Management of Farmers & Merchants Bancorp and Subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2016. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
The Company’s system of internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and fair presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 as described in
“Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission
. As a result of this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2016.
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
Notes to Consolidated Financial Statements
1.
|
Significant Accounting Policies
|
Farmers & Merchants Bancorp (the “Company”) was organized March 10, 1999. Primary operations are related to traditional banking activities through its subsidiary Farmers & Merchants Bank of Central California (the “Bank”) which was established in 1916. The Bank’s wholly owned subsidiaries include Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Farmers & Merchants Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts as trustee on deeds of trust originated by the Bank.
The Company’s other subsidiaries include F & M Bancorp, Inc. and FMCB Statutory Trust I. F & M Bancorp, Inc. was created in March 2002 to protect the name F & M Bank. During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name “F & M Bank” as part of a larger effort to enhance the Company’s image and build brand name recognition. In December 2003, the Company formed a wholly owned subsidiary, FMCB Statutory Trust I. FMCB Statutory Trust I is a non-consolidated subsidiary per Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”) and was formed for the sole purpose of issuing Trust Preferred Securities and related subordinated debentures.
On November 18, 2016, Farmers & Merchants Bancorp completed the acquisition of Delta National Bancorp, headquartered in Manteca, California, and the parent holding company for Delta Bank N.A., a locally owned and operated community bank established in 1973. As of the acquisition date, Delta National Bancorp had approximately $112 million in assets and four branch locations in the communities of Manteca, Riverbank, Modesto and Turlock. At the effective time of the acquisition, Delta National Bancorp was merged into Farmers & Merchants Bancorp and Delta Bank, N.A. was merged into Farmers & Merchants Bank of Central California.
The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practice within the banking industry. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements.
Basis of Presentation
The accompanying consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America for financial information.
The accompanying consolidated financial statements include the accounts of the Company and the Company’s wholly owned subsidiaries, F & M Bancorp, Inc. and the Bank, along with the Bank’s wholly owned subsidiaries, Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Significant inter-company transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with U.S. 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 these estimates.
Certain amounts in the prior years' financial statements and related footnote disclosures have been reclassified to conform to the current-year presentation. These reclassifications had no effect on previously reported net income or total shareholders’ equity.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company has defined cash and cash equivalents as those amounts included in the balance sheet captions Cash and Due from Banks, Interest Bearing Deposits with Banks, Federal Funds Sold and Securities Purchased Under Agreements to Resell. For these instruments, the carrying amount is a reasonable estimate of fair value.
Investment Securities
Investment securities are classified at the time of purchase as held-to-maturity (“HTM”) if it is management’s intent and the Company has the ability to hold the securities until maturity. These securities are carried at cost, adjusted for amortization of premium and accretion of discount using a level yield of interest over the estimated remaining period until maturity. Losses, reflecting a decline in value judged by the Company to be other than temporary, are recognized in the period in which they occur.
Securities are classified as available-for-sale (“AFS”) if it is management’s intent, at the time of purchase, to hold the securities for an indefinite period of time and/or to use the securities as part of the Company’s asset/liability management strategy. These securities are reported at fair value with aggregate unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, net of related income taxes. Fair values are based on quoted market prices or broker/dealer price quotations on a specific identification basis. Gains or losses on the sale of these securities are computed using the specific identification method.
Trading securities, if any, are acquired for short-term appreciation and are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in non-interest income.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement; and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
Loans & Leases
Loans & leases are reported at the principal amount outstanding net of unearned discounts and deferred loan & lease fees and costs. Interest income on loans & leases is accrued daily on the outstanding balances using the simple interest method. Loan & lease origination fees are deferred and recognized over the contractual life of the loan or lease as an adjustment to the yield. Loans & leases are placed on non-accrual status when the collection of principal or interest is in doubt or when they become past due for 90 days or more unless they are both well-secured and in the process of collection. For this purpose, a loan or lease is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or lease or is guaranteed by a financially capable party. When a loan or lease is placed on non-accrual status, the accrued and unpaid interest receivable is reversed and charged against current income; thereafter, interest income is recognized only as it is collected in cash. Additionally, cash would be applied to principal if all principal was not expected to be collected. Loans & leases placed on non-accrual status are returned to accrual status when the loans or leases are paid current as to principal and interest and future payments are expected to be made in accordance with the contractual terms of the loan or lease.
A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Impaired loans & leases are either: (1) non-accrual loans & leases; or (2) restructured loans & leases that are still accruing interest. Loans or leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.
A restructuring of a loan or lease constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the borrower’s (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction) financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans & leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment as described above.
Generally, the Company will not restructure loans or leases for borrowers unless: (1) the existing loan or lease is brought current as to principal and interest payments; and (2) the restructured loan or lease can be underwritten to reasonable underwriting standards. If these standards are not met other actions will be pursued (e.g., foreclosure) to collect outstanding loan or lease amounts. After restructure a determination is made whether the loan or lease will be kept on accrual status based upon the underwriting and historical performance of the restructured credit.
Allowance for Credit Losses
The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance sheet date. The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors.
The determination of the general reserve for loans & leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, qualitative factors that include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.
The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1
st
mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer and other; and (9) equipment leases. The allowance for credit losses attributable to each portfolio segment, which includes both individually evaluated impaired loans & leases and loans & leases that are collectively evaluated for impairment, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.
The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:
Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.
Special Mention – A special mention loan or lease has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company's credit position at some future date. Special mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard – A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans or leases classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations.
They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful –
Loans or leases classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable.
Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance.
The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:
Commercial Real Estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.
Real Estate Construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.
Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term; typically made to relationship customers; generally underwritten to existing cash flows of operating businesses; and may be collateralized by fixed assets, inventory and/or accounts receivable. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.
Agricultural Real Estate and Agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate. These loans are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.
Leases – Equipment leases are generally considered to possess a moderate inherent risk of loss. As lessor, the Company is subject to both the credit risk of the borrower and the residual value risk of the equipment. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.
Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a low inherent risk of loss, although this is not always true as evidenced by the correction in residential real estate values that occurred between 2007 and 2012. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.
Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.
At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company's and Bank's regulators, including the Federal Reserve Board (“FRB”), the California Department of Business Oversight (“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”), as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.
Acquired Loans
Loans acquired through purchase or through a business combination are recorded at their fair value at the acquisition date. Credit discounts, which reflect estimates of credit losses, expected to be incurred over the life of the loan, are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.
Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in Interest Payable and Other Liabilities on the Company’s Consolidated Balance Sheet.
Premises and Equipment
Premises, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. Estimated useful lives of buildings range from 30 to 40 years, and for furniture and equipment from 3 to 7 years. Leasehold improvements are amortized over the lesser of the terms of the respective leases, or their useful lives, which are generally 5 to 10 years. Remodeling and capital improvements are capitalized while maintenance and repairs are charged directly to occupancy expense.
Other Real Estate
Other real estate, which is included in other assets, is expected to be sold and is comprised of properties no longer utilized for business operations and property acquired through foreclosure in satisfaction of indebtedness. These properties are recorded at fair value less estimated selling costs upon acquisition. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the allowance for credit losses at the time of acquisition. Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest expense as incurred.
Income Taxes
The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year.
The Company follows the standards set forth in the “Income Taxes” topic of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The Company accounts for leases with Investment Tax Credits (ITC) under the deferred method as established in ASC 740-10. ITC are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income on the Company’s financial statement.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. 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 taken are not offset or aggregated with other positions. 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 consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest expense and penalties associated with unrecognized tax benefits, if any, are included in the provision for income taxes in the Consolidated Statements of Income.
Basic Earnings Per Common Share
The Company’s common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. There are no common stock equivalent shares. Therefore, there is no presentation of diluted basic earnings per common share. See Note 16 for additional information.
Segment Reporting
The “Segment Reporting” topic of the FASB ASC requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a holding company for a community bank, which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change. Therefore, the Company only reports one segment.
Low Income Housing Tax Credit Investments (LIHTC)
The Company accounts for its interest in LIHTC using the cost method as established in ASC 323-740. As an investor, the Company obtains income tax credits and deductions from the operating losses of these tax credit entities. The income tax credits and deductions are allocated to the investors based on their ownership percentages and are recorded as a reduction of income tax expense (or an increase to income tax benefit) and a reduction of federal income taxes payable.
Comprehensive Income
The “Comprehensive Income” topic of the FASB ASC establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income (loss) refers to revenues, expenses, gains, and losses that U.S. GAAP recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
Business Combinations And Related Matters
Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the fair value over the purchase price of net assets and other identifiable intangible assets acquired is recorded as bargain purchase gain. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of operations from the date of acquisition. Acquisition-related costs, including conversion charges, are expensed as incurred. The Company applied this guidance to the acquisition of Delta National Bancorp that was consummated on November 18, 2016. The Company's consolidated financial statements reflect the operations of Delta National Bancorp from November 19, 2016 through December 31, 2016.
Intangible Assets
Intangible assets are comprised of core deposit intangibles acquired in the Delta National Bancorp acquisition. Intangible assets with definite useful lives are amortized over their respective estimated useful lives. If an event occurs that indicates the carrying amount of an intangible asset may not be recoverable, management reviews the asset for impairment.
Delta National Bancorp
On November 18, 2016, the Company completed the acquisition of Delta National Bancorp. Delta National Bancorp was incorporated under the laws of the State of California on December 21, 1981, for the purpose of serving as a bank holding company under the Bank Holding Act of 1956. Its wholly owned subsidiary, Delta Bank, N.A., operated as a commercial bank with branches in the cities of Manteca, Riverbank, Turlock, and Modesto, California. The acquisition enhances our market presence and added $32.4 million in loans, $103.7 million in deposits and $38.7 million in investment securities to the Company. Effective December 9, 2016, the Modesto branch was closed after Management determined that our customers and the business community could be easily supported from our current Modesto location. The assets acquired and liabilities assumed, both tangible and intangible, were recorded at their fair values as of the acquisition date in accordance with ASC 805,
Business Combinations
. The acquisition was treated as a "reorganization" within the meaning of section 368(a)(1)(A) of the Internal Revenue Code and is considered tax-free for U.S. federal income tax purposes.
The following table reflects the book value and estimated fair value of the assets acquired and liabilities assumed related to the Delta National Bancorp Acquisition:
|
|
Delta National Bancorp
|
|
(in thousands)
|
|
Book Value
|
|
|
Fair Value
|
|
Assets Acquired:
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
34,009
|
|
|
$
|
34,009
|
|
Investments
|
|
|
38,727
|
|
|
|
38,727
|
|
Loans
|
|
|
32,885
|
|
|
|
32,410
|
|
Core Deposit Intangible
|
|
|
-
|
|
|
|
959
|
|
Deferred Tax Asset
|
|
|
-
|
|
|
|
893
|
|
Other Assets
|
|
|
6,263
|
|
|
|
7,873
|
|
Total Assets Acquired
|
|
$
|
111,884
|
|
|
$
|
114,871
|
|
|
|
|
|
|
|
|
|
|
Liabilities Assumed
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Demand
|
|
|
35,106
|
|
|
|
35,106
|
|
Interest-Bearing Transaction
|
|
|
20,572
|
|
|
|
20,572
|
|
Savings and Money Market
|
|
|
33,091
|
|
|
|
33,091
|
|
Time
|
|
|
14,930
|
|
|
|
14,930
|
|
Total Deposits
|
|
$
|
103,699
|
|
|
$
|
103,699
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
161
|
|
|
|
161
|
|
Total liabilities assumed
|
|
$
|
103,860
|
|
|
$
|
103,860
|
|
|
|
|
|
|
|
|
|
|
Cash Paid
|
|
|
|
|
|
|
2,258
|
|
Fair Value of Common Stock Issued
|
|
|
|
|
|
|
6,921
|
|
Total Merger Consideration
|
|
|
|
|
|
$
|
9,179
|
|
The following table presents the net assets acquired from Delta National Bancorp and the estimated fair value adjustment:
(in thousands)
|
|
Acquisition Date
November 18, 2016
|
|
Book Value of Net Assets Acquired
|
|
$
|
8,024
|
|
Fair Value Adjustments:
|
|
|
|
|
Loans
|
|
|
(1,063
|
)
|
Reversal of Allowance for Loan Loss
|
|
|
588
|
|
Core Deposit Intangible Asset
|
|
|
959
|
|
Other Assets & Liabilities, net
|
|
|
1,610
|
|
Total Purchase Accounting Adjustments
|
|
$
|
2,094
|
|
|
|
|
|
|
Deferred Tax Asset (tax effect of purchase accounting adjustments at 42%)
|
|
|
(880
|
)
|
DTA Carryforward
|
|
|
1,773
|
|
Fair Value of Net Assets Acquired
|
|
$
|
11,011
|
|
|
|
|
|
|
Fair Value of Net Assets Acquired
|
|
|
11,011
|
|
Less Merger Consideration
|
|
|
(9,179
|
)
|
Bargain Purchase Gain
|
|
$
|
1,832
|
|
The following is a description of the methods used to determine the fair value of significant assets and liabilities presented above.
Cash and Cash Equivalents:
The carrying amount for cash and due from banks, interest-bearing deposits with banks and federal funds sold are a reasonable estimate of fair value based on the short-term nature of these assets.
Investments:
Fair value for investments was obtained from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment spreads, credit information and the bond’s terms and conditions.
Loans:
Fair value for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, and amortization status. Loans were individually assessed, with some assumptions being applied from the aggregate pool level to the individual loan itself. The discount rates used for loans are based on a build-up method that considers credit ratings, funding, liquidity, and other adjustments. No credit impaired loans were acquired as part of this business combination.
Core Deposit Intangible (CDI):
This intangible asset represents the value of the relationships with deposit customers. The fair value was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost the deposit base, reserve requirements and the net maintenance cost attributable to customer deposits. The CDI is being amortized over 10 years based on the estimated economic benefits received.
Other Assets:
Other assets are composed of real property assets which include two branch premises and various ORE properties. These assets were valued in November and December 2016 via USPAP-compliant appraisals for the 100% interest in the fee simple estate by a state licensed appraiser.
Deposits:
The fair values used for the demand and savings deposits by definition equal the amount payable on demand at the acquisition date. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered to the contractual interest rates on such time deposits.
Debt:
The fair values of long-term debt instruments are estimated based on quoted market prices for the instrument if available, or for similar instruments if not available, or by using discounted cash flow analyses, based on current incremental borrowing rates for similar types of instruments.
The Company issued 11,932 shares of common stock to Delta National Bancorp’s common stock holders. The shares issued were valued at $580 per share. The share price was based upon valuations completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder.
The amortized cost, fair values, and unrealized gains and losses of the securities
available-for-sale
are as follows:
(in thousands)
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Fair/Book
|
|
December 31, 2016
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Government Agency & Government-Sponsored Entities
|
|
$
|
3,127
|
|
|
$
|
114
|
|
|
$
|
-
|
|
|
$
|
3,241
|
|
US Treasury Notes
|
|
|
134,755
|
|
|
|
5
|
|
|
|
332
|
|
|
|
134,428
|
|
US Govt SBA
|
|
|
36,532
|
|
|
|
42
|
|
|
|
260
|
|
|
|
36,314
|
|
Mortgage Backed Securities
(1)
|
|
|
272,858
|
|
|
|
1,725
|
|
|
|
1,313
|
|
|
|
273,270
|
|
Other
|
|
|
1,010
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,010
|
|
Total
|
|
$
|
448,282
|
|
|
$
|
1,886
|
|
|
$
|
1,905
|
|
|
$
|
448,263
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Fair/Book
|
|
December 31, 2015
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Government Agency & Government-Sponsored Entities
|
|
$
|
33,536
|
|
|
$
|
134
|
|
|
$
|
419
|
|
|
$
|
33,251
|
|
US Treasury Notes
|
|
|
73,048
|
|
|
|
-
|
|
|
|
164
|
|
|
|
72,884
|
|
Mortgage Backed Securities
(1)
|
|
|
261,016
|
|
|
|
2,708
|
|
|
|
1,231
|
|
|
|
262,493
|
|
Other
|
|
|
509
|
|
|
|
-
|
|
|
|
-
|
|
|
|
509
|
|
Total
|
|
$
|
368,109
|
|
|
$
|
2,842
|
|
|
$
|
1,814
|
|
|
$
|
369,137
|
|
(1)
All Mortgage Backed Securities were issued by an agency or government sponsored entity of the U.S. government.
The book values, estimated fair values and unrealized gains and losses of investments classified as
held-to-maturity
are as follows:
(in thousands)
|
|
Book
|
|
|
Gross Unrealized
|
|
|
Fair
|
|
December 31, 2016
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Obligations of States and Political Subdivisions
|
|
$
|
58,109
|
|
|
$
|
339
|
|
|
$
|
40
|
|
|
$
|
58,408
|
|
Total
|
|
$
|
58,109
|
|
|
$
|
339
|
|
|
$
|
40
|
|
|
$
|
58,408
|
|
|
|
Book
|
|
|
Gross Unrealized
|
|
|
Fair
|
|
December 31, 2015
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Obligations of States and Political Subdivisions
|
|
$
|
61,396
|
|
|
$
|
993
|
|
|
$
|
1
|
|
|
$
|
62,388
|
|
Total
|
|
$
|
61,396
|
|
|
$
|
993
|
|
|
$
|
1
|
|
|
$
|
62,388
|
|
Fair values are based on quoted market prices or dealer quotes. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities.
The amortized cost and estimated fair values of investment securities at December 31, 2016 by contractual maturity are shown in the following tables.
(in thousands)
|
|
Available-for-Sale
|
|
|
Held-to-Maturity
|
|
December 31, 2016
|
|
Amortized
Cost
|
|
|
Fair/Book
Value
|
|
|
Book
Value
|
|
|
Fair
Value
|
|
Within One Year
|
|
$
|
66,137
|
|
|
$
|
66,141
|
|
|
$
|
1,905
|
|
|
$
|
1,907
|
|
After One Year Through Five Years
|
|
|
66,205
|
|
|
|
66,115
|
|
|
|
9,530
|
|
|
|
9,556
|
|
After Five Years Through Ten Years
|
|
|
13,945
|
|
|
|
13,788
|
|
|
|
12,699
|
|
|
|
12,747
|
|
After Ten Years
|
|
|
29,137
|
|
|
|
28,948
|
|
|
|
33,975
|
|
|
|
34,198
|
|
|
|
|
175,424
|
|
|
|
174,992
|
|
|
|
58,109
|
|
|
|
58,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Not Due at a Single Maturity Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Backed Securities
|
|
|
272,858
|
|
|
|
273,271
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
448,282
|
|
|
$
|
448,263
|
|
|
$
|
58,109
|
|
|
$
|
58,408
|
|
Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
The following tables show those investments with gross unrealized losses and their market value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at the dates indicated.
(in thousands)
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
December 31, 2016
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury Notes
|
|
$
|
99,429
|
|
|
$
|
332
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
99,429
|
|
|
$
|
332
|
|
US Govt SBA
|
|
|
27,483
|
|
|
|
260
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,483
|
|
|
|
260
|
|
Mortgage Backed Securities
|
|
|
123,157
|
|
|
|
1,313
|
|
|
|
-
|
|
|
|
-
|
|
|
|
123,157
|
|
|
|
1,313
|
|
Total
|
|
$
|
250,069
|
|
|
$
|
1,905
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
250,069
|
|
|
$
|
1,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of States and Political Subdivisions
|
|
$
|
7,251
|
|
|
$
|
40
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,251
|
|
|
$
|
40
|
|
Total
|
|
$
|
7,251
|
|
|
$
|
40
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,251
|
|
|
$
|
40
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
December 31, 2015
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Agency & Government-Sponsored Entities
|
|
$
|
29,944
|
|
|
$
|
419
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
29,944
|
|
|
$
|
419
|
|
US Treasury Notes
|
|
|
44,887
|
|
|
|
164
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,887
|
|
|
|
164
|
|
Mortgage Backed Securities
|
|
|
78,899
|
|
|
|
1,089
|
|
|
|
7,277
|
|
|
|
142
|
|
|
|
86,176
|
|
|
|
1,231
|
|
Total
|
|
$
|
153,730
|
|
|
$
|
1,672
|
|
|
$
|
7,277
|
|
|
$
|
142
|
|
|
$
|
161,007
|
|
|
$
|
1,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of States and Political Subdivisions
|
|
$
|
839
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
839
|
|
|
$
|
1
|
|
Total
|
|
$
|
839
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
839
|
|
|
$
|
1
|
|
As of December 31, 2016, the Company held 500 investment securities of which 209 were in an unrealized loss position for less than twelve months. No securities were in an unrealized loss position for twelve months or more. Management periodically evaluates each investment security for other-than-temporary impairment relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities.
Securities of Government Agency and Government Sponsored Entities – At December 31, 2016, no securities of government agency and government sponsored entities were in a loss position for less than 12 months or in a loss position for 12 months or more. The unrealized losses on the Company's investments in securities of government agency and government sponsored entities were $419,000 at December 31, 2015. The unrealized loss was caused by interest rate fluctuations. Repayment of these investments is guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2015.
`
U.S. Treasury Notes – At December 31, 2016, eight U.S. Treasury Note security investments were in a loss position for less than 12 months and none were in a loss position for 12 months or more. The unrealized losses on the Company's investment in US treasury notes were $332,000 at December 31, 2016 and $164,000 at December 31, 2015. The unrealized losses were caused by interest rate fluctuations. 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 the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2016 and December 31, 2015.
U.S. Government SBA – At December 31, 2016, 138 U.S. Government SBA security investments were in a loss position for less than 12 months and none were in a loss position for 12 months or more. The unrealized losses on the Company's investment in U.S. Government SBA were $260,000 at December 31, 2016. The unrealized losses were caused by interest rate fluctuations. 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 the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2016. The Company did not own any U.S. Government SBA securities in 2015.
Mortgage Backed Securities - At December 31, 2016, 45 mortgage backed security investments were in a loss position for less than 12 months and none was in a loss position for 12 months or more. The unrealized losses on the Company's investment in mortgage-backed securities were $1.3 million at December 31, 2016 and $1.2 million at December 31, 2015. The unrealized losses were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2016 or 2015.
Obligations of States and Political Subdivisions - At December 31, 2016, 18 obligations of states and political subdivisions were in a loss position for less than 12 months. None were in a loss position for 12 months or more. As of December 31, 2016, over ninety-eight percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or the issuer level, and all of these ratings are “investment grade.” The Company monitors the status of the three percent of the portfolio that is not rated and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.
The unrealized losses on the Company’s investment in obligation of states and political subdivision were $40,000 at December 31, 2016 and $1,000 at December 31, 2015. Management believes that any unrealized losses on the Company's investments in obligations of states and political subdivisions were caused by interest rate fluctuations. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company did not intend to sell the securities and it is more likely than not that the Company would not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2016 and December 31, 2015.
Proceeds from sale/calls of securities for the periods shown were as follows:
(in thousands)
|
|
Gross
Proceeds
|
|
|
Gross Gains
|
|
|
Gross
Losses
|
|
2016
|
|
$
|
105,941
|
|
|
$
|
250
|
|
|
$
|
534
|
|
2015
|
|
$
|
61,335
|
|
|
$
|
275
|
|
|
$
|
-
|
|
2014
|
|
$
|
130,174
|
|
|
$
|
1,204
|
|
|
$
|
1,114
|
|
Pledged Securities
As of December 31, 2016, securities carried at $171.9 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This amount was $189.2 million at December 31, 2015.
4.
|
Federal Home Loan Bank Stock and Other Equity Securities, at Cost
|
The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock and other equity securities are carried at cost, classified as restricted securities, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. FHLB stock and other equity securities are reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheets and totaled $9.2 million at December 31, 2016 and $7.8 million at December 31, 2015.
Loans & leases as of December 31 consisted of the following:
(in thousands)
|
|
2016
|
|
|
2015
|
|
Commercial Real Estate
|
|
$
|
674,445
|
|
|
$
|
609,602
|
|
Agricultural Real Estate
|
|
|
467,685
|
|
|
|
424,034
|
|
Real Estate Construction
|
|
|
176,462
|
|
|
|
151,974
|
|
Residential 1st Mortgages
|
|
|
242,247
|
|
|
|
206,405
|
|
Home Equity Lines and Loans
|
|
|
31,625
|
|
|
|
33,056
|
|
Agricultural
|
|
|
295,325
|
|
|
|
293,966
|
|
Commercial
|
|
|
217,577
|
|
|
|
210,804
|
|
Consumer & Other
|
|
|
6,913
|
|
|
|
6,592
|
|
Leases
|
|
|
70,986
|
|
|
|
65,054
|
|
Total Gross Loans & Leases
|
|
|
2,183,265
|
|
|
|
2,001,487
|
|
Less: Unearned Income
|
|
|
5,664
|
|
|
|
5,128
|
|
Subtotal
|
|
|
2,177,601
|
|
|
|
1,996,359
|
|
Less: Allowance for Credit Losses
|
|
|
47,919
|
|
|
|
41,523
|
|
Loans & Leases, Net
|
|
$
|
2,129,682
|
|
|
$
|
1,954,836
|
|
At December 31, 2016, the portion of loans that were approved for pledging as collateral on borrowing lines with the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”) were $664.7 million and $548.0 million, respectively. The borrowing capacity on these loans was $566.5 million from FHLB and $356.1 million from the FRB.
6.
|
Allowance for Credit Losses
|
The following tables show the allocation of the allowance for credit losses at December 31, 2016 and December 31, 2015 by portfolio segment and by impairment methodology
(in thousands)
:
December 31, 2016
|
|
Commercial Real Estate
|
|
|
Agricultural
Real Estate
|
|
|
Real Estate
Construction
|
|
|
Residential 1st
Mortgages
|
|
|
Home Equity
Lines & Loans
|
|
|
Agricultural
|
|
|
Commercial
|
|
|
Consumer
& Other
|
|
|
Leases
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-To-Date Allowance for Credit Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance- January 1, 2016
|
|
$
|
10,063
|
|
|
$
|
6,881
|
|
|
$
|
2,485
|
|
|
$
|
789
|
|
|
$
|
2,146
|
|
|
$
|
6,308
|
|
|
$
|
7,836
|
|
|
$
|
175
|
|
|
$
|
3,294
|
|
|
$
|
1,546
|
|
|
$
|
41,523
|
|
Charge-Offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(21
|
)
|
|
|
(46
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(105
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(172
|
)
|
Recoveries
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
103
|
|
|
|
-
|
|
|
|
47
|
|
|
|
55
|
|
|
|
-
|
|
|
|
-
|
|
|
|
233
|
|
Provision
|
|
|
1,045
|
|
|
|
2,569
|
|
|
|
738
|
|
|
|
71
|
|
|
|
(63
|
)
|
|
|
1,073
|
|
|
|
632
|
|
|
|
75
|
|
|
|
292
|
|
|
|
(97
|
)
|
|
|
6,335
|
|
Ending Balance- December 31, 2016
|
|
$
|
11,110
|
|
|
$
|
9,450
|
|
|
$
|
3,223
|
|
|
$
|
865
|
|
|
$
|
2,140
|
|
|
$
|
7,381
|
|
|
$
|
8,515
|
|
|
$
|
200
|
|
|
$
|
3,586
|
|
|
$
|
1,449
|
|
|
$
|
47,919
|
|
Ending Balance Individually Evaluated for Impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70
|
|
|
|
18
|
|
|
|
128
|
|
|
|
608
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
831
|
|
Ending Balance Collectively Evaluated for Impairment
|
|
|
11,110
|
|
|
|
9,450
|
|
|
|
3,223
|
|
|
|
795
|
|
|
|
2,122
|
|
|
|
7,253
|
|
|
|
7,907
|
|
|
|
193
|
|
|
|
3,586
|
|
|
|
1,449
|
|
|
|
47,088
|
|
Loans & Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
668,046
|
|
|
$
|
467,685
|
|
|
$
|
176,462
|
|
|
$
|
242,247
|
|
|
$
|
31,625
|
|
|
$
|
295,325
|
|
|
$
|
217,577
|
|
|
$
|
6,913
|
|
|
$
|
71,721
|
|
|
$
|
-
|
|
|
$
|
2,177,601
|
|
Ending Balance Individually Evaluated for Impairment
|
|
|
1,932
|
|
|
|
1,304
|
|
|
|
-
|
|
|
|
2,126
|
|
|
|
402
|
|
|
|
625
|
|
|
|
4,464
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,863
|
|
Ending Balance Collectively Evaluated for Impairment
|
|
|
666,114
|
|
|
|
466,381
|
|
|
|
176,462
|
|
|
|
240,121
|
|
|
|
31,223
|
|
|
|
294,700
|
|
|
|
213,113
|
|
|
|
6,903
|
|
|
|
71,721
|
|
|
|
-
|
|
|
|
2,166,738
|
|
December 31, 2015
|
|
Commercial
Real Estate
|
|
|
Agricultural
Real Estate
|
|
|
Real Estate
Construction
|
|
|
Residential 1st
Mortgages
|
|
|
Home Equity
Lines & Loans
|
|
|
Agricultural
|
|
|
Commercial
|
|
|
Consumer
& Other
|
|
|
Leases
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-To-Date Allowance for Credit Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance- January 1, 2015
|
|
$
|
7,842
|
|
|
$
|
4,185
|
|
|
$
|
1,669
|
|
|
$
|
1,022
|
|
|
$
|
2,426
|
|
|
$
|
6,104
|
|
|
$
|
8,195
|
|
|
$
|
218
|
|
|
$
|
2,211
|
|
|
$
|
1,529
|
|
|
$
|
35,401
|
|
Charge-Offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
(84
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(96
|
)
|
Recoveries
|
|
|
2,939
|
|
|
|
-
|
|
|
|
2,225
|
|
|
|
8
|
|
|
|
87
|
|
|
|
4
|
|
|
|
136
|
|
|
|
69
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,468
|
|
Provision
|
|
|
(718
|
)
|
|
|
2,696
|
|
|
|
(1,409
|
)
|
|
|
(241
|
)
|
|
|
(367
|
)
|
|
|
200
|
|
|
|
(483
|
)
|
|
|
(28
|
)
|
|
|
1,083
|
|
|
|
17
|
|
|
|
750
|
|
Ending Balance- December 31, 2015
|
|
$
|
10,063
|
|
|
$
|
6,881
|
|
|
$
|
2,485
|
|
|
$
|
789
|
|
|
$
|
2,146
|
|
|
$
|
6,308
|
|
|
$
|
7,836
|
|
|
$
|
175
|
|
|
$
|
3,294
|
|
|
$
|
1,546
|
|
|
$
|
41,523
|
|
Ending Balance Individually Evaluated for Impairment
|
|
|
61
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69
|
|
|
|
35
|
|
|
|
115
|
|
|
|
905
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,213
|
|
Ending Balance Collectively Evaluated for Impairment
|
|
|
10,002
|
|
|
|
6,881
|
|
|
|
2,485
|
|
|
|
720
|
|
|
|
2,111
|
|
|
|
6,193
|
|
|
|
6,931
|
|
|
|
147
|
|
|
|
3,294
|
|
|
|
1,546
|
|
|
|
40,310
|
|
Loans & Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
603,650
|
|
|
$
|
424,034
|
|
|
$
|
151,974
|
|
|
$
|
206,405
|
|
|
$
|
33,056
|
|
|
$
|
293,966
|
|
|
$
|
210,804
|
|
|
$
|
6,592
|
|
|
$
|
65,878
|
|
|
$
|
-
|
|
|
$
|
1,996,359
|
|
Ending Balance Individually Evaluated for Impairment
|
|
|
3,420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,010
|
|
|
|
1,214
|
|
|
|
606
|
|
|
|
4,760
|
|
|
|
34
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,044
|
|
Ending Balance Collectively Evaluated for Impairment
|
|
|
600,230
|
|
|
|
424,034
|
|
|
|
151,974
|
|
|
|
204,395
|
|
|
|
31,842
|
|
|
|
293,360
|
|
|
|
206,044
|
|
|
|
6,558
|
|
|
|
65,878
|
|
|
|
-
|
|
|
|
1,984,315
|
|
The ending balance of loans individually evaluated for impairment includes restructured loans in the amount of $3.3 million and $4.9 million at December 31, 2016 and 2015, respectively, which are no longer disclosed or classified as TDR’s.
The following tables show the loan & lease portfolio allocated by management’s internal risk ratings at December 31, 2016 and December 31, 2015
(in thousands)
:
December 31, 2016
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Total Loans
|
|
Loans & Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
659,694
|
|
|
$
|
6,817
|
|
|
$
|
1,535
|
|
|
$
|
668,046
|
|
Agricultural Real Estate
|
|
|
464,997
|
|
|
|
1,384
|
|
|
|
1,304
|
|
|
|
467,685
|
|
Real Estate Construction
|
|
|
176,462
|
|
|
|
-
|
|
|
|
-
|
|
|
|
176,462
|
|
Residential 1st Mortgages
|
|
|
241,816
|
|
|
|
47
|
|
|
|
384
|
|
|
|
242,247
|
|
Home Equity Lines and Loans
|
|
|
31,558
|
|
|
|
-
|
|
|
|
67
|
|
|
|
31,625
|
|
Agricultural
|
|
|
283,525
|
|
|
|
11,366
|
|
|
|
434
|
|
|
|
295,325
|
|
Commercial
|
|
|
208,172
|
|
|
|
6,974
|
|
|
|
2,431
|
|
|
|
217,577
|
|
Consumer & Other
|
|
|
6,705
|
|
|
|
-
|
|
|
|
208
|
|
|
|
6,913
|
|
Leases
|
|
|
71,721
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71,721
|
|
Total
|
|
$
|
2,144,650
|
|
|
$
|
26,588
|
|
|
$
|
6,363
|
|
|
$
|
2,177,601
|
|
December 31, 2015
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Total Loans
|
|
Loans & Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
595,011
|
|
|
$
|
7,917
|
|
|
$
|
722
|
|
|
$
|
603,650
|
|
Agricultural Real Estate
|
|
|
424,034
|
|
|
|
-
|
|
|
|
-
|
|
|
|
424,034
|
|
Real Estate Construction
|
|
|
150,379
|
|
|
|
1,595
|
|
|
|
-
|
|
|
|
151,974
|
|
Residential 1st Mortgages
|
|
|
205,135
|
|
|
|
413
|
|
|
|
857
|
|
|
|
206,405
|
|
Home Equity Lines and Loans
|
|
|
32,419
|
|
|
|
75
|
|
|
|
562
|
|
|
|
33,056
|
|
Agricultural
|
|
|
293,325
|
|
|
|
9
|
|
|
|
632
|
|
|
|
293,966
|
|
Commercial
|
|
|
199,467
|
|
|
|
8,160
|
|
|
|
3,177
|
|
|
|
210,804
|
|
Consumer & Other
|
|
|
6,411
|
|
|
|
-
|
|
|
|
181
|
|
|
|
6,592
|
|
Leases
|
|
|
65,878
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65,878
|
|
Total
|
|
$
|
1,972,059
|
|
|
$
|
18,169
|
|
|
$
|
6,131
|
|
|
$
|
1,996,359
|
|
See Note 1. Significant Accounting Policies – Allowance for Credit Losses for a description of the internal risk ratings used by the Company. There were no loans & leases outstanding at December 31, 2016 and 2015 rated doubtful or loss.
The following tables show an aging analysis of the loan & lease portfolio by the time past due at December 31, 2016 and December 31, 2015
(in thousands)
:
December 31, 2016
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days and
Still Accruing
|
|
|
Nonaccrual
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total
Loans & Leases
|
|
Loans & Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
668,046
|
|
|
$
|
668,046
|
|
Agricultural Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,304
|
|
|
|
1,304
|
|
|
|
466,381
|
|
|
|
467,685
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
176,462
|
|
|
|
176,462
|
|
Residential 1st Mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95
|
|
|
|
95
|
|
|
|
242,152
|
|
|
|
242,247
|
|
Home Equity Lines and Loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,625
|
|
|
|
31,625
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
243
|
|
|
|
243
|
|
|
|
295,082
|
|
|
|
295,325
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,425
|
|
|
|
1,425
|
|
|
|
216,152
|
|
|
|
217,577
|
|
Consumer & Other
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
17
|
|
|
|
6,896
|
|
|
|
6,913
|
|
Leases
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71,721
|
|
|
|
71,721
|
|
Total
|
|
$
|
10
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,074
|
|
|
$
|
3,084
|
|
|
$
|
2,174,517
|
|
|
$
|
2,177,601
|
|
December 31, 2015
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days and
Still Accruing
|
|
|
Nonaccrual
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total
Loans & Leases
|
|
Loans & Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
705
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
19
|
|
|
$
|
724
|
|
|
$
|
602,926
|
|
|
$
|
603,650
|
|
Agricultural Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
424,034
|
|
|
|
424,034
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
151,974
|
|
|
|
151,974
|
|
Residential 1st Mortgages
|
|
|
97
|
|
|
|
194
|
|
|
|
-
|
|
|
|
65
|
|
|
|
356
|
|
|
|
206,049
|
|
|
|
206,405
|
|
Home Equity Lines and Loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
538
|
|
|
|
538
|
|
|
|
32,518
|
|
|
|
33,056
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
293,966
|
|
|
|
293,966
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,524
|
|
|
|
1,524
|
|
|
|
209,280
|
|
|
|
210,804
|
|
Consumer & Other
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
17
|
|
|
|
6,575
|
|
|
|
6,592
|
|
Leases
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65,878
|
|
|
|
65,878
|
|
Total
|
|
$
|
809
|
|
|
$
|
194
|
|
|
$
|
-
|
|
|
$
|
2,156
|
|
|
$
|
3,159
|
|
|
$
|
1,993,200
|
|
|
$
|
1,996,359
|
|
Non-accrual loans & leases at December 31, 2016 and 2015 were $3.1 million and $2.2 million, respectively.
Interest income forgone on loans & leases placed on non-accrual status was
$127,000,
$109,000, and $92,000 for the years ended December 31, 2016, 2015, and 2014, respectively.
The following tables show information related to impaired loans & leases at and for the year ended December 31, 2016 and December 31, 2015
(in thousands)
:
December 31, 2016
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
184
|
|
|
$
|
184
|
|
|
$
|
-
|
|
|
$
|
354
|
|
|
$
|
7
|
|
Agricultural Real Estate
|
|
|
1,305
|
|
|
|
1,305
|
|
|
|
-
|
|
|
|
569
|
|
|
|
3
|
|
Residential 1st Mortgages
|
|
|
451
|
|
|
|
504
|
|
|
|
-
|
|
|
|
404
|
|
|
|
10
|
|
Home Equity Lines and Loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
181
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
144
|
|
|
|
5
|
|
Commercial
|
|
|
3,023
|
|
|
|
3,023
|
|
|
|
-
|
|
|
|
3,053
|
|
|
|
133
|
|
|
|
$
|
4,963
|
|
|
$
|
5,016
|
|
|
$
|
-
|
|
|
$
|
4,705
|
|
|
$
|
158
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1st Mortgages
|
|
$
|
430
|
|
|
$
|
469
|
|
|
$
|
21
|
|
|
$
|
336
|
|
|
$
|
13
|
|
Home Equity Lines and Loans
|
|
|
90
|
|
|
|
97
|
|
|
|
5
|
|
|
|
123
|
|
|
|
4
|
|
Agricultural
|
|
|
625
|
|
|
|
625
|
|
|
|
128
|
|
|
|
581
|
|
|
|
22
|
|
Commercial
|
|
|
1,441
|
|
|
|
1,640
|
|
|
|
608
|
|
|
|
1,536
|
|
|
|
8
|
|
Consumer & Other
|
|
|
6
|
|
|
|
13
|
|
|
|
6
|
|
|
|
12
|
|
|
|
-
|
|
|
|
$
|
2,592
|
|
|
$
|
2,844
|
|
|
$
|
768
|
|
|
$
|
2,588
|
|
|
$
|
47
|
|
Total
|
|
$
|
7,555
|
|
|
$
|
7,860
|
|
|
$
|
768
|
|
|
$
|
7,293
|
|
|
$
|
205
|
|
December 31, 2015
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
102
|
|
|
$
|
104
|
|
|
$
|
-
|
|
|
$
|
479
|
|
|
$
|
7
|
|
Residential 1st Mortgages
|
|
|
551
|
|
|
|
618
|
|
|
|
-
|
|
|
|
560
|
|
|
|
16
|
|
Home Equity Lines and Loans
|
|
|
581
|
|
|
|
646
|
|
|
|
-
|
|
|
|
620
|
|
|
|
3
|
|
Agricultural
|
|
|
193
|
|
|
|
193
|
|
|
|
-
|
|
|
|
105
|
|
|
|
3
|
|
Commercial
|
|
|
3,103
|
|
|
|
3,103
|
|
|
|
-
|
|
|
|
2,349
|
|
|
|
85
|
|
|
|
$
|
4,530
|
|
|
$
|
4,664
|
|
|
$
|
-
|
|
|
$
|
4,113
|
|
|
$
|
114
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1st Mortgages
|
|
$
|
348
|
|
|
$
|
420
|
|
|
$
|
17
|
|
|
$
|
354
|
|
|
$
|
16
|
|
Home Equity Lines and Loans
|
|
|
134
|
|
|
|
151
|
|
|
|
7
|
|
|
|
136
|
|
|
|
5
|
|
Agricultural
|
|
|
412
|
|
|
|
413
|
|
|
|
115
|
|
|
|
431
|
|
|
|
28
|
|
Commercial
|
|
|
1,657
|
|
|
|
1,798
|
|
|
|
905
|
|
|
|
2,456
|
|
|
|
31
|
|
Consumer & Other
|
|
|
34
|
|
|
|
40
|
|
|
|
29
|
|
|
|
39
|
|
|
|
3
|
|
|
|
$
|
2,585
|
|
|
$
|
2,822
|
|
|
$
|
1,073
|
|
|
$
|
3,416
|
|
|
$
|
83
|
|
Total
|
|
$
|
7,115
|
|
|
$
|
7,486
|
|
|
$
|
1,073
|
|
|
$
|
7,529
|
|
|
$
|
197
|
|
Total recorded investment shown in the prior table will not equal the total ending balance of loans & leases individually evaluated for impairment on the allocation of allowance table. This is because the calculation of recorded investment takes into account charge-offs, net unamortized loan & lease fees & costs, unamortized premium or discount, and accrued interest. This table also excludes impaired loans that were previously modified in a troubled debt restructuring, are currently performing and are no longer disclosed or classified as TDR’s.
At December 31, 2016, the Company allocated $736,000 of specific reserves to $5.9 million of troubled debt restructured loans, of which $4.5 million were performing. At December 31, 2015, the Company allocated $1.1 million of specific reserves to $6.6 million of troubled debt restructured loans, of which $5.0 million were performing. The Company had no commitments at December 31, 2016 and December 31, 2015 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.
During the period ending December 31, 2016, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
Modifications involving a reduction of the stated interest rate of the loan were for 5 years. Modifications involving an extension of the maturity date were for 10 years.
The following table presents loans by class modified as troubled debt restructured loans for the period ended December 31, 2016
(in thousands)
:
|
|
December 31, 2016
|
|
Troubled Debt Restructurings
|
|
Number of
Loans
|
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
Commercial Real Estate
|
|
|
1
|
|
|
$
|
112
|
|
|
$
|
112
|
|
Residential 1st Mortgages
|
|
|
2
|
|
|
|
289
|
|
|
|
281
|
|
Home Equity Lines and Loans
|
|
|
2
|
|
|
|
305
|
|
|
|
286
|
|
Total
|
|
|
5
|
|
|
$
|
706
|
|
|
$
|
679
|
|
The troubled debt restructurings described above had no impact on the allowance for credit losses and resulted in charge-offs of $27,000 for the twelve months ended December 31, 2016.
During the period ended December 31, 2016, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan to be in payment default once it is greater than 90 days contractually past due under the modified terms.
During the period ending December 31, 2015, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 5 to 10 years. Modifications involving an extension of the maturity date were for periods ranging from 5 to 10 years.
The following table presents loans by class modified as troubled debt restructured loans for the period ended December 31, 2015
(in thousands)
:
|
|
December 31, 2015
|
|
Troubled Debt Restructurings
|
|
Number of
Loans
|
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
Agricultural
|
|
|
1
|
|
|
$
|
194
|
|
|
$
|
194
|
|
Commercial
|
|
|
1
|
|
|
|
131
|
|
|
|
119
|
|
Total
|
|
|
2
|
|
|
$
|
325
|
|
|
$
|
313
|
|
The troubled debt restructurings described above increased the allowance for credit losses by $70,000 and resulted in charge-offs of $12,000 for the twelve months ended December 31, 2015.
During the period ended December 31, 2015, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan to be in payment default once it is greater than 90 days contractually past due under the modified terms.
7.
|
Premises and Equipment
|
Premises and equipment as of December 31, consisted of the following:
(in thousands)
|
|
2016
|
|
|
2015
|
|
Land and Buildings
|
|
$
|
37,003
|
|
|
$
|
33,530
|
|
Furniture, Fixtures, and Equipment
|
|
|
20,196
|
|
|
|
19,125
|
|
Leasehold Improvements
|
|
|
2,439
|
|
|
|
2,437
|
|
Subtotal
|
|
|
59,638
|
|
|
|
55,092
|
|
Less: Accumulated Depreciation and Amortization
|
|
|
30,409
|
|
|
|
28,517
|
|
Total
|
|
$
|
29,229
|
|
|
$
|
26,575
|
|
Depreciation and amortization on premises and equipment included in occupancy and equipment expense amounted to $1,896,000, $1,685,000, and $1,325,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Total rental expense for premises was $644,000, $604,000, and $530,000 for the years ended December 31, 2016, 2015, and 2014, respectively. Rental income was $102,000, $94,000, and $81,000 for the years ended December 31, 2016, 2015, and 2014, respectively.
The Bank reported $3.7 million in other real estate at December 31, 2016, and $2.4 million at December 31, 2015. The acquisition of Delta National Bancorp added $3.0 million of ORE to the Company. Other real estate includes property no longer utilized for business operations and property acquired through foreclosure proceedings. These properties are carried at fair value less selling costs determined at the date acquired. Losses, if any, arising from properties acquired through foreclosure are charged against the allowance for loan losses at the time of foreclosure. Subsequent declines in value, periodic holding costs, and net gains or losses on disposition are included in other operating expense as incurred. Other real estate is reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheets.
Time Deposits of $250,000 or more as of December 31 were as follows:
(in thousands)
|
|
2016
|
|
|
2015
|
|
Balance
|
|
$
|
289,955
|
|
|
$
|
236,963
|
|
At December 31, 2016, the scheduled maturities of time deposits were as follows:
(in thousands)
|
|
Scheduled
Maturities
|
|
2017
|
|
$
|
480,828
|
|
2018
|
|
|
80,231
|
|
2019
|
|
|
5,315
|
|
2020
|
|
|
741
|
|
2021
|
|
|
3,178
|
|
Total
|
|
$
|
570,293
|
|
Current and deferred income tax expense (benefit) provided for the years ended December 31 consisted of the following:
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
13,101
|
|
|
$
|
11,979
|
|
|
$
|
7,941
|
|
State
|
|
|
4,832
|
|
|
|
4,446
|
|
|
|
4,345
|
|
Total Current
|
|
|
17,933
|
|
|
|
16,425
|
|
|
|
12,286
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,607
|
)
|
|
|
383
|
|
|
|
3,116
|
|
State
|
|
|
(229
|
)
|
|
|
116
|
|
|
|
(308
|
)
|
Total Deferred
|
|
|
(1,836
|
)
|
|
|
499
|
|
|
|
2,808
|
|
Total Provision for Taxes
|
|
$
|
16,097
|
|
|
$
|
16,924
|
|
|
$
|
15,094
|
|
The total provision for income taxes differs from the federal statutory rate as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
(in thousands)
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Tax Provision at Federal Statutory Rate
|
|
$
|
16,037
|
|
|
|
35.0
|
%
|
|
$
|
15,510
|
|
|
|
35.0
|
%
|
|
$
|
14,174
|
|
|
|
35.0
|
%
|
Interest on Obligations of States and Political Subdivisions exempt from Federal Taxation
|
|
|
(675
|
)
|
|
|
(1.5
|
%)
|
|
|
(711
|
)
|
|
|
(1.6
|
%)
|
|
|
(805
|
)
|
|
|
(2.0
|
%)
|
State and Local Income Taxes, Net of Federal Income Tax Benefit
|
|
|
2,992
|
|
|
|
6.5
|
%
|
|
|
2,966
|
|
|
|
6.7
|
%
|
|
|
2,624
|
|
|
|
6.5
|
%
|
Bank Owned Life Insurance
|
|
|
(731
|
)
|
|
|
(1.6
|
%)
|
|
|
(712
|
)
|
|
|
(1.6
|
%)
|
|
|
(696
|
)
|
|
|
(1.7
|
%)
|
Low-Income Housing Tax Credit
|
|
|
(1,201
|
)
|
|
|
(2.6
|
%)
|
|
|
(291
|
)
|
|
|
(0.7
|
%)
|
|
|
(126
|
)
|
|
|
(0.3
|
%)
|
Bargain Purchase Gain
|
|
|
(641
|
)
|
|
|
(1.4
|
%)
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Other, Net
|
|
|
316
|
|
|
|
0.7
|
%
|
|
|
162
|
|
|
|
0.4
|
%
|
|
|
(77
|
)
|
|
|
(0.2
|
%)
|
Total Provision for Taxes
|
|
$
|
16,097
|
|
|
|
35.1
|
%
|
|
$
|
16,924
|
|
|
|
38.2
|
%
|
|
$
|
15,094
|
|
|
|
37.3
|
%
|
The components of net deferred tax assets as of December 31 are as follows: The net deferred tax assets are reported in Interest Receivable and Other Assets on the Company's Consolidated Balance Sheet.
(in thousands)
|
|
2016
|
|
|
2015
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
Allowance for Credit Losses
|
|
$
|
20,260
|
|
|
$
|
17,529
|
|
Accrued Liabilities
|
|
|
9,807
|
|
|
|
8,614
|
|
Deferred Compensation
|
|
|
14,166
|
|
|
|
11,586
|
|
State Franchise Tax
|
|
|
1,680
|
|
|
|
1,549
|
|
Acquired Net Operating Loss
|
|
|
1,135
|
|
|
|
-
|
|
Fair Value Adjustment on Loans Acquired
|
|
|
429
|
|
|
|
-
|
|
Fair Value Adjustment on ORE Acquired
|
|
|
299
|
|
|
|
-
|
|
ORE Writedown and Holding Costs
|
|
|
-
|
|
|
|
1,547
|
|
Unrealized Loss on Securities Available-for-Sale
|
|
|
58
|
|
|
|
-
|
|
Low-Income Housing Investment
|
|
|
366
|
|
|
|
73
|
|
Other
|
|
|
233
|
|
|
|
46
|
|
Total Deferred Tax Assets
|
|
$
|
48,433
|
|
|
$
|
40,944
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Premises and Equipment
|
|
|
(1,707
|
)
|
|
|
(869
|
)
|
Securities Accretion
|
|
|
(341
|
)
|
|
|
(310
|
)
|
Unrealized Gain on Securities Available-for-Sale
|
|
|
-
|
|
|
|
(432
|
)
|
Leasing Activities
|
|
|
(14,868
|
)
|
|
|
(11,469
|
)
|
Core Deposit Intangible Asset
|
|
|
(398
|
)
|
|
|
-
|
|
Other
|
|
|
(808
|
)
|
|
|
(744
|
)
|
Total Deferred Tax Liabilities
|
|
|
(18,122
|
)
|
|
|
(13,824
|
)
|
Net Deferred Tax Assets
|
|
$
|
30,311
|
|
|
$
|
27,120
|
|
As a result of the recent acquisition of Delta National Bancorp, the Company has included in its deferred tax assets usable net operating loss carryforwards in the Federal and California jurisdictions of $2.7 million, which begin to expire in 2028. The amount of carryforwards that may be utilized in each jurisdiction annually is limited to approximately $141,000 per year under Section 382 of the Internal Revenue Code due to the changes in control. As a result of limitations under Section 382, certain net operating losses are expected to expire unused and have been excluded from the deferred tax asset. Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are expected to be deductible, Management believes it is more likely than not we will realize the benefit of the remaining deferred tax assets. Accordingly, no other valuation allowance has been established as of December 31, 2016.
The Company and its subsidiaries file income tax returns in the U.S. federal and California jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2012.
11.
|
Short Term Borrowings
|
As of December 31, 2016 and 2015, the Company had unused lines of credit available for short-term liquidity purposes of $962.8 million and $875.3 million, respectively. Federal Funds purchased and advances are generally issued on an overnight basis. There were no advances from the FHLB at December 31, 2016 or 2015. There were no Federal Funds purchased or advances from the FRB at December 31, 2016 or 2015.
12.
|
Securities Sold Under Agreement to Repurchase
|
Securities Sold Under Agreement to Repurchase are used as secured borrowing alternatives to FHLB Advances or FRB Borrowings.
At December 31, 2016 and December 31, 2015, the Company had no securities sold under agreement to repurchase.
13.
|
Federal Home Loan Bank Advances
|
The Company had no short-term or long-term advances from the Federal Home Loan Bank of San Francisco at December 31, 2016 or 2015.
In accordance with the Collateral Pledge and Security Agreement, advances are secured by all FHLB stock held by the Company and by government agency & government-sponsored entity securities and mortgage-backed securities with borrowing capacity of $200,000. At December 31, 2016, $664.7 million in loans were approved for pledging as collateral on borrowing lines with the FHLB. The borrowing capacity on these loans was $566.5 million.
14.
|
Long-term Subordinated Debentures
|
In December 2003, the Company formed a wholly owned Connecticut statutory business trust, FMCB Statutory Trust I (“Statutory Trust I”), which issued $10.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures (the “Trust Preferred Securities”). The Company is not considered the primary beneficiary of the trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. These debentures qualify as Tier 1 capital under current regulatory guidelines. All of the common securities of Statutory Trust I are owned by the Company. The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by FMCB Statutory Trust to purchase $10.3 million of junior subordinated debentures of the Company, which carry a floating rate based on three-month LIBOR plus 2.85%. The debentures represent the sole asset of Statutory Trust I. The Trust Preferred Securities accrue and pay distributions at a floating rate of three-month LIBOR plus 2.85% per annum of the stated liquidation value of $1,000 per capital security. The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment to the extent that Statutory Trust I has funds available therefore of: (i) accrued and unpaid distributions required to be paid on the Trust Preferred Securities; (ii) the redemption price with respect to any Trust Preferred Securities called for redemption by Statutory Trust I; and (iii) payments due upon a voluntary or involuntary dissolution, winding up, or liquidation of Statutory Trust I. The Trust Preferred Securities are mandatorily redeemable upon maturity of the subordinated debentures on December 17, 2033, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the subordinated debentures purchased by Statutory Trust I, in whole or in part, on or after December 17, 2008. As specified in the indenture, if the subordinated debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.
In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on August 11, 2015, the Board of Directors approved an extension of the $20 million stock repurchase program over the three-year period ending September 30, 2018.
Repurchases under the program may be made from time to time on the open market or through private transactions. The repurchase program also requires that no purchases may be made if the Bank would not remain “well-capitalized” after the repurchase.
Dividends from the Bank constitute the principal source of cash to the Company. The Company is a legal entity separate and distinct from the Bank. Under regulations controlling California state chartered banks, the Bank is, to some extent, limited in the amount of dividends that can be paid to the Company without prior approval of the California DBO. These regulations require approval if total dividends declared by a state chartered bank in any calendar year exceed the bank's net profits for that year combined with its retained net profits for the preceding two calendar years.
During 2016, the Company issued 16,542 shares of common stock, of which 4,610 shares were contributed to the Bank’s non-qualified defined contribution retirement plans and 11,932 shares were issued in the acquisition of Delta National Bancorp. The shares issued had prices ranging from $525 per share to $580 per share. These share prices were based upon valuations completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds from these issuances were contributed to the Bank as equity capital.
During 2015, the Company issued 6,705 shares of common stock. All of these shares were contributed to the Bank’s non-qualified defined contribution retirement plans. The shares issued had prices ranging from $450 per share to $525 per share. These share prices were based upon valuations completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds from these issuances were contributed to the Bank as equity capital.
The Company and the Bank are subject to various federal regulatory capital requirements under the Basel III Capital Rules. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The implementation of Basel III requirements will increase the required capital levels that the Company and the Bank must maintain. The final rules include new minimum risk-based capital and leverage ratios, which would be phased in over time. The new minimum capital level requirements applicable to the Company and the Bank under the final rules will be: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets (“RWA”); (ii) a Tier 1 capital ratio of 6% of RWA; (iii) a total capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. The final rules also establish a "capital conservation buffer" of 2.5% above each of the new regulatory minimum capital ratios, which would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA; and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. The final rules also permit the Company’s subordinated debentures issued in 2003 to continue to be counted as Tier 1 capital.
The final rules became effective as applied to the Company and the Bank on January 1, 2015, with a phase in period through January 1, 2019. The Company believes that it is currently in compliance with all of these new capital requirements (as fully phased-in) and that they will not result in any restrictions on the Company’s business activity.
In addition, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since that notification that management believes have changed the Bank’s category.
(in thousands)
|
|
Actual
|
|
|
Current
Regulatory Capital
Requirements
|
|
|
Well Capitalized
Under Prompt
Corrective Action
|
|
December 31, 2016
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total Bank Capital to Risk Weighted Assets
|
|
$
|
319,776
|
|
|
|
12.79
|
%
|
|
$
|
199,958
|
|
|
|
8.0
|
%
|
|
$
|
249,947
|
|
|
|
10.0
|
%
|
Total Consolidated Capital to Risk Weighted Assets
|
|
$
|
319,983
|
|
|
|
12.80
|
%
|
|
$
|
199,981
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Total Bank Common Equity Tier 1 Capital Ratio
|
|
$
|
288,324
|
|
|
|
11.54
|
%
|
|
$
|
112,476
|
|
|
|
4.5
|
%
|
|
$
|
162,466
|
|
|
|
6.5
|
%
|
Total Consolidated Common Equity Tier 1 Capital Ratio
|
|
$
|
278,981
|
|
|
|
11.16
|
%
|
|
$
|
112,489
|
|
|
|
4.5
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 Bank Capital to Risk Weighted Assets
|
|
$
|
288,323
|
|
|
|
11.54
|
%
|
|
$
|
149,968
|
|
|
|
6.0
|
%
|
|
$
|
199,958
|
|
|
|
8.0
|
%
|
Tier 1 Consolidated Capital to Risk Weighted Assets
|
|
$
|
288,527
|
|
|
|
11.54
|
%
|
|
$
|
149,986
|
|
|
|
6.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 Bank Capital to Average Assets
|
|
$
|
288,324
|
|
|
|
10.08
|
%
|
|
$
|
114,409
|
|
|
|
4.0
|
%
|
|
$
|
143,011
|
|
|
|
5.0
|
%
|
Tier 1 Consolidated Capital to Average Assets
|
|
$
|
288,527
|
|
|
|
10.07
|
%
|
|
$
|
114,568
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
(in thousands)
|
|
Actual
|
|
|
Current
Regulatory Capital
Requirements
|
|
|
Well Capitalized
Under Prompt
Corrective Action
|
|
December 31, 2015
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total Bank Capital to Risk Weighted Assets
|
|
$
|
290,941
|
|
|
|
12.22
|
%
|
|
$
|
190,480
|
|
|
|
8.0
|
%
|
|
$
|
238,101
|
|
|
|
10.0
|
%
|
Total Consolidated Capital to Risk Weighted Assets
|
|
$
|
291,152
|
|
|
|
12.23
|
%
|
|
$
|
190,493
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Total Bank Common Equity Tier 1 Capital Ratio
|
|
$
|
261,031
|
|
|
|
10.96
|
%
|
|
$
|
107,145
|
|
|
|
4.5
|
%
|
|
$
|
154,765
|
|
|
|
6.5
|
%
|
Total Consolidated Common Equity Tier 1 Capital Ratio
|
|
$
|
251,240
|
|
|
|
10.55
|
%
|
|
$
|
107,152
|
|
|
|
4.5
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 Bank Capital to Risk Weighted Assets
|
|
$
|
261,031
|
|
|
|
10.96
|
%
|
|
$
|
142,860
|
|
|
|
6.0
|
%
|
|
$
|
190,480
|
|
|
|
8.0
|
%
|
Tier 1 Consolidated Capital to Risk Weighted Assets
|
|
$
|
261,240
|
|
|
|
10.97
|
%
|
|
$
|
142,870
|
|
|
|
6.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 Bank Capital to Average Assets
|
|
$
|
261,031
|
|
|
|
10.30
|
%
|
|
$
|
101,402
|
|
|
|
4.0
|
%
|
|
$
|
126,753
|
|
|
|
5.0
|
%
|
Tier 1 Consolidated Capital to Average Assets
|
|
$
|
261,240
|
|
|
|
10.29
|
%
|
|
$
|
101,525
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
16.
|
Dividends and Basic Earnings Per Common Share
|
Total cash dividends during 2016 were $10,478,000 or $13.10 per share of common stock, an increase of 1.6% per share from $10,157,000 or $12.90 per share in 2015. In 2014, cash dividends totaled $9,919,000 or $12.70 per share.
Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. The following table calculates the basic earnings per common share for the periods indicated.
(
net income in thousands
)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net Income
|
|
$
|
29,723
|
|
|
$
|
27,392
|
|
|
$
|
25,402
|
|
Weighted Average Number of Common Shares Outstanding
|
|
|
793,970
|
|
|
|
786,582
|
|
|
|
778,358
|
|
Basic Earnings Per Common Share
|
|
$
|
37.44
|
|
|
$
|
34.82
|
|
|
$
|
32.64
|
|
17.
|
Employee Benefit Plans
|
Profit Sharing Plan
The Company, through the Bank, sponsors a Profit Sharing Plan for substantially all full-time employees of the Company with one or more years of service. Participants receive up to two annual employer contributions, one is discretionary and the other is mandatory. The discretionary contributions to the Profit Sharing Plan are determined annually by the Board of Directors. The discretionary contributions totaled $975,000, $925,000, and $875,000 for the years ended December 31, 2016, 2015, and 2014, respectively. The mandatory contributions to the Profit Sharing Plan are made according to a predetermined set of criteria. Mandatory contributions totaled $1.2 million, $1.1 million, and $1.0 million for the years ended December 31, 2016, 2015, and 2014, respectively. Company employees are permitted, within limitations imposed by tax law, to make pretax contributions and after tax (Roth) contributions to the 401(k) feature of the Profit Sharing Plan. The Company does not match employee contributions within the 401(k) feature of the Profit Sharing Plan and the Company can terminate the Profit Sharing Plan at any time. Benefits pursuant to the Profit Sharing Plan vest 0% during the first year of participation, 25% per full year thereafter and after five years such benefits are fully vested.
Executive Retirement Plan and Life Insurance Arrangements
The Company, through the Bank, sponsors an Executive Retirement Plan for certain executive level employees. The Executive Retirement Plan is a non-qualified defined contribution plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service. The Plan is comprised of: (1) a Performance Component which makes contributions based upon long-term cumulative profitability and increase in market value of the Company; (2) a Salary Component which makes contributions based upon participant salary levels; and (3) an Equity Component for which contributions are discretionary and subject to Board of Directors approval. Executive Retirement Plan contributions are invested in a mix of financial instruments; however Equity Component contributions are invested primarily in stock of the Company.
The Company expensed $3.8 million to the Executive Retirement Plan during the year ended December 31, 2016, $3.5 million during the year ended December 31, 2015 and $2.7 million during the year ended December 31, 2014. The Company’s total accrued liability under the Executive Retirement Plan was $37.4 million as of December 31, 2016 and $31.3 million as of December 31, 2015. All amounts have been fully funded into a Rabbi Trust as of December 31, 2016.
The Company has purchased single premium life insurance policies on the lives of certain key employees of the Company. These policies provide: (1) financial protection to the Company in the event of the death of a key employee; and (2) significant income to the Company to offset the expense associated with the Executive Retirement Plan and other employee benefit plans, since the interest earned on the cash surrender value of the policies is tax exempt as long as the policies are used to finance employee benefits. As compensation to each employee for agreeing to allow the Company to purchase an insurance policy on his or her life, split dollar agreements have been entered into with those employees. These agreements provide for a division of the life insurance death proceeds between the Company and each employee’s designated beneficiary or beneficiaries.
The Company earned tax-exempt interest on the life insurance policies of $1.9 million for the years ended December 31, 2016, 2015, and 2014. As of December 31, 2016 and 2015, the total cash surrender value of the insurance policies was $57.8 million and $55.9 million, respectively.
Senior Management Retention Plan
The Company, through the Bank, sponsors a Senior Management Retention Plan (“SMRP”) for certain senior level employees. The SMRP is a non-qualified defined contribution plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service. All contributions are discretionary and subject to the Board of Directors approval. Contributions are invested primarily in stock of the Company. The Company expensed $627,000 to the SMRP during the year ended December 31, 2016, $530,000 during the year ended December 31, 2015 and $475,000 during the year ended December 31, 2014. The Company’s total accrued liability under the SMRP was $3.4 million as of December 31, 2016 and $2.3 million as of December 31, 2015. All amounts have been fully funded into a Rabbi Trust as of December 31, 2016.
18.
|
Fair Value Measurements
|
The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC, which establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. This standard applies whenever other standards require, or permit, assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:
Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
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, the transfer is reported 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.
Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.
The Company does not record all loans & leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered impaired and an allowance for credit losses is established. Once a loan or lease is identified as individually impaired, management measures impairment in accordance with the “Receivable” topic of the FASB ASC. The fair value of impaired loans or leases is estimated using one of several methods, including collateral value when the loan is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Impaired loans & leases not requiring an allowance represent loans & leases for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans & leases. Impaired loans & leases where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.
The fair value of collateral dependent impaired loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring impaired loans is primarily the sales comparison approach less selling costs of 10%.
Other Real Estate (“ORE”) is reported at fair value on a non-recurring basis.
Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring ORE is primarily the sales comparison approach less selling costs of 10%.
At December 31, 2016, formal foreclosure proceedings were in process for $322,000 of consumer mortgage loans secured by residential real estate properties.
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated.
|
|
|
|
|
Fair Value Measurements
At December 31, 2016, Using
|
|
|
|
Fair Value
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
(in thousands)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Agency & Government-Sponsored Entities
|
|
$
|
3,241
|
|
|
$
|
-
|
|
|
$
|
3,241
|
|
|
$
|
-
|
|
US Treasury Notes
|
|
|
134,428
|
|
|
|
134,428
|
|
|
|
-
|
|
|
|
-
|
|
US Govt SBA
|
|
|
36,314
|
|
|
|
|
|
|
|
36,314
|
|
|
|
|
|
Mortgage Backed Securities
|
|
|
273,270
|
|
|
|
-
|
|
|
|
273,270
|
|
|
|
-
|
|
Other
|
|
|
1,010
|
|
|
|
200
|
|
|
|
310
|
|
|
|
500
|
|
Total Assets Measured at Fair Value On a Recurring Basis
|
|
$
|
448,263
|
|
|
$
|
134,628
|
|
|
$
|
313,135
|
|
|
$
|
500
|
|
|
|
|
|
|
Fair Value Measurements
At December 31, 2015, Using
|
|
|
|
Fair Value
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
(in thousands)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Agency & Government-Sponsored Entities
|
|
$
|
33,251
|
|
|
$
|
-
|
|
|
$
|
33,251
|
|
|
$
|
-
|
|
US Treasury Notes
|
|
|
72,884
|
|
|
|
72,884
|
|
|
|
-
|
|
|
|
-
|
|
Mortgage Backed Securities
|
|
|
262,493
|
|
|
|
-
|
|
|
|
262,493
|
|
|
|
-
|
|
Other
|
|
|
509
|
|
|
|
199
|
|
|
|
310
|
|
|
|
-
|
|
Total Assets Measured at Fair Value On a Recurring Basis
|
|
$
|
369,137
|
|
|
$
|
73,083
|
|
|
$
|
296,054
|
|
|
$
|
-
|
|
Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the year ended December 31, 2016, there were no transfers in or out of level 1, 2, or 3.
Available for sale investment securities categorized as Level 3 assets for year ended December 31, 2016 consisted of a $500,000 investment in a limited liability company that purchases SBA loans. There were no gains or losses or transfers in or out of level 3 during the year ended December 31, 2016.
The following tables present information about the Company’s impaired loans & leases and other real estate, classes of assets or liabilities that the Company carries at fair value on a non-recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated. Not all impaired loans & leases are carried at fair value. Impaired loans & leases are only included in the following tables when their fair value is based upon an appraisal of the collateral, and if that appraisal results in a partial charge-off or the establishment of a specific reserve.
|
|
|
|
|
Fair Value Measurements
At December 31, 2016, Using
|
|
|
|
Fair Value
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
(in thousands)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Impaired Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1st Mortgage
|
|
$
|
480
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
480
|
|
Home Equity Lines and Loans
|
|
|
83
|
|
|
|
-
|
|
|
|
-
|
|
|
|
83
|
|
Agricultural
|
|
|
497
|
|
|
|
-
|
|
|
|
-
|
|
|
|
497
|
|
Commercial
|
|
|
833
|
|
|
|
-
|
|
|
|
-
|
|
|
|
833
|
|
Total Impaired Loans
|
|
|
1,893
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,893
|
|
Other Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity Lines and Loans
|
|
|
785
|
|
|
|
-
|
|
|
|
-
|
|
|
|
785
|
|
Real Estate Construction
|
|
|
2,960
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,960
|
|
Total Other Real Estate
|
|
|
3,745
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,745
|
|
Total Assets Measured at Fair Value On a Non-Recurring Basis
|
|
$
|
5,638
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,638
|
|
|
|
|
|
|
Fair Value Measurements
At December 31, 2015, Using
|
|
|
|
Fair Value
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
(in thousands)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Impaired Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1st Mortgage
|
|
$
|
329
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
329
|
|
Home Equity Lines and Loans
|
|
|
125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
125
|
|
Agricultural
|
|
|
298
|
|
|
|
-
|
|
|
|
-
|
|
|
|
298
|
|
Commercial
|
|
|
752
|
|
|
|
-
|
|
|
|
-
|
|
|
|
752
|
|
Consumer
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
Total Impaired Loans
|
|
|
1,509
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,509
|
|
Other Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Construction
|
|
|
2,441
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,441
|
|
Total Other Real Estate
|
|
|
2,441
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,441
|
|
Total Assets Measured at Fair Value On a Non-Recurring Basis
|
|
$
|
3,950
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,950
|
|
The Company’s property appraisals are primarily based on the sales comparison approach and the income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2016:
(in thousands)
|
|
Fair Value
|
|
Valuation Technique
|
Unobservable Inputs
|
|
Range, Weighted Avg.
|
|
Impaired Loans:
|
|
|
|
|
|
|
|
|
Residential 1st Mortgages
|
|
$
|
480
|
|
Sales Comparison Approach
|
Adjustment for Difference Between Comparable Sales
|
|
|
2% -4%, 3
|
%
|
Home Equity Lines and Loans
|
|
$
|
83
|
|
Sales Comparison Approach
|
Adjustment for Difference Between Comparable Sales
|
|
|
1% - 2%, 2
|
%
|
Agricultural
|
|
$
|
286
|
|
Income Approach
|
Capitalization Rate
|
|
|
16% - 16%, 16
|
%
|
Agricultural
|
|
$
|
211
|
|
Collateral Approach
|
Collateral Value
|
|
|
10% -10%, 10
|
%
|
Commercial
|
|
$
|
833
|
|
Income Approach
|
Capitalization Rate
|
|
|
16% - 16%, 16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate:
|
|
|
|
|
|
|
|
|
|
|
Home Equity Lines and Loans
|
|
$
|
785
|
|
Sales Comparison Approach
|
Adjustment for Difference Between Comparable Sales
|
|
|
10% - 10%, 10
|
%
|
Real Estate Construction
|
|
$
|
2,960
|
|
Sales Comparison Approach
|
Adjustment for Difference Between Comparable Sales
|
|
|
10% - 10%, 10
|
%
|
19.
|
Fair Value of Financial Instruments
|
U.S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period of time between origination of the instrument and its expected realization.
The following tables summarize the book value and estimated fair value of financial instruments for the periods indicated:
|
|
|
|
|
Fair Value of Financial Instruments Using
|
|
|
|
|
December 31, 2016
(in thousands)
|
|
Carrying
Amount
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Estimated
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
98,960
|
|
|
$
|
98,960
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
98,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Agency & Government-Sponsored Entities
|
|
|
3,241
|
|
|
|
-
|
|
|
|
3,241
|
|
|
|
-
|
|
|
|
3,241
|
|
U.S. Govt SBA
|
|
|
36,314
|
|
|
|
-
|
|
|
|
36,314
|
|
|
|
-
|
|
|
|
36,314
|
|
U.S. Treasury Notes
|
|
|
134,428
|
|
|
|
134,428
|
|
|
|
-
|
|
|
|
|
|
|
|
134,428
|
|
Mortgage Backed Securities
|
|
|
273,270
|
|
|
|
-
|
|
|
|
273,270
|
|
|
|
-
|
|
|
|
273,270
|
|
Other
|
|
|
1,010
|
|
|
|
200
|
|
|
|
310
|
|
|
|
500
|
|
|
|
1,010
|
|
Total Investment Securities Available-for-Sale
|
|
|
448,263
|
|
|
|
134,628
|
|
|
|
313,135
|
|
|
|
500
|
|
|
|
448,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of States and Political Subdivisions
|
|
|
58,109
|
|
|
|
-
|
|
|
|
40,415
|
|
|
|
17,993
|
|
|
|
58,408
|
|
Total Investment Securities Held-to-Maturity
|
|
|
58,109
|
|
|
|
-
|
|
|
|
40,415
|
|
|
|
17,993
|
|
|
|
58,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB Stock
|
|
|
8,872
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans & Leases, Net of Deferred Fees & Allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
656,936
|
|
|
|
-
|
|
|
|
-
|
|
|
|
651,877
|
|
|
|
651,877
|
|
Agricultural Real Estate
|
|
|
458,235
|
|
|
|
-
|
|
|
|
-
|
|
|
|
444,393
|
|
|
|
444,393
|
|
Real Estate Construction
|
|
|
173,239
|
|
|
|
-
|
|
|
|
-
|
|
|
|
172,682
|
|
|
|
172,682
|
|
Residential 1st Mortgages
|
|
|
241,382
|
|
|
|
-
|
|
|
|
-
|
|
|
|
241,174
|
|
|
|
241,174
|
|
Home Equity Lines and Loans
|
|
|
29,485
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,495
|
|
|
|
30,495
|
|
Agricultural
|
|
|
287,944
|
|
|
|
-
|
|
|
|
-
|
|
|
|
286,074
|
|
|
|
286,074
|
|
Commercial
|
|
|
209,062
|
|
|
|
-
|
|
|
|
-
|
|
|
|
207,215
|
|
|
|
207,215
|
|
Consumer & Other
|
|
|
6,713
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,706
|
|
|
|
6,706
|
|
Leases
|
|
|
68,135
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67,893
|
|
|
|
67,893
|
|
Unallocated Allowance
|
|
|
(1,449
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,449
|
)
|
|
|
(1,449
|
)
|
Total Loans & Leases, Net of Deferred Fees & Allowance
|
|
|
2,129,682
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,107,060
|
|
|
|
2,107,060
|
|
Accrued Interest Receivable
|
|
|
10,047
|
|
|
|
-
|
|
|
|
10,047
|
|
|
|
-
|
|
|
|
10,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
756,236
|
|
|
|
756,236
|
|
|
|
-
|
|
|
|
-
|
|
|
|
756,236
|
|
Interest Bearing Transaction
|
|
|
495,063
|
|
|
|
495,063
|
|
|
|
-
|
|
|
|
-
|
|
|
|
495,063
|
|
Savings and Money Market
|
|
|
760,119
|
|
|
|
760,119
|
|
|
|
-
|
|
|
|
-
|
|
|
|
760,119
|
|
Time
|
|
|
570,293
|
|
|
|
-
|
|
|
|
569,183
|
|
|
|
-
|
|
|
|
569,183
|
|
Total Deposits
|
|
|
2,581,711
|
|
|
|
2,011,418
|
|
|
|
569,183
|
|
|
|
-
|
|
|
|
2,580,601
|
|
Subordinated Debentures
|
|
|
10,310
|
|
|
|
-
|
|
|
|
6,578
|
|
|
|
-
|
|
|
|
6,578
|
|
Accrued Interest Payable
|
|
|
852
|
|
|
|
-
|
|
|
|
852
|
|
|
|
-
|
|
|
|
852
|
|
|
|
|
|
|
Fair Value of Financial Instruments Using
|
|
|
|
|
December 31, 2015 (in thousands)
|
|
Carrying Amount
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Total Estimated Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
59,446
|
|
|
$
|
59,446
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
59,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Agency & Government-Sponsored Entities
|
|
|
33,251
|
|
|
|
-
|
|
|
|
33,251
|
|
|
|
-
|
|
|
|
33,251
|
|
U.S. Treasury Notes
|
|
|
72,884
|
|
|
|
72,884
|
|
|
|
-
|
|
|
|
|
|
|
|
72,884
|
|
Mortgage Backed Securities
|
|
|
262,493
|
|
|
|
-
|
|
|
|
262,493
|
|
|
|
-
|
|
|
|
262,493
|
|
Other
|
|
|
509
|
|
|
|
199
|
|
|
|
310
|
|
|
|
-
|
|
|
|
509
|
|
Total Investment Securities Available-for-Sale
|
|
|
369,137
|
|
|
|
73,083
|
|
|
|
296,054
|
|
|
|
-
|
|
|
|
369,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Held-to-Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of States and Political Subdivisions
|
|
|
61,396
|
|
|
|
-
|
|
|
|
44,675
|
|
|
|
17,713
|
|
|
|
62,388
|
|
Total Investment Securities Held-to-Maturity
|
|
|
61,396
|
|
|
|
-
|
|
|
|
44,675
|
|
|
|
17,713
|
|
|
|
62,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB Stock
|
|
|
7,795
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans & Leases, Net of Deferred Fees & Allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
593,587
|
|
|
|
-
|
|
|
|
-
|
|
|
|
591,271
|
|
|
|
591,271
|
|
Agricultural Real Estate
|
|
|
417,153
|
|
|
|
-
|
|
|
|
-
|
|
|
|
405,295
|
|
|
|
405,295
|
|
Real Estate Construction
|
|
|
149,489
|
|
|
|
-
|
|
|
|
-
|
|
|
|
149,371
|
|
|
|
149,371
|
|
Residential 1st Mortgages
|
|
|
205,616
|
|
|
|
-
|
|
|
|
-
|
|
|
|
207,431
|
|
|
|
207,431
|
|
Home Equity Lines and Loans
|
|
|
30,910
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,360
|
|
|
|
32,360
|
|
Agricultural
|
|
|
287,658
|
|
|
|
-
|
|
|
|
-
|
|
|
|
285,733
|
|
|
|
285,733
|
|
Commercial
|
|
|
202,968
|
|
|
|
-
|
|
|
|
-
|
|
|
|
201,105
|
|
|
|
201,105
|
|
Consumer & Other
|
|
|
6,417
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,416
|
|
|
|
6,416
|
|
Leases
|
|
|
62,584
|
|
|
|
-
|
|
|
|
-
|
|
|
|
62,139
|
|
|
|
62,139
|
|
Unallocated Allowance
|
|
|
(1,546
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,546
|
)
|
|
|
(1,546
|
)
|
Total Loans & Leases, Net of Deferred Fees & Allowance
|
|
|
1,954,836
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,939,575
|
|
|
|
1,939,575
|
|
Accrued Interest Receivable
|
|
|
9,240
|
|
|
|
-
|
|
|
|
9,240
|
|
|
|
-
|
|
|
|
9,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
711,029
|
|
|
|
711,029
|
|
|
|
-
|
|
|
|
-
|
|
|
|
711,029
|
|
Interest Bearing Transaction
|
|
|
377,594
|
|
|
|
377,594
|
|
|
|
-
|
|
|
|
-
|
|
|
|
377,594
|
|
Savings and Money Market
|
|
|
707,885
|
|
|
|
707,885
|
|
|
|
-
|
|
|
|
-
|
|
|
|
707,885
|
|
Time
|
|
|
481,024
|
|
|
|
-
|
|
|
|
480,334
|
|
|
|
-
|
|
|
|
480,334
|
|
Total Deposits
|
|
|
2,277,532
|
|
|
|
1,796,508
|
|
|
|
480,334
|
|
|
|
-
|
|
|
|
2,276,842
|
|
Subordinated Debentures
|
|
|
10,310
|
|
|
|
-
|
|
|
|
6,424
|
|
|
|
-
|
|
|
|
6,424
|
|
Accrued Interest Payable
|
|
|
513
|
|
|
|
-
|
|
|
|
513
|
|
|
|
-
|
|
|
|
513
|
|
Fair value estimates presented herein are based on pertinent information available to management as of December 31, 2016 and December 31, 2015. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purpose of these financial statements since that date, and; therefore, current estimates of fair value may differ significantly from the amounts presented above. The methods and assumptions used to estimate the fair value of each class of financial instrument listed in the table above are explained below.
Cash and Cash Equivalents - The carrying amounts reported in the balance sheet for cash and due from banks, interest-bearing deposits with banks, federal funds sold, and securities purchased under agreements to resell are a reasonable estimate of fair value. All cash and cash equivalents are classified as Level 1.
Investment Securities - Fair values for investment securities consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. Based on the available market information the classification level could be 1, 2, or 3.
Federal Home Loan Bank Stock - It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Loans & Leases, Net of Deferred Loan & Lease Fees & Allowance - Fair values of loans & leases are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans & leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans & leases are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans & leases do not necessarily represent an exit price.
Deposit Liabilities - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed-maturity certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
Subordinated Debentures - The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
Accrued Interest Receivable and Payable - The carrying amount of accrued interest receivable and payable approximates their fair value resulting in a Level 2 classification.
20.
|
Commitments and Contingencies
|
In the normal course of business, the Company enters in to financial instruments with off balance sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These instruments include commitments to extend credit, letters of credit, and other types of financial guarantees. The Company had the following off balance sheet commitments as of the dates indicated.
(in thousands)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Commitments to Extend Credit
|
|
$
|
609,653
|
|
|
$
|
708,122
|
|
Letters of Credit
|
|
|
20,444
|
|
|
|
14,745
|
|
Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties
|
|
|
1,835
|
|
|
|
2,758
|
|
The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. 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. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party. Outstanding standby letters of credit have maturity dates ranging from 1 to 60 months with final expiration in January 2022. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
The Company is obligated under a number of noncancellable operating leases for premises and equipment used for banking purposes. Minimum future rental commitments under noncancellable operating leases as of December 31, 2016, were $618,000,
$557,000,
$571,000, $579,000, and $394,000 for the years 2017 through 2021, and $255,000 for the remaining term of the leases.
In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material in relation to the financial position of the Company.
The Company may be required to maintain average reserves on deposit with the Federal Reserve Bank primarily based on deposits outstanding. There were no reserve requirements during 2016 or 2015.
21.
|
Recent Accounting Developments
|
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
The ASU will require the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that is currently in use. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost. The impairment model for available-for-sale debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary. The new guidance is effective on January 1, 2020, with early adoption permitted on January 1, 2019. The Company is currently
evaluating the provisions of this ASU and has created a cross-functional team to begin its implementation efforts of this new guidance. While the Company has not quantified the impact of this ASU, it is evaluating historical loan level data requirements necessary for the implementation of the model, as well as various methodologies for determining expected credit losses.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The new standard is being issued to increase the transparency and comparability around lease obligations. Previously unrecorded off-balance sheet obligations will now be brought more prominently to light by presenting lease liabilities on the face of the balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements.
This ASU applies to leasing arrangements exceeding a twelve-month term. ASU 2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2018 and requires a modified retrospective method upon adoption. Early application of the amendments is permitted. The Company is currently evaluating the provisions of this ASU to determine the potential impact the new standard will have on the Company’s consolidated financial statements. While the Company has not quantified the impact to its balance sheet, it does expect the adoption of this ASU will result in a gross-up in its balance sheet as a result of recording a right-of-use asset and a lease liability for these leases.
In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09,
Revenue from Contracts with Customers (Topic 606).
As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. The Update modifies the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations.
The Company is currently evaluating the impact the adoption of this update will have on the consolidated financial statements. As a financial institution, the Company’s largest component of revenue, interest income, is excluded from the scope of this ASU. The Company is currently evaluating which, if any, of its sources of non-interest income will be impacted by this ASU.
22.
|
Parent Company Financial Information
|
The following financial information is presented as of December 31 for the periods indicated.
Farmers & Merchants Bancorp
Condensed Balance Sheets
(in thousands)
|
|
2016
|
|
|
2015
|
|
Cash
|
|
$
|
228
|
|
|
$
|
308
|
|
Investment in Farmers & Merchants Bank of Central California
|
|
|
289,778
|
|
|
|
261,626
|
|
Investment Securities
|
|
|
409
|
|
|
|
409
|
|
Other Assets
|
|
|
184
|
|
|
|
60
|
|
Total Assets
|
|
$
|
290,599
|
|
|
$
|
262,403
|
|
|
|
|
|
|
|
|
|
|
Subordinated Debentures
|
|
$
|
10,310
|
|
|
$
|
10,310
|
|
Liabilities
|
|
|
308
|
|
|
|
258
|
|
Shareholders' Equity
|
|
|
279,981
|
|
|
|
251,835
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
290,599
|
|
|
$
|
262,403
|
|
Farmers & Merchants Bancorp
Condensed Statements of Income
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Equity in Undistributed Earnings in Farmers & Merchants Bank of Central California
|
|
$
|
17,043
|
|
|
$
|
17,352
|
|
|
$
|
18,211
|
|
Dividends from Subsidiary
|
|
|
14,275
|
|
|
|
10,875
|
|
|
|
8,000
|
|
Interest Income
|
|
|
11
|
|
|
|
10
|
|
|
|
10
|
|
Other Expenses, Net
|
|
|
(2,485
|
)
|
|
|
(1,451
|
)
|
|
|
(1,406
|
)
|
Tax Benefit
|
|
|
879
|
|
|
|
606
|
|
|
|
587
|
|
Net Income
|
|
$
|
29,723
|
|
|
$
|
27,392
|
|
|
$
|
25,402
|
|
Farmers & Merchants Bancorp
Condensed Statements of Cash Flows
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
29,723
|
|
|
$
|
27,392
|
|
|
$
|
25,402
|
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Undistributed Net Earnings from Subsidiary
|
|
|
(17,043
|
)
|
|
|
(17,352
|
)
|
|
|
(18,211
|
)
|
Net (Increase) Decrease in Other Assets
|
|
|
(124
|
)
|
|
|
(79
|
)
|
|
|
(114
|
)
|
Net Increase (Decrease) in Liabilities
|
|
|
49
|
|
|
|
141
|
|
|
|
(1
|
)
|
Net Cash Provided by Operating Activities
|
|
|
12,605
|
|
|
|
10,102
|
|
|
|
7,076
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for Business Acquisition
|
|
|
(2,207
|
)
|
|
|
-
|
|
|
|
-
|
|
Payments for Investments in Subsidiaries
|
|
|
(2,586
|
)
|
|
|
(3,360
|
)
|
|
|
-
|
|
Net Cash Used by Investing Activities
|
|
|
(4,793
|
)
|
|
|
(3,360
|
)
|
|
|
-
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock
|
|
|
2,586
|
|
|
|
3,360
|
|
|
|
2,790
|
|
Cash Dividends
|
|
|
(10,478
|
)
|
|
|
(10,157
|
)
|
|
|
(9,919
|
)
|
Net Cash Used by Financing Activities
|
|
|
(7,892
|
)
|
|
|
(6,797
|
)
|
|
|
(7,129
|
)
|
Decrease in Cash and Cash Equivalents
|
|
|
(80
|
)
|
|
|
(55
|
)
|
|
|
(53
|
)
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
308
|
|
|
|
363
|
|
|
|
416
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
228
|
|
|
$
|
308
|
|
|
$
|
363
|
|
On February 17, 2017, the Company issued 1,375 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. These shares were issued at a price of $590.00 per share based upon a valuation completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.