The following discussion and analysis is intended to provide a better understanding of Farmers & Merchants Bancorp and its subsidiaries’ performance during each of the years in the three-year period ended December 31, 2017 and the material changes in financial condition, operating income, and expense of the Company and its subsidiaries as shown in the accompanying financial statements.
On November 18, 2016, Farmers & Merchants Bancorp completed the acquisition of Delta National Bancorp. Since the acquisition took place late in the year, and Delta National Bancorp had only $112 million in assets (less than 4% of Farmers & Merchants Bancorp’s total assets), the post-acquisition impact on the Company’s 2016 Results of Operations was immaterial with the exception of a Bargain Purchase Gain of $1.83 million that was booked as non-interest income and $910,000 in acquisition expenses that were booked as non-interest expense (see Note 2, located in “Item 8. Financial Statements and Supplementary Data”). Accordingly, limited discussion of the acquisition’s impact on operating income and expense is included in the following discussion.
The tables on the following pages reflect the Company's average balance sheets and volume and rate analysis for the years ending 2017, 2016 and 2015. Average balance amounts for assets and liabilities are the computed average of daily balances.
Net interest income is the amount by which the interest and fees on loans & leases and other interest-earning assets exceed the interest paid on interest-bearing sources of funds. For the purpose of analysis, the interest earned on tax-exempt investments and municipal loans is adjusted to an amount comparable to interest subject to normal income taxes. This adjustment is referred to as “tax equivalent” adjustment and is noted wherever applicable. The presentation of net interest income and net interest margin on a tax equivalent basis is a common practice within the banking industry.
The Volume and Rate Analysis of Net Interest Income summarizes the changes in interest income and interest expense based on changes in average asset and liability balances (volume) and changes in average rates (rate). For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to: (1) changes in volume (change in volume multiplied by initial rate); (2) changes in rate (change in rate multiplied by initial volume); and (3) changes in rate/volume, also called “changes in mix” (allocated in proportion to the respective volume and rate components).
The Company’s earning assets and rate sensitive liabilities are subject to repricing at different times, which exposes the Company to income fluctuations when interest rates change. In order to minimize income fluctuations, the Company attempts to match asset and liability maturities. However, some maturity mismatch is inherent in the asset and liability mix. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk.”
Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis. Loan interest income includes fee income and unearned discount in the amount of $4.9 million for the year ended December 31, 2017. Non-accrual loans and lease financing receivables have been included in the average balances. Yields on securities available-for-sale are based on historical cost.
Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis. Loan interest income includes fee income and unearned discount in the amount of $5.1 million for the year ended December 31, 2016. Non-accrual loans and lease financing receivables have been included in the average balances. Yields on securities available-for-sale are based on historical cost.
Notes: Yields on municipal securities have been calculated on a fully taxable equivalent basis. Loan interest income includes fee income and unearned discount in the amount of $5.7 million for the year ended December 31, 2015. Non-accrual loans and lease financing receivables have been included in the average balances. Yields on securities available-for-sale are based on historical cost.
Notes: Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total "net change." The above figures have been rounded to the nearest whole number.
Notes: Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total "net change." The above figures have been rounded to the nearest whole number.
Net interest income increased 13.9% to $108.3 million during 2017. On a fully tax equivalent basis, net interest income increased 13.7% and totaled $109.3 million during 2017 compared to $96.1 million for 2016. As more fully discussed below, the increase in net interest income was primarily due to a $349.3 million increase in average earning assets.
Net interest income on a tax equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin. For 2017, the Company’s net interest margin was 3.88% compared to 3.89% in 2016. This decrease in net interest margin was due primarily to a decrease in the mix of loans and leases as a percentage of total earning assets.
Average loans & leases totaled $2.2 billion for the year ended December 31, 2017; an increase of $128.5 million compared to the year ended December 31, 2016. Loans & leases decreased from 83.1% of average earning assets during 2016 to 77.3% in 2017. The year-to-date yield on the loan & lease portfolio increased to 4.71% for the year ended December 31, 2017, compared to 4.47% for the year ended December 31, 2016. This higher yield combined with the impact of increased average loan & lease balances resulted in interest revenue from loans & leases increasing 12.1% to $102.7 million for 2017. The Company continues to experience aggressive competitor pricing for loans & leases to which it may need to respond in order to retain key customers. This could place negative pressure on future loan & lease yields and net interest margin.
The investment portfolio is the other main component of the Company’s earning assets. Historically, the Company invested primarily in: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by the U.S. Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times the Company selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 5 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity without subjecting the Company to the interest rate risk associated with mortgage-backed securities. Since the risk factor for these types of investments is generally lower than that of loans & leases, the yield earned on investments is generally less than that of loans & leases.
Average investment securities increased $98.2 million in 2017 compared to the average balance during 2016. As a result, tax equivalent interest income on securities increased $2.4 million to $10.8 million for the year ended December 31, 2017, compared to $8.4 million for the year ended December 31, 2016. The average yield, on a tax equivalent basis, in the investment portfolio was 2.33% in 2017 compared to 2.31% in 2016. This overall increase in yield was caused primarily by an increase in the mix of mortgage-backed securities as a percentage of total securities and a decrease in the balance of lower yielding Government Agency & Government-Sponsored Entities investments. See “Financial Condition – Investment Securities” for a discussion of the Company’s investment strategy in 2017. Net interest income on the Schedule of Year-to-Date Average Balances and Interest Rates is shown on a tax equivalent basis, which is higher than net interest income as reflected on the Consolidated Statements of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.
Average interest-bearing liabilities increased $245.6 million or 14.7% during the twelve months ended December 31, 2017, primarily in lower cost interest-bearing DDA, and savings and money market deposits. See “Financial Condition – Deposits” for a discussion of trends in the Company’s deposit base. Total interest expense on deposits was $5.9 million for 2017 and $3.8 million for 2016. The average rate paid on interest-bearing deposits was 0.31% in 2017 and 0.23% in 2016. See “Overview – Looking Forward: 2018 and Beyond” for a discussion of factors influencing the Company’s future deposit rates and their impact on net interest margin.
2016 Compared to 2015
Net interest income increased 9.6% to $95.1 million during 2016. On a fully tax equivalent basis, net interest income increased 9.4% and totaled $96.1 million during 2016 compared to $87.8 million for 2015. As more fully discussed below, the increase in net interest income was primarily due to an increase in average earning assets assisted somewhat by a small increase in the net interest margin.
Net interest income on a tax equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin. For 2016, the Company’s net interest margin was 3.89% compared to 3.87% in 2015. This increase in net interest margin was due primarily to an increase in the mix of loans and leases as a percentage of total earning assets.
Average loans & leases totaled $2.1 billion for the year ended December 31, 2016; an increase of $247.7 million compared to the year ended December 31, 2015. Loans & leases increased from 79.5% of average earning assets during 2015 to 83.1% in 2016. The year-to-date yield on the loan & lease portfolio declined to 4.47% for the year ended December 31, 2016, compared to 4.52% for the year ended December 31, 2015. This lower yield partially offset the impact of an increase in average loan & lease balances but still resulted in interest revenue from loans & leases increasing 12.3% to $91.6 million for 2016.
The investment portfolio is the other main component of the Company’s earning assets. Historically, the Company invested primarily in: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by the U.S. Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times the Company selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 5 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity without subjecting the Company to the interest rate risk associated with mortgage-backed securities. Since the risk factor for these types of investments is generally lower than that of loans & leases, the yield earned on investments is generally less than that of loans & leases.
Average investment securities decreased $34.1 million in 2016 compared to the average balance during 2015. As a result, tax equivalent interest income on securities decreased $1.0 million to $8.4 million for the year ended December 31, 2016, compared to $9.4 million for the year ended December 31, 2015. The average yield, on a tax equivalent basis, in the investment portfolio was 2.31% in 2016 compared to 2.36% in 2015. This overall decrease in yield was caused primarily by a decrease in the mix of mortgage-backed securities as a percentage of total securities and an increase in the mix of lower yielding short-term U.S. Treasury securities.
Interest-bearing deposits with banks and overnight investments in Federal Funds Sold are additional earning assets available to the Company.
Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB
earn interest at the Fed Funds rate, which increased to 0.75% in December 2016. Average interest-bearing deposits with banks for the year ended December 31, 2016, was $53.7 million, a decrease of $13.1 million compared to the average balance for the year ended December 31, 2015. Interest income on interest-bearing deposits with banks for the year ended December 31, 2016, increased $115,000 to $287,000 from the year ended December 31, 2015.
Average interest-bearing liabilities increased $132.5 million or 8.9% during the twelve months ended December 31, 2016, primarily in lower cost interest-bearing DDA, and savings and money market deposits. See “Financial Condition – Deposits” for a discussion of trends in the Company’s deposit base. Total interest expense on deposits was $3.8 million for 2016 and $3.0 million for 2015. The average rate paid on interest-bearing deposits was 0.23% in 2016 and 0.20% in 2015. Since most of the Company’s interest-bearing deposits are priced off of short-term market rates, the Company continues to benefit from the impact of lower market interest rates.
Provision and Allowance for Credit Losses
As a financial institution that assumes lending and credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction), and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. Management reports regularly to the Board of Directors regarding trends and conditions in the loan & lease portfolio and regularly conducts credit reviews of individual loans & leases. Loans & leases that are performing but have shown some signs of weakness are subject to more stringent reporting and oversight.
Allowance for Credit Losses
The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance sheet date. The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors.
A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Loans & leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.
A restructuring of a loan or lease constitutes a troubled debt restructuring (“TDR”) under ASC 310-40, if the Company for economic or legal reasons related to the borrower's financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans or leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment.
The determination of the general reserve for loans or leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors that include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.
The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1
st
mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer & other; and (9) equipment leases. See “Financial Condition – Loans & Leases” for examples of loans & leases made by the Company. The allowance for credit losses attributable to each portfolio segment, which includes both impaired loans & leases and loans & leases that are not impaired, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.
The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:
Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.
Special Mention – A special mention loan or lease has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease position at some future date. Special mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard – A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans or leases classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans or leases classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable.
Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will estimate its probable loss and immediately charge-off some or all of the balance.
The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:
Commercial Real Estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.
Real Estate Construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.
Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term; typically made to relationship customers; generally underwritten to existing cash flows of operating businesses; and may be collateralized by fixed assets, inventory and/or accounts receivable. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.
Agricultural Real Estate and Agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate. These loans are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.
Leases – Equipment leases are generally considered to possess a moderate inherent risk of loss. As lessor, the Company is subject to both the credit risk of the borrower and the residual value risk of the equipment. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.
Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a low inherent risk of loss, although this is not always true as evidenced by the weakness in residential real estate values over the past five years. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.
Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.
In addition, the Company's and Bank's regulators, including the FRB, DBO and FDIC, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.
Provision for Credit Losses
Changes in the provision for credit losses between years are the result of management’s evaluation, based upon information currently available, of the adequacy of the allowance for credit losses relative to factors such as the credit quality of the loan & lease portfolio, loan & lease growth, current credit losses, and the prevailing economic climate and its effect on borrowers’ ability to repay loans & leases in accordance with the terms of the notes.
The Central Valley of California was one of the hardest hit areas in the country during the recession. In many areas, housing prices declined as much as 60% and unemployment reached 15% or more. Although the economy has improved throughout most of the Central Valley, in many of the Company’s market segments housing prices remain below peak levels and unemployment rates remain above those in other areas of the state and country. While, in management’s opinion, the Company’s levels of net charge-offs and non-performing assets as of December 31, 2017, compare very favorably to our peers at the present time, carefully managing credit risk remains a key focus of the Company.
The State of California experienced drought conditions from 2013 through most of 2016. Although significant levels of rain and snow in late 2016 and early 2017 alleviated drought conditions in many areas of California, including those in the Company’s primary service area, the long-term risks associated with the availability of water continue to exist. See “Item 1A. Risk Factors” for additional information.
The provision for credit losses totaled $2.9 million in 2017 compared to $6.3 million in 2016. Net charge offs during 2017 were $427,000 compared to net recoveries of $61,000 during 2016 and net recoveries of $5.4 million in 2015. During 2015, the Company was able to fully recover $5.2 million that was charged-off in 2010 on restructured commercial real estate and construction loans. In addition to the full recovery of the charged off principal, this transaction also resulted in the recovery of $353,000 in interest income and the client’s payment of a financing fee of $1.1 million. See “Critical Accounting Policies and Estimates – Allowance for Credit Losses” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk.”
The following table summarizes the activity and the allocation of the allowance for credit losses for the years indicated.
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Allowance for Credit Losses Beginning of Year
|
|
$
|
47,919
|
|
|
$
|
41,523
|
|
|
$
|
35,401
|
|
|
$
|
34,274
|
|
|
$
|
34,217
|
|
Provision Charged to Expense
|
|
|
2,850
|
|
|
|
6,335
|
|
|
|
750
|
|
|
|
1,175
|
|
|
|
425
|
|
Charge-Offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
109
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
Agricultural Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
575
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential 1st Mortgages
|
|
|
53
|
|
|
|
21
|
|
|
|
-
|
|
|
|
73
|
|
|
|
16
|
|
Home Equity Lines and Loans
|
|
|
3
|
|
|
|
46
|
|
|
|
-
|
|
|
|
70
|
|
|
|
91
|
|
Agricultural
|
|
|
374
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
1
|
|
|
|
60
|
|
Consumer & Other
|
|
|
146
|
|
|
|
105
|
|
|
|
84
|
|
|
|
132
|
|
|
|
120
|
|
Total Charge-Offs
|
|
|
685
|
|
|
|
172
|
|
|
|
96
|
|
|
|
276
|
|
|
|
891
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
109
|
|
|
|
2
|
|
|
|
2,939
|
|
|
|
11
|
|
|
|
-
|
|
Agricultural Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
2,225
|
|
|
|
-
|
|
|
|
-
|
|
Residential 1st Mortgages
|
|
|
40
|
|
|
|
26
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
Home Equity Lines and Loans
|
|
|
8
|
|
|
|
103
|
|
|
|
87
|
|
|
|
58
|
|
|
|
115
|
|
Agricultural
|
|
|
17
|
|
|
|
-
|
|
|
|
4
|
|
|
|
8
|
|
|
|
42
|
|
Commercial
|
|
|
8
|
|
|
|
47
|
|
|
|
136
|
|
|
|
86
|
|
|
|
312
|
|
Consumer & Other
|
|
|
76
|
|
|
|
55
|
|
|
|
69
|
|
|
|
65
|
|
|
|
54
|
|
Total Recoveries
|
|
|
258
|
|
|
|
233
|
|
|
|
5,468
|
|
|
|
228
|
|
|
|
523
|
|
Net (Charge-Offs) Recoveries
|
|
|
(427
|
)
|
|
|
61
|
|
|
|
5,372
|
|
|
|
(48
|
)
|
|
|
(368
|
)
|
Total Allowance for Credit Losses, End of Year
|
|
$
|
50,342
|
|
|
$
|
47,919
|
|
|
$
|
41,523
|
|
|
$
|
35,401
|
|
|
$
|
34,274
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans & Leases at Year End
|
|
|
2.27
|
%
|
|
|
2.19
|
%
|
|
|
2.07
|
%
|
|
|
2.06
|
%
|
|
|
2.00
|
%
|
Average Loans & Leases
|
|
|
2.31
|
%
|
|
|
2.34
|
%
|
|
|
2.30
|
%
|
|
|
2.36
|
%
|
|
|
2.70
|
%
|
Consolidated Net (Charge-Offs) Recoveries to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans & Leases at Year End
|
|
|
(0.02
|
%)
|
|
|
0.00
|
%
|
|
|
0.27
|
%
|
|
|
(0.00
|
%)
|
|
|
(0.02
|
%)
|
Average Loans & Leases
|
|
|
(0.02
|
%)
|
|
|
0.00
|
%
|
|
|
0.30
|
%
|
|
|
(0.00
|
%)
|
|
|
(0.03
|
%)
|
The table below breaks out year-to-date activity by portfolio segment
(in thousands):
December 31, 2017
|
|
Commercial
Real
Estate
|
|
|
Agricultural
Real
Estate
|
|
|
Real
Estate
Construction
|
|
|
Residential
1st
Mortgages
|
|
|
Home
Equity
Lines &
Loans
|
|
|
Agricultural
|
|
|
Commercial
|
|
|
Consumer &
Other
|
|
|
Leases
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-To-Date Allowance for Credit Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance- January 1, 2017
|
|
$
|
11,110
|
|
|
$
|
9,450
|
|
|
$
|
3,223
|
|
|
$
|
865
|
|
|
$
|
2,140
|
|
|
$
|
7,381
|
|
|
$
|
8,515
|
|
|
$
|
200
|
|
|
$
|
3,586
|
|
|
$
|
1,449
|
|
|
$
|
47,919
|
|
Charge-Offs
|
|
|
(109
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(53
|
)
|
|
|
(3
|
)
|
|
|
(374
|
)
|
|
|
-
|
|
|
|
(146
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(685
|
)
|
Recoveries
|
|
|
109
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
8
|
|
|
|
17
|
|
|
|
8
|
|
|
|
76
|
|
|
|
-
|
|
|
|
-
|
|
|
|
258
|
|
Provision
|
|
|
(188
|
)
|
|
|
2,635
|
|
|
|
(1,377
|
)
|
|
|
(37
|
)
|
|
|
179
|
|
|
|
1,135
|
|
|
|
674
|
|
|
|
79
|
|
|
|
(223
|
)
|
|
|
(27
|
)
|
|
|
2,850
|
|
Ending Balance- December 31, 2017
|
|
$
|
10,922
|
|
|
$
|
12,085
|
|
|
$
|
1,846
|
|
|
$
|
815
|
|
|
$
|
2,324
|
|
|
$
|
8,159
|
|
|
$
|
9,197
|
|
|
$
|
209
|
|
|
$
|
3,363
|
|
|
$
|
1,422
|
|
|
$
|
50,342
|
|
Overall, the Allowance for Credit Losses as of December 31, 2017 increased $2.4 million from December 31, 2016. The allowance allocated to the following categories of loans changed as indicated during the twelve months ended December 31, 2017:
·
|
Agricultural and Agricultural Real Estate allowance balances increased $3.4 million due primarily to an increase of substandard loans related to one borrower offset somewhat by a decrease in Agricultural loan balances.
|
·
|
Real Estate Construction allowance balances decreased $1.4 million due to a decrease in loan balances combined with a decline in the overall risk of the portfolio as several major projects moved out of the construction phase and into lease-up.
|
·
|
Commercial allowance balances increased $682,000 due to an increase in loan balances.
|
·
|
Lease allowance balances decreased $223,000 due to the Company’s assessment that approximately five years of experience in this financing segment supported the elimination of the qualitative factor for “new market segments” in the loan loss allowance.
|
|
|
Allowance Allocation at December 31,
|
|
(in thousands)
|
|
2017
Amount
|
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
2016
Amount
|
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
2015
Amount
|
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
2014
Amount
|
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
2013
Amount
|
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
Commercial Real Estate
|
|
$
|
10,922
|
|
|
|
31.1
|
%
|
|
$
|
11,110
|
|
|
|
30.9
|
%
|
|
$
|
10,063
|
|
|
|
30.4
|
%
|
|
$
|
7,842
|
|
|
|
28.9
|
%
|
|
$
|
5,178
|
|
|
|
29.5
|
%
|
Agricultural Real Estate
|
|
|
12,085
|
|
|
|
22.5
|
%
|
|
|
9,450
|
|
|
|
21.4
|
%
|
|
|
6,881
|
|
|
|
21.2
|
%
|
|
|
4,185
|
|
|
|
20.8
|
%
|
|
|
3,576
|
|
|
|
23.6
|
%
|
Real Estate Construction
|
|
|
1,846
|
|
|
|
4.5
|
%
|
|
|
3,223
|
|
|
|
8.1
|
%
|
|
|
2,485
|
|
|
|
7.6
|
%
|
|
|
1,669
|
|
|
|
5.6
|
%
|
|
|
654
|
|
|
|
3.0
|
%
|
Residential 1st Mortgages
|
|
|
815
|
|
|
|
11.7
|
%
|
|
|
865
|
|
|
|
11.1
|
%
|
|
|
789
|
|
|
|
10.3
|
%
|
|
|
1,022
|
|
|
|
10.0
|
%
|
|
|
1,108
|
|
|
|
10.9
|
%
|
Home Equity Lines and Loans
|
|
|
2,324
|
|
|
|
1.6
|
%
|
|
|
2,140
|
|
|
|
1.4
|
%
|
|
|
2,146
|
|
|
|
1.7
|
%
|
|
|
2,426
|
|
|
|
1.9
|
%
|
|
|
2,767
|
|
|
|
2.5
|
%
|
Agricultural
|
|
|
8,159
|
|
|
|
12.3
|
%
|
|
|
7,381
|
|
|
|
13.5
|
%
|
|
|
6,308
|
|
|
|
14.7
|
%
|
|
|
6,104
|
|
|
|
16.4
|
%
|
|
|
12,205
|
|
|
|
18.4
|
%
|
Commercial
|
|
|
9,197
|
|
|
|
12.0
|
%
|
|
|
8,515
|
|
|
|
10.0
|
%
|
|
|
7,836
|
|
|
|
10.5
|
%
|
|
|
8,195
|
|
|
|
13.5
|
%
|
|
|
5,697
|
|
|
|
10.8
|
%
|
Consumer & Other
|
|
|
209
|
|
|
|
0.3
|
%
|
|
|
200
|
|
|
|
0.3
|
%
|
|
|
175
|
|
|
|
0.3
|
%
|
|
|
218
|
|
|
|
0.3
|
%
|
|
|
176
|
|
|
|
0.4
|
%
|
Leases
|
|
|
3,363
|
|
|
|
4.0
|
%
|
|
|
3,586
|
|
|
|
3.3
|
%
|
|
|
3,294
|
|
|
|
3.3
|
%
|
|
|
2,211
|
|
|
|
2.6
|
%
|
|
|
639
|
|
|
|
0.9
|
%
|
Unallocated
|
|
|
1,422
|
|
|
|
|
|
|
|
1,449
|
|
|
|
|
|
|
|
1,546
|
|
|
|
|
|
|
|
1,529
|
|
|
|
|
|
|
|
2,274
|
|
|
|
|
|
Total
|
|
$
|
50,342
|
|
|
|
100.0
|
%
|
|
$
|
47,919
|
|
|
|
100.0
|
%
|
|
$
|
41,523
|
|
|
|
100.0
|
%
|
|
$
|
35,401
|
|
|
|
100.0
|
%
|
|
$
|
34,274
|
|
|
|
100.0
|
%
|
As of December 31, 2017, the allowance for credit losses was $50.3 million, which represented 2.27% of the total loan & lease balance. At December 31, 2016, the allowance for credit losses was $47.9 million or 2.19% of the total loan & lease balance. After reviewing all factors above, based upon information currently available, management concluded that the allowance for credit losses as of December 31, 2017, was adequate
.
Non-Interest Income
Non-interest income includes: (1) service charges and fees from deposit accounts; (2) net gains and losses from investment securities; (3) increases in the cash surrender value of bank owned life insurance; (4) debit card and ATM fees; (5) net gains and losses on non-qualified deferred compensation plan investments; and (6) fees from other miscellaneous business services. See “Overview – Looking Forward: 2018 and Beyond.”
2017 Compared to 2016
Non‑interest income totaled $16.8 million for 2017, an increase of $1.5 million or 9.9% from non-interest income of $15.3 million for 2016.
Service charges on deposit accounts totaled $3.5 million for 2017, an increase of $77,000 or 2.1% from service charges on deposit accounts of $3.4 million in 2016. This was due primarily to fees related to the Company’s Overdraft Privilege Service.
Net (loss) gain on investment securities was a net gain of $131,000 in 2017 compared to a net loss of $284,000 for 2016. See “Financial Condition-Investment Securities” for a discussion of the Company’s investment strategy.
Debit card and ATM fees totaled $3.9 million in 2017, an increase of 14.0% or $475,000 from $3.4 million in 2016. This was primarily due to increased numbers of cardholders and increased account activity.
Net gains on deferred compensation plan investments were $2.6 million in 2017 compared to net gains of $2.0 million in 2016. See Note 17, located in “Item 8. Financial Statements and Supplementary Data” for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income.
There was no bargain purchase gain in 2017 as this gain related to the purchase of Delta National Bancorp, which took place in 2016.
Other non-interest income was $4.9 million, an increase of $1.8 million or 60.2% from 2016. This increase was primarily comprised of: (1) a $1.1 million increase in the gain on sale of fixed assets related to the disposition of one of the Company’s properties; (2) $453,000 in non-recurring fees from certain loan customers; and (3) $402,000 in dividend income on equity securities.
2016 Compared to 2015
Non‑interest income totaled $15.3 million, an increase of $682,000 or 4.7% from non-interest income of $14.6 million for 2015.
Service charges on deposit accounts totaled $3.4 million, a decrease of $82,000 or 2.4% from service charges on deposit accounts of $3.5 million in 2015. This was due primarily to a decrease in fees related to the Company’s Overdraft Privilege Service.
Net (loss) gain on investment securities was a net loss of $284,000 in 2016 compared to a net gain of $275,000 for 2015.
Net gains on deferred compensation plan investments were $2.0 million in 2016 compared to net gains of $1.4 million in 2015.
The Company completed its acquisition of Delta National Bancorp in November 2016. This acquisition resulted in a bargain purchase gain of $1.8 million (see Note 2, located in “Item 8. Financial Statements and Supplementary Data.”)
Other non-interest income was $3.1 million, a decrease of $1.3 million or 29.8% from 2015. This decrease was primarily comprised of (1) a
$1.1 million financing fee related to the full recovery of a loan previously charged off; and (2) a $392,000 gain on the sale of our Sacramento branch building; both of which occurred in 2015.
Non-Interest Expense
Non-interest expense for the Company includes expenses for: (1) salaries and employee benefits; (2) net gains and losses on non-qualified deferred compensation plan investments; (3) occupancy; (4) equipment; (5) supplies; (6) legal fees; (7) professional services; (8) data processing; (9) marketing; (10) deposit insurance; and (11) other miscellaneous expenses.
2017 Compared to 2016
Overall, non-interest expense totaled $67.8 million for 2017, an increase of $9.6 million or 16.5% from the year ended December 31, 2016.
Salaries and employee benefits increased $3.8 million or 9.0% in 2017, primarily related to: (1) new staff from the acquisition of Delta National Bancorp; (2) bank wide raises that occurred in mid-2017; and (3) increased contributions to retirement and profit sharing plans.
Net gains on deferred compensation plan investments were $2.6 million in 2017 compared to net gains of $2.0 million in 2016. See Note 17, located in “Item 8. Financial Statements and Supplementary Data” for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no effect on the Company’s net income.
Occupancy expense in 2017 totaled $3.5 million, an increase of $558,000 or 18.7% from 2016 and equipment expense in 2017 totaled $4.0 million, an increase of $501,000 or 14.3% from 2016. Both of these increases were primarily related to operating expenses associated with: (1) 3 new branches from the acquisition of Delta National Bancorp and (2) remodeling existing branch offices.
Legal expenses decreased $819,000 from 2016 and totaled $424,000. This decrease was primarily due to legal fees related to: (1) changes to the Company’s by-laws and extension of the Company’s shareholder rights agreement; (2) trademark/branding issues; and (3) the Delta National Bancorp acquisition, which were paid in 2016.
Gain on sale of ORE property totaled $414,000 in 2017 compared to $5.9 million for 2016. During 2016, the Company sold at a substantial gain a large parcel of ORE that was acquired through foreclosure in 2008.
Other non-interest expense decreased $108,000, or 1.1%, to $9.9 million in 2017 compared to $10.0 million in 2016.
2016 Compared to 2015
Overall, non-interest expense totaled $58.2 million, an increase of $1.9 million or 3.4% for the year ended December 31, 2016.
Salaries and employee benefits increased $2.3 million or 5.6% primarily related to: (1) new staff added for the branches opened in Walnut Creek and Concord, CA and the Company’s equipment leasing activities; (2) bank wide raises that occurred in mid-2015; and (3) increased contributions to retirement and profit sharing plans.
Net gains on deferred compensation plan investments were $2.0 million in 2016 compared to net gains of $1.4 million in 2015.
Occupancy expense in 2016 totaled $3.0 million, an increase of $101,000 or 3.5% from 2015 and equipment expense in 2016 totaled $3.5 million, an increase of $331,000 or 10.5% from 2015. Both of these increases were primarily related to operating lease payments and depreciation expense associated with: (1) expanding into Walnut Creek and Concord, CA and the equipment leasing business; (2) remodeling existing branch offices; and (3) replacing all ATM’s with the newest generation of technology.
Legal expenses increased $822,000 from 2015 and totaled $1.2 million. This increase was primarily due to legal fees related to: (1) changes to the Company’s by-laws and extension of the Company’s shareholder rights agreement; (2) trademark/branding issues; and (3) the Delta National Bancorp acquisition.
Gain on sale of ORE property totaled $5.9 million in 2016 compared to $299,000 for 2015. During 2016, the Company sold at a substantial gain a large parcel of ORE that was acquired through foreclosure in 2008.
Other non-interest expense increased $3.5 million, or 52.6%, to $10.0 million in 2016 compared to $6.6 million in 2015. The major components of this increase were: (1) a $1.1 million increase in professional fees of which $633,100 was related to the acquisition of Delta National Bancorp; (2) a $1.1 million increase in amortization expense related to an increase in low income housing tax credit investments (see Income Taxes” for the offsetting credits related to these investments); (3) a $335,000 increase in recruitment and staff training expenses related to the addition of new staff as the Company expands its geographic footprint and business activities; and (4) a $126,000 increase in contributions.
Income Taxes
The provision for income taxes increased $10.0 million during 2017. The effective federal and state tax rate was higher than the statutory rate of 42% due to the signing of the Tax Cuts and Jobs Act by President Trump on December 22, 2017. As a result, during the 4
th
quarter of 2017, all companies were required to re-measure their deferred tax assets (DTA) and deferred tax liabilities (DTL) at the new corporate tax rate of 21%. This one-time re-measurement resulted in a $6.3 million increase to the Company’s income tax provision. This DTA re-measurement accompanied by an 8.7% increase in pre-tax earnings resulted in the tax provision increase. The Company will benefit significantly in 2018 from the reduction of the federal corporate tax rate which changes from 35% to 21%.
With the exception of the one-time DTA re-measurement, tax law causes the Company’s taxes payable to approximate or exceed the current provision for taxes on the income statement. Three provisions have had a significant effect on the Company’s current income tax liability: (1) the restrictions on the deductibility of credit losses; (2) deductibility of pension and other long-term employee benefits only when paid; and (3) the statutory deferral of deductibility of California franchise taxes on the Company’s federal return.
Financial Condition
Investment Securities and Federal Funds Sold
The investment portfolio provides the Company with an income alternative to loans & leases. The debt securities in the Company’s investment portfolio have historically been comprised primarily of: (1) mortgage-backed securities issued by federal government-sponsored entities; (2) debt securities issued by US Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times, the Company has selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 5 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity without subjecting the Company to the interest rate risk associated with mortgage-backed securities.
The Company’s investment portfolio at December 31, 2017 was $536.1 million compared to $506.4 million at December 31, 2016, an increase of $29.7 million or 5.9%. To protect against future increases in market interest rates, while at the same time generating some reasonable level of current yields, the Company currently invests most of its available funds in either shorter term U.S. Treasury, government agency & government-sponsored entity securities or shorter term (10, 15, and 20 year) mortgage-backed securities. As part of the acquisition of Delta National Bancorp, the Company now owns $29.4 million of floating rate U.S. Government SBA securities.
The Company's total investment portfolio currently represents 17.4% of the Company’s total assets as compared to 17.3% at December 31, 2016.
As of December 31, 2017, the Company held $54.5 million of municipal investments, of which $37.7 million were bank-qualified municipal bonds, all classified as held-to-maturity (“HTM”). In order to comply with Section 939A of the Dodd-Frank Act, the Company performs its own credit analysis on new purchases of municipal bonds. As of December 31, 2017, ninety-nine percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or issuer level, and all of these ratings are “investment grade.” The Company monitors the status of all municipal investments with particular attention paid to the approximately one percent ($295,000) of the portfolio that is not rated, and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.
Not included in the investment portfolio are interest bearing deposits with banks and overnight investments in Federal Funds Sold. Interest bearing deposits with banks consisted primarily of FRB deposits. The FRB currently pays interest on the deposits that banks maintain in their FRB accounts, whereas historically banks had to sell these Federal Funds to other banks in order to earn interest. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest bearing deposits with banks totaled $121.2 million at December 31, 2017 and $43.9 million at December 31, 2016.
The Company classifies its investments as held-to-maturity, trading, or available-for-sale (“AFS”). Securities are classified as held-to-maturity and are carried at amortized cost when the Company has the intent and ability to hold the securities to maturity. Trading securities are securities acquired for short-term appreciation and are carried at fair value, with unrealized gains and losses recorded in non-interest income. As of December 31, 2017 and December 31, 2016, there were no securities in the trading portfolio. Securities classified as available-for-sale include securities, which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demands and other factors. These securities are reported at fair value with aggregate, unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, net of related income taxes.
Investment Portfolio
The following table summarizes the balances and distributions of the investment securities held on the dates indicated.
|
|
Available
for Sale
|
|
|
Held to
Maturity
|
|
|
Available
for Sale
|
|
|
Held to
Maturity
|
|
|
Available
for Sale
|
|
|
Held to
Maturity
|
|
December 31:
(in thousands)
|
|
2017
|
|
|
|
|
|
2016
|
|
|
|
|
|
2015
|
|
|
|
|
U.S. Treasury Notes
|
|
$
|
144,164
|
|
|
$
|
-
|
|
|
$
|
134,428
|
|
|
$
|
-
|
|
|
$
|
72,884
|
|
|
$
|
-
|
|
U.S. Government SBA
|
|
|
29,380
|
|
|
|
-
|
|
|
|
36,314
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Government Agency & Government Sponsored Entities
|
|
|
3,128
|
|
|
|
-
|
|
|
|
3,241
|
|
|
|
-
|
|
|
|
33,251
|
|
|
|
-
|
|
Obligations of States and Political Subdivisions - Non-Taxable
|
|
|
-
|
|
|
|
54,460
|
|
|
|
-
|
|
|
|
58,109
|
|
|
|
-
|
|
|
|
61,396
|
|
Mortgage Backed Securities
|
|
|
301,914
|
|
|
|
-
|
|
|
|
273,270
|
|
|
|
-
|
|
|
|
262,493
|
|
|
|
-
|
|
Other
|
|
|
3,010
|
|
|
|
-
|
|
|
|
1,010
|
|
|
|
-
|
|
|
|
509
|
|
|
|
-
|
|
Total Book Value
|
|
$
|
481,596
|
|
|
$
|
54,460
|
|
|
$
|
448,263
|
|
|
$
|
58,109
|
|
|
$
|
369,137
|
|
|
$
|
61,396
|
|
Fair Value
|
|
$
|
481,596
|
|
|
$
|
55,236
|
|
|
$
|
448,263
|
|
|
$
|
58,408
|
|
|
$
|
369,137
|
|
|
$
|
62,388
|
|
Analysis of Investment Securities Available-for-Sale
The following table is a summary of the relative maturities and yields of the Company's investment securities Available-for-Sale as of December 31, 2017.
December 31, 2017
(in thousands)
|
|
Fair
Value
|
|
|
Average
Yield
|
|
U.S. Treasury
|
|
|
|
|
|
|
One year or less
|
|
$
|
109,935
|
|
|
|
1.05
|
%
|
After one year through five years
|
|
|
24,926
|
|
|
|
1.01
|
%
|
After five years through ten years
|
|
|
9,303
|
|
|
|
2.28
|
%
|
Total U.S. Treasury Securities
|
|
|
144,164
|
|
|
|
1.13
|
%
|
U.S. Government SBA
|
|
|
|
|
|
|
|
|
One year or less
|
|
|
44
|
|
|
|
2.63
|
%
|
After one year through five years
|
|
|
1,925
|
|
|
|
2.55
|
%
|
After five years through ten years
|
|
|
3,619
|
|
|
|
2.95
|
%
|
After ten years
|
|
|
23,792
|
|
|
|
2.33
|
%
|
Total U.S. Government Securities
|
|
|
29,380
|
|
|
|
2.42
|
%
|
Government Agency & Government Sponsored Entities
|
|
|
|
|
|
|
|
|
After one year through five years
|
|
|
3,128
|
|
|
|
2.89
|
%
|
Total Government Agency & Government Sponsored Entities
|
|
|
3,128
|
|
|
|
2.89
|
%
|
Other
|
|
|
|
|
|
|
|
|
One year or less
|
|
|
3,010
|
|
|
|
2.25
|
%
|
Total Other Securities
|
|
|
3,010
|
|
|
|
2.25
|
%
|
Mortgage Backed Securities
|
|
|
301,914
|
|
|
|
2.39
|
%
|
Total Investment Securities Available-for-Sale
|
|
$
|
481,596
|
|
|
|
2.02
|
%
|
Note: The average yield for floating rate securities is calculated using the current stated yield.
Analysis of Investment Securities Held-to-Maturity
The following table is a summary of the relative maturities and yields of the Company's investment securities Held-to-Maturity as of December 31, 2017. Non-taxable Obligations of States and Political Subdivisions have been calculated on a fully taxable equivalent basis.
December 31, 2017
(in thousands)
|
|
Book
Value
|
|
|
Average
Yield
|
|
Obligations of States and Political Subdivisions - Non-Taxable
|
|
|
|
|
|
|
One year or less
|
|
$
|
1,760
|
|
|
|
6.17
|
%
|
After one year through five years
|
|
|
8,659
|
|
|
|
4.55
|
%
|
After five years through ten years
|
|
|
14,155
|
|
|
|
4.10
|
%
|
After ten years
|
|
|
29,886
|
|
|
|
5.14
|
%
|
Total Obligations of States and Political Subdivisions - Non-Taxable
|
|
|
54,460
|
|
|
|
4.81
|
%
|
Total Investment Securities Held-to-Maturity
|
|
$
|
54,460
|
|
|
|
4.81
|
%
|
Loans
&
Leases
Loans & leases can be categorized by borrowing purpose and use of funds. Common examples of loans & leases made by the Company include:
Commercial and Agricultural Real Estate - These are loans secured by farmland, commercial real estate, multifamily residential properties, and other non-farm, non-residential properties generally within our market area. Commercial mortgage term loans can be made if the property is either income producing or scheduled to become income producing based upon acceptable pre-leasing, and the income will be the Bank's primary source of repayment for the loan. Loans are made both on owner occupied and investor properties; generally do not exceed 15 years (and may have pricing adjustments on a shorter timeframe); have debt service coverage ratios of 1.00 or better with a target of greater than 1.20; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.
Real Estate Construction - These are loans for development and construction (the Company generally requires the borrower to fund the land acquisition) and are secured by commercial or residential real estate. These loans are generally made only to experienced local developers with whom the Bank has a successful track record; for projects in our service area; with Loan To Value (LTV) below 75%; and where the property can be developed and sold within 2 years. Commercial construction loans are made only when there is a written take-out commitment from the Bank or an acceptable financial institution or government agency. Most acquisition, development and construction loans are tied to the prime rate or LIBOR with an appropriate spread based on the amount of perceived risk in the loan.
Residential 1
st
Mortgages - These are loans primarily made on owner occupied residences; generally underwritten to income and LTV guidelines similar to those used by FNMA and FHLMC; however, we will make loans on rural residential properties up to 20 acres. Most residential loans have terms from ten to twenty years and carry fixed rates priced off of treasury rates. The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as “subprime,” “no or low doc,” or “stated income.”
Home Equity Lines and Loans - These are loans made to individuals for home improvements and other personal needs. Generally, amounts do not exceed $250,000; Combined Loan To Value (CLTV) does not exceed 80%; FICO scores are at or above 670; Total Debt Ratios do not exceed 43%; and in some situations the Company is in a 1
st
lien position.
Agricultural - These are loans and lines of credit made to farmers to finance agricultural production. Lines of credit are extended to finance the seasonal needs of farmers during peak growing periods; are usually established for periods no longer than 12 to 24 months; are often secured by general filing liens on livestock, crops, crop proceeds and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a processing plant, or orchard/vineyard development; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.
Commercial - These are loans and lines of credit to businesses that are sole proprietorships, partnerships, LLC’s and corporations. Lines of credit are extended to finance the seasonal working capital needs of customers during peak business periods; are usually established for periods no longer than 12 to 24 months; are often secured by general filing liens on accounts receivable, inventory and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a plant or purchase of a business; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.
Consumer - These are loans to individuals for personal use, and primarily include loans to purchase automobiles or recreational vehicles, and unsecured lines of credit. The Company has a minimal consumer loan portfolio, and loans are primarily made as an accommodation to deposit customers.
Leases –These are leases to businesses or individuals, for the purpose of financing the acquisition of equipment. They can be either “finance leases” where the lessee retains the tax benefits of ownership but obtains 100% financing on their equipment purchases; or “true tax leases” where the Company, as lessor, places reliance on equipment residual value and in doing so obtains the tax benefits of ownership. Leases typically have a maturity of three to ten years, and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.
The Company accounts for leases with Investment Tax Credits (ITC) under the deferred method as established in ASC 740-10. ITC are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income on the Company’s financial statement.
See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” for a discussion about the credit risks the Company assumes and its overall credit risk management practices.
Each loan or lease type involves risks specific to the: (1) borrower; (2) collateral; and (3) loan & lease structure. See “Results of Operations - Provision and Allowance for Credit Losses” for a more detailed discussion of risks by loan & lease type. The Company’s current underwriting policies and standards are designed to mitigate the risks involved in each loan & lease type. The Company’s policies require that loans & leases are approved only to those borrowers exhibiting a clear source of repayment and the ability to service existing and proposed debt. The Company’s underwriting procedures for all loan & lease types require careful consideration of the borrower, the borrower’s financial condition, the borrower’s management capability, the borrower’s industry, and the economic environment affecting the loan or lease.
Most loans & leases made by the Company are secured, but collateral is the secondary or tertiary source of repayment; cash flow is our primary source of repayment. The quality and liquidity of collateral are important and must be confirmed before the loan is made.
In order to be responsive to borrower needs, the Company prices loans & leases: (1) on both a fixed rate and adjustable rate basis; (2) over different terms; and (3) based upon different rate indices; as long as these structures are consistent with the Company’s interest rate risk management policies and procedures. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Interest Rate Risk” for further details.
Overall, the Company's loan & lease portfolio at December 31, 2017 totaled $2.2 billion, an increase of $37.7 million or 1.7% over December 31, 2016. This increase has occurred as a result of: (1) the Company’s business development efforts directed toward credit-qualified borrowers; (2) entry into the equipment leasing business; and (3) expansion of our service area into Walnut Creek and Concord. No assurances can be made that this growth in the loan & lease portfolio will continue.
The following table sets forth the distribution of the loan & lease portfolio by type and percent as of December 31 of the years indicated.
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
(in thousands)
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Commercial Real Estate
|
|
$
|
691,639
|
|
|
|
31.1
|
%
|
|
$
|
674,445
|
|
|
|
30.9
|
%
|
|
$
|
609,602
|
|
|
|
30.4
|
%
|
|
$
|
495,316
|
|
|
|
28.9
|
%
|
|
$
|
411,037
|
|
|
|
29.5
|
%
|
Agricultural Real Estate
|
|
|
499,231
|
|
|
|
22.5
|
%
|
|
|
467,685
|
|
|
|
21.4
|
%
|
|
|
424,034
|
|
|
|
21.2
|
%
|
|
|
357,207
|
|
|
|
20.8
|
%
|
|
|
328,264
|
|
|
|
23.6
|
%
|
Real Estate Construction
|
|
|
100,206
|
|
|
|
4.5
|
%
|
|
|
176,462
|
|
|
|
8.1
|
%
|
|
|
151,974
|
|
|
|
7.6
|
%
|
|
|
96,519
|
|
|
|
5.6
|
%
|
|
|
41,092
|
|
|
|
3.0
|
%
|
Residential 1st Mortgages
|
|
|
260,751
|
|
|
|
11.7
|
%
|
|
|
242,247
|
|
|
|
11.1
|
%
|
|
|
206,405
|
|
|
|
10.3
|
%
|
|
|
171,880
|
|
|
|
10.0
|
%
|
|
|
151,292
|
|
|
|
10.9
|
%
|
Home Equity Lines and Loans
|
|
|
34,525
|
|
|
|
1.6
|
%
|
|
|
31,625
|
|
|
|
1.4
|
%
|
|
|
33,056
|
|
|
|
1.7
|
%
|
|
|
33,017
|
|
|
|
1.9
|
%
|
|
|
35,477
|
|
|
|
2.5
|
%
|
Agricultural
|
|
|
273,582
|
|
|
|
12.3
|
%
|
|
|
295,325
|
|
|
|
13.5
|
%
|
|
|
293,966
|
|
|
|
14.7
|
%
|
|
|
281,963
|
|
|
|
16.4
|
%
|
|
|
256,414
|
|
|
|
18.4
|
%
|
Commercial
|
|
|
265,703
|
|
|
|
12.0
|
%
|
|
|
217,577
|
|
|
|
10.0
|
%
|
|
|
210,804
|
|
|
|
10.5
|
%
|
|
|
230,819
|
|
|
|
13.5
|
%
|
|
|
150,398
|
|
|
|
10.8
|
%
|
Consumer & Other
|
|
|
6,656
|
|
|
|
0.3
|
%
|
|
|
6,913
|
|
|
|
0.3
|
%
|
|
|
6,592
|
|
|
|
0.3
|
%
|
|
|
4,719
|
|
|
|
0.3
|
%
|
|
|
5,052
|
|
|
|
0.4
|
%
|
Leases
|
|
|
88,957
|
|
|
|
4.0
|
%
|
|
|
70,986
|
|
|
|
3.3
|
%
|
|
|
65,054
|
|
|
|
3.3
|
%
|
|
|
44,217
|
|
|
|
2.6
|
%
|
|
|
12,733
|
|
|
|
0.9
|
%
|
Total Gross Loans & Leases
|
|
|
2,221,250
|
|
|
|
100.0
|
%
|
|
|
2,183,265
|
|
|
|
100.0
|
%
|
|
|
2,001,487
|
|
|
|
100.0
|
%
|
|
|
1,715,657
|
|
|
|
100.0
|
%
|
|
|
1,391,759
|
|
|
|
100.0
|
%
|
Less: Unearned Income
|
|
|
5,955
|
|
|
|
|
|
|
|
5,664
|
|
|
|
|
|
|
|
5,128
|
|
|
|
|
|
|
|
3,413
|
|
|
|
|
|
|
|
3,523
|
|
|
|
|
|
Subtotal
|
|
|
2,215,295
|
|
|
|
|
|
|
|
2,177,601
|
|
|
|
|
|
|
|
1,996,359
|
|
|
|
|
|
|
|
1,712,244
|
|
|
|
|
|
|
|
1,388,236
|
|
|
|
|
|
Less: Allowance for Credit Losses
|
|
|
50,342
|
|
|
|
|
|
|
|
47,919
|
|
|
|
|
|
|
|
41,523
|
|
|
|
|
|
|
|
35,401
|
|
|
|
|
|
|
|
34,274
|
|
|
|
|
|
Loans & Leases, Net
|
|
$
|
2,164,953
|
|
|
|
|
|
|
$
|
2,129,682
|
|
|
|
|
|
|
$
|
1,954,836
|
|
|
|
|
|
|
$
|
1,676,843
|
|
|
|
|
|
|
$
|
1,353,962
|
|
|
|
|
|
There were no concentrations of loans exceeding 10% of total loans which were not otherwise disclosed as a category of loans in the above table.
The following table shows the maturity distribution and interest rate sensitivity of the loan portfolio of the Company on December 31, 2017.
(in thousands)
|
|
One Year
or Less
|
|
|
Over One
Year to
Five
Years
|
|
|
Over
Five
Years
|
|
|
Total
|
|
Commercial Real Estate
|
|
$
|
41,785
|
|
|
$
|
169,991
|
|
|
$
|
473,185
|
|
|
$
|
684,961
|
|
Agricultural Real Estate
|
|
|
12,794
|
|
|
|
77,619
|
|
|
|
408,818
|
|
|
|
499,231
|
|
Real Estate Construction
|
|
|
72,246
|
|
|
|
24,345
|
|
|
|
3,615
|
|
|
|
100,206
|
|
Residential 1st Mortgages
|
|
|
384
|
|
|
|
9,423
|
|
|
|
250,944
|
|
|
|
260,751
|
|
Home Equity Lines and Loans
|
|
|
12
|
|
|
|
743
|
|
|
|
33,770
|
|
|
|
34,525
|
|
Agricultural
|
|
|
154,670
|
|
|
|
91,277
|
|
|
|
27,635
|
|
|
|
273,582
|
|
Commercial
|
|
|
124,238
|
|
|
|
103,011
|
|
|
|
38,454
|
|
|
|
265,703
|
|
Consumer & Other
|
|
|
752
|
|
|
|
5,552
|
|
|
|
352
|
|
|
|
6,656
|
|
Leases
|
|
|
331
|
|
|
|
40,571
|
|
|
|
48,778
|
|
|
|
89,680
|
|
Total
|
|
$
|
407,212
|
|
|
$
|
522,532
|
|
|
$
|
1,285,551
|
|
|
$
|
2,215,295
|
|
Rate Sensitivity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
|
$
|
52,727
|
|
|
$
|
276,272
|
|
|
$
|
559,516
|
|
|
$
|
888,515
|
|
Variable Rate
|
|
|
354,485
|
|
|
|
246,260
|
|
|
|
726,035
|
|
|
|
1,326,780
|
|
Total
|
|
$
|
407,212
|
|
|
$
|
522,532
|
|
|
$
|
1,285,551
|
|
|
$
|
2,215,295
|
|
Percent
|
|
|
18.38
|
%
|
|
|
23.59
|
%
|
|
|
58.03
|
%
|
|
|
100.00
|
%
|
Classified Loans & Leases and Non-Performing Assets
All loans & leases are assigned a credit risk grade using grading standards developed by bank regulatory agencies. See “Results of Operations - Provision and Allowance for Credit Losses” for more detail on risk grades. The Company utilizes the services of a third-party independent loan & lease review firm to perform evaluations of individual loans & leases and review the credit risk grades the Company places on loans & leases. Loans & leases that are judged to exhibit a higher risk profile are referred to as “classified” and these loans & leases receive increased management attention. As of December 31, 2017, classified loans & leases totaled $8.9 million compared to $6.4 million at December 31, 2016.
Classified loans & leases with higher levels of credit risk can be further designated as “impaired” loans & leases. A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. See “Results of Operations - Provision and Allowance for Credit Losses” for further details. Impaired loans & leases consist of: (1) non-accrual loans & leases; and/or (2) restructured loans & leases that are still performing (i.e., accruing interest).
Non-Accrual Loans & Leases - Accrual of interest on loans & leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans & leases are 90 days past due, but in management's judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans & leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. As of December 31, 2017 and 2016, non-accrual loans & leases totaled $0 and $3.1 million.
Restructured Loans & Leases - A restructuring of a loan or lease constitutes a TDR under ASC 310-40, if the Company for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. Restructured loans or leases typically present an elevated level of credit risk, as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR loans, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment.
At December 31, 2017, restructured loans totaled $6.3 million all of which were performing and at December 31, 2016, restructured loans totaled $7.5 million with $6.0 million performing.
Other Real Estate - Loans where the collateral has been repossessed are classified as other real estate ("ORE") or, if the collateral is personal property, the loan is classified as other assets on the Company's financial statements.
The following table sets forth the amount of the Company's non-performing loans & leases and ORE as of December 31 of the years indicated.
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Non-Accrual Loans & Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
19
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Agricultural Real Estate
|
|
|
-
|
|
|
|
1,304
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential 1st Mortgages
|
|
|
-
|
|
|
|
95
|
|
|
|
65
|
|
|
|
77
|
|
|
|
324
|
|
Home Equity Lines and Loans
|
|
|
-
|
|
|
|
-
|
|
|
|
538
|
|
|
|
576
|
|
|
|
406
|
|
Agricultural
|
|
|
-
|
|
|
|
243
|
|
|
|
-
|
|
|
|
18
|
|
|
|
35
|
|
Commercial
|
|
|
-
|
|
|
|
1,426
|
|
|
|
1,524
|
|
|
|
1,586
|
|
|
|
1,815
|
|
Consumer & Other
|
|
|
-
|
|
|
|
6
|
|
|
|
10
|
|
|
|
13
|
|
|
|
16
|
|
Total Non-Accrual Loans & Leases
|
|
|
-
|
|
|
|
3,074
|
|
|
|
2,156
|
|
|
|
2,270
|
|
|
|
2,596
|
|
Accruing Loans & Leases Past Due 90 Days or More
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Agricultural Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential 1st Mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Home Equity Lines and Loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer & Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Accruing Loans & Leases Past Due 90 Days or More
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Non-Performing Loans & Leases
|
|
$
|
-
|
|
|
$
|
3,074
|
|
|
$
|
2,156
|
|
|
$
|
2,270
|
|
|
$
|
2,596
|
|
Other Real Estate Owned
|
|
$
|
873
|
|
|
$
|
3,745
|
|
|
$
|
2,441
|
|
|
$
|
3,299
|
|
|
$
|
4,611
|
|
Total Non-Performing Assets
|
|
$
|
873
|
|
|
$
|
6,819
|
|
|
$
|
4,597
|
|
|
$
|
5,569
|
|
|
$
|
7,207
|
|
Restructured Loans & Leases (Performing)
|
|
$
|
6,301
|
|
|
$
|
4,462
|
|
|
$
|
4,953
|
|
|
$
|
4,955
|
|
|
$
|
4,649
|
|
Non-Performing Loans & Leases as a Percent of Total Loans & Leases
|
|
|
0.00
|
%
|
|
|
0.14
|
%
|
|
|
0.11
|
%
|
|
|
0.13
|
%
|
|
|
0.19
|
%
|
Although management believes that non-performing loans & leases are generally well-secured and that potential losses are provided for in the Company’s allowance for credit losses, there can be no assurance that future deterioration in economic conditions and/or collateral values will not result in future credit losses. See Note 6, located in “Item 8. Financial Statements and Supplementary Data” for an allocation of the allowance classified to impaired loans & leases.
The Company reported $873,000 of ORE at December 31, 2017, and $3.7 million at December 31, 2016. ORE at December 31, 2017 consisted of commercial land.
Except for those classified and non-performing loans & leases discussed above, the Company’s management is not aware of any loans & leases as of December 31, 2017, for which known financial problems of the borrower would cause serious doubts as to the ability of these borrowers to materially comply with their present loan or lease repayment terms, or any known events that would result in the loan or lease being designated as non-performing at some future date. However:
|
·
|
The Central Valley was one of the hardest hit areas in the country during the recession. In many areas housing prices declined as much as 60% and unemployment reached 15% or more. Although the economy has improved throughout most of the Central Valley, in many of the Company’s market segments housing prices remain below peak levels and unemployment levels remain above those in other areas of the state and country.
|
|
·
|
The State of California experienced drought conditions from 2013 through most of 2016. Although significant levels of rain and snow in late 2016 and early 2017 have alleviated drought conditions in many areas of California, including those in the Company’s primary service area, the long-term risks associated with the availability of water continue to exist. See “Item 1A. Risk Factors” for additional information.
|
|
·
|
The agricultural industry is facing challenges associated with: (1) weakness in export markets due to proposed changes in trade policies; (2) tight labor markets and higher wages due to legislative changes at the state and federal levels; and (3) proposed changes in immigration policy and the resulting impact on the labor pool.
|
Deposits
One of the key sources of funds to support earning assets is the generation of deposits from the Company’s customer base. The ability to grow the customer base and subsequently deposits is a significant element in the performance of the Company.
The following table sets forth, by time remaining to maturity, the Company’s time deposits in amounts of $250,000 or more at December 31, 2017.
(in thousands)
|
|
|
|
Time Deposits of $250,000 or More
|
|
|
|
Three Months or Less
|
|
$
|
117,306
|
|
Over Three Months Through Six Months
|
|
|
33,656
|
|
Over Six Months Through Twelve Months
|
|
|
43,959
|
|
Over Twelve Months
|
|
|
17,653
|
|
Total Time Deposits of $250,000 or More
|
|
$
|
212,574
|
|
Refer to the Year-To-Date Average Balances and Rate Schedules located in this "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for information on separate deposit categories.
At December 31, 2017, deposits totaled $2.7 billion. This represents an increase of 5.5% or $141.5 million from December 31, 2016. In addition to the Company’s ongoing business development activities for deposits, the following factors positively impacted year-over-year deposit growth: (1) the Company’s strong financial results and position and F&M Bank’s reputation as one of the most safe and sound banks in its market area; and (2) the Company’s expansion of its service area into Walnut Creek and Concord. The Company expects that, at some point, deposit customers may begin to diversify how they invest their money (e.g., move funds back into the stock market or other investments) and this could impact future deposit growth.
Although total deposits have increased 5.5% since December 31, 2016, the Company’s focus continues to be on increasing low cost transaction and savings accounts:
·
|
Demand and interest-bearing transaction accounts increased $182.8 million or 14.6% since December 31, 2016.
|
·
|
Savings and money market accounts have increased $53.6 million or 7.1% since December 31, 2016.
|
·
|
Time deposit accounts have decreased $94.9 million or 16.6% since December 31, 2016, primarily due to the Company’s decision not to renew $90.0 million in high rate public funds time deposit accounts from the State of California.
|
Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings
Lines of Credit with the Federal Reserve Bank and Federal Home Loan Bank are other key sources of funds to support earning assets. These sources of funds are also used to manage the Bank’s interest rate risk exposure; and, as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio. There were no FHLB advances at December 31, 2017 or 2016. There were no Federal Funds purchased or advances from the FRB at December 31, 2017 or 2016.
Long-Term Subordinated Debentures
On December 17, 2003, the Company raised $10.0 million through the sale of subordinated debentures to an off-balance sheet trust and its sale of trust-preferred securities. See Note 14, located in “Item 8. Financial Statements and Supplementary Data.” Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our TPS will continue to qualify as regulatory capital. These securities accrue interest at a variable rate based upon 3-month London InterBank Offered Rate (“LIBOR”) plus 2.85%. Interest rates reset quarterly (the next reset is March 16, 2018) and the rate was 4.45% as of December 31, 2017. The average rate paid for these securities was 4.11% in 2017 and 3.60% in 2016. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.
Capital
The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders’ Equity totaled $300.3 million at December 31, 2017, and $280.0 million at the end of 2016.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a material effect on the Company and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The implementation of Basel III requirements will increase the required capital levels that the Company and the Bank must maintain. The final rules include new minimum risk-based capital and leverage ratios, which would be phased in over time. The new minimum capital level requirements applicable to the Company and the Bank under the final rules will be: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets (“RWA”); (ii) a Tier 1 capital ratio of 6% of RWA; (iii) a total capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. The final rules also establish a "capital conservation buffer" of 2.5% above each of the new regulatory minimum capital ratios, which would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA; and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. The final rules also permit the Company’s subordinated debentures issued in 2003 to continue to be counted as Tier 1 capital.
The final rules became effective as applied to the Company and the Bank on January 1, 2015, with a phase in period through January 1, 2019. The Company believes that it is currently in compliance with all of these new capital requirements (as fully phased-in) and that they will not result in any restrictions on the Company’s business activity.
In addition, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category. For further information on the Company’s and the Bank’s risk-based capital ratios, see Note 15, located in “Item 8. Financial Statements and Supplementary Data.”
As previously discussed, in order to supplement its regulatory capital base, during December 2003, the Company issued $10.0 million of trust preferred securities. In accordance with the provisions of the “Consolidation” topic of the FASB Accounting Standards Codification (“ASC”), the Company does not consolidate the subsidiary trust, which has issued the trust-preferred securities.
In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on August 11, 2015, the Board of Directors approved an extension of the $20 million stock repurchase program over the three-year period ending September 30, 2018. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
In 2017 and 2016, the Company did not repurchase any shares under the Stock Repurchase Program. The remaining dollar value of shares that may yet be purchased under the Company’s Stock Repurchase Program is approximately $20 million.
On August 5, 2008, the Board of Directors approved a Share Purchase Rights Plan (the “Rights Plan”), pursuant to which the Company entered into a Rights Agreement dated August 5, 2008, with Computershare (formerly Registrar and Transfer Company) as Rights Agent. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for further explanation.
During 2017, the Company issued 4,975 shares of common stock, which were contributed to the Bank’s non-qualified defined contribution retirement plans. The shares issued had prices ranging from $590 per share to $595 per share. These share prices were based upon valuations completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds from these issuances were contributed to the Bank as equity capital. See Note 15, located in “Item 8. Financial Statements and Supplementary Data.”
During 2016, the Company issued 16,542 shares of common stock, of which 4,610 shares were contributed to the Bank’s non-qualified defined contribution retirement plans and 11,932 shares were issued in the acquisition of Delta National Bancorp. The shares issued had prices ranging from $525 per share to $580 per share. These share prices were based upon valuations completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds from these issuances were contributed to the Bank as equity capital.
During 2015, the Company issued 6,705 shares of common stock. All of these shares were contributed to the Bank’s non-qualified defined contribution retirement plans. The average share price of these newly issued shares was $501 per share. The share price for each issuance was based upon a valuation completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds from these issuances were contributed to the Bank as equity capital.
Critical Accounting Policies and Estimates
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the Company’s financial statements management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Management believes that the most significant subjective judgments that it makes include the following:
Allowance for Credit Losses - As a financial institution, which assumes lending and credit risks as a principal element in its business, the Company anticipates that credit losses will be experienced in the normal course of business. Accordingly, the allowance for credit losses is maintained at a level considered adequate by management to provide for losses that are inherent in the portfolio. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. Management employs a systematic methodology for determining the allowance for credit losses. On a quarterly basis, management reviews the credit quality of the loan & lease portfolio and considers problem loans & leases, delinquencies, internal credit reviews, current economic conditions, loan & lease loss experience, and other factors in determining the adequacy of the allowance balance.
While the Company utilizes a systematic methodology in determining its allowance, the allowance is based on estimates, and ultimate losses may vary from current estimates. The estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the periods in which they become known. For additional information, see Note 6, located in “Item 8. Financial Statements and Supplementary Data.”
Fair Value - The Company discloses the fair value of financial instruments and the methods and significant assumptions used to estimate those fair values. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period of time between origination of the instrument and its expected realization. For additional information, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Credit Risk” and Notes 18 and 19 located in “Item 8. Financial Statements and Supplementary Data.”
Income Taxes
-
The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year. For additional information, see Note 1, located in “Item 8. Financial Statements and Supplementary Data.”
Off-Balance-Sheet Arrangements
Off-balance-sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity, or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or research and development services with the Company. The Company had the following off balance sheet commitments as of the dates indicated.
(in thousands)
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Commitments to Extend Credit
|
|
$
|
735,678
|
|
|
$
|
609,653
|
|
Letters of Credit
|
|
|
20,061
|
|
|
|
20,444
|
|
Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties
|
|
|
759
|
|
|
|
1,835
|
|
The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party. Most standby letters of credit are issued for 12 months or less. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Additionally, the Company maintains a reserve for off balance sheet commitments, which totaled $267,000 at December 31, 2017 and $267,000 at December 31, 2016. We do not anticipate any material losses as a result of these transactions.
Aggregate Contractual Obligations and Commitments
The following table presents, as of December 31, 2017, our significant and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts, hedge basis adjustments, or other similar carrying value adjustments. For further information on the nature of each obligation type, see applicable note disclosures located in “Item 8. Financial Statements and Supplementary Data.”
(in thousands)
|
|
Total
|
|
|
1 Year or
Less
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
More Than 5
Years
|
|
Operating Lease Obligations
|
|
$
|
2,695
|
|
|
$
|
670
|
|
|
$
|
1,278
|
|
|
$
|
608
|
|
|
$
|
139
|
|
Long-Term Subordinated Debentures
|
|
|
10,310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,310
|
|
Deferred Compensation
(1)
|
|
|
47,755
|
|
|
|
2,970
|
|
|
|
1,796
|
|
|
|
1,061
|
|
|
|
41,928
|
|
Total
|
|
$
|
60,760
|
|
|
$
|
3,640
|
|
|
$
|
3,074
|
|
|
$
|
1,669
|
|
|
$
|
52,377
|
|
(1)
These amounts represent obligations to participants under the Company's various non-qualified deferred compensation plans. All amounts have been fully funded in to a Rabbi Trust as of December 31, 2017. See Note 17 located in “Item 8. Financial Statements and Supplementary Data.”
|
Quantitative and Qualitative Disclosures About Market Risk
|
Risk Management
The Company has adopted risk management policies and procedures, which aim to ensure the proper control and management of all risk factors inherent in the operation of the Company, most importantly credit risk, interest rate risk and liquidity risk. These risk factors are not mutually exclusive. It is recognized that any product or service offered by the Company may expose the Company to one or more of these risk factors.
Credit Risk
Credit risk is the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer, or borrower performance.
Credit risk in the investment portfolio and correspondent bank accounts is addressed through defined limits in the Company’s policy statements. In addition, certain securities carry insurance to enhance credit quality of the bond.
In order to control credit risk in the loan & lease portfolio the Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower, and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. However, as a financial institution that assumes credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The allowance for credit losses is maintained at a level considered by management to be adequate to provide for risks inherent in the loan & lease portfolio. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs.
The Company’s methodology for assessing the appropriateness of the allowance is applied on a regular basis and considers all loans & leases. The systematic methodology consists of three parts.
Part 1 - includes a detailed analysis of the loan & lease portfolio in two phases. The first phase is conducted in accordance with the “Receivables” topic of the FASB ASC. Individual loans & leases are reviewed to identify them for impairment. A loan or lease is impaired when principal and interest are deemed uncollectible in accordance with the original contractual terms of the loan or lease. Impairment is measured as either the expected future cash flows discounted at each loan’s or lease’s effective interest rate, the fair value of the loan’s or lease’s collateral if the loan or lease is collateral dependent, or an observable market price of the loan or lease, if one exists. Upon measuring the impairment, the Company will ensure an appropriate level of allowance is present or established.
Central to the first phase of the analysis of the loan & lease portfolio is the risk rating system. The originating credit officer assigns each borrower an initial risk rating, which is based primarily on a thorough analysis of that borrower’s financial position in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior credit administration personnel. Credits are monitored by credit administration personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary. Risk ratings are reviewed by both the Company’s independent third-party credit examiners and bank examiners from the DBO and FDIC.
Based on the risk rating system, specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates that the loan or lease is impaired and there is a probability of loss. Management performs a detailed analysis of these loans & leases, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral, and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses as a specific allowance for each of these credits.
The second phase is conducted by segmenting the loan & lease portfolio by risk rating and into groups of loans & leases with similar characteristics in accordance with the “Contingency” topic of the FASB ASC. In this second phase, groups of loans & leases with similar characteristics are reviewed and the appropriate allowance factor is applied based on the historical average charge-off rate for each particular group of loans or leases.
Part 2 - considers qualitative internal and external factors that may affect a loan or lease’s collectability, is based upon management’s evaluation of various conditions, the effects of which are not directly measured in the determination of the historical and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the second element of the analysis of the allowance include, but are not limited to the following conditions that existed as of the balance sheet date:
§
|
general economic and business conditions affecting the key service areas of the Company;
|
§
|
credit quality trends (including trends in collateral values, delinquencies and non-performing loans & leases);
|
§
|
loan & lease volumes, growth rates and concentrations;
|
§
|
loan & lease portfolio seasoning;
|
§
|
specific industry and crop conditions;
|
§
|
recent loss experience; and
|
§
|
duration of the current business cycle.
|
Part 3 - An unallocated allowance often occurs due to the imprecision in estimating and allocating allowance balances associated with macro factors such as: (1) the improving but still challenging economic conditions in the Central Valley; and (2) the long-term risks associated with the availability of water in the Central Valley.
Management reviews all of these conditions in discussion with the Company’s senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable impaired credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable impaired credit or portfolio segment as of the evaluation date, management’s evaluation of the inherent loss related to such condition is reflected in the second element of the allowance or in the unallocated allowance.
Management believes, that based upon the preceding methodology, and using information currently available, the allowance for credit losses at December 31, 2017 was adequate. No assurances can be given that future events may not result in increases in delinquencies, non-performing loans & leases, or net loan & lease charge-offs that would require increases in the provision for credit losses and thereby adversely affect the results of operations.
Interest Rate Risk
The mismatch between maturities of interest sensitive assets and liabilities results in uncertainty in the Company’s earnings and economic value and is referred to as interest rate risk. The Company does not attempt to predict interest rates and positions the balance sheet in a manner, which seeks to minimize, to the extent possible, the effects of changing interest rates.
The Company measures interest rate risk in terms of potential impact on both its economic value and earnings. The methods for governing the amount of interest rate risk include: (1) analysis of asset and liability mismatches (Gap analysis); (2) the utilization of a simulation model; and (3) limits on maturities of investment, loan & lease, and deposit products, which reduces the market volatility of those instruments.
The Gap analysis measures, at specific time intervals, the divergence between earning assets and interest bearing liabilities for which repricing opportunities will occur. A positive difference, or Gap, indicates that earning assets will reprice faster than interest-bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates and a lower net interest margin during periods of declining interest rates. Conversely, a negative Gap will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates.
The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans & leases. In addition, the magnitude of changes in the rates charged on loans & leases is not always proportionate to the magnitude of changes in the rate paid for deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease in the net interest margin solely as a result of the differences between repricing opportunities of earning assets or interest bearing liabilities.
The Company also utilizes the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of the Company’s net interest income is measured over a rolling one-year horizon.
The simulation model estimates the impact of changing interest rates on interest income from all interest earning assets and the interest expense paid on all interest bearing liabilities reflected on the Company’s balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and a 100 basis point downward shift in interest rates. A shift in rates over a 12-month period is assumed. Results that exceed policy limits, if any, are analyzed for risk tolerance and reported to the Board with appropriate recommendations. At December 31, 2017, the Company’s estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was an increase in net interest income of 2.83% if rates increase by 200 basis points and a decrease in net interest income of 4.42% if rates decline 100 basis points.
The estimated sensitivity does not necessarily represent a Company forecast and the results may not be indicative of actual changes to the Company’s net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape; prepayments on loans & leases and securities; pricing strategies on loans & leases and deposits; replacement of asset and liability cash flows; and other assumptions. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.
Liquidity Risk
Liquidity risk is the risk to earnings or capital resulting from the Company’s inability to meet its obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the Company’s ability to liquidate assets or acquire funds quickly and with minimum loss of value. The Company endeavors to maintain a cash flow adequate to fund operations, handle fluctuations in deposit levels, respond to the credit needs of borrowers, and to take advantage of investment opportunities as they arise.
The Company’s principal operating sources of liquidity include (see “Item 8. Financial Statements and Supplementary Data – Consolidated Statements of Cash Flows”) cash and cash equivalents, cash provided by operating activities, principal payments on loans & leases, proceeds from the maturity or sale of investments, and growth in deposits. To supplement these operating sources of funds the Company maintains Federal Funds credit lines of $77 million and repurchase lines of $130 million with major banks. As of December 31, 2017, the Company has additional borrowing capacity of $455.2 million with the Federal Home Loan Bank and $381.4 million with the Federal Reserve Bank. Borrowings under these lines are collateralized with loans or securities that have been accepted for pledging at the FHLB and FRB.
At December 31, 2017, the Company had available sources of liquidity, which included cash and cash equivalents and unpledged investment securities available-for-sale of approximately $424.0 million, which represents 14% of total assets.
|
Financial Statements and Supplementary Data
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
|
Page
|
|
|
Report of Management on Internal Control Over Financial Reporting
|
60
|
Report of Independent Registered Public Accounting Firm
|
61
|
Consolidated Financial Statements
|
|
Consolidated Balance Sheets – December 31, 2017, and 2016
|
62
|
Consolidated Statements of Income – Years ended December 31, 2017, 2016 and 2015
|
63
|
Consolidated Statements of Comprehensive Income – Years Ended December 31, 2017, 2016 and 2015
|
64
|
Consolidated Statements of Changes in Shareholders' Equity – Years ended December 31, 2017, 2016 and 2015
|
65
|
Consolidated Statements of Cash Flows - Years Ended December 31, 2017, 2016 and 2015
|
66
|
Notes to Consolidated Financial Statements
|
67
|
Farmers & Merchants Bancorp
Report of Management on Internal Control Over Financial Reporting
Management of Farmers & Merchants Bancorp and Subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2017. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
The Company’s system of internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and fair presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 as described in
“Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission
. As a result of this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.
Moss Adams LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report, was engaged to express an opinion as to the fairness of presentation of such financial statements. Moss Adams LLP was also engaged to audit the effectiveness of the Company’s internal control over financial reporting. The report of Moss Adams LLP follows this report.
/s/ Kent A. Steinwert
|
/s/ Stephen W. Haley
|
|
|
Kent A. Steinwert
|
Stephen W. Haley
|
Chairman, President & Chief Executive Officer
|
Executive Vice President & Chief Financial Officer
|
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Farmers & Merchants Bancorp
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying
consolidated
balance sheets of Farmers & Merchants Bancorp
and subsidiaries
(the “Company”) as of
December 31, 2017 and 2016
, the related
consolidated
statements of
income, comprehensive income, changes in shareholders’ equity and cash flows
for each of the three years in the period ended
December 31, 2017
, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of
December 31, 2017
, based on criteria established in
Internal Control - Integrated Framework 2013
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the
consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated
financial position of the Company as of
December 31, 2017 and 2016
, and the
consolidated
results of its operations and its cash flows for each of the three years in the period ended
December 31, 20
17, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017
, based on criteria established in
Internal Control - Integrated Framework 2013
issued by COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated
financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of
Management on Internal Control over Financial Reporting included in Item 8
. Our responsibility is to express an opinion on the Company’s
consolidated
financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
consolidated
financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the
consolidated
financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Moss Adams LLP
Los Angeles, California
March 15, 2018
We have served as the Company’s auditor since 2013.
Farmers & Merchants Bancorp
Consolidated Balance Sheets
(in thousands except share and per share data)
|
|
December 31,
|
|
Assets
|
|
2017
|
|
|
2016
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
Cash and Due from Banks
|
|
$
|
65,956
|
|
|
$
|
54,896
|
|
Interest Bearing Deposits with Banks
|
|
|
121,193
|
|
|
|
43,964
|
|
Total Cash and Cash Equivalents
|
|
|
187,149
|
|
|
|
98,860
|
|
|
|
|
|
|
|
|
|
|
Investment Securities:
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
|
481,596
|
|
|
|
448,263
|
|
Held-to-Maturity
|
|
|
54,460
|
|
|
|
58,109
|
|
Total Investment Securities
|
|
|
536,056
|
|
|
|
506,372
|
|
|
|
|
|
|
|
|
|
|
Loans & Leases:
|
|
|
2,215,295
|
|
|
|
2,177,601
|
|
Less: Allowance for Credit Losses
|
|
|
50,342
|
|
|
|
47,919
|
|
Loans& Leases, Net
|
|
|
2,164,953
|
|
|
|
2,129,682
|
|
|
|
|
|
|
|
|
|
|
Premises and Equipment, Net
|
|
|
28,679
|
|
|
|
29,229
|
|
Bank Owned Life Insurance
|
|
|
59,583
|
|
|
|
57,761
|
|
Interest Receivable and Other Assets
|
|
|
99,032
|
|
|
|
100,217
|
|
Total Assets
|
|
$
|
3,075,452
|
|
|
$
|
2,922,121
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Demand
|
|
$
|
832,652
|
|
|
$
|
756,236
|
|
Interest-Bearing Transaction
|
|
|
601,476
|
|
|
|
495,063
|
|
Savings and Money Market
|
|
|
813,703
|
|
|
|
760,119
|
|
Time
|
|
|
475,397
|
|
|
|
570,293
|
|
Total Deposits
|
|
|
2,723,228
|
|
|
|
2,581,711
|
|
Subordinated Debentures
|
|
|
10,310
|
|
|
|
10,310
|
|
Interest Payable and Other Liabilities
|
|
|
42,254
|
|
|
|
50,119
|
|
Total Liabilities
|
|
|
2,775,792
|
|
|
|
2,642,140
|
|
|
|
|
|
|
|
|
|
|
Commitments & Contingencies (See Note 20)
|
|
|
|
|
|
|
|
|
Shareholders' Equity
|
|
|
|
|
|
|
|
|
Preferred Stock: No Par Value, 1,000,000 Shares Authorized, None Issued or Outstanding
|
|
|
-
|
|
|
|
-
|
|
Common Stock: Par Value $0.01, 7,500,000 Shares Authorized, 812,304 and 807,329 Shares Issued and Outstanding at December 31, 2017 and 2016, respectively.
|
|
|
8
|
|
|
|
8
|
|
Additional Paid-In Capital
|
|
|
93,624
|
|
|
|
90,671
|
|
Retained Earnings
|
|
|
206,845
|
|
|
|
189,313
|
|
Accumulated Other Comprehensive Income
|
|
|
(817
|
)
|
|
|
(11
|
)
|
Total Shareholders' Equity
|
|
|
299,660
|
|
|
|
279,981
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
3,075,452
|
|
|
$
|
2,922,121
|
|
The accompanying notes are an integral part of these consolidated financial statements
Farmers & Merchants Bancorp
Consolidated Statements of Income
(in thousands except per share data)
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
Interest and Fees on Loans & Leases
|
|
$
|
102,682
|
|
|
$
|
91,570
|
|
|
$
|
81,558
|
|
Interest on Deposits with Banks
|
|
|
2,060
|
|
|
|
287
|
|
|
|
172
|
|
Interest on Investment Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
8,123
|
|
|
|
5,505
|
|
|
|
6,311
|
|
Exempt from Federal Tax
|
|
|
1,747
|
|
|
|
1,904
|
|
|
|
2,034
|
|
Total Interest Income
|
|
|
114,612
|
|
|
|
99,266
|
|
|
|
90,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
5,865
|
|
|
|
3,807
|
|
|
|
2,989
|
|
Borrowed Funds
|
|
|
-
|
|
|
|
18
|
|
|
|
7
|
|
Subordinated Debentures
|
|
|
424
|
|
|
|
371
|
|
|
|
329
|
|
Total Interest Expense
|
|
|
6,289
|
|
|
|
4,196
|
|
|
|
3,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
108,323
|
|
|
|
95,070
|
|
|
|
86,750
|
|
Provision for Credit Losses
|
|
|
2,850
|
|
|
|
6,335
|
|
|
|
750
|
|
Net Interest Income After Provision for Credit Losses
|
|
|
105,473
|
|
|
|
88,735
|
|
|
|
86,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Charges on Deposit Accounts
|
|
|
3,453
|
|
|
|
3,376
|
|
|
|
3,458
|
|
Net Gain (Loss) on Investment Securities
|
|
|
131
|
|
|
|
(284
|
)
|
|
|
275
|
|
Increase in Cash Surrender Value of Life Insurance
|
|
|
1,822
|
|
|
|
1,864
|
|
|
|
1,908
|
|
Debit Card and ATM Fees
|
|
|
3,873
|
|
|
|
3,398
|
|
|
|
3,183
|
|
Net Gain on Deferred Compensation Investments
|
|
|
2,563
|
|
|
|
1,999
|
|
|
|
1,375
|
|
Bargain Purchase Gain
|
|
|
-
|
|
|
|
1,832
|
|
|
|
-
|
|
Other
|
|
|
4,920
|
|
|
|
3,072
|
|
|
|
4,376
|
|
Total Non-Interest Income
|
|
|
16,762
|
|
|
|
15,257
|
|
|
|
14,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and Employee Benefits
|
|
|
45,746
|
|
|
|
41,981
|
|
|
|
39,683
|
|
Net Gain on Deferred Compensation Investments
|
|
|
2,563
|
|
|
|
1,999
|
|
|
|
1,375
|
|
Occupancy
|
|
|
3,543
|
|
|
|
2,985
|
|
|
|
2,884
|
|
Equipment
|
|
|
3,994
|
|
|
|
3,493
|
|
|
|
3,162
|
|
Marketing
|
|
|
1,027
|
|
|
|
1,191
|
|
|
|
1,254
|
|
Legal
|
|
|
424
|
|
|
|
1,243
|
|
|
|
421
|
|
FDIC Insurance
|
|
|
932
|
|
|
|
1,174
|
|
|
|
1,193
|
|
Gain on Sale of ORE
|
|
|
(414
|
)
|
|
|
(5,941
|
)
|
|
|
(299
|
)
|
Other
|
|
|
9,939
|
|
|
|
10,047
|
|
|
|
6,586
|
|
Total Non-Interest Expense
|
|
|
67,754
|
|
|
|
58,172
|
|
|
|
56,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
54,481
|
|
|
|
45,820
|
|
|
|
44,316
|
|
Provision for Income Taxes
|
|
|
26,111
|
|
|
|
16,097
|
|
|
|
16,924
|
|
Net Income
|
|
$
|
28,370
|
|
|
$
|
29,723
|
|
|
$
|
27,392
|
|
Basic Earnings Per Common Share
|
|
$
|
35.03
|
|
|
$
|
37.44
|
|
|
$
|
34.82
|
|
The accompanying notes are an integral part of these consolidated financial statements
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive Income
(in thousands)
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net Income
|
|
$
|
28,370
|
|
|
$
|
29,723
|
|
|
$
|
27,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Loss on Available-for-Sale Securities
|
|
|
(1,011
|
)
|
|
|
(1,330
|
)
|
|
|
(3,069
|
)
|
Deferred Tax Benefit Related to Unrealized Losses
|
|
|
281
|
|
|
|
559
|
|
|
|
1,290
|
|
Reclassification Adjustment for Realized (Gain) Loss on Available-for-Sale Securities Included in Net Income
|
|
|
(131
|
)
|
|
|
284
|
|
|
|
(275
|
)
|
Tax Expense (Benefit) Related to Reclassification Adjustment
|
|
|
55
|
|
|
|
(119
|
)
|
|
|
116
|
|
Change in Net Unrealized Loss on Available-for-Sale Securities, Net of Tax
|
|
|
(806
|
)
|
|
|
(606
|
)
|
|
|
(1,938
|
)
|
Total Other Comprehensive Loss
|
|
|
(806
|
)
|
|
|
(606
|
)
|
|
|
(1,938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
27,564
|
|
|
$
|
29,117
|
|
|
$
|
25,454
|
|
The accompanying notes are an integral part of these consolidated financial statements
Farmers & Merchants Bancorp
Consolidated Statements of Changes in Shareholders' Equity
(in thousands except share and per share data)
|
|
Common
Shares
Outstanding
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
|
Total
Shareholders'
Equity
|
|
Balance, January 1, 2015
|
|
|
784,082
|
|
|
$
|
8
|
|
|
$
|
77,804
|
|
|
$
|
152,833
|
|
|
$
|
2,533
|
|
|
$
|
233,178
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,392
|
|
|
|
|
|
|
|
27,392
|
|
Cash Dividends Declared on Common Stock ($12.90 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,157
|
)
|
|
|
|
|
|
|
(10,157
|
)
|
Issuance of Common Stock
|
|
|
6,705
|
|
|
|
|
|
|
|
3,360
|
|
|
|
|
|
|
|
|
|
|
|
3,360
|
|
Change in Net Unrealized Gain on Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,938
|
)
|
|
|
(1,938
|
)
|
Balance, December 31, 2015
|
|
|
790,787
|
|
|
$
|
8
|
|
|
$
|
81,164
|
|
|
$
|
170,068
|
|
|
$
|
595
|
|
|
$
|
251,835
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,723
|
|
|
|
|
|
|
|
29,723
|
|
Cash Dividends Declared on Common Stock ($13.10 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,478
|
)
|
|
|
|
|
|
|
(10,478
|
)
|
Issuance of Common Stock
|
|
|
16,542
|
|
|
|
|
|
|
|
9,507
|
|
|
|
|
|
|
|
|
|
|
|
9,507
|
|
Change in Net Unrealized Gain on Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(606
|
)
|
|
|
(606
|
)
|
Balance, December 31, 2016
|
|
|
807,329
|
|
|
$
|
8
|
|
|
$
|
90,671
|
|
|
$
|
189,313
|
|
|
$
|
(11
|
)
|
|
$
|
279,981
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,370
|
|
|
|
|
|
|
|
28,370
|
|
Cash Dividends Declared on Common Stock ($13.55 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,982
|
)
|
|
|
|
|
|
|
(10,982
|
)
|
Issuance of Common Stock
|
|
|
4,975
|
|
|
|
|
|
|
|
2,953
|
|
|
|
|
|
|
|
|
|
|
|
2,953
|
|
Tax Adjustment of Available-for-Sale Securities Reclassed from AOCI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
(144
|
)
|
|
|
-
|
|
Change in Net Unrealized (Loss) on Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(662
|
)
|
|
|
(662
|
)
|
Balance, December 31, 2017
|
|
|
812,304
|
|
|
$
|
8
|
|
|
$
|
93,624
|
|
|
$
|
206,845
|
|
|
$
|
(817
|
)
|
|
$
|
299,660
|
|
The accompanying notes are an integral part of these consolidated financial statements
Farmers & Merchants Bancorp
Consolidated Statements of Cash Flows
(in thousands)
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
28,370
|
|
|
$
|
29,723
|
|
|
$
|
27,392
|
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Credit Losses
|
|
|
2,850
|
|
|
|
6,335
|
|
|
|
750
|
|
Depreciation and Amortization
|
|
|
2,186
|
|
|
|
1,896
|
|
|
|
1,685
|
|
Provision for Deferred Income Taxes
|
|
|
12,605
|
|
|
|
(2,299
|
)
|
|
|
(907
|
)
|
Net Amortization of Investment Security Premium & Discounts
|
|
|
1,430
|
|
|
|
1,481
|
|
|
|
1,554
|
|
Amortization of Core Deposit Intangible
|
|
|
110
|
|
|
|
13
|
|
|
|
-
|
|
Accretion of Discount on Acquired Loans
|
|
|
(202
|
)
|
|
|
(43
|
)
|
|
|
-
|
|
Net (Gain) Loss on Investment Securities
|
|
|
(131
|
)
|
|
|
284
|
|
|
|
(275
|
)
|
Net (Gain) Loss on Sale of Property & Equipment
|
|
|
(1,189
|
)
|
|
|
71
|
|
|
|
(383
|
)
|
Net Gain on sale of ORE
|
|
|
(414
|
)
|
|
|
(5,941
|
)
|
|
|
(299
|
)
|
Net Gain from Acquisition
|
|
|
-
|
|
|
|
(1,832
|
)
|
|
|
-
|
|
Net Change in Operating Assets & Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Increase) Decrease in Interest Receivable and Other Assets
|
|
|
(275
|
)
|
|
|
1,056
|
|
|
|
4,685
|
|
Net (Decrease) Increase in Interest Payable and Other Liabilities
|
|
|
(5,396
|
)
|
|
|
4,068
|
|
|
|
3,125
|
|
Net Cash Provided by Operating Activities
|
|
|
39,944
|
|
|
|
34,812
|
|
|
|
37,327
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of Investment Securities Available-for-Sale
|
|
|
(325,573
|
)
|
|
|
(497,797
|
)
|
|
|
(203,996
|
)
|
Proceeds from Sold, Matured, or Called Securities Available-for-Sale
|
|
|
289,857
|
|
|
|
426,142
|
|
|
|
227,157
|
|
Purchase of Investment Securities Held-to-Maturity
|
|
|
(1,205
|
)
|
|
|
(2,264
|
)
|
|
|
(17,747
|
)
|
Proceeds from Matured, or Called Securities Held-to-Maturity
|
|
|
4,794
|
|
|
|
5,499
|
|
|
|
18,031
|
|
Net Loans & Leases Paid, Originated or Acquired
|
|
|
(38,178
|
)
|
|
|
(148,960
|
)
|
|
|
(284,211
|
)
|
Principal Collected on Loans & Leases Previously Charged Off
|
|
|
259
|
|
|
|
232
|
|
|
|
5,468
|
|
Cash Acquired in Acquisition, Net of Cash Paid
|
|
|
-
|
|
|
|
31,751
|
|
|
|
-
|
|
Additions to Premises and Equipment
|
|
|
(4,254
|
)
|
|
|
(1,504
|
)
|
|
|
(2,726
|
)
|
Purchase of Other Investment
|
|
|
(14,380
|
)
|
|
|
(6,825
|
)
|
|
|
(2,110
|
)
|
Proceeds from Sale of Property & Equipment
|
|
|
3,304
|
|
|
|
-
|
|
|
|
670
|
|
Proceeds from Sale of ORE
|
|
|
3,186
|
|
|
|
8,282
|
|
|
|
1,156
|
|
Net Cash Used in Investing Activities
|
|
|
(82,190
|
)
|
|
|
(185,444
|
)
|
|
|
(258,308
|
)
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Deposits
|
|
|
141,517
|
|
|
|
200,524
|
|
|
|
213,459
|
|
Cash Dividends
|
|
|
(10,982
|
)
|
|
|
(10,478
|
)
|
|
|
(10,157
|
)
|
Net Cash Provided by Financing Activities
|
|
|
130,535
|
|
|
|
190,046
|
|
|
|
203,302
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
88,289
|
|
|
|
39,414
|
|
|
|
(17,679
|
)
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
98,860
|
|
|
|
59,446
|
|
|
$
|
77,125
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
187,149
|
|
|
$
|
98,860
|
|
|
$
|
59,446
|
|
Supplementary Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Transferred to Foreclosed Assets (ORE)
|
|
$
|
-
|
|
|
$
|
538
|
|
|
$
|
-
|
|
Cash Payments Made for Income Taxes
|
|
$
|
13,942
|
|
|
$
|
12,891
|
|
|
$
|
8,475
|
|
Issuance of Common Stock to the Bank's Non-Qualified Retirement Plans
|
|
$
|
2,953
|
|
|
$
|
2,586
|
|
|
$
|
3,360
|
|
Interest Paid
|
|
$
|
6,005
|
|
|
$
|
3,856
|
|
|
$
|
3,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Assets Acquired
|
|
$
|
-
|
|
|
$
|
114,871
|
|
|
$
|
-
|
|
Fair Value of Liabilities Acquired
|
|
$
|
-
|
|
|
$
|
103,861
|
|
|
$
|
-
|
|
Issuance of Common Stock to Acquired Bank's Shareholders
|
|
$
|
-
|
|
|
$
|
6,921
|
|
|
$
|
-
|
|
The accompanying notes are an integral part of these consolidated financial statements
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Farmers & Merchants Bancorp (the “Company”) was organized March 10, 1999. Primary operations are related to traditional banking activities through its subsidiary Farmers & Merchants Bank of Central California (the “Bank”) which was established in 1916. The Bank’s wholly owned subsidiaries include Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Farmers & Merchants Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts as trustee on deeds of trust originated by the Bank.
The Company’s other subsidiaries include F & M Bancorp, Inc. and FMCB Statutory Trust I. F & M Bancorp, Inc. was created in March 2002 to protect the name F & M Bank. During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name “F & M Bank” as part of a larger effort to enhance the Company’s image and build brand name recognition. In December 2003, the Company formed a wholly owned subsidiary, FMCB Statutory Trust I, for the sole purpose of issuing Trust Preferred Securities and related subordinated debentures, in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). FMCB Statutory Trust I is a non-consolidated subsidiary.
On November 18, 2016, Farmers & Merchants Bancorp completed the acquisition of Delta National Bancorp, headquartered in Manteca, California, and the parent holding company for Delta Bank N.A., a locally owned and operated community bank established in 1973. As of the acquisition date, Delta National Bancorp had approximately $112 million in assets and four branch locations in the communities of Manteca, Riverbank, Modesto and Turlock. At the effective time of the acquisition, Delta National Bancorp was merged into Farmers & Merchants Bancorp and Delta Bank, N.A. was merged into Farmers & Merchants Bank of Central California.
The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practice within the banking industry. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements.
Basis of Presentation
The accompanying consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America for financial information.
The accompanying consolidated financial statements include the accounts of the Company and the Company’s wholly owned subsidiaries, F & M Bancorp, Inc. and the Bank, along with the Bank’s wholly owned subsidiaries, Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Significant inter-company transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Certain amounts in the prior years' financial statements and related footnote disclosures have been reclassified to conform to the current-year presentation. These reclassifications had no effect on previously reported net income or total shareholders’ equity.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company has defined cash and cash equivalents as those amounts included in the balance sheet captions Cash and Due from Banks, Interest Bearing Deposits with Banks, Federal Funds Sold and Securities Purchased Under Agreements to Resell. For these instruments, the carrying amount is a reasonable estimate of fair value.
Investment Securities
Investment securities are classified at the time of purchase as held-to-maturity (“HTM”) if it is management’s intent and the Company has the ability to hold the securities until maturity. These securities are carried at cost, adjusted for amortization of premium and accretion of discount using a level yield of interest over the estimated remaining period until maturity. Losses, reflecting a decline in value judged by the Company to be other than temporary, are recognized in the period in which they occur.
Securities are classified as available-for-sale (“AFS”) if it is management’s intent, at the time of purchase, to hold the securities for an indefinite period of time and/or to use the securities as part of the Company’s asset/liability management strategy. These securities are reported at fair value with aggregate unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, net of related income taxes. Fair values are based on quoted market prices or broker/dealer price quotations on a specific identification basis. Gains or losses on the sale of these securities are computed using the specific identification method.
Trading securities, if any, are acquired for short-term appreciation and are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in non-interest income.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement; and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
Loans & Leases
Loans & leases are reported at the principal amount outstanding net of unearned discounts and deferred loan & lease fees and costs. Interest income on loans & leases is accrued daily on the outstanding balances using the simple interest method. Loan & lease origination fees are deferred and recognized over the contractual life of the loan or lease as an adjustment to the yield. Loans & leases are placed on non-accrual status when the collection of principal or interest is in doubt or when they become past due for 90 days or more unless they are both well-secured and in the process of collection. For this purpose, a loan or lease is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or lease or is guaranteed by a financially capable party. When a loan or lease is placed on non-accrual status, the accrued and unpaid interest receivable is reversed and charged against current income; thereafter, interest income is recognized only as it is collected in cash. Additionally, cash would be applied to principal if all principal was not expected to be collected. Loans & leases placed on non-accrual status are returned to accrual status when the loans or leases are paid current as to principal and interest and future payments are expected to be made in accordance with the contractual terms of the loan or lease.
A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Impaired loans & leases are either: (1) non-accrual loans & leases; or (2) restructured loans & leases that are still accruing interest. Loans or leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.
A restructuring of a loan or lease constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the borrower’s (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction) financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans & leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment as described above.
Generally, the Company will not restructure loans or leases for borrowers unless: (1) the existing loan or lease is brought current as to principal and interest payments; and (2) the restructured loan or lease can be underwritten to reasonable underwriting standards. If these standards are not met other actions will be pursued (e.g., foreclosure) to collect outstanding loan or lease amounts. After restructure, a determination is made whether the loan or lease will be kept on accrual status based upon the underwriting and historical performance of the restructured credit.
Allowance for Credit Losses
The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance sheet date. The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors.
The determination of the general reserve for loans & leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, qualitative factors that include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.
The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1
st
mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer and other; and (9) equipment leases. The allowance for credit losses attributable to each portfolio segment, which includes both individually evaluated impaired loans & leases and loans & leases that are collectively evaluated for impairment, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.
The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:
Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.
Special Mention – A special mention loan or lease has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company's credit position at some future date. Special mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard – A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans or leases classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations.
They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful –
Loans or leases classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable.
Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance.
The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:
Commercial Real Estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.
Real Estate Construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.
Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term; typically made to relationship customers; generally underwritten to existing cash flows of operating businesses; and may be collateralized by fixed assets, inventory and/or accounts receivable. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.
Agricultural Real Estate and Agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate. These loans are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.
Leases – Equipment leases are generally considered to possess a moderate inherent risk of loss. As lessor, the Company is subject to both the credit risk of the borrower and the residual value risk of the equipment. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.
Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a low inherent risk of loss, although this is not always true as evidenced by the correction in residential real estate values that occurred between 2007 and 2012. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.
Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.
At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company's and Bank's regulators, including the Federal Reserve Board (“FRB”), the California Department of Business Oversight (“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”), as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.
Acquired Loans
Loans acquired through purchase or through a business combination are recorded at their fair value at the acquisition date. Credit discounts, which reflect estimates of credit losses, expected to be incurred over the life of the loan, are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.
Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in Interest Payable and Other Liabilities on the Company’s Consolidated Balance Sheet.
Premises and Equipment
Premises, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. Estimated useful lives of buildings range from 30 to 40 years, and for furniture and equipment from 3 to 7 years. Leasehold improvements are amortized over the lesser of the terms of the respective leases, or their useful lives, which are generally 5 to 10 years. Remodeling and capital improvements are capitalized while maintenance and repairs are charged directly to occupancy expense.
Other Real Estate
Other real estate, which is included in other assets, is expected to be sold and is comprised of properties no longer utilized for business operations and property acquired through foreclosure in satisfaction of indebtedness. These properties are recorded at fair value less estimated selling costs upon acquisition. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the allowance for credit losses at the time of acquisition. Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest expense as incurred.
Income Taxes
The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year.
The Company follows the standards set forth in the “Income Taxes” topic of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The Company accounts for leases with Investment Tax Credits (ITC) under the deferred method as established in ASC 740-10. ITC are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income on the Company’s financial statement.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest expense and penalties associated with unrecognized tax benefits, if any, are included in the provision for income taxes in the Consolidated Statements of Income.
Basic Earnings Per Common Share
The Company’s common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. There are no common stock equivalent shares. Therefore, there is no presentation of diluted basic earnings per common share. See Note 16 for additional information.
Segment Reporting
The “Segment Reporting” topic of the FASB ASC requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a holding company for a community bank, which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change. Therefore, the Company only reports one segment.
Low Income Housing Tax Credit Investments (LIHTC)
The Company accounts for its interest in LIHTC using the cost method as established in ASC 323-740. As an investor, the Company obtains income tax credits and deductions from the operating losses of these tax credit entities. The income tax credits and deductions are allocated to the investors based on their ownership percentages and are recorded as a reduction of income tax expense (or an increase to income tax benefit) and a reduction of federal income taxes payable.
Comprehensive Income
The “Comprehensive Income” topic of the FASB ASC establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income (loss) refers to revenues, expenses, gains, and losses that U.S. GAAP recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
Business Combinations And Related Matters
Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100 percent of the acquired assets and assumed liabilities, regardless of the percentage owned, at their estimated fair values as of the date of acquisition. Any excess of the fair value over the purchase price of net assets and other identifiable intangible assets acquired is recorded as bargain purchase gain. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of operations from the date of acquisition. Acquisition-related costs, including conversion charges, are expensed as incurred. The Company applied this guidance to the acquisition of Delta National Bancorp that was consummated on November 18, 2016. The Company's consolidated financial statements reflect the operations of Delta National Bancorp from November 19, 2016 through December 31, 2016.
Intangible Assets
Intangible assets are comprised of core deposit intangibles acquired in the Delta National Bancorp acquisition. Intangible assets with definite useful lives are amortized over their respective estimated useful lives. If an event occurs that indicates the carrying amount of an intangible asset may not be recoverable, management reviews the asset for impairment.
2. Business Combinations
Delta National Bancorp
On November 18, 2016, the Company completed the acquisition of Delta National Bancorp. Delta National Bancorp was incorporated under the laws of the State of California on December 21, 1981, for the purpose of serving as a bank holding company under the Bank Holding Act of 1956. Its wholly owned subsidiary, Delta Bank, N.A., operated as a commercial bank with branches in the cities of Manteca, Riverbank, Turlock, and Modesto, California. The acquisition enhances our market presence and added $32.4 million in loans, $103.7 million in deposits and $38.7 million in investment securities to the Company. Effective December 9, 2016, the Modesto branch was closed after Management determined that our customers and the business community could be easily supported from our current Modesto location. The assets acquired and liabilities assumed, both tangible and intangible, were recorded at their fair values as of the acquisition date in accordance with ASC 805,
Business Combinations
. The acquisition was treated as a "reorganization" within the meaning of section 368(a)(1)(A) of the Internal Revenue Code and is considered tax-free for U.S. federal income tax purposes.
3. Investment Securities
The amortized cost, fair values, and unrealized gains and losses of the securities
available-for-sale
are as follows:
(in thousands)
December 31, 2017
|
|
Amortized
Cost
|
|
|
Gross Unrealized
|
|
|
Fair/Book
Value
|
|
Gains
|
|
|
Losses
|
Government Agency & Government-Sponsored Entities
|
|
$
|
3,080
|
|
|
$
|
48
|
|
|
$
|
-
|
|
|
$
|
3,128
|
|
US Treasury Notes
|
|
|
144,606
|
|
|
|
-
|
|
|
|
442
|
|
|
|
144,164
|
|
US Govt SBA
|
|
|
29,559
|
|
|
|
29
|
|
|
|
208
|
|
|
|
29,380
|
|
Mortgage Backed Securities
(1)
|
|
|
302,502
|
|
|
|
939
|
|
|
|
1,527
|
|
|
|
301,914
|
|
Other
|
|
|
3,010
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,010
|
|
Total
|
|
$
|
482,757
|
|
|
$
|
1,016
|
|
|
$
|
2,177
|
|
|
$
|
481,596
|
|
December 31, 2016
|
|
Amortized
Cost
|
|
|
Gross Unrealized
|
|
|
Fair/Book
Value
|
|
Gains
|
|
|
Losses
|
Government Agency & Government-Sponsored Entities
|
|
$
|
3,127
|
|
|
$
|
114
|
|
|
$
|
-
|
|
|
$
|
3,241
|
|
US Treasury Notes
|
|
|
134,755
|
|
|
|
5
|
|
|
|
332
|
|
|
|
134,428
|
|
US Govt SBA
|
|
|
36,532
|
|
|
|
42
|
|
|
|
260
|
|
|
|
36,314
|
|
Mortgage Backed Securities
(1)
|
|
|
272,858
|
|
|
|
1,725
|
|
|
|
1,313
|
|
|
|
273,270
|
|
Other
|
|
|
1,010
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,010
|
|
Total
|
|
$
|
448,282
|
|
|
$
|
1,886
|
|
|
$
|
1,905
|
|
|
$
|
448,263
|
|
(1)
|
All Mortgage Backed Securities were issued by an agency or government sponsored entity of the U.S. government.
|
The book values, estimated fair values and unrealized gains and losses of investments classified as
held-to-maturity
are as follows:
(in thousands)
December 31, 2017
|
|
Book
Value
|
|
|
Gross Unrealized
|
|
|
Fair
Value
|
|
Gains
|
|
|
Losses
|
Obligations of States and Political Subdivisions
|
|
$
|
54,460
|
|
|
$
|
776
|
|
|
$
|
-
|
|
|
$
|
55,236
|
|
Total
|
|
$
|
54,460
|
|
|
$
|
776
|
|
|
$
|
-
|
|
|
$
|
55,236
|
|
December 31, 2016
|
|
Book
Value
|
|
|
Gross Unrealized
|
|
|
Fair
Value
|
|
Gains
|
|
|
Losses
|
Obligations of States and Political Subdivisions
|
|
$
|
58,109
|
|
|
$
|
339
|
|
|
$
|
40
|
|
|
$
|
58,408
|
|
Total
|
|
$
|
58,109
|
|
|
$
|
339
|
|
|
$
|
40
|
|
|
$
|
58,408
|
|
Fair values are based on quoted market prices or dealer quotes. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities.
The amortized cost and estimated fair values of investment securities at December 31, 2017 by contractual maturity are shown in the following tables.
(in thousands)
|
|
Available-for-Sale
|
|
|
Held-to-Maturity
|
|
December 31, 2017
|
|
Amortized
Cost
|
|
|
Fair/Book
Value
|
|
|
Book
Value
|
|
|
Fair
Value
|
|
Within One Year
|
|
$
|
113,065
|
|
|
$
|
112,989
|
|
|
$
|
1,760
|
|
|
$
|
1,769
|
|
After One Year Through Five Years
|
|
|
30,207
|
|
|
|
29,979
|
|
|
|
8,659
|
|
|
|
8,664
|
|
After Five Years Through Ten Years
|
|
|
13,044
|
|
|
|
12,922
|
|
|
|
14,155
|
|
|
|
14,347
|
|
After Ten Years
|
|
|
23,939
|
|
|
|
23,792
|
|
|
|
29,886
|
|
|
|
30,456
|
|
|
|
|
180,255
|
|
|
|
179,682
|
|
|
|
54,460
|
|
|
|
55,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Not Due at a Single Maturity Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Backed Securities
|
|
|
302,502
|
|
|
|
301,914
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
482,757
|
|
|
$
|
481,596
|
|
|
$
|
54,460
|
|
|
$
|
55,236
|
|
Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
The following tables show those investments with gross unrealized losses and their market value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at the dates indicated.
(in thousands)
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
December 31, 2017
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury Notes
|
|
$
|
94,281
|
|
|
$
|
144
|
|
|
$
|
49,883
|
|
|
$
|
298
|
|
|
$
|
144,164
|
|
|
$
|
442
|
|
US Govt SBA
|
|
|
8,379
|
|
|
|
51
|
|
|
|
12,900
|
|
|
|
157
|
|
|
|
21,279
|
|
|
|
208
|
|
Mortgage Backed Securities
|
|
|
126,863
|
|
|
|
932
|
|
|
|
43,208
|
|
|
|
595
|
|
|
|
170,071
|
|
|
|
1,527
|
|
Total
|
|
$
|
229,523
|
|
|
$
|
1,127
|
|
|
$
|
105,991
|
|
|
$
|
1,050
|
|
|
$
|
335,514
|
|
|
$
|
2,177
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
December 31, 2016
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury Notes
|
|
$
|
99,429
|
|
|
$
|
332
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
99,429
|
|
|
$
|
332
|
|
US Govt SBA
|
|
|
27,483
|
|
|
|
260
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,483
|
|
|
|
260
|
|
Mortgage Backed Securities
|
|
|
123,157
|
|
|
|
1,313
|
|
|
|
-
|
|
|
|
-
|
|
|
|
123,157
|
|
|
|
1,313
|
|
Total
|
|
$
|
250,069
|
|
|
$
|
1,905
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
250,069
|
|
|
$
|
1,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of States and Political Subdivisions
|
|
$
|
7,251
|
|
|
$
|
40
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,251
|
|
|
$
|
40
|
|
Total
|
|
$
|
7,251
|
|
|
$
|
40
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,251
|
|
|
$
|
40
|
|
As of December 31, 2017, the Company held 476 investment securities of which 97 were in an unrealized loss position for less than twelve months and 98 securities were in an unrealized loss position for twelve months or more. Management periodically evaluates each investment security for other-than-temporary impairment relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities.
Securities of Government Agency and Government Sponsored Entities – At December 31, 2017, no securities of government agency and government sponsored entities were in a loss position for less than 12 months and none were in a loss position for 12 months or more. There were no unrealized losses on the Company's investments in securities of government agency and government sponsored entities at December 31, 2017 or December 31, 2016. Repayment of these investments is guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2017.
U.S. Treasury Notes – At December 31, 2017, 7 U.S. Treasury Note security investments were in a loss position for less than 12 months and 2 were in a loss position for 12 months or more. The unrealized losses on the Company's investment in US treasury notes were $442,000 at December 31, 2017 and $332,000 at December 31, 2016. The unrealized losses were caused by interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2017 and December 31, 2016.
U.S. Government SBA – At December 31, 2017, 54 U.S. Government SBA security investments were in a loss position for less than 12 months and 70 were in a loss position for 12 months or more. The unrealized losses on the Company's investment in U.S. Government SBA were $208,000 at December 31, 2017 and $260,000 at December 31, 2016. The unrealized losses were caused by interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2017 and December 31, 2016.
Mortgage Backed Securities - At December 31, 2017, 26 mortgage backed security investments were in a loss position for less than 12 months and 36 was in a loss position for 12 months or more. The unrealized losses on the Company's investment in mortgage-backed securities were $1.5 million at December 31, 2017 and $1.3 million at December 31, 2016. The unrealized losses were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2017 or 2016.
Obligations of States and Political Subdivisions - At December 31, 2017, no obligations of states and political subdivisions were in a loss position for less than 12 months. None were in a loss position for 12 months or more. As of December 31, 2017, over ninety-nine percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or the issuer level, and all of these ratings are “investment grade.” The Company monitors the status of the one percent of the portfolio that is not rated and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.
The unrealized losses on the Company’s investment in obligation of states and political subdivisions were $0 at December 31, 2017 and $40,000 at December 31, 2016. Management believes that any unrealized losses on the Company's investments in obligations of states and political subdivisions were caused by interest rate fluctuations. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company does not intend to sell the securities and it is more likely than not that the Company would not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2017 and December 31, 2016.
Proceeds from sales and calls of these securities were as follows:
(in thousands)
Gross Gross Gross
|
|
Gross
Proceeds
|
|
|
Gross
Gains
|
|
|
Gross
Losses
|
|
2017
|
|
$
|
7,831
|
|
|
$
|
143
|
|
|
$
|
12
|
|
2016
|
|
$
|
105,941
|
|
|
$
|
250
|
|
|
$
|
534
|
|
2015
|
|
$
|
61,335
|
|
|
$
|
275
|
|
|
$
|
-
|
|
Pledged Securities
As of December 31, 2017, securities carried at $214.5 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This amount was $171.9 million at December 31, 2016.
Investment in Unconsolidated Subsidiary
On April 5, 2017, the Company purchased 4.9% of the voting shares of Bank of Rio Vista, Rio Vista, California for $1.4 million. On July 3, 2017, the Federal Reserve Bank of San Francisco approved the Company’s application to acquire an additional 34.55% of the voting shares for $10.5 million. The purchase of the additional shares closed on July 20, 2017. The Company, as per requirements outlined in ASC 323-10-15-6, does not have the ability to exercise significant influence over BORV’s operating and financial policies. Accordingly, the investment in BORV is accounted for under the cost method of accounting as Other Assets.
4. Federal Home Loan Bank Stock and Other Equity Securities, at Cost
The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock and other equity securities are carried at cost, classified as restricted securities, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. FHLB stock and other equity securities are reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheets and totaled $22.6 million at December 31, 2017 and $9.2 million at December 31, 2016.
5. Loans & Leases
Loans & leases as of December 31 consisted of the following:
(in thousands)
|
|
2017
|
|
|
2016
|
|
Commercial Real Estate
|
|
$
|
691,639
|
|
|
$
|
674,445
|
|
Agricultural Real Estate
|
|
|
499,231
|
|
|
|
467,685
|
|
Real Estate Construction
|
|
|
100,206
|
|
|
|
176,462
|
|
Residential 1st Mortgages
|
|
|
260,751
|
|
|
|
242,247
|
|
Home Equity Lines and Loans
|
|
|
34,525
|
|
|
|
31,625
|
|
Agricultural
|
|
|
273,582
|
|
|
|
295,325
|
|
Commercial
|
|
|
265,703
|
|
|
|
217,577
|
|
Consumer & Other
|
|
|
6,656
|
|
|
|
6,913
|
|
Leases
|
|
|
88,957
|
|
|
|
70,986
|
|
Total Gross Loans & Leases
|
|
|
2,221,250
|
|
|
|
2,183,265
|
|
Less: Unearned Income
|
|
|
5,955
|
|
|
|
5,664
|
|
Subtotal
|
|
|
2,215,295
|
|
|
|
2,177,601
|
|
Less: Allowance for Credit Losses
|
|
|
50,342
|
|
|
|
47,919
|
|
Loans & Leases, Net
|
|
$
|
2,164,953
|
|
|
$
|
2,129,682
|
|
At December 31, 2017, the portion of loans that were approved for pledging as collateral on borrowing lines with the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”) were $618.4 million and $568.6 million, respectively. The borrowing capacity on these loans was $521.2 million from FHLB and $381.4 million from the FRB.
6. Allowance for Credit Losses
The following tables show the allocation of the allowance for credit losses at December 31, 2017 and December 31, 2016 by portfolio segment and by impairment methodology
(in thousands)
:
December 31, 2017
|
|
Commercial
Real
Estate
|
|
|
Agricultural
Real
Estate
|
|
|
Real
Estate
Construction
|
|
|
Residential
1st
Mortgages
|
|
|
Home
Equity
Lines &
Loans
|
|
|
Agricultural
|
|
|
Commercial
|
|
|
Consumer
&
Other
|
|
|
Leases
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-To-Date Allowance for Credit Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance- January 1, 2017
|
|
$
|
11,110
|
|
|
$
|
9,450
|
|
|
$
|
3,223
|
|
|
$
|
865
|
|
|
$
|
2,140
|
|
|
$
|
7,381
|
|
|
$
|
8,515
|
|
|
$
|
200
|
|
|
$
|
3,586
|
|
|
$
|
1,449
|
|
|
$
|
47,919
|
|
Charge-Offs
|
|
|
(109
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(53
|
)
|
|
|
(3
|
)
|
|
|
(374
|
)
|
|
|
-
|
|
|
|
(146
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(685
|
)
|
Recoveries
|
|
|
109
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
8
|
|
|
|
17
|
|
|
|
8
|
|
|
|
76
|
|
|
|
-
|
|
|
|
-
|
|
|
|
258
|
|
Provision
|
|
|
(188
|
)
|
|
|
2,635
|
|
|
|
(1,377
|
)
|
|
|
(37
|
)
|
|
|
179
|
|
|
|
1,135
|
|
|
|
674
|
|
|
|
79
|
|
|
|
(223
|
)
|
|
|
(27
|
)
|
|
|
2,850
|
|
Ending Balance- December 31, 2017
|
|
$
|
10,922
|
|
|
$
|
12,085
|
|
|
$
|
1,846
|
|
|
$
|
815
|
|
|
$
|
2,324
|
|
|
$
|
8,159
|
|
|
$
|
9,197
|
|
|
$
|
209
|
|
|
$
|
3,363
|
|
|
$
|
1,422
|
|
|
$
|
50,342
|
|
Ending Balance Individually Evaluated for Impairment
|
|
|
366
|
|
|
|
-
|
|
|
|
-
|
|
|
|
73
|
|
|
|
17
|
|
|
|
-
|
|
|
|
220
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
684
|
|
Ending Balance Collectively Evaluated for Impairment
|
|
|
10,556
|
|
|
|
12,085
|
|
|
|
1,846
|
|
|
|
742
|
|
|
|
2,307
|
|
|
|
8,159
|
|
|
|
8,977
|
|
|
|
201
|
|
|
|
3,363
|
|
|
|
1,422
|
|
|
|
49,658
|
|
Loans & Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
684,961
|
|
|
$
|
499,231
|
|
|
$
|
100,206
|
|
|
$
|
260,751
|
|
|
$
|
34,525
|
|
|
$
|
273,582
|
|
|
$
|
265,703
|
|
|
$
|
6,656
|
|
|
$
|
89,680
|
|
|
$
|
-
|
|
|
$
|
2,215,295
|
|
Ending Balance Individually Evaluated for Impairment
|
|
|
4,822
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,373
|
|
|
|
340
|
|
|
|
-
|
|
|
|
1,734
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,279
|
|
Ending Balance Collectively Evaluated for Impairment
|
|
|
680,139
|
|
|
|
499,231
|
|
|
|
100,206
|
|
|
|
258,378
|
|
|
|
34,185
|
|
|
|
273,582
|
|
|
|
263,969
|
|
|
|
6,646
|
|
|
|
89,680
|
|
|
|
-
|
|
|
|
2,206,016
|
|
December 31, 2016
|
|
Commercial
Real
Estate
|
|
|
Agricultural
Real
Estate
|
|
|
Real
Estate
Construction
|
|
|
Residential
1st
Mortgages
|
|
|
Home
Equity
Lines &
Loans
|
|
|
Agricultural
|
|
|
Commercial
|
|
|
Consumer
&
Other
|
|
|
Leases
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-To-Date Allowance for Credit Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance- January 1, 2016
|
|
$
|
10,063
|
|
|
$
|
6,881
|
|
|
$
|
2,485
|
|
|
$
|
789
|
|
|
$
|
2,146
|
|
|
$
|
6,308
|
|
|
$
|
7,836
|
|
|
$
|
175
|
|
|
$
|
3,294
|
|
|
$
|
1,546
|
|
|
$
|
41,523
|
|
Charge-Offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(21
|
)
|
|
|
(46
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(105
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(172
|
)
|
Recoveries
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
103
|
|
|
|
-
|
|
|
|
47
|
|
|
|
55
|
|
|
|
-
|
|
|
|
-
|
|
|
|
233
|
|
Provision
|
|
|
1,045
|
|
|
|
2,569
|
|
|
|
738
|
|
|
|
71
|
|
|
|
(63
|
)
|
|
|
1,073
|
|
|
|
632
|
|
|
|
75
|
|
|
|
292
|
|
|
|
(97
|
)
|
|
|
6,335
|
|
Ending Balance- December 31, 2016
|
|
$
|
11,110
|
|
|
$
|
9,450
|
|
|
$
|
3,223
|
|
|
$
|
865
|
|
|
$
|
2,140
|
|
|
$
|
7,381
|
|
|
$
|
8,515
|
|
|
$
|
200
|
|
|
$
|
3,586
|
|
|
$
|
1,449
|
|
|
$
|
47,919
|
|
Ending Balance Individually Evaluated for Impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70
|
|
|
|
18
|
|
|
|
128
|
|
|
|
608
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
831
|
|
Ending Balance Collectively Evaluated for Impairment
|
|
|
11,110
|
|
|
|
9,450
|
|
|
|
3,223
|
|
|
|
795
|
|
|
|
2,122
|
|
|
|
7,253
|
|
|
|
7,907
|
|
|
|
193
|
|
|
|
3,586
|
|
|
|
1,449
|
|
|
|
47,088
|
|
Loans & Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
668,046
|
|
|
$
|
467,685
|
|
|
$
|
176,462
|
|
|
$
|
242,247
|
|
|
$
|
31,625
|
|
|
$
|
295,325
|
|
|
$
|
217,577
|
|
|
$
|
6,913
|
|
|
$
|
71,721
|
|
|
$
|
-
|
|
|
$
|
2,177,601
|
|
Ending Balance Individually Evaluated for Impairment
|
|
|
1,932
|
|
|
|
1,304
|
|
|
|
-
|
|
|
|
2,126
|
|
|
|
402
|
|
|
|
625
|
|
|
|
4,464
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,863
|
|
Ending Balance Collectively Evaluated for Impairment
|
|
|
666,114
|
|
|
|
466,381
|
|
|
|
176,462
|
|
|
|
240,121
|
|
|
|
31,223
|
|
|
|
294,700
|
|
|
|
213,113
|
|
|
|
6,903
|
|
|
|
71,721
|
|
|
|
-
|
|
|
|
2,166,738
|
|
The ending balance of loans individually evaluated for impairment includes restructured loans in the amount of $3.0 million and $3.3 million at December 31, 2017 and 2016, respectively, which are no longer disclosed or classified as TDR’s.
The following tables show the loan & lease portfolio allocated by management’s internal risk ratings at December 31, 2017 and December 31, 2016
(in thousands)
:
December 31, 2017
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Total Loans
|
|
Loans & Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
677,636
|
|
|
$
|
6,843
|
|
|
$
|
482
|
|
|
$
|
684,961
|
|
Agricultural Real Estate
|
|
|
488,672
|
|
|
|
6,529
|
|
|
|
4,030
|
|
|
|
499,231
|
|
Real Estate Construction
|
|
|
90,728
|
|
|
|
9,478
|
|
|
|
-
|
|
|
|
100,206
|
|
Residential 1st Mortgages
|
|
|
259,795
|
|
|
|
41
|
|
|
|
915
|
|
|
|
260,751
|
|
Home Equity Lines and Loans
|
|
|
34,476
|
|
|
|
-
|
|
|
|
49
|
|
|
|
34,525
|
|
Agricultural
|
|
|
264,425
|
|
|
|
6,439
|
|
|
|
2,718
|
|
|
|
273,582
|
|
Commercial
|
|
|
260,565
|
|
|
|
4,610
|
|
|
|
528
|
|
|
|
265,703
|
|
Consumer & Other
|
|
|
6,498
|
|
|
|
-
|
|
|
|
158
|
|
|
|
6,656
|
|
Leases
|
|
|
87,497
|
|
|
|
2,183
|
|
|
|
-
|
|
|
|
89,680
|
|
Total
|
|
$
|
2,170,292
|
|
|
$
|
36,123
|
|
|
$
|
8,880
|
|
|
$
|
2,215,295
|
|
December 31, 2016
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Total Loans
|
|
Loans & Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
659,694
|
|
|
$
|
6,817
|
|
|
$
|
1,535
|
|
|
$
|
668,046
|
|
Agricultural Real Estate
|
|
|
464,997
|
|
|
|
1,384
|
|
|
|
1,304
|
|
|
|
467,685
|
|
Real Estate Construction
|
|
|
176,462
|
|
|
|
-
|
|
|
|
-
|
|
|
|
176,462
|
|
Residential 1st Mortgages
|
|
|
241,816
|
|
|
|
47
|
|
|
|
384
|
|
|
|
242,247
|
|
Home Equity Lines and Loans
|
|
|
31,558
|
|
|
|
-
|
|
|
|
67
|
|
|
|
31,625
|
|
Agricultural
|
|
|
283,525
|
|
|
|
11,366
|
|
|
|
434
|
|
|
|
295,325
|
|
Commercial
|
|
|
208,172
|
|
|
|
6,974
|
|
|
|
2,431
|
|
|
|
217,577
|
|
Consumer & Other
|
|
|
6,705
|
|
|
|
-
|
|
|
|
208
|
|
|
|
6,913
|
|
Leases
|
|
|
71,721
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71,721
|
|
Total
|
|
$
|
2,144,650
|
|
|
$
|
26,588
|
|
|
$
|
6,363
|
|
|
$
|
2,177,601
|
|
See Note 1. Significant Accounting Policies – Allowance for Credit Losses for a description of the internal risk ratings used by the Company. There were no loans & leases outstanding at December 31, 2017 and 2016 rated doubtful or loss.
The following tables show an aging analysis of the loan & lease portfolio by the time past due at December 31, 2017 and December 31, 2016
(in thousands)
:
December 31, 2017
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days and
Still Accruing
|
|
|
Nonaccrual
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total
Loans & Leases
|
|
Loans & Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
684,961
|
|
|
$
|
684,961
|
|
Agricultural Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
499,231
|
|
|
|
499,231
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,206
|
|
|
|
100,206
|
|
Residential 1st Mortgages
|
|
|
448
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
448
|
|
|
|
260,303
|
|
|
|
260,751
|
|
Home Equity Lines and Loans
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
34,515
|
|
|
|
34,525
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
273,582
|
|
|
|
273,582
|
|
Commercial
|
|
|
180
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
180
|
|
|
|
265,523
|
|
|
|
265,703
|
|
Consumer & Other
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
6,649
|
|
|
|
6,656
|
|
Leases
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
89,680
|
|
|
|
89,680
|
|
Total
|
|
$
|
645
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
645
|
|
|
$
|
2,214,650
|
|
|
$
|
2,215,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days and
Still Accruing
|
|
|
Nonaccrual
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total
Loans & Leases
|
|
Loans & Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
668,046
|
|
|
$
|
668,046
|
|
Agricultural Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,304
|
|
|
|
1,304
|
|
|
|
466,381
|
|
|
|
467,685
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
176,462
|
|
|
|
176,462
|
|
Residential 1st Mortgages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95
|
|
|
|
95
|
|
|
|
242,152
|
|
|
|
242,247
|
|
Home Equity Lines and Loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,625
|
|
|
|
31,625
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
243
|
|
|
|
243
|
|
|
|
295,082
|
|
|
|
295,325
|
|
Commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,425
|
|
|
|
1,425
|
|
|
|
216,152
|
|
|
|
217,577
|
|
Consumer & Other
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
17
|
|
|
|
6,896
|
|
|
|
6,913
|
|
Leases
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71,721
|
|
|
|
71,721
|
|
Total
|
|
$
|
10
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,074
|
|
|
$
|
3,084
|
|
|
$
|
2,174,517
|
|
|
$
|
2,177,601
|
|
There were no non-accrual loans & leases at December 31, 2017. At December 31, 2016, non-accrual loans & leases were $3.1 million.
Interest income forgone on loans & leases placed on non-accrual status was
$0,
$127,000, and $109,000 for the years ended December 31, 2017, 2016, and 2015, respectively.
The following tables show information related to impaired loans & leases at and for the year ended December 31, 2017 and December 31, 2016
(in thousands)
:
December 31, 2017
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
104
|
|
|
$
|
104
|
|
|
$
|
-
|
|
|
$
|
107
|
|
|
$
|
11
|
|
Agricultural Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
488
|
|
|
|
-
|
|
Residential 1st Mortgages
|
|
|
911
|
|
|
|
1,012
|
|
|
|
-
|
|
|
|
532
|
|
|
|
11
|
|
Home Equity Lines and Loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
$
|
1,015
|
|
|
$
|
1,116
|
|
|
$
|
-
|
|
|
$
|
1,173
|
|
|
$
|
22
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
2,973
|
|
|
$
|
2,961
|
|
|
$
|
366
|
|
|
$
|
2,999
|
|
|
$
|
104
|
|
Residential 1st Mortgages
|
|
|
508
|
|
|
|
571
|
|
|
|
25
|
|
|
|
469
|
|
|
|
16
|
|
Home Equity Lines and Loans
|
|
|
73
|
|
|
|
89
|
|
|
|
4
|
|
|
|
74
|
|
|
|
3
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
409
|
|
|
|
21
|
|
Commercial
|
|
|
1,741
|
|
|
|
1,734
|
|
|
|
220
|
|
|
|
1,693
|
|
|
|
59
|
|
Consumer & Other
|
|
|
8
|
|
|
|
9
|
|
|
|
8
|
|
|
|
11
|
|
|
|
-
|
|
|
|
$
|
5,303
|
|
|
$
|
5,364
|
|
|
$
|
623
|
|
|
$
|
5,655
|
|
|
$
|
203
|
|
Total
|
|
$
|
6,318
|
|
|
$
|
6,480
|
|
|
$
|
623
|
|
|
$
|
6,828
|
|
|
$
|
225
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
184
|
|
|
$
|
184
|
|
|
$
|
-
|
|
|
$
|
354
|
|
|
$
|
7
|
|
Agricultural Real Estate
|
|
|
1,305
|
|
|
|
1,305
|
|
|
|
-
|
|
|
|
569
|
|
|
|
3
|
|
Residential 1st Mortgages
|
|
|
451
|
|
|
|
504
|
|
|
|
-
|
|
|
|
404
|
|
|
|
10
|
|
Home Equity Lines and Loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
181
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
144
|
|
|
|
5
|
|
Commercial
|
|
|
3,023
|
|
|
|
3,023
|
|
|
|
-
|
|
|
|
3,053
|
|
|
|
133
|
|
|
|
$
|
4,963
|
|
|
$
|
5,016
|
|
|
$
|
-
|
|
|
$
|
4,705
|
|
|
$
|
158
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1st Mortgages
|
|
$
|
430
|
|
|
$
|
469
|
|
|
$
|
21
|
|
|
$
|
336
|
|
|
$
|
13
|
|
Home Equity Lines and Loans
|
|
|
90
|
|
|
|
97
|
|
|
|
5
|
|
|
|
123
|
|
|
|
4
|
|
Agricultural
|
|
|
625
|
|
|
|
625
|
|
|
|
128
|
|
|
|
581
|
|
|
|
22
|
|
Commercial
|
|
|
1,441
|
|
|
|
1,640
|
|
|
|
608
|
|
|
|
1,536
|
|
|
|
8
|
|
Consumer & Other
|
|
|
6
|
|
|
|
13
|
|
|
|
6
|
|
|
|
12
|
|
|
|
-
|
|
|
|
$
|
2,592
|
|
|
$
|
2,844
|
|
|
$
|
768
|
|
|
$
|
2,588
|
|
|
$
|
47
|
|
Total
|
|
$
|
7,555
|
|
|
$
|
7,860
|
|
|
$
|
768
|
|
|
$
|
7,293
|
|
|
$
|
205
|
|
Total recorded investment shown in the prior table will not equal the total ending balance of loans & leases individually evaluated for impairment on the allocation of allowance table. This is because this table does not include impaired loans that were previously modified in a troubled debt restructuring, are currently performing and are no longer disclosed or classified as TDR’s.
At December 31, 2017, the Company allocated $623,000 of specific reserves to $6.3 million of troubled debt restructured loans, all of which were performing. At December 31, 2016, the Company allocated $736,000 of specific reserves to $5.9 million of troubled debt restructured loans, of which $4.5 million were performing. The Company had no commitments at December 31, 2017 and December 31, 2016 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.
During the period ending December 31, 2017, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
Modifications involving a reduction of the stated interest rate of the loan ranged from 3 to 5 years. Modifications involving an extension of the maturity date ranged from 3 to 10 years.
The following table presents loans by class modified as troubled debt restructured loans for the period ended December 31, 2017
(in thousands)
:
|
|
December 31, 2017
|
|
Troubled Debt Restructurings
|
|
Number of
Loans
|
|
|
Pre-Modification Outstanding
Recorded
Investment
|
|
|
Post-Modification Outstanding
Recorded
Investment
|
|
Residential 1st Mortgages
|
|
|
2
|
|
|
$
|
673
|
|
|
$
|
630
|
|
Home Equity Lines and Loans
|
|
|
1
|
|
|
|
32
|
|
|
|
32
|
|
Commercial
|
|
|
2
|
|
|
|
138
|
|
|
|
138
|
|
Consumer & Other
|
|
|
1
|
|
|
|
9
|
|
|
|
8
|
|
Total
|
|
|
6
|
|
|
$
|
852
|
|
|
$
|
808
|
|
The troubled debt restructurings described above had no impact on the allowance for credit losses and resulted in charge-offs of $44,000 for the twelve months ended December 31, 2017.
During the period ended December 31, 2017, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan to be in payment default once it is greater than 90 days contractually past due under the modified terms.
During the period ending December 31, 2016, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 5 to 10 years. Modifications involving an extension of the maturity date were for periods ranging from 5 to 10 years.
The following table presents loans by class modified as troubled debt restructured loans for the period ended December 31, 2016
(in thousands)
:
|
|
December 31, 2016
|
|
Troubled Debt Restructurings
|
|
Number of
Loans
|
|
|
Pre-Modification Outstanding
Recorded
Investment
|
|
|
Post-Modification Outstanding
Recorded
Investment
|
|
Commercial Real Estate
|
|
|
1
|
|
|
$
|
112
|
|
|
$
|
112
|
|
Residential 1st Mortgages
|
|
|
2
|
|
|
|
289
|
|
|
|
281
|
|
Home Equity Lines and Loans
|
|
|
2
|
|
|
|
305
|
|
|
|
286
|
|
Total
|
|
|
5
|
|
|
$
|
706
|
|
|
$
|
679
|
|
The troubled debt restructurings described above had no impact on the allowance for credit losses and resulted in charge-offs of $27,000 for the twelve months ended December 31, 2016.
During the period ended December 31, 2016, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan to be in payment default once it is greater than 90 days contractually past due under the modified terms.
7. Premises and Equipment
Premises and equipment as of December 31
st
, consisted of the following:
(in thousands)
|
|
2017
|
|
|
2016
|
|
Land and Buildings
|
|
$
|
36,018
|
|
|
$
|
37,003
|
|
Furniture, Fixtures, and Equipment
|
|
|
20,399
|
|
|
|
20,196
|
|
Leasehold Improvements
|
|
|
3,117
|
|
|
|
2,439
|
|
Subtotal
|
|
|
59,534
|
|
|
|
59,638
|
|
Less: Accumulated Depreciation and Amortization
|
|
|
30,855
|
|
|
|
30,409
|
|
Total
|
|
$
|
28,679
|
|
|
$
|
29,229
|
|
Depreciation and amortization on premises and equipment included in occupancy and equipment expense amounted to $2,186,000, $1,896,000, and $1,685,000 for the years ended December 31, 2017, 2016 and 2015, respectively. Total rental expense for premises was $688,000, $644,000, and $604,000 for the years ended December 31, 2017, 2016, and 2015, respectively. Rental income was $169,000, $102,000, and $94,000 for the years ended December 31, 2017, 2016, and 2015, respectively.
8. Other Real Estate
The Bank reported $837,000 in other real estate at December 31, 2017, and $3.7 million at December 31, 2016. Other real estate includes property no longer utilized for business operations and property acquired through foreclosure proceedings. These properties are carried at fair value less selling costs determined at the date acquired. Losses, if any, arising from properties acquired through foreclosure are charged against the allowance for loan losses at the time of foreclosure. Subsequent declines in value, periodic holding costs, and net gains or losses on disposition are included in other operating expense as incurred. Other real estate is reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheets.
9. Time Deposits
Time Deposits of $250,000 or more as of December 31 were as follows:
(in thousands)
|
|
2017
|
|
|
2016
|
|
Balance
|
|
$
|
212,574
|
|
|
$
|
289,955
|
|
At December 31, 2017, the scheduled maturities of time deposits were as follows:
(in thousands)
|
|
Scheduled
Maturities
|
|
2018
|
|
$
|
426,874
|
|
2019
|
|
|
30,219
|
|
2020
|
|
|
10,317
|
|
2021
|
|
|
3,100
|
|
2022
|
|
|
4,887
|
|
Total
|
|
$
|
475,397
|
|
10. Income Taxes
Current and deferred income tax expense (benefit) provided for the years ended December 31 consisted of the following:
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
9,460
|
|
|
$
|
13,101
|
|
|
$
|
11,979
|
|
State
|
|
|
4,046
|
|
|
|
4,832
|
|
|
|
4,446
|
|
Total Current
|
|
|
13,506
|
|
|
|
17,933
|
|
|
|
16,425
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
11,154
|
|
|
|
(1,607
|
)
|
|
|
383
|
|
State
|
|
|
1,451
|
|
|
|
(229
|
)
|
|
|
116
|
|
Total Deferred
|
|
|
12,605
|
|
|
|
(1,836
|
)
|
|
|
499
|
|
Total Provision for Taxes
|
|
$
|
26,111
|
|
|
$
|
16,097
|
|
|
$
|
16,924
|
|
The total provision for income taxes differs from the federal statutory rate as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
(in thousands)
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Tax Provision at Federal Statutory Rate
|
|
$
|
19,068
|
|
|
|
35.0
|
%
|
|
$
|
16,037
|
|
|
|
35.0
|
%
|
|
$
|
15,510
|
|
|
|
35.0
|
%
|
Interest on Obligations of States and Political Subdivisions exempt from Federal Taxation
|
|
|
(617
|
)
|
|
|
(1.1
|
%)
|
|
|
(675
|
)
|
|
|
(1.5
|
%)
|
|
|
(711
|
)
|
|
|
(1.6
|
%)
|
State and Local Income Taxes, Net of Federal Income Tax Benefit
|
|
|
3,573
|
|
|
|
6.5
|
%
|
|
|
2,992
|
|
|
|
6.5
|
%
|
|
|
2,966
|
|
|
|
6.7
|
%
|
Bank Owned Life Insurance
|
|
|
(696
|
)
|
|
|
(1.3
|
%)
|
|
|
(731
|
)
|
|
|
(1.6
|
%)
|
|
|
(712
|
)
|
|
|
(1.6
|
%)
|
Low-Income Housing Tax Credit
|
|
|
(1,546
|
)
|
|
|
(2.8
|
%)
|
|
|
(1,201
|
)
|
|
|
(2.6
|
%)
|
|
|
(291
|
)
|
|
|
(0.7
|
%)
|
Bargain Purchase Gain
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(641
|
)
|
|
|
(1.4
|
%)
|
|
|
-
|
|
|
|
0.0
|
%
|
Deferred Tax Asset Remeasurement
|
|
|
6,256
|
|
|
|
11.5
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Other, Net
|
|
|
73
|
|
|
|
0.1
|
%
|
|
|
316
|
|
|
|
0.7
|
%
|
|
|
162
|
|
|
|
0.4
|
%
|
Total Provision for Taxes
|
|
$
|
26,111
|
|
|
|
47.9
|
%
|
|
$
|
16,097
|
|
|
|
35.1
|
%
|
|
$
|
16,924
|
|
|
|
38.2
|
%
|
The components of net deferred tax assets as of December 31 are as follows: The net deferred tax assets are reported in Interest Receivable and Other Assets on the Company's Consolidated Balance Sheet.
(in thousands)
|
|
2017
|
|
|
2016
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
Allowance for Credit Losses
|
|
$
|
14,962
|
|
|
$
|
20,260
|
|
Accrued Liabilities
|
|
|
7,421
|
|
|
|
9,807
|
|
Deferred Compensation
|
|
|
8,996
|
|
|
|
14,166
|
|
State Franchise Tax
|
|
|
850
|
|
|
|
1,680
|
|
Acquired Net Operating Loss
|
|
|
756
|
|
|
|
1,135
|
|
Fair Value Adjustment on Loans Acquired
|
|
|
242
|
|
|
|
429
|
|
Fair Value Adjustment on ORE Acquired
|
|
|
108
|
|
|
|
299
|
|
Unrealized Loss on Securities Available-for-Sale
|
|
|
373
|
|
|
|
58
|
|
Low-Income Housing Investment
|
|
|
470
|
|
|
|
366
|
|
Other
|
|
|
17
|
|
|
|
233
|
|
Total Deferred Tax Assets
|
|
$
|
34,195
|
|
|
$
|
48,433
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Premises and Equipment
|
|
|
(1,361
|
)
|
|
|
(1,707
|
)
|
Securities Accretion
|
|
|
(164
|
)
|
|
|
(341
|
)
|
Leasing Activities
|
|
|
(12,389
|
)
|
|
|
(14,868
|
)
|
Core Deposit Intangible Asset
|
|
|
(247
|
)
|
|
|
(398
|
)
|
Prepaid
|
|
|
(964
|
)
|
|
|
(314
|
)
|
Other
|
|
|
(944
|
)
|
|
|
(494
|
)
|
Total Deferred Tax Liabilities
|
|
|
(16,069
|
)
|
|
|
(18,122
|
)
|
Net Deferred Tax Assets
|
|
$
|
18,126
|
|
|
$
|
30,311
|
|
The Tax Cuts and Jobs Act, which lowers the Company’s previous 35% federal corporate tax rate to 21%, was signed into law by President Trump on December 22, 2017. In accordance with the ASC Topic 740, Income Taxes, companies must recognize the effect of tax law changes in the period of enactment. As a result, the Company is required to re-measure its deferred tax assets (DTA) and deferred tax liabilities (DTL) at the new tax rate of 21%. This onetime re-measurement resulted in a $6.3 million increase in the Company’s income tax provision. Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are expected to be deductible, Management believes it is more likely than not we will realize the benefit of the remaining deferred tax assets. The net deferred tax assets are reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheet.
The Company and its subsidiaries file income tax returns in the U.S. federal and California jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by the tax authorities for the years before 2013.
11. Short Term Borrowings
As of December 31, 2017 and 2016, the Company had unused lines of credit available for short-term liquidity purposes of $1.0 billion and $962.8 million, respectively. Federal Funds purchased and advances are generally issued on an overnight basis. There were no advances from the FHLB at December 31, 2017 or 2016. There were no Federal Funds purchased or advances from the FRB at December 31, 2017 or 2016.
12. Securities Sold Under Agreement to Repurchase
Securities Sold Under Agreement to Repurchase are used as secured borrowing alternatives to FHLB Advances or FRB Borrowings.
At December 31, 2017 and December 31, 2016, the Company had no securities sold under agreement to repurchase.
13. Federal Home Loan Bank Advances
The Company had no short-term or long-term advances from the Federal Home Loan Bank of San Francisco at December 31, 2017 or 2016.
In accordance with the Collateral Pledge and Security Agreement, advances are secured by all FHLB stock held by the Company. At December 31, 2017, $618.4 million in loans were approved for pledging as collateral on borrowing lines with the FHLB. The borrowing capacity on these loans was $521.2 million.
14. Long-term Subordinated Debentures
In December 2003, the Company formed a wholly owned Connecticut statutory business trust, FMCB Statutory Trust I (“Statutory Trust I”), which issued $10.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures (the “Trust Preferred Securities”). The Company is not considered the primary beneficiary of the trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. These debentures qualify as Tier 1 capital under current regulatory guidelines. All of the common securities of Statutory Trust I are owned by the Company. The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by FMCB Statutory Trust to purchase $10.3 million of junior subordinated debentures of the Company, which carry a floating rate based on three-month LIBOR plus 2.85%. The debentures represent the sole asset of Statutory Trust I. The Trust Preferred Securities accrue and pay distributions at a floating rate of three-month LIBOR plus 2.85% per annum of the stated liquidation value of $1,000 per capital security. The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment to the extent that Statutory Trust I has funds available therefore of: (i) accrued and unpaid distributions required to be paid on the Trust Preferred Securities; (ii) the redemption price with respect to any Trust Preferred Securities called for redemption by Statutory Trust I; and (iii) payments due upon a voluntary or involuntary dissolution, winding up, or liquidation of Statutory Trust I. The Trust Preferred Securities are mandatorily redeemable upon maturity of the subordinated debentures on December 17, 2033, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the subordinated debentures purchased by Statutory Trust I, in whole or in part, on or after December 17, 2008. As specified in the indenture, if the subordinated debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.
15. Shareholders' Equity
In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on August 11, 2015, the Board of Directors approved an extension of the $20 million stock repurchase program over the three-year period ending September 30, 2018.
Repurchases under the program may be made from time to time on the open market or through private transactions. The repurchase program also requires that no repurchases may be made if the Bank would not remain “well-capitalized” after the repurchase. There were no stock repurchases made in 2017 or 2016.
Dividends from the Bank constitute the principal source of cash to the Company. The Company is a legal entity separate and distinct from the Bank. Under regulations controlling California state chartered banks, the Bank is, to some extent, limited in the amount of dividends that can be paid to the Company without prior approval of the California DBO. These regulations require approval if total dividends declared by a state chartered bank in any calendar year exceed the bank's net profits for that year combined with its retained net profits for the preceding two calendar years.
During 2017, the Company issued 4,975 shares of common stock. All of these shares were contributed to the Bank’s non-qualified defined contribution retirement plans. The shares issued had prices ranging from $590 per share to $595 per share. These share prices were based upon valuations completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds from these issuances were contributed to the Bank as equity capital.
During 2016, the Company issued 16,542 shares of common stock, of which 4,610 shares were contributed to the Bank’s non-qualified defined contribution retirement plans and 11,932 shares were issued in the acquisition of Delta National Bancorp. The shares issued had prices ranging from $525 per share to $580 per share. These share prices were based upon valuations completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds from these issuances were contributed to the Bank as equity capital.
The Company and the Bank are subject to various federal regulatory capital requirements under the Basel III Capital Rules. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The implementation of Basel III requirements will increase the required capital levels that the Company and the Bank must maintain. The final rules include new minimum risk-based capital and leverage ratios, which would be phased in over time. The new minimum capital level requirements applicable to the Company and the Bank under the final rules will be: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets (“RWA”); (ii) a Tier 1 capital ratio of 6% of RWA; (iii) a total capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. The final rules also establish a "capital conservation buffer" of 2.5% above each of the new regulatory minimum capital ratios, which would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA; and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. The final rules also permit the Company’s subordinated debentures issued in 2003 to continue to be counted as Tier 1 capital.
The final rules became effective as applied to the Company and the Bank on January 1, 2015, with a phase in period through January 1, 2019. The Company believes that it is currently in compliance with all of these new capital requirements (as fully phased-in) and that they will not result in any restrictions on the Company’s business activity.
In addition, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since that notification that management believes have changed the Bank’s category.
(in thousands)
|
|
Actual
|
|
|
Current
Regulatory Capital
Requirements
|
|
|
Well Capitalized
Under Prompt
Corrective Action
|
|
December 31, 2017
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total Bank Capital to Risk Weighted Assets
|
|
$
|
330,041
|
|
|
|
12.66
|
%
|
|
$
|
208,552
|
|
|
|
8.0
|
%
|
|
$
|
260,691
|
|
|
|
10.0
|
%
|
Total Consolidated Capital to Risk Weighted Assets
|
|
$
|
342,210
|
|
|
|
13.07
|
%
|
|
$
|
209,532
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Total Bank Common Equity Tier 1 Capital Ratio
|
|
$
|
297,232
|
|
|
|
11.40
|
%
|
|
$
|
117,311
|
|
|
|
4.5
|
%
|
|
$
|
169,449
|
|
|
|
6.5
|
%
|
Total Consolidated Common Equity Tier 1 Capital Ratio
|
|
$
|
299,401
|
|
|
|
11.43
|
%
|
|
$
|
117,862
|
|
|
|
4.5
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 Bank Capital to Risk Weighted Assets
|
|
$
|
297,232
|
|
|
|
11.40
|
%
|
|
$
|
156,414
|
|
|
|
6.0
|
%
|
|
$
|
208,552
|
|
|
|
8.0
|
%
|
Tier 1 Consolidated Capital to Risk Weighted Assets
|
|
$
|
309,250
|
|
|
|
11.81
|
%
|
|
$
|
157,150
|
|
|
|
6.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 Bank Capital to Average Assets
|
|
$
|
297,232
|
|
|
|
9.65
|
%
|
|
$
|
123,178
|
|
|
|
4.0
|
%
|
|
$
|
153,972
|
|
|
|
5.0
|
%
|
Tier 1 Consolidated Capital to Average Assets
|
|
$
|
309,250
|
|
|
|
9.99
|
%
|
|
$
|
123,790
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
(in thousands)
|
|
Actual
|
|
|
Current
Regulatory Capital
Requirements
|
|
|
Well Capitalized
Under Prompt
Corrective Action
|
|
December 31, 2016
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total Bank Capital to Risk Weighted Assets
|
|
$
|
319,776
|
|
|
|
12.79
|
%
|
|
$
|
199,958
|
|
|
|
8.0
|
%
|
|
$
|
249,947
|
|
|
|
10.0
|
%
|
Total Consolidated Capital to Risk Weighted Assets
|
|
$
|
319,983
|
|
|
|
12.80
|
%
|
|
$
|
199,981
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Total Bank Common Equity Tier 1 Capital Ratio
|
|
$
|
288,324
|
|
|
|
11.54
|
%
|
|
$
|
112,476
|
|
|
|
4.5
|
%
|
|
$
|
162,466
|
|
|
|
6.5
|
%
|
Total Consolidated Common Equity Tier 1 Capital Ratio
|
|
$
|
278,981
|
|
|
|
11.16
|
%
|
|
$
|
112,489
|
|
|
|
4.5
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 Bank Capital to Risk Weighted Assets
|
|
$
|
288,323
|
|
|
|
11.54
|
%
|
|
$
|
149,968
|
|
|
|
6.0
|
%
|
|
$
|
199,958
|
|
|
|
8.0
|
%
|
Tier 1 Consolidated Capital to Risk Weighted Assets
|
|
$
|
288,527
|
|
|
|
11.54
|
%
|
|
$
|
149,986
|
|
|
|
6.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Tier 1 Bank Capital to Average Assets
|
|
$
|
288,324
|
|
|
|
10.08
|
%
|
|
$
|
114,409
|
|
|
|
4.0
|
%
|
|
$
|
143,011
|
|
|
|
5.0
|
%
|
Tier 1 Consolidated Capital to Average Assets
|
|
$
|
288,527
|
|
|
|
10.07
|
%
|
|
$
|
114,568
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
16. Dividends and Basic Earnings Per Common Share
Total cash dividends during 2017 were $10,982,000 or $13.55 per share of common stock, an increase of 3.4% per share from $10,478,000 or $13.10 per share in 2016. In 2015, cash dividends totaled $10,157,000 or $12.90 per share.
Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. The following table calculates the basic earnings per common share for the periods indicated.
(
net income in thousands
)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net Income
|
|
$
|
28,370
|
|
|
$
|
29,723
|
|
|
$
|
27,392
|
|
Weighted Average Number of Common Shares Outstanding
|
|
|
809,834
|
|
|
|
793,970
|
|
|
|
786,582
|
|
Basic Earnings Per Common Share
|
|
$
|
35.03
|
|
|
$
|
37.44
|
|
|
$
|
34.82
|
|
17. Employee Benefit Plans
Profit Sharing Plan
The Company, through the Bank, sponsors a Profit Sharing Plan for substantially all full-time employees of the Company with one or more years of service. Participants receive up to two annual employer contributions, one is discretionary and the other is mandatory. The discretionary contributions to the Profit Sharing Plan are determined annually by the Board of Directors. The discretionary contributions totaled $1.0 million, $975,000, and $925,000 for the years ended December 31, 2017, 2016, and 2015, respectively. The mandatory contributions to the Profit Sharing Plan are made according to a predetermined set of criteria. Mandatory contributions totaled $1.2 million, $1.2 million, and $1.1 million for the years ended December 31, 2017, 2016, and 2015, respectively. Company employees are permitted, within limitations imposed by tax law, to make pretax contributions and after tax (Roth) contributions to the 401(k) feature of the Profit Sharing Plan. The Company does not match employee contributions within the 401(k) feature of the Profit Sharing Plan and the Company can terminate the Profit Sharing Plan at any time. Benefits pursuant to the Profit Sharing Plan vest 0% during the first year of participation, 25% per full year thereafter and after five years such benefits are fully vested.
Executive Retirement Plan and Life Insurance Arrangements
The Company, through the Bank, sponsors an Executive Retirement Plan for certain executive level employees. The Executive Retirement Plan is a non-qualified defined contribution plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service. The Plan is comprised of: (1) a Performance Component which makes contributions based upon long-term cumulative profitability and increase in market value of the Company; (2) a Salary Component which makes contributions based upon participant salary levels; and (3) an Equity Component for which contributions are discretionary and subject to Board of Directors approval. Executive Retirement Plan contributions are invested in a mix of financial instruments; however, Equity Component contributions are invested primarily in stock of the Company.
The Company expensed $4.3 million to the Executive Retirement Plan during the year ended December 31, 2017, $3.8 million during the year ended December 31, 2016 and $3.5 million during the year ended December 31, 2015. The Company’s total accrued liability under the Executive Retirement Plan was $43.3 million as of December 31, 2017 and $37.4 million as of December 31, 2016. All amounts have been fully funded into a Rabbi Trust as of December 31, 2017.
The Company has purchased single premium life insurance policies on the lives of certain key employees of the Company. These policies provide: (1) financial protection to the Company in the event of the death of a key employee; and (2) significant income to the Company to offset the expense associated with the Executive Retirement Plan and other employee benefit plans, since the interest earned on the cash surrender value of the policies is tax exempt as long as the policies are used to finance employee benefits. As compensation to each employee for agreeing to allow the Company to purchase an insurance policy on his or her life, split dollar agreements have been entered into with those employees. These agreements provide for a division of the life insurance death proceeds between the Company and each employee’s designated beneficiary or beneficiaries.
The Company earned tax-exempt interest on the life insurance policies of $1.8 million for the year ended December 31, 2017, and $1.9 million for the years ended December 31, 2016, and 2015. As of December 31, 2017 and 2016, the total cash surrender value of the insurance policies was $59.6 million and $57.8 million, respectively.
Senior Management Retention Plan
The Company, through the Bank, sponsors a Senior Management Retention Plan (“SMRP”) for certain senior level employees. The SMRP is a non-qualified defined contribution plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service. All contributions are discretionary and subject to the Board of Directors approval. Contributions are invested primarily in stock of the Company. The Company expensed $765,000 to the SMRP during the year ended December 31, 2017, $627,000 during the year ended December 31, 2016 and $530,000 during the year ended December 31, 2015. The Company’s total accrued liability under the SMRP was $4.4 million as of December 31, 2017 and $3.4 million as of December 31, 2016. All amounts have been fully funded into a Rabbi Trust as of December 31, 2017.
18. Fair Value Measurements
The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC, which establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. This standard applies whenever other standards require, or permit, assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:
Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.
Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.
The Company does not record all loans & leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered impaired and an allowance for credit losses is established. Once a loan or lease is identified as individually impaired, management measures impairment in accordance with the “Receivable” topic of the FASB ASC. The fair value of impaired loans or leases is estimated using one of several methods, including collateral value when the loan is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Impaired loans & leases not requiring an allowance represent loans & leases for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans & leases. Impaired loans & leases where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.
The fair value of collateral dependent impaired loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring impaired loans is primarily the sales comparison approach less selling costs of 10%.
Other Real Estate (“ORE”) is reported at fair value on a non-recurring basis.
Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring ORE is primarily the sales comparison approach less selling costs of 10%.
At December 31, 2017, there were no formal foreclosure proceedings in process for consumer mortgage loans secured by residential real estate properties.
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated.
|
|
|
|
|
Fair Value Measurements
At December 31, 2017, Using
|
|
|
|
Fair Value
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
(in thousands)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Agency & Government-Sponsored Entities
|
|
$
|
3,128
|
|
|
$
|
-
|
|
|
$
|
3,128
|
|
|
$
|
-
|
|
US Treasury Notes
|
|
|
144,164
|
|
|
|
144,164
|
|
|
|
-
|
|
|
|
-
|
|
US Govt SBA
|
|
|
29,380
|
|
|
|
-
|
|
|
|
29,380
|
|
|
|
-
|
|
Mortgage Backed Securities
|
|
|
301,914
|
|
|
|
-
|
|
|
|
301,914
|
|
|
|
-
|
|
Other
|
|
|
3,010
|
|
|
|
200
|
|
|
|
310
|
|
|
|
2,500
|
|
Total Assets Measured at Fair Value On a Recurring Basis
|
|
$
|
481,596
|
|
|
$
|
144,364
|
|
|
$
|
334,732
|
|
|
$
|
2,500
|
|
|
|
|
|
|
Fair Value Measurements
At December 31, 2016, Using
|
|
|
|
Fair Value
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
(in thousands)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Government Agency & Government-Sponsored Entities
|
|
$
|
3,241
|
|
|
$
|
-
|
|
|
$
|
3,241
|
|
|
$
|
-
|
|
US Treasury Notes
|
|
|
134,428
|
|
|
|
134,428
|
|
|
|
-
|
|
|
|
-
|
|
US Govt SBA
|
|
|
36,314
|
|
|
|
|
|
|
|
36,314
|
|
|
|
|
|
Mortgage Backed Securities
|
|
|
273,270
|
|
|
|
-
|
|
|
|
273,270
|
|
|
|
-
|
|
Other
|
|
|
1,010
|
|
|
|
200
|
|
|
|
310
|
|
|
|
500
|
|
Total Assets Measured at Fair Value On a Recurring Basis
|
|
$
|
448,263
|
|
|
$
|
134,628
|
|
|
$
|
313,135
|
|
|
$
|
500
|
|
Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the year ended December 31, 2017, there were no transfers in or out of level 1, 2, or 3.
The available for sale investment security categorized as a Level 3 asset for year ended December 31, 2017 consisted of one $2.5 million investment in a limited liability company that purchases SBA loans. The Company increased this investment by $2.0 million during 2017. This security is not actively traded and is owned by a few investors. The significant unobservable data reflected in the fair value measurement include dealer quotes, projected prepayment speeds/average lives and credit information, among other things. There were no gains or losses or transfers in or out of level 3 during the year ended December 31, 2017.
The following tables present information about the Company’s impaired loans & leases and other real estate, classes of assets or liabilities that the Company carries at fair value on a non-recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated. Not all impaired loans & leases are carried at fair value. Impaired loans & leases are only included in the following tables when their fair value is based upon an appraisal of the collateral, and if that appraisal results in a partial charge-off or the establishment of a specific reserve.
|
|
|
|
|
Fair Value Measurements
At December 31, 2017, Using
|
|
(in thousands)
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Other
Observable
|
|
|
Significant
Unobservable
|
|
Impaired Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
2,595
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,595
|
|
Residential 1st Mortgage
|
|
|
997
|
|
|
|
-
|
|
|
|
-
|
|
|
|
997
|
|
Home Equity Lines and Loans
|
|
|
75
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75
|
|
Commercial
|
|
|
1,514
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,514
|
|
Total Impaired Loans
|
|
|
5,181
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,181
|
|
Other Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Construction
|
|
|
873
|
|
|
|
-
|
|
|
|
-
|
|
|
|
873
|
|
Total Other Real Estate
|
|
|
873
|
|
|
|
-
|
|
|
|
-
|
|
|
|
873
|
|
Total Assets Measured at Fair Value On a Non-Recurring Basis
|
|
$
|
6,054
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,054
|
|
|
|
|
|
|
Fair Value Measurements
At December 31, 2016, Using
|
|
(in thousands)
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
|
|
|
Other
Observable
|
|
|
Significant
Unobservable
|
|
Impaired Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1st Mortgage
|
|
$
|
480
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
480
|
|
Home Equity Lines and Loans
|
|
|
83
|
|
|
|
-
|
|
|
|
-
|
|
|
|
83
|
|
Agricultural
|
|
|
497
|
|
|
|
-
|
|
|
|
-
|
|
|
|
497
|
|
Commercial
|
|
|
833
|
|
|
|
-
|
|
|
|
-
|
|
|
|
833
|
|
Total Impaired Loans
|
|
|
1,893
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,893
|
|
Other Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity Lines and Loans
|
|
|
785
|
|
|
|
-
|
|
|
|
-
|
|
|
|
785
|
|
Real Estate Construction
|
|
|
2,960
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,960
|
|
Total Other Real Estate
|
|
|
3,745
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,745
|
|
Total Assets Measured at Fair Value On a Non-Recurring Basis
|
|
$
|
5,638
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,638
|
|
The Company’s property appraisals are primarily based on the sales comparison approach and the income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2017:
(in thousands)
|
|
Fair Value
|
|
Valuation Technique
|
Unobservable Inputs
|
Range, Weighted Avg.
|
|
Impaired Loans:
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
2,595
|
|
Income Approach
|
Capitalization Rate
|
|
3.25%, 3.25 %
|
|
Residential 1st Mortgages
|
|
$
|
997
|
|
Sales Comparison Approach
|
Adjustment for Difference Between Comparable Sales
|
|
1% -4%, 2 %
|
|
Home Equity Lines and Loans
|
|
$
|
75
|
|
Sales Comparison Approach
|
Adjustment for Difference Between Comparable Sales
|
|
1% - 2%, 2 %
|
|
Commercial
|
|
$
|
1,514
|
|
Income Approach
|
Capitalization Rate
|
|
2.95% - 8.70%, 3.40 %
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate:
|
|
|
|
|
|
|
|
|
|
Real Estate Construction
|
|
$
|
873
|
|
Sales Comparison Approach
|
Adjustment for Difference Between Comparable Sales
|
|
10%, 10 %
|
|
19. Fair Value of Financial Instruments
U.S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period of time between origination of the instrument and its expected realization.
The following tables summarize the book value and estimated fair value of financial instruments for the periods indicated:
|
|
|
|
|
Fair Value of Financial Instruments Using
|
|
|
|
|
December 31, 2017
(in thousands)
|
|
Carrying
Amount
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Estimated
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
187,149
|
|
|
$
|
187,149
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
187,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Available-for-Sale
|
|
|
481,596
|
|
|
|
29,580
|
|
|
|
449,516
|
|
|
|
2,500
|
|
|
|
481,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Held-to-Maturity
|
|
|
54,460
|
|
|
|
-
|
|
|
|
38,492
|
|
|
|
16,744
|
|
|
|
55,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB Stock
|
|
|
10,342
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans & Leases, Net of Deferred Fees & Allowance
|
|
|
2,164,953
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,137,987
|
|
|
|
2,137,987
|
|
Accrued Interest Receivable
|
|
|
10,999
|
|
|
|
-
|
|
|
|
10,999
|
|
|
|
-
|
|
|
|
10,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,723,228
|
|
|
|
2,247,831
|
|
|
|
472,671
|
|
|
|
-
|
|
|
|
2,720,502
|
|
Subordinated Debentures
|
|
|
10,310
|
|
|
|
-
|
|
|
|
7,428
|
|
|
|
-
|
|
|
|
7,428
|
|
Accrued Interest Payable
|
|
|
1,137
|
|
|
|
-
|
|
|
|
1,137
|
|
|
|
-
|
|
|
|
1,137
|
|
|
|
|
|
|
Fair Value of Financial Instruments Using
|
|
|
|
|
December 31, 2016
(in thousands)
|
|
Carrying
Amount
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Estimated
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
98,960
|
|
|
$
|
98,960
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
98,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Available-for-Sale
|
|
|
448,263
|
|
|
|
134,628
|
|
|
|
313,135
|
|
|
|
500
|
|
|
|
448,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Held-to-Maturity
|
|
|
58,109
|
|
|
|
-
|
|
|
|
40,415
|
|
|
|
17,993
|
|
|
|
58,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB Stock
|
|
|
8,872
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans & Leases, Net of Deferred Fees & Allowance
|
|
|
2,129,682
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,107,060
|
|
|
|
2,107,060
|
|
Accrued Interest Receivable
|
|
|
10,047
|
|
|
|
-
|
|
|
|
10,047
|
|
|
|
-
|
|
|
|
10,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,581,711
|
|
|
|
2,011,418
|
|
|
|
569,183
|
|
|
|
-
|
|
|
|
2,580,601
|
|
Subordinated Debentures
|
|
|
10,310
|
|
|
|
-
|
|
|
|
6,578
|
|
|
|
-
|
|
|
|
6,578
|
|
Accrued Interest Payable
|
|
|
852
|
|
|
|
-
|
|
|
|
852
|
|
|
|
-
|
|
|
|
852
|
|
Fair value estimates presented herein are based on pertinent information available to management as of December 31, 2017 and December 31, 2016. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purpose of these financial statements since that date, and; therefore, current estimates of fair value may differ significantly from the amounts presented above. The methods and assumptions used to estimate the fair value of each class of financial instrument listed in the table above are explained below.
Cash and Cash Equivalents - The carrying amounts reported in the balance sheet for cash and due from banks, interest-bearing deposits with banks, federal funds sold, and securities purchased under agreements to resell are a reasonable estimate of fair value. All cash and cash equivalents are classified as Level 1.
Investment Securities - Fair values for investment securities consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. Based on the available market information the classification level could be 1, 2, or 3.
Federal Home Loan Bank Stock - It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Loans & Leases, Net of Deferred Loan & Lease Fees & Allowance - Fair values of loans & leases are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans & leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans & leases are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans & leases do not necessarily represent an exit price.
Deposit Liabilities - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed-maturity certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
Subordinated Debentures - The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
Accrued Interest Receivable and Payable - The carrying amount of accrued interest receivable and payable approximates their fair value resulting in a Level 2 classification.
20. Commitments and Contingencies
In the normal course of business, the Company enters in to financial instruments with off balance sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These instruments include commitments to extend credit, letters of credit, and other types of financial guarantees. The Company had the following off balance sheet commitments as of the dates indicated.
(in thousands)
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Commitments to Extend Credit
|
|
$
|
735,678
|
|
|
$
|
609,653
|
|
Letters of Credit
|
|
|
20,061
|
|
|
|
20,444
|
|
Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties
|
|
|
759
|
|
|
|
1,835
|
|
The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party. Outstanding standby letters of credit have maturity dates ranging from 1 to 60 months with final expiration in January 2023. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
The Company is obligated under a number of noncancellable operating leases for premises and equipment used for banking purposes. Minimum future rental commitments under noncancellable operating leases as of December 31, 2017, were $670,000,
$
634
,000,
$
644
,000, $462,000, and $146,000 for the years 2018 through 2022, and $139,000 for the remaining term of the leases.
In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material in relation to the financial position of the Company.
The Company may be required to maintain average reserves on deposit with the Federal Reserve Bank primarily based on deposits outstanding. There were no reserve requirements during 2017 or 2016.
21. Recent Accounting Developments
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. The ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the ASU changes the income statement impact of equity investments held by the Company and the requirement for the Company to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The Company adopted the ASU provisions on January 1, 2018. Management does not expect the adoption of the ASU to have a material effect on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
The ASU will require the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that is currently in use. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded lending commitments, held-to-maturity debt securities and other debt instruments measured at amortized cost. The impairment model for available-for-sale debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary. The new guidance is effective on January 1, 2020, with early adoption permitted on January 1, 2019. The Company is currently
evaluating the provisions of this ASU and has created a cross-functional team to begin its implementation efforts of this new guidance. While the Company has not quantified the impact of this ASU, it is evaluating historical loan level data requirements necessary for the implementation of the model, as well as various methodologies for determining expected credit losses.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The new standard is being issued to increase the transparency and comparability around lease obligations. Previously unrecorded off-balance sheet obligations will now be brought more prominently to light by presenting lease liabilities on the face of the balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements.
This ASU applies to leasing arrangements exceeding a twelve-month term. ASU 2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2018 and requires a modified retrospective method upon adoption. Early application of the amendments is permitted. The Company is currently evaluating the provisions of this ASU to determine the potential impact the new standard will have on the Company’s consolidated financial statements. While the Company has not quantified the impact to its balance sheet, it does expect the adoption of this ASU will result in a gross-up in its balance sheet as a result of recording a right-of-use asset and a lease liability for these leases.
In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09,
Revenue from Contracts with Customers (Topic 606).
As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017. The Update modifies the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations.
The Company is currently evaluating the impact the adoption of this update will have on the consolidated financial statements. As a financial institution, the Company’s largest component of revenue, interest income, is excluded from the scope of this ASU. The Company adopted this ASU on January 1, 2018.
22. Parent Company Financial Information
The following financial information is presented as of December 31 for the periods indicated.
Farmers & Merchants Bancorp
Condensed Balance Sheets
(in thousands)
|
|
2017
|
|
|
2016
|
|
Cash
|
|
$
|
332
|
|
|
$
|
228
|
|
Investment in Farmers & Merchants Bank of Central California
|
|
|
297,643
|
|
|
|
289,778
|
|
Investment Securities
|
|
|
409
|
|
|
|
409
|
|
Other Assets
|
|
|
12,006
|
|
|
|
184
|
|
Total Assets
|
|
$
|
310,390
|
|
|
$
|
290,599
|
|
|
|
|
|
|
|
|
|
|
Subordinated Debentures
|
|
$
|
10,310
|
|
|
$
|
10,310
|
|
Liabilities
|
|
|
420
|
|
|
|
308
|
|
Shareholders' Equity
|
|
|
299,660
|
|
|
|
279,981
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
310,390
|
|
|
$
|
290,599
|
|
Farmers & Merchants Bancorp
Condensed Statements of Income
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Equity in Undistributed Earnings in Farmers & Merchants Bank of Central California
|
|
$
|
5,575
|
|
|
$
|
17,043
|
|
|
$
|
17,352
|
|
Dividends from Subsidiary
|
|
|
23,575
|
|
|
|
14,275
|
|
|
|
10,875
|
|
Interest Income
|
|
|
13
|
|
|
|
11
|
|
|
|
10
|
|
Other Expenses, Net
|
|
|
(1,552
|
)
|
|
|
(2,485
|
)
|
|
|
(1,451
|
)
|
Tax Benefit
|
|
|
759
|
|
|
|
879
|
|
|
|
606
|
|
Net Income
|
|
$
|
28,370
|
|
|
$
|
29,723
|
|
|
$
|
27,392
|
|
Farmers & Merchants Bancorp
Condensed Statements of Cash Flows
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
28,370
|
|
|
$
|
29,723
|
|
|
$
|
27,392
|
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Undistributed Net Earnings from Subsidiary
|
|
|
(5,575
|
)
|
|
|
(17,043
|
)
|
|
|
(17,352
|
)
|
Net (Increase) Decrease in Other Assets
|
|
|
(11,822
|
)
|
|
|
(124
|
)
|
|
|
(79
|
)
|
Net Increase (Decrease) in Liabilities
|
|
|
112
|
|
|
|
49
|
|
|
|
141
|
|
Net Cash Provided by Operating Activities
|
|
|
11,085
|
|
|
|
12,605
|
|
|
|
10,102
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Sold or Matured
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
Payments for Business Acquisition
|
|
|
-
|
|
|
|
(2,207
|
)
|
|
|
-
|
|
Payments for Investments in Subsidiaries
|
|
|
(2,953
|
)
|
|
|
(2,586
|
)
|
|
|
(3,360
|
)
|
Net Cash Used by Investing Activities
|
|
|
(2,952
|
)
|
|
|
(4,793
|
)
|
|
|
(3,360
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock
|
|
|
2,953
|
|
|
|
2,586
|
|
|
|
3,360
|
|
Cash Dividends
|
|
|
(10,982
|
)
|
|
|
(10,478
|
)
|
|
|
(10,157
|
)
|
Net Cash Used by Financing Activities
|
|
|
(8,029
|
)
|
|
|
(7,892
|
)
|
|
|
(6,797
|
)
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
104
|
|
|
|
(80
|
)
|
|
|
(55
|
)
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
228
|
|
|
|
308
|
|
|
|
363
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
332
|
|
|
$
|
228
|
|
|
$
|
308
|
|
23. Quarterly Unaudited Financial Data
The following tables set forth certain unaudited historical quarterly financial data for each of the eight consecutive quarters in 2017 and 2016. This information is derived from unaudited consolidated financial statements that include, in management’s opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation when read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.
2017
(in thousands except per share data)
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
|
|
Total Interest Income
|
|
$
|
27,242
|
|
|
$
|
28,069
|
|
|
$
|
29,609
|
|
|
$
|
29,692
|
|
|
$
|
114,612
|
|
Total Interest Expense
|
|
|
1,376
|
|
|
|
1,538
|
|
|
|
1,759
|
|
|
|
1,616
|
|
|
|
6,289
|
|
Net Interest Income
|
|
|
25,866
|
|
|
|
26,531
|
|
|
|
27,850
|
|
|
|
28,076
|
|
|
|
108,323
|
|
Provision for Credit Losses
|
|
|
600
|
|
|
|
650
|
|
|
|
1,600
|
|
|
|
-
|
|
|
|
2,850
|
|
Net Interest Income After
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Credit Losses
|
|
|
25,266
|
|
|
|
25,881
|
|
|
|
26,250
|
|
|
|
28,076
|
|
|
|
105,473
|
|
Total Non-Interest Income
|
|
|
5,406
|
|
|
|
3,539
|
|
|
|
3,638
|
|
|
|
4,179
|
|
|
|
16,762
|
|
Total Non-Interest Expense
|
|
|
18,422
|
|
|
|
16,525
|
|
|
|
16,307
|
|
|
|
16,500
|
|
|
|
67,754
|
|
Income Before Income Taxes
|
|
|
12,250
|
|
|
|
12,895
|
|
|
|
13,581
|
|
|
|
15,755
|
|
|
|
54,481
|
|
Provision for Income Taxes
|
|
|
4,429
|
|
|
|
4,708
|
|
|
|
5,000
|
|
|
|
11,974
|
|
|
|
26,111
|
|
Net Income
|
|
$
|
7,821
|
|
|
$
|
8,187
|
|
|
$
|
8,581
|
|
|
$
|
3,781
|
|
|
$
|
28,370
|
|
Basic Earnings Per Common Share
|
|
$
|
9.68
|
|
|
$
|
10.12
|
|
|
$
|
10.59
|
|
|
$
|
4.64
|
|
|
$
|
35.03
|
|
2016
(in thousands except per share data)
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
|
|
Total Interest Income
|
|
$
|
24,026
|
|
|
$
|
24,314
|
|
|
$
|
25,262
|
|
|
$
|
25,664
|
|
|
$
|
99,266
|
|
Total Interest Expense
|
|
|
920
|
|
|
|
951
|
|
|
|
1,110
|
|
|
|
1,215
|
|
|
|
4,196
|
|
Net Interest Income
|
|
|
23,106
|
|
|
|
23,363
|
|
|
|
24,152
|
|
|
|
24,449
|
|
|
|
95,070
|
|
Provision for Credit Losses
|
|
|
2,600
|
|
|
|
-
|
|
|
|
250
|
|
|
|
3,485
|
|
|
|
6,335
|
|
Net Interest Income After
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Credit Losses
|
|
|
20,506
|
|
|
|
23,363
|
|
|
|
23,902
|
|
|
|
20,964
|
|
|
|
88,735
|
|
Total Non-Interest Income
|
|
|
2,721
|
|
|
|
2,875
|
|
|
|
4,553
|
|
|
|
5,108
|
|
|
|
15,257
|
|
Total Non-Interest Expense
|
|
|
12,019
|
|
|
|
14,737
|
|
|
|
16,414
|
|
|
|
15,002
|
|
|
|
58,172
|
|
Income Before Income Taxes
|
|
|
11,208
|
|
|
|
11,501
|
|
|
|
12,041
|
|
|
|
11,070
|
|
|
|
45,820
|
|
Provision for Income Taxes
|
|
|
4,036
|
|
|
|
4,169
|
|
|
|
4,503
|
|
|
|
3,389
|
|
|
|
16,097
|
|
Net Income
|
|
$
|
7,172
|
|
|
$
|
7,332
|
|
|
$
|
7,538
|
|
|
$
|
7,681
|
|
|
$
|
29,723
|
|
Basic Earnings Per Common Share
|
|
$
|
9.06
|
|
|
$
|
9.25
|
|
|
$
|
9.51
|
|
|
$
|
9.62
|
|
|
$
|
37.44
|
|
24. Subsequent Events
On February 27, 2018 the Company acquired an additional 8 shares of Bank of Rio Vista for $95,200, increasing our total ownership to 1,586 shares, or 39.65% of the total common shares outstanding.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
None
The Company maintains controls and procedures designed to ensure that all relevant information is recorded and reported in all filings of financial reports. Such information is reported to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer to allow timely and accurate disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of December 31, 2017, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of December 31, 2017.
There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.
Management’s report on internal control over financial reporting is set forth in “Item 8. Financial Statements and Supplementary Data,” and is incorporated herein by reference. Moss Adams
LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report, was engaged to audit the effectiveness of the Company’s internal control over financial reporting. The report of Moss Adams LLP
, which is set forth in “Item 8. Financial Statements and Supplementary Data,” is incorporated herein by reference.
None
PART III
|
Directors, Executive Officers and Corporate Governance
|
Set forth below is certain information regarding the Executive Officers of the Company and/or Bank:
Name and Position(s)
|
Age
|
Principal Occupation during the Past Five Years
|
|
|
|
Kent A. Steinwert
Chairman, President
& Chief Executive Officer
of the Company and Bank
|
65
|
Chairman, President & Chief Executive Officer of the Company and Bank.
|
|
|
|
Deborah E. Skinner
Executive Vice President & Chief
Administrative Officer of the Bank
|
55
|
Executive Vice President & Chief Administrative Officer of the Bank.
|
|
|
|
Stephen W. Haley
Executive Vice President
& Chief Financial Officer &
Secretary of the Company and
Bank
|
64
|
Executive Vice President & Chief Financial Officer of the Company and Bank.
|
|
|
|
Kenneth W. Smith
Executive Vice President
& Senior Credit Officer
of the Company and Bank
|
58
|
Executive Vice President & Senior Credit Officer of the Company and Bank.
|
|
|
|
David M. Zitterow
Executive Vice President,
Wholesale Banking Division
of the Bank
|
45
|
Executive Vice President, Wholesale Banking Division Manager – Farmers & Merchants Bank since May 2017.
Senior Vice President – Northern California Regional Executive – Umpqua Bank, April 2014 – May 2017.
Senior Vice President – Head of Business Banking - Umpqua Bank, July 2013 to April 2014.
Senior Vice President – Commercial Banking Manager and Business Banking Manager – Umpqua Bank, April 2011 – July 2013.
|
|
|
|
Jay J. Colombini
Executive Vice President,
Wholesale Banking Division
of the Bank
|
55
|
Executive Vice President, Wholesale Banking Division Manager of the Bank since November 15, 2013.
Senior Vice President and Manager – Lodi Main Branch from August 1, 2012 through November 14, 2013.
|
|
|
|
Ryan J. Misasi
Executive Vice President,
Retail Banking Division of the Bank
|
41
|
Executive Vice President, Retail Banking Division of the Bank since May 29, 2014.
Executive Vice President and Chief Retail Officer – Patelco Credit Union from December, 2011 to April, 2014.
|
Also, see “Election of Directors” and “Compliance with Section 16(a) of the Exchange Act” in the Company’s definitive proxy statement for the 2018 Annual Meeting of Stockholders which will be filed with the SEC and which is incorporated herein by reference. During 2017, there were no changes in procedures for the election of directors.
The Company has adopted a Code of Conduct, which complies with the Code of Ethics requirements of the SEC. A copy of the Code of Conduct is posted on the Company’s website. The Company intends to disclose promptly any amendment to, or waiver from any provision of, the Code of Conduct applicable to senior financial officers, and any waiver from any provision of the Code of Conduct applicable to directors, on its website on the
About Us
page. The Company’s website address is www.fmbonline.com. This website address is for information only and is not intended to be an active link, or to incorporate any website information into this document.
The information required by Item 11 of Form 10-K is incorporated by reference from the information contained in the Company’s definitive proxy statement for the 2018 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The information required by Item 12 of Form 10-K is incorporated by reference from the information contained in the Company’s definitive proxy statement for the 2018 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A. The Company does not have any equity compensation plans, which require disclosure under Item 201(d) of Regulation S-K.
|
Certain Relationships and Related Transactions, and Director Independence
|
The information required by Item 13 of Form 10-K is incorporated by reference from the information contained in the Company’s definitive proxy statement for the 2018 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A.
|
Principal Accounting Fees and Services
|
The information required by Item 14 of Form 10-K is incorporated by reference from the information contained in the Company’s definitive proxy statement for the 2018 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A.
PART IV
|
Exhibits and Financial Statement Schedules
|
|
(a)
|
(1) Financial Statements. Incorporated herein by reference, are listed in Item 8 hereof.
|
|
(2)
|
Financial Statement Schedules. Not applicable.
|
Exhibit
Number
|
Description
|
|
Agreement and Plan of Reorganization dated as of June 8, 2016, by and between Farmers & Merchants Bancorp and Delta National Bancorp and filed on the Registrant’s Current Report on Form 8-K dated June 10, 2016, is incorporated herein by reference.
|
3.1
|
Amended Certificate of Incorporation (incorporated by reference to Proposal #2 in the Registrant’s Definitive Proxy Statement on Schedule 14A for its 2012 Annual Meeting of Stockholders, Appendices 1 and 2 to the Registrant's Definitive Proxy Statement on Schedule 14A for its 2007 Annual Meeting of Stockholders, and Exhibit 3(i) to the Registrant's Current Report on Form 8-K dated April 30, 1999).
|
|
Amended By-Laws (incorporated by reference to the Registrant’s Current Report on Form 8-K dated April 4, 2016, the Registrant’s Current Report on Form 8-K dated September 19, 2008, Appendix 3 to the Registrant's Definitive Proxy Statement on Schedule 14A for its 2007 Annual Meeting of Stockholders, Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated June 7, 2005, and Exhibit 3(ii) to the Registrant's Current Report on
Form 8-K dated April 30, 1999
).
|
|
Certificate of Designation for the Series A Junior Participating Preferred Stock (included as Exhibit A to the Rights Agreement between Farmers & Merchants Bancorp and Registrar and Transfer Company, dated as of August 5, 2008, filed as Exhibit 4.1 below), filed on the Registrant’s Form 10-Q for the quarter ended June 30, 2008, is incorporated herein by reference.
|
|
Rights Agreement between Farmers & Merchants Bancorp and Registrar and Transfer Company, dated as of August 5, 2008, including Form of Right Certificate attached thereto as Exhibit B, filed on the Registrant’s Form 10-Q for the quarter ended June 30, 2008, is incorporated herein by reference.
|
|
Amendment No. 1 to Rights Agreement between Farmers & Merchants Bancorp and Computershare Trust, N.A., as Rights Agent,
dated as of February 18, 2016, incorporated herein by reference to Exhibit 4.2 of the Registrant’s Form 8-A/A filed on February 19, 2016.
|
|
Amended and Restated Employment Agreement effective July 1, 2015, between Farmers & Merchants Bank of Central California and Kent A. Steinwert
,
filed on Registrant’s Form 10-Q for the quarter ended June 30, 2015, is incorporated herein by reference.
|
|
Amended and Restated Employment Agreement effective July 1, 2015, between Farmers & Merchants Bank of Central California and Deborah E. Skinner, filed on Registrant’s Form 10-Q for the quarter ended June 30, 2015, is incorporated herein by reference.
|
|
Amended and Restated Employment Agreement effective July 1, 2015, between Farmers & Merchants Bank of Central California and Kenneth W. Smith, filed on Registrant’s Form 10-Q for the quarter ended June 30, 2015, is incorporated herein by reference.
|
|
Amended and Restated Employment Agreement effective July 1, 2015, between Farmers & Merchants Bank of Central California and Stephen W. Haley, filed on Registrant’s Form 10-Q for the quarter ended June 30, 2015, is incorporated herein by reference.
|
|
Employment Agreement effective July 1, 2015, between Farmers & Merchants Bank of Central California and Jay J. Colombini, filed on Registrant’s Form 10-Q for the quarter ended June 30, 2015, is incorporated herein by reference.
|
|
Employment Agreement effective July 1, 2015, between Farmers & Merchants Bank of Central California and James P. Daugherty
,
filed on Registrant’s Form 10-Q for the quarter ended June 30, 2015, is incorporated herein by reference.
|
|
Employment Agreement effective July 1, 2015, between Farmers & Merchants Bank of Central California and Ryan J. Misasi, filed on Registrant’s Form 10-Q for the quarter ended June 30, 2015, is incorporated herein by reference.
|
|
Employment Agreement effective May 1, 2017, between Farmers & Merchants Bank of Central California and David M. Zitterow, filed on the Registrant’s Current Report on Form 8-K dated June 30, 2017, is incorporated herein by reference.
|
|
Executive Retirement Plan – Performance Component
as amended on November 5, 2010, filed on Registrant’s Form 10-Q for the period ended September 30, 2010, is incorporated herein by reference.
|
|
Executive Retirement Plan – Retention Component as amended on November 5, 2010, filed on Registrant’s Form 10-Q for the period ended September 30, 2010, is incorporated herein by reference.
|
|
Executive Retirement Plan – Salary Component, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014, is incorporated herein by reference.
|
|
Deferred Compensation Plan of Farmers & Merchants Bank of Central California,, as amended on November 5, 2010, filed on Registrant’s Form 10-Q for the period ended September 30, 2010, is incorporated herein by reference.
|
|
Executive Retirement Plan – Equity Component, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014, is incorporated herein by reference.
|
|
Senior Management Retention Plan,, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014, is incorporated herein by reference.
|
|
Code of Conduct of Farmers & Merchants Bancorp,, filed on Registrant’s Form 10-K for the year ended December 31, 2003, is incorporated herein by reference.
|
|
Subsidiaries of the Registrant, filed on Registrant’s Form 10-K for the year ended December 31, 2003, is incorporated herein by reference.
|
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
101.INS
|
XBRL Instance Document
|
101.SCH
|
XBRL Schema Document
|
101.CAL
|
XBRL Calculation Linkbase Document
|
101.LAB
|
XBRL Label Linkbase Document
|
101.PRE
|
XBRL Presentation Linkbase Document
|
101.DEF
|
XBRL Definition Linkbase Document
|
None
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
Farmers & Merchants Bancorp
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
By
|
/s/ Stephen W. Haley
|
|
|
|
|
|
Dated: March 15, 2018
|
|
Stephen W. Haley
|
|
|
|
Executive Vice President &
|
|
|
|
Chief Financial Officer
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 15, 2018.
/s/ Kent A. Steinwert
|
|
|
|
|
|
Chairman, President & Chief Executive Officer
|
|
Kent A. Steinwert
|
(Principal Executive Officer)
|
|
|
|
|
/s/ Stephen W. Haley
|
|
|
|
Executive Vice President & Chief Financial Officer
|
|
Stephen W. Haley
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
/s/ Gary Long
|
/s/ Calvin Suess
|
|
|
|
|
|
Gary Long, Director
|
Calvin Suess, Director
|
|
|
|
|
|
/s/ Stewart C. Adams, Jr.
|
/s/ Kevin Sanguinetti
|
|
|
|
|
|
Stewart C. Adams, Jr., Director
|
Kevin Sanguinetti, Director
|
|
|
|
|
|
/s/ Edward Corum, Jr.
|
/s/ Steven K. Green
|
|
|
|
|
|
Edward Corum, Jr., Director
|
Steven K. Green, Director
|
|
|
|
|
/s/ Terrence A. Young
|
|
|
|
|
|
|
Terrence A. Young, Director
|
|
|