NOTES TO FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF ACCOUNTING POLICIES
Nature of Operations
On July 3, 2008 (the “Effective Date”), a bank holding company reorganization was completed whereby Oak Valley Bancorp (“Bancorp”) became the parent holding company for Oak Valley Community Bank ( the “Bank”). On the Effective Date, a tax-free exchange was completed whereby each outstanding share of the Company was converted into one share of Bancorp and the Company became the sole wholly-owned subsidiary of the holding company.
The consolidated financial statements include the accounts of Bancorp and its wholly-owned bank subsidiary. All material intercompany transactions have been eliminated. In the opinion of Management, the consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations, changes in shareholders’ equity and cash flows. All adjustments are of a normal, recurring nature.
Oak Valley Community Bank is a California State chartered bank. The Company was incorporated under the laws of the state of California on May 31, 1990, and began operations in Oakdale on May 28, 1991. The Company operates branches in Oakdale, Sonora, Bridgeport, Bishop, Mammoth Lakes, Modesto, Manteca, Patterson, Turlock, Ripon, Stockton, and Escalon, California. The Bridgeport, Mammoth Lakes, and Bishop branches operate as a separate division, Eastern Sierra Community Bank. The Company’s primary source of revenue is providing loans to customers who are predominantly middle-market businesses.
On December 23, 2015, the Company completed its acquisition of Mother Lode Bank (“MLB”), a California state-chartered bank headquartered in Sonora, California, in a transaction in which Mother Lode Bank was merged with and into the Bank, with the Bank as the surviving company in the transaction (Note 2). The purchase price for Mother Lode Bank was approximately $7.3 million.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. 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. Significant accounting estimates reflected in the Company’s consolidated financial statements include the allowance for loan losses, accounting for income taxes, fair value measurements, and the determination, recognition and measurement of impaired loans. Actual results could differ from these estimates.
A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.
Subsequent events
—
The Company has evaluated events and transactions subsequent to December 31, 2016for potential recognition or disclosure.
Cash and cash equivalents —
The Company has defined cash and cash equivalents to include cash, due from banks, certificates of deposit with original maturities of three months or less, and federal funds sold. Generally, federal funds are sold for one-day periods. At times throughout the year, balances can exceed FDIC insurance limits.
Securities available for sale —
Available-for-sale securities consist of bonds, notes, and debentures not classified as trading securities or held-to-maturity securities. Available-for-sale securities with unrealized holding gains and losses are reported as an amount in accumulated other comprehensive income, net of tax. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. The amortization of premiums and accretion of discounts are recognized as adjustments to interest income over the period to maturity.
Investments with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates. At each consolidated financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other than temporary. This assessment includes a determination of whether the Company intends to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other than temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the amount of impairment is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is calculated as the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of the future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income. If the Company sold an impaired security, both the credit loss component and amount due to other factors would be recognized through earnings as described above.
Other real estate owned
—
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value of the property at the date of foreclosure less estimated selling costs. Subsequent to foreclosure, valuations are periodically performed and any subject revisions in the estimate of fair value are reported as adjustment to the carrying value of the real estate, provided the adjusted carrying amount does not exceed the original amount at foreclosure. Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses.
Loans originated
— Loans are reported at the principal amount outstanding, net of unearned income, deferred loan fees, and the allowance for loan losses. Unearned discounts on installment loans are recognized as income over the terms of the loans. Interest on other loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding.
Loan fees net of certain direct costs of origination are deferred and amortized, as an adjustment to interest yield, over the estimated life of the loan.
Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.
Allowance for loan losses
— The allowance for loan losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries of previously charged off amounts, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additional allowance based on their judgment about information available to them at the time of their examination.
The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as impaired. Impaired loans, as defined, are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. The general component relates to non-impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
The Company considers a loan impaired when it is probable that all amounts of principal and interest due, according to the contractual terms of the loan agreement, will not be collected. Interest income is recognized on impaired loans in the same manner as non-accrual loans. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
The method for calculating the allowance for unfunded loan commitments is based on an allowance percentage which is less than other outstanding loan types because they are at a lower risk level. This allowance percentage is evaluated by management periodically and is applied to the total undisbursed loan commitment balance to calculate the allowance for off-balance-sheet commitments.
The Company considers a loan to be a troubled debt restructure (“TDR”) when the Company has granted a concession and the borrower is experiencing financial difficulty. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. A TDR loan is kept on non-accrual status until the borrower has paid for six consecutive months with no payment defaults, at which time the TDR is placed back on accrual status. A TDR loan is impaired and a specific valuation allowance is allocated, if necessary, so that the TDR loan is reported net, at the present value of estimated future cash flows using the TDR loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
Acquired Loans and Leases
—
Loans and leases acquired through purchase or through a business combination are recorded at their fair value at the acquisition date. Credit discounts, 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 and lease losses is not recorded at the acquisition date.
Acquired loans are evaluated upon acquisition for evidence of deterioration in credit quality since their origination to determine if it is probable the Company will be unable to collect all contractually required payments. These loans are classified as Purchased Credit Impaired (“PCI”) loans, while all other acquired loans are classified as non-PCI loans. The Company has elected to account for PCI loans at the individual loan level. The Company estimates the amount and timing of expected cash flows for each loan. The expected cash flow in excess of the loan's carrying value, is referred to as the accretable yield, and is recorded as interest income over the remaining expected life of the loan. The excess of the loan's contractual principal and interest over expected cash flows is referred to as the non-accretable difference, and is representative of contractual amounts the Company does not expect to collect. The non-accretable difference is not recorded in the Company's consolidated financial statements.
Quarterly, management performs an evaluation of expected future cash flows for PCI loans. If current expectations of future cash flows are less than management's previous expectations, other than due to decreases in interest rates and prepayment assumptions, an allowance for loan and leases losses is recorded with a charge to provision for loan and lease losses. If there has been a probable and significant increase in expected future cash flows over that which was previously expected, the Company first reduces any previously established allowance for loan and lease losses, and then records an adjustment to interest income through a prospective increase in the accretable yield.
For acquired loans not considered credit impaired (“non-PCI”), we recognize the entire fair value discount accretion to interest income, based on contractual cash flows using an effective interest rate method for term loans, and on a straight line basis for revolving lines. When a non-PCI loan is placed on non-accrual status subsequent to acquisition, accretion stops until the loan is returned to accrual status. The level of accretion on non-PCI loans varies from period to period due to maturities and early pay-offs of these loans during the reporting periods. Subsequent to acquisition, if the probable and estimable losses for non-PCI loans exceed the amount of the remaining unaccreted discount, the excess is established as an allowance for loan losses. All acquired loans were acquired in acquisitions and do not represent loans purchased from third parties.
Premises and equipment —
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line basis. The estimated lives used in determining depreciation and amortization are:
Building (in years)
|
|
31.5
|
|
|
|
|
|
|
|
Equipment (in years)
|
3
|
–
|
12
|
|
|
|
|
|
|
Furniture and fixtures (in years)
|
3
|
–
|
7
|
|
|
|
|
|
|
Leasehold improvements (in years)
|
5
|
–
|
15
|
|
|
|
|
|
|
Automobiles (in years)
|
3
|
–
|
5
|
|
Leasehold improvements are amortized over the lesser of the useful life of the asset or the remaining term of the lease. The straight-line method of depreciation is followed for all assets for financial reporting purposes, but accelerated methods are used for tax purposes. Deferred income taxes have been provided for the resulting temporary differences.
Income taxes —
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled using the liability method. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
The Company files income tax returns in the U.S. federal jurisdiction, and the state of California. With few exceptions, the Company is no longer subject to U.S. federal tax examinations by tax authorities for years before 2013 or to state/local income tax examinations by tax authorities for years before 2012.
Transfers of financial assets —
Transfers of an entire financial asset, a group of financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that contain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Advertising costs —
The Company expenses marketing costs as they are incurred. Advertising expense was $199,000 and $189,000 for the years ended December 31, 2016 and 2015, respectively.
Comprehensive income —
Comprehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) includes items previously recorded directly to equity, such as unrealized gains and losses on securities available for sale. Comprehensive income is presented in the statements of comprehensive income and as a component of shareholders’ equity. For the years ended December 31, 2016 and 2015, $31,000 and $121,000 net of tax, respectively, was reclassified from comprehensive income into net income related to gains on called and sold available for sale securities.
Federal Reserve Bank Stock
—
Federal Reserve Bank stock represents the Company’s investment in the stock of the Federal Reserve Bank (“FRB”) and is carried at par value, which reasonably approximates its fair value. While technically these are considered equity securities, there is no market for the FRB stock. Therefore, the shares are considered as restricted investment securities. Management periodically evaluates FRB stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FRB as compared to the capital stock amount for the FRB and the length of time this situation has persisted, (2) commitments by the FRB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FRB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FRB, and (4) the liquidity position of the FRB. This investment is reflected as a component of interest receivable and other assets on the consolidated balance sheets.
Federal Home Loan Bank Stock
—
Federal Home Loan Bank stock represents the Company’s investment in the stock of the Federal Home Loan Bank of San Francisco (“FHLB”) and is carried at par value, which reasonably approximates its fair value. While technically these are considered equity securities, there is no market for the FHLB stock. Therefore, the shares are considered as restricted investment securities. Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB. This investment is reflected as a component of interest receivable and other assets on the consolidated balance sheets.
Earnings per
common share (“EPS”)
— EPS is based upon the weighted average number of common shares outstanding during each year. The table in footnote 13 shows: (1) weighted average basic shares, (2) effect of dilutive securities related to stock options and non-vested restricted stock, and (3) weighted average diluted shares. Basic EPS are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding dilutive stock options and unvested restricted stock awards. Diluted EPS are calculated using the weighted average diluted shares. The total dilutive shares included in annual diluted EPS is a year-to-date weighted average of the total dilutive shares included in each quarterly diluted EPS computation under the treasury stock method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of restricted stock awards receive non-forfeitable dividends at the same rate as common stockholders and they both share equally in undistributed earnings. Therefore, under the two-class method, the difference in EPS is not significant for these participating securities.
Stock based compensation —
The Company recognizes in the consolidated statements of income the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over the employees’ requisite service period (generally the vesting period). The Company uses the straight-line recognition of expenses for awards with graded vesting.
The fair value of each option grant is estimated as of the grant date using a binomial option-pricing model for all grants. Expected volatility is based on the historical volatility of the price of the Company’s stock. The Company uses historical data to estimate option exercise and stock option forfeiture rates within the valuation model. The expected term of options granted for the binomial model is derived from applying a historical suboptimal exercise factor to the contractual term of the grant. For binomial pricing, the risk-free rate for periods is equal to the U.S. Treasury yield at the time of grant and commensurate with the contractual term of the grant. There were no stock options granted in 2016 or 2015.
Fair values of financial instruments —
The consolidated financial statements include various estimated fair value information as of December 31, 2016 and 2015. Such information, which pertains to the Company’s financial instruments, does not purport to represent the aggregate net fair value of the Company. Further, the fair value estimates are based on various assumptions, methodologies, and subjective considerations, which vary widely among different financial institutions and which are subject to change.
Fair value measurements —
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company bases the fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available for sale, derivatives, and loans held for sale, if any, are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record certain assets at fair value on a non-recurring basis, such as certain impaired loans held for investment and securities held to maturity that are other-than-temporarily impaired. These non-recurring fair value adjustments typically involve write-downs of individual assets due to application of lower-of-cost or market accounting.
The Company has established and documented a process for determining fair value. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements. Whenever there is no readily available market data, Management uses its best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of Management's judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures could have been materially different from those reflected in these financial consolidated statements.
Reclassifications
— Certain prior year amounts have been reclassified to conform to the current year presentation. See Note 2. There was no effect on net income or shareholders’ equity as a result of reclassifications.
B
usiness combinations and related m
atters
—
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 purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. 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 Mother Lode Bank that was consummated on December 23, 2015. The Company's consolidated financial statements for the year ended December 31, 2015 reflect the operations of Mother Lode Bank from December 24, 2015 through December 31, 2015.
Goodwill and o
ther
i
ntangible
a
ssets
—
Intangible assets are comprised of goodwill and core deposit intangibles acquired in the Mother Lode Bank 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. Any goodwill and any intangible asset acquired in a purchase business combination determined to have an indefinite useful life is not amortized, but is evaluated for impairment, at a minimum, on an annual basis.
The Company applies a qualitative analysis of conditions in order to determine if it is more likely than not that the carrying value is impaired. In the event that the qualitative analysis suggests that the carrying value of goodwill may be impaired, the Company, with the assistance of an independent third party valuation firm, uses several quantitative valuation methodologies in evaluating goodwill for impairment including a discounted cash flow approach that includes assumptions made concerning the future earnings potential of the organization, and a market-based approach that looks at values for organizations of comparable size, structure and business model. The current year's review of qualitative factors did not indicate that impairment has occurred, as such no quantitative analysis was performed at December 31, 2016.
Recently Issued Accounting Standards —
In September, 2015, the FASB issued ASU No. 2015-16,
Simplifying the Accounting for Measurement Period Adjustments (Topic 805).
This ASU eliminates the requirement to restate prior period financial statements for measurement period adjustments to assets acquired and liabilities assumed in a business combination. The new guidance under this update requires the cumulative impact of measurement period adjustments be recognized in the period the adjustment is determined. This update does not change what constitutes a measurement period adjustment, nor does it change the length of the measurement period. The new standard is effective for interim annual periods beginning after December 15, 2015 and should be applied prospectively to measurement period adjustments that occur after the effective date. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments - Overall (Subtopic 825-10)
: Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU make improvements to GAAP related to financial instruments that include the following as applicable to us.
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●
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Equity investments, except for those accounted for under the equity method of accounting or those that result in consolidation of the investee, are required to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
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●
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Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment - if impairment exists, this requires measuring the investment at fair value.
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●
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Eliminates the requirement for public companies to disclose the method(s) and significant assumptions used to estimate the fair value that is currently required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
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Public companies will be required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
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Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements.
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The reporting entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.
|
ASU 2016-01 is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU will impact our financial statement disclosures, however, we do not expect this ASU to have a material impact on our financial condition or results of operations.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
This ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities, including leases classified as operating leases under previous GAAP, on the balance sheet and requiring additional disclosures of key information about leasing arrangements. 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 approach to adoption. Early application of the amendments is permitted. 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 each lease.
In March 2016, FASB issued ASU 2016-09,
Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
The amendments in ASU 2016-09 simplify several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period. The Company adopted this ASU for the full fiscal year of 2016 and it did not have a significant impact on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326).
This update changes the methodology used by financial institutions under current U.S. GAAP to recognize credit losses in the financial statements. Currently, U.S. GAAP requires the use of the incurred loss model, whereby financial institutions recognize in current period earnings, incurred credit losses and those inherent in the financial statements, as of the date of the balance sheet. This guidance results in a new model for estimating the allowance for loan and lease losses, commonly referred to as the Current Expected Credit Loss (“CECL”) model. Under the CECL model, financial institutions are required to estimate future credit losses and recognize those losses in current period earnings. The amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2019, with early adoption permitted. Upon adoption of the amendments within this update, the Company will be required to make a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. The Company is currently in the process of evaluating the impact the adoption of this update will have on its financial statements. While the Company has not quantified the impact of this ASU, it does expect changing from the current incurred loss model to an expected loss model will result in an earlier recognition of losses.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (Topic 230).
This update clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing the existing diversity in practice related to eight specific cash flow issues. The amendments in this update are effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of the amendments within this update will have a material impact on the Company’s financial statements.
In January 2017, FASB issued ASU 2017-03,
Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.
These amendments apply to ASU 2014-9 (Revenue from Contracts with Customers), ASU 2016-02 (Leases), and ASU 2016-13 (Financial Instruments - Credit Losses). The Company does not expect these amendments to have a significant impact on its consolidated financial statements.
NOTE 2 – BUSINESS COMBINATION
On
December 23, 2015, in effort to expand our market presence and enhance shareholder value, the Company acquired Mother Lode Bank ("MLB"), via a merger with and into the Bank, upon the consummation of which all outstanding common shares and unexercised options to purchase MLB common stock were cancelled, in exchange for $7,336,000 in cash (the "MLB Acquisition"). On January 29, 2016, the two acquired MLB branches in Sonora were closed after management determined that our two existing branches in Sonora would be able to support our acquired customers.
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.
During the third quarter of 2016, the Company determined that deferred tax assets acquired from MLB totaling $2,651,000, mainly from net operating loss carryforwards, cannot be utilized by the Company. As a result, the Company decreased deferred tax assets and increased goodwill by $2,651,000 as of the December 23, 2015 acquisition date in the tables below. Additionally, all related financial statement disclosures have been revised. These revisions did not impact previously reported net income or shareholders equity.
The following table reflects the estimated fair values of the assets acquired and liabilities assumed related to the MLB Acquisition:
(Dollars in thousands)
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Acquisition Date
December 23, 2015
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Assets:
|
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|
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Cash and cash equivalents
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$
|
30,804
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Loans
|
|
|
42,831
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Core deposit intangible
|
|
|
1,031
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Goodwill
|
|
|
3,313
|
|
Other assets
|
|
|
737
|
|
Total assets acquired
|
|
$
|
78,717
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|
|
|
|
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Liabilities:
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|
|
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Deposits:
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|
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Non-interest bearing
|
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$
|
36,177
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|
Interest bearing
|
|
|
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Transaction accounts
|
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6,112
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|
Savings accounts
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15,727
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Money market accounts
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|
|
7,602
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Other time accounts
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5,507
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Total deposits
|
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71,125
|
|
|
|
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Other liabilities
|
|
|
256
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|
Total liabilities assumed
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$
|
71,381
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|
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|
|
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Merger consideration
|
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$
|
7,336
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|
The following table presents the net assets acquired from MLB and the estimated fair value adjustments:
(Dollars in thousands)
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Acquisition Date
December 23, 2015
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Book value of net assets acquired from Mother Lode Bank
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$
|
4,884
|
|
|
|
|
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Fair value adjustments:
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|
|
|
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Loans
|
|
|
(2,960
|
)
|
Reversal of Allowance for Loan Loss
|
|
|
1,279
|
|
Core deposit intangible asset
|
|
|
1,031
|
|
Other assets & liabilities, net
|
|
|
(211
|
)
|
Total purchase accounting adjustments
|
|
$
|
(861
|
)
|
|
|
|
|
|
Fair value of net assets acquired from Mother Lode Bank
|
|
$
|
4,023
|
|
|
|
|
|
|
Merger consideration
|
|
|
7,336
|
|
Less: fair value of net assets acquired
|
|
|
(4,023
|
)
|
Goodwill
|
|
$
|
3,313
|
|
As a result of the MLB Acquisition, we recorded $3,313,000 in goodwill, which represents the excess of the total purchase price paid over the fair value of the assets acquired, net of the fair values of liabilities assumed. Goodwill mainly reflects expected value created through the combined operations of MLB and the Company. At December 31, 2016 and 2015, we determined that the fair value of our traditional community banking activities (provided through our branch network) exceeded the carrying amount. Therefore, no impairment on goodwill has been recorded. The following is a description of the methods used to determine the fair values of significant assets and liabilities at acquisition date presented above.
Loans
The fair values for acquired loans were developed based upon the present values of the expected cash flows utilizing market-derived discount rates. Expected cash flows for each acquired loan were projected based on contractual cash flows adjusted for expected prepayment, expected default (i.e. probability of default and loss severity), and principal recovery.
Prepayment rates were applied to the principal outstanding based on the type of loan, where appropriate. Prepayments were based on a constant prepayment rate (“CPR”) applied across the life of a loan. The annual CPRs were between 0% and 5%, depending on the characteristics of the loan pool (e.g. construction, commercial real estate, etc.).
Non-credit-impaired loans with similar characteristics were grouped together and were treated in the aggregate when applying the discount rate on the expected cash flows. Aggregation factors considered included the type of loan and related collateral, risk classification, fixed or variable interest rate, term of loan and whether or not the loan was amortizing. See Note 5 for additional information.
Core Deposit Intangible
The core deposit intangible represents the estimated future benefits of acquired deposits and is booked separately from the related deposits. The value of the core deposit intangible asset was determined using a discounted cash flow approach to arrive at the cost differential between the core deposits (non-maturity deposits such as transaction, savings and money market accounts) and alternative funding sources. The core deposit intangible is amortized on an accelerated basis over an estimated ten-year life, and it is evaluated periodically for impairment. No impairment loss was recognized as of December 31, 2016.
A core deposit intangible asset of $1,031,000 was recorded on December 23, 2015, none of which was amortized during 2015 and $159,000 was amortized during 2016. At December 31, 2016, the future estimated amortization expense is as follows:
(in thousands)
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
|
|
Core deposit intangible amortization
|
|
$
|
129
|
|
|
$
|
114
|
|
|
$
|
105
|
|
|
$
|
96
|
|
|
$
|
93
|
|
|
$
|
335
|
|
|
$
|
872
|
|
Acquisition Related Expenses
Acquisition-related expenses are recognized as incurred and continue until all systems have been converted and operational functions become fully integrated. We incurred one-time third-party acquisition-related expenses in the consolidated statements of income totaling $173,000 and $1,971,000 during the years ended December 31, 2016 and 2015, respectively. The conversion of the operating systems was completed in April 2016.
Pro Forma Results of Operations
Included in the Company’s consolidated statement of income for the year ended December 31, 2015, was revenue of $64,000 and net income of $37,000 related to normal business operations of MLB. Management believes pro forma results of operations for the year ended December 31, 2015 would not have been significantly different had the MLB acquisition occurred on January 1, 2015.
Acquisition-related expenses are recognized as incurred and continue until all systems have been converted and operational functions become fully integrated. We incurred one-time third-party acquisition-related expenses in the consolidated statements of income in 2016 and 2015 as follows:
(
Dollars in thousands)
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Data processing
|
|
$
|
(5
|
)
|
|
$
|
1,137
|
|
Professional services
|
|
|
58
|
|
|
|
582
|
|
Personnel severance
|
|
|
(20
|
)
|
|
|
210
|
|
Other
|
|
|
140
|
|
|
|
42
|
|
|
|
$
|
173
|
|
|
$
|
1,971
|
|
NOTE 3 — CASH AND DUE FROM BANKS
Cash and due from banks includes balances with the Federal Reserve Bank and other correspondent banks. The Company is required to maintain specified reserves by the Federal Reserve Bank. The average reserve requirements are based on a percentage of the Company’s deposit liabilities. In addition, the Federal Reserve Bank requires the Company to maintain a certain minimum balance at all times. As of December 31, 2016 and 2015, the Company had a balance of $65,467,000 and $107,792,000, respectively, which exceeds the reserve requirement.
NOTE 4 — SECURITIES
The amortized cost and estimated fair values of debt securities as of December 31, 2016, are as follows:
(dollars in thousands)
|
|
Amortized Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agencies
|
|
$
|
27,879
|
|
|
$
|
616
|
|
|
$
|
(209
|
)
|
|
$
|
28,286
|
|
Collateralized mortgage obligations
|
|
|
4,159
|
|
|
|
7
|
|
|
|
(57
|
)
|
|
|
4,109
|
|
Municipalities
|
|
|
77,957
|
|
|
|
1,318
|
|
|
|
(946
|
)
|
|
|
78,329
|
|
SBA pools
|
|
|
7,219
|
|
|
|
0
|
|
|
|
(51
|
)
|
|
|
7,168
|
|
Corporate debt
|
|
|
21,349
|
|
|
|
81
|
|
|
|
(867
|
)
|
|
|
20,563
|
|
Asset backed securities
|
|
|
18,888
|
|
|
|
32
|
|
|
|
(101
|
)
|
|
|
18,819
|
|
Mutual fund
|
|
|
3,264
|
|
|
|
0
|
|
|
|
(205
|
)
|
|
|
3,059
|
|
|
|
$
|
160,715
|
|
|
$
|
2,054
|
|
|
$
|
(2,436
|
)
|
|
$
|
160,333
|
|
The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2016.
(dollars in thousands)
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
Description of Securities
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
U.S. agencies
|
|
$
|
8,769
|
|
|
$
|
(208
|
)
|
|
$
|
718
|
|
|
$
|
(1
|
)
|
|
$
|
9,487
|
|
|
$
|
(209
|
)
|
Collateralized mortgage obligations
|
|
|
3,166
|
|
|
|
(57
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
3,166
|
|
|
|
(57
|
)
|
Municipalities
|
|
|
45,137
|
|
|
|
(917
|
)
|
|
|
402
|
|
|
|
(29
|
)
|
|
|
45,539
|
|
|
|
(946
|
)
|
SBA pools
|
|
|
6,415
|
|
|
|
(46
|
)
|
|
|
753
|
|
|
|
(5
|
)
|
|
|
7,168
|
|
|
|
(51
|
)
|
Corporate debt
|
|
|
12,776
|
|
|
|
(757
|
)
|
|
|
2,884
|
|
|
|
(110
|
)
|
|
|
15,660
|
|
|
|
(867
|
)
|
Asset backed securities
|
|
|
2,576
|
|
|
|
(15
|
)
|
|
|
8,272
|
|
|
|
(86
|
)
|
|
|
10,848
|
|
|
|
(101
|
)
|
Mutual fund
|
|
|
0
|
|
|
|
0
|
|
|
|
3,059
|
|
|
|
(205
|
)
|
|
|
3,059
|
|
|
|
(205
|
)
|
Total temporarily impaired securities
|
|
$
|
78,839
|
|
|
$
|
(2,000
|
)
|
|
$
|
16,088
|
|
|
$
|
(436
|
)
|
|
$
|
94,927
|
|
|
$
|
(2,436
|
)
|
At December 31, 2016, there was one U.S. agency, one municipality, two SBA pools, four corporate debts, five asset backed securities, and one mutual fund that comprised the total securities in an unrealized loss position for greater than 12 months and seven U.S. agencies, two collateralized mortgage obligations, forty-four municipalities, three SBA pools, eight corporate debts, and one asset backed security that make up the total securities in a loss position for less than 12 months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary. This evaluation encompasses various factors including, the nature of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings and other credit related factors such as third party guarantees and volatility of the security’s fair value. Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due primarily to interest rate changes and the Company does not intend to sell the securities and it is not likely that we will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.
The amortized cost and estimated fair value of debt securities at December 31, 2016, by contractual maturity or call date, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(dollars in thousands)
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
9,880
|
|
|
$
|
10,433
|
|
Due after one year through five years
|
|
|
52,380
|
|
|
|
52,005
|
|
Due after five years through ten years
|
|
|
65,103
|
|
|
|
64,789
|
|
Due after ten years
|
|
|
33,352
|
|
|
|
33,106
|
|
|
|
$
|
160,715
|
|
|
$
|
160,333
|
|
The amortized cost and estimated fair values of debt securities as of December 31, 2015, are as follows:
(dollars in thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agencies
|
|
$
|
31,815
|
|
|
$
|
1,142
|
|
|
$
|
(89
|
)
|
|
$
|
32,868
|
|
Collateralized mortgage obligations
|
|
|
2,729
|
|
|
|
17
|
|
|
|
(27
|
)
|
|
|
2,719
|
|
Municipalities
|
|
|
66,535
|
|
|
|
2,248
|
|
|
|
(197
|
)
|
|
|
68,586
|
|
SBA pools
|
|
|
811
|
|
|
|
0
|
|
|
|
(5
|
)
|
|
|
806
|
|
Corporate debt
|
|
|
13,497
|
|
|
|
44
|
|
|
|
(121
|
)
|
|
|
13,420
|
|
Asset backed securities
|
|
|
10,321
|
|
|
|
0
|
|
|
|
(183
|
)
|
|
|
10,138
|
|
Mutual fund
|
|
|
3,172
|
|
|
|
0
|
|
|
|
(163
|
)
|
|
|
3,009
|
|
|
|
$
|
128,880
|
|
|
$
|
3,451
|
|
|
$
|
(785
|
)
|
|
$
|
131,546
|
|
The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2015.
(dollars in thousands)
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
Description of Securities
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
U.S. agencies
|
|
$
|
7,129
|
|
|
$
|
(30
|
)
|
|
$
|
1,800
|
|
|
$
|
(59
|
)
|
|
$
|
8,929
|
|
|
$
|
(89
|
)
|
Collateralized mortgage obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
1,266
|
|
|
|
(27
|
)
|
|
|
1,266
|
|
|
|
(27
|
)
|
Municipalities
|
|
|
11,451
|
|
|
|
(123
|
)
|
|
|
3,680
|
|
|
|
(74
|
)
|
|
|
15,131
|
|
|
|
(197
|
)
|
SBA pools
|
|
|
0
|
|
|
|
0
|
|
|
|
807
|
|
|
|
(5
|
)
|
|
|
807
|
|
|
|
(5
|
)
|
Corporate debt
|
|
|
9,376
|
|
|
|
(121
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
9,376
|
|
|
|
(121
|
)
|
Asset backed securities
|
|
|
5,351
|
|
|
|
(78
|
)
|
|
|
4,787
|
|
|
|
(105
|
)
|
|
|
10,138
|
|
|
|
(183
|
)
|
Mutual fund
|
|
|
0
|
|
|
|
0
|
|
|
|
3,009
|
|
|
|
(163
|
)
|
|
|
3,009
|
|
|
|
(163
|
)
|
Total temporarily impaired securities
|
|
$
|
33,307
|
|
|
$
|
(352
|
)
|
|
$
|
15,349
|
|
|
$
|
(433
|
)
|
|
$
|
48,656
|
|
|
$
|
(785
|
)
|
The Company recognized gross realized gains of $52,000 and $238,000 during 2016 and 2015, respectively, on certain available-for-sale securities that were called or sold. The gains in 2015 reflected in the condensed consolidated statements of income are net of a $32,000 gross realized loss related to one available-for-sale security sold during the first quarter of 2015, compared to no sales of securities and no losses on called securities during 2016.
There were no losses on called available-for-sale securities realized during 2016 and 2015.
Securities carried at $89,362,000 and $65,902,000 at December 31, 2016 and 2015, respectively, were pledged to secure deposits of public funds.
NOTE 5 — LOANS
The Company’s customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. As of December 31, 2015, approximately 78% of the Company’s loans are commercial real estate loans which includes construction loans. Approximately 11% of the Company’s loans are for general commercial uses including professional, retail, and small business. Additionally, 6% of the Company’s loans are for residential real estate and other consumer loans. The remaining 5% are agriculture loans.
Loan totals were as follows:
|
|
YEAR ENDED DECEMBER 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Commercial real estate- construction
|
|
$
|
23,378
|
|
|
$
|
19,363
|
|
Commercial real estate- mortgages
|
|
|
389,495
|
|
|
|
363,644
|
|
Land
|
|
|
9,823
|
|
|
|
10,239
|
|
Farmland
|
|
|
56,159
|
|
|
|
29,801
|
|
Commercial and industrial
|
|
|
64,201
|
|
|
|
63,776
|
|
Consumer
|
|
|
767
|
|
|
|
774
|
|
Consumer residential
|
|
|
38,672
|
|
|
|
32,588
|
|
Agriculture
|
|
|
28,454
|
|
|
|
20,847
|
|
Total loans
|
|
|
610,949
|
|
|
|
541,032
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Deferred loan fees and costs, net
|
|
|
(2,013
|
)
|
|
|
(3,282
|
)
|
Allowance for loan losses
|
|
|
(7,832
|
)
|
|
|
(7,356
|
)
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
601,104
|
|
|
$
|
530,394
|
|
Loan Origination/Risk Management.
The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.
Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At December 31, 2016, approximately 40.9% of the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-occupied properties.
With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
The Company originates consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans follow bank policy, which include, but are not limited to, a maximum loan-to-value percentage of 80%, a maximum housing and total debt ratio of 36% and 42%, respectively and other specified credit and documentation requirements.
The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.
Purchased Credit-Impaired
(“PCI”) Loans.
We evaluated loans purchased in the Acquisition in accordance with accounting guidance in ASC 310-30 related to loans acquired with deteriorated credit quality. Acquired loans are considered credit-impaired if there is evidence of significant deterioration of credit quality since origination and it is probable, at the acquisition date, that we will be unable to collect all contractually required payments receivable. Management has determined certain loans purchased in the MLB Acquisition to be PCI loans based on credit indicators such as nonaccrual status, past due status, loan risk grade, loan-to-value ratio, etc. Revolving credit agreements (e.g., home equity lines of credit and revolving commercial loans) are not considered PCI loans as cash flows cannot be reasonably estimated.
For acquired loans not considered credit-impaired, the difference between the contractual amounts due (principal amount) and the fair value is accounted for subsequently through accretion. We recognize discount accretion based on the acquired loan’s contractual cash flows using an effective interest rate method. The accretion is recognized through the net interest margin.
The following table presents the fair value of purchased credit-impaired and other loans acquired from Mother Lode Bank as of the acquisition date:
|
|
December 23, 2015
|
|
(in thousands)
|
|
Purchased
credit-impaired
loans
|
|
|
Other
purchased
loans
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractually required payments including interest
|
|
$
|
1,982
|
|
|
$
|
44,007
|
|
|
$
|
45,989
|
|
Less: nonaccretable difference
|
|
|
(1,103
|
)
|
|
|
0
|
|
|
|
(1,103
|
)
|
Cash flows expected to be collected (undiscounted)
|
|
|
879
|
|
|
|
44,007
|
|
|
|
44,886
|
|
Accretable yield
|
|
|
(14
|
)
|
|
|
(2,041
|
)
|
|
|
(2,055
|
)
|
Fair value of purchased loans
|
|
$
|
865
|
|
|
$
|
41,966
|
|
|
$
|
42,831
|
|
The following table reflects the outstanding balance and related carrying value of PCI loans as of December 31, 2016 and December 31, 2015:
(in thousands)
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Unpaid
principal
balance
|
|
|
Carrying value
|
|
|
Unpaid principal balance
|
|
|
Carrying value
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate- construction
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Commercial real estate- mortgages
|
|
|
0
|
|
|
|
0
|
|
|
|
196
|
|
|
|
118
|
|
Land
|
|
|
280
|
|
|
|
33
|
|
|
|
795
|
|
|
|
269
|
|
Farmland
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
|
|
0
|
|
|
|
794
|
|
|
|
478
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer residential
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Agriculture
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total purchased credit-impaired loans
|
|
$
|
280
|
|
|
$
|
33
|
|
|
$
|
1,785
|
|
|
$
|
865
|
|
For the PCI loans, the accretable yield represents the excess of the cash flows expected to be collected at acquisition over the fair value of the loans at the acquisition date, and is accreted into interest income over the estimated remaining life of the purchased credit-impaired loans using the effective yield method, provided that the timing and amount of future cash flows is reasonably estimable. The cash flows expected to be collected are updated each quarter based on current assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. Probable decreases in expected cash flows after acquisition result in the recognition of impairment as a specific allowance for loan losses or a charge-off to the allowance. The nonaccretable difference represents the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows, and also reflects the estimated credit losses in the acquired loan portfolio at the acquisition date and can fluctuate due to changes in expected cash flows during the life of the PCI loans. Due to the timing of the Acquisition being near December 31, 2015, the accretable yield at Acquisition approximates the accretable yield at December 31, 2015.
Non-Accrual and Past Due Loans.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Year-end non-accrual loans, segregated by class of loans, were as follows:
|
|
YEAR ENDED DECEMBER 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Commercial real estate- construction
|
|
$
|
0
|
|
|
$
|
0
|
|
Commercial real estate- mortgages
|
|
|
0
|
|
|
|
0
|
|
Land
|
|
|
2,715
|
|
|
|
2,739
|
|
Farmland
|
|
|
0
|
|
|
|
51
|
|
Commercial and industrial
|
|
|
306
|
|
|
|
322
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
Consumer residential
|
|
|
16
|
|
|
|
0
|
|
Agriculture
|
|
|
0
|
|
|
|
2,704
|
|
Total non-accrual loans
|
|
$
|
3,037
|
|
|
$
|
5,816
|
|
(1)
|
Excluded from the above non-accrual loan table are Purchased Credit Impaired loans acquired in the MLB Acquisition.
|
Had non-accrual loans performed in accordance with their original contract terms, the Company would have recognized additional interest income of approximately $156,000 in 2016 and $376,000 in 2015.
The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of December 31, 2016 (in thousands):
December 31, 2016
|
|
30-59
Days
Past
Due
|
|
|
60-89
Days
Past
Due
|
|
|
Greater
Than 90
Days
Past
Due
|
|
|
Total
Past
Due
|
|
|
Current
|
|
|
Purchased Credit
Impaired
Loans
|
|
|
Total
|
|
|
Greater
Than 90
Days Past
Due and
Still
Accruing
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial R.E. - construction
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
23,378
|
|
|
$
|
0
|
|
|
|
23,378
|
|
|
$
|
0
|
|
Commercial R.E. - mortgages
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
389,495
|
|
|
|
0
|
|
|
|
389,495
|
|
|
|
0
|
|
Land
|
|
|
0
|
|
|
|
0
|
|
|
|
2,715
|
|
|
|
2,715
|
|
|
|
7,075
|
|
|
|
33
|
|
|
|
9,823
|
|
|
|
0
|
|
Farmland
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
56,159
|
|
|
|
0
|
|
|
|
56,159
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
0
|
|
|
|
0
|
|
|
|
302
|
|
|
|
302
|
|
|
|
63,899
|
|
|
|
0
|
|
|
|
64,201
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
767
|
|
|
|
0
|
|
|
|
767
|
|
|
|
0
|
|
Consumer residential
|
|
|
0
|
|
|
|
0
|
|
|
|
16
|
|
|
|
16
|
|
|
|
38,656
|
|
|
|
0
|
|
|
|
38,672
|
|
|
|
0
|
|
Agriculture
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
28,454
|
|
|
|
0
|
|
|
|
28,454
|
|
|
|
0
|
|
Total
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,033
|
|
|
$
|
3,033
|
|
|
$
|
607,883
|
|
|
$
|
33
|
|
|
|
610,949
|
|
|
$
|
0
|
|
The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of December 31, 2015 (in thousands):
December 31, 2015
|
|
30-59
Days
Past
Due
|
|
|
60-89
Days
Past
Due
|
|
|
Greater
Than
90
Days
Past
Due
|
|
|
Total
Past
Due
|
|
|
Current
|
|
|
Purchased
Credit
Impaired
Loans
|
|
|
Total
|
|
|
Greater
Than 90
Days
Past Due
and Still
Accruing
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial R.E. - construction
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
19,363
|
|
|
$
|
0
|
|
|
$
|
19,363
|
|
|
$
|
0
|
|
Commercial R.E. –
mortgages
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
363,526
|
|
|
|
118
|
|
|
|
363,644
|
|
|
|
0
|
|
Land
|
|
|
0
|
|
|
|
0
|
|
|
|
2,261
|
|
|
|
2,261
|
|
|
|
7,709
|
|
|
|
269
|
|
|
|
10,239
|
|
|
|
0
|
|
Farmland
|
|
|
1,182
|
|
|
|
0
|
|
|
|
51
|
|
|
|
1,233
|
|
|
|
28,568
|
|
|
|
0
|
|
|
|
29,801
|
|
|
|
0
|
|
Commercial and industrial
|
|
|
352
|
|
|
|
0
|
|
|
|
312
|
|
|
|
664
|
|
|
|
62,634
|
|
|
|
478
|
|
|
|
63,776
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
774
|
|
|
|
0
|
|
|
|
774
|
|
|
|
0
|
|
Consumer residential
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
32,588
|
|
|
|
0
|
|
|
|
32,588
|
|
|
|
0
|
|
Agriculture
|
|
|
0
|
|
|
|
2,704
|
|
|
|
0
|
|
|
|
2,704
|
|
|
|
18,143
|
|
|
|
0
|
|
|
|
20,847
|
|
|
|
0
|
|
Total
|
|
$
|
1,534
|
|
|
$
|
2,704
|
|
|
$
|
2,624
|
|
|
$
|
6,862
|
|
|
$
|
533,305
|
|
|
$
|
865
|
|
|
$
|
541,032
|
|
|
$
|
0
|
|
Impaired Loans.
Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Impaired loans by class as of December 31, 2016 and 2015 are set forth in the following tables. PCI loans are excluded from the tables, as they have not experienced post acquisition declines in cash flows expected to be collected. No interest income was recognized on impaired loans subsequent to their classification as impaired during 2016 and 2015.
(in thousands)
|
|
Unpaid Contractual Principal Balance
|
|
|
Recorded Investment With No Allowance
|
|
|
Recorded Investment With Allowance
|
|
|
Total Recorded Investment
|
|
|
Related Allowance
|
|
|
Average Recorded Investment
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial R.E. - construction
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Commercial R.E. - mortgages
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Land
|
|
|
3,131
|
|
|
|
2,715
|
|
|
|
0
|
|
|
|
2,715
|
|
|
|
680
|
|
|
|
2,476
|
|
Farmland
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial and Industrial
|
|
|
353
|
|
|
|
4
|
|
|
|
302
|
|
|
|
306
|
|
|
|
0
|
|
|
|
313
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer residential
|
|
|
16
|
|
|
|
16
|
|
|
|
0
|
|
|
|
16
|
|
|
|
0
|
|
|
|
0
|
|
Agriculture
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
3,500
|
|
|
$
|
2,735
|
|
|
$
|
302
|
|
|
$
|
3,037
|
|
|
$
|
680
|
|
|
$
|
2,789
|
|
(in thousands)
|
|
Unpaid Contractual Principal Balance
|
|
|
Recorded Investment With No Allowance
|
|
|
Recorded Investment With Allowance
|
|
|
Total Recorded Investment
|
|
|
Related Allowance
|
|
|
Average Recorded Investment
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial R.E. - construction
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
Commercial R.E. - mortgages
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
301
|
|
Land
|
|
|
3,856
|
|
|
|
0
|
|
|
|
2,739
|
|
|
|
2,739
|
|
|
|
722
|
|
|
|
2,914
|
|
Farmland
|
|
|
63
|
|
|
|
51
|
|
|
|
0
|
|
|
|
51
|
|
|
|
0
|
|
|
|
61
|
|
Commercial and Industrial
|
|
|
357
|
|
|
|
322
|
|
|
|
0
|
|
|
|
322
|
|
|
|
0
|
|
|
|
611
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer residential
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Agriculture
|
|
|
2,704
|
|
|
|
2,704
|
|
|
|
0
|
|
|
|
2,704
|
|
|
|
0
|
|
|
|
7
|
|
Total
|
|
$
|
6,980
|
|
|
$
|
3,077
|
|
|
$
|
2,739
|
|
|
$
|
5,816
|
|
|
$
|
722
|
|
|
|
3,894
|
|
Troubled Debt Restructurings –
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.
At December 31, 2016, there were 6 loans that were considered to be troubled debt restructurings, all of which are considered non-accrual totaling $3,037,000. At December 31, 2015, there were 5 loans that were considered to be troubled debt restructurings, all of which are considered non-accrual totaling $3,060,000. There were no unfunded commitments on TDR loans at December 31, 2016 and 2015
.
We have allocated $680,000 and $722,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of December 31, 2016 and 2015, respectively.
During the year ended December 31, 2016, the terms of two loans were modified as troubled debt restructurings, as compared to two loans during 2015. 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; or a temporary payment modification in which the payment amount allocated towards principal was reduced. In some cases, a permanent reduction of the accrued interest on the loan was conceded.
During 2016 and 2015, two loans were modified as troubled debt restructurings totaling $308,000 and $594,000, respectively. The troubled debt restructurings during the years ended December 31, 2016 and 2015 did not modify the principal balances, did not increase the allowance for loan losses and there were no charge offs as a result of the loan modifications.
There was one commercial real estate loan with a balance of $289,000 that was modified as troubled debt restructuring and had a subsequent payment default during the year ended December 31, 2016, as compared to no payment defaults of modified loans during 2015.
A loan is considered to be in payment default once it is thirty days contractually past due under the modified terms.
Quality ratings (Risk Grades) are assigned to all commitments and stand-alone notes. Risk grades define the basic characteristics of commitments or stand-alone note in relation to their risk. All loans are graded using a system that maximizes the loan quality information contained in loan review grades, while ensuring that the system is compatible with the grades used by bank examiners.
We grade loans using the following letter system:
1 Exceptional Loan
2 Quality Loan
3A Better Than Acceptable Loan
3B Acceptable Loan
3C Marginally Acceptable Loan
4 (W) Watch Acceptable Loan
5 Other Loans Especially Mentioned
6 Substandard Loan
7 Doubtful Loan
8 Loss
1.
Exceptional Loan
- Loans with A+ credits that contain very little, if any, risk. Grade 1 loans are considered Pass. To qualify for this rating, the following characteristics must be present:
-A high level of liquidity and whose debt-servicing capacity exceeds expected obligations by a substantial margin.
-Where leverage is below average for the industry and earnings are consistent or growing without severe vulnerability to economic cycles.
-Also included in this rating (but not mandatory unless one or more of the preceding characteristics are missing) are loans that are fully secured and properly margined by our own time instruments or U.S. blue chip securities. To be properly margined cash collateral must be equal to, or greater than, 110% of the loan amount.
2.
Quality Loan
- Loans with excellent sources of repayment that conform in all respects to bank policy and regulatory requirements. These are also loans for which little repayment risk has been identified. No credit or collateral exceptions. Grade 2 loans are considered Pass. Other factors include:
-Unquestionable debt-servicing capacity to cover all obligations in the ordinary course of business from well-defined primary and secondary sources.
-Consistent strong earnings.
-A solid equity base.
3A.
Better than Acceptable Loan
- In the interest of better delineating the loan portfolio’s true credit risk for reserve allocation, further granularity has been sought by splitting the grade 3 category into three classifications. The distinction between the three are bank-defined guidelines and represent a further refinement of the regulatory definition of a pass, or grade 3 loan. Grade 3A is the stronger third of the pass category, but is not strong enough to be a grade 2 and is characterized by:
-Strong earnings with no loss in last three years and ample cash flow to service all debt well above policy guidelines.
-Long term experienced management with depth and defined management succession.
-The loan has no exceptions to policy.
-Loan-to-value on real estate secured transactions is 10% to 20% less than policy guidelines.
-Very liquid balance sheet that may have cash available to pay off our loan completely.
-Little to no debt on balance sheet.
3B.
Acceptable Loan
- 3B loans are simply defined as all loans that are less qualified than 3A loans and are stronger than 3C loans. These loans are characterized by acceptable sources of repayment that conform to bank policy and regulatory requirements. Repayment risks are acceptable for these loans. Credit or collateral exceptions are minimal, are in the process of correction, and do not represent repayment risk. These loans:
-Are those where the borrower has average financial strengths, a history of profitable operations and experienced management.
-Are those where the borrower can be expected to handle normal credit needs in a satisfactory manner.
3C.
Marginally Acceptable
- 3C loans have similar characteristics as that of 3Bs with the following additional characteristics:
Requires collateral. A credit facility where the borrower has average financial strengths, but usually lacks reliable secondary sources of repayment other than the subject collateral. Other common characteristics can include some or all of the following: minimal background experience of management, lacking continuity of management, a start-up operation, erratic historical profitability (acceptable reasons-well identified), lack of or marginal sponsorship of guarantor, and government guaranteed loans.
4W
Watch Acceptable
- Watch grade will be assigned to any credit that is adequately secured and performing but monitored for a number of indicators. These characteristics may include any unexpected short-term adverse financial performance from budgeted projections or prior period’s results (i.e., declining profits, sales, margins, cash flow, or increased reliance on leverage, including adverse balance sheet ratios, trade debt issues, etc.). Additionally, any managerial or personal problems of company management, decline in the entire industry or local economic conditions failure to provide financial information or other documentation as requested; issues regarding delinquency, overdrafts, or renewals; and any other issues that cause concern for the company. Loans to individuals or loans supported by guarantors with marginal net worth and/or marginal collateral. Weakness identified
in a Watch credit is short-term in nature. Loans in this category are usually accounts the Company would want to retain providing a positive turnaround can be expected within a reasonable time frame. Grade 4 loans are considered Pass.
5
Other Loans Especially Mentioned (Special Mention)
- A special mention extension of credit is defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date result in the deterioration of the repayment prospects for the credit or the institution’s credit position. Extensions of credit that might be detailed in this category include the following:
-The lending officer may be unable to properly supervise the credit because of an inadequate loan or credit agreement.
-Questions exist regarding the condition of and/or control over collateral.
-Economic or market conditions may unfavorably affect the obligor in the future.
-A declining trend in the obligor’s operations or an imbalanced position in the balance sheet exists, but not to the point that repayment is jeopardized.
6
Substandard Loan
- A “substandard” extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified substandard.
7
Doubtful Loan
- An extension of credit classified “doubtful” has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral or refinancing plans. The entire loan need not be classified doubtful when collection of a specific portion appears highly probable. An example of proper use of the doubtful category is the case of a company being liquidated, with the trustee-in-bankruptcy indicating a minimum disbursement of 40 percent and a maximum of 65 percent to unsecured creditors, including the Company. In this situation, estimates are based on liquidation value appraisals with actual values yet to be realized. By definition, the only portion of the credit that is doubtful is the 25 percent difference between 40 and 65 percent.
A proper classification of such a credit would show 40 percent substandard, 25 percent doubtful, and 35 percent loss. A credit classified as doubtful should be resolved within a ‘reasonable’ period of time. Reasonable is generally defined as the period between examinations. In other words, a credit classified doubtful at an examination should be cleared up before the next exam. However, there may be situations that warrant continuation of the doubtful classification a while longer.
8.
Loss
- Extensions of credit classified “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off, even though partial recovery may be affected in the future. It should not be the Company’s practice to attempt long-term recoveries while the credit remains on the books. Losses should be taken in the period in which they surface as uncollectible.
As of December 31, 2016 and 2015, there are no loans that are classified with a risk grade of
8- Loss.
The following table presents weighted average risk grades of our loan portfolio.
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Weighted Average
Risk Grade
|
|
|
Weighted Average
Risk Grade
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Commercial real estate - construction
|
|
|
3.07
|
|
|
|
3.72
|
|
Commercial real estate - mortgages
|
|
|
3.08
|
|
|
|
3.16
|
|
Land
|
|
|
4.39
|
|
|
|
4.58
|
|
Farmland
|
|
|
3.09
|
|
|
|
3.12
|
|
Commercial and industrial
|
|
|
2.70
|
|
|
|
3.57
|
|
Consumer
|
|
|
2.28
|
|
|
|
1.99
|
|
Consumer residential
|
|
|
3.03
|
|
|
|
3.01
|
|
Agriculture
|
|
|
3.08
|
|
|
|
3.39
|
|
Total gross loans
|
|
|
3.06
|
|
|
|
3.25
|
|
The following table presents risk grade totals by class of loans as of December 31, 2016 and 2015. Risk grades 1 through 4 have been aggregated in the “Pass” line.
(in thousands)
|
|
Commercial R.E.
Construction
|
|
|
Commercial R.E.
Mortgages (1)
|
|
|
Land (1)
|
|
|
Farmland
|
|
|
Commercial and Industrial (1)
|
|
|
Consumer
|
|
|
Consumer Residential
|
|
|
Agriculture
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
22,560
|
|
|
$
|
388,365
|
|
|
$
|
6,637
|
|
|
$
|
56,159
|
|
|
$
|
62,770
|
|
|
$
|
738
|
|
|
$
|
38,300
|
|
|
$
|
28,454
|
|
|
$
|
603,983
|
|
Special mention
|
|
|
818
|
|
|
|
1,063
|
|
|
|
-
|
|
|
|
-
|
|
|
|
189
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,070
|
|
Substandard
|
|
|
-
|
|
|
|
67
|
|
|
|
2,906
|
|
|
|
|
|
|
|
1,242
|
|
|
|
29
|
|
|
|
372
|
|
|
|
-
|
|
|
|
4,616
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
280
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
280
|
|
Total loans
|
|
$
|
23,378
|
|
|
$
|
389,495
|
|
|
$
|
9,823
|
|
|
$
|
56,159
|
|
|
$
|
64,201
|
|
|
$
|
767
|
|
|
$
|
38,672
|
|
|
$
|
28,454
|
|
|
$
|
610,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
18,312
|
|
|
$
|
357,339
|
|
|
$
|
6,358
|
|
|
$
|
28,568
|
|
|
$
|
55,957
|
|
|
$
|
745
|
|
|
$
|
32,532
|
|
|
$
|
18,143
|
|
|
$
|
517,954
|
|
Special mention
|
|
|
-
|
|
|
|
4,389
|
|
|
|
110
|
|
|
|
-
|
|
|
|
6,153
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,652
|
|
Substandard
|
|
|
1,051
|
|
|
|
1,916
|
|
|
|
3,283
|
|
|
|
1,233
|
|
|
|
1,416
|
|
|
|
29
|
|
|
|
56
|
|
|
|
2,704
|
|
|
|
11,688
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
488
|
|
|
|
-
|
|
|
|
250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
738
|
|
Total loans
|
|
$
|
19,363
|
|
|
$
|
363,644
|
|
|
$
|
10,239
|
|
|
$
|
29,801
|
|
|
$
|
63,776
|
|
|
$
|
774
|
|
|
$
|
32,588
|
|
|
$
|
20,847
|
|
|
$
|
541,032
|
|
(1)
|
Included in the above table is Purchased Credit Impaired loans recorded at their fair value of $33,000 and $865,000 as of December 31, 2016 and 2015, respectively, which were acquired in the MLB Acquisition.
|
Allowance for Loan Losses.
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.
The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
The Company’s allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Company.
The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated grade of 5 or higher, a special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.
Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company’s pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans.
General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Company’s lending management and staff; (ii) the effectiveness of the Company’s loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume; (v) the composition and concentrations of credit; (vi) the impact of competition on loan structuring and pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks; and (ix) the impact of rising interest rates on portfolio risk. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, moderate or low degree of risk. The results are then input into a “general allocation matrix” to determine an appropriate general valuation allowance.
Included in the general valuation allowances are allocations for groups of similar loans with risk characteristics that exceed certain concentration limits established by management. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy exceptions that exceed specified risk grades.
Loans identified as losses by management, internal loan review and/or bank examiners are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.
The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2016 and 2015. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
Allowance for Loan Losses
|
For the Year Ended December 31, 2016 and 2015
|
(in thousands)
|
|
Commercial
|
|
|
Commercial
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Real Estate
|
|
|
and Industrial
|
|
|
Consumer
|
|
|
Residential
|
|
|
Agriculture
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning balance
|
|
$
|
5,920
|
|
|
$
|
627
|
|
|
$
|
38
|
|
|
$
|
426
|
|
|
$
|
309
|
|
|
$
|
36
|
|
|
$
|
7,356
|
|
Charge-offs
|
|
|
0
|
|
|
|
0
|
|
|
|
(18
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(18
|
)
|
Recoveries
|
|
|
4
|
|
|
|
0
|
|
|
|
5
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
10
|
|
(Reversal of) provision for loan losses
|
|
|
261
|
|
|
|
70
|
|
|
|
26
|
|
|
|
(102
|
)
|
|
|
195
|
|
|
|
34
|
|
|
|
484
|
|
Ending balance
|
|
$
|
6,185
|
|
|
$
|
697
|
|
|
$
|
51
|
|
|
$
|
325
|
|
|
$
|
504
|
|
|
$
|
70
|
|
|
$
|
7,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
5,963
|
|
|
$
|
720
|
|
|
$
|
42
|
|
|
$
|
388
|
|
|
$
|
286
|
|
|
$
|
135
|
|
|
$
|
7,534
|
|
Charge-offs
|
|
|
0
|
|
|
|
(32
|
)
|
|
|
(30
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(62
|
)
|
Recoveries
|
|
|
5
|
|
|
|
0
|
|
|
|
4
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
9
|
|
(Reversal of) provision for loan losses
|
|
|
(48
|
)
|
|
|
(61
|
)
|
|
|
22
|
|
|
|
38
|
|
|
|
23
|
|
|
|
-99
|
|
|
|
(125
|
)
|
Ending balance
|
|
$
|
5,920
|
|
|
$
|
627
|
|
|
$
|
38
|
|
|
$
|
426
|
|
|
$
|
309
|
|
|
$
|
36
|
|
|
$
|
7,356
|
|
The following table details the allowance for loan losses and ending gross loan balances as of December 31, 2016 and 2015, summarized by collective and individual evaluation methods of impairment.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Real Estate
|
|
|
and Industrial
|
|
|
Consumer
|
|
|
Residential
|
|
|
Agriculture
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for loan losses for loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
680
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
$
|
680
|
|
Collectively evaluated for impairment
|
|
|
5,505
|
|
|
|
697
|
|
|
|
51
|
|
|
|
325
|
|
|
|
504
|
|
|
|
70
|
|
|
|
7,152
|
|
|
|
$
|
6,185
|
|
|
$
|
697
|
|
|
$
|
51
|
|
|
$
|
325
|
|
|
$
|
504
|
|
|
$
|
70
|
|
|
$
|
7,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending gross loan balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2,715
|
|
|
$
|
306
|
|
|
$
|
0
|
|
|
$
|
16
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,037
|
|
Individually evaluated purchased credit impaired loans
|
|
|
33
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33
|
|
Collectively evaluated for impairment
|
|
|
476,107
|
|
|
|
63,895
|
|
|
|
767
|
|
|
|
38,656
|
|
|
|
28,454
|
|
|
|
0
|
|
|
|
607,879
|
|
|
|
$
|
478,855
|
|
|
$
|
64,201
|
|
|
$
|
767
|
|
|
$
|
38,672
|
|
|
$
|
28,454
|
|
|
$
|
0
|
|
|
$
|
610,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses for loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
722
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
$
|
722
|
|
Collectively evaluated for impairment
|
|
|
5,198
|
|
|
|
627
|
|
|
|
38
|
|
|
|
426
|
|
|
|
309
|
|
|
|
36
|
|
|
|
6,634
|
|
|
|
$
|
5,920
|
|
|
$
|
627
|
|
|
$
|
38
|
|
|
$
|
426
|
|
|
$
|
309
|
|
|
$
|
36
|
|
|
$
|
7,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending gross loans balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2,790
|
|
|
$
|
322
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,704
|
|
|
$
|
0
|
|
|
$
|
5,816
|
|
Individually evaluated purchased credit impaired loans
|
|
|
387
|
|
|
|
478
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
865
|
|
Collectively evaluated for impairment
|
|
|
419,870
|
|
|
|
62,976
|
|
|
|
774
|
|
|
|
32,588
|
|
|
|
18,143
|
|
|
|
0
|
|
|
|
534,351
|
|
|
|
$
|
423,047
|
|
|
$
|
63,776
|
|
|
$
|
774
|
|
|
$
|
32,588
|
|
|
$
|
20,847
|
|
|
$
|
0
|
|
|
$
|
541,032
|
|
Changes in the allowance off-balance-sheet commitments were as follows:
(in thousands)
|
|
YEARS ENDED DECEMBER 31,
|
|
|
|
201
6
|
|
|
201
5
|
|
Balance, beginning of year
|
|
$
|
238
|
|
|
$
|
218
|
|
Provision charged to operations for off balance sheet
|
|
|
46
|
|
|
|
7
|
|
Acquired balance from Mother Lode Bank (fair value)
|
|
|
0
|
|
|
|
13
|
|
Balance, end of year
|
|
$
|
284
|
|
|
$
|
238
|
|
The method for calculating the reserve for off-balance-sheet loan commitments is based on a reserve percentage which is less than other outstanding loan types because they are at a lower risk level. This reserve percentage, based on many factors including historical losses and existing economic conditions, is evaluated by management periodically and is applied to the total undisbursed loan commitment balance to calculate the reserve for off-balance-sheet commitments. Reserves for off-balance-sheet commitments are recorded in interest payable and other liabilities on the consolidated balance sheets.
At December 31, 2016 and 2015, loans carried at $610,949,000 and $541,032,000, respectively, were pledged as collateral on advances from the Federal Home Loan Bank.
NOTE 6 — PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
(
in thousands)
|
|
DECEMBER 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
4,755
|
|
|
$
|
4,755
|
|
Building
|
|
|
9,064
|
|
|
|
8,939
|
|
Leasehold improvements
|
|
|
4,307
|
|
|
|
4,135
|
|
Furniture, fixtures, and equipment
|
|
|
7,470
|
|
|
|
7,132
|
|
|
|
|
25,596
|
|
|
|
24,961
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(11,908
|
)
|
|
|
(10,684
|
)
|
|
|
$
|
13,688
|
|
|
$
|
14,277
|
|
Depreciation expense was $1,252,000 and $1,207,000 and for the years ended December 31, 2016 and 2015, respectively.
NOTE 7 — INTEREST RECEIVABLE AND OTHER ASSETS
Other assets are summarized as follows:
(
in thousands)
|
|
DECEMBER 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash surrender value of life insurance
|
|
$
|
18,004
|
|
|
$
|
13,747
|
|
Net deferred tax asset
|
|
|
4,729
|
|
|
|
2,788
|
|
Goodwill
|
|
|
3,313
|
|
|
|
3,313
|
|
Federal Home Loan Bank stock
|
|
|
3,037
|
|
|
|
2,958
|
|
Interest income receivable on loans
|
|
|
1,688
|
|
|
|
1,495
|
|
Interest income receivable on investments
|
|
|
1,143
|
|
|
|
925
|
|
Core deposit intangible
|
|
|
872
|
|
|
|
1,031
|
|
Federal Reserve Bank stock
|
|
|
758
|
|
|
|
758
|
|
Investment in limited partnership
|
|
|
328
|
|
|
|
388
|
|
Prepaid expenses and other
|
|
|
1,093
|
|
|
|
749
|
|
|
|
$
|
34,965
|
|
|
$
|
28,152
|
|
NOTE 8 — DEPOSITS
Deposit totals were as follows:
|
|
DECEMBER 31,
|
|
(
in thousands)
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
$
|
336,083
|
|
|
$
|
279,367
|
|
NOW accounts
|
|
|
164,847
|
|
|
|
130,674
|
|
Money market deposit accounts
|
|
|
283,643
|
|
|
|
282,449
|
|
Savings
|
|
|
75,122
|
|
|
|
71,627
|
|
Time, $250,000 and under
|
|
|
33,428
|
|
|
|
35,482
|
|
Time, over $250,000
|
|
|
20,970
|
|
|
|
15,092
|
|
Total deposits
|
|
$
|
914,093
|
|
|
$
|
814,691
|
|
Certificates of deposit issued and their remaining maturities at December 31, 2016, are as follows (in thousands):
Year ending December 31,
|
|
|
|
|
2017
|
|
$
|
39,953
|
|
2018
|
|
|
4,958
|
|
2019
|
|
|
9,355
|
|
2020
|
|
|
109
|
|
2021
|
|
|
23
|
|
|
|
$
|
54,398
|
|
NOTE 9 — FHLB ADVANCES
At December 31, 2016, the Company had no outstanding advances from the Federal Home Loan Bank (“FHLB”). Unused and available advances totaled $236,730,000 at December 31, 2016. Loans carried at $610,949,000 as of December 31, 2016, were pledged as collateral on advances from the Federal Home Loan Bank.
At December 31, 2015, the Company had no outstanding advances from the Federal Home Loan Bank (“FHLB”). Unused and available advances totaled $198,415,000 at December 31, 2015. Loans carried at $541,032,000 as of December 31, 2015, were pledged as collateral on advances from the Federal Home Loan Bank.
NOTE 10 — INTEREST ON DEPOSITS
Interest on deposits was comprised of the following:
|
|
YEARS ENDED DECEMBER 31,
|
|
(in thousands)
|
|
201
6
|
|
|
201
5
|
|
|
|
|
|
|
|
|
|
|
Savings and other deposits
|
|
$
|
594
|
|
|
$
|
423
|
|
Time deposits over $250,000
|
|
|
63
|
|
|
|
26
|
|
Other time deposits
|
|
|
107
|
|
|
|
166
|
|
|
|
$
|
764
|
|
|
$
|
615
|
|
NOTE 11 — INCOME TAXES
The provision for income taxes consists of the following:
(in thousands)
|
|
YEARS ENDED DECEMBER 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,117
|
|
|
$
|
1,498
|
|
State
|
|
|
1,044
|
|
|
|
521
|
|
|
|
|
4,161
|
|
|
|
2,019
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(568
|
)
|
|
|
64
|
|
State
|
|
|
(119
|
)
|
|
|
(29
|
)
|
|
|
|
(687
|
)
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,474
|
|
|
$
|
2,054
|
|
The components of the Company’s deferred tax assets and liabilities (included in accrued interest and other assets on the consolidated balance sheets, is shown below:
(in thousands)
|
|
DECEMBER 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
3,222
|
|
|
$
|
3,026
|
|
Restricted stock expense
|
|
|
49
|
|
|
|
50
|
|
Accrued vacation
|
|
|
88
|
|
|
|
72
|
|
Accrued salary continuation liability
|
|
|
1,137
|
|
|
|
1,004
|
|
Deferred compensation
|
|
|
108
|
|
|
|
110
|
|
Nonaccrual loans
|
|
|
218
|
|
|
|
213
|
|
Reserve for undisbursed commitments
|
|
|
111
|
|
|
|
92
|
|
OREO expenses
|
|
|
241
|
|
|
|
274
|
|
State income tax
|
|
|
409
|
|
|
|
244
|
|
Holding company organization fees
|
|
|
25
|
|
|
|
30
|
|
Unrealized loss on securities available for sale
|
|
|
157
|
|
|
|
0
|
|
|
|
|
5,765
|
|
|
|
5,115
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(107
|
)
|
|
|
(120
|
)
|
FHLB dividends
|
|
|
(220
|
)
|
|
|
(220
|
)
|
Accumulated depreciation
|
|
|
(396
|
)
|
|
|
(554
|
)
|
Deferred loan costs
|
|
|
(419
|
)
|
|
|
(334
|
)
|
Accrued bonus
|
|
|
14
|
|
|
|
(2
|
)
|
Core deposit intangible
|
|
|
37
|
|
|
|
0
|
|
Goodwill tax amortization
|
|
|
(98
|
)
|
|
|
0
|
|
Merger costs
|
|
|
153
|
|
|
|
0
|
|
Unrealized gain on securities available for sale
|
|
|
0
|
|
|
|
(1,097
|
)
|
|
|
|
(1,036
|
)
|
|
|
(2,327
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$
|
4,729
|
|
|
$
|
2,788
|
|
During the third quarter of 2016, the Company determined that deferred tax assets acquired from MLB totaling $2,651,000, mainly from net operating loss carryforwards, cannot be utilized by the Company. As a result, the Company decreased deferred tax assets and increased goodwill by $2,651,000 as of the December 23, 2015 acquisition date which is reflected in the December 31, 2015 figures in the table above. See Note 2 for further discussion of the goodwill and deferred tax asset adjustment.
Management has assessed the realizability of deferred tax assets and believes it is more likely than not that all deferred tax assets will be realized in the normal course of operations. Accordingly, these assets have not been reduced by a valuation allowance.
The Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment.
The Company had no liabilities for unrecognized tax benefits as of December 31, 2016. During 2015, the Company settled the exams for the tax years of 2010, 2011, 2012 and 2013 with the California Franchise Tax Board (“FTB”) by submitting a payment of $332,000. The net impact of this payment after the federal deduction was $219,000 and therefore resulted in a reversal of $83,000 to tax expense to clear the unrecognized tax benefit liability account of $302,000 as described below. The Company had no liabilities for unrecognized tax benefits as of December 31, 2016 and 2015.
The effective tax rate for 2016 and 2015 differs from the current Federal statutory income tax rate as follows:
|
|
YEARS ENDED DECEMBER 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Federal statutory income tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal tax benefit
|
|
|
7.2
|
%
|
|
|
7.2
|
%
|
Tax exempt interest on municipal securities and loans
|
|
|
-6.2
|
%
|
|
|
-8.7
|
%
|
Tax exempt earnings on bank owned life insurance
|
|
|
-1.6
|
%
|
|
|
-2.5
|
%
|
Reversal of reserve for tax exams
|
|
|
0.0
|
%
|
|
|
-1.2
|
%
|
Low income housing tax credit
|
|
|
-0.6
|
%
|
|
|
-0.9
|
%
|
California enterprise zone tax credits and deductions
|
|
|
-0.1
|
%
|
|
|
-0.5
|
%
|
(Adjustment of) non-deductible merger expenses
|
|
|
-1.5
|
%
|
|
|
2.4
|
%
|
Other
|
|
|
0.0
|
%
|
|
|
-0.2
|
%
|
Effective tax rate
|
|
|
31.2
|
%
|
|
|
29.5
|
%
|
Oak Valley Bancorp files a consolidated return in the U.S. Federal tax jurisdiction and a combined report in the State of California tax jurisdiction. None of the entities are subject to examination by taxing authorities for years before 2013 for U.S. Federal or for years before 2012 for California.
NOTE 12 — STOCK OPTION PLAN
The Company currently has two equity based incentive plans, the Oak Valley Community Bank 1998 Restated Stock Option Plan and the Oak Valley Bancorp 2008 Stock Plan. The 2008 Stock Plan provides for awards in the form of incentive stocks, non-statutory stock options, stock appreciation rights and restrictive stocks. Under the 2008 Plan, the Company is authorized to issue 1,500,000 shares of its common stock to key employees and directors as incentive and non-qualified stock options, respectively, at a price equal to the fair value on the date of grant. The Plan provides that the options are exercisable in equal increments over a five-year period from the date of grant or over any other schedule approved by the Board of Directors. All incentive stock options expire no later than ten years from the date of grant. Future grants are not permitted under the 1998 Stock Plan and will all be issued from the 2008 Stock Plan.
A summary of the status of the Company’s stock option plan and changes during the year are presented below.
|
|
DECEMBER 31, 2016
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
Outstanding at beginning of year
|
|
|
33,000
|
|
|
$
|
12.13
|
|
Granted
|
|
|
0
|
|
|
$
|
0.00
|
|
Exercised
|
|
|
0
|
|
|
$
|
0.00
|
|
Forfeited
|
|
|
(18,000
|
)
|
|
$
|
14.26
|
|
Outstanding at end of year
|
|
|
15,000
|
|
|
$
|
9.58
|
|
(dollars in thousands)
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted-average fair value of options granted during the year
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value of options exercised
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Options outstanding and exercisable at year end:
|
|
|
15,000
|
|
|
|
33,000
|
|
Weighted average exercise price
|
|
$
|
9.58
|
|
|
$
|
12.13
|
|
Intrinsic value
|
|
$
|
45
|
|
|
$
|
19
|
|
Weighted average remaining contractual life (years)
|
|
|
0.84
|
|
|
|
1.13
|
|
There were no tax benefits recorded in the consolidated statements of income during 2016 and 2015 related to the vesting of non-qualified stock options. For the years ended December 31, 2016 and 2015, there were no exercises of stock options and therefore no income tax benefits related to disqualifying dispositions. All outstanding stock options became fully vested during 2014 and therefore there was no recognition of stock option compensation expense in the consolidated statements of income in 2015 or 2016.
A summary of the status of the Company’s restricted stock and changes during the year are presented below.
|
|
DECEMBER 31, 2016
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Unvested at beginning of year
|
|
|
81,511
|
|
|
$
|
7.59
|
|
Granted
|
|
|
17,000
|
|
|
$
|
9.61
|
|
Vested
|
|
|
(35,736
|
)
|
|
$
|
7.24
|
|
Cancelled
|
|
|
(6,700
|
)
|
|
$
|
9.80
|
|
Unvested at end of year
|
|
|
56,075
|
|
|
$
|
8.16
|
|
The Company granted 17,000 shares of restricted stock in 2016 with a weighted average fair value of $9.61 per share. For the year ended December 31, 2016, total compensation expense recorded in the consolidated statements of income related to restricted stock awards was $256,000, with an offsetting tax benefit of $105,000, as this expense is deductible for income tax purposes. The Company recorded an additional tax benefit of $33,000 to income tax expense to recognize the full tax deduction of the vested restricted stock, which is equal to the fair value on the vesting date, as the tax benefit from the restricted stock expense is based on the grant date fair value. As of December 31, 2016, there was $260,000 of total unrecognized compensation cost related to restricted stock awards which is expected to be recognized over a weighted-average period of 2.89 years. During 2016, shares of restricted stock awards totaling 35,736 with a fair value of $321,000, based on the vested date of each award, were vested and became unrestricted.
NOTE 13 — EARNINGS PER SHARE
Earnings per share (“EPS”) are based upon the weighted average number of common shares outstanding during each year. The following table shows: (1) weighted average basic shares, (2) effect of dilutive securities related to stock options and non-vested restricted stock, and (3) weighted average diluted shares. Basic EPS are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding dilutive stock options and unvested restricted stock awards. Diluted EPS are calculated using the weighted average diluted shares. The total dilutive shares included in annual diluted EPS is a year-to-date weighted average of the total dilutive shares included in each quarterly diluted EPS computation under the treasury stock method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of restricted stock awards receive non-forfeitable dividends at the same rate as common stockholders and they both share equally in undistributed earnings. Therefore, under the two class method the difference in EPS is not significant for these participating securities.
The Company’s calculation of earnings per share (“EPS”) including basic EPS, which does not consider the effect of common stock equivalents and diluted EPS, which considers all dilutive common stock equivalents is as follows:
|
|
YEAR ENDED DECEMBER 31, 2016
|
|
|
|
|
|
|
|
Weighted Avg
|
|
|
|
|
|
(dollars in thousands)
|
|
Income
|
|
|
Shares
|
|
|
Per-Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,665
|
|
|
|
8,047,046
|
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
1,663
|
|
|
|
|
|
Non-vested restricted stock
|
|
|
—
|
|
|
|
33,948
|
|
|
|
|
|
Total dilutive shares
|
|
|
|
|
|
|
35,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share
|
|
$
|
7,665
|
|
|
|
8,082,657
|
|
|
$
|
0.95
|
|
|
|
YEAR ENDED DECEMBER 31, 2015
|
|
|
|
|
|
|
|
Weighted Avg
|
|
|
|
|
|
(dollars in thousands)
|
|
Income
|
|
|
Shares
|
|
|
Per-Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,908
|
|
|
|
7,989,088
|
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
1,399
|
|
|
|
|
|
Non-vested restricted stock
|
|
|
—
|
|
|
|
46,358
|
|
|
|
|
|
Total dilutive shares
|
|
|
|
|
|
|
47,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share
|
|
$
|
4,908
|
|
|
|
8,036,845
|
|
|
$
|
0.61
|
|
Weighted average anti-dilutive options to purchase 17,480 and 47,784 shares of common stock in prices ranging from $9.95 to $15.67 were outstanding during 2016 and 2015, respectively. They were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares. These options began to expire in 2015.
During 2016 and 2015, there were no anti-dilutive shares from non-vested restricted stock grants because the fair value of each grant was lower than the average market price of the common shares.
NOTE 14 — COMMITMENTS AND CONTINGENCIES
The Company is obligated for rental payments under certain operating lease agreements, some of which contain renewal options and escalation clauses that provide for increased rentals. Total rental expense for the years ended December 31, 2016 and 2015, was $1,004,000 and $874,000, respectively.
At December 31, 2016, the future minimum commitments under these operating leases are as follows (in thousands):
Year ending December 31,
|
|
|
|
|
2017
|
|
$
|
1,023
|
|
2018
|
|
|
1,001
|
|
2019
|
|
|
975
|
|
2020
|
|
|
877
|
|
2021
|
|
|
601
|
|
Thereafter
|
|
|
1,874
|
|
|
|
$
|
6,351
|
|
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Financial instruments at December 31, 2016 whose contract amounts represent credit risk:
|
|
Contract
|
|
(in thousands)
|
|
Amount
|
|
|
|
|
|
|
Undisbursed loan commitments
|
|
$
|
94,637
|
|
Checking reserve
|
|
|
1,143
|
|
Equity lines
|
|
|
13,698
|
|
Standby letters of credit
|
|
|
1,309
|
|
|
|
$
|
110,787
|
|
Commitments to extend credit, including undisbursed loan commitments and equity lines, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant, equipment and income-producing commercial properties.
Checking reserves are lines of credit associated consumer deposit accounts that meet qualification standards for extension of credit if the deposit account were to become overdraft.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
NOTE 15 — FINANCIAL INSTRUMENTS
Fair values of financial instruments —
The consolidated financial statements include various estimated fair value information as of December 31, 2016 and 2015. Such information, which pertains to the Company’s financial instruments, does not purport to represent the aggregate net fair value of the Company. Further, the fair value estimates are based on various assumptions, methodologies, and subjective considerations, which vary widely among different financial institutions and which are subject to change. The following methods and assumptions are used by the Company.
Cash and cash equivalents
— The carrying amounts of cash and cash equivalents approximate their fair value.
Restricted Equity Securities
—
The carrying amounts of the stock the Company’s owns in FRB and FHLB approximate their fair value and are considered a level 2 valuation.
Securities (including mortgage-backed securities)
— Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. See Note 16 for additional disclosure regarding fair values of securities.
Loans receivable
— For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair values for other loans (e.g., real estate construction and mortgage, commercial, and installment loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The allowance for loan losses is considered to be a reasonable estimate of loan discount due to credit risks.
Deposit liabilities
— The fair values estimated for demand deposits (interest and non-interest checking, 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 amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of the aggregate expected monthly maturities on time deposits.
Interest
receivable and payable
— The carrying amounts of accrued interest approximate their fair value.
Off-balance-sheet instruments
— Fair values for the Company’s off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the counterparties.
The estimated fair values of the Company’s financial instruments at December 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
Hierarchy
|
|
(in thousands)
|
|
Carrying
|
|
|
Fair
|
|
|
Valuation
|
|
|
|
Amount
|
|
|
Value
|
|
|
Level
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
190,810
|
|
|
$
|
190,810
|
|
|
|
1
|
|
Restricted equity securities
|
|
|
3,795
|
|
|
|
3,795
|
|
|
|
2
|
|
Loans, net
|
|
|
601,104
|
|
|
|
611,553
|
|
|
|
3
|
|
Interest receivable
|
|
|
2,831
|
|
|
|
2,831
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(914,093
|
)
|
|
|
(811,519
|
)
|
|
|
3
|
|
Interest payable
|
|
|
(45
|
)
|
|
|
(45
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance-sheet assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and standby letters of credit
|
|
|
|
|
|
|
(1,107
|
)
|
|
|
3
|
|
The estimated fair values of the Company’s financial instruments at December 31, 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
Hierarchy
|
|
(in thousands)
|
|
Carrying
|
|
|
Fair
|
|
|
Valuation
|
|
|
|
Amount
|
|
|
Value
|
|
|
Level
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
190,603
|
|
|
$
|
190,603
|
|
|
|
1
|
|
Restricted equity securities
|
|
|
3,716
|
|
|
|
3,716
|
|
|
|
2
|
|
Loans, net
|
|
|
530,394
|
|
|
|
537,761
|
|
|
|
3
|
|
Interest receivable
|
|
|
2,420
|
|
|
|
2,420
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(814,691
|
)
|
|
|
(725,982
|
)
|
|
|
3
|
|
Interest payable
|
|
|
(36
|
)
|
|
|
(36
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance-sheet assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and standby letters of credit
|
|
|
|
|
|
|
(917
|
)
|
|
|
3
|
|
NOTE 16
–
FAIR VALUE MEASUREMENTS
ASC Topic 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:
Level 1: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. During 2016, there was one corporate debt with a fair value balance of $2,476,000 that was transferred from a level 3 to a level 2 due to the increased volume of observable trading activity of similar security instruments.
Assets and liabilities measured at fair value on a recurring and non-recurring basis for the years ended December 31, 2016 and 2015 are summarized below:
|
|
Fair Value Measurements at December 31, 201
6
Using
|
|
(in thousands)
|
|
December 31,
201
6
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets and liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agencies
|
|
$
|
28,286
|
|
|
$
|
0
|
|
|
$
|
28,286
|
|
|
$
|
0
|
|
Collateralized mortgage obligations
|
|
|
4,109
|
|
|
|
0
|
|
|
|
4,109
|
|
|
|
0
|
|
Municipalities
|
|
|
78,329
|
|
|
|
0
|
|
|
|
78,329
|
|
|
|
0
|
|
SBA pools
|
|
|
7,168
|
|
|
|
0
|
|
|
|
7,168
|
|
|
|
0
|
|
Corporate debt
|
|
|
20,563
|
|
|
|
0
|
|
|
|
20,563
|
|
|
|
0
|
|
Asset backed securities
|
|
|
18,819
|
|
|
|
0
|
|
|
|
18,819
|
|
|
|
0
|
|
Mutual fund
|
|
|
3,059
|
|
|
|
3,059
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,746
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,746
|
|
Commercial and industrial
|
|
|
302
|
|
|
|
0
|
|
|
|
0
|
|
|
|
302
|
|
Consumer residential
|
|
|
16
|
|
|
|
0
|
|
|
|
0
|
|
|
|
16
|
|
Other real estate owned
|
|
$
|
1,210
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,210
|
|
|
|
Fair Value Measurements at December 31, 201
5
Using
|
|
(in thousands)
|
|
December 31,
201
5
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets and liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agencies
|
|
$
|
32,868
|
|
|
$
|
0
|
|
|
$
|
32,868
|
|
|
$
|
0
|
|
Collateralized mortgage obligations
|
|
|
2,719
|
|
|
|
0
|
|
|
|
2,719
|
|
|
|
0
|
|
Municipalities
|
|
|
68,586
|
|
|
|
0
|
|
|
|
68,586
|
|
|
|
0
|
|
SBA pools
|
|
|
806
|
|
|
|
0
|
|
|
|
806
|
|
|
|
0
|
|
Corporate debt
|
|
|
13,420
|
|
|
|
0
|
|
|
|
10,944
|
|
|
|
2,476
|
|
Asset backed securities
|
|
|
10,138
|
|
|
|
0
|
|
|
|
10,138
|
|
|
|
0
|
|
Mutual fund
|
|
|
3,009
|
|
|
|
3,009
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,965
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,965
|
|
Other real estate owned
|
|
$
|
2,066
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,066
|
|
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Available-for-sale securities
-
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Impaired loans
- ASC Topic 820 applies to loans measured for impairment using the practical expedients permitted by ASC Topic 310,
Accounting by Creditors for Impairment of a Loan
. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Impaired loans where an allowance is established based on the fair value of collateral less the cost related to liquidation of the collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as non-recurring Level 3. Likewise, when an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as non-recurring Level 3.
Other Real Estate Owned
- Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held-for-sale and are initially recorded at the lower of cost or fair value, less selling costs. Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses, subsequent to foreclosure. Appraisals or evaluations are then done periodically thereafter charging any additional write-downs or valuation allowances to the appropriate expense accounts. Values are derived from appraisals of underlying collateral and discounted cash flow analysis. OREO is classified within Level 3 of the hierarchy.
Net realizable value of the underlying collateral is the fair value of the collateral less estimated selling costs and any prior liens. Appraisals, recent comparable sales, offers and listing prices are factored in when valuing the collateral. We review and verify the qualifications and licenses of the certified general appraisers used for appraising commercial properties or certified residential appraisers for residential properties. Real estate appraisals may utilize a combination of approaches including replacement cost, sales comparison and the income approach. Comparable sales and income data are analyzed by the appraisers and adjusted to reflect differences between them and the subject property such as type, leasing status and physical condition. When the appraisals are received, Management reviews the assumptions and methodology utilized in the appraisal, as well as the overall resulting value in conjunction with independent data sources such as recent market data and industry-wide statistics. We generally use a 6% discount for selling costs which is applied to all properties, regardless of size. Appraised values may be adjusted to reflect changes in market conditions that have occurred subsequent to the appraisal date, or for revised estimates regarding the timing or cost of the property sale. These adjustments typically range between 10% and 20% of the appraised value and are based on qualitative judgments made by management on a case-by-case basis.
NOTE 17 — RELATED PARTY TRANSACTIONS
The Company, in the normal course of business, makes loans and receives deposits from its directors, officers, principal shareholders, and their associates. In management’s opinion, these transactions are on substantially the same terms as comparable transactions with other customers of the Company. Loans to directors, officers, shareholders, and affiliates are summarized below:
|
|
YEARS ENDED DECEMBER 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Aggregate amount outstanding, beginning of year
|
|
$
|
6,634
|
|
|
$
|
8,218
|
|
New loans or advances during year
|
|
|
3,322
|
|
|
|
17,402
|
|
Repayments during year
|
|
|
(2,856
|
)
|
|
|
(18,986
|
)
|
Aggregate amount outstanding, end of year
|
|
$
|
7,100
|
|
|
$
|
6,634
|
|
Related party deposits totaled $66,006,000 and $62,727,000 at December 31, 2016 and 2015, respectively.
From time to time, some of the Company’s Directors, directly or through affiliates, may perform services for the Bank. These activities are performed in the ordinary course of the Bank’s business and are subject to strict compliance with the policies outlined below. In 2016, the Company paid $330,000 to Design Studio 120, a company affiliated with a Director’s daughter, for construction, renovation and design work performed in connection with various projects and maintenance on the Bank’s branches. In 2015, the Company paid $409,000 to Design Studio 120 for similar services including those related to the opening of a new Sonora branch in 2015 and renovation of corporate administrative offices. Except for such payments, no other material services or activities were performed for purposes of Item 404(a) of Regulation S-K under the Exchange Act.
NOTE 18 — PROFIT SHARING PLAN
The profit sharing plan to which both the Company and eligible employees contribute was established in 1995. Bank contributions are voluntary and at the discretion of the Board of Directors. Contributions were approximately $489,000 and $454,000 for the years ended December 31, 2016 and 2015, respectively.
NOTE 19 — RESTRICTIONS ON DIVIDENDS
Under current California State banking laws, the Bank may not pay cash dividends in an amount that exceeds the lesser of retained earnings of the Bank or the Bank’s net earnings for its last three fiscal years (less the amount of any distributions to shareholders made during that period). If the above requirements are not met, cash dividends may only be paid with the prior approval of the Commissioner of the Department of Business Oversight, in an amount not exceeding the Bank’s net earnings for its last fiscal year or the amount of its net earnings for its current fiscal year. Accordingly, the future payment of cash dividends will depend on the Bank’s earnings and its ability to meet its capital requirements.
NOTE 20 — OTHER POST-RETIREMENT BENEFIT PLANS
The Company has awarded certain officers a salary continuation plan (the “Plan”). Under the Plan, the participants will be provided with a fixed annual retirement benefit for ten to twenty years after retirement. The Company is also responsible for certain pre-retirement death benefits under the Plan. In connection with the implementation of the Plan, the Company purchased single premium life insurance policies on the life of each of the officers covered under the Plan. The Company is the owner and partial beneficiary of these life insurance policies. The assets of the Plan, under Internal Revenue Service regulations, are owned by the Company and are available to satisfy the Company’s general creditors.
During December 2001, the Company awarded its directors a director retirement plan (“DRP”). Under the DRP, the participants will be provided with a fixed annual retirement benefit for ten years after retirement. The Company is also responsible for certain pre-retirement death benefits under the DRP. In connection with the implementation of the DRP, the Company purchased single premium life insurance policies on the life of each director covered under the DRP. The Company is the owner and partial beneficiary of these life insurance policies. The assets of the DRP, under Internal Revenue Service regulations, are the property of the Company and are available to satisfy the Company’s general creditors.
Future compensation under both plans is earned for services rendered through retirement. The Company accrues for the salary continuation liability based on anticipated years of service and vesting schedules provided under the plans. The Company’s current benefit liability is determined based on vesting and the present value of the benefits at a corresponding discount rate. The discount rate used is an equivalent rate for investment-grade bonds with lives matching those of the service periods remaining for the salary continuation contracts, which average approximately ten years. At December 31, 2016 and 2015, $2,762,000 and $2,440,000, respectively, has been accrued to date, and is included in other liabilities on the consolidated balance sheets.
The Company entered into split-dollar life insurance agreements with certain officers. In connection with the implementation of the split-dollar agreements, the Company purchased single premium life insurance policies on the life of each of the officers covered by the split-dollar life insurance agreements. The Company is the owner of the policies and the partial beneficiary in an amount equal to the cash surrender value of the policies.
The combined cash surrender value of all Bank-owned life insurance policies was $18,004,000 and $13,747,000 at December 31, 2016 and 2015, respectively. The cash surrender value of the life insurance policies is included in other assets on the consolidated balance sheets (Note 7).
NOTE 2
1
— REGULATORY MATTERS
The Bank and the Company are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total, Tier I and Common Equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2016, that the Bank and Company meets all capital adequacy requirements to which they are subject.
As of December 31, 2016, the most recent notification from the Federal Reserve Bank 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 I risk-based, Common Equity Tier 1 risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since notification that management believes have changed the Bank’s category.
The Company and Bank’s actual capital amounts and ratios at December 31, 2016 and 2015, are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capitalized under
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Adequately capitalized
|
|
|
prompt corrective
|
|
|
|
Actual
|
|
|
threshold (1)
|
|
|
action provisions
|
|
Capital ratios for Bank:
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to Risk- Weighted Assets)
|
|
$
|
86,603
|
|
|
|
11.3%
|
|
|
$
|
66,358
|
|
|
|
>
8.625%
|
|
|
$
|
76,937
|
|
|
|
>
10.0%
|
|
Tier I capital (to Risk- Weighted Assets)
|
|
$
|
78,487
|
|
|
|
10.2%
|
|
|
$
|
50,970
|
|
|
|
>
6.625%
|
|
|
$
|
61,549
|
|
|
|
>
8.0%
|
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
$
|
78,487
|
|
|
|
10.2%
|
|
|
$
|
39,430
|
|
|
|
>
5.125%
|
|
|
$
|
50,009
|
|
|
|
>
6.5%
|
|
Tier I capital (to Average Assets)
|
|
$
|
78,487
|
|
|
|
8.1%
|
|
|
$
|
38,726
|
|
|
|
>
4.0%
|
|
|
$
|
48,408
|
|
|
|
>
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to Risk- Weighted Assets)
|
|
$
|
80,184
|
|
|
|
12.1%
|
|
|
$
|
53,245
|
|
|
|
>
8.0%
|
|
|
$
|
66,556
|
|
|
|
>
10.0%
|
|
Tier I capital (to Risk- Weighted Assets)
|
|
$
|
72,590
|
|
|
|
10.9%
|
|
|
$
|
39,933
|
|
|
|
>
6.0%
|
|
|
$
|
53,245
|
|
|
|
>
8.0%
|
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
$
|
72,590
|
|
|
|
10.9%
|
|
|
$
|
29,950
|
|
|
|
>
4.5%
|
|
|
$
|
43,261
|
|
|
|
>
6.5%
|
|
Tier I capital (to Average Assets)
|
|
$
|
72,590
|
|
|
|
9.0%
|
|
|
$
|
32,423
|
|
|
|
>
4.0%
|
|
|
$
|
40,529
|
|
|
|
>
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital ratios for Bancorp:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to Risk- Weighted Assets)
|
|
$
|
86,966
|
|
|
|
11.3%
|
|
|
$
|
66,365
|
|
|
|
>
8.625%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier I capital (to Risk- Weighted Assets)
|
|
$
|
78,850
|
|
|
|
10.3%
|
|
|
$
|
50,976
|
|
|
|
>
6.625%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
$
|
78,850
|
|
|
|
10.3%
|
|
|
$
|
39,435
|
|
|
|
>
5.125%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier I capital (to Average Assets)
|
|
$
|
78,850
|
|
|
|
8.1%
|
|
|
$
|
38,731
|
|
|
|
>
4.0%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to Risk- Weighted Assets)
|
|
$
|
80,574
|
|
|
|
12.1%
|
|
|
$
|
53,250
|
|
|
|
>
8.0%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier I capital (to Risk- Weighted Assets)
|
|
$
|
72,980
|
|
|
|
11.0%
|
|
|
$
|
39,937
|
|
|
|
>
6.0%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
$
|
72,980
|
|
|
|
11.0%
|
|
|
$
|
29,953
|
|
|
|
>
4.5%
|
|
|
|
|
|
|
|
|
|
Tier I capital (to Average Assets)
|
|
$
|
72,980
|
|
|
|
9.0%
|
|
|
$
|
32,427
|
|
|
|
>
4.0%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
(1) The 2016 adequately capitalized threshold includes the capital conservation buffer that was effective January 1, 2016. These ratios are not reflected on a fully phased-in basis, which will occur in January 2019.
The December 31, 2015 capital ratios reported above have been revised for the Tier 1 capital net reduction of $1,278,000 as a result of the increase of $2,651,000 to goodwill. See Footnote 2 for further discussion of the goodwill adjustment. The revisions to the December 31, 2015 capital ratios are reflected in the table below:
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initially Reported
|
|
|
Revised
|
|
|
Difference
|
|
Capital ratios for Bank:
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to Risk- Weighted Assets)
|
|
$
|
81,462
|
|
|
|
12.2%
|
|
|
$
|
80,184
|
|
|
|
12.1%
|
|
|
$
|
(1,278
|
)
|
|
|
(0.1%)
|
|
Tier I capital (to Risk- Weighted Assets)
|
|
$
|
73,868
|
|
|
|
11.1%
|
|
|
$
|
72,590
|
|
|
|
10.9%
|
|
|
$
|
(1,278
|
)
|
|
|
(0.2%)
|
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
$
|
73,868
|
|
|
|
11.1%
|
|
|
$
|
72,590
|
|
|
|
10.9%
|
|
|
$
|
(1,278
|
)
|
|
|
(0.2%)
|
|
Tier I capital (to Average Assets)
|
|
$
|
73,868
|
|
|
|
9.1%
|
|
|
$
|
72,590
|
|
|
|
9.0%
|
|
|
$
|
(1,278
|
)
|
|
|
(0.1%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital ratios for Bancorp:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to Risk- Weighted Assets)
|
|
$
|
81,852
|
|
|
|
12.3%
|
|
|
$
|
80,574
|
|
|
|
12.1%
|
|
|
$
|
(1,278
|
)
|
|
|
(0.2%)
|
|
Tier I capital (to Risk- Weighted Assets)
|
|
$
|
74,258
|
|
|
|
11.1%
|
|
|
$
|
72,980
|
|
|
|
11.0%
|
|
|
$
|
(1,278
|
)
|
|
|
(0.1%)
|
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
$
|
74,258
|
|
|
|
11.1%
|
|
|
$
|
72,980
|
|
|
|
11.0%
|
|
|
$
|
(1,278
|
)
|
|
|
(0.1%)
|
|
Tier I capital (to Average Assets)
|
|
$
|
74,258
|
|
|
|
9.2%
|
|
|
$
|
72,980
|
|
|
|
9.0%
|
|
|
$
|
(1,278
|
)
|
|
|
(0.2%)
|
|
In July 2013, the U.S. banking agencies approved the U.S. version of Basel III. The federal bank regulatory agencies adopted version of Basel III revises the risk-based and leverage capital requirements and the method for calculating risk-weighted assets to make them consistent with Basel III and to meet the requirements of the Dodd-Frank Act. Although many of the rules contained in these final regulations are applicable only to large, internationally active banks, some of them will apply on a phased in basis to all banking organizations, including the Company and the Bank. Among other things, the rules establish a new minimum common equity Tier 1 ratio (4.5% of risk-weighted assets), a higher minimum Tier 1 risk-based capital requirement (6.0% of risk-weighted assets) and a minimum non-risk-based leverage ratio (4.00% eliminating a 3.00% exception for higher rated banks). The new additional capital conservation buffer of 2.5% of risk weighted assets over each of the required capital ratios will be phased in from 2016 to 2019 and must be met to avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The additional “countercyclical capital buffer” is also required for larger and more complex institutions. The new rules assign higher risk weighting to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. The rules also change the permitted composition of Tier 1 capital to exclude trust preferred securities, mortgage servicing rights and certain deferred tax assets and include unrealized gains and losses on available for sale debt and equity securities (with a one-time opt out option for Standardized Banks (banks with less than $250 billion of total consolidated assets and less than $10 billion of foreign exposures)). The rules, including alternative requirements for smaller community financial institutions like the Company, would be phased in through 2019. The implementation of the Basel III framework for the Company and the Bank commenced on January 1, 2015.
In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total average assets, referred to as the leverage ratio. Banks that have received the highest rating of the five categories used by regulators to rate banks and are not anticipating or experiencing any significant growth must maintain a ratio of Tier 1 capital (net of all intangibles) to adjusted total assets, or “Leverage Capital Ratio”, of at least 3%. All other institutions are required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum, for a minimum of 4% to 5%. Pursuant to federal regulations, banks must maintain capital levels commensurate with the level of risk to which they are exposed, including the volume and severity of problem loans.
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
ASSETS
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
229
|
|
|
$
|
359
|
|
Investment in bank subsidiary
|
|
|
82,087
|
|
|
|
77,878
|
|
Other assets
|
|
|
135
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
82,451
|
|
|
$
|
78,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
1
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
Common stock, no par value; 50,000,000 shares authorized,
8,088,455 and 8,078,155 shares issued and outstanding at
December 31, 2016 and 2015, respectively
|
|
|
24,682
|
|
|
|
24,682
|
|
Additional paid-in capital
|
|
|
3,474
|
|
|
|
3,217
|
|
Retained earnings
|
|
|
54,519
|
|
|
|
48,795
|
|
Accumulated other comprehensive (loss) income, net of tax
|
|
|
(225
|
)
|
|
|
1,569
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
82,450
|
|
|
|
78,263
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
82,451
|
|
|
$
|
78,346
|
|
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
(dollars in thousands)
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
INCOME
|
|
|
|
|
|
|
|
|
Dividends declared by subsidiary
|
|
$
|
1,940
|
|
|
$
|
1,695
|
|
Total income
|
|
|
1,940
|
|
|
|
1,695
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
Salary expense
|
|
|
97
|
|
|
|
94
|
|
Employee benefit expense
|
|
|
255
|
|
|
|
261
|
|
Legal expense
|
|
|
32
|
|
|
|
76
|
|
Other operating expenses
|
|
|
145
|
|
|
|
476
|
|
Total non-interest expense
|
|
|
529
|
|
|
|
907
|
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed income of subsidiary
|
|
|
1,411
|
|
|
|
788
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income of subsidiary
|
|
|
6,003
|
|
|
|
3,889
|
|
Income before income tax benefit
|
|
|
7,414
|
|
|
|
4,677
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
251
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,665
|
|
|
$
|
4,908
|
|
OAK VALLEY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASHFLOWS
|
|
YEAR ENDED DECEMBER 31,
|
|
(dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,665
|
|
|
$
|
4,908
|
|
Adjustments to reconcile net income to net cash from operating activities:
|
|
|
|
|
|
|
|
|
Undistributed net income of subsidiary
|
|
|
(6,003
|
)
|
|
|
(3,889
|
)
|
Stock based compensation
|
|
|
255
|
|
|
|
261
|
|
Excess tax benefits from vested restricted stock awards
|
|
|
0
|
|
|
|
(46
|
)
|
(Decrease) increase in other liabilities
|
|
|
(82
|
)
|
|
|
83
|
|
(Increase) decrease in other assets
|
|
|
(25
|
)
|
|
|
79
|
|
Net cash from operating activities
|
|
|
1,810
|
|
|
|
1,396
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Shareholder cash dividends paid
|
|
|
(1,940
|
)
|
|
|
(1,695
|
)
|
Excess tax benefits from vested restricted stock awards
|
|
|
0
|
|
|
|
46
|
|
Net cash used in financing activities
|
|
|
(1,940
|
)
|
|
|
(1,649
|
)
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(130
|
)
|
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
359
|
|
|
|
612
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
229
|
|
|
$
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
2,331
|
|
|
$
|
4,152
|
|