, 2011 and 2010, respectively.  Diluted earnings per share were $0.16 and $0.13 for the three months ended March 31, 2011 and 2010, respectively.  Annualized ROE was 6.41% for the three months ended March 31, 2011 compared to 5.53% for the three months ended March 31, 2010.  Annualized ROA for the three months ended March 31, 2011 was 0.82% compared to 0.68% for the three months ended March 31, 2010.

 

The increase in net income for the three months ended March 31, 2011 compared to the same period in 2010 can be attributed to decreases in the provision for credit losses, an increase in non-interest income, and a decrease in non-interest expenses, offset by decreases in net interest income,.  Net interest income decreased due to a decrease in the yield on our investment securities and a decrease in average loans.  The increase in non-interest income is due to a gain on sale of other real estate owned.  Non-interest expenses decreased due to a decrease in OREO related expenses partially offset by increases in salary and employee benefits expense.  Further discussion of non-interest expenses is below.

 

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Table of Contents

 

Interest Income and Expense

 

Net interest income is the most significant component of our income from operations.  Net interest income (the “interest rate spread”) is the difference between the gross interest and fees earned on the loan and investment portfolio and the interest paid on deposits and other borrowings.  Net interest income depends on the volume of and interest rate earned on interest earning assets and the volume of and interest rate paid on interest bearing liabilities.

 

The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented.  Average balances are derived from daily balances, and non-accrual loans are not included as interest earning assets for purposes of this table.

 

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Table of Contents

 

CENTRAL VALLEY COMMUNITY BANCORP

SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES

(Dollars in thousands)

 

 

 

FOR THE THREE MONTHS
ENDED MARCH 31,2011

 

FOR THE THREE MONTHS
ENDED MARCH, 31, 2010

 

 

 

Average
Balance

 

Interest
Income/

Expense

 

Average
Interest
Rate

 

Average
Balance

 

Interest
Income/

Expense

 

Average
Interest
Rate

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning deposits in other banks

 

$

76,618

 

$

50

 

0.26

%

$

37,067

 

$

23

 

0.25

%

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

127,621

 

1,097

 

3.44

%

131,657

 

1,630

 

4.95

%

Non-taxable securities (1)

 

68,830

 

1,212

 

7.04

%

64,628

 

1,147

 

7.10

%

Total investment securities

 

196,451

 

2,309

 

4.70

%

196,285

 

2,777

 

5.66

%

Federal funds sold

 

758

 

1

 

0.30

%

858

 

 

0.25

%

Total securities

 

273,827

 

2,360

 

3.45

%

234,210

 

2,800

 

4.78

%

Loans (2) (3)

 

409,353

 

6,462

 

6.40

%

435,550

 

6,778

 

6.31

%

Federal Home Loan Bank stock

 

3,050

 

2

 

0.26

%

3,140

 

2

 

0.25

%

Total interest-earning assets

 

686,230

 

$

8,824

 

5.14

%

672,900

 

$

9,580

 

5.69

%

 

Allowance for credit losses

 

(11,007

)

 

 

 

 

(10,606

)

 

 

 

 

Nonaccrual loans

 

16,881

 

 

 

 

 

18,695

 

 

 

 

 

Other real estate owned

 

620

 

 

 

 

 

2,826

 

 

 

 

 

Cash and due from banks

 

17,492

 

 

 

 

 

15,458

 

 

 

 

 

Bank premises and equipment

 

5,738

 

 

 

 

 

6,414

 

 

 

 

 

Other non-earning assets

 

54,775

 

 

 

 

 

53,209

 

 

 

 

 

Total average assets

 

$

770,729

 

 

 

 

 

$

758,896

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings and NOW accounts

 

$

143,383

 

$

102

 

0.29

%

$

142,861

 

$

140

 

0.40

%

Money market accounts

 

159,355

 

184

 

0.47

%

148,855

 

271

 

0.74

%

Time certificates of deposit, under $100,000

 

54,587

 

117

 

0.87

%

66,089

 

254

 

1.56

%

Time certificates of deposit, $100,000 and over

 

119,122

 

313

 

1.07

%

129,635

 

388

 

1.21

%

Total interest-bearing deposits

 

476,447

 

716

 

0.61

%

487,440

 

1,053

 

0.88

%

Other borrowed funds

 

13,655

 

95

 

2.82

%

21,099

 

149

 

2.86

%

Total interest-bearing liabilities

 

490,102

 

$

811

 

0.67

%

508,539

 

$

1,202

 

0.96

%

Non-interest bearing demand deposits

 

173,005

 

 

 

 

 

149,995

 

 

 

 

 

Other liabilities

 

8,504

 

 

 

 

 

7,029

 

 

 

 

 

Shareholders’ equity

 

99,118

 

 

 

 

 

93,333

 

 

 

 

 

Total average liabilities and shareholders’ equity

 

$

770,729

 

 

 

 

 

$

758,896

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income and rate earned on average earning assets

 

 

 

$

8,824

 

5.14

%

 

 

$

9,580

 

5.69

%

Interest expense and interest cost related to average interest-bearing liabilities

 

 

 

811

 

0.67

%

 

 

1,202

 

0.96

%

Net interest income and net interest margin (4)

 

 

 

$

8,013

 

4.67

%

 

 

$

8,378

 

4.98

%

 


(1)  Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $412 and $390 in 2011 and 2010 respectively.

 

(2)  Loan interest income includes loan fees of $93 in 2011 and $103 in 2010

 

(3)  Average loans do not include non-accrual loans.

 

(4)  Net interest margin is computed by dividing net interest income by total average interest-earning assets.

 

Interest and fee income from loans decreased $316,000 or 4.66% for the three months ended March 31, 2011 compared to the same period in 2010.  Average total loans, including non-accrual loans, for the three months ended March 31, 2011 decreased $28,011,000 or 6.17% to $426,234,000 compared to $454,245,000 the same period in 2010.  The yield on average total loans increased 9 basis points to 6.40% for the three months ended 2011 compared to 6.31% for the same period in 2010.  We have been successful in implementing interest rate floors on many of our new adjustable rate loans to partially offset the effects of the decrease in the prime interest rate experienced in the last two years.  We are committed to providing our customers with competitive pricing without sacrificing strong asset quality and value to our shareholders.

 

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Interest income from total investments on a non tax equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits with other banks, and other securities) decreased $462,000 in the first three months of 2011 to $1,948,000 compared to $2,410,000, for the same period in 2010.  The decrease is attributed to lower yields on the investment securities portfolio.  The yield on average investments decreased 133 basis points to 3.45% for the three month period ended March 31, 2011 compared to 4.78% for the same period in 2010.  We experienced a decrease in yield in our investment securities in 2011 due to purchases of lower yielding debt securities and an increase in average interest-earning deposits in other banks.  Average total investments for the first three months of 2011 increased $39,617,000 or 16.92% to $273,827,000 compared to $234,210,000 for the same period in 2010.  Income from investments represents 25.64% of net interest income for the first three months of 2011 compared to 30.18% for the same period in 2010.

 

In an effort to increase yields, without accepting unreasonable risk, a significant portion of the investment purchases have been in mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs).  At March 31, 2011, we held $121,544,000 or 58.60% of the total fair value of the investment portfolio in MBS and CMOs with an average yield of 3.43%.  We invest in Collateralized Mortgage Obligations (CMO) and Mortgage Backed Securities, (MBS) as part of the overall strategy to increase our net interest margin.  CMOs and MBS by their nature react to changes in interest rates.  In a normal declining rate environment, prepayments from MBS and CMOs would be expected to increase and the expected life of the investment would be expected to shorten.  Conversely, if interest rates increase, prepayments normally would be expected to decline and the average life of the MBS and CMOs would be expected to extend.  However, in the current economic environment, prepayments may not behave according to historical norms.  Premium amortization and discount accretion of these investments affects our net interest income.  Our management monitors the prepayment speed of these investments and adjusts premium amortization and discount accretion based on several factors.  These factors include the type of investment, the investment structure, interest rates, interest rates on new mortgage loans, expectation of interest rate changes, current economic conditions, the level of principal remaining on the bond, the bond coupon rate, the bond origination date, and volume of available bonds in market.  The calculation of premium amortization and discount accretion is by nature inexact, and represents management’s best estimate of principal pay downs inherent in the total investment portfolio.

 

The net of tax effect value of the change in fair value of the available-for-sale investment portfolio was a gain of $1,058,000 at March 31, 2011 and is reflected in the Company’s equity.  At March 31, 2011, the average life of the investment portfolio was 7.05 years and the fair value reflected a pre-tax gain of $1,798,000.  Management reviews fair value declines on individual investment securities to determine whether they represent an other-than-temporary impairment (OTTI) and recorded a $31,000 OTTI loss for the three months ended March 31, 2011.  Refer to Note 4 of the Notes to Consolidated Financial Statements (unaudited) for more detail.  Future deterioration in the market values of our investment securities may require the Company to recognize future OTTI losses.

 

A component of the Company’s strategic plan has been to use its investment portfolio to offset, in part, its interest rate risk relating to variable rate loans.  At March 31, 2011, an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the investment portfolio by approximately $16,518,000.  Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio is $10,649,000.  The modeling environment assumes management would take no action during an immediate shock of 200 basis points.  However, the Company uses those increments to measure its interest rate risk in accordance with regulatory requirements and to measure the possible future risk in the investment portfolio.  For further discussion of the Company’s market risk, refer to Item 3 - Quantitative and Qualitative Disclosures about Market Risk.

 

Management’s review of all investments before purchase includes an analysis of how the security will perform under several interest rate scenarios to monitor whether investments are consistent with our investment policy.  The policy addresses issues of average life, duration, and concentration guidelines, prohibited investments, impairment, and prohibited practices.

 

Total interest income for the three months ended March 31, 2011 decreased $778,000 or 8.47% to $8,410,000 compared to $9,188,000 for the three months ended March 31, 2010.  The decrease was due to the 55 basis point decrease in average interest earning assets.  The yield on interest earning assets decreased to 5.14% for the three months ended March 31, 2011 from 5.69% for the three months ended March 31, 2010.  Average interest earning assets increased to $686,230,000 for the three months ended March 31, 2011 compared to $672,900,000 for the three months ended March 31, 2010.  The $13,330,000 increase in average earning assets can be attributed to the $39,617,000 increase in total investments offset by a $26,197,000 decrease in loans.

 

Interest expense on deposits for the three months ended March 31, 2011 decreased $336,000 or 31.91% to $717,000 compared to $1,053,000 for the three months ended March 31, 2010.  This decrease in interest expense was primarily due to repricing of interest bearing deposits which decreased 27 basis points to 0.61% for the three months ended March 31, 2011 from 0.88% in 2010 as a result of the ongoing low interest rate environment.  Average interest-bearing deposits decreased 2.26% or $10,993,000 to $476,447,000 for the three months ended March 31, 2011 compared to $487,440,000 for the same period ended March 31, 2010.

 

Average other borrowed funds decreased $7,444,000 or 35.28% to $13,655,000 with an effective rate of 2.82% for the three months ended March 31, 2011 compared to $21,099,000 with an effective rate of 2.86% for the three months ended March 31, 2010.  As a result, total interest expense on other borrowed funds decreased $54,000 to $95,000 for the three months ended March 31, 2011 from $149,000 for the three months ended March 31, 2010.  Other borrowings include advances from the Federal Home Loan Bank (FHLB) and junior subordinated deferrable interest debentures.  The FHLB advances are fixed rate short-term and long term borrowings.  The effective rate of the FHLB advances was 2.82% for the three month period ended March 31, 2011.  Advances were utilized as part of a leveraged strategy in the first quarter of 2008 to purchase investment securities.   The debentures were acquired in the merger with Service 1st and carry a floating rate based on the three month Libor plus a margin of 1.6%.  The rate at March 31, 2011 was 1.90%.  See the section on Financial Condition for more detail.

 

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Table of Contents

 

The cost of all of our interest-bearing liabilities decreased 29 basis points to 0.67% for the three month period ended March 31, 2011 compared to 0.96% for 2010 while the cost of total deposits decreased to 0.45% for the three month period ended March 31, 2011 compared to 0.67% for same period in 2010.  Average demand deposits increased 15.34% to $173,005,000 in 2011 compared to $149,995,000 for 2010.  The ratio of demand deposits to total deposits increased to 26.64% in the three month period of 2011 compared to 23.53% for the same period in 2010.

 

Net Interest Income before Provision for Credit Losses

 

Net interest income before provision for credit losses for the three months ended March 31, 2011 decreased by $388,000 or 4.86% to $7,598,000 compared to $7,986,000 for the same period in 2010.  The decrease was due to the 31 basis point decrease in our net interest margin and the decrease in average loans.  Average interest earning assets were $686,230,000 for the three months ended March 31, 2011 with a net interest margin of 4.67% compared to $672,900,000 with a net interest margin of 4.98% for the three months ended March 31, 2010.  The $13,330,000 increase in average earning assets can be attributed to the $39,617,000 increase in total investments offset by a $26,197,000 decrease in average loans.  Average interest bearing liabilities decreased 3.63% to $490,102,000 for the three months ended March 31, 2011 compared to $508,539,000 for the same period in 2010.  For a discussion of the repricing of our assets and liabilities, see “Item 3 — Quantitative and Qualitative Disclosure about Market Risk.”

 

Provision for Credit Losses

 

We provide for probable credit losses by a charge to operating income based upon the composition of the loan portfolio, delinquency levels, losses and nonperforming assets, economic and environmental conditions and other factors which, in management’s judgment, deserve recognition in estimating credit losses.  Loans are charged off when they are considered uncollectible or of such little value that continuance as an active earning bank asset is not warranted.

 

The establishment of an adequate credit allowance is based on both an accurate risk rating system and loan portfolio management tools.  The Board has established initial responsibility for the accuracy of credit risk grades with the individual credit officer.  The grading is then submitted to the Chief Credit Administrator (CCA), who reviews the grades for accuracy and gives final approval.  The CCA is not involved in loan originations.  The risk grading and reserve allocation is analyzed quarterly by the CCA and the Board and at least annually by a third party credit reviewer and by various regulatory agencies.

 

Quarterly, the CCA sets the specific reserve for all adversely risk-graded credits.  This process includes the utilization of loan delinquency reports, classified asset reports, and portfolio concentration reports to assist in accurately assessing credit risk and establishing appropriate reserves.  Reserves are also allocated to credits that are not impaired.

 

The allowance for credit losses is reviewed at least quarterly by the Board’s Audit/Compliance Committee and by the Board of Directors.  Reserves are allocated to loan portfolio categories using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors.  We have adopted the specific reserve approach to allocate reserves to each impaired asset for the purpose of estimating potential loss exposure.  Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety.  Additions may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process.  Additions are also required when, in management’s judgment, the allowance does not properly reflect the portfolio’s potential loss exposure.

 

The allocation of the allowance for credit losses is set forth below:

 

Loan Type (Dollars in Thousands) 

 

March 31, 2011

 

% of
Total
Loans

 

December 31, 2010

 

% of
Total
Loans

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

2,721

 

23.4

%

$

2,417

 

24.1

%

Agricultural production

 

239

 

4.5

%

182

 

9.0

%

Real estate:

 

 

 

 

 

 

 

 

 

Owner occupied

 

1,850

 

26.4

%

1,978

 

25.9

%

Real estate-construction and other land loans

 

1,957

 

7.5

%

1,805

 

7.4

%

Agricultural real estate

 

569

 

14.4

%

466

 

14.7

%

Commercial real estate

 

933

 

10.4

%

1,387

 

5.1

%

Other

 

1,227

 

3.9

%

1,362

 

3.8

%

Total real estate

 

6,536

 

62.6

%

6,998

 

56.9

%

Equity loans and lines of credit

 

610

 

7.6

%

797

 

8.0

%

Consumer and installment

 

388

 

2.0

%

382

 

2.0

%

Unallocated reserves

 

525

 

 

 

238

 

 

 

Total allowance for credit losses

 

$

11,019

 

 

 

$

11,014

 

 

 

 

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Table of Contents

 

Loans are charged to the allowance for credit losses when the loans are deemed uncollectible.  It is the policy of management to make additions to the allowance so that it remains adequate to cover all probable loan charge-offs that exist in the portfolio at that time. In 2010 enhanced methodology enabled us to assign qualitative and quantitative factors (Q factors) to each loan category resulting in a decrease in unallocated reserves.  Q factors include reserves held for the effects of lending policies, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio.

 

The unallocated reserves as of March 31, 2011 are principally due to qualitative and quantitative factors (Q factors).   Q factors include reserves held for the effects of lending policies, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio.

 

Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our potential losses.  Management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary.

 

Additions to the allowance for credit losses in the three months of 2011 were $100,000 compared to $600,000 for the same period in 2010.  These provisions are primarily the result of our assessment of the overall adequacy of the allowance for credit losses considering a number of factors as discussed in the “Allowance for Credit Losses” section below.  During the three months ended March 31, 2011, the Company had net charge offs totaling $95,000 compared $205,000 for the same period in 2010.  During the first quarter of 2011, gross charge offs of $321,000 were partially offset by gross recoveries of $226,000.  The period-to-period decrease in provision for credit losses resulted from a decrease in the level of outstanding loans and a decrease in net charge offs.

 

Nonperforming loans were $15,589,000 and $18,561,000 at March 31, 2011 and December 31, 2010, respectively and $18,053,000 at March 31, 2010.  Nonperforming loans as a percentage of total loans were 3.69% at March 31, 2011 compared to 4.30% at December 31, 2010 and 3.99% at March 31, 2010.  Other real estate owned at March 31, 2011 was $257,000 compared to $1,325,000 net of a valuation allowance of $309,000, at December 31, 2010, and $2,549,000 net of a valuation allowance of $639,000 at March 31, 2010.

 

The annualized net charge off ratio, which reflects net charge-offs to average loans for the three months ended March 31, 2011, was 0.09% compared to 0.18% for the same period in 2010.  The annual net charge off ratios for 2010, 2009, and 2008 were 0.66%, 1.56% and 0.20%, respectively.

 

We believe the significant economic downturn witnessed during 2008 that has continued through 2011 has had a considerable impact on the ability of certain borrowers to satisfy their obligations, resulting in loan downgrades and corresponding increases in credit loss provisions.  Additionally, we estimate the impact certain economic factors will have on various credits within the portfolio.

 

While the Company saw a decline in the balance of non-accruing loans when compared to that reported at December 31, 2010, non-accruing balances remain elevated relative to historical periods.  Continued increases in the level of charge-offs and the number and dollar volume of past due and non-performing loans may result in further provisions to the allowance for credit losses.

 

We anticipate weakness in economic conditions on national, state and local levels to continue.  Continued economic pressures may negatively impact the financial condition of borrowers to whom the Company has extended credit and as a result we may be required to make further significant provisions to the allowance for credit losses during 2011.  We have been and will continue to be proactive in looking for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate any further losses.

 

As of March 31, 2011, we believe, based on all current and available information, the allowance for credit losses is adequate to absorb current estimable losses within the loan portfolio.  However, no assurance can be given that we may not sustain charge-offs which are in excess of the allowance in any given period.  Refer to “Allowance for Credit Losses” below for further information.

 

Net Interest Income after Provision for Credit Losses

 

Net interest income, after the provision for credit losses, was $7,498,000 for the three month period ended March 31, 2011 and $7,386,000 for the same period in 2010.

 

Non-Interest Income

 

Non-interest income is comprised of customer service charges, loan placement fees, gains on sale of other real estate owned, gains on sales of investment securities, appreciation in cash surrender value of bank owned life insurance, Federal Home Loan Bank dividends, and other income.  Non-interest income was $1,748,000 for the three months ended March 31, 2011 compared to $1,334,000 for the same period in 2010.  The $414,000 or 31.03% increase in non-interest income was due to an increase in gains on sale of other real estate owned, offset by a decrease in service charges.

 

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Table of Contents

 

During the three months ended March 31, 2011, we realized net loss on sales and calls of investment securities of $16,000 compared to a gain of $21,000 for the same period in 2010.  During the first quarter of 2011 we also realized a gain on sale of other real estate owned of $545,000 compared to none in 2010.  For the three month period ended March 31, 2011, we realized a $31,000 other-than-temporary impairment write down on certain investment securities.  See Note 4 of the Notes to Consolidated Financial Statements (unaudited) for more detail.

 

Customer service charges decreased $162,000 or 18.82% to $699,000 for the first three months of 2011 compared to 861,000 for the same period in 2010, mainly due to a decrease in overdraft fee income.

 

The Bank holds stock from the Federal Home Loan Bank in relationship with the borrowing capacity and generally earns quarterly dividends.  We currently hold $3,050,000 in FHLB stock.  We received dividends totaling $2,000 in each of the three months ended March 31, 2011 and 2010.

 

Non-Interest Expenses

 

Salaries and employee benefits, occupancy, regulatory assessments, professional services, other real estate owned expense, and data processing are the major categories of non-interest expenses.  Non-interest expenses decreased $51,000 or 0.71% to $7,153,000 for the three months ended March 31, 2011 compared to $7,204,000 for the three months ended March 31, 2010.  The decrease in 2011 was primarily due to a decrease in other real estate owned expense and legal expense, partially offset by an increase in salaries and employee benefits.

 

The Company’s efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangible assets and foreclosure expenses) to net interest income before provision for credit losses plus non-interest income (exclusive of realized gains on sale and calls of investments) was 79.6% for the first three months of 2011 compared to 73.0% for the three months ended March 31, 2010.  The deterioration in the ratio resulted from a decrease in net interest income.  After the elimination of OREO related gains and expenses, non-interest income decreased and operating expenses increased.

 

Salaries and employee benefits increased $331,000 or 8.83% to $4,078,000 for the first three months of 2011 compared to $3,747,000 for the three months ended March 31, 2010.  The increase in salaries and employee benefits for the 2011 period can be attributed to the addition of personnel in connection with the expansion of offices in Modesto and Merced and other new positions along with normal cost increases.  Full time equivalents were 214.6 on March 31, 2011 compared to 194.6 on March 31, 2010.

 

Occupancy and equipment expense increased $8,000 or 0.86% to $934,000 for the three months ended March 31, 2011 compared to $926,000 for the three months ended March 31, 2010.  The new Modesto and Merced offices as well as the relocation of our Oakhurst office in 2010 contributed to the increase in occupancy expenses.

 

Regulatory assessments decreased to $289,000 for the three month period ended March 31, 2011 compared to $300,000 for the same period in 2010.

 

Total other real estate owned (OREO) expenses were $9,000 for the three months ended March 31, 2011 and $314,000 for the same period in 2010.  The decrease in 2011 is the result of the write downs of several OREO properties to their estimated fair value for the three month period ended March 31, 2010.

 

Other categories of non-interest expenses decreased $25,000 or 2.27% in the period under review.  The following table shows significant components of other non-interest expense as a percentage of average assets.

 

For the Three Months Ended March 31, 

 

Other Expense
2011

 

% Average
Assets

 

Other Expense
2010

 

%
Average
Assets

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

ATM/debit card expenses

 

$

87

 

0.05

%

$

98

 

0.05

%

Telephone

 

81

 

0.04

%

77

 

0.04

%

Appraisal fees

 

30

 

0.02

%

74

 

0.04

%

Stationery/supplies

 

60

 

0.03

%

60

 

0.03

%

License and maintenance contracts

 

83

 

0.04

%

57

 

0.03

%

Postage

 

48

 

0.02

%

53

 

0.03

%

Director fees and related expenses

 

53

 

0.03

%

52

 

0.03

%

Amortization of software

 

56

 

0.03

%

48

 

0.03

%

Donations

 

47

 

0.02

%

44

 

0.02

%

General insurance

 

25

 

0.01

%

36

 

0.02

%

Consulting

 

36

 

0.02

%

32

 

0.02

%

Education/training

 

25

 

0.01

%

28

 

0.01

%

Operating losses

 

17

 

0.01

%

18

 

0.01

%

Other

 

426

 

0.22

%

422

 

0.22

%

Total other non-interest expense

 

$

1,074

 

0.56

%

$

1,099

 

0.63

%

 

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Table of Contents

 

Provision for Income Taxes

 

Our effective income tax rate was 24.13% for the three months ended March 31, 2011 compared to 14.78% for the three months ended March 31, 2010.  The Company reported an income tax provision of $505,000 for three months ended March 31, 2011, compared to $224,000 for the three months ended March 31, 2010.  The increase in the effective tax rate in 2011 is due to increases in taxable income and reserves for uncertain tax positions which are primarily attributable to state tax credits and deductions related to certain enterprise zone activities in California.

 

Preferred Stock Dividends and Accretion

 

On January 30, 2009, we entered into a Letter Agreement with the United States Department of the Treasury under the Capital Purchase Program.  We received $7,000,000 in proceeds and the Treasury owns 7,000 shares of the Company’s Series A Fixed Rate Cumulative Perpetual Preferred Stock (“Preferred Stock”) and a warrant to purchase 79,089 shares, at $6.64 per share, of the Company’s common stock, no par value.  The Company accrued preferred stock dividends to the United States Department of the Treasury and accretion of the warrants in the amount of $99,000 during the three months ended March 31, 2011 and 2010, respectively.

 

FINANCIAL CONDITION

 

Summary of Changes in Consolidated Balance Sheets

 

March 31, 2011 compared to December 31, 2010

 

Total assets were $766,690,000, compared to $777,594,000 as of December 31, 2010, a decrease of 1.40%, or $10,904,000.  Total gross loans were $422,042,000 as of March 31, 2011 compared to $431,597,000 as of December 31, 2010.  The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) decreased 1.57% or $4,407,000 to $276,560,000.  Total deposits decreased 0.97% or $6,318,000 to $644,177,000 as of March 31, 2011 compared to $650,495,000 as of December 31, 2010.  Stockholders’ equity increased $2,152,000 or 2.21% to $99,543,000 as of March 31, 2011 compared to $97,391,000 as of December 31, 2010 due to net income included in retained earnings, an increase in other comprehensive income and issuance of common stock from the exercise of stock options.

 

Fair Value

 

The Company measures the fair values of its financial instruments utilizing a hierarchical disclosure framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value.  The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario.  Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value.  Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value.  Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.

 

See Note 5 of the Notes to Consolidated Financial Statements (unaudited) for additional information about the level of pricing transparency associated with financial instruments carried at fair value.

 

Investments

 

Our investment portfolio consists primarily of agency securities, mortgage backed securities, municipal securities, collateralized mortgage obligations, corporate debt securities, and overnight investments in the Federal funds market and are classified at the date of acquisition as available for sale or held to maturity.  As of March 31, 2011, investment securities with a fair value of $128,118,000, or 61.77% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes.  Our investment policies are established by the Board of Directors and implemented by our Investment/Asset Liability Committee.  They are designed primarily to provide and maintain liquidity, to enable us to meet our pledging requirements for public money and borrowing arrangements, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement our lending activities.

 

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Table of Contents

 

The level of our investment portfolio is generally considered higher than our peers due primarily to a comparatively low loan to deposit ratio.  Our loan to deposit ratio at March 31, 2011 was 63.81% compared to 66.35% at December 31, 2010.  The loan to deposit ratio of our peers was 80.53% at December 31, 2010.  The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, decreased 1.57% or $4,407,000 to $276,560,000 at March 31, 2011 from $280,967,000 at December 31, 2010.  The market value of the portfolio reflected an unrealized gain of $1,798,000 at March 31, 2011 compared to $1,643,000 at December 31, 2010.

 

We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations.

 

As of March 31, 2011, we performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI).  We evaluated all available-for-sale investment securities with an unrealized loss at March 31, 2011 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at March 31, 2011 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000.  In addition, we reviewed all private label residential mortgage backed securities (PLRMBS) at March 31, 2011.

 

For those bonds that met the evaluation criteria we obtained and reviewed the most recently published national credit ratings for those bonds.  For those bonds that were municipal debt securities with an investment grade rating by the rating agencies, we also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded that no credit related impairment existed based on the rating.  Our evaluation for PLRMBS also includes estimating projected cash flows that the Company is likely to collect based on an assessment of all available information about the applicable security on an individual basis, the structure of the security, and certain assumptions, such as the remaining payment terms for the security, prepayment speeds, default rates, loss severity on the collateral supporting the security based on underlying loan-level borrower and loan characteristics, expected housing price changes, and interest rate assumptions, to determine whether the Company will recover the entire amortized cost basis of the security.  In performing a detailed cash flow analysis, the Company identified the best estimate of the cash flows expected to be collected.  If this estimate results in a present value of expected cash flows (discounted at the security’s effective yield) that is less than the amortized cost basis of the security, OTTI is considered to have occurred.

 

To assess whether it expects to recover the entire amortized cost basis of its PLRMBS, the Company performed a cash flow analysis for all of its PLRMBS as of March 31, 2011.  In performing the cash flow analysis for each security, the Company uses a third-party model.  The model considers borrower characteristics and the particular attributes of the loans underlying the Company’s securities, in conjunction with assumptions about future changes in home prices and other assumptions, to project prepayments, default rates, and loss severities.

 

The month-by-month projections of future loan performance are allocated to the various security classes in each securitization structure in accordance with the structure’s prescribed cash flow and loss allocation rules.  When the credit enhancement for the senior securities in a securitization is derived from the presence of subordinated securities, losses are allocated first to the subordinated securities until their principal balance is reduced to zero.  The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations.  The scenario of cash flows determined based on the model approach described above reflects a best-estimate scenario.

 

At each quarter end, the Company compares the present value of the cash flows expected to be collected on its PLRMBS to the amortized cost basis of the securities to determine whether a credit loss exists.

 

The unrealized losses associated with private residential PLRMBS are primarily driven by higher projected collateral losses, wider credit spreads, and changes in interest rates.  The Company assesses for credit impairment using a discounted cash flow model.  The key assumptions include home price depreciation, default rates, severities, discount rates and prepayment rates.  We estimate losses to a security by forecasting the underlying mortgage loans in each transaction.  The forecasted loan performance is used to project cash flows to the various tranches in the structure.  Based upon management’s assessment of the expected credit losses of the security given the performance of the underlying collateral compared with our credit enhancement (which occurs as a result of credit loss protection provided by subordinated tranches), we expect to recover the entire amortized cost basis of these securities, with the exception of certain securities for which we recorded an OTTI.

 

At March 31, 2011, the Company held 163 obligations of states and political subdivision securities of which 36 were in a loss position for less than 12 months and seven were in a loss position and have been in a loss position for 12 months or more.  The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes.  Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

 

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Table of Contents

 

At March 31, 2011, the Company held 140 U.S. Government agency securities collateralized by mortgage obligation securities of which 15 were in a loss position for less than 12 months.  The unrealized losses on the Company’s investments in U.S. government agencies collateralized by mortgage obligations were caused by interest rate changes.  The contractual cash flows of those investments are guaranteed by an agency of the U.S. government.  Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment.  Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2011.

 

At March 31, 2011, the Company had a total of 36 PLRMBS with a remaining principal balance of $17,528,000 and a net unrealized loss of approximately $816,000.  Eight of these securities account for $1,355,000 of the unrealized loss at March 31, 2011 offset by 28 of these securities with gains totaling $539,000.  Nine of these PLRMBS with a remaining principal balance of $10,682,000 had credit ratings below investment grade.  The Company continues to perform extensive analyses on these securities as well as all whole loan CMOs.  Several of these investment securities continue to demonstrate cash flows and credit support as expected and the expected cash flows of the security discounted at the security’s effective yield are greater than the book value of the security, therefore management does not consider these securities to be other than temporarily impaired.   No OTTI charges related to PLRMBS were recorded during the first quarter of 2011.

 

During the three months ended March 31, 2011, the Company recorded an OTTI charge of $31,000 related to one mutual fund investment security.

 

See Note 4 of the Notes to Consolidated Financial Statements (unaudited) included in this report for carrying values and estimated fair values of our investment securities portfolio.

 

Loans

 

Total gross loans decreased $9,555,000 or 2.21% to $422,042,000 as of March 31, 2011 compared to $431,597,000 as of December 31, 2010.

 

The following table sets forth information concerning the composition of our loan portfolio at the dates indicated:

 

Loan Type
(Dollars in thousands) 

 

March 31,
2011

 

% of
Total
loans

 

December 31,
2010

 

% of
Total
loans

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

99,236

 

23.5

%

$

104,387

 

24.1

%

Agricultural production

 

44,024

 

10.4

%

38,787

 

9.0

%

Total commercial

 

143,260

 

33.9

%

143,174

 

33.1

%

Real estate:

 

 

 

 

 

 

 

 

 

Owner occupied

 

111,754

 

26.4

%

111,888

 

25.9

%

Real estate-construction and other land loans

 

31,865

 

7.5

%

32,039

 

7.4

%

Commercial real estate

 

60,892

 

14.4

%

63,627

 

14.7

%

Agricultural real estate

 

18,201

 

4.3

%

22,100

 

5.1

%

Other

 

16,464

 

3.9

%

16,254

 

3.8

%

Total real estate

 

239,176

 

56.5

%

245,908

 

56.9

%

Consumer:

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

31,950

 

7.6

%

34,521

 

8.0

%

Consumer and installment

 

8,289

 

2.0

%

8,493

 

2.0

%

Total consumer

 

40,239

 

9.6

%

43,014

 

10.0

%

Deferred loan fees, net

 

(633

)

 

 

(499

)

 

 

Total gross loans

 

422,042

 

100.0

%

431,597

 

100.0

%

Allowance for credit losses

 

(11,019

)

 

 

(11,014

)

 

 

Total loans

 

$

411,023

 

 

 

$

420,583

 

 

 

 

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Table of Contents

 

As of March 31, 2011, in management’s judgment, a concentration of loans existed in commercial loans and loans collateralized by real-estate-related loans, representing approximately 90.5% of total loans of which 27.9% were commercial and 62.6% were real-estate-related.  This level of concentration is consistent with 90.0% at December 31, 2010.  Although management believes the loans within this concentration have no more than the normal risk of collectibility, a substantial further decline in the performance of the economy in general or a further decline in real estate values in our primary market areas, in particular, could have an adverse impact on collectibility, increase the level of real estate-related non-performing loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on our business, financial condition, results of operations and cash flows.  The Company was not involved in any sub-prime mortgage lending activities at March 31, 2011 or December 31, 2010.

 

We believe that our commercial real estate loan underwriting policies and practices result in prudent extensions of credit, but recognize that our lending activities result in relatively high reported commercial real estate lending levels.  Commercial real estate loans include certain loans which represent low to moderate risk and certain loans with higher risks.

 

The Board of Directors reviews and approves concentration limits and exceptions to limitations of concentration are reported to the Board of Directors at least quarterly.

 

Nonperforming Assets

 

Nonperforming assets consist of nonperforming loans, other real estate owned (OREO), and repossessed assets.  Nonperforming loans are those loans which have (i) been placed on nonaccrual status; (ii) been subject to troubled debt restructuring; (iii) been classified as doubtful under our asset classification system; or (iv) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on nonaccrual status.  A loan is classified as nonaccrual when 1) it is maintained on a cash basis because of deterioration in the financial condition of the borrower; 2) payment in full of principal or interest under the original contractual terms is not expected; or 3) principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection.

 

At March 31, 2011, total nonperforming assets totaled $15,846,000, or 2.07% of total assets, compared to $19,984,000, or 2.57% of total assets at December 31, 2010.  Total nonperforming assets at March 31, 2011 included nonaccrual loans totaling $15,589,000 and OREO of $257,000.  At March 31, 2011, we had 13 loans considered troubled debt restructurings totaling $8,290,000, which are included in nonaccrual loans.  At December 31, 2010, nonperforming assets included nonaccrual loans totaling $18,561,000, OREO of $1,325,000, and repossessed assets of $98,000.  We had seven restructured loans totaling $6,180,000 at December 31, 2010.  Foregone interest on nonaccrual loans totaled $288,000 and $385,000 for the three month periods ended March 31, 2011 and 2010, respectively.

 

A summary of nonaccrual, restructured, and past due loans at March 31, 2011 and December 31, 2010 is set forth below.  The Company had no loans past due more than 90 days and still accruing interest at March 31, 2011 or December 31, 2010.  Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future.

 

Composition of Non-accrual, Past Due and Restructured Loans

 

(Dollars in thousands)

 

March 31, 2011

 

December 31, 2010

 

Non-accrual loans

 

 

 

 

 

Commercial and industrial

 

$

481

 

$

1,487

 

Real estate

 

763

 

4,772

 

Real estate construction and other land loans

 

5,533

 

5,634

 

Equity loans and lines of credit

 

523

 

488

 

Troubled debt restructured loans (non-accruing)

 

 

 

 

 

Commercial and industrial

 

922

 

869

 

Consumer

 

82

 

 

Real estate

 

2,874

 

3,118

 

Real estate construction and land development

 

4,411

 

2,193

 

Total non-accrual

 

15,589

 

18,561

 

Accruing loans past due 90 days or more

 

 

 

Total non-performing loans

 

$

15,589

 

$

18,561

 

Nonperforming loans to total loans

 

3.69

%

4.30

%

Ratio of non-performing loans to allowance for credit losses

 

141.48

%

168.52

%

Loans considered to be impaired

 

$

15,589

 

$

18,561

 

Related allowance for credit losses on impaired loans

 

$

1,702

 

$

2,124

 

 

We measure our impaired loans by using the fair value of the collateral if the loan is collateral dependent and the present value of the expected future cash flows discounted at the loan’s effective interest rate if the loan is not collateral dependent.  As of March 31, 2011 and December 31, 2010, we had impaired loans totaling $15,589,000 and $18,561,000, respectively.  For collateral dependent loans secured by real estate, we obtain external appraisals which are updated at least annually to determine the fair value of the collateral, and we record an immediate charge off for the difference between the book value of the loan and the appraised value of collateral.  We perform quarterly internal reviews on substandard loans.  We place loans on nonaccrual status and classify them as impaired when it becomes probable that we will not receive interest and principal under the original contractual terms, or when loans are delinquent 90 days or more unless the loan is both well secured and in the process of collection. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods.

 

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Table of Contents

 

The following table provides a reconciliation of the change in non-accrual loans for the first three months of 2011.

 

(Dollars in thousands)

 

Balances
December
31, 2010

 

Additions to
Nonaccrual
Loans

 

Net Pay
Downs

 

Transfers
to
Foreclosed
Collateral
- OREO

 

Returns to
Accrual
Status

 

Charge
Offs

 

Balances
March 31,
2011

 

Non-accrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

377

 

$

390

 

$

(42

)

$

(95

)

$

 

$

(149

)

$

481

 

Real estate

 

1,407

 

297

 

(720

)

 

(195

)

(26

)

763

 

Real estate construction and other land loans

 

5,634

 

 

(101

)

 

 

 

5,533

 

Equity loans and lines of credit

 

488

 

248

 

(214

)

 

 

 

522

 

Restructured loans (non-accruing):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

1,978

 

 

(206

)

 

(850

)

 

922

 

Consumer

 

 

82

 

 

 

 

 

82

 

Real estate

 

4,198

 

 

(1,324

)

 

 

 

2,874

 

Real estate construction and land development

 

4,479

 

 

(67

)

 

 

 

4,412

 

Total non-accrual

 

$

18,561

 

$

1,017

 

$

(2,674

)

$

(95

)

$

(1,045

)

$

(175

)

$

15,589

 

 

The following table provides a summary of the change in the OREO balance for the three months ended March 31, 2011:

 

(Dollars in thousands)

 

Three
Months
Ended
March  31,
2011

 

Balance, December 31, 2010

 

$

1,325

 

Additions

 

257

 

Dispositions

 

(1,325

)

Balance, March 31, 2011

 

$

257

 

 

OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower.  OREO is carried at the lesser of cost or fair market value, less selling costs.  OREO holdings represented one property with a fair value totaling $257,000 at March 31, 2011 and two properties totaling $1,325,000 at December 31, 2010.

 

Allowance for Credit Losses

 

We have established a methodology for the determination of provisions for credit losses.  The methodology is set forth in a formal policy and takes into consideration the need for an overall allowance for credit losses as well as specific allowances that are tied to individual loans.  Our methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance and a specific allowance for identified problem loans.

 

In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan.  The allowance is increased by provisions charged against earnings and reduced by net loan charge offs.  Loans are charged off when they are deemed to be uncollectible, or partially charged off when portions of a loan are deemed to be uncollectible.  Recoveries are generally recorded only when cash payments are received.

 

The allowance for credit losses is maintained to cover probable losses inherent in the loan portfolio.  The responsibility for the review of our assets and the determination of the adequacy lies with management and our Audit Committee.  They delegate the authority to the Chief Credit Administrator (CCA) to determine the loss reserve ratio for each type of asset and reviews, at least quarterly, the adequacy of the allowance based on an evaluation of the portfolio, past experience, prevailing market conditions, amount of government guarantees, concentration in loan types and other relevant factors.

 

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Table of Contents

 

The allowance for credit losses is an estimate of the losses that may be sustained in our loan and lease portfolio.  The allowance is based on principles of accounting: (1) ASC 310-10 which requires that losses be accrued when they are probable of occurring and can be reasonably estimated and (2) ASC 450-20 which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

 

Credit Administration adheres to an internal asset review system and loss allowance methodology designed to provide for timely recognition of problem assets and adequate valuation allowances to cover expected asset losses.  The Bank’s asset monitoring process includes the use of asset classifications to segregate the assets, largely loans and real estate, into various risk categories.  The Bank uses the various asset classifications as a means of measuring risk and determining the adequacy of valuation allowances by using a nine-grade system to classify assets.  All credit facilities exceeding 90 days of delinquency require classification.

 

The following table sets forth information regarding our allowance for credit losses at the dates and for the periods indicated:

 

(Dollars in thousands)

 

For the Three Months
Ended March 31, 2011

 

For the Year Ended
December 31, 2010

 

For the Three Months
Ended March 31, 2010

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

11,014

 

$

10,200

 

$

10,200

 

Provision charged to operations

 

100

 

3,800

 

600

 

Losses charged to allowance

 

(321

)

(4,122

)

(476

)

Recoveries

 

226

 

1,136

 

271

 

Balance, end of period

 

$

11,019

 

$

11,014

 

$

10,595

 

Ratio of non-performing loans to allowance for credit losses at end of period

 

141.48

%

168.52

%

170.39

%

Allowance for credit losses to total loans at end of period

 

2.61

%

2.55

%

2.34

%

 

As of March 31, 2011 the balance in the allowance for credit losses was $11,019,000 compared to $11,014,000 as of December 31, 2010.  The increase was due to net charge offs during the three months ended March 31, 2011 being less than the amount of the provision for credit losses.  Net charge offs totaled $95,000 while the provision for credit losses was $100,000.  The balance of commitments to extend credit on undisbursed construction and other loans and letters of credit was $129,595,000 as of March 31, 2011 compared to $123,676,000 as of December 31, 2010.  Risks and uncertainties exist in all lending transactions and our management and Directors’ Loan Committee have established reserve levels based on economic uncertainties and other risks that exist as of each reporting period.

 

As of March 31, 2011, the allowance for credit losses was 2.61% of total gross loans compared to 2.55% as of December 31, 2010.  During the three months ended March 31, 2011 there were no major changes in loan concentrations that significantly affected the allowance for credit losses.  During the period ended March 31, 2011 the Company enhanced the process for estimating the allowance for credit losses.  The modification did not have a significant impact on the amount of the allowance for credit losses in total nor did it have a material impact on the allocation of the allowance within loan categories. In 2010 enhanced methodology enabled us to assign qualitative and quantitative factors (Q factors) to each loan category resulting in a decrease in unallocated reserves. Q factors include reserves held for the effects of lending policies, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio. Assumptions regarding the collateral value of various under performing loans may affect the level and allocation of the allowance for credit losses in future periods.  The allowance may also be affected by trends in the amount of charge offs experienced or expected trends within different loan portfolios.

 

Non-performing loans totaled $15,589,000 as of March 31, 2011, and $18,561,000 as of December 31, 2010.  The allowance for credit losses as a percentage of nonperforming loans was 70.68% and 59.34% as of March 31, 2011 and December 31, 2010, respectively.  Management believes the allowance at March 31, 2011 is adequate based upon its ongoing analysis of the loan portfolio, historical loss trends and other factors.  However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.

 

Goodwill and Intangible Assets

 

Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill.  Total goodwill at March 31, 2011 was $23,577,000 consisting of $14,643,000 and $8,934,000 representing the excess of the cost of Service 1st and Bank of Madera County, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting.  The value of goodwill is ultimately derived from the Bank’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes.  A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment.  For that reason, goodwill is assessed at least annually for impairment.

 

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During the third quarter of 2010 we engaged an independent valuation specialist to test goodwill for impairment.  Goodwill impairment testing is a two step process.  The first step compares the fair value of a reporting unit with its carrying amount, including goodwill.  If the carrying amount exceeds the fair value, the second step of the goodwill impairment test is performed to measure the impairment loss, if any.  If the fair value of the reporting unit exceeds the carrying value, then goodwill is not impaired and step two is unnecessary.  Since the Company is considered to be one reporting unit, the fair value of the Company was compared to the carrying value.  Based on the results of the testing performed, the fair value of the Company exceeded the carrying value so step two was not required and goodwill was not impaired.  The fair value of the Company was determined based on an analysis of three different valuation methods including the analysis of discounted future cash flows, comparable whole bank transactions, and the Company’s market capitalization plus a control premium.

 

Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount.  No such events or circumstances arose during the first quarter of 2011, so goodwill was not required to be retested.

 

The intangible assets represent the estimated fair value of the core deposit relationships acquired in the acquisition of Service 1st in 2008 of $1,400,000 and the 2005 acquisition of Bank of Madera County of $1,500,000 at December 31, 2009.  Core deposit intangibles are being amortized using the straight-line method over an estimated life of seven years from the date of acquisition.  The carrying value of intangible assets at March 31, 2011 was $1,094,000, net of $1,806,000 in accumulated amortization expense.  The carrying value at December 31, 2010 was $1,198,000, net of $1,702,000 accumulated amortization expense.  We evaluate the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization.  Based on the evaluation, no changes to the remaining useful lives was required in the first quarter of 2011.  We engaged an independent valuation specialist to perform our annual impairment test on core deposit intangibles as of September 30, 2010 and determined no impairment was necessary.  Amortization expense recognized was $104,000 for the three month periods ended March 31, 2011 and 2010.

 

Deposits and Borrowings

 

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits.  The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act permanently raises the current standard maximum deposit insurance amount to $250,000 and extended unlimited FDIC deposit insurance to qualifying noninterest-bearing transaction accounts through December 31, 2012.

 

Total deposits decreased $6,318,000 or 0.97% to $644,177,000 as of March 31, 2011 compared to $650,495,000 as of December 31, 2010.  Interest-bearing deposits increased $1,796,000 or 0.38% to $478,424,000 as of March 31, 2011 compared to $476,628,000 as of December 31, 2010.  Non-interest bearing deposits decreased $8,114,000 or 4.67% to $165,753,000 as of March 31, 2011 compared to $173,867,000 as of December 31, 2010.  Average non-interest bearing deposits to average total deposits was 26.64% for the three months ended March 31, 2011 compared to 23.53% for the same period in 2010.

 

The composition of the deposits and average interest rates paid at March 31, 2011 and December 31, 2010 is summarized in the table below.

 

(Dollars in thousands)

 

March 31,
2011

 

% of
Total
Deposits

 

Effective
Rate

 

December 31,
2010

 

% of
Total
Deposits

 

Effective
Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

119,359

 

18.5

%

0.31

%

$

114,473

 

17.6

%

0.38

%

MMA accounts

 

157,513

 

24.5

%

0.47

%

157,345

 

24.2

%

0.66

%

Time deposits

 

172,153

 

26.7

%

1.01

%

177,132

 

27.2

%

1.19

%

Savings deposits

 

29,399

 

4.6

%

0.20

%

27,678

 

4.3

%

0.20

%

Total interest-bearing

 

478,424

 

74.3

%

0.67

%

476,628

 

73.3

%

0.77

%

Non-interest bearing

 

165,753

 

25.7

%

 

 

173,867

 

26.7

%

 

 

Total deposits

 

$

644,177

 

100.0

%

 

 

$

650,495

 

100.0

%

 

 

 

Other Borrowings

 

There were no short term borrowings as of March 31, 2011 compared to $10,000,000 as of December 31, 2010.

 

Long-term borrowings of $4,000,000 at March 31, 2011 represent FHLB advances with weighted average interest of 3.31% and weighted average maturity of 1.9 years.  Long-term borrowings at December 31, 2010 were $4,000,000.

 

The Company holds junior subordinated deferrable interest debentures (trust preferred securities).  Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis.  At March 31, 2011, all of the trust preferred securities that have been issued qualify as Tier 1 capital.  Interest on the trust preferred securities is payable and the rate is adjusted to equal the three month LIBOR plus 1.60% each January 7, April 7, July 7 or October 7 of each year.  As of March 31, 2011, the rate was 1.98%.  Interest expense recognized by the Company for the three months ended March 31, 2011 was $94,907.

 

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Capital

 

Our stockholders’ equity was $99,543,000 as of March 31, 2011 compared to $97,391,000 as of December 31, 2010.   The increase in stockholders’ equity is the result of retained earnings increase of $1,491,000 for the three months ended March 31, 2011, an increase in other comprehensive income net of tax of $91,000, and proceeds from the exercise of employee stock options of $559,000.

 

Management considers capital requirements as part of its strategic planning process.  The strategic plan calls for continuing increases in assets and liabilities, and the capital required may therefore be in excess of retained earnings.  The ability to obtain capital is dependent upon the capital markets as well as our performance.  Management regularly evaluates sources of capital and the timing required to meet its strategic objectives.

 

The following table presents the Company’s and the Bank’s Regulation capital ratios as of March 31, 2011 and December 31, 2010.

 

 

 

March 31, 2011

 

December 31, 2010

 

(Dollars in thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Tier 1 Leverage Ratio

 

 

 

 

 

 

 

 

 

Central Valley Community Bancorp and Subsidiary

 

$

73,050

 

9.87

%

$

70,669

 

9.48

%

Minimum regulatory requirement

 

$

29,612

 

4.00

%

$

29,832

 

4.00

%

Central Valley Community Bank

 

$

71,514

 

9.67

%

$

69,457

 

9.32

%

Minimum requirement for “Well-Capitalized” institution

 

$

36,989

 

5.00

%

$

37,264

 

5.00

%

Minimum regulatory requirement

 

$

29,591

 

4.00

%

$

29,811

 

4.00

%

 

 

 

 

 

 

 

 

 

 

Tier 1 Risk-Based Capital Ratio

 

 

 

 

 

 

 

 

 

Central Valley Community Bancorp and Subsidiary

 

$

73,050

 

14.81

%

$

70,669

 

14.16

%

Minimum regulatory requirement

 

$

19,729

 

4.00

%

$

19,965

 

4.00

%

Central Valley Community Bank

 

$

71,514

 

14.51

%

$

69,457

 

13.92

%

Minimum requirement for “Well-Capitalized” institution

 

$

29,570

 

6.00

%

$

29,929

 

6.00

%

Minimum regulatory requirement

 

$

19,714

 

4.00

%

$

19,953

 

4.00

%

 

 

 

 

 

 

 

 

 

 

Total Risk-Based Capital Ratio

 

 

 

 

 

 

 

 

 

Central Valley Community Bancorp and Subsidiary

 

$

79,298

 

16.08

%

$

76,982

 

15.42

%

Minimum regulatory requirement

 

$

39,458

 

8.00

%

$

39,931

 

8.00

%

Central Valley Community Bank

 

$

77,757

 

15.78

%

$

75,766

 

15.19

%

Minimum requirement for “Well-Capitalized” institution

 

$

49,284

 

10.00

%

$

49,881

 

10.00

%

Minimum regulatory requirement

 

$

39,427

 

8.00

%

$

39,905

 

8.00

%

 

We are required to deduct the disallowed portion of net deferred tax assets from Tier 1 capital in calculating our capital ratios.  Generally, disallowed deferred tax assets that are dependent upon future taxable income are limited to the lesser of the amount of deferred tax assets that we expect to realize within one year, based on projected future taxable income, or 10% of the amount of our Tier 1 capital.  Disallowed deferred tax assets deducted from Tier 1 capital were $5,764,000 and $5,981,000 at March 31, 2011 and December 31, 2010, respectively.

 

Liquidity

 

Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs and ongoing repayment of borrowings.  Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Director’s Asset/Liability Committees.  This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flow for off-balance sheet commitments.

 

Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities with correspondent banks, and advances from the Federal Home Loan Bank of San Francisco.  These funding sources are augmented by payments of principal and interest on loans, the routine maturities and pay downs of securities from the securities portfolio, the stability of our core deposits and the ability to sell investment securities.  As of March 31, 2011, the Company had unpledged securities totaling $67,958,000 available as a secondary source of liquidity and total cash and cash equivalents of

 

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$84,431,000.  Cash and cash equivalents at March 31, 2011 decreased 16.40% compared to December 2010.  Primary uses of funds include withdrawal of and interest payments on deposits, originations and purchases of loans, purchases of investment securities, and payment of operating expenses. Due to the negative impact of the slow economic recovery, we have been cautiously managing our asset quality. Consequently, expanding our portfolio or finding adequate investments to utilize some of our excess liquidity has been difficult in the current economic environment.

 

As a means of augmenting our liquidity, we have established federal funds lines with correspondent banks.  At March 31, 2011 our available borrowing capacity includes approximately $39,000,000 in unsecured credit lines with our correspondent banks, $112,570,100 in unused FHLB advances and $1,064,000 secured credit line at the Federal Reserve Bank.  We believe our liquidity sources to be stable and adequate.  At March 31, 2011, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position.

 

The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at March 31, 2011 and December 31, 2010:

 

Credit Lines (In thousands)

 

March 31,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Unsecured Credit Lines

 

 

 

 

 

(interest rate varies with market):

 

 

 

 

 

Credit limit

 

$

39,000

 

$

39,000

 

Balance outstanding

 

$

 

$

 

 

 

 

 

 

 

Federal Home Loan Bank

 

 

 

 

 

(interest rate at prevailing interest rate):

 

 

 

 

 

Credit limit

 

$

116,570

 

$

114,659

 

Balance outstanding

 

$

4,000

 

$

14,000

 

Collateral pledged

 

$

120,084

 

$

123,717

 

Fair value of collateral

 

$

122,627

 

$

126,326

 

 

 

 

 

 

 

Federal Reserve Bank

 

 

 

 

 

(interest rate at prevailing discount interest rate):

 

 

 

 

 

Credit limit

 

$

1,064

 

$

1,321

 

Balance outstanding

 

$

 

$

 

Collateral pledged

 

$

1,027

 

$

1,278

 

Fair value of collateral

 

$

1,084

 

$

1,354

 

 

The liquidity of the parent company, Central Valley Community Bancorp, is primarily dependent on the payment of cash dividends by its subsidiary, Central Valley Community Bank, subject to limitations imposed by the regulations.

 

OFF-BALANCE SHEET ITEMS

 

In the ordinary course of business, the Company is a party to financial instruments with off-balance risk.  These financial instruments include commitments to extend credit and standby letters of credit.  Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.  For an expanded discussion of these financial instruments, refer to Note 8 of the Notes to Consolidated Financial Statements included herein and Note 11 of the Notes to Consolidated Financial Statements in the Company’s 2010 Annual Report to Shareholders on Form 10-K.

 

In the ordinary course of business, the Company is party to various operating leases.  For a fuller discussion of these financial instruments, refer to Note 11 of the Notes to Consolidated Financial Statements in the Company’s 2010 Annual Report to Shareholders on Form 10-K.

 

ITEM 4. CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures with respect to the information generated for use in this Quarterly Report. The evaluation was based in part upon reports provided by a number of executives.    Based upon, and as of the date of that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures, as so amended, were effective to provide reasonable assurances that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed by the Company in the reports that it files or submits is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

 

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Table of Contents

 

There was no change in the Company’s internal controls over financial reporting during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

In designing and evaluating disclosure controls and procedures, the Company’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurances of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

PART II OTHER INFORMATION

 

ITEM 1 LEGAL PROCEEDINGS

 

None to report.

 

ITEM 1A RISK FACTORS

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results.  The risks described in our Annual Report on Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS

 

None to report.

 

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

 

None to report.

 

ITEM 4 REMOVED AND RESERVED

 

ITEM 5 OTHER INFORMATION

 

None to report.

 

ITEM 6 EXHIBITS

 

None to report.

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Central Valley Community Bancorp

 

Date: May 13, 2011

/s/ Daniel J. Doyle

 

Daniel J. Doyle

 

President and Chief Executive Officer

 

 

Date: May 13, 2011

/s/ David A. Kinross

 

David A. Kinross

 

Senior Vice President and Chief Financial Officer

 

45