Notes
to Consolidated Financial Statements
Years
Ended December 31, 2007, 2006, and 2005
1.
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Organization
and Summary of Significant Accounting and Reporting
Policies
|
Basis
of Presentation
- The
consolidated financial statements include the accounts of United Security
Bancshares, and its wholly owned subsidiary, United Security Bank and subsidiary
(the “Bank”).United Security Bancshares Capital Trust II (the “Trust”) is
deconsolidated pursuant to FIN46. As a result, the Trust’s Trust Preferred
Securities are not presented on the Company’s consolidated financial statements,
but instead the Company’s Subordinated Debentures are presented as a separate
liability category. (see Note 10 to the Company’s consolidated financial
statements). Intercompany accounts and transactions have been eliminated in
consolidation. In the following notes, references to the Bank are references
to
United Security Bank. References to the Company are references to United
Security Bancshares, (including the Bank and Trust). United Security Bancshares
operates as one business segment providing banking services to commercial
establishments and individuals primarily in the San Joaquin Valley of
California.
Nature
of Operations
- United
Security Bancshares is a bank holding company, incorporated in the state of
California for the purpose of acquiring all the capital stock of the Bank
through a holding company reorganization (the “Reorganization”) of the Bank. The
Reorganization, which was accounted for in a manner similar to a pooling of
interests, was completed on June 12, 2001. Management believes the
Reorganization has provided the Company greater operating and financial
flexibility and has permitted expansion into a broader range of financial
services and other business activities.
United
Security Bancshares Capital Trust I was formed during June 2001 as a Delaware
statutory business trust for the exclusive purpose of issuing and selling Trust
Preferred Securities. The Trust was
deconsolidated
in 2004 pursuant to FIN46. During July 2007, the Trust Preferred Securities
were
redeemed by USB Capital Trust I, and upon retirement, the Trust was dissolved.
During July 2007 the Company formed United Security Bancshares Capital Trust
II
and issued $15.0 million in Trust Preferred Securities with terms similar to
those originally issued under USB Capital Trust I.
(See
Note
10. “Junior Subordinated Debt/Trust Preferred Securities”).
USB
Investment Trust Inc was incorporated effective December 31, 2001 as a special
purpose real estate investment trust (“REIT”) under Maryland law. The REIT is a
subsidiary of the Bank and was funded with $133.0 million in real estate-secured
loans contributed by the Bank. USB Investment Trust was originally formed to
give the Bank flexibility in raising capital, and reduce the expenses associated
with holding the assets contributed to USB Investment Trust (See Note 11.
“Income Taxes”).
On
February 16, 2007, the Company completed its merger with Legacy Bank, N.A.,
located in Campbell, California, with the acquisition of 100 percent of Legacy’s
outstanding common shares. At merger, Legacy Bank’s one branch was merged with
and into United Security Bank, a wholly owned subsidiary of the Company. The
total value of the merger transaction was $21.5 million,
and the
shareholders of Legacy Bank received merger consideration consisting of 976,411
shares of common stock of the Company. The merger transaction was accounted
for
as a purchase transaction, and resulted in the purchase price being allocated
to
the assets acquired and liabilities assumed from Legacy Bank based on the fair
value of those assets and liabilities. The net of assets acquired and
liabilities assumed totaled approximately $8.6 million at the date of the
merger. Fair value of Legacy assets and liabilities acquired, including
resultant goodwill of approximately $8.8 million, has been determined, with
final purchase adjustments made during the fourth quarter of 2007
.
(See
Note 24 to the Company’s consolidated financial statements contained herein for
details of the merger).
During
November 2007, the Company purchased the recurring revenue stream and certain
fixed assets from ICG Financial, LLC. Additionally, the Company hired all but
one of the former employees of ICG Financial, LLC and its subsidiaries. The
total purchase price was $414,000 including $378,000 for the recurring revenue
stream and $36,000 for the fixed assets. ICG Financial, LLC provided wealth
management, employee benefit, insurance and loan products, as well as consulting
services for a variety of clients. Now operating as a newly formed department
of
the Bank, USB Financial Services provides those same services utilizing the
employees hired from ICG Financial LLC. The Company believes the wealth
management and related services provided by USB Financial Services will enhance
the products and services offered by the Company, and increase noninterest
income. The capitalized cost of $378,000 for the recurring revenue stream will
be amortized over a period of approximately three years, and will be tested
periodically for impairment.
The
Bank
was founded in 1987 and currently operates eleven branches and one construction
lending office in an area from eastern Madera County to western Fresno County,
as well as Taft and Bakersfield in Kern County, and Campbell in Santa Clara
County. The Bank also operates one financial services department located in
Fresno, California. The Bank’s primary source of revenue is providing loans to
customers, who are predominantly small and middle-market businesses and
individuals. The Bank engages in a full compliment of lending activities,
including real estate mortgage, commercial and industrial, real estate
construction, agricultural and consumer loans, with particular emphasis on
short
and medium term obligations.
The
Bank
offers a wide range of deposit instruments. These include personal and business
checking accounts and savings accounts, interest-bearing negotiable order of
withdrawal ("NOW") accounts, money market accounts and time certificates of
deposit. Most of the Bank's deposits are attracted from individuals and from
small and medium-sized business-related sources.
The
Bank
also offers a wide range of specialized services designed to attract and service
the needs of commercial customers and account holders. These services include
cashiers checks, travelers checks, money orders, and foreign drafts. In
addition, the Bank offers Internet banking services to its commercial and retail
customers, and offers certain financial and wealth management services through
its financial services department. The Bank does not operate a trust department,
however it makes arrangements with its correspondent bank to offer trust
services to its customers upon request.
Use
of Estimates in the Preparation of Financial
Statements
- The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Material
estimates that are particularly susceptible to significant change, relate to
the
determination of the allowance for loan losses, determination of goodwill,
fair
value of junior subordinated debt, and the valuation of real estate acquired
in
connection with foreclosures or in satisfaction of loans. In connection with
the
determination of the allowance for loan losses and the valuation of foreclosed
assets held for sale, management obtains independent appraisals for significant
properties.
Significant
Accounting Policies
- The
accounting and reporting policies of the Company conform to generally accepted
accounting principles and to prevailing practices within the banking industry.
The following is a summary of significant policies:
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a.
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Cash
and cash equivalents
-
Cash and cash equivalents include cash on hand, amounts due from
banks,
federal funds sold and repurchase agreements. At times throughout
the
year, balances can exceed FDIC insurance limits. Generally, federal
funds
sold and repurchase agreements are sold for one-day periods. Repurchase
agreements are with a registered broker-dealer affiliated with a
correspondent bank and work much like federal funds sold, except
that the
transaction is collateralized by various investment securities. The
securities collateralizing such transactions generally consist of
U.S.
Treasuries, U.S. Government and U.S. Government-sponsored agencies.
The
Bank did not have any repurchase agreements during 2007 or 2006,
or at
December 31, 2007 or 2006. All cash and cash equivalents have maturities
when purchased of three months or less.
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b.
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Securities
-
Debt and equity securities classified as available for sale are reported
at fair value, with unrealized gains and losses excluded from net
income
and reported, net of tax, as a separate component of comprehensive
income
and shareholders’ equity. Debt securities classified as held to maturity
are carried at amortized cost. Gains and losses on disposition are
reported using the specific identification method for the adjusted
basis
of the securities sold.
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The
Company classifies its securities as available for sale or held to maturity,
and
periodically reviews its investment portfolio on an individual security basis.
Securities that are to be held for indefinite periods of time (including, but
not limited to, those that management intends to use as part of its
asset/liability management strategy, those which may be sold in response to
changes in interest rates, changes in prepayments or any such other factors)
are
classified as securities available for sale. Securities which the Company has
the ability and intent to hold to maturity are classified as held to
maturity.
Declines
in fair value of individual held-to-maturity and available-for-sale securities
below their cost that are other than temporary are recognized by write-downs
of
the individual securities to fair value. Such write-downs would be included
in
earnings as realized losses. Premiums and discounts are recognized in interest
income using the interest method 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
financial statement date,
management
assesses each investment to determine if impaired investments are temporarily
impaired or if the impairment is other-than-temporary based upon the positive
and negative evidence available. Evidence evaluated includes, but is not limited
to, industry analyst reports, credit market conditions, and interest rate
trends. If negative evidence outweighs positive evidence that the carrying
amount is recoverable
within
a
reasonable period of time, the impairment is deemed to be other-than-temporary
and the security is written down in the period in which such determination
is
made.
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c.
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Loans
-
Interest income on loans is credited to income as earned and is calculated
by using the simple interest method on the daily balance of the principal
amounts outstanding. Loans are placed on non-accrual status when
principal
or interest is past due for 90 days and/or when management believes
the
collection of amounts due is doubtful. For loans placed on nonaccrual
status, the accrued and unpaid interest receivable may be reversed
at
management's discretion based upon management's assessment of
collectibility, and interest is thereafter credited to principal
to the
extent necessary to eliminate doubt as to the collectibility of the
net
carrying amount of the loan.
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Nonrefundable
fees and related direct costs associated with the origination or purchase of
loans are deferred and netted against outstanding loan balances. The net
deferred fees and costs are generally amortized into interest income over the
loan term using a method, which approximates the interest method. Other
credit-related fees, such as standby letter of credit fees, loan placement
fees
and annual credit card fees are recognized as noninterest income during the
period the related service is performed.
Impaired
loans are measured based on the present value of expected future cash flows
discounted at the loan’s effective interest rate or as a practical expedient at
the loan’s observable market rate or the fair value of the collateral if the
loan is collateral dependent.
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d.
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Allowance
for Credit Losses and
Reserve
for Unfunded Loan Commitments
-
The allowance for credit losses is maintained to provide for losses
that
can reasonably be anticipated. The allowance is based on ongoing
quarterly
assessments of the probable losses inherent in the loan portfolio,
and to
a lesser extent, unfunded loan commitments. The reserve for unfunded
loan
commitments is a liability on the Company’s consolidated financial
statements and is included in other liabilities. The liability is
computed
using a methodology similar to that used to determine the allowance
for
credit losses, modified to take into account the probability of a
drawdown
on the commitment.
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The
allowance for credit losses is increased by provisions charged to operations
during the current period and reduced by loan charge-offs net of recoveries.
Loans are charged against the allowance when management believes that the
collection of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb losses inherent in existing
loans, based on evaluations of the probability of collection. In evaluating
the
probability of collection, management is required to make estimates and
assumptions that affect the reported amounts of loans, allowance for credit
losses and the provision for credit losses charged to operations. Actual results
could differ significantly from those estimates. These evaluations take into
consideration such factors as the composition of the portfolio, overall
portfolio quality, loan concentrations, specific problem loans, and current
economic conditions that may affect the borrowers' ability to pay. The Company’s
methodology for assessing the adequacy of the allowance for credit losses
consists of several key elements, which include the formula allowance, specific
allowances, and the unallocated allowance.
The
formula allowance is calculated by applying loss factors to outstanding loans
and certain unfunded loan commitments. Loss factors are based on the Company’s
historical loss experience and may be adjusted for significant factors that,
in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date. The Company determines the loss factors for problem-graded
loans (substandard, doubtful, and loss), special mention loans, and pass graded
loans, based on a loss migration model. The migration analysis incorporates
the
Company’s losses over the past twelve quarters (three years) and loss factors
are adjusted to recognize and quantify the loss exposure from changes in market
conditions and trends in the loan portfolio. For purposes of this analysis,
loans are grouped by internal risk classifications, which are “pass”, “special
mention”, “substandard”, “doubtful”, and “loss”. Certain loans are homogenous in
nature and are therefore pooled by risk grade. These homogenous loans include
consumer installment and home equity loans. Special mention loans are currently
performing but are potentially weak, as the borrower has begun to exhibit
deteriorating trends, which if not corrected, could jeopardize repayment of
the
loan and result in further downgrade. Substandard loans have well-defined
weaknesses which, if not corrected, could jeopardize the full satisfaction
of
the debt. A loan classified as “doubtful” has critical weaknesses that make full
collection of the obligation improbable. Classified loans, as defined by the
Company, include loans categorized as substandard, doubtful, and loss.
Specific
allowances are established based on management’s periodic evaluation of loss
exposure inherent in classified loans, impaired loans, and other loans in which
management believes it is probable that a loss has been incurred in excess
of
the amount determined by the application of the formula allowance.
The
unallocated portion of the allowance is based upon management’s evaluation of
various conditions that are not directly measured in the determination of the
formula and specific allowances. The conditions may include, but are not limited
to, general economic and business conditions affecting the key lending areas
of
the Company, credit quality trends, collateral values, loan volumes and
concentration, and other business conditions.
The
allowance analysis also incorporates the results of measuring impaired loans
as
provided in Statement of Financial Accounting Standards (“SFAS”) No. 114,
“Accounting by Creditors for Impairment of a Loan” and SFAS 118, “Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures”. A loan
is considered impaired when management determines that it is probable that
the
Company will be unable to collect all amounts due according to the original
contractual terms of the loan agreement. Impairment is measured by the
difference between the original recorded investment in the loan and the
estimated present value of the total expected cash flows, discounted at the
loan’s effective rate, or the fair value of the collateral, if the loan is
collateral dependent. Any differences in the specific allowance amounts
calculated in the impaired loan analysis and the migration analysis are
reconciled by management and changes are made to the allowance as deemed
necessary.
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e.
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Loans
held-for-sale
-
Loans originated and designated as held-for-sale are carried at the
lower
of cost or estimated fair value, as determined by quoted market prices,
in
aggregate. Net unrealized losses are recognized in a valuation allowance
by charges to income. Gains or losses on the sale of such loans are
based
on the specific identification method. The Company held no loans
for sale
at December 31, 2007 or 2006.
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f.
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Premises
and Equipment
-
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation expense is computed principally on the straight-line
method
over the estimated useful lives of the assets. Estimated useful lives
are
as follows:
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Buildings
31
Years
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Furniture and equipment
3-7
Years
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g.
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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,
less estimated costs to sell. The excess, if any, of the loan amount
over
the fair value is charged to the allowance for credit losses. Subsequent
declines in the fair value of other real estate owned, along with
related
revenue and expenses from operations, are charged to noninterest
expense
at foreclosure.
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h.
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Intangible
Assets and Goodwill
-
Intangible assets are comprised of core deposit intangibles, other
specific identifiable intangibles, and goodwill acquired in branch
acquisitions in which the fair value of the liabilities assumed exceeded
the fair value of the assets acquired. Core deposit intangibles of
$3,611,000 and $1,475,000 (net of accumulated amortization of $3,386,000
and $2,121,000) at December 31, 2007 and 2006 are amortized over
the
estimated useful lives of the existing deposit bases (average of
7 years)
using a method which approximates the interest method. Other specific
identifiable intangibles resulting from the purchase of certain bank
branches during 1997, which were non self-sustaining businesses,
of
$653,000 and $790,000 (net accumulated amortization of $1.3 million
and
$1.4 million) at December 31, 2007 and 2006 are being amortized using
a
method which approximates the interest method over a period of 15
years.
The identifiable intangible asset resulting from the purchase of
the
recurring income stream from ICG Financial Services totaled $357,000
at
December 31, 2007 (net accumulated amortization of $21,000) and will
be
amortized over a period of three years. As with other intangible
assets,
we will review them for impairment on an annual basis, or sooner
if
circumstances or events warrant such a
review.
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The
estimated aggregate amortization expense related to intangible assets for each
of the five succeeding years is as follows (in 000’s):
Year
|
|
Amortization
expense
|
|
2008
|
|
$
|
944
|
|
2009
|
|
|
874
|
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2010
|
|
|
770
|
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2011
|
|
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565
|
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2012
|
|
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446
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Total
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|
$
|
3,599
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Goodwill
amounts resulting from the acquisitions of Taft National Bank during April
2004,
and Legacy Bank during February 2007 are considered to have an indefinite life
and are not amortized. At December 31, 2007 goodwill related to Taft National
Bank totaled $1.6 million, and goodwill related to Legacy Bank totaled $8.8
million. Pursuant to SFAS No. 142,
Goodwill
and Other Intangible Assets
,
goodwill is evaluated annually for impairment. Impairment testing of goodwill
is
performed during April of each year at a reporting unit level for Taft, and
will
be performed during March of each year for Legacy. The Company had no impairment
adjustments during 2007, 2006, or 2005.
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i.
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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 using the liability method, and 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.
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|
j.
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Net
Income per Share
-
Basic income per common share is computed based on the weighted average
number of common shares outstanding. Diluted income per share includes
the
effect of stock options and other potentially dilutive securities
using
the treasury stock method. Leveraged ESOP shares, if any, are only
considered outstanding for earnings per share calculations when they
are
committed to be released. The Company had no leveraged ESOP shares
outstanding at December 31, 2007, 2006 or 2005. (see Note
18).
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|
k.
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Cash
Flow Reporting
-
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, noninterest-bearing amounts due from banks, federal
funds
sold and securities purchased under agreements to resell. Federal
funds
and securities purchased under agreements to resell are generally
sold for
one-day periods.
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|
l.
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Transfers
of Financial Assets
-
Transfers of financial assets are accounted for as sales when control
over
the assets has been surrendered. Control over transferred assets
is deemed
to be surrendered when (1) the assets have been isolated from the
Company,
(2) the transferee obtains the right (free of conditions that constrain
it
from taking advantage of that right) to pledge or exchange the transferred
assets, and (3) the Company does not maintain effective control over
the
transferred assets through an agreement to repurchase them before
their
maturity.
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m.
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Advertising
Costs
-
The Company expenses marketing costs as they are incurred. Advertising
expense was $113,000, $105,000, and $98,000 for the years ended December
31, 2007, 2006 and 2005,
respectively.
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n.
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Stock
Based Compensation -
At
December 31, 2006, the Company has a stock-based employee compensation
plan, which is described more fully in Note 12. On January 1, 2006
the
Company adopted the disclosure provisions of Financial Accounting
Standards Board (FASB) Statement No. 123 R, “Accounting for Share-Based
Payments”. SFAS No. 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the
financial statements based on the grant-date fair value of the award.
The
fair value is amortized over the requisite service period (generally
the
vesting period). Included in salaries and employee benefits for the
years
ended December 31, 2007 and 2006 is $187,000 and $248,000, respectively,
of share-based compensation. The related tax benefit, recorded in
the
provision for income taxes, was not significant.
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Prior
to
January 1, 2006, the Company accounted for stock-based awards to employees
using
the intrinsic value method in accordance with APB No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under
those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. See Note 12 to the Company’s consolidated financial
statements for a table that illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions
of
SFAS
No.
148, “Accounting for Stock-Based Compensation - Transition and Disclosure an
amendment of FASB Statement No. 123” during 2005.
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o.
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Long-Lived
Assets
-
The Company periodically evaluates the carrying value of long-lived
assets
to be held and used, including other specific intangible assets,
and core
deposit intangible assets in accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets.” Based on such
evaluation, the Bank determined that there is no impairment loss
to be
recognized in 2007, 2006, or 2005.
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|
p.
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Employee
Stock Ownership Plan (“ESOP”) -
The
Company accounts for shares acquired by leveraged ESOP’s, if any, in
accordance with the guidelines established by the American Institute
of
Certified Public Accounts Statement of Position 93-6, “Employers’
Accounting for Employee Stock Ownership Plans” (“SOP 93-6”). Under SOP
93-6, the Company recognizes compensation cost equal to the fair
value of
the ESOP shares during the periods in which they become committed
to be
released. To the extent that the fair value of the Company’s ESOP shares
committed to be released differ from the cost of those shares, the
differential is charged or credited to equity. For externally leveraged
ESOPs, the ESOP debt is recorded as a liability and interest expense
is
recorded on that debt. The ESOP shares not yet committed to be released
are accounted for as a reduction of shareholders’ equity. The credit line
related to the Company’s leveraged ESOP matured during 2005, and as
result, all remaining balances were repaid during the first quarter
of
2005. The Company had no leveraged ESOP transactions during 2007
or
2006.
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|
q.
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Derivative
Financial Instruments
-
All derivative instruments (including certain derivative instruments
embedded in other contracts) are recognized in the consolidated balance
sheet at fair value. The Company’s accounting treatment for gains or
losses from changes in the derivative instrument’s fair value is
contingent on whether the derivative instrument qualifies as a hedge.
On
the date the Company enters into a derivative contract, the Company
designates the derivative instruments as (1) a hedge of the fair
value of a recognized asset or liability or of an unrecognized firm
commitment (fair value hedge), (2) a hedge of a forecasted
transaction or of the variability of cash flows to be received or
paid
related to a recognized asset or liability (cash flow hedge) or (3),
a
hedge for trading, customer accommodation or not qualifying for hedge
accounting (free-standing derivative instruments). For a fair value
hedge,
changes in the fair value of the derivative instrument and changes
in the
fair value of the hedged asset or liability or of an unrecognized
firm
commitment attributable to the hedged risk are recorded in current
period
net income. For a cash flow hedge, changes in the fair value of the
derivative instrument to the extent that it is highly effective are
recorded in other comprehensive income, net of tax, within shareholders’
equity and subsequently reclassified to net income in the same period(s)
that the hedged transaction impacts net income. For freestanding
derivative instruments, changes in the fair values are reported in
current
period net income. The Company formally documents the relationship
between
hedging instruments and hedged items, as well as the risk management
objective and strategy for undertaking any hedge transaction. This
process
includes relating all derivative instruments that are designated
as fair
value or cash flow hedges to specific assets and liabilities on the
balance sheet or to specific forecasted transactions. The Company
also
formally assesses both at the inception of the hedge and on an ongoing
basis, whether the derivative instruments used are highly effective
in
offsetting changes in fair values or cash flows of hedged items.
If it is
determined that the derivative instrument is not, and will not be,
highly
effective as a hedge, hedge accounting is
discontinued.
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|
r.
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Federal
Home Loan Bank stock and Federal Reserve Stock
-
As
a member of the Federal Home Loan Bank (FHLB), the Company is required
to
maintain an investment in capital stock of the FHLB. In addition,
as a
member of the Federal Reserve Bank (FRB), the Company is required
to
maintain an investment in capital stock of the FRB. The investments
in
both the FHLB and the FRB are carried at cost in the accompanying
consolidated balance sheets under other assets and are subject to
certain
redemption requirements by the FHLB and
FRB.
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|
s.
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Comprehensive
Income
-Comprehensive income is comprised of net income and other comprehensive
income. Other comprehensive income includes items previously recorded
directly to equity, such as unrealized gains and losses on securities
available-for-sale, unrecognized costs of salary continuation defined
benefit plans, and certain derivative instruments used as a cash
flow
hedge. Comprehensive income is presented in the consolidated statement
of
shareholders’ equity.
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|
t.
|
Segment
Reporting
-
The Company's operations are solely in the financial services industry
and
include providing to its customers traditional banking and other
financial
services. The Company operates primarily in the San Joaquin Valley
region
of California. Management makes operating decisions and assesses
performance based on an ongoing review of the Company's consolidated
financial results. Therefore, the Company has a single operating
segment
for financial reporting purposes.
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|
u.
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New
Accounting Standards:
|
Statements
of Financial Accounting Standards
In
December 2007, the FASB issued SFAS No. 160,
"Noncontrolling
Interests in Consolidated Financial Statements,"
which
provides guidance for accounting and reporting of noncontrolling (minority)
interests in consolidated financial statements. The statement is effective
for
fiscal years and interim periods within fiscal years beginning on or after
December 15, 2008. The Company does not hold minority interests in subsidiaries,
therefore it is expected that SFAS No. 160 will have no impact on its financial
condition or results of operations.
In
February 2007, the FASB issued SFAS 159
,
The
Fair Value Option for Financial Assets and Financial Liabilities, including
an
amendment of FASB Statement No. 115.
SFAS 159
allows entities to irrevocably elect fair value as the initial and subsequent
measurement attribute for certain financial assets and financial liabilities
that are not otherwise required to be measured at fair value, with changes
in
fair value recognized in earnings as they occur. SFAS 159 also requires entities
to report those financial assets and financial liabilities measured at fair
value in a manner that separates those reported fair values from the carrying
amounts of similar assets and liabilities measured using another measurement
attribute on the face of the statement of financial position. Lastly, SFAS
159
establishes presentation and disclosure requirements designed to improve
comparability between entities that elect different measurement attributes
for
similar assets and liabilities. SFAS 159 is effective for fiscal years beginning
after November 15, 2007, with early adoption permitted if an entity also early
adopts the provisions of SFAS 157. Effective January 1, 2007, the Company
elected early adoption of the fair value option to value its junior subordinated
debt. The initial impact upon adoption of SFAS No. 159 was to record a $1.3
million loss, reflected as an adjustment to beginning retained earnings at
January 1, 2007. Subsequent to adoption, the Company recorded total gains
resulting from fair value adjustments on its junior subordinated debt totaling
$2.5 million during the year ended December 31, 2007, which are reflected as
a
component of other noninterest income. (see Note 10).
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
158,
Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans
(“SFAS
No. 158”). SFAS No. 158 amends SFAS No. 87 and SFAS No. 106. SFAS No. 158 amends
previous applicable accounting statements and requires companies to better
disclose, among other things, the funded status of benefit plans, and to
recognize as a component of other comprehensive income, net of tax, the gains
or
losses and prior service costs or credits that arise during the period but
are
not recognized as components of net periodic benefit cost pursuant to FASB
Statement No. 87,
Employers’
Accounting for Pensions
,
or No.
106,
Employers’
Accounting for Postretirement Benefits Other Than Pensions
.
Amounts
recognized in accumulated other comprehensive income, including the gains or
losses, prior service costs or credits, and the transition asset or obligation
remaining from the initial application of Statements 87 and 106, are adjusted
as
they are subsequently recognized as components of net periodic benefit cost
pursuant to the recognition and amortization provisions of those Statements.
SFAS No. 158 is effective for public companies with fiscal years ending after
December 15, 2006. The Company adopted SFAS No. 158 effective December 31,
2006,
and has made required disclosures since December 31, 2006. As a result, the
Company upon adoption at December 31, 2006, recorded $169,000 in accumulated
other comprehensive income (net tax of $112,000) for the previously unrecognized
cost of post-retirement benefits related to the Company’s Salary Continuation
Plan, and had $85,000 in other comprehensive income (net tax of $57,000) for
the
previously unrecognized at December 31, 2007 (see Note 13,
Employee
Benefit Plans
).
In
September 2006, the FASB issued SFAS 157,
Fair
Value Measurements.
SFAS
No.
157 clarifies the definition of fair value, describes methods used to
appropriately measure fair value in accordance with generally accepted
accounting principles and expands fair value disclosure requirements. This
statement applies whenever other accounting pronouncements require or permit
fair value measurements and is effective for fiscal years beginning after
November 15, 2007. Effective January 1, 2007, the Company adopted SFAS No.
157
as a result of its early adoption of SFAS No. 159 (see Note 15).
Financial
Accounting Standards Board Staff Positions and Interpretations
On
July
13, 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation 48 (FIN 48),
Accounting
for Uncertainty in Income Taxes: an interpretation of FASB Statement No.
109
.
FIN 48
clarifies SFAS No. 109,
Accounting
for Income Taxes
,
to
indicate a criterion that an individual tax position would have to meet for
some
or all of the income tax benefit to be recognized in a taxable entity’s
financial statements. Under the guidelines of the Interpretation, an entity
should recognize the financial statement benefit of a tax position if it
determines that it is
more
likely than not
that
the
position will be sustained on examination. The term “more likely than not” means
“a likelihood of more than 50 percent.” In assessing whether the
more-likely-than-not criterion is met, the entity should assume that the tax
position will be reviewed by the applicable taxing authority. The scope of
FIN
48 is broad and includes
all
tax
positions accounted for in accordance with SFAS No. 109. Additionally, besides
business enterprises, FIN 48 applies to pass-through entities, and entities
whose tax liability is subject to 100 percent credit for dividends paid (such
as
real estate investment trusts). FIN 48 is effective for the Company beginning
after January 1, 2007. The cumulative effect of applying FIN 48 totaling $1.3
million was reported as an adjustment to retained earnings at January 1, 2007
(see Note 11).
In
September 2006, the Emerging Issues Task Force (EITF) reached a final consensus
on Issue No. 064-4 (EITF
06-4),
"Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements."
EITF
06-4
requires employers to recognize a liability for future benefits provided through
endorsement split-dollar life insurance arrangements that extend into
postretirement periods in accordance with SFAS No. 106,
"Employers'
Accounting for Postretirement Benefits Other Than Pensions
or
APB
Opinion No. 12,
Omnibus
Opinion-1967."
The
provisions of EITF 06-4 become effective on January 1, 2008 and are to be
applied as a change in accounting principle either through a cumulative-effect
adjustment to retained earnings or other components of equity or net assets
in
the statement of financial position as of the beginning of the year of adoption,
or through retrospective application to all prior periods. The Company's
split-dollar life insurance benefits are limited to the employee's active
service period. Therefore it is expected that EITF 06-4 will have no impact
on
financial condition or results of operations.
|
v.
|
Reclassifications
-
Certain reclassifications have been made to the 2006 and 2005 financial
statements to conform to the classifications used in
2007.
|
Following
is a comparison of the amortized cost and approximate fair value of investment
securities for the years ended December 31, 2007 and December 31, 2006:
(In
thousands)
|
|
|
|
Gross
|
|
Gross
|
|
Fair
Value
|
|
December
31, 2007:
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
(Carrying
|
|
Securities
available for sale:
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Amount)
|
|
U.S.
Government agencies
|
|
$
|
65,764
|
|
$
|
524
|
|
|
($302
|
)
|
$
|
65,986
|
|
U.S.
Government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collateralized
mortgage obligations
|
|
|
7,782
|
|
|
44
|
|
|
(4
|
)
|
|
7,822
|
|
Obligations
of state and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
political
subdivisions
|
|
|
2,227
|
|
|
54
|
|
|
0
|
|
|
2,281
|
|
Other
investment securities
|
|
|
13,752
|
|
|
0
|
|
|
(426
|
)
|
|
13,326
|
|
Total
securities available for sale
|
|
$
|
89,525
|
|
$
|
622
|
|
|
($732
|
)
|
$
|
89,415
|
|
December
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
69,746
|
|
$
|
51
|
|
|
($1,293
|
)
|
$
|
68,504
|
|
U.S.
Government agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collateralized
mortgage obligations
|
|
|
17
|
|
|
0
|
|
|
(1
|
)
|
|
16
|
|
Obligations
of state and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
political
subdivisions
|
|
|
2,226
|
|
|
65
|
|
|
(1
|
)
|
|
2,290
|
|
Other
investment securities
|
|
|
13,000
|
|
|
0
|
|
|
(444
|
)
|
|
12,556
|
|
Total
securities available for sale
|
|
$
|
84,989
|
|
$
|
116
|
|
|
($1,739
|
)
|
$
|
83,366
|
|
Included
in other investment securities at December 31, 2007, is a short-term government
securities mutual fund totaling $7.7 million, a CRA-qualified mortgage fund
totaling $4.9 million, and an overnight money-market mutual fund totaling
$752,000. Included in other investment securities at December 31, 2006, is
a
short-term government securities mutual fund totaling $7.7 million, and a
CRA-qualified mortgage fund totaling $4.8 million.
The
commercial asset-backed trust consists of fixed and floating rate commercial
and
multifamily mortgage loans. The short-term government securities mutual fund
invests in debt securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, with a maximum duration equal to that of a 3-year
U.S. Treasury Note.
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. Management has determined that no investment security
is
other than temporarily impaired. The unrealized losses are due solely to
interest rate changes and the Company has the ability and intent to hold all
investment securities with identified impairments resulting from interest rate
changes to the earlier of the forecasted recovery or the maturity of the
underlying investment security.
The
following summarizes temporarily impaired investment securities at December
31,
2007 and 2006:
|
|
Less
than 12 Months
|
|
12
Months or More
|
|
Total
|
|
(In
thousands)
|
|
Fair
Value
|
|
|
|
Fair
Value
|
|
|
|
Fair
Value
|
|
|
|
December
31, 2007:
|
|
(Carrying
|
|
Unrealized
|
|
(Carrying
|
|
Unrealized
|
|
(Carrying
|
|
Unrealized
|
|
Securities
available for sale:
|
|
Amount)
|
|
Losses
|
|
Amount)
|
|
Losses
|
|
Amount)
|
|
Losses
|
|
U.S.
Government agencies
|
|
$
|
0
|
|
$
|
0
|
|
$
|
30,241
|
|
$
|
(302
|
)
|
$
|
30,241
|
|
$
|
(302
|
)
|
U.S.
Govt. agency CMO’s
|
|
|
4,129
|
|
|
(4
|
)
|
|
0
|
|
|
0
|
|
|
4,129
|
|
|
(4
|
)
|
Obligations
of state and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
political
subdivisions
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Other
investment securities
|
|
|
0
|
|
|
0
|
|
|
12,574
|
|
|
(426
|
)
|
|
12,574
|
|
|
(426
|
)
|
Total
impaired securities
|
|
$
|
4,129
|
|
$
|
(4
|
)
|
$
|
42,815
|
|
$
|
(728
|
)
|
$
|
46,944
|
|
$
|
(732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
506
|
|
$
|
(6
|
)
|
$
|
65,626
|
|
$
|
(1,287
|
)
|
$
|
66,132
|
|
$
|
(1,293
|
)
|
U.S.
Govt. agency CMO’s
|
|
|
0
|
|
|
0
|
|
|
12
|
|
|
(1
|
)
|
|
12
|
|
|
(1
|
)
|
Obligations
of state and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
political
subdivisions
|
|
|
0
|
|
|
0
|
|
|
34
|
|
|
(1
|
)
|
|
34
|
|
|
(1
|
)
|
Other
investment securities
|
|
|
0
|
|
|
0
|
|
|
12,556
|
|
|
(444
|
)
|
|
12,556
|
|
|
(444
|
)
|
Total
impaired securities
|
|
$
|
506
|
|
$
|
(6
|
)
|
$
|
78,228
|
|
$
|
(1,733
|
)
|
$
|
78,734
|
|
$
|
(1,739
|
)
|
Temporarily
impaired securities at December 31, 2007 are comprised of nine (9) U.S.
government agency securities, one U.S. agency collateralized mortgage
obligation, and two other investment securities, with a total weighted average
life of 1.0 years. Temporarily impaired securities at December 31, 2006 are
comprised of nineteen (19) U.S. government agency securities, two other
investment securities, one municipal bond, and one U.S. agency collateralized
mortgage obligation with a total weighted average life of 2.4
years.
There
were no gross realized gains or losses on available-for-sale securities during
the year ended December 31, 2007. There were gross realized gains on sales
of
available-for-sale securities totaling $27,000, and $163,000 during the years
ended December 31, 2006, and 2005, respectively. There were no gross realized
losses on available-for-sale securities during the year ended December 31,
2006
or 2005.
The
amortized cost and fair value of securities available for sale at December
31,
2007, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because issuers have the right to call or prepay
obligations with or without call or prepayment penalties. Contractual maturities
on collateralized mortgage obligations cannot be anticipated due to allowed
paydowns.
|
|
December
31, 2007
|
|
|
|
Amortized
|
|
Fair
Value
|
|
(In
thousands)
|
|
Cost
|
|
(Carrying
Amount)
|
|
Due
in one year or less
|
|
$
|
37,980
|
|
$
|
37,419
|
|
Due
after one year through five years
|
|
|
1,110
|
|
|
1,104
|
|
Due
after five years through ten years
|
|
|
10,103
|
|
|
10,365
|
|
Due
after ten years
|
|
|
32,550
|
|
|
32,704
|
|
Collateralized
mortgage obligations
|
|
|
7,782
|
|
|
7,823
|
|
|
|
$
|
89,525
|
|
$
|
89,415
|
|
At
December 31, 2007 and 2006, available-for-sale securities with an amortized
cost
of approximately $71.0 million and $70.9 million (fair value of $71.3 million
and $69.7 million) were pledged as collateral for public funds, treasury tax
and
loan balances, and repurchase agreements.
The
Company had no held-to-maturity or trading securities at December 31, 2007
or
2006.
Loans
are comprised of the following:
|
|
December
31,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
Commercial
and industrial
|
|
$
|
204,385
|
|
$
|
155,811
|
|
Real
estate - mortgage
|
|
|
142,565
|
|
|
113,613
|
|
Real
estate - construction
|
|
|
178,296
|
|
|
168,378
|
|
Agricultural
|
|
|
46,055
|
|
|
35,102
|
|
Installment
|
|
|
18,171
|
|
|
16,712
|
|
Lease
financing
|
|
|
8,748
|
|
|
10,952
|
|
Total
Loans
|
|
$
|
598,220
|
|
$
|
500,568
|
|
The
Company's loans are predominantly in the San Joaquin Valley, and the greater
Oakhurst/East Madera County area, as well as the Campbell area of Santa Clara
County, although the Company does participate in loans with other financial
institutions, primarily in the state of California.
Commercial
and industrial loans represent 34.2% of total loans at December 31, 2007 and
have a high degree of industry diversification. A substantial portion of the
commercial and industrial loans are secured by accounts receivable, inventory,
leases or other collateral including real estate. The remainder are unsecured;
however, extensions of credit are predicated upon the financial capacity of
the
borrower. Repayment of commercial loans is generally from the cash flow of
the
borrower.
Real
estate mortgage loans, representing 23.8% of total loans at December 31, 2007,
are secured by trust deeds on primarily commercial property. Repayment of real
estate mortgage loans is generally from the cash flow of the
borrower.
Real
estate construction loans, representing 29.8% of total loans at December 31,
2007, consist of loans to residential contractors, which are secured by
single-family residential properties. All real estate loans have established
equity requirements. Repayment on construction loans is generally from long-term
mortgages with other lending institutions.
Agricultural
loans represent 7.7% of total loans at December 31, 2007 and are generally
secured by land, equipment, inventory and receivables. Repayment is from the
cash flow of the borrower.
Lease
financing loans, representing 1.5% of total loans at December 31, 2007, consist
of loans to small businesses, which are secured by commercial equipment.
Repayment of the lease obligation is from the cash flow of the
borrower.
Occasionally,
shared appreciation agreements are made between the Company and the borrower
on
certain construction loans where the Company agrees to receive interest on
the
loan at maturity rather than monthly and the borrower agrees to share in the
profits of the project. Due to the difficulty in calculating future values,
shared appreciation income is recognized when received. The Company does not
participate in a significant number of shared appreciation projects.
Shared
appreciation income totaled $42,000, $567,000, and $393,000 for the years ended
December 31, 2007, 2006, and 2005, respectively.
Loans
over 90 days past due and still accruing consisted of one loan totaling $189,000
at December 31, 2007. There were no loans over 90 days past due and still
accruing at December 31, 2006. Nonaccrual loans totaled $21.6 million and $8.1
million at December 31, 2007 and 2006, respectively. There were remaining
undisbursed commitments to extend credit on nonaccrual loans of $12,000 at
December 31, 2007, and no remaining undisbursed commitments at December 31,
2006. The interest income that would have been earned on nonaccrual loans
outstanding at December 31, 2007 in accordance with their original terms is
approximately $1.5 million. There was no interest income recorded on such loans
during the year ended December 31, 2007. The interest income recorded on such
loans during 2006 and 2005 totaled $65,000 and $34,000, respectively.
The
Company has, and expects to have, lending transactions in the ordinary course
of
its business with directors, officers, principal shareholders and their
affiliates. These loans are granted on substantially the same terms, including
interest rates and collateral, as those prevailing on comparable transactions
with unrelated parties, and do not involve more than the normal risk of
collectibility or present unfavorable features.
Loans
to directors, officers, principal shareholders and their affiliates are
summarized below:
|
|
December
31,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
Aggregate
amount outstanding, beginning of year
|
|
$
|
1,605
|
|
$
|
2,440
|
|
New
loans or advances during year
|
|
|
9,734
|
|
|
1,897
|
|
Repayments
during year
|
|
|
(3,903
|
)
|
|
(2,732
|
)
|
Aggregate
amount outstanding, end of year
|
|
$
|
7,436
|
|
$
|
1,605
|
|
Loan
commitments
|
|
$
|
6,799
|
|
$
|
2,241
|
|
An
analysis of changes in the allowance for credit losses is as
follows:
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Balance,
beginning of year
|
|
$
|
8,365
|
|
$
|
7,748
|
|
$
|
7,251
|
|
Provision
charged to operations
|
|
|
5,697
|
|
|
880
|
|
|
1,140
|
|
Losses
charged to allowance
|
|
|
(4,493
|
)
|
|
(502
|
)
|
|
(773
|
)
|
Recoveries
on loans previously charged off
|
|
|
64
|
|
|
239
|
|
|
165
|
|
Reserve
acquired in merger
|
|
|
1,268
|
|
|
—
|
|
|
|
|
Reclass
off-balance sheet reserve
|
|
|
|
|
|
|
|
|
(35
|
)
|
Balance
at end-of-period
|
|
$
|
10,901
|
|
$
|
8,365
|
|
$
|
7,748
|
|
The
allowance for credit losses represents management's estimate of the risk
inherent in the loan portfolio based on the current economic conditions,
collateral values and economic prospects of the borrowers. Significant changes
in these estimates might be required in the event of a downturn in the economy
and/or the real estate markets in the San Joaquin Valley, the greater Oakhurst
and East Madera County area, and in Santa Clara County.
At
December 31, 2007 and 2006, the Company's recorded investment in loans for
which
impairment has been recognized totaled $20.6 million and $8.9 million,
respectively. Included in total impaired loans at December 31, 2007 are $10.7
million of impaired loans for which the related specific allowance is $4.5
million, as well as $9.9 million of impaired loans that as a result of
write-downs or the fair value of the collateral, did not have a specific
allowance. At December 31, 2006, total impaired loans included $5.7 million
for
which the related specific allowance is $4.1 million, as well as $3.2 million
of
impaired loans that as a result of write-downs to the fair value of the
collateral did not have a specific allowance. The average recorded investment
in
impaired loans was $15.9 million, $10.1 million, and $15.9 million for the
years
ended December 31, 2007, 2006, and 2005, respectively. In most cases, the
Company uses the cash basis method of income recognition for impaired loans.
In
the case of certain troubled debt restructuring for which the loan is performing
under the current contractual terms, income is recognized under the accrual
method. For the year ended December 31, 2007, the Company recognized no income
on impaired loans. For the year ended December 31, 2006 and 2005, the Company
recognized income of $65,000 and $34,000, respectively, on such loans.
In
the
normal course of business, the Company is party to financial instruments with
off-balance sheet risk to meet the financing needs of its customers. At December
31, 2007 and 2006 these financial instruments include commitments to extend
credit of $196.3 million and $188.2 million, respectively, and standby letters
of credit of $6.7 million and $4.9 million, respectively. These instruments
involve elements of credit risk in excess of the amount recognized on the
balance sheet. The contract amounts of these instruments reflect the extent
of
the involvement the Company has in off-balance sheet financial
instruments.
The
Company’s exposure to credit loss in the event of nonperformance by the
counterparty to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amounts of those
instruments. The Company uses the same credit policies as it does for on-balance
sheet instruments.
Commitments
to extend credit are agreements to lend to a customer, as long as there is
no
violation of any condition established in the contract. Substantially all of
these commitments are at floating interest rates based on the Prime rate.
Commitments generally have fixed expiration dates. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary, is based on management's credit evaluation.
Collateral held varies but includes accounts receivable, inventory, leases,
property, plant and equipment, residential real estate and income-producing
properties.
Standby
letters of credit are generally unsecured and are 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 loans to customers.
4.
|
Lease
Assets held for Sale
|
The
Company had a lease portfolio totaling $8.7 million and $11.0 million at
December 31, 2007 and December 31, 2006, respectively. The lease portfolio
is
included as a component of total loans. Leases, like other types of loans,
may
become nonperforming at which time they are foreclosed upon and the remaining
lease assets, including equipment and furniture, are transferred to lease assets
held for sale which is included in other assets. Valuation adjustments, if
required, at the time of foreclosure are charged to the allowance for loan
losses. The Company discontinued making new leases during the first quarter
of
2007, and since that time the balances in the lease portfolio have declined.
The
Company previously utilized a third-party broker to aid in the collection and
ultimate disposition of lease assets held for sale. During the third quarter
of
2007, the Company determined that the third-party broker no longer wished to
continue collection and disposition efforts for the Company due to the Company’s
exit strategy from the leasing business. During the fourth quarter of 2007,
the
Company increased its efforts to dispose of existing lease assets held through
foreclosure, while during the same period, additional lease assets were being
foreclosed upon due to general declines in the economy. As a result, the Company
reviewed the collectability of values recorded for lease assets held for sale
during the fourth quarter of 2007 and charged-off $820,000 of the lease assets
held for sale. The expense is recorded as a component of noninterest expense
for
the year ended December 31, 2007.
5.
|
Premises
and Equipment
|
The
components of premises and equipment are as follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
Land
|
|
$
|
968
|
|
$
|
968
|
|
Buildings
and improvements
|
|
|
14,160
|
|
|
13,017
|
|
Furniture
and equipment
|
|
|
8,776
|
|
|
7,399
|
|
|
|
|
23,904
|
|
|
21,384
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(8,330
|
)
|
|
(6,082
|
)
|
Total
premises and equipment
|
|
$
|
15,574
|
|
$
|
15,302
|
|
During
February 2007, the Company purchased Legacy Bank, N.A. in Campbell, California
which included net fixed assets totaling $729,000. Included in this amount
were
buildings and improvements of $631,000, furniture and equipment of $713,000,
and
accumulated depreciation of $615,000. The Company determined that the net
carrying value of Legacy fixed assets reasonably approximated fair value, and
therefore did not make any fair value adjustments pursuant to purchase
accounting guidelines.
During
September 2006, the Company sold its administrative headquarters at 1525 E.
Shaw
Avenue in Fresno, California in preparation for a move to the Company’s new
administrative headquarters located in downtown Fresno during mid-November
2006.
The Company rented the East Shaw premises during the two months for transition
purposes pending its move to the new administrative location. Proceeds from
the
sale totaled $1.5 million for the building and certain furniture and fixtures.
The total carrying value of the building and furniture sold amounted to
$498,000, resulting in a realized gain of $1.0 million during the third quarter
of 2006.
During
November 2006, the Company moved its administrative headquarters to its new
location at 2126 Inyo Street, in downtown Fresno. The location was originally
acquired in June 2003 as a real estate foreclosure (OREO). During 2005, the
Company provided improvements to the building for a tenant that leases a portion
of the building. Then during 2006, the Company completed the improvements to
the
building required to prepare it for occupancy as the Company’s administrative
headquarters. The Company owns the building with a total capitalized cost of
$7.8 million, including building and improvements of $6.0 million, land and
land
improvements of $1.1 million, and furniture and fixtures of $710,000.
Total
depreciation expense on Company premises and equipment totaled $1.6 million,
$1.1 million, and $906,000 for the years ended December 31, 2007, 2006 and
2005,
respectively, and is included in occupancy expense in the accompanying
consolidated statements of income.
6.
|
Investment
in Limited
Partnership
|
The
Bank
owns limited interests in a private limited partnerships that acquire affordable
housing properties in California that generate Low Income Housing Tax Credits
under Section 42 of the Internal Revenue Code of 1986, as amended. The Bank's
limited partnership investment is accounted for under the equity method. The
Bank's noninterest expense associated with the utilization and expiration of
these tax credits for the year ended December 31, 2007, 2006 and 2005 was
$430,000, $440,000, and $458,000, respectively. The limited partnership
investments are expected to generate remaining tax credits of approximately
$3.1
million over the life of the investment. The tax credits expire between 2009
and
2014. Tax credits utilized for income tax purposes for the years ended December
31, 2007, 2006, and 2005 totaled $545,000, $547,000, and $547,000,
respectively.
Deposits
include the following:
|
|
December
31,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
Noninterest-bearing
deposits
|
|
$
|
139,066
|
|
$
|
159,002
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
NOW
and money market accounts
|
|
|
153,717
|
|
|
184,384
|
|
Savings
accounts
|
|
|
40,012
|
|
|
31,933
|
|
Time
deposits:
|
|
|
|
|
|
|
|
Under
$100,000
|
|
|
52,297
|
|
|
42,428
|
|
$100,000
and over
|
|
|
249,525
|
|
|
169,380
|
|
Total
interest-bearing deposits
|
|
|
495,551
|
|
|
428,125
|
|
Total
deposits
|
|
$
|
634,617
|
|
$
|
587,127
|
|
At
December 31, 2007, the scheduled maturities of all certificates of deposit
and
other time deposits are as follows:
(In
thousands)
|
|
|
|
One
year or less
|
|
$
|
282,258
|
|
More
than one year, but less than or equal to two years
|
|
|
16,725
|
|
More
than two years, but less than or equal to three years
|
|
|
1,847
|
|
More
than three years, but less than or equal to four years
|
|
|
300
|
|
More
than four years, but less than or equal to five years
|
|
|
82
|
|
More
than five years
|
|
|
610
|
|
|
|
$
|
301,822
|
|
The
Company may utilize brokered deposits as an additional source of funding. At
December 31, 2007 and 2006, the Company held brokered time deposits totaling
$139.3 million and $67.7 million, with average rates of 4.93% and 5.06%,
respectively. Of this balance at December 31, 2007, $134.0 million is included
in time deposits of $100,000 or more, and the remaining $5.3 million is included
in time deposits of less than $100,000. Included in brokered time deposits
at
December 31, 2007 are balances totaling $40.4 million maturing in three months
or less, $59.9 million maturing in three to six months, $30.5 million maturing
in 6 to twelve months, and $8.5 million maturing in more than one
year.
Deposit
balances representing overdrafts reclassified as loan balances totaled $565,000
and $303,000 as of December 31, 2007 and 2006, respectively.
Deposits
of directors, officers and other related parties to the Bank totaled $5.9
million and $6.2 million at December 31, 2007 and 2006, respectively. The rates
paid on these deposits were those customarily paid to the Bank's customers
in
the normal course of business.
8.
|
Short-term
Borrowings/Other
Borrowings
|
At
December 31, 2007, the Company had collateralized and uncollateralized lines
of
credit with the Federal Reserve Bank of San Francisco and other correspondent
banks aggregating $386.7 million, as well as Federal Home Loan Bank (“FHLB”)
lines of credit totaling $22.0 million. At December 31, 2007, the Company had
total outstanding balances of $32.3 million in borrowings, including $10.4
million in federal funds purchased from correspondent banks at an average rate
of 4.2%, and $21.9 million drawn against its FHLB lines of credit. Of the $21.9
million in FHLB borrowings outstanding at December 31, 2007, $11.9 million
was
in overnight borrowings at an average rate of 3.3%, and the other $10.0 million
consists of a two-year FHLB advance, at a fixed rate of 4.92%, and a maturity
date of March 30, 2009. The weighted average cost of borrowings for the year
ended December 31, 2007 was 5.17%. These lines of credit generally have interest
rates tied to the Federal Funds rate or are indexed to short-term U.S. Treasury
rates or LIBOR. FHLB advances are collateralized by all of the Company’s stock
in the FHLB and certain qualifying mortgage loans. As of December 31, 2007,
$46.5 million in real estate-secured loans were pledged as collateral for FHLB
advances. Additionally, $428.9 million in real estate-secured loans were pledged
at December 31, 2007 as collateral for used and unused borrowing lines with
the
Federal Reserve Bank totaling $321.7 million. All lines of credit are on an
“as
available” basis and can be revoked by the grantor at any time.
The
Company had collateralized and uncollateralized lines of credit with the Federal
Reserve Bank of San Francisco and other correspondent banks aggregating $308.3
million, as well as Federal Home Loan Bank (“FHLB”) lines of credit totaling
$20.8 million at December 31, 2006. At December 31, 2006, the Company had no
advances on its lines of credit.
9.
|
Fair
Value - Adoption of SFAS No.
159
|
Effective
January 1, 2007, the Company elected early adoption of SFAS No.159,
“
The
Fair
Value Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115”.
The
Company also adopted the provisions of SFAS No. 157, “
Fair
Value Measurements”,
effective January 1, 2007, in conjunction with the adoption of SFAS No. 159.
SFAS No. 159 generally permits the measurement of selected eligible financial
instruments at fair value at specified election dates. Upon adoption of SFAS
No.
159, the Company elected the fair value measurement option for all the Company’s
pre-existing junior subordinated debentures with a carrying cost of $15.5
million, prior to the adoption of SFAS No. 159.
The
Company believes its adoption of SFAS No. 159 will have a positive impact on
its
ability to better manage the balance sheet and interest rate risks associated
with this liability while potentially benefiting the net interest margin, net
interest income, net income and earnings per common share in future periods.
Specifically, the Company believes the election of fair value accounting for
the
junior subordinated debentures better reflects the true economic value of the
debt instrument on the balance sheet. The Company’s junior subordinated
debentures were issued in 2001 when the Trust Preferred Securities market was
new and less liquid than today. As a result, subordinated debentures are
available in the market at narrower spreads and lower issuing costs. With a
higher-than-market spread to LIBOR, and remaining capitalized issuance costs
of
more than $400,000 on the balance sheet, the Company’s cost-basis of the
subordinated debentures recorded on the balance sheet does not properly reflect
the true opportunity costs to the Company.
The
initial fair value measurement at adoption resulted in a $1,053,000
cumulative-effect adjustment to the opening balance of retained earnings at
January 1, 2007. The adjustment resulted in an increase of $1,053,000 in the
reported balance of the junior subordinated debentures, an increase in deferred
tax assets of $443,000 and the corresponding reduction in retained earnings
of
$610,000. Under SFAS No. 159, this one-time charge to shareholders’ equity was
not recognized in earnings. In addition to the fair value adjustment of the
junior subordinated debentures recorded effective January 1, 2007, the Company
also removed the remaining $405,000 in unamortized issuance costs of the debt
instrument. The remaining issuance costs were removed in accordance with SFAS
159 effective January 1, 2007, with corresponding charges of $170,000 to
deferred taxes and $235,000 to retained earnings.
As
a
requirement of electing early adoption of SFAS 159, the Company also adopted
SFAS 157, “Fair Value Measurement” effective January 1, 2007. The Company
utilized the guidelines of SFAS No. 157 to perform the fair value analysis
on
the junior subordinated debentures. In its analysis, the Company used a
net-present-value approach based upon observable market rates of interest,
over
a term that considers the most advantageous market for the liability, and the
most reasonable behavior of market participants.
The
following table summarizes the effects of the adoption of SFAS No. 159 at both
adoption date and December 31, 2007 (in 000’s) on the Company’s junior
subordinated debentures. Changes in fair value (FV) for periods subsequent
to
adoption are recorded in current earnings. The pretax change in fair value
for
the year ended December 31, 2007 totaled $2.5 million and is included as a
gain
in other noninterest income.
Balance
of junior subordinated debentures at December 31, 2006
|
|
$
|
15,464
|
|
Adjustments
upon adoption:
|
|
|
|
|
Combine
accrued interest 1/1/07
|
|
|
613
|
|
Total
carrying value 1/1/07
|
|
|
16,077
|
|
FV
adjustment upon adoption of SFAS No. 159
|
|
|
1,053
|
|
Total
FV of junior subordinated debentures at adoption - January 1,
2007
|
|
$
|
17,130
|
|
|
|
|
|
|
Total
FV of junior subordinated debentures at December 31, 2007
|
|
$
|
13,341
|
|
10.
|
Junior
Subordinated Debt/Trust Preferred
Securities
|
At
June
30, 2007, the Company held junior subordinated debentures issued to capital
trusts commonly known as "Trust Preferred securities.” The debt instrument was
issued by the Company’s wholly-owned special purpose trust entity, USB Capital
Trust I on July 25, 2001 in the amount of $15,000,000 with a thirty-year
maturity, interest benchmarked at the 6-month-LIBOR rate (re-priced in January
and July each year) plus 3.75%. The Company had the ability to redeem the
debentures at its option. The prepayment provisions of the instrument allowed
repayment after five years (July 25, 2006) with certain prepayment penalties.
On
July 25, 2007, the Company redeemed the $15.0 million in subordinated debentures
plus accrued interest of $690,000 and a 6.15% prepayment penalty totaling
$922,500. Concurrently, the Trust Preferred securities issued by Capital Trust
I
were redeemed. The prepayment penalty of $922,500 had previously been a
component of the fair value adjustment for the junior subordinated debt at
the
initial adoption of SFAS No. 159, and as a result was recorded through retained
earnings effective January 1, 2007.
During
July 2007, the Company formed USB Capital Trust II, a wholly-owned special
purpose entity, for the purpose of issuing Trust Preferred Securities. Like
USB
Capital Trust I formed in July 2001, USB Capital Trust II is a Variable Interest
Entity (VIE) and will be considered a deconsolidated entity pursuant to FIN
46.
On July 23, 2007 USB Capital Trust II issued $15 million in Trust Preferred
securities. The securities have a thirty-year maturity and bear a floating
rate
of interest (repricing quarterly) of 1.29% over the three-month LIBOR rate
(initial coupon rate of 6.65%). Interest will be paid quarterly. Concurrent
with
the issuance of the Trust Preferred securities, USB Capital Trust II used the
proceeds of the Trust Preferred securities offering to purchase a like amount
of
junior subordinated debentures of the Company. The Company will pay interest
on
the junior subordinated debentures to USB Capital Trust II, which represents
the
sole source of dividend distributions to the holders of the Trust Preferred
securities. The Company may redeem the junior subordinated debentures at anytime
before October 2008 at a redemption price of 103.3, and thereafter each October
as follows: 2008 at 102.64, 2009 at 101.98, 2010 at 101.32, 2011 at 100.66,
and
at par anytime after October 2012.
As
with
the previous junior subordinated securities issued under USB Capital Trust
I,
the
Company
has elected the fair value measurement option for all the Company’s new junior
subordinated debentures issued under USB Capital Trust II. During the year
ended
December 31, 2007, the Company recorded pre-tax gains of $2.5 million pursuant
to SFAS No. 159 as measured under fair value measurement guidelines of SFAS
No.
157. The initial gain of $2.1 million realized on USB Capital Trust II during
the third quarter resulted from an overall deterioration of the credit markets
during the third quarter of 2007 which increased pricing spreads from base
rates
on similar debt instruments. The Company recorded an additional gain on the
junior subordinated debt of $270,000 during the fourth quarter of 2007 bring
the
year-to-date gain on the junior subordinated debt issued by USB Capital Trust
II
to $2.4 million.
The
tax effects of significant items comprising the Company’s net deferred tax
assets (liabilities) are as follows:
|
|
December
31,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
Credit
losses not currently deductible
|
|
$
|
4,646
|
|
$
|
3,688
|
|
State
franchise tax
|
|
|
525
|
|
|
777
|
|
Deferred
compensation
|
|
|
1,249
|
|
|
1,051
|
|
Net
operating losses
|
|
|
1,830
|
|
|
—
|
|
Startup/organizational
costs
|
|
|
113
|
|
|
|
|
Accrued
reserves
|
|
|
133
|
|
|
3
|
|
Amortization
of core deposit intangible
|
|
|
|
|
|
353
|
|
Write-down
on other real estate owned
|
|
|
15
|
|
|
15
|
|
Deferred
gain on sale of other real estate owned
|
|
|
0
|
|
|
89
|
|
Unrealized
gain on interest rate swap
|
|
|
39
|
|
|
136
|
|
Unrealized
loss on AFS securities
|
|
|
44
|
|
|
649
|
|
Unrecognized
costs on post-retirement benefits
|
|
|
57
|
|
|
112
|
|
Amortization
of premium on time deposits
|
|
|
46
|
|
|
70
|
|
Other
|
|
|
38
|
|
|
93
|
|
Total
deferred tax assets
|
|
|
8,735
|
|
|
7,036
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(24
|
)
|
|
(56
|
)
|
FHLB
dividend
|
|
|
(204
|
)
|
|
(50
|
)
|
Loss
on limited partnership investment
|
|
|
(1,590
|
)
|
|
(1,354
|
)
|
Amortization
of core deposit intangible
|
|
|
(1,249
|
)
|
|
|
|
Deferred
gain SFAS No. 159 - fair value option
|
|
|
(998
|
)
|
|
|
|
Prepaid
expenses
|
|
|
(369
|
)
|
|
(269
|
)
|
Total
deferred tax liabilities
|
|
|
(4,434
|
)
|
|
(1,729
|
)
|
Net
deferred tax assets
|
|
$
|
4,301
|
|
$
|
5,307
|
|
The
Company periodically evaluates its deferred tax assets to determine whether
a
valuation allowance is required based upon a determination that some or all
of
the deferred assets may not be ultimately realized. The Company has concluded
that it is more likely than not that the deferred tax assets will be recognized
in the normal course of business, therefore no valuation allowance is considered
necessary at December 31, 2007 and 2006.
Taxes
on income for the years ended December 31, consist of the
following:
(In
thousands)
|
|
|
|
|
|
|
|
2007:
|
|
Federal
|
|
State
|
|
Total
|
|
Current
|
|
$
|
3,640
|
|
$
|
1,507
|
|
$
|
5,147
|
|
Deferred
|
|
|
1,091
|
|
|
323
|
|
|
1,414
|
|
|
|
$
|
4,731
|
|
$
|
1,830
|
|
$
|
6,561
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
6,284
|
|
$
|
2,133
|
|
$
|
8,417
|
|
Deferred
|
|
|
(390
|
)
|
|
8
|
|
|
(382
|
)
|
|
|
$
|
5,894
|
|
$
|
2,141
|
|
$
|
8,035
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
4,686
|
|
$
|
1,618
|
|
$
|
6,304
|
|
Deferred
|
|
|
(86
|
)
|
|
172
|
|
|
86
|
|
|
|
$
|
4,600
|
|
$
|
1,790
|
|
$
|
6,390
|
|
A
reconciliation of the statutory federal income tax rate to the effective income
tax rate is as follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Statutory
federal income tax rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
34.3
|
%
|
State
franchise tax, net of federal income tax benefit
|
|
|
7.0
|
|
|
7.0
|
|
|
7.2
|
|
Tax
exempt interest income
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
(0.6
|
)
|
Low
Income Housing - federal credits
|
|
|
(3.1
|
)
|
|
(2.6
|
)
|
|
(3.1
|
)
|
Other
|
|
|
(1.9
|
)
|
|
(1.4
|
)
|
|
(1.1
|
)
|
|
|
|
36.8
|
%
|
|
37.8
|
%
|
|
36.7
|
%
|
At
December 31, 2007 the Company has remaining federal net operating loss
carry-forwards totaling $4.4 million which expire between 2023 and 2027, and
remaining state net operating loss carry-forwards totaling $4.2 million which
expire between 2014 and 2017.
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (FIN48), on January 1, 2007. FIN 48 clarifies SFAS
No. 109, “
Accounting
for Income Taxes,”
to
indicate a criterion that an individual tax position would have to meet for
some
or all of the income tax benefit to be recognized in a taxable entity’s
financial statements. Under the guidelines of FIN48, an entity should recognize
the financial statement benefit of a tax position if it determines that it
is
more
likely than not
that
the
position will be sustained on examination. The term, “more likely than not”,
means a likelihood of more than 50 percent.” In assessing whether the
more-likely-than-not criterion is met, the entity should assume that the tax
position will be reviewed by the applicable taxing authority and all available
information is known to the taxing authority.
The
Company and a subsidiary file income tax returns in the U.S federal
jurisdiction, and several states within the U.S. There are no filings in foreign
jurisdictions. The Company is not currently aware of any tax jurisdictions
where
the Company or any subsidiary is subject examination by federal, state, or
local
taxing authorities before 2001. The Internal Revenue Service (IRS) has not
examined the Company’s or any subsidiaries federal tax returns since before
2001, and the Company currently is not aware of any examination planned or
contemplated by the IRS. The California Franchise Tax Board (FTB) concluded
an
audit of the Company’s 2004 state tax return during the fourth quarter of 2007,
resulting in a disallowance of approximately $19,000 related to Enterprise
Zone
loan interest deductions taken during 2004. The $19,000 was recorded as a
component of tax expense for the year ended December 31, 2007.
During
the second quarter of 2006, the FTB issued the Company a letter of proposed
adjustments to, and assessments for, (as a result of examination of the tax
years 2001 and 2002) certain tax benefits taken by the REIT during 2002. The
Company continues to review the information available from the FTB and its
financial advisors and believes that the Company's position has merit. The
Company is pursing its tax claims and will defend its use of these entities
and
transactions. The Company will continue to assert its administrative protest
and
appeal rights pending the outcome of litigation by another taxpayer presently
in
process on the REIT issue in the Los Angeles Superior Court (City National
v.
Franchise Tax Board).
The
Company reviewed its REIT tax position as of January 1, 2007 (adoption date)
and
again during subsequent quarter during 2007 in light of the adoption of FIN48.
The Bank, with guidance from advisors believes that the case has merit with
regard to points of law, and that the tax law at the time allowed for the
deduction of the consent dividend. However, the Bank, with the concurrence
of
advisors, cannot conclude that it is “more than likely” (as defined in FIN48)
that the Bank will prevail in its case with the FTB. As a result of the
implementation of FIN48, the Company recognized approximately a $1.3 million
increase in the liability for unrecognized tax benefits (included in other
liabilities), which was accounted for as a reduction to the January 1, 2007
balance of retained earnings. The adjustment provided at adoption included
penalties proposed by the FTB of $181,000 and interest totaling $210,000. During
the year ended December 31, 2007, the Company recorded an additional $87,000
in
interest liability pursuant to the provisions of FIN48. The Company had
approximately $456,000 accrued for the payment of interest and penalties at
December 31, 2007. Subsequent to the initial adoption of FIN48, it is the
Company’s policy to recognize interest expense related to unrecognized tax
benefits, and penalties, as a component tax expense. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows (in
000’s):
Balance
at January 1, 2007
|
|
$
|
1,298
|
|
Additions
for tax provisions of prior years
|
|
|
87
|
|
Balance
at December 31, 2007
|
|
$
|
1,385
|
|
12.
|
Stock
Options and Stock Based
Compensation
|
On
January 1, 2006 the Company adopted the disclosure provisions of Financial
Accounting Standards Board (FASB) Statement No. 123 R, “Accounting for
Share-Based Payments”. SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in
the
financial statements based on the grant-date fair value of the award. The fair
value is amortized over the requisite service period (generally the vesting
period). The Company previously accounted for stock-based awards to employees
under the intrinsic value provisions of APB 25 in which no compensation cost
was
required to be recognized for options granted that had an exercise price equal
to the market value of the underlying common stock on the date of the grant.
The
Company has adopted SFAS No. 123 R using the modified-prospective-transition
method. Under that transition method, compensation cost recognized in the year
ended December 31, 2006 includes: a) compensation cost for all share-based
awards granted prior to, but not yet vested as of January 1, 2006 and b)
compensation cost for all share-based awards granted subsequent to January
1,
2006. Compensation cost was determined using proforma disclosure information
previously calculated under SFAS No. 123. Pursuant to the
modified-prospective-transition method, the results for prior periods have
not
been restated.
As
of
January 1, 2006, options have been granted to officers and key employees at
an
exercise price equal to estimated fair value at the date of grant as determined
by the Board of Directors. All options granted are service awards, and as such
are based solely upon fulfilling a requisite service period (the vesting
period). In May 2005, the Company’s shareholders approved the adoption of the
United Security Bancshares 2005 Stock Option Plan (2005 Plan). At the same
time,
all previous plans, including the 1995 Plan, were terminated. The 2005 Plan
provides for the granting of up to 500,000 shares (adjusted for the 2-for-1
stock split effective May 2006) of authorized and unissued shares of common
stock at option prices per share which must not be less than 100% of the fair
market value per share at the time each option is granted. The 2005 Plan further
provides that the maximum aggregate number of shares that may be issued as
incentive stock options under the 2005 Plan is 500,000 (as adjusted for stock
split).
The
options granted (incentive stock options for employees and non-qualified stock
options for Directors) have an exercise price at the prevailing market price
on
the date of grant under the 1995 or 2005 Stock Option Plans. The options granted
under both the 1995 and 2005 Stock Option Plans are exercisable 20% each year
commencing one year after the date of grant and expire ten years after the
date
of grant. Pursuant to the adoption of the 2005 Stock Option Plan, there are
no
remaining shares reserved under the 1995 Stock Option Plan.
The
number of shares granted remaining under the 1995 Plan was 36,000 shares (24,000
exercisable) as of December 31, 2007. Under the 2005 Plan, 176,500 shares
granted shares remain (168,500 incentive stock options and 8,000 nonqualified
stock options) as of December 31, 2007, of which 46,700 are vested.
Options
outstanding, exercisable, exercised and forfeited are as
follows:
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
2005
|
|
Average
|
|
1995
|
|
Average
|
|
|
|
Plan
|
|
Exercise
Price
|
|
Plan
|
|
Exercise
Price
|
|
Options
outstanding January 1, 2005
|
|
|
—
|
|
|
|
|
|
216,000
|
|
$
|
8.02
|
|
Granted
during the year
|
|
|
70,000
|
|
$
|
14.18
|
|
|
30,000
|
|
|
12.16
|
|
Exercised
during the year
|
|
|
0
|
|
|
|
|
|
(12,000
|
)
|
$
|
9.86
|
|
Canceled
or expired
|
|
|
0
|
|
|
|
|
|
(62,000
|
)
|
$
|
12.20
|
|
Options
outstanding December 31, 2005
|
|
|
0
|
|
|
|
|
|
172,000
|
|
$
|
7.11
|
|
Granted
during the year
|
|
|
103,500
|
|
$
|
18.91
|
|
|
|
|
|
|
|
Exercised
during the year
|
|
|
(2,000
|
)
|
$
|
12.65
|
|
|
(46,000
|
)
|
$
|
6.73
|
|
Options
outstanding December 31, 2006
|
|
|
171,500
|
|
$
|
17.05
|
|
|
126,000
|
|
$
|
7.25
|
|
Granted
during the year
|
|
|
5,000
|
|
$
|
20.24
|
|
|
|
|
|
|
|
Exercised
during the year
|
|
|
|
|
|
|
|
|
(90,000
|
)
|
$
|
5.67
|
|
Options
outstanding December 31, 2007
|
|
|
176,500
|
|
$
|
17.14
|
|
|
36,000
|
|
$
|
11.21
|
|
Included
in total outstanding options at December 31, 2007, are 24,000 exercisable shares
under the 1995 plan, at a weighted average price of $10.74, and 46,700
exercisable shares under the 2005 plan, at a weighted average price of $16.34.
Included in total outstanding options at December 31, 2006, are 108,000
exercisable shares under the 1995 plan, at a weighted average price of $6.43,
and 12,000 exercisable shares under the 2005 plan, at a weighted average price
of $14.44. Included in total outstanding options at December 31, 2005, are
70,000 exercisable shares under the 1995 plan, at a weighted average price
of
$12.31. There were no shares exercisable under the 2005 Plan at December 31,
2005.
Additional
information regarding options as of December 31, 2007 is as
follows:
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of
Exercise
Prices
|
|
Number
Outstanding
|
|
Weighted
Avg
Remaining
Contract
Life (yrs)
|
|
Weighted
Avg
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Avg
Exercise
Price
|
|
$8.75
|
|
|
10,000
|
|
|
3.2
|
|
$
|
8.75
|
|
|
10,000
|
|
$
|
8.75
|
|
$12.08
to $14.44
|
|
|
94,000
|
|
|
7.5
|
|
$
|
13.65
|
|
|
40,000
|
|
$
|
13.55
|
|
$16.88
to $18.10
|
|
|
58,000
|
|
|
8.1
|
|
$
|
17.04
|
|
|
11,600
|
|
$
|
17.04
|
|
$19.38
to $22.54
|
|
|
50,500
|
|
|
8.4
|
|
$
|
21.18
|
|
|
9,100
|
|
$
|
21.28
|
|
Total
|
|
|
212,500
|
|
|
|
|
|
|
|
|
70,700
|
|
|
|
|
Included
in salaries and employee benefits for the years ended December 31, 2007 and
2006
is $187,000 and $248,000 of share-based compensation, respectively. The related
tax benefit on share-based compensation recorded in the provision for income
taxes was not material to either year.
As
of
December 31, 2007 and 2006, there was $223,500 and $388,000, respectively,
of
total unrecognized compensation expense related to nonvested stock options.
This
cost is expected to be recognized over a weighted average period of
approximately 1.0 years and 1.5 years, respectively. The Company received
$510,000 and $335,000 in cash proceeds on options exercised during the year
ended December 31, 2007 and 2006, respectively. No tax benefits were realized
on
stock options exercised during the year ended December 31, 2007, because all
options exercised during the period were incentive stock options. Tax benefits
realized on options exercised during the year ended December 31, 2006 totaled
$218,000.
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
December
31,
2007
|
|
December
31,
2006
|
|
Weighted
average grant-date fair value of stock options granted
|
|
$
|
4.51
|
|
$
|
4.30
|
|
Total
fair value of stock options vested
|
|
$
|
167,028
|
|
$
|
61,030
|
|
Total
intrinsic value of stock options exercised
|
|
$
|
1,517,000
|
|
$
|
661,840
|
|
The
Bank
determines fair value at grant date using the Black-Scholes-Merton pricing
model
that takes into account the stock price at the grant date, the exercise price,
the expected life of the option, the volatility of the underlying stock and
the
expected dividend yield and the risk-free interest rate over the expected life
of the option.
The
weighted average assumptions used in the pricing model are noted in the table
below. The expected term of options granted is derived using the simplified
method, which is based upon the average period between vesting term and
expiration term of the options. The risk free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of the grant. Expected volatility is based on the historical
volatility of the Bank's stock over a period commensurate with the expected
term
of the options. The Company believes that historical volatility is indicative
of
expectations about its future volatility over the expected term of the
options.
For
options granted after January 1, 2006, and valued in accordance with FAS 123R,
the Bank expenses the fair value of the option on a straight-line basis over
the
vesting period for each separately vesting portion of the award. The Bank
estimates forfeitures and only recognizes expense for those shares expected
to
vest. Based upon historical evidence, the Company has determined that because
options are granted to a limited number of key employees rather than a broad
segment of the employee base, expected forfeitures, if any, are not
material.
|
|
Year
Ended
|
|
|
|
December
31,
2007
|
|
December
31,
2006
|
|
Risk
Free Interest Rate
|
|
|
4.53
|
%
|
|
4.60
|
%
|
Expected
Dividend Yield
|
|
|
2.47
|
%
|
|
2.65
|
%
|
Expected
Life in Years
|
|
|
6.50
Years
|
|
|
6.50
Years
|
|
Expected
Price Volatility
|
|
|
20.63
|
%
|
|
18.38
|
%
|
The
Black-Scholes-Merton option valuation model requires the input of highly
subjective assumptions, including the expected life of the stock based award
and
stock price volatility. The assumptions listed above represent management's
best
estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if other assumptions had been
used, the Bank's recorded stock-based compensation expense could have been
materially different from that previously reported in proforma disclosures.
In
addition, the Bank is required to estimate the expected forfeiture rate and
only
recognize expense for those shares expected to vest. If the Bank's actual
forfeiture rate is materially different from the estimate, the share-based
compensation expense could be materially different.
As
stated
previously, the Company has adopted SFAS No. 123 R using the
modified-prospective-transition method, and as such, the results for prior
periods have not been restated. The following table illustrates the effect
on
net income and earnings per share for the year ended December 31, 2005, if
the
Company had applied the fair value recognition provisions of
SFAS
No.
148, “Accounting for Stock-Based Compensation - Transition and Disclosure”, an
amendment of FASB Statement No. 123” (earnings per share information has been
restated to reflect 2-for-1 stock split effective May 1, 2006).
|
|
Year
Ended Dec 31,
|
|
(In
thousands except earnings per share)
|
|
2005
|
|
Net
income, as reported
|
|
$
|
11,008
|
|
Deduct:
Total stock-based employee
|
|
|
|
|
compensation
expense determined under fair
|
|
|
|
|
value
based method for all awards, net of
|
|
|
|
|
related
tax effects
|
|
|
(46
|
)
|
Pro
forma net income
|
|
$
|
10,962
|
|
Earnings
per share:
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.97
|
|
Basic
- pro forma
|
|
$
|
0.96
|
|
Diluted
- as reported
|
|
$
|
0.96
|
|
Diluted
- pro forma
|
|
$
|
0.96
|
|
13.
Employee Benefit Plans
Employee
Stock Ownership Plan
The
Company has an Employee Stock Ownership Plan and Trust, (the “ESOP”), designed
to enable eligible employees to acquire shares of common stock. ESOP eligibility
is based upon length of service requirements. The Bank contributes cash to
the
ESOP in an amount determined at the discretion of the Board of Directors. The
trustee of the ESOP uses such contribution to purchase shares of common stock
currently outstanding, or to repay debt on the leveraged portion of the ESOP,
if
applicable. The shares of stock purchased by the trustee are then allocated
to
the accounts of the employees participating in the ESOP on the basis of total
relative compensation. Employer contributions vest over a period of six years.
During
June of 2000, the Company’s Employee Stock Ownership Plan (“ESOP”) established
an unsecured five-year variable-rate line of credit (“the loan”) in the amount
of $1.0 million for the purpose of purchasing common stock of the Company.
The
loan was with a correspondent
bank
and
was guaranteed by the plan’s sponsor, United Security Bancshares. The loan
matured and final payment was made during the first quarter of 2005. Concurrent
with the loan payoff, the final 3,846 shares remaining unallocated leveraged
ESOP shares, with an average cost of $17.33 per share, were committed to be
released. There are no further commitments on the line of credit.
The
ESOP
used the proceeds of the loan to acquire shares of the Company’s common stock,
which were held in a suspense account by the ESOP. At the end of each year,
shares were released for allocation to the accounts of the individual ESOP
participants in proportion to the principal and interest paid on the loan during
the year. The ESOP loan was recorded as a liability of the Company and the
unreleased shares purchased with the loan were reported as unearned ESOP shares
in shareholders’ equity. Unreleased shares were not recognized as outstanding
for earnings per share and capital computations. Dividends on unallocated ESOP
shares were used to pay debt service on the ESOP loan and, as such, were
recorded as a reduction of debt and accrued interest. Dividends on unallocated
ESOP shares used to pay debt service on the ESOP loan amounted to $3,000 for
the
year ended December 31, 2005.
ESOP
compensation expense totaled $501,000, $409,000, and $467,000 for the years
ended December 31, 2007, 2006, and 2005 respectively. Interest expense incurred
on the ESOP loan totaled $408 for the year ended December 31, 2005.
Allocated,
committed-to-be-released, and unallocated ESOP shares as of December 31, 2007,
2006 and 2005 were as follows (shares adjusted for 2-for-1 stock split of May
2006):
|
|
2007
|
|
2006
|
|
2005
|
|
Allocated
|
|
|
402,988
|
|
|
375,639
|
|
|
349,564
|
|
Committed-to-be-released
|
|
|
0
|
|
|
0
|
|
|
7,692
|
|
Unallocated
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
ESOP shares
|
|
|
402,988
|
|
|
375,639
|
|
|
357,256
|
|
Fair
value of unreleased shares
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
401K
Plan
The
Company has a Cash or Deferred 401(k) Stock Ownership Plan (the “401(k) Plan”)
organized under Section 401(k) of the Code. All employees of the Company are
initially eligible to participate in the 401(k) Plan upon the first day of
the
month after date of hire. Under the terms of the plan, the participants may
elect to make contributions to the 401(k) Plan as determined by the Board of
Directors. Participants are automatically vested 100% in all employee
contributions. Participants may direct the investment of their contributions
to
the 401(k) Plan in any of several authorized investment vehicles. The Company
contributes funds to the Plan up to 5% of the employees’ eligible annual
compensation. Company contributions are subject to certain vesting requirements
over a period of six years. Contributions made by the Company are invested
in
Company stock. During 2007, 2006 and 2005, the Company contributed a total
of
$286,000, $242,000, and $214,000, respectively, to the Deferral Plan.
Salary
Continuation Plan
The
Company has an unfunded, non-qualified Salary Continuation Plan for senior
executive officers and certain other key officers of the Company, which provides
additional compensation benefits upon retirement for a period of 15 years.
Future compensation under the Plan is earned by the employees for services
rendered through retirement and vests over a period of 12 to 15 years. The
Company accrues for the salary continuation liability based on anticipated
years
of service and vesting schedules provided under the Plan. The Company’s current
benefit liability is determined based upon vesting and the present value of
the
benefits at a corresponding discount rate. The discount rate used is an
equivalent rate for high-quality investment-grade bonds with lives matching
those of the service periods remaining for the salary continuation contracts,
which averages approximately 20 years. At December 31, 2007 and 2006, $3.0
million and $2.7 million, respectively, had been accrued to date, based on
a
discounted cash flow using a discount rate of 6.40% and 6.42%, respectively,
and
is included in other liabilities. In connection with the implementation of
the
Salary Continuation Plans, the Company purchased single premium universal life
insurance policies on the life of each of the key employees covered under the
Plan. The Company is the owner and beneficiary of these insurance policies.
The
cash surrender value of the policies was $3.7 million and $3.6 million December
31, 2007 and 2006, respectively. Although the Plan is unfunded, the Company
intends to utilize the proceeds of such policies to settle the Plan obligations.
Under Internal Revenue Service regulations, the life insurance policies are
the
property of the Company and are available to satisfy the Company's general
creditors
.
Effective
December 31, 2006, the Company adopted Statement of Financial Accounting
Standards No. 158,
Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans
(“SFAS
No. 158”). SFAS No. 158 amends SFAS No. 87 and SFAS No. 106, which the Bank
previously has followed for accounting for its salary continuation plan.
SFAS
No.
158 amends previous applicable accounting statements and requires companies
to
better disclose, among other things, the funded status of benefit plans, and
to
recognize as a component of other comprehensive income, net of tax, the gains
or
losses and prior service costs or credits that arise during the period but
are
not recognized as components of net periodic benefit cost pursuant to FASB
Statement No. 87,
Employers’
Accounting for Pensions
,
or No.
106,
Employers’
Accounting for Postretirement Benefits Other Than Pensions
.
Amounts
recognized in accumulated other comprehensive income, including the gains or
losses, prior service costs or credits, and the transition asset or obligation
remaining from the initial application of Statements 87 and 106, are adjusted
as
they are subsequently recognized as components of net periodic benefit cost
pursuant to the recognition and amortization provisions of those
Statements.
In
addition to expanded disclosure requirements under the Statement, the Company
is
required to recognize in accumulated other comprehensive income, the amounts
that have not yet been recognized as components of net periodic benefit costs.
These unrecognized costs arise from of changes in estimated interest rates
used
in the calculation of net liabilities under the plan. Under SFAS No. 87 and
SFAS
No. 106, these differences were previously recognized over the remaining
required service period of the salary continuation contracts. SFAS No. 158
requires the Company to record those unrecognized periodic benefit costs from
previous period as a component of accumulated other comprehensive
income.
As
of
December 31, 2007 and 2006, the Company had approximately $142,000 and $281,000,
respectively, in unrecognized net periodic benefit costs arising from changes
in
interest rates used in calculating the current post-retirement liability
required under the plan. This amount represents the difference between the
plan
liabilities calculated under net present value calculations, and the net plan
liabilities actually recorded on the Company’s books at December 31, 2007 and
2006. Pursuant to the adoption of SFAS No. 158, the Company recorded $169,000
(net of tax of $112,000), as a component of other comprehensive income at
December 31, 2006. The average remaining life of the service terms of the Salary
Continuation contracts to which the unrecognized service costs related at the
time of adoption, was approximately two years. During the year ended December
31, 2007, approximately $140,000 of the unrecognized prior service cost was
recognized in earnings as additional salary expense, reflected as an adjustment
to accumulated other comprehensive income.
For
the
for the year ended December 31, 2006, a transition adjustment in the amount
of
$169,000 net of tax benefit of $112,000, was recognized as a component of the
ending balance of Accumulated Other Comprehensive Income/(Loss) on the Company’s
balance sheet as the result of the adoption of SFAS No. 158, “Employer’s
Accounting for Defined Benefit Pension and Other Postretirement Plans”. This
adjustment was misapplied as a component of Comprehensive Income on the
Company’s consolidated statement of income and comprehensive income for the year
ended December 31, 2006. The table below reflects the effects of the
misapplication of this adjustment at December 31, 2006.
(in
000’s)
|
|
As
Reported
|
|
Adjustment
|
|
As
Adjusted
|
|
Other
comprehensive income (loss), net of tax
|
|
$
|
462
|
|
$
|
(169
|
)
|
$
|
631
|
|
Comprehensive
income
|
|
$
|
13,822
|
|
$
|
(169
|
)
|
$
|
13,991
|
|
The
Company has corrected the other comprehensive income presentations in the
financial statements for the fiscal years ended December 31, 2007 and 2006
to
reflect the adjusted amounts shown above.
Salary
continuation expense is included in salaries and benefits expense, and totaled
$504,000, $448,000, and $331,000 for the years ended December 31, 2007, 2006,
and 2005, respectively.
Officer
Supplemental Life Insurance Plan
During
2004, the Company purchased single premium Bank-owned life insurance policies
(BOLI) on certain officers with a portion of the death benefits available to
the
officers’ beneficiaries. The single premium paid at policy commencement of
the BOLI in 2004 totaled $9.0 million. Additional BOLI policies totaling
$227,000 and $579,000 were purchased during 2006 and 2005, respectively. The
BOLI’s initial net cash surrender value is equivalent to the premium paid, and
it adds income through non-taxable increases in its cash surrender value, net
of
the cost of insurance, plus any death benefits ultimately received by the
Company. The cash surrender value of these insurance policies totaled $10.2
million and $10.1 million at December 31, 2007 and December 31, 2006, and
is included on the consolidated balance sheet in cash surrender value of life
insurance. Income on these policies, net of expense, totaled approximately
$408,000, $400,000, and $353,000 for the years ended December 31, 2007,
2006 and 2005, respectively.
14.
Commitments and Contingent Liabilities
Lease
Commitments
:
The
Company leases land and premises for its branch banking offices and
administration facilities. The initial terms of these leases expire at various
dates through 2019. Under the provisions of most of these leases, the Company
has the option to extend the leases beyond their original terms at rental rates
adjusted for changes reported in certain economic indices or as reflected by
market conditions. The total expense on land and premises leased under operating
leases was $877,000, $407,000, and $455,000 during 2007, 2006, and 2005,
respectively. Total rent expense of $877,000 for the year ended December 31,
2007 included approximately $165,000 related to adjustments made under SFAS
No.
13, “Accounting for Leases”.
During
the fourth quarter of 2007 the Company reviewed accounting methods for recording
rent expense under operating leases pursuant to SFAS No. 13 “Accounting for
Leases”. The Company had previously recognized periodic rent expense as those
contractual rent payments became payable to the lessor, rather than on a
straight-line basis throughout the life of the lease. The difference in
methodology was not previously considered material, but as the Company has
grown, it was determined that adjustments should be made to properly comply
with
SFAS No. 13. The expense adjustment to record the difference between the
contractual rental payment amounts and straight-line expense over the lease
terms as applicable under SFAS No. 13 totaled $165,000 ($95,000 net of tax,
and
less than $0.01 per share) and was recorded as a liability as of December 31,
2007. This timing difference will result in an increase of approximately $19,000
in the liability for rental obligations between December 31, 2007 and December
31, 2009, then should reverse and decline over the remaining term of the
Company’s leases through 2019.
Future
minimum rental commitments under existing non-cancelable leases as of December
31, 2007 are as follows:
(In
thousands):
|
|
|
|
2007
|
|
$
|
637
|
|
2008
|
|
|
671
|
|
2009
|
|
|
692
|
|
2010
|
|
|
389
|
|
2011
|
|
|
392
|
|
Thereafter
|
|
|
1,403
|
|
|
|
$
|
4,184
|
|
Financial
Instruments with Off-Balance Sheet Risk:
The
Company is party to financial instruments with off-balance sheet risk which
arise in the normal course of business. These instruments may contain elements
of credit risk, interest rate risk and liquidity risk, and include commitments
to extend credit and standby letters of credit. The credit risk associated
with
these instruments is essentially the same as that involved in extending credit
to customers and is represented by the contractual amount indicated in the
table
below:
|
|
Contractual
amount -
December
31,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
Commitments
to extend credit
|
|
$
|
196,258
|
|
$
|
188,166
|
|
Standby
letters of credit
|
|
|
6,726
|
|
|
4,936
|
|
Commitments
to extend credit are agreements to lend to a customer, as long as there is
no
violation of any condition established in the contract. Substantially all of
these commitments are at floating interest rates based on the Prime rate, and
most have fixed expiration dates. The Company evaluates each customer's
creditworthiness on a case-by-case basis, and the amount of collateral obtained,
if deemed necessary, is based on management's credit evaluation. Collateral
held
varies but includes accounts receivable, inventory, leases, property, plant
and
equipment, residential real estate and income-producing properties. Many of
the
commitments are expected to expire without being drawn upon and, as a result,
the total commitment amounts do not necessarily represent future cash
requirements of the Company.
Standby
letters of credit are generally unsecured and are 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 loans to customers. The Company’s letters of credit are short-term
guarantees and have terms from less than one month to approximately 2.5 years.
At December 31, 2007, the maximum potential amount of future undiscounted
payments the Company could be required to make under outstanding standby letters
of credit totaled $6.7 million.
15.
Fair Value Measurements and Disclosure
The
following summary disclosures are made in accordance with the provisions of
Statement of Financial Accounting Standards No. 107, “Disclosures About Fair
Value of Financial Instruments,” which requires the disclosure of fair value
information about both on- and off- balance sheet financial instruments where
it
is practicable to estimate that value.
|
|
December
31, 2007
|
|
December
31, 2006
|
|
|
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
(In
thousands)
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
25,300
|
|
$
|
25,300
|
|
$
|
43,068
|
|
$
|
43,068
|
|
Interest-bearing
deposits
|
|
|
2,909
|
|
|
2,918
|
|
|
7,893
|
|
|
7,779
|
|
Investment
securities
|
|
|
89,415
|
|
|
89,415
|
|
|
83,366
|
|
|
83,366
|
|
Loans,
net
|
|
|
596,481
|
|
|
594,054
|
|
|
499,569
|
|
|
494,695
|
|
Bank-owned
life insurance
|
|
|
13,852
|
|
|
13,852
|
|
|
13,668
|
|
|
13,668
|
|
Investment
in limited partnerships
|
|
|
3,134
|
|
|
3,134
|
|
|
3,564
|
|
|
3,564
|
|
Investment
in bank stock
|
|
|
372
|
|
|
372
|
|
|
0
|
|
|
0
|
|
Interest
rate swap contracts
|
|
|
(12
|
)
|
|
(12
|
)
|
|
(320
|
)
|
|
(320
|
)
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
634,617
|
|
|
633,408
|
|
|
587,127
|
|
|
587,438
|
|
Borrowings
|
|
|
32,280
|
|
|
32,162
|
|
|
0
|
|
|
0
|
|
Junior
Subordinated Debt
|
|
|
13,341
|
|
|
13,341
|
|
|
15,464
|
|
|
15,464
|
|
Commitments
to extend credit
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Standby
letters of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
January 1, 2007, the Company adopted SFAS 157, “
Fair
Value Measurements”, concurrent with its early adoption of SFAS No. 159.
SFAS
No.
157 clarifies the definition of fair value, describes methods generally used
to
appropriately measure fair value in accordance with generally accepted
accounting principles and expands fair value disclosure requirements. Fair
value
is defined in SFAS No. 157 as 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. The statement applies whenever other
accounting pronouncements require or permit fair value
measurements.
The
fair
value hierarchy under SFAS No. 157 prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels (Level 1, Level
2,
and Level 3). Level 1 inputs are unadjusted quoted prices in active markets
(as
defined) for identical assets or liabilities that the Company has the ability
to
access at the measurement date. Level 2 inputs are inputs other than quoted
prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly. Level 3 inputs are unobservable inputs for the
asset or liability, and reflect the Company’s own assumptions about the
assumptions that market participants would use in pricing the asset or liability
(including assumptions about risk) in a principal market.
The
Company performs fair value measurements on certain assets and liabilities
as
the result of the application of accounting guidelines and pronouncements that
were relevant prior to the adoption of SFAS No. 157. Some fair value
measurements, such as for available-for-sale securities, junior subordinated
debt, impaired loans that are collateral dependent, and interest rate swaps,
are
performed on a recurring basis, while others, such as impairment of goodwill
and
other intangibles, are performed on a nonrecurring basis.
The
following tables summarize the Company’s assets and liabilities that were
measured at fair value on a recurring basis during the year ended December
31,
2007 (in 000’s):
|
|
December
31,
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
Significant
Other Observable Inputs
|
|
Significant
Unobservable Inputs
|
|
Description
of Assets
|
|
2007
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
AFS
Securities
|
|
$
|
89,415
|
|
$
|
89,415
|
|
|
|
|
|
|
|
Interest
Rate Swap
|
|
|
(12
|
)
|
|
|
|
|
($12
|
)
|
|
|
|
Impaired
Loans
|
|
|
16,175
|
|
|
|
|
|
13,964
|
|
$
|
2,211
|
|
Total
|
|
$
|
105,578
|
|
$
|
89,415
|
|
$
|
13,952
|
|
$
|
2,211
|
|
|
|
December
31,
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
Significant
Other Observable Inputs
|
|
Significant
Unobservable Inputs
|
|
Description
of Liabilities
|
|
2007
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
Junior
subordinated debt
|
|
$
|
13,341
|
|
|
|
|
$
|
13,341
|
|
|
|
|
Total
|
|
$
|
13,341
|
|
$
|
0
|
|
$
|
13,341
|
|
$
|
0
|
|
Upon
adoption of SFAS No. 159 on January 1, 2007, the Company elected the fair value
measurement option for all the Company’s pre-existing junior subordinated
debentures, and subsequently for new junior subordinated debentures issued
during July 2007 under USB Capital Trust II. The fair value of the debentures
was determined based upon discounted cash flows utilizing observable market
rates and credit characteristics for similar instruments. In its analysis,
the
Company used characteristics that distinguish market participants generally
use,
and considered factors specific to (a) the liability, (b) the principal (or
most
advantageous) market for the liability, and (c) market participants with whom
the reporting entity would transact in that market. The adjustment for fair
value at adoption was recorded as a cumulative-effect adjustment to the opening
balance of retained earnings at January 1, 2007. Fair value adjustments
subsequent to adoption were recorded in current earnings.
The
following tables summarize the Company’s assets and liabilities that were
measured at fair value on a nonrecurring basis during the year ended December
31, 2007 (in 000’s):
|
|
(in
000’s)
Dec
31
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
Significant
Other Observable Inputs
|
|
Significant
Unobservable Inputs
|
|
Description
of Assets
|
|
2007
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
Business
combination:
|
|
|
|
|
|
|
|
|
|
Securities
- AFS
|
|
$
|
7,414
|
|
$
|
7,414
|
|
|
|
|
|
|
|
Loans,
net allowance for losses
|
|
|
62,426
|
|
|
|
|
|
|
|
$
|
62,426
|
|
Premises
and Equipment
|
|
|
729
|
|
|
|
|
|
|
|
|
729
|
|
Goodwill
|
|
|
8,790
|
|
|
|
|
|
|
|
|
8,790
|
|
Other
assets
|
|
|
6,928
|
|
|
|
|
|
|
|
|
6,928
|
|
Total
assets
|
|
$
|
86,287
|
|
$
|
7,414
|
|
$
|
0
|
|
$
|
78,873
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets
|
|
Significant
Other Observable Inputs
|
|
Significant
Unobservable Inputs
|
|
Description
of Liabilities
|
|
2007
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
Business
combination
:
|
|
|
|
|
|
|
|
|
|
Deposits
(net CDI)
|
|
$
|
66,600
|
|
|
|
|
|
|
|
$
|
66,600
|
|
Other
liabilities
|
|
|
286
|
|
|
|
|
|
|
|
|
286
|
|
Total
liabilities
|
|
$
|
66,886
|
|
$
|
0
|
|
$
|
0
|
|
$
|
66,886
|
|
The
Company completed its merger with Legacy Bank in February 2007. The merger
transaction was accounted for using the purchase accounting method, and resulted
in the purchase price being allocated to the assets acquired and liabilities
assumed from Legacy Bank based on the fair value of those assets and
liabilities. The allocations of purchase price based upon the fair value of
assets acquired and liabilities assumed were finalized during the fourth quarter
of 2007. The fair value measurements for Legacy’s loan portfolio included
certain market rate assumptions on segmented portions of the loan portfolio
with
similar credit characteristics, and credit risk assumptions specific to the
individual loans within that portfolio. Available-for sale securities were
valued based upon open-market quotes obtained from third-party sources. Legacy’s
deposits were valued based upon anticipated net present cash flows related
to
Legacy’s deposit base, and resulted in a core deposit intangible (CDI)
adjustment of $3.0 million that is carried as an asset on the Company’s balance
sheet. Assumptions used to determine the CDI included anticipated costs of,
and
revenues generated by, those deposits, as well as the estimated life of the
deposit base. Other assets and liabilities generally consist of short-term
items
including cash, overnight investments, and accrued interest receivable or
payable, and as such, it was determined that carrying value approximated fair
value.
The
following tables provide a reconciliation of assets and liabilities at fair
value using significant unobservable inputs (Level 3) on both a recurring
(impaired loans) and nonrecurring (business combination) basis during the period
(in 000’s):
Reconciliation
of Assets:
|
|
Impaired
Loans
|
|
Beginning
balance
|
|
$
|
1,521
|
|
Total
gains or (losses) included in earnings (or changes in net
assets)
|
|
|
(203
|
)
|
Transfers
in and/or out of Level 3
|
|
|
893
|
|
Ending
balance
|
|
$
|
2,211
|
|
|
|
|
|
|
The
amount of total gains or (losses) for the period included in earnings
(or
changes in net assets) attributable to the change in unrealized gains
or
losses relating to assets still held at the reporting date
|
|
|
($203
|
)
|
The
following methods and assumptions were used in estimating the fair values of
financial instruments:
Cash
and Cash Equivalents
- The
carrying amounts reported in the balance sheets for cash and cash equivalents
approximate their estimated fair values.
Interest-bearing
Deposits -
Interest
bearing deposits in other banks consist of fixed-rate certificates of deposits.
Accordingly, fair value has been estimated based upon interest rates currently
being offered on deposits with similar characteristics and
maturities.
Investments
-
Available-for-sale securities are valued based upon open-market quotes obtained
from reputable third-party brokers. Market pricing is based upon specific CUSIP
identification for each individual security.
Loans
- Fair
values of variable rate loans, which reprice frequently and with no significant
change in credit risk, are based on carrying values. Fair values for all other
loans, except impaired loans, are estimated using discounted cash flows over
their remaining maturities, using interest rates at which similar loans would
currently be offered to borrowers with similar credit ratings and for the same
remaining maturities.
Impaired
Loans -
Fair
value measurements for impaired loans are performed pursuant to SFAS No. 114,
and are based upon either collateral values supported by appraisals, or observed
market prices. The change in fair value of impaired assets that were valued
based upon level three inputs was approximately $690,000 for the year ended
December 31, 2007. This loss is not recorded directly as an adjustment to
current earnings or comprehensive income, but rather as an adjustment component
in determining the overall adequacy of the loan loss reserve. Such adjustments
to the estimated fair value of impaired loans may result in increases or
decreases to the provision for credit losses recorded in current
earnings.
Bank-owned
Life Insurance
-
Fair
values of life insurance policies owned by the Company are based upon the
insurance contract’s cash surrender value.
Investment
in limited partnerships
-
Investment in limited partnerships which invest in qualified low-income housing
projects generate tax credits to the Company. The investment is amortized using
the effective yield method based upon the estimated remaining utilization of
low-income housing tax credits. The Company’s carrying value approximates fair
value.
Investments
in Bank Stock
-
Equity
investments in bank stock are carried at fair value. Fair values are based
upon
quoted market prices.
Interest
Rate Swaps
- The
Company records interest rate swap contracts at fair value on the balance sheet.
The fair value of interest rate swap contracts is based on the discounted net
present value of the swap using third party dealer quotes.
Deposits
- In
accordance with SFAS No. 107, fair values for transaction and savings accounts
are equal to the respective amounts payable on demand at December 31, 2007
and
2006 (i.e., carrying amounts). The Company believes that the fair value of
these
deposits is clearly greater than that prescribed by SFAS No. 107. Fair values
of
fixed-maturity certificates of deposit were estimated using the rates currently
offered for deposits with similar remaining maturities.
Borrowings
-
Borrowings consist of federal funds sold, securities sold under agreements
to
repurchase, and other short-term borrowings. Fair values of borrowings were
estimated using the rates currently offered for borrowings with similar
remaining maturities.
Junior
Subordinated Debt
- The
fair value of junior subordinated debt is estimated using discounted cash flows
based upon rates currently offered for junior subordinated debt with similar
remaining repricing characteristics.
Off-balance
sheet Instruments
-
Off-balance sheet instruments consist of commitments to extend credit, standby
letters of credit and derivative contracts. The contract amounts of commitments
to extend credit and standby letters of credit are disclosed in Note 14. Fair
values of commitments to extend credit are estimated using the interest rate
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present counterparties’ credit
standing. There was no material difference between the contractual amount and
the estimated value of commitments to extend credit at December 31, 2007 and
2006.
Fair
values of standby letters of credit are based on fees currently charged for
similar agreements. The fair value of commitments generally approximates the
fees received from the customer for issuing such commitments. These fees are
deferred and recognized over the term of the commitment, and are not material
to
the Company’s consolidated balance sheet and results of operations.
16.
Regulatory Matters
Capital
Guidelines
-
The
Company (on a consolidated basis) and the Bank are subject to various regulatory
capital requirements adopted by the Board of Governors of the Federal Reserve
System (“Board of Governors”). Failure to meet minimum capital requirements can
initiate certain mandates and possible additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company’s consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the consolidated
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding companies.
Quantitative
measures established by regulation to ensure capital adequacy require insured
institutions to maintain a minimum leverage ratio of Tier 1 capital (the sum
of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, minus intangible assets,
identified losses and investments in certain subsidiaries, plus unrealized
losses or minus unrealized gains on available for sale securities) to total
assets. Institutions which have received the highest composite regulatory rating
and which are not experiencing or anticipating significant growth are required
to maintain a minimum leverage capital ratio of 3% of Tier 1 capital to total
assets. All other institutions are required to maintain a minimum leverage
capital ratio of at least 100 to 200 basis points above the 3% minimum
requirement.
|
|
|
|
|
|
|
|
|
|
To
Be Well Capitalized Under
|
|
|
|
|
|
For
Capital
|
|
Prompt
Corrective
|
|
|
|
Actual
|
|
Adequacy
Purposes
|
|
Action
Provisions
|
|
(In
thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
As
of December 31, 2007 (Company):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets)
|
|
$
|
89,136
|
|
|
12.18
|
%
|
$
|
58,531
|
|
|
8.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Tier
1 Capital (to Risk Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets)
|
|
|
79,986
|
|
|
10.93
|
%
|
|
29,265
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Tier
1 Capital ( to Average Assets)
|
|
|
79,986
|
|
|
10.30
|
%
|
|
23,299
|
|
|
3.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007 (Bank):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets)
|
|
$
|
86,294
|
|
|
11.79
|
%
|
$
|
58,531
|
|
|
8.00
|
%
|
$
|
73,164
|
|
|
10.00
|
%
|
Tier
1 Capital (to Risk Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets)
|
|
|
77,144
|
|
|
10.54
|
%
|
|
29,265
|
|
|
4.00
|
%
|
|
43,898
|
|
|
6.00
|
%
|
Tier
1 Capital ( to Average Assets)
|
|
|
77,144
|
|
|
9.93
|
%
|
|
23,299
|
|
|
3.00
|
%
|
|
38,832
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2006 - (Company):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets)
|
|
$
|
84,826
|
|
|
13.85
|
%
|
$
|
48,989
|
|
|
8.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Tier
1 Capital (to Risk Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets)
|
|
|
77,891
|
|
|
12.72
|
%
|
|
24,494
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Tier
1 Capital ( to Average Assets)
|
|
|
77,891
|
|
|
11.55
|
%
|
|
20,228
|
|
|
3.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2006 - (Bank):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets)
|
|
$
|
82,644
|
|
|
13.52
|
%
|
$
|
48,884
|
|
|
8.00
|
%
|
$
|
61,105
|
|
|
10.00
|
%
|
Tier
1 Capital (to Risk Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets)
|
|
|
75,709
|
|
|
12.39
|
%
|
|
24,442
|
|
|
4.00
|
%
|
|
36,663
|
|
|
6.00
|
%
|
Tier
1 Capital ( to Average Assets)
|
|
|
75,709
|
|
|
11.23
|
%
|
|
20,228
|
|
|
3.00
|
%
|
|
33,714
|
|
|
5.00
|
%
|
The
Board
of Governors has also adopted a statement of policy, supplementing its leverage
capital ratio requirements, which provides definitions of qualifying total
capital (consisting of Tier 1 capital and supplementary capital, including
the
allowance for loan losses up to a maximum of 1.25% of risk-weighted assets)
and
sets forth minimum risk-based capital ratios of capital to risk-weighted assets.
Insured institutions are required to maintain a ratio of qualifying total
capital to risk weighted assets of 8%, at least one-half of which must be in
the
form of Tier 1 capital. Management believes, as of December 31, 2007, that
the
Company and the Bank meet all capital adequacy requirements to which they are
subject.
As
of
December 31, 2007 and 2006, the most recent notifications from the Bank’s
regulators 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 capital and Tier 1 capital (as defined)
to
risk-based assets (as defined), and a minimum leverage ratio of Tier 1 capital
to average assets (as defined) as set forth in the proceeding discussion. There
are no conditions or events since the notification that management believes
have
changed the institution’s category.
Under
regulatory guidelines, the $15 million in Trust Preferred Securities issued
by
USB Capital Trust II in July of 2007 qualifies as Tier 1 capital up to 25%
of
Tier 1 capital. Any additional portion of Trust Preferred Securities qualifies
as Tier 2 capital.
Dividends
-
Dividends paid to shareholders are paid by the bank holding company, subject
to
restrictions set forth in the California General Corporation Law. The primary
source of funds with which dividends will be paid to shareholders will come
from
cash dividends received by the Company from the Bank. Year-to-date as of
December 31, 2007, the Company received $17.6 million in cash dividends from
the
Bank, from which the Company has declared $6.0 million in dividends to
shareholders.
Under
California state banking law, the Bank may not pay cash dividends in an amount
which exceeds the lesser of the retained earnings of the Bank or the Bank’s net
income for the last three fiscal years (less the amount of distributions to
shareholders during that period of time). If the above test is not met, cash
dividends may only be paid with the prior approval of the California State
Department of Financial Institutions, in an amount not exceeding the greater
of:
(i) the Bank’s retained earnings; (ii) its net income for the last fiscal year;
or (iii) its net income for the current fiscal year. As of December 31, 2007,
approximately $7.5 million was available to the Bank for cash dividend
distributions without prior approval. Year-to-date, the Bank has paid dividends
of $17.6 million to the Company.
Cash
Restrictions
- The
Bank is required to maintain average reserve balances with the Federal Reserve
Bank. During 2005, the Company implemented a deposit reclassification program,
which allows the Company to reclassify a portion of transaction accounts to
non-transaction accounts for reserve purposes. The deposit reclassification
program was provided by a third-party vendor, and has been approved by the
Federal Reserve Bank. At both December 31, 2007 and 2006, the Bank’s qualifying
balance with the Federal Reserve Bank was $25,000 consisting of vault cash
and
balances.
17.
Supplemental Cash Flow Disclosures
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
21,147
|
|
$
|
13,574
|
|
$
|
8,949
|
|
Income
Taxes
|
|
|
6,411
|
|
|
8,287
|
|
|
5,689
|
|
Noncash
investing activities:
|
|
|
|
|
|
|
|
|
|
|
Loans
transferred to foreclosed property
|
|
|
7,837
|
|
|
0
|
|
|
4,311
|
|
Dividends
declared not paid
|
|
|
1,483
|
|
|
1,413
|
|
|
1,135
|
|
Supplemental
disclosures related to acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
69,600
|
|
|
—
|
|
|
|
|
Other
liabilities
|
|
|
286
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
|
(7,414
|
)
|
|
|
|
|
|
|
Loans,
net of allowance for loan loss
|
|
|
(62,426
|
)
|
|
|
|
|
|
|
Premises
and equipment
|
|
|
(728
|
)
|
|
|
|
|
|
|
Intangibles
|
|
|
(11,085
|
)
|
|
|
|
|
|
|
Accrued
interest and other assets
|
|
|
(3,396
|
)
|
|
|
|
|
|
|
Stock
issued
|
|
|
21,536
|
|
|
|
|
|
|
|
Net
cash and equivalents acquired
|
|
|
6,373
|
|
|
|
|
|
|
|
18.
Net Income Per Share
The
following table provides a reconciliation of the numerator and the denominator
of the basic EPS computation with the numerator and the denominator of the
diluted EPS computation. (Weighted average shares have been adjusted to give
retroactive recognition for 2-for-1 stock split during May
2006):
|
|
Years
Ended December 31,
|
|
(In
thousands, except earnings per share data)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$
|
11,257
|
|
$
|
13,360
|
|
$
|
11,008
|
|
Weighted
average shares outstanding
|
|
|
11,926
|
|
|
11,344
|
|
|
11,370
|
|
Add:
dilutive effect of stock options
|
|
|
35
|
|
|
118
|
|
|
84
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
adjusted
for potential dilution
|
|
|
11,961
|
|
|
11,462
|
|
|
11,454
|
|
Basic
earnings per share
|
|
$
|
0.94
|
|
$
|
1.18
|
|
$
|
0.97
|
|
Diluted
earnings per share
|
|
$
|
0.94
|
|
$
|
1.17
|
|
$
|
0.96
|
|
Anti-dilutive
shares excluded from
earnings
per share calculation
|
|
|
57
|
|
|
33
|
|
|
30
|
|
19.
Other Comprehensive Income
The
following table provides
a
reconciliation of the amounts included in comprehensive
income:
|
|
Years
Ended December 31
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Unrealized
(loss) gain on available-for-sale securities:
|
|
|
|
|
|
|
|
Unrealized
(loss) gain on sale securities - net of income
|
|
|
|
|
|
|
|
|
|
|
tax
(benefit) of $605, $253, and $(644)
|
|
$
|
909
|
|
$
|
379
|
|
$
|
(966
|
)
|
Less:
Reclassification adjustment for loss (gain) on sale of
|
|
|
|
|
|
|
|
|
|
|
available-for-sale
securities included in net income -
|
|
|
|
|
|
|
|
|
|
|
net
of income tax (benefit) of $0, $11, and $65
|
|
|
0
|
|
|
(16
|
)
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized (loss) gain on available-for-sale securities -
|
|
|
|
|
|
|
|
|
|
|
net
income tax (benefit) of $605, $242, and $(709)
|
|
$
|
909
|
|
$
|
363
|
|
$
|
(1,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses arising during period - net of income tax
|
|
|
|
|
|
|
|
|
|
|
benefit
of $110, $150 and $24
|
|
$
|
(165
|
)
|
$
|
(225
|
)
|
$
|
(36
|
)
|
Less:
reclassification adjustments to interest income
|
|
|
310
|
|
|
493
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized loss on interest rate swaps -
|
|
|
|
|
|
|
|
|
|
|
net
of income tax $97, $140 and $24
|
|
$
|
145
|
|
$
|
268
|
|
$
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously
unrecognized past service costs of
employee
benefit plans (net tax of $55)
|
|
$
|
85
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss)
|
|
$
|
1,137
|
|
$
|
631
|
|
$
|
(854
|
)
|
20.
Derivative Financial Instruments and Hedging
Activities
As
part
of its overall risk management, the Company pursues various asset and liability
management strategies, which may include obtaining derivative financial
instruments to mitigate the impact of interest fluctuations on the Company’s net
interest margin. During the second quarter of 2003, the Company entered into
an
interest rate swap agreement with the purpose of minimizing interest rate
fluctuations on its interest rate margin and equity.
Under
the
interest rate swap agreement, the Company receives a fixed rate and pays a
variable rate based on the Prime Rate (“Prime”). The swap qualifies as a cash
flow hedge under SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities”, as amended, and is designated as a hedge of the variability
of cash flows the Company receives from certain variable-rate loans indexed
to
Prime. In accordance with SFAS No. 133, the swap agreement is measured at fair
value and reported as an asset or liability on the consolidated balance sheet.
The portion of the change in the fair value of the swap that is deemed effective
in hedging the cash flows of the designated assets are recorded in accumulated
other comprehensive income and reclassified into interest income when such
cash
flow occurs in the future. Any ineffectiveness resulting from the hedge is
recorded as a gain or loss in the consolidated statement of income as part
of
noninterest income.
At
December 31, 2007 and 2006, the information pertaining to the outstanding
interest rate swap is as follows:
|
|
December
31,
|
|
December
31,
|
|
(000’s
in millions)
|
|
2007
|
|
2006
|
|
Notional
amount
|
|
$
|
1,753
|
|
$
|
14,107
|
|
Weighted
average pay rate
|
|
|
8.05
|
%
|
|
7.86
|
%
|
Weighted
average receive rate
|
|
|
4.88
|
%
|
|
4.88
|
%
|
Weighted
average maturity in years
|
|
|
0.3
|
|
|
1.0
|
|
Unrealized
loss relating to interest rate swaps
|
|
$
|
12
|
|
$
|
320
|
|
The
amortizing hedge has a remaining notional value of $1.8 million and a duration
of approximately three months. As of December 31, 2007, the maximum length
of
time over which the Company is hedging its exposure to the variability of future
cash flows is approximately nine months. As of December 31, 2007, the net loss
amounts in accumulated other comprehensive income associated with these cash
flows totaled $2,000. During the year ended December 31, 2007, $310,000 was
reclassified from accumulated other comprehensive income as a reduction to
interest income.
As
of December 31, 2007, the amounts in accumulated OCI associated with these
cash
flows that are expected to be reclassified into interest income during the
remainder of the hedge instrument in 2008 total $9,000.
The
Company performed a quarterly analysis of the effectiveness of the interest
rate
swap agreement at December 31, 2007. As a result of a correlation analysis,
the
Company has determined that the swap remains
highly
effective in achieving offsetting cash flows attributable to the hedged risk
during the term of the hedge and, therefore, continues to qualify for hedge
accounting under the guidelines of SFAS No. 133.
However,
d
uring
the
second quarter of 2006, the Company determined that the underlying loans being
hedged were paying off faster than the notional value of the hedge instrument
was amortizing. This difference between the notional value of the hedge and
the
underlying hedged assets is considered an “overhedge” pursuant to SFAS No. 133
guidelines and may constitute ineffectiveness if the difference is other than
temporary. The Company determined during 2006 that the difference was other
than
temporary and, as a result, reclassified a net total of $75,000 of the pretax
hedge loss reported in other comprehensive income into earnings during 2006.
As
of December 31, 2007, the notional value of the hedge was still in excess of
the
value of the underlying loans being hedged by approximately $1.3 million, but
had improved from the $3.3 million difference existing at December 31, 2006.
As
a result, the Company recorded a pretax hedge gain related to swap
ineffectiveness of approximately $66,000 during the December 31, 2007. Amounts
recognized as hedge ineffectiveness gains or losses are reflected in noninterest
income.
21.
Investment in Bank Stock
During
December 2007, the Company purchased 33,854 common shares of Northern California
Bancorp, Inc. (NRLB) in a privately negotiated transaction for a price of $11.50
per share or approximately $389,000. This purchase equals approximately 1.9%
of
NRLB’s outstanding stock and will be treated as an marketable equity investment
by the Company with changes in fair value recorded in earnings. NRLB is the
holding company of Monterey County Bank. At December 31, 2007, the Company
recorded a loss in its equity investment in NRLB of $17,000 based on a quoted
market price of $11.00 per share at that date. The Company may purchase
additional common shares of NRLB as shares become available.
22.
Stock Split
On
March
28, 2006, the Company’s Board of Directors approved a 2-for-1 stock split of the
Company’s no par common stock effected in the form of a 100% stock dividend. The
stock dividend was payable May 1, 2006 to shareholders of record as of April
7,
2006. Effective May 1, 2006, each shareholder received one additional share
for
each common share held as of the record date. All periods presented in the
financial statements have been restated to reflect the effect of the 2-for-1
stock split.
23.
Common Stock Repurchase Plan
During
August 2001, the Company’s Board of Directors approved a plan to repurchase, as
conditions warrant, up to 280,000 shares (effectively 580,000 shares adjusted
for 2-for-1 stock split in May 2006) of the Company’s common stock on the open
market or in privately negotiated transactions. The duration of the program
is
open-ended and the timing of the purchases will depend on market conditions.
On
February 25, 2004, the Company announced another stock repurchase plan under
which the Board of Directors approved a plan to repurchase, as conditions
warrant, up to 276,500 shares (effectively 553,000 shares adjusted for 2-for-1
stock split in May 2006) of the Company's common stock on the open market or
in
privately negotiated transactions. As with the first plan, the duration of
the
new program is open-ended and the timing of purchases will depend on market
conditions. Concurrent with the approval of the new repurchase plan, the Board
terminated the 2001 repurchase plan.
During
the year ended December 31, 2005, 13,081 shares (26,162 shares effected for
2006
2-for-1 stock split) were repurchased at a total cost of $377,000 and an average
price per share of $28.92 ($14.46 effected for 2006 2-for-1 stock split). During
the year ended December 31, 2006, 108,005 shares were repurchased at a total
cost of $2.4 million and an average price per share of $22.55.
On
May
16, 2007, the Company announced a third stock repurchase plan to
repurchase,
as conditions warrant, up to 610,000 shares of the Company's common stock on
the
open market or in privately negotiated transactions. The repurchase plan
represents approximately 5.00% of the Company's currently outstanding common
stock. The duration of the program is open-ended and the timing of purchases
will depend on market conditions. Concurrent with the approval of the new
repurchase plan, the Company canceled the remaining 75,733 shares available
under the 2004 repurchase plan.
During
the year ended December 31, 2007, 512,332 shares were repurchased at a total
cost of $10.1 million and an average per share price of $19.71. Of the shares
repurchased during 2007, 166,660 shares were repurchased under the 2004 plan
at
an average cost of $20.46 per shares, and 345,672 shares were repurchased under
the 2007 plan at an average cost of $19.35 per shares.
24.
Business Combination
On
February 16, 2007, the Company acquired 100 percent of the outstanding common
shares of Legacy Bank, N.A., located in Campbell, California. At merger, Legacy
Bank’s one branch was merged with and into United Security Bank, a wholly owned
subsidiary of the Company. The purchase of Legacy Bank provided the Company
with
an opportunity to expand its market area into Santa Clara County and to serve
a
loyal and growing small business niche and individual client base build by
Legacy.
The
aggregate purchase price for Legacy was $21.7 million, which included $177,000
in direct acquisition costs related to the merger. At the date of merger, Legacy
Bank had 1,674,373 shares of common stock outstanding. Based upon an exchange
rate of approximately .58 shares of the Company’s stock for each share of Legacy
stock, Legacy shareholders received 976,411 shares of the Company’s common
stock, amounting to consideration of approximately $12.86 per Legacy common
share.
Legacy’s
results of the operations have been included in the Company’s results beginning
February 17, 2007.
During
the second quarter of 2007, the Company re-evaluated the preliminary estimate
of
the core deposit intangible related to savings accounts acquired from Legacy
and
determined that the initial run-off of those deposits was faster than originally
anticipated. As a result, the Company reduced the core deposits intangible
by
approximately $215,000 from the amount reported at March 31, 2007.
Correspondingly, resultant goodwill was increased by that same $215,000. During
the fourth quarter of 2007 recorded the final purchase accounting adjustments
which reflected Legacy’s final book-to-tax deferred tax amounts, and other
deferred tax adjustments related to purchase accounting guidelines under SFAS
No. 141. The result of adjustments made during the fourth quarter of 2007 was
to
increase the recorded NOL benefit by $22,000, record deferred tax liabilities
of
$727,000, and to increase goodwill by $705,000.
The
following summarizes the purchase and the resultant allocation to
fair-market-value adjustments and goodwill:
Purchase
Price:
|
|
|
|
Total
value of the Company's common stock exchanged
|
|
$
|
21,536
|
|
Direct
acquisition costs
|
|
|
177
|
|
Total
purchase price
|
|
|
21,713
|
|
Allocation
of Purchase Price:
|
|
|
|
|
Legacy's
shareholder equity
|
|
|
8,588
|
|
Estimated
adjustments to reflect assets acquired
and
liabilities assumed at fair value:
|
Investments
|
|
|
23
|
|
Loans
|
|
|
(118
|
)
|
Deferred
taxes
|
|
|
1,430
|
|
Core
Deposit Intangible
|
|
|
3,000
|
|
Estimated
fair value of net assets acquired
|
|
|
12,923
|
|
Goodwill
resulting from acquisition
|
|
$
|
8,790
|
|
The
following condensed balance sheet summarizes the amount assigned for each major
asset and liability category of Legacy at the merger date:
Assets:
|
|
|
|
Cash
|
|
$
|
3,173
|
|
Federal
Funds Purchased
|
|
|
3,200
|
|
Securities
available for sale
|
|
|
7,414
|
|
Loans,
net of allowance for loan losses
|
|
|
62,426
|
|
Premises
and equipment
|
|
|
729
|
|
Deferred
taxes
|
|
|
1,430
|
|
Core
deposit intangibles
|
|
|
3,000
|
|
Goodwill
|
|
|
8,790
|
|
Accrued
interest and other assets
|
|
|
1,437
|
|
Total
Assets
|
|
$
|
91,599
|
|
Liabilities:
|
|
|
|
|
Deposits:
|
|
|
|
|
Non-interest
bearing
|
|
$
|
17,262
|
|
Interest-bearing
|
|
|
52,338
|
|
Total
deposits
|
|
$
|
69,600
|
|
Accrued
interest payable and other liabilities
|
|
|
286
|
|
Total
liabilities
|
|
$
|
69,886
|
|
Net
assets assigned to purchase
|
|
$
|
21,713
|
|
The
merger transaction was accounted for using the purchase accounting method,
and
resulted in the purchase price being allocated to the assets acquired and
liabilities assumed from Legacy Bank based on the fair value of those assets
and
liabilities. The allocations of purchase price based upon the fair value of
assets acquired and liabilities assumed were finalized during the fourth quarter
of 2007. Management believes the Company will be able to fully utilize the
net
operating loss carry-forward (NOL) obtained in the Legacy merger. The Company
has utilized a fair value approach for Legacy’s loan portfolio which includes
certain market rate assumptions on segmented portions of the loan portfolio
with
similar credit characteristics, and credit risk assumptions specific to the
individual loans within that portfolio.
Core
deposit intangibles totaling $3.0 million will be amortized for financial
statement purposes over an estimated life of approximately 7 years using a
method that approximates the interest method. Core deposit intangibles will
be
reviewed for impairment on an annual basis.
Goodwill
totaling $8.8 million will not be amortized for book purposes under current
accounting guidelines. Because the merger was a tax-deferred stock-for-stock
purchase, goodwill is not deductible for tax purposes. Goodwill will be reviewed
for impairment on an annual basis.
25.
Parent Company Only Financial Statements
The
following are the condensed financial statements of United Security Bancshares
and should be read in conjunction with the consolidated financial
statements:
United
Security Bancshares - (parent only)
|
|
|
|
|
|
Balance
Sheets - December 31, 2007 and 2006
|
|
|
|
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
2,546
|
|
$
|
2,417
|
|
Investment
in bank subsidiary
|
|
|
94,589
|
|
|
79,835
|
|
Investment
in nonbank entity
|
|
|
122
|
|
|
122
|
|
Investment
in bank stock
|
|
|
372
|
|
|
0
|
|
Other
assets
|
|
|
470
|
|
|
944
|
|
Total
assets
|
|
$
|
98,099
|
|
$
|
83,318
|
|
|
|
|
|
|
|
|
|
Liabilities
& Shareholders' Equity
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Junior
subordinated debt securities (at fair value) 12/31/07)
|
|
$
|
13,341
|
|
$
|
15,464
|
|
Accrued
interest payable
|
|
|
0
|
|
|
613
|
|
Deferred
taxes
|
|
|
998
|
|
|
0
|
|
Other
liabilities
|
|
|
1,329
|
|
|
1,199
|
|
Total
liabilities
|
|
|
15,668
|
|
|
17,276
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
Common
stock, no par value
|
|
|
|
|
|
|
|
20,000,000
shares authorized, 11,855,192 and 11,301,113
|
|
|
|
|
|
|
|
issued
and outstanding, in 2007 and 2006
|
|
|
32,587
|
|
|
20,448
|
|
Retained
earnings
|
|
|
49,997
|
|
|
46,884
|
|
Accumulated
other comprehensive loss
|
|
|
(153
|
)
|
|
(1,290
|
)
|
Total
shareholders' equity
|
|
|
82,431
|
|
|
66,042
|
|
Total
liabilities and shareholders' equity
|
|
$
|
98,099
|
|
$
|
83,318
|
|
United
Security Bancshares - (parent only)
Income
Statements
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Income
|
|
|
|
|
|
|
|
Dividends
from subsidiaries
|
|
$
|
17,600
|
|
$
|
7,300
|
|
$
|
5,012
|
|
Gain
on fair value option of financial assets
|
|
|
2,504
|
|
|
0
|
|
|
0
|
|
Other
income
|
|
|
0
|
|
|
0
|
|
|
20
|
|
Total
income
|
|
|
20,104
|
|
|
7,300
|
|
|
5,032
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
1,234
|
|
|
1,355
|
|
|
1,091
|
|
Other
expense
|
|
|
469
|
|
|
378
|
|
|
1,033
|
|
Total
expense
|
|
|
1,703
|
|
|
1,733
|
|
|
2,124
|
|
Income
before taxes and equity in undistributed
|
|
|
|
|
|
|
|
|
|
|
income
of subsidiary
|
|
|
18,401
|
|
|
5,567
|
|
|
2,908
|
|
Income
tax expense (benefit)
|
|
|
337
|
|
|
(729
|
)
|
|
(866
|
)
|
(Deficit)
equity in undistributed income of subsidiary
|
|
|
(6,807
|
)
|
|
7,064
|
|
|
7,234
|
|
Net
Income
|
|
$
|
11,257
|
|
$
|
13,360
|
|
$
|
11,008
|
|
United
Security Bancshares - (parent only)
Income
Statements
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
11,257
|
|
$
|
13,360
|
|
$
|
11,008
|
|
Adjustments
to reconcile net earnings to cash
|
|
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Deficit
(equity) in undistributed income of subsidiary
|
|
|
6,807
|
|
|
(7,064
|
)
|
|
(7,234
|
)
|
Deferred
taxes
|
|
|
998
|
|
|
0
|
|
|
0
|
|
Write-down
of other investments
|
|
|
17
|
|
|
0
|
|
|
702
|
|
Gain
on fair value option of financial liability
|
|
|
(2,504
|
)
|
|
0
|
|
|
0
|
|
Amortization
of issuance costs
|
|
|
0
|
|
|
17
|
|
|
17
|
|
Net
change in other liabilities
|
|
|
381
|
|
|
297
|
|
|
(92
|
)
|
Net
cash provided by operating activities
|
|
|
16,956
|
|
|
6,610
|
|
|
4,401
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Investment
in bank stock
|
|
|
(389
|
)
|
|
0
|
|
|
0
|
|
Proceeds
from sale of investment in title company
|
|
|
0
|
|
|
149
|
|
|
527
|
|
Net
cash (used in) provided by investing activities
|
|
|
(389
|
)
|
|
149
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from stock options exercised
|
|
|
510
|
|
|
335
|
|
|
118
|
|
Net
proceeds from issuance of junior subordinated debt
|
|
|
(923
|
)
|
|
0
|
|
|
0
|
|
Repurchase
and retirement of common stock
|
|
|
(10,095
|
)
|
|
(2,436
|
)
|
|
(377
|
)
|
Payment
of dividends on common stock
|
|
|
(5,930
|
)
|
|
(4,881
|
)
|
|
(3,980
|
)
|
Net
cash used in financing activities
|
|
|
(16,438
|
)
|
|
(6,982
|
)
|
|
(4,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase decrease in cash and cash equiv
alents
|
|
|
129
|
|
|
(223
|
)
|
|
689
|
|
Cash
and cash equivalents at beginning of year
|
|
|
2,417
|
|
|
2,640
|
|
|
1,951
|
|
Cash
and cash equivalents at end of year
|
|
$
|
2,546
|
|
$
|
2,417
|
|
$
|
2,640
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosures
|
|
|
|
|
|
|
|
|
|
|
Noncash
financing activities:
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared not paid
|
|
$
|
1,483
|
|
$
|
1,413
|
|
$
|
1,135
|
|
26.
Quarterly Financial Data (unaudited)
Selected
quarterly financial data for the years ended December 31, 2007 and 2006 are
presented below:
|
|
2007
|
|
2006
|
|
(In
thousands except per share data)
|
|
4th
|
|
3rd
|
|
2nd
|
|
1st
|
|
4
th
|
|
3rd
|
|
2nd
|
|
1st
|
|
Interest
income
|
|
$
|
14,245
|
|
$
|
14,713
|
|
$
|
13,962
|
|
$
|
14,236
|
|
$
|
12,847
|
|
$
|
12,548
|
|
$
|
11,409
|
|
$
|
10,552
|
|
Interest
expense
|
|
|
5,450
|
|
|
5,494
|
|
|
5,126
|
|
|
4,503
|
|
|
4,126
|
|
|
3,999
|
|
|
3,311
|
|
|
2,739
|
|
Net
interest income
|
|
|
8,795
|
|
|
9,219
|
|
|
8,836
|
|
|
9,733
|
|
|
8,721
|
|
|
8,549
|
|
|
8,098
|
|
|
7,813
|
|
Provision
for credit losses
|
|
|
3,337
|
|
|
1,950
|
|
|
208
|
|
|
202
|
|
|
241
|
|
|
276
|
|
|
123
|
|
|
240
|
|
Gain
(loss) on sale of securities
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
27
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Other
noninterest income
|
|
|
2,110
|
|
|
4,019
|
|
|
1,954
|
|
|
1,581
|
|
|
1,872
|
|
|
2,331
|
|
|
1,594
|
|
|
3,207
|
|
Noninterest
expense
|
|
|
6,723
|
|
|
5,292
|
|
|
5,517
|
|
|
5,200
|
|
|
5,293
|
|
|
5,060
|
|
|
5,036
|
|
|
4,548
|
|
Income
before income tax expense
|
|
|
845
|
|
|
5,996
|
|
|
5,065
|
|
|
5,912
|
|
|
5,086
|
|
|
5,544
|
|
|
4,533
|
|
|
6,232
|
|
Income
tax expense
|
|
|
156
|
|
|
2,339
|
|
|
1,757
|
|
|
2,309
|
|
|
2,113
|
|
|
2,083
|
|
|
1,471
|
|
|
2,368
|
|
Net
income
|
|
$
|
689
|
|
$
|
3,657
|
|
$
|
3,308
|
|
$
|
3,603
|
|
$
|
2,973
|
|
$
|
3,461
|
|
$
|
3,062
|
|
$
|
3,864
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
$
|
0.31
|
|
$
|
0.27
|
|
$
|
0.30
|
|
$
|
0.26
|
|
$
|
0.30
|
|
$
|
0.27
|
|
$
|
0.34
|
|
Diluted
|
|
$
|
0.06
|
|
$
|
0.31
|
|
$
|
0.27
|
|
$
|
0.30
|
|
$
|
0.26
|
|
$
|
0.30
|
|
$
|
0.27
|
|
$
|
0.34
|
|
Dividends
declared per share
|
|
$
|
0.125
|
|
$
|
0.125
|
|
$
|
0.125
|
|
$
|
0.125
|
|
$
|
0.125
|
|
$
|
0.11
|
|
$
|
0.11
|
|
$
|
0.11
|
|
Average
shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,887
|
|
|
11,925
|
|
|
12,078
|
|
|
11,947
|
|
|
11,302
|
|
|
11,358
|
|
|
11,369
|
|
|
11,370
|
|
Diluted
|
|
|
11,900
|
|
|
11,946
|
|
|
12,135
|
|
|
12,006
|
|
|
11,430
|
|
|
11,476
|
|
|
11,496
|
|
|
11,490
|
|