Notes to Consolidated Financial Statements
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - Central Valley Community Bancorp (the “Company”) was incorporated on February 7, 2000 and subsequently obtained approval from the Board of Governors of the Federal Reserve System to be a bank holding company in connection with its acquisition of Central Valley Community Bank (the “Bank”). The Company became the sole shareholder of the Bank on November 15, 2000 in a statutory merger, pursuant to which each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company.
Service 1st Capital Trust I (the Trust) is a business trust formed by Service 1st for the sole purpose of issuing trust preferred securities. The Company succeeded to all the rights and obligations of Service 1st in connection with the acquisition of Service 1st. The Trust is a wholly-owned subsidiary of the Company.
The Bank operates 19 full service offices throughout California’s San Joaquin Valley and Greater Sacramento Region. The Bank’s primary source of revenue is providing loans to customers who are predominately small and middle-market businesses and individuals.
The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits. Depositors’ accounts at an insured depository institution, including all non-interest bearing transactions accounts, will be insured by the FDIC up to the standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category.
The accounting and reporting policies of the Company and the Bank conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.
Management has determined that because all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, the Bank. Intercompany transactions and balances are eliminated in consolidation.
For financial reporting purposes, Service 1st Capital Trust I, is a wholly-owned subsidiary acquired in the merger of Service 1st Bancorp and formed for the exclusive purpose of issuing trust preferred securities. The Company is not considered the primary beneficiary of this 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 on the Company’s consolidated financial statements. The Company’s investment in the common stock of the Trust is included in accrued interest receivable and other assets on the consolidated balance sheet.
Use of Estimates - The preparation of these financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates the estimates used. Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances.
These estimates result in judgments regarding the carrying values of assets and liabilities when these values are not readily available from other sources, as well as assessing and identifying the accounting treatments of contingencies and commitments. 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 may differ from these estimates under different assumptions.
Cash and Cash Equivalents - For the purpose of the statement of cash flows, cash, due from banks with maturities less than 90 days, interest-earning deposits in other banks, and Federal funds sold are considered to be cash equivalents. Generally, Federal funds are sold and purchased for one-day periods. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other banks, and Federal funds purchased.
Investment Securities - Investments are classified into the following categories:
•Available-for-sale securities, reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders’ equity.
•Held-to-maturity securities, which management has the positive intent and ability to hold to maturity, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums.
Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. All transfers between categories are accounted for at fair value in the period which the transfer occurs.
Gains or losses on the sale of investment securities are computed on the specific identification method. Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums. Premiums and discounts on securities are amortized or accreted on the level yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated.
An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether such a decline in their fair value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the securities for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more likely than not that the Company will not be required to sell the security before recovery, for debt securities, only the portion of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other comprehensive income. If management intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to earnings.
Loans - All loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at principal balances outstanding net of deferred loan fees and costs, and the allowance for credit losses. Interest is accrued daily based upon outstanding loan principal balances. However, when a loan becomes impaired and the future collectability of interest and principal is in serious doubt, the loan is placed on nonaccrual status and the accrual of interest income is suspended. Any loan delinquent 90 days or more is automatically placed on nonaccrual status. Any interest accrued but unpaid is charged against income. Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectability of principal is not in doubt, are applied first to principal until fully collected and then to interest.
Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer and credit card loans are typically charged off no later than 90 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. A loan placed on non-accrual status may be restored to accrual status when principal and interest are no longer past due and unpaid, or the loan otherwise becomes both well secured and in the process of collection. When a loan is brought current, the Company must also have reasonable assurance that the obligor has the ability to meet all contractual obligations in the future, that the loan will be repaid within a reasonable period of time, and that a minimum of six months of satisfactory repayment performance has occurred.
Substantially all loan origination fees, commitment fees, direct loan origination costs and purchase premiums and discounts on loans are deferred and recognized as an adjustment of yield, and amortized to interest income over the contractual term of the loan. The unamortized balance of deferred fees and costs is reported as a component of net loans.
Acquired loans and Leases - Loans and leases acquired through purchase or through a business combination are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date. Should the Company’s allowance for credit losses methodology indicate that the credit discount associated with acquired, non-purchased credit impaired loans, is no longer sufficient to cover probable losses inherent in those loans, the Company will establish an allowance for those loans through a charge to provision for credit losses. At the time of an acquisition, we evaluate loans to determine if they are purchase credit impaired loans. Purchased credit impaired loans are those acquired loans with evidence of credit deterioration for which collection of all contractual payments was not considered probable at the date of acquisition. This determination is made by considering past due and/or nonaccrual status, prior designation of a troubled debt restructuring, or other factors that may suggest we will not be able to collect all contractual payments. Purchased credit impaired loans are initially recorded at fair value with the difference between fair value and estimated future cash flows accreted over the expected cash flow period as income only to the extent we can reasonably estimate the timing and amount of future cash flows. In this case, these loans would be classified as accruing. In the event we are unable to reasonably estimate the timing and amount of future cash flows, or if the loan is acquired primarily for the rewards of ownership of the underlying collateral, the loan is classified as non-accrual. An acquired loan
previously classified by the seller as a troubled debt restructuring is no longer classified as such at the date of acquisition. Past due status is reported based on contractual payment status.
All loans not otherwise classified as purchase credit impaired are recorded at fair value with the discount to contractual value accreted over the life of the loan.
Allowance for Credit Losses - The allowance for credit losses (the “allowance”) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. The allowance is established through a provision for credit losses which is charged to expense. Additions to the allowance are made to maintain the adequacy of the total allowance after credit losses and loan 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 two primary components, specific reserves related to impaired loans and general reserves for inherent losses related to loans that are not impaired.
A loan 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. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to come solely from the sale or operation of underlying collateral.
A restructuring of a debt constitutes a troubled debt restructuring (TDR) 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 workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.
When determining the allowance for loan losses on acquired loans, we bifurcate the allowance between legacy loans and acquired loans. Loans remain designated as acquired until either (i) loan is renewed or (ii) loan is substantially modified whereby modification results in a new loan. When determining the allowance on acquired loans, the Company estimates probable incurred credit losses as compared to the Company’s recorded investment, with the recorded investment being net of any unaccreted discounts from the acquisition.
The determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of a simple average of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 56 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, industry and geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.
The Company segregates the allowance by portfolio segment. These portfolio segments include commercial, real estate, and consumer loans. The relative significance of risk considerations vary by portfolio segment. For commercial and real estate loans, the primary risk consideration is a borrower’s ability to generate sufficient cash flows to repay their loan. Secondary considerations include the creditworthiness of guarantors and the valuation of collateral. In addition to the creditworthiness of a borrower, the type and location of real estate collateral is an important risk factor for real estate loans. The primary risk considerations for consumer loans are a borrower’s personal cash flow and liquidity, as well as collateral value. The allowance for credit losses attributable to each portfolio segment, which includes both impaired loans and loans that are not impaired, is combined to determine the Company’s overall allowance, which is included on the consolidated balance sheet.
Commercial:
Commercial and industrial - Commercial and industrial loans are generally underwritten to existing cash flows of operating businesses. Additionally, economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Past due payments may indicate the borrower’s capacity to repay their obligations may be deteriorating.
Agricultural production - Loans secured by crop production and livestock are especially vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.
Real Estate:
Owner-occupied commercial real estate - Real estate collateral secured by commercial or professional properties with repayment arising from the owner’s business cash flows. To meet this classification, the owner’s operation must occupy no less
than 50% of the real estate held. Financial profitability and capacity to meet the cyclical nature of the industry and related real estate market over a significant timeframe is essential.
Real estate construction and other land loans - Land and construction loans generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified costs 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.
Agricultural real estate - Agricultural loans secured by real estate generally possess a higher inherent risk of loss caused by changes in concentration of permanent plantings, government subsidies, and the value of the U.S. dollar affecting the export of commodities.
Investor commercial real estate - Investor commercial real estate loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. 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 flows to service debt obligations.
Other real estate - Primarily loans secured by agricultural real estate for development and production of permanent plantings that have not reached maximum yields. Real estate loans where agricultural vertical integration exists in packing and shipping of commodities and risk is primarily based on the liquidity of the borrower to sustain payment during the development period.
Consumer:
Equity loans and lines of credit - 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. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends may indicate that the borrowers’ capacity to repay their obligations may be deteriorating.
Installment and other consumer loans - An 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 directly for consumer purchases. Other consumer loans include other open ended unsecured consumer loans. Open ended unsecured loans generally have a higher rate of default than all other portfolio segments and are also impacted by weak economic conditions and trends. Open ended unsecured loans in homogeneous loan portfolio segments are not evaluated for specific impairment.
Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. 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 primary regulators, the FDIC and California Department of Business Oversight, 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.
Risk Rating - The Company assigns a risk rating to all loans, and periodically performs detailed reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. The most recent review of risk rating was completed in December 2022. These risk ratings are also subject to examination by independent specialists engaged by the Company, and the Company’s regulators. During these internal reviews, 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. These credit quality indicators are used to assign a risk rating to each individual loan. The risk ratings can be grouped into five major categories, defined as follows:
Pass - A pass loan is a strong credit with no existing or known potential weaknesses deserving of management’s close attention.
Special Mention - A special mention loan 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 in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard - A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans 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 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, on the basis of currently known facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. Doubtful classification is considered temporary and short term.
Loss - Loans classified as loss are considered uncollectible and charged off immediately.
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 including economic trends in the Company’s service areas, industry experience and trends, industry and geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole. Inherent credit risk and qualitative reserve factors are inherently subjective and are driven by the repayment risk associated with each class of loans.
Bank Premises and Equipment - Land is carried at cost. Bank premises and equipment are carried at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. The useful lives of Bank premises are estimated to be between 20 and 40 years. The useful lives of improvements to Bank premises, furniture, fixtures and equipment are estimated to be three to ten years. Leasehold improvements are amortized over the life of the asset or the term of the related lease, whichever is shorter. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred.
The Bank evaluates premises and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable.
Federal Home Loan Bank (FHLB) Stock - 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 is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Investments in Low Income Housing Tax Credit Funds - The Bank has invested in limited partnerships that were formed to develop and operate affordable housing projects for low or moderate income tenants throughout California. Our ownership in each limited partnership is less than two percent. In accordance with ASU No. 2014-01, Investments - Equity Method and Joint Ventures (Topic 323), we elected to account for the investments in qualified affordable housing tax credit funds using the proportional amortization method. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received and the net investment performance is recognized as part of income tax expense (benefit). Each of the partnerships must meet the regulatory minimum requirements for affordable housing for a minimum 15-year compliance period to fully utilize the tax credits. If the partnerships cease to qualify during the compliance period, the credit may be denied for any period in which the project is not in compliance and a portion of the credit previously taken is subject to recapture with interest. The Company’s investment in Low Income Housing Tax Credit (“LIHTC”) partnerships is reported in other assets on the consolidated balance sheet.
Other Real Estate Owned - Other real estate owned (OREO) is comprised of property acquired through foreclosure proceedings or acceptance of deeds-in-lieu of foreclosure. Losses recognized at the time of acquiring property in full or partial satisfaction of debt are charged against the allowance for credit losses. OREO, when acquired, is initially recorded at fair value less estimated disposition costs, establishing a new cost basis. Fair value of OREO is generally based on an independent appraisal of the property. Subsequent to initial measurement, OREO is carried at the lower of the recorded investment or fair value less disposition costs. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Revenues and expenses associated with OREO are reported as a component of noninterest expense when incurred.
Foreclosed Assets - Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through operations. Operating costs after acquisition are expensed. Gains and losses on disposition are included in noninterest expense. There was no carrying value for foreclosed assets at December 31, 2022 and at December 31, 2021.
Bank Owned Life Insurance - The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Business Combinations - The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques included discounted cash flow analyses to determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.
Goodwill - Business combinations involving the Bank’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Goodwill represents the excess of the purchase price of acquired businesses over the net fair value of assets, including identified intangible assets, acquired and liabilities assumed in the transactions accounted for under the acquisition method of accounting. The value of goodwill is ultimately derived from the Bank’s ability to generate net earnings after the acquisitions. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed at least annually for impairment.
The Company has selected September 30 as the date to perform the annual impairment test. Management assessed qualitative factors including performance trends and noted no factors indicating goodwill impairment. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. No such events or circumstances arose during the fourth quarter of 2022, so goodwill was not required to be retested. Goodwill is the only intangible asset with an indefinite life on the balance sheet.
Intangible Assets - The intangible assets at December 31, 2022 represent the estimated fair value of the core deposit relationships acquired in business combinations. Core deposit intangibles are being amortized using the straight-line method over an estimated life of five to ten years from the date of acquisition. Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization. Based on the evaluation, no changes to the remaining useful lives was required. Management performed an annual impairment test on core deposit intangibles as of September 30, 2022 and determined no impairment was necessary. Core deposit intangibles are also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. No such events or circumstances arose during the fourth quarter of 2022, so core deposit intangibles were not required to be retested.
Loan Commitments and Related Financial Instruments - Financial instruments include off‑balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount of these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Income Taxes - The Company files its income taxes on a consolidated basis with the Bank. The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for income taxes.
Income tax expense represents the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.
The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax assets will not be realized. “More likely than not” is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed.
Accounting for Uncertainty in Income Taxes - The Company uses a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded.
Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statement of income.
Retirement Plans - Employee 401(k) plan expense is the amount of employer matching contributions. Profit sharing plan expense is the amount of employer contributions. Contributions to the profit sharing plan are determined at the discretion of the Board of Directors. Deferred compensation and supplemental retirement plan expense is allocated over years of service.
Earnings Per Common Share - Basic earnings per common share (EPS), which excludes dilution, is computed by dividing income available to common shareholders (net income after deducting dividends, if any, on preferred stock and accretion of
discount) by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options or warrants, result in the issuance of common stock which shares in the earnings of the Company. All data with respect to computing earnings per share is retroactively adjusted to reflect stock dividends and splits and the treasury stock method is applied to determine the dilutive effect of stock options in computing diluted EPS.
Comprehensive Income - Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.
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 are such matters that will have a material effect on the financial statements.
Restrictions on Cash - Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.
Share-Based Compensation - Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes-Merton model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Additionally, the compensation expense for the Company’s employee stock ownership plan is based on the market price of the shares as they are committed to be released to participant accounts. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Dividend Restriction - Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to shareholders.
Fair Value of Financial Instruments - Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 2. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. Recently Issued Accounting Standards:
FASB Accounting Standards Update (ASU) 2016-13 - Measurement of Credit Losses on Financial Instruments (Subtopic 326): Financial Instruments - Credit Losses, commonly referred to as “CECL,” was issued June 2016. The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL, reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the contractual term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity (“HTM”) debt securities. Under the provisions of the update, credit losses recognized on available for sale (“AFS”) debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL, reserves will be established for purchased loans at the time of acquisition, the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. The FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. On August 15, 2019, the FASB issued a proposed Accounting Standards Update (ASU), “Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” that would provide private entities and certain small public companies additional time to implement the standards of CECL, leases, and hedging. The final ASU extends the effective date for SEC filers, such as the Company, that are classified as smaller reporting companies to January 1, 2023.
The Company has formed an internal task force that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. The Company has also established a project management governance process
to manage the implementation across affected disciplines. An external provider specializing in community bank loss driver and CECL reserving model design as well as other related consulting services has been retained, and we continue to evaluate CECL modeling factors. As part of this process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as evaluated the key economic loss drivers for each segment. Further, the Company has begun developing internal controls around the CECL process, data, calculations and implementation. The Company has generated and continues to evaluate model scenarios under CECL in tandem with its current reserving processes for interim and annual reporting periods during 2022 due to the fact the Company elected to delay implementation of the CECL process as allowed by FASB. While the Company is currently unable to reasonably estimate the impact of adopting this new guidance, management expects the impact of adoption will be significantly influenced by the composition and quality of the Company’s loan and held-to-maturity investment portfolios, as well as the economic conditions as of the date of adoption. The Company also anticipates changes to the processes and procedures for calculating the allowance for credit losses, and an additional allowance for held-to-maturity investments. The Company’s evaluation is nearing completion, however we continue to review the full impact and the changes to internal controls required.
FASB Accounting Standards Update (ASU) 2020-04 - Reference Rate Reform (Subtopic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, was issued March 2020. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements. The Company believes the adoption of this guidance on activities subsequent to December 31, 2022 will not have a material impact on the consolidated financial statements.
FASB Accounting Standards Update (ASU) 2022-02 - Financial Instruments-Credit Losses (Subtopic 326). Troubled Debt Restructurings and Vintage Disclosures, was issued March 2022. The amendments in this update eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, for public business entities, the amendments in this Update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6. The guidance is effective for the Corporation upon the adoption of ASU 2016-13, January 1, 2023. The Company is currently assessing the impact of ASU 2022-02 on its disclosures and control structure; however, the Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued a revised interagency statement encouraging financial institutions to work with customers affected by COVID-19 and providing additional information regarding loan modifications. The revised interagency statement clarifies the interaction between the interagency statement issued on March 22, 2020 and the temporary relief provided by Section 4013 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. Section 4013 allows financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (“TDRs”). The revised statement also provides supervisory interpretations on past due and nonaccrual regulatory reporting of loan modification programs and regulatory capital. This interagency guidance is expected to reduce the number of TDRs that will be reported in future periods; however, the amount is indeterminable and will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
2.FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 — Quoted market prices (unadjusted) for identical instruments traded in active markets that the entity has the ability to access as of the measurement date.
Level 2 —Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, we report the transfer at the beginning of the reporting period.
The estimated carrying and fair values of the Company’s financial instruments are as follows (in thousands):
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| | December 31, 2022 |
| | Carrying Amount | | Fair Value |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
Financial assets: | | | | | | | | | | |
Cash and due from banks | | $ | 25,485 | | | $ | 25,485 | | | $ | — | | | $ | — | | | $ | 25,485 | |
Interest-earning deposits in other banks | | 5,685 | | | 5,685 | | | — | | | — | | | 5,685 | |
| | | | | | | | | | |
Available-for-sale investment securities | | 648,825 | | | — | | | 648,825 | | | — | | | 648,825 | |
Held-to-maturity investment securities | | 305,107 | | | — | | | 271,249 | | | — | | | 271,249 | |
Equity securities | | 6,558 | | | 6,558 | | | — | | — | | 6,558 | |
Loans, net | | 1,245,456 | | | — | | | — | | | 1,113,849 | | | 1,113,849 | |
Federal Home Loan Bank stock | | 6,169 | | | N/A | | N/A | | N/A | | N/A |
Accrued interest receivable | | 10,547 | | | — | | | 6,035 | | | 4,512 | | | 10,547 | |
Financial liabilities: | | | | | | | | | | |
Deposits | | 2,099,649 | | | 2,034,928 | | | 67,047 | | | — | | | 2,101,975 | |
Short-term borrowings | | 46,000 | | | — | | | 46,000 | | | — | | | 46,000 | |
Senior debt and subordinated debentures | | 69,599 | | | — | | | — | | | 62,504 | | | 62,504 | |
Accrued interest payable | | 794 | | | — | | | 83 | | | 711 | | | 794 | |
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| | December 31, 2021 |
| | Carrying Amount | | Fair Value |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
Financial assets: | | | | | | | | | | |
Cash and due from banks | | $ | 29,412 | | | $ | 29,412 | | | $ | — | | | $ | — | | | $ | 29,412 | |
Interest-earning deposits in other banks | | 134,055 | | | 134,055 | | | — | | | — | | | 134,055 | |
| | | | | | | | | | |
Available-for-sale investment securities | | 1,109,208 | | | — | | | 1,109,208 | | | — | | | 1,109,208 | |
Equity securities | | 7,416 | | | 7,416 | | | — | | | — | | | 7,416 | |
| | | | | | | | | | |
Loans, net | | 1,029,511 | | | — | | | — | | | 1,015,052 | | | 1,015,052 | |
Federal Home Loan Bank stock | | 5,595 | | | N/A | | N/A | | N/A | | N/A |
Accrued interest receivable | | 9,395 | | | 7 | | | 6,076 | | | 3,312 | | | 9,395 | |
Financial liabilities: | | | | | | | | | | |
Deposits | | 2,122,797 | | | 2,010,407 | | | 89,923 | | | — | | | 2,100,330 | |
| | | | | | | | | | |
Senior debt and subordinated debentures | | 39,454 | | | — | | | — | | | 39,463 | | | 39,463 | |
Accrued interest payable | | 202 | | | — | | | 30 | | | 172 | | | 202 | |
These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented.
The methods and assumptions used to estimate fair values are described as follows:
(a) Cash and Cash Equivalents — The carrying amounts of cash and due from banks, interest-earning deposits in other banks, and Federal funds sold approximate fair values and are classified as Level 1.
(b) Investment Securities — Investment securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for investment securities classified in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators.
(c) Loans — Fair values of loans 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. Purchased credit impaired (PCI) loans are measured at estimated fair value on the date of acquisition. Carrying value is calculated as the present value of expected cash flows and approximates fair value and included in Level 3. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are initially valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The estimated fair values of financial instruments disclosed above follow the guidance in ASU 2016-01 which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity, and marketability factors.
(d) FHLB Stock — It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.
(e) Deposits — Fair value of demand deposit, savings, and 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 value for fixed and variable rate certificates of deposit are estimated using discounted cash flow analyses using interest rates offered at each reporting date by the Company for certificates with similar remaining maturities resulting in a Level 2 classification.
(f) Short-Term Borrowings — The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.
(g) Subordinated Debentures and Senior Debt — 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 3 classification.
(h) Accrued Interest Receivable/Payable — The fair value of accrued interest receivable and payable is based on the fair value hierarchy of the related asset or liability.
(i) Off-Balance Sheet Instruments — Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
Assets Recorded at Fair Value
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2022 and 2021:
Recurring Basis
The Company is required or permitted to record the following assets at fair value on a recurring basis under other accounting pronouncements (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 |
December 31, 2022 | | | | | | | | |
Available-for-sale investment securities | | | | | | | | |
Debt Securities: | | | | | | | | |
U.S. Treasury securities | | $ | 8,707 | | | $ | — | | | $ | 8,707 | | | $ | — | |
U.S. Government agencies | | 98 | | | — | | | 98 | | | — | |
Obligations of states and political subdivisions | | 174,985 | | | — | | | 174,985 | | | — | |
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations | | 109,493 | | | — | | | 109,493 | | | — | |
Private label mortgage and asset backed securities | | 355,542 | | | — | | | 355,542 | | | — | |
| | | | | | | | |
Equity Securities | | 6,558 | | | 6,558 | | | — | | — | |
Total assets measured at fair value on a recurring basis | | $ | 655,383 | | | $ | 6,558 | | | $ | 648,825 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 |
December 31, 2021 | | | | | | | | |
Available-for-sale securities | | | | | | | | |
Debt Securities: | | | | | | | | |
U.S. Treasury securities | | $ | 9,925 | | | $ | — | | | $ | 9,925 | | | $ | — | |
U.S. Government agencies | | 379 | | | — | | | 379 | | | — | |
Obligations of states and political subdivisions | | 526,467 | | | — | | | 526,467 | | | — | |
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations | | 214,439 | | | — | | | 214,439 | | | — | |
Private label residential mortgage and asset backed securities | | 313,220 | | | — | | | 313,220 | | | — | |
Corporate debt securities | | 44,778 | | | — | | | 44,778 | | | — | |
Equity Securities | | 7,416 | | | 7,416 | | | — | | | — | |
Total assets measured at fair value on a recurring basis | | $ | 1,116,624 | | | $ | 7,416 | | | $ | 1,109,208 | | | $ | — | |
Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets. Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities in active markets. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the years ended December 31, 2022 and 2021, no transfers between levels occurred.
There were no Level 3 assets measured at fair value on a recurring basis at December 31, 2022 or December 31, 2021. Also there were no liabilities measured at fair value on a recurring basis at December 31, 2022 or December 31, 2021.
Non-recurring Basis
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include the following assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at December 31, 2022 and 2021. As of December 31, 2022, there were no impaired loans measured for impairment using the fair value. Those measured at December 31, 2021 were (in thousands):
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| | Fair Value | | Level 1 | | Level 2 | | Level 3 |
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December 31, 2021 | | | | | | | | |
Real estate: | | | | | | | | |
Real estate-construction and other land loans | | $ | 262 | | | $ | — | | | $ | — | | | $ | 262 | |
Total assets measured at fair value on a non-recurring basis | | $ | 262 | | | $ | — | | | $ | — | | | $ | 262 | |
| | | | | | | | |
At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. The fair value of impaired loans is based on the fair value of the collateral. Impaired loans were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements. Impaired loans evaluated under the discounted cash flow method are excluded from the table above. The discounted cash flow method as prescribed by ASC 310 is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate which is not a market rate. There were no changes in valuation techniques used during the year ended December 31, 2022.
Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value is compared with independent data sources such as recent market data or industry-wide statistics.
There were no impaired loans that were measured for impairment using the fair value of the collateral for collateral dependent loans at December 31, 2022. Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans had a principal balance of $292,000 with a valuation allowance of $30,000 at December 31, 2021, and a resulting fair value of $262,000. The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans.
During the year ended December 31, 2022 the specific allocation of the allowance for credit losses related to loans carried at fair value was zero, compared to $30,000 during the year ended December 31, 2021. There were no net charge-offs related to loans carried at fair value at December 31, 2022 and 2021.
3.INVESTMENT SECURITIES
The following tables summarize the amortized cost and fair value of securities available-for-sale and securities held-for-maturity at December 31, 2022 and 2021 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive (loss) income and gross unrecognized gains and losses:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Available-for-Sale Securities | | | | | | | |
Debt Securities: | | | | | | | |
U.S. Treasury securities | $ | 9,990 | | | $ | — | | | $ | (1,283) | | | $ | 8,707 | |
U.S. Government agencies | 107 | | | — | | | (9) | | | 98 | |
Obligations of states and political subdivisions | 201,638 | | | — | | | (26,653) | | | 174,985 | |
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations | 117,292 | | | 4 | | | (7,803) | | | 109,493 | |
Private label mortgage and asset backed securities | 411,441 | | | 14 | | | (55,913) | | | 355,542 | |
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| $ | 740,468 | | | $ | 18 | | | $ | (91,661) | | | $ | 648,825 | |
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| December 31, 2022 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Held to Maturity | | | | | | | |
Debt Securities: | | | | | | | |
| | | | | | | |
Obligations of states and political subdivisions | $ | 192,004 | | | $ | 67 | | | $ | (23,166) | | | $ | 168,905 | |
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations | 10,430 | | | — | | | (1,762) | | | 8,668 | |
Private label mortgage and asset backed securities | 56,691 | | | — | | | (5,931) | | | 50,760 | |
Corporate debt securities | 45,982 | | | — | | | (3,066) | | | 42,916 | |
| $ | 305,107 | | | $ | 67 | | | $ | (33,925) | | | $ | 271,249 | |
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| December 31, 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
Available-for-Sale Securities | | | | | | | |
Debt Securities: | | | | | | | |
U.S. Treasury securities | $ | 9,988 | | | $ | — | | | $ | (63) | | | $ | 9,925 | |
U.S. Government agencies | 373 | | | 6 | | | — | | | 379 | |
Obligations of states and political subdivisions | 512,952 | | | 16,703 | | | (3,188) | | | 526,467 | |
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations | 213,471 | | | 2,245 | | | (1,277) | | | 214,439 | |
Private label mortgage and asset backed securities | 317,089 | | | 824 | | | (4,693) | | | 313,220 | |
Corporate debt securities | 44,500 | | | 595 | | | (317) | | | 44,778 | |
` | $ | 1,098,373 | | | $ | 20,373 | | | $ | (9,538) | | | $ | 1,109,208 | |
Proceeds and gross realized (losses)/gains on investment securities for the years ended December 31, 2022, 2021, and 2020 are shown below (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Available-for-Sale Securities | | | | | | |
Proceeds from sales or calls | | $ | 252,331 | | | $ | 26,222 | | | $ | 283,956 | |
Gross realized gains from sales or calls | | $ | 5,235 | | | $ | 580 | | | $ | 7,123 | |
Gross realized losses from sales or calls | | $ | (6,965) | | | $ | (79) | | | $ | (2,871) | |
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During the second quarter of 2022, the Company re-designated certain securities previously classified as available-for-sale to the held-to-maturity classification. The securities re-designated consisted of obligations of states and political subdivision securities, U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations, private label mortgage and asset backed securities, and corporate debt securities with a total carrying value of $306.7 million at April 1, 2022. At the time of re-designation, the securities included $25.3 million of pretax unrealized losses in other comprehensive income; which is being amortized over the remaining life of the securities in a manner consistent with the amortization of a premium or discount.
As market interest rates or risks associated with an available-for-sale security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that fit with the Company’s current risk profile is appropriate and beneficial to the Company.
Losses recognized in 2022, 2021, and 2020 were incurred in order to reposition the investment securities portfolio based on the current rate environment. The securities sold at a loss were acquired when the rate environment was not as volatile. The securities sold were primarily purchased to serve a purpose in the rate environment in which the securities were purchased. The Company addressed risks in the security portfolio by selling these securities and using the proceeds to purchase securities that fall within the Company’s current risk profile.
The provision for income taxes includes $(511,000), $148,000, and $1,257,000 income (benefit)/tax impact from the reclassification of unrealized net (losses)/gains on available-for-sale securities to realized net (losses)/gains on available-for-sale securities for the years ended December 31, 2022, 2021, and 2020, respectively.
Investment securities with unrealized losses at December 31, 2022 and 2021 are summarized and classified according to the duration of the loss period as follows (in thousands):
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| December 31, 2022 |
| Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Available-for-Sale Securities | | | | | | | | | | | |
Debt Securities: | | | | | | | | | | | |
U.S. Treasury securities | $ | — | | | $ | — | | | $ | 8,707 | | | $ | (1,283) | | | $ | 8,707 | | | $ | (1,283) | |
U.S. Government agencies | — | | | — | | | 98 | | | (9) | | | 98 | | | (9) | |
Obligations of states and political subdivisions | 90,808 | | | (12,208) | | | 84,177 | | | (14,445) | | | 174,985 | | | (26,653) | |
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations | 20,825 | | | (1,058) | | | 88,520 | | | (6,745) | | | 109,345 | | | (7,803) | |
Private label residential mortgage and asset backed securities | 126,284 | | | (14,529) | | | 229,152 | | | (41,384) | | | 355,436 | | | (55,913) | |
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| $ | 237,917 | | | $ | (27,795) | | | $ | 410,654 | | | $ | (63,866) | | | $ | 648,571 | | | $ | (91,661) | |
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| December 31, 2022 |
| Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Held-to-Maturity Securities | | | | | | | | | | | |
Debt Securities: | | | | | | | | | | | |
| | | | | | | | | | | |
Obligations of states and political subdivisions | $ | 48,311 | | | $ | (5,505) | | | $ | 118,026 | | | $ | (17,661) | | | $ | 166,337 | | | $ | (23,166) | |
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations | — | | | — | | | 8,668 | | | (1,762) | | | 8,668 | | | (1,762) | |
Private label residential mortgage and asset backed securities | 19,393 | | | (1,916) | | | 31,367 | | | (4,015) | | | 50,760 | | | (5,931) | |
Corporate debt securities | 23,997 | | | (1,561) | | | 18,919 | | | (1,505) | | | 42,916 | | | (3,066) | |
| $ | 91,701 | | | $ | (8,982) | | | $ | 176,980 | | | $ | (24,943) | | | $ | 268,681 | | | $ | (33,925) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Available-for-Sale Securities | | | | | | | | | | | |
Debt Securities: | | | | | | | | | | | |
U.S. Treasury securities | $ | 9,925 | | | $ | (63) | | | $ | — | | | $ | — | | | $ | 9,925 | | | $ | (63) | |
| | | | | | | | | | | |
Obligations of states and political subdivisions | 143,336 | | | (2,896) | | | 6,336 | | | (292) | | | 149,672 | | | (3,188) | |
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations | 91,385 | | | (905) | | | 40,365 | | | (372) | | | 131,750 | | | (1,277) | |
Private label residential mortgage backed securities | 230,987 | | | (3,661) | | | 28,908 | | | (1,032) | | | 259,895 | | | (4,693) | |
Corporate debt securities | 21,183 | | | (317) | | | — | | | — | | | 21,183 | | | (317) | |
| $ | 496,816 | | | $ | (7,842) | | | $ | 75,609 | | | $ | (1,696) | | | $ | 572,425 | | | $ | (9,538) | |
The Company periodically evaluates each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase.
As of December 31, 2022, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). The Company evaluated all individual available-for-sale investment securities with an unrealized loss at December 31, 2022 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 2022 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $250,000. The Company also analyzed any securities that may have been downgraded by credit rating agencies.
For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds. There were no OTTI losses recorded during the twelve months ended December 31, 2022, 2021, or 2020.
U.S. Treasury Securities - At December 31, 2022, the Company held one U.S. Treasury security which was in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Treasury securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2022.
U.S. Government Agencies - At December 31, 2022, the Company held one U.S. Government agency security which was in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government agency
securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2022.
Obligations of States and Political Subdivisions - At December 31, 2022, the Company held 43 obligations of states and political subdivision securities of which 25 were in a loss position for less than 12 months, and 18 have been in a loss position for more than 12 months. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2022.
U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations - At December 31, 2022, the Company held 66 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligation securities of which 40 were in a loss position for less than 12 months and 26 have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entity and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed or supported by an agency or 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, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2022.
Private Label Mortgage and Asset Backed Securities - At December 31, 2022, the Company had a total of 82 Private Label Mortgage and Asset Backed Securities (PLMBS). 27 of these securities were in a loss position for less than 12 months and 55 have been in a loss position for more than 12 months at December 31, 2022. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2022. The Company continues to monitor these securities for changes in credit ratings or other indications of credit deterioration.
The amortized cost and estimated fair value of available-for-sale and held-to-maturity investment securities at December 31, 2022 and 2021 by contractual maturity are shown in the two tables below (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Available-for-Sale Securities | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
Within one year | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
After one year through five years | | — | | | — | | | 3,690 | | | 4,038 | |
After five years through ten years | | 45,918 | | | 38,383 | | | 99,615 | | | 101,498 | |
After ten years | | 165,710 | | | 145,309 | | | 419,635 | | | 430,856 | |
| | 211,628 | | | 183,692 | | | 522,940 | | | 536,392 | |
Investment securities not due at a single maturity date: | | | | | | | | |
| | | | | | | | |
U.S. Government agencies | | 107 | | | 98 | | | 373 | | | 379 | |
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations | | 117,292 | | | 109,493 | | | 213,471 | | | 214,439 | |
Private label mortgage and asset backed securities | | 411,441 | | | 355,542 | | | 317,089 | | | 313,220 | |
Corporate debt securities | | — | | | — | | | 44,500 | | | 44,778 | |
| | $ | 740,468 | | | $ | 648,825 | | | $ | 1,098,373 | | | $ | 1,109,208 | |
| | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Held-to-Maturity Securities | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
Within one year | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
After one year through five years | | 132 | | | 129 | | | — | | | — | |
After five years through ten years | | 51,424 | | | 46,143 | | | — | | | — | |
After ten years | | 140,448 | | | 122,633 | | | — | | | — | |
| | 192,004 | | | 168,905 | | | — | | | — | |
Investment securities not due at a single maturity date: | | | | | | | | |
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations | | 10,430 | | | 8,668 | | | — | | | — | |
Private label mortgage and asset backed securities | | 56,691 | | | 50,760 | | | — | | | — | |
Corporate debt securities | | 45,982 | | | 42,916 | | | — | | | — | |
| | $ | 305,107 | | | $ | 271,249 | | | $ | — | | | $ | — | |
Investment securities with amortized costs totaling $214,579,000 and $252,986,000 and fair values totaling $190,814,000 and $260,325,000 were pledged as collateral for borrowing arrangements, public funds and for other purposes at December 31, 2022 and 2021, respectively.
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Outstanding loans are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Loan Type | | December 31, 2022 | | % of Total loans | | December 31, 2021 | | % of Total loans |
Commercial: | | | | | | | | |
Commercial and industrial | | $ | 141,197 | | | 11.2 | % | | $ | 136,847 | | | 13.2 | % |
Agricultural production | | 39,007 | | | 3.1 | % | | 40,860 | | | 3.9 | % |
Total commercial | | 180,204 | | | 14.3 | % | | 177,707 | | | 17.1 | % |
Real estate: | | | | | | | | |
Owner occupied | | 194,663 | | | 15.5 | % | | 212,234 | | | 20.4 | % |
Real estate construction and other land loans | | 109,175 | | | 8.7 | % | | 61,586 | | | 5.9 | % |
Commercial real estate | | 464,809 | | | 37.1 | % | | 369,529 | | | 35.6 | % |
Agricultural real estate | | 117,648 | | | 9.4 | % | | 98,481 | | | 9.5 | % |
Other real estate | | 24,586 | | | 2.0 | % | | 26,084 | | | 2.5 | % |
| | 910,881 | | | 72.7 | % | | 767,914 | | | 73.9 | % |
Consumer: | | | | | | | | |
Equity loans and lines of credit | | 123,581 | | | 9.8 | % | | 55,620 | | | 5.4 | % |
Consumer and installment | | 40,252 | | | 3.2 | % | | 36,999 | | | 3.6 | % |
Total consumer | | 163,833 | | | 13.0 | % | | 92,619 | | | 9.0 | % |
Net deferred origination costs (fees) | | 1,386 | | | | | 871 | | | |
Total gross loans | | 1,256,304 | | | 100.0 | % | | 1,039,111 | | | 100.0 | % |
Allowance for credit losses | | (10,848) | | | | | (9,600) | | | |
Total loans | | $ | 1,245,456 | | | | | $ | 1,029,511 | | | |
At December 31, 2022 and 2021, loans originated under Small Business Administration (SBA) programs totaling $19,947,000 and $23,024,000, respectively, were included in the real estate and commercial categories. In addition, the Company participated in the SBA Paycheck Protection Program (PPP) to help provide loans to our business customers to provide them with additional working capital. At December 31, 2022 and 2021, PPP loans totaling $333,000 and $18,553,000, respectively, were outstanding and included in the commercial and industrial category above. Approximately $665,612,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of $319,309,000 as of December 31, 2022. The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral.
Salaries and employee benefits totaling $1,745,000, $1,890,000, and $2,782,000 have been deferred as loan origination costs for the years ended December 31, 2022, 2021, and 2020, respectively.
Allowance for Credit Losses
The allowance for credit losses (the “allowance”) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. 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 growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged-off credits is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired.
For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer loss data) over the most recent 56 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, industry and geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.
Changes in the allowance for credit losses were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Balance, beginning of year | | $ | 9,600 | | | $ | 12,915 | | | $ | 9,130 | |
Provision (reversal) charged to operations | | 1,000 | | | (4,300) | | | 3,275 | |
Losses charged to allowance | | (178) | | | (267) | | | (229) | |
Recoveries | | 426 | | | 1,252 | | | 739 | |
Balance, end of year | | $ | 10,848 | | | $ | 9,600 | | | $ | 12,915 | |
The following table shows the summary of activities for the allowance for credit losses as of and for the years ended December 31, 2022, 2021, and 2020 by portfolio segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial | | Real Estate | | Consumer | | Unallocated | | Total |
Allowance for credit losses: | | | | | | | | | | |
Beginning balance, January 1, 2022 | | $ | 2,011 | | | $ | 6,741 | | | $ | 568 | | | $ | 280 | | | $ | 9,600 | |
Provision (reversal) charged to operations | | (531) | | | 1,062 | | | 409 | | | 60 | | | 1,000 | |
Losses charged to allowance | | (27) | | | — | | | (151) | | | — | | | (178) | |
Recoveries | | 367 | | | — | | | 59 | | | — | | | 426 | |
Ending balance, December 31, 2022 | | $ | 1,820 | | | $ | 7,803 | | | $ | 885 | | | $ | 340 | | | $ | 10,848 | |
| | | | | | | | | | |
Allowance for credit losses: | | | | | | | | | | |
Beginning balance, January 1, 2021 | | $ | 2,019 | | | $ | 9,174 | | | $ | 1,091 | | | $ | 631 | | | $ | 12,915 | |
Reversal of provision charged to operations | | (663) | | | (2,752) | | | (534) | | | (351) | | | (4,300) | |
Losses charged to allowance | | (46) | | | — | | | (221) | | | — | | | (267) | |
Recoveries | | 701 | | | 319 | | | 232 | | | — | | | 1,252 | |
Ending balance, December 31, 2021 | | $ | 2,011 | | | $ | 6,741 | | | $ | 568 | | | $ | 280 | | | $ | 9,600 | |
| | | | | | | | | | |
Allowance for credit losses: | | | | | | | | | | |
Beginning balance, January 1, 2020 | | $ | 1,428 | | | $ | 6,769 | | | $ | 897 | | | $ | 36 | | | $ | 9,130 | |
Provision charged to operations | | 100 | | | 2,405 | | | 175 | | | 595 | | | 3,275 | |
Losses charged to allowance | | (121) | | | — | | | (108) | | | — | | | (229) | |
Recoveries | | 612 | | | — | | | 127 | | | — | | | 739 | |
Ending balance, December 31, 2020 | | $ | 2,019 | | | $ | 9,174 | | | $ | 1,091 | | | $ | 631 | | | $ | 12,915 | |
The following is a summary of the allowance for credit losses by impairment methodology and portfolio segment as of December 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial | | Real Estate | | Consumer | | Unallocated | | Total |
Allowance for credit losses: | | | | | | | | | | |
Ending balance, December 31, 2022 | | $ | 1,820 | | | $ | 7,803 | | | $ | 885 | | | $ | 340 | | | $ | 10,848 | |
Ending balance: individually evaluated for impairment | | $ | 309 | | | $ | 5 | | | $ | — | | | $ | — | | | $ | 314 | |
Ending balance: collectively evaluated for impairment | | $ | 1,511 | | | $ | 7,798 | | | $ | 885 | | | $ | 340 | | | $ | 10,534 | |
| | | | | | | | | | |
Ending balance, December 31, 2021 | | $ | 2,011 | | | $ | 6,741 | | | $ | 568 | | | $ | 280 | | | $ | 9,600 | |
Ending balance: individually evaluated for impairment | | $ | 607 | | | $ | 38 | | | $ | 4 | | | $ | — | | | $ | 649 | |
Ending balance: collectively evaluated for impairment | | $ | 1,404 | | | $ | 6,703 | | | $ | 564 | | | $ | 280 | | | $ | 8,951 | |
The following table shows the ending balances of loans as of December 31, 2022 and December 31, 2021 by portfolio segment and by impairment methodology (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial | | Real Estate | | Consumer | | Total |
Loans: | | | | | | | | |
Ending balance, December 31, 2022 | | $ | 180,204 | | | $ | 910,881 | | | $ | 163,833 | | | $ | 1,254,918 | |
Ending balance: individually evaluated for impairment | | $ | 1,240 | | | $ | 139 | | | $ | 993 | | | $ | 2,372 | |
Ending balance: collectively evaluated for impairment | | $ | 178,964 | | | $ | 910,742 | | | $ | 162,840 | | | $ | 1,252,546 | |
| | | | | | | | |
Loans: | | | | | | | | |
Ending balance, December 31, 2021 | | $ | 177,707 | | | $ | 767,914 | | | $ | 92,619 | | | $ | 1,038,240 | |
Ending balance: individually evaluated for impairment | | $ | 7,086 | | | $ | 450 | | | $ | 1,050 | | | $ | 8,586 | |
Ending balance: collectively evaluated for impairment | | $ | 170,621 | | | $ | 767,464 | | | $ | 91,569 | | | $ | 1,029,654 | |
The following table shows the loan portfolio by class allocated by management’s internal risk ratings at December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
Commercial: | | | | | | | | | | |
Commercial and industrial | | $ | 130,835 | | | $ | 8,706 | | | $ | 1,656 | | | $ | — | | | $ | 141,197 | |
Agricultural production | | 26,894 | | | 6,714 | | | 5,399 | | | — | | | 39,007 | |
Real Estate: | | | | | | | | | | |
Owner occupied | | 189,211 | | | 3,282 | | | 2,170 | | | — | | | 194,663 | |
Real estate construction and other land loans | | 94,151 | | | — | | | 15,024 | | | — | | | 109,175 | |
Commercial real estate | | 458,957 | | | 3,440 | | | 2,412 | | | — | | | 464,809 | |
Agricultural real estate | | 107,945 | | | 8,879 | | | 824 | | | — | | | 117,648 | |
Other real estate | | 24,586 | | | — | | | — | | | — | | | 24,586 | |
Consumer: | | | | | | | | | | |
Equity loans and lines of credit | | 123,315 | | | — | | | 266 | | | — | | | 123,581 | |
Consumer and installment | | 40,216 | | | 2 | | | 34 | | | — | | | 40,252 | |
Total | | $ | 1,196,110 | | | $ | 31,023 | | | $ | 27,785 | | | $ | — | | | $ | 1,254,918 | |
The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
Commercial: | | | | | | | | | | |
Commercial and industrial | | $ | 125,537 | | | $ | 8,724 | | | $ | 2,586 | | | $ | — | | | $ | 136,847 | |
Agricultural production | | 37,179 | | | 1,325 | | | 2,356 | | | — | | | 40,860 | |
Real Estate: | | | | | | | | | | |
Owner occupied | | 205,092 | | | 3,582 | | | 3,560 | | | — | | | 212,234 | |
Real estate construction and other land loans | | 54,066 | | | 7,520 | | | — | | | — | | | 61,586 | |
Commercial real estate | | 351,395 | | | 18,134 | | | — | | | — | | | 369,529 | |
Agricultural real estate | | 96,949 | | | 1,532 | | | — | | | — | | | 98,481 | |
Other real estate | | 26,084 | | | — | | | — | | | — | | | 26,084 | |
Consumer: | | | | | | | | | | |
Equity loans and lines of credit | | 55,611 | | | 9 | | | — | | | — | | | 55,620 | |
Consumer and installment | | 36,942 | | | 19 | | | 38 | | | — | | | 36,999 | |
Total | | $ | 988,855 | | | $ | 40,845 | | | $ | 8,540 | | | $ | — | | | $ | 1,038,240 | |
The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater Than 90 Days Past Due | | Total Past Due | | Current | | Total Loans | | Recorded Investment > 90 Days Accruing | | Non-accrual |
Commercial: | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 392 | | | $ | — | | | $ | — | | | $ | 392 | | | $ | 140,805 | | | $ | 141,197 | | | $ | — | | | $ | — | |
Agricultural production | | — | | | — | | | — | | | — | | | 39,007 | | | 39,007 | | | — | | | — | |
Real estate: | | | | | | | | | | | | | | | | |
Owner occupied | | 249 | | | — | | | — | | | 249 | | | 194,414 | | | 194,663 | | | — | | | — | |
Real estate construction and other land loans | | — | | | — | | | — | | | — | | | 109,175 | | | 109,175 | | | — | | | — | |
Commercial real estate | | 4,507 | | | — | | | — | | | 4,507 | | | 460,302 | | | 464,809 | | | — | | | — | |
Agricultural real estate | | — | | | — | | | — | | | — | | | 117,648 | | | 117,648 | | | — | | | — | |
Other real estate | | — | | | — | | | — | | | — | | | 24,586 | | | 24,586 | | | — | | | — | |
Consumer: | | | | | | | | | | | | | | | | |
Equity loans and lines of credit | | 465 | | | — | | | — | | | 465 | | | 123,116 | | | 123,581 | | | — | | | — | |
Consumer and installment | | 237 | | | — | | | — | | | 237 | | | 40,015 | | | 40,252 | | | — | | | — | |
Total | | $ | 5,850 | | | $ | — | | | $ | — | | | $ | 5,850 | | | $ | 1,249,068 | | | $ | 1,254,918 | | | $ | — | | | $ | — | |
The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | Greater Than 90 Days Past Due | | Total Past Due | | Current | | Total Loans | | Recorded Investment > 90 Days Accruing | | Non- accrual |
Commercial: | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 136,846 | | | $ | 136,847 | | | $ | — | | | $ | 312 | |
Agricultural production | | — | | | — | | | — | | | — | | | 40,860 | | | 40,860 | | | — | | | 634 | |
Real estate: | | — | | | | | | | | | | | — | | | | | |
Owner occupied | | — | | | — | | | — | | | — | | | 212,234 | | | 212,234 | | | — | | | — | |
Real estate construction and other land loans | | — | | | — | | | — | | | — | | | 61,586 | | | 61,586 | | | — | | | — | |
Commercial real estate | | — | | | — | | | — | | | — | | | 369,529 | | | 369,529 | | | — | | | — | |
Agricultural real estate | | — | | | — | | | — | | | — | | | 98,481 | | | 98,481 | | | — | | | — | |
Other real estate | | — | | | — | | | — | | | — | | | 26,084 | | | 26,084 | | | — | | | — | |
Consumer: | | | | | | | | | | | | — | | | | | |
Equity loans and lines of credit | | — | | | — | | | — | | | — | | | 55,620 | | | 55,620 | | | — | | | — | |
Consumer and installment | | 79 | | | — | | | — | | | 79 | | | 36,920 | | | 36,999 | | | — | | | — | |
Total | | $ | 80 | | | $ | — | | | $ | — | | | $ | 80 | | | $ | 1,038,160 | | | $ | 1,038,240 | | | $ | — | | | $ | 946 | |
The following table shows information related to impaired loans by class at December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
With no related allowance recorded: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Consumer: | | | | | | |
Equity loans and lines of credit | | $ | 993 | | | $ | 1,007 | | | $ | — | |
| | | | | | |
| | | | | | |
Total with no related allowance recorded | | 993 | | | 1,007 | | | — | |
| | | | | | |
With an allowance recorded: | | | | | | |
Commercial: | | | | | | |
Commercial and industrial | | 1,240 | | | 1,240 | | | 309 | |
| | | | | | |
| | | | | | |
Real estate: | | | | | | |
| | | | | | |
| | | | | | |
Commercial real estate | | 126 | | | 126 | | | 2 | |
Agricultural real estate | | 13 | | | 13 | | | 3 | |
| | | | | | |
Total real estate | | 139 | | | 139 | | | 5 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Total with an allowance recorded | | 1,379 | | | 1,379 | | | 314 | |
Total | | $ | 2,372 | | | $ | 2,386 | | | $ | 314 | |
The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.
The following table shows information related to impaired loans by class at December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
With no related allowance recorded: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Consumer: | | | | | | |
Equity loans and lines of credit | | $ | 136 | | | $ | 172 | | | $ | — | |
| | | | | | |
| | | | | | |
Total with no related allowance recorded | | 136 | | | 172 | | | — | |
| | | | | | |
With an allowance recorded: | | | | | | |
Commercial: | | | | | | |
Commercial and industrial | | 6,452 | | | 6,491 | | | 544 | |
Agricultural land and production | | 634 | | | 714 | | | 63 | |
Total commercial | | 7,086 | | | 7,205 | | | 607 | |
Real estate: | | | | | | |
| | | | | | |
Real estate construction and other land loans | | 292 | | | 292 | | | 30 | |
Commercial real estate | | 137 | | | 138 | | | 3 | |
Agricultural real estate | | 21 | | | 21 | | | 5 | |
| | | | | | |
Total real estate | | 450 | | | 451 | | | 38 | |
Consumer: | | | | | | |
Equity loans and lines of credit | | 914 | | | 914 | | | 4 | |
| | | | | | |
Total consumer | | 914 | | | 914 | | | 4 | |
Total with an allowance recorded | | 8,450 | | | 8,570 | | | 649 | |
Total | | $ | 8,586 | | | $ | 8,742 | | | $ | 649 | |
The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.
The following presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
With no related allowance recorded: | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | $ | 81 | | | $ | — | | | $ | 43 | | | $ | — | | | $ | 1,322 | | | $ | — | |
Agricultural production | | 25 | | | — | | | — | | | — | | | 104 | | | — | |
Total commercial | | 106 | | | — | | | 43 | | | — | | | 1,426 | | | — | |
Real estate: | | | | | | | | | | | | |
Owner occupied | | — | | | — | | | 55 | | | — | | | 394 | | | — | |
Real estate construction and other land loans | | — | | | — | | | 156 | | | — | | | 8 | | | — | |
Commercial real estate | | — | | | — | | | 380 | | | — | | | 779 | | | — | |
Agricultural real estate | | — | | | — | | | — | | | — | | | 146 | | | — | |
| | | | | | | | | | | | |
Total real estate | | — | | | — | | | 591 | | | — | | | 1,327 | | | — | |
Consumer: | | | | | | | | | | | | |
Equity loans and lines of credit | | 750 | | | 71 | | | 140 | | | 12 | | | 216 | | | 12 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total with no related allowance recorded | | 856 | | | 71 | | | 774 | | | 12 | | | 2,969 | | | 12 | |
| | — | | | | | | | | | | | |
With an allowance recorded: | | — | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | 2,296 | | | 129 | | | 6,327 | | | 365 | | | 6,139 | | | 582 | |
Agricultural production | | 49 | | | — | | | 908 | | | — | | | 430 | | | — | |
Total commercial | | 2,345 | | | 129 | | | 7,235 | | | 365 | | | 6,569 | | | 582 | |
Real estate: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Real estate construction and other land loans | | 88 | | | — | | | 673 | | | 21 | | | 586 | | | — | |
Commercial real estate | | 132 | | | 8 | | | 142 | | | 9 | | | 206 | | | 11 | |
Agricultural real estate | | 19 | | | 2 | | | 27 | | | 1 | | | 27 | | | 2 | |
| | | | | | | | | | | | |
Total real estate | | 239 | | | 10 | | | 842 | | | 31 | | | 819 | | | 13 | |
Consumer: | | | | | | | | | | | | |
Equity loans and lines of credit | | 280 | | | — | | | 925 | | | 54 | | | 1,001 | | | 55 | |
Consumer and installment | | — | | | — | | | 14 | | | — | | | 64 | | | — | |
Total consumer | | 280 | | | — | | | 939 | | | 54 | | | 1,065 | | | 55 | |
Total with an allowance recorded | | 2,864 | | | 139 | | | 9,016 | | | 450 | | | 8,453 | | | 650 | |
Total | | $ | 3,720 | | | $ | 210 | | | $ | 9,790 | | | $ | 462 | | | $ | 11,422 | | | $ | 662 | |
Foregone interest on nonaccrual loans totaled $132,000, $99,000, and $177,000 for the years ended December 31, 2022, 2021, and 2020, respectively. Interest income recognized on cash basis during the years presented above was not considered significant for financial reporting purposes.
Troubled Debt Restructurings:
As of December 31, 2022 and 2021, the Company has a recorded investment in troubled debt restructurings (“TDR”) of $2,372,000 and, $7,640,000, respectively. The Company has allocated $314,000 and $538,000 of specific reserves for those loans at December 31, 2022 and 2021, respectively. The Company has committed to lend no additional amounts as of December 31, 2022 to customers with outstanding loans that are classified as troubled debt restructurings.
For the years ended December 31, 2021, and 2020 the terms of certain loans were modified as TDRs. 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 or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with
similar risk. During the same periods, there were no troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower were forgiven.
Section 4013 of the CARES Act and the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)” provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019 or at the time of modification program implementation, respectively, and the borrowers meet other applicable criteria. In accordance with such guidance, during 2020 and throughout 2021 the Company offered short-term modifications in response to COVID-19 to borrowers who were current and otherwise not past due. As of December 31, 2022, there were no such loans remaining on deferral.
During the year ended December 31, 2022, no loans were modified as troubled debt restructuring.
The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Troubled Debt Restructurings: | | Number of Loans | | Pre-Modification Outstanding Recorded Investment (1) | | Principal Modification | | Post Modification Outstanding Recorded Investment (2) | | Outstanding Recorded Investment |
Commercial: | | | | | | | | | | |
Commercial and Industrial | | 1 | | | $ | 2,489 | | | $ | — | | | $ | 2,489 | | | $ | 1,989 | |
| | | | | | | | | | |
| | | | | | | | | | |
Real Estate: | | | | | | | | | | |
| | | | | | | | | | |
Real estate construction and other land loans | | 1 | | | 333 | | | — | | | 333 | | | 292 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total | | 2 | | | $ | 2,822 | | | $ | — | | | $ | 2,822 | | | $ | 2,281 | |
(1)Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.
(2)Balance outstanding after principal modification, if any borrower reduction to recorded investment.
The following table presents loans by class modified as TDRs that occurred during the year ended December 31, 2020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Troubled Debt Restructurings: | | Number of Loans | | Pre-Modification Outstanding Recorded Investment (1) | | Principal Modification | | Post Modification Outstanding Recorded Investment (2) | | Outstanding Recorded Investment |
Commercial: | | | | | | | | | | |
Commercial and Industrial | | 1 | | | $ | 12,925 | | | $ | — | | | $ | 12,925 | | | $ | 6,650 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(1)Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.
(2)Balance outstanding after principal modification, if any borrower reduction to recorded investment.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings within 12 months following the modification during the years ended December 31, 2022, 2021, and 2020.
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Land | | $ | 1,131 | | | $ | 1,131 | |
Buildings and improvements | | 8,360 | | | 8,219 | |
Furniture, fixtures and equipment | | 11,885 | | | 11,721 | |
Leasehold improvements | | 4,305 | | | 4,290 | |
| | 25,681 | | | 25,361 | |
Less accumulated depreciation and amortization | | (17,694) | | | (16,981) | |
| | $ | 7,987 | | | $ | 8,380 | |
Depreciation and amortization included in occupancy and equipment expense totaled $755,000, $897,000 and $881,000 for the years ended December 31, 2022, 2021, and 2020, respectively.
6. GOODWILL AND INTANGIBLE ASSETS
Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill. Total goodwill at December 31, 2022 and 2021 was $53,777,000. Total goodwill at December 31, 2022 consisted of $13,466,000, $10,394,000, $6,340,000, $14,643,000, and $8,934,000 representing the excess of the cost of Folsom Lake Bank, Sierra Vista Bank, Visalia Community Bank, Service 1st Bancorp, and Bank of Madera County, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting. The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes. A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment. For that reason, goodwill is assessed at least annually for impairment.
The Company has selected September 30 as the date to perform the annual impairment test. Management assessed qualitative factors including performance trends and noted no factors indicating goodwill impairment.
Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount. No such events or circumstances arose during the fourth quarter of 2022, so goodwill was not required to be retested.
The intangible assets at December 31, 2022 represent the estimated fair value of the core deposit relationships acquired in the 2013 acquisition of Visalia Community Bank of $1,365,000. Core deposit intangibles are being amortized using the straight-line method over an estimated life of five to ten years from the date of acquisition. At December 31, 2022, the weighted average remaining amortization period is less than one year. The carrying value of intangible assets at December 31, 2022 was $68,000, net of $1,297,000 in accumulated amortization expense. The carrying value at December 31, 2021 was $522,000, net of $3,230,000 in accumulated amortization expense. Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization. Based on the evaluation, no changes to the remaining useful lives was required. Amortization expense recognized was $454,000 for 2022, $661,000 for 2021, and $695,000 for 2020. The remaining $68,000 core deposit intangible will be amortized during 2023.
7. DEPOSITS
Interest-bearing deposits consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Savings | | $ | 215,287 | | | $ | 197,273 | |
Money market | | 435,783 | | | 511,448 | |
NOW accounts | | 324,089 | | | 360,462 | |
Time, $250,000 or more | | 13,338 | | | 20,131 | |
Time, under $250,000 | | 54,585 | | | 69,899 | |
| | $ | 1,043,082 | | | $ | 1,159,213 | |
Aggregate annual maturities of time deposits are as follows (in thousands):
| | | | | | | | |
Years Ending December 31, | | |
2023 | | $ | 59,467 | |
2024 | | 5,107 | |
2025 | | 1,660 | |
2026 | | 981 | |
2027 | | 708 | |
Thereafter | | — | |
| | $ | 67,923 | |
Interest expense recognized on interest-bearing deposits consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Savings | | $ | 25 | | | $ | 20 | | | $ | 25 | |
Money market | | 848 | | | 661 | | | 542 | |
NOW accounts | | 207 | | | 162 | | | 316 | |
Time certificates of deposit | | 117 | | | 193 | | | 582 | |
| | $ | 1,197 | | | $ | 1,036 | | | $ | 1,465 | |
8. BORROWING ARRANGEMENTS
Federal Home Loan Bank Advances - As of December 31, 2022, the Company had $46,000,000 Federal Home Loan Bank (“FHLB”) of San Francisco advances with an interest rate of 4.65% as compared to no advance at December 31, 2021. Approximately $665,612,000 in loans were pledged under a blanket lien as collateral to the FHLB for the Bank’s remaining borrowing capacity of $319,309,000 as of December 31, 2022. FHLB advances are also secured by investment securities with amortized costs totaling $21,745,000 and $112,000 and market values totaling $28,961,000 and $117,000 at December 31, 2022 and 2021, respectively. The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral.
Lines of Credit - The Bank had unsecured lines of credit with its correspondent banks which, in the aggregate, amounted to $110,000,000 and $110,000,000 at December 31, 2022 and 2021, respectively, at interest rates which vary with market conditions. As of December 31, 2022 and 2021, the Company had no Federal funds purchased.
Federal Reserve Line of Credit - The Bank has a line of credit in the amount of $4,702,000 and $9,961,000 with the Federal Reserve Bank of San Francisco (FRB) at December 31, 2022 and 2021, respectively, which bears interest at the prevailing discount rate collateralized by investment securities with amortized costs totaling $5,508,000 and $10,361,000 and market values totaling $4,893,000 and $10,241,000, respectively. At December 31, 2022 and 2021, the Bank had no outstanding borrowings with the FRB.
9. LEASES
Leases - The Bank leases certain of its branch facilities and administrative offices under noncancelable operating leases with terms extending through 2033. Leases with an initial term of twelve months or less are not recorded on the balance sheet. Operating lease cost is comprised of lease expense recognized on a straight-line basis, the amortization of the right-of-use asset and the implicit interest accreted on the operating lease liability. Operating lease cost is included in occupancy and equipment expense on our consolidated statements of income. We evaluate the lease term by assuming the exercise of options to extend that are reasonably assured and those option periods covered by an option to terminate the lease, if deemed not reasonably certain to be exercised. The lease term is used to determine the straight-line expense and limits the depreciable life of any related leasehold improvements. Certain leases require us to pay real estate taxes, insurance, maintenance and other operating expenses associated with the leased premises. These expenses are classified in occupancy and equipment expense on our consolidated statements of income, consistent with similar costs for owned locations, but is not included in operating lease cost below. We calculate the lease liability using a discount rate that represents our incremental borrowing rate at the lease commencement date.
Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2022 are as follows (in thousands):
| | | | | | | | |
Years Ending December 31, | | |
2023 | | 2,479 | |
2024 | | 2,208 | |
2025 | | 1,715 | |
2026 | | 1,535 | |
2027 | | 1,306 | |
Thereafter | | 2,585 | |
Total lease payments | | 11,828 | |
Less: imputed interest | | (379) | |
Present value of operating lease liabilities | | $ | 11,449 | |
The table below summarizes the total lease cost for the period ending:
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | December 31, 2022 | | December 31, 2021 | |
Operating lease cost | | | | $ | 2,187 | | | $ | 2,088 | | |
Short-term lease cost | | | | — | | | 3 | | |
Variable lease cost | | | | 307 | | | 353 | | |
| | | | | | | |
Total lease cost | | | | $ | 2,494 | | | $ | 2,444 | | |
The table below summarizes other information related to our operating leases:
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Weighted average remaining lease term, in years | | 6 | | 5 |
Weighted average discount rate | | 1.5 | % | | 2.67 | % |
The table below shows operating lease right of use assets and operating lease liabilities as of :
| | | | | | | | | | | | | | |
(Dollars in thousands) | | December 31, 2022 | | December 31, 2021 |
Operating lease right-of-use assets | | $ | 10,629 | | | $ | 7,308 | |
Operating lease liabilities | | $ | 11,449 | | | $ | 7,962 | |
The right-of-use-assets and lease liabilities are included with other assets and other liabilities on the balance sheet, respectively.
10. INCOME TAXES
The provision for income taxes for the years ended December 31, 2022, 2021, and 2020 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Federal | | State | | Total |
2022 | | | | | | |
Current | | $ | 4,827 | | | $ | 3,445 | | | $ | 8,272 | |
Deferred | | 80 | | | 144 | | | 224 | |
| | | | | | |
Provision for income taxes | | $ | 4,907 | | | $ | 3,589 | | | $ | 8,496 | |
2021 | | | | | | |
Current | | $ | 4,687 | | | $ | 3,464 | | | $ | 8,151 | |
Deferred | | 1,002 | | | 463 | | | 1,465 | |
| | | | | | |
Provision for income taxes | | $ | 5,689 | | | $ | 3,927 | | | $ | 9,616 | |
2020 | | | | | | |
Current | | $ | 4,915 | | | $ | 3,050 | | | $ | 7,965 | |
Deferred | | (656) | | | (395) | | | (1,051) | |
| | | | | | |
Provision for income taxes | | $ | 4,259 | | | $ | 2,655 | | | $ | 6,914 | |
Deferred tax assets (liabilities) consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Deferred tax assets: | | | | |
Allowance for credit losses | | $ | 3,207 | | | $ | 2,838 | |
Deferred compensation | | 4,204 | | | 4,588 | |
Unrealized loss on available-for-sale investment securities | | 34,093 | | | — | |
Net operating loss carryovers | | 1,907 | | | 2,048 | |
| | | | |
Mark-to-market adjustment | | 497 | | | 74 | |
Other deferred tax assets | | 84 | | | 101 | |
Other-than-temporary impairment | | 30 | | | 192 | |
| | | | |
Loan and investment impairment | | 376 | | | 530 | |
| | | | |
| | | | |
Operating lease liabilities | | 3,385 | | | 2,354 | |
Partnership income | | 52 | | | 111 | |
State taxes | | 777 | | | 736 | |
| | | | |
Total deferred tax assets | | 48,612 | | | 13,572 | |
| | | | |
| | | | |
Deferred tax liabilities: | | | | |
Operating lease right-of-use assets | | (3,142) | | | (2,160) | |
Finance leases | | (668) | | | (749) | |
Unrealized gain on available-for-sale investment securities | | — | | | (3,203) | |
Core deposit intangible | | (20) | | | (154) | |
FHLB stock | | (191) | | | (191) | |
Loan origination costs | | (829) | | | (450) | |
Bank premises and equipment | | (385) | | | (360) | |
Total deferred tax liabilities | | (5,235) | | | (7,267) | |
Net deferred tax assets | | $ | 43,377 | | | $ | 6,305 | |
The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is more likely than not that all or a portion of the deferred tax asset will not be realized. More likely than not is
defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of the evidence, a valuation allowance is needed. Thus, management concludes no valuation allowance is necessary against deferred tax assets as of December 31, 2022 and 2021.
The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rates to operating income before income taxes. The significant items comprising these differences for the years ended December 31, 2022, 2021, and 2020 consisted of the following:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Federal income tax, at statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State taxes, net of Federal tax benefit | 8.1 | % | | 8.2 | % | | 7.7 | % |
Tax exempt investment security income, net | (4.0) | % | | (3.1) | % | | (1.5) | % |
Bank owned life insurance, net | (0.8) | % | | (0.5) | % | | (1.2) | % |
Compensation - Stock Compensation | (0.2) | % | | (0.1) | % | | (0.2) | % |
| | | | | |
| | | | | |
| | | | | |
Other | 0.1 | % | | (0.2) | % | | (0.4) | % |
Effective tax rate | 24.2 | % | | 25.3 | % | | 25.4 | % |
As of December 31, 2022, the Company had Federal and California net operating loss (“NOL”) carry-forwards of $6,137,000 and $7,214,000, respectively. These NOLs were acquired through business combinations and are subject to IRC 382 will begin expiring at various dates between 2029 and 2035, for federal purposes and various dates between 2030 and 2036 for California purposes. While they are subject to IRC Section 382, management has determined that all of the NOLs are more than likely than not to be utilized before they expire.
The Company and its subsidiary file income tax returns in the U.S. federal and California jurisdictions. The Company conducts all of its business activities in the State of California. There are no pending U.S. federal or state income tax examinations by those taxing authorities. The Company is no longer subject to the examination by U.S. federal taxing authorities for the years ended before December 31, 2019 and by the state taxing authorities for the years ended before December 31, 2018.
As of December 31, 2022, the Company has no unrecognized tax benefits and does not expect any material changes in the next 12 months.
During the years ended December 31, 2022 and 2021, the Company recorded no interest or penalties related to uncertain tax positions.
11. SENIOR DEBT AND SUBORDINATED DEBENTURES
The following table summarizes the Company’s subordinated debentures:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | December 31, 2022 | | December 31, 2021 |
Fixed - floating rate subordinated debentures, due 2031 | | $ | 35,000 | | | $ | 35,000 | |
Unamortized debt issuance costs | | (556) | | | (701) | |
Floating rate senior debt bank loan, due 2032 | | 30,000 | | | — | |
Junior subordinated deferrable interest debentures, due October 2036 | | 5,155 | | | 5,155 | |
Total subordinated debentures | | $ | 69,599 | | | $ | 39,454 | |
Junior Subordinated Debentures
Service 1st Capital Trust I is a Delaware business trust formed by Service 1st. The Company succeeded to all of the rights and obligations of Service 1st in connection with the merger with Service 1st as of November 12, 2008. The Trust was formed on August 17, 2006 for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by Service 1st. Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis. At December 31, 2022, all of the trust preferred securities that have been issued qualify as Tier 1 capital. The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month LIBOR plus 1.60%.
The Trust used the proceeds from the sale of the trust preferred securities to purchase approximately $5,155,000 in aggregate principal amount of Service 1st’s junior subordinated notes (the Notes). The Notes bear interest at the same variable interest rate during the same quarterly periods as the trust preferred securities. The Notes are redeemable by the Company on
any January 7, April 7, July 7, or October 7 or at any time within 90 days following the occurrence of certain events, such as: (i) a change in the regulatory capital treatment of the Notes (ii) in the event the Trust is deemed an investment company or (iii) upon the occurrence of certain adverse tax events. In each such case, the Company may redeem the Notes for their aggregate principal amount, plus any accrued but unpaid interest.
The Notes may be declared immediately due and payable at the election of the trustee or holders of 25% of the aggregate principal amount of outstanding Notes in the event that the Company defaults in the payment of any interest following the nonpayment of any such interest for 20 or more consecutive quarterly periods.
Holders of the trust preferred securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security. For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%. As of December 31, 2022, the rate was 5.68%. Interest expense recognized by the Company for the years ended December 31, 2022, 2021, and 2020 was $188,000, $93,000 and $130,000, respectively.
Subordinated Debentures
On November 12, 2021, the Company completed a private placement of $35.0 million aggregate principal amount of its fixed-to-floating rate subordinated notes (“Subordinated Debt”) due December 1, 2031. The Subordinated Debt initially bears a fixed interest rate of 3.125% per year. Commencing on December 1, 2026, the interest rate on the Subordinated Debt will reset each quarter at a floating interest rate equal to the then-current three month term SOFR plus 210 basis points. The Company may at its option redeem in whole or in part the Subordinated Debt on or after November 12, 2026 without a premium. The Subordinated Debt is treated as Tier 2 Capital for regulatory purposes.
Senior Debt
On September 15, 2022, the Company entered into a $30.0 million loan agreement with Bell Bank. Initially, payments of interest only are payable in 12 quarterly payments commencing December 31, 2022. Commencing December 31, 2025, 27 equal quarterly principal and interest payments are payable based on the outstanding balance of the loan on August 30, 2025 and an amortization of 48 quarters. A final payment of outstanding principal and accrued interest is due at maturity on September 30, 2032. Variable interest is payable at the Prime Rate (published by the Wall Street Journal) less 50 basis points. The loan is secured by the assets of the Company and a pledge of the outstanding common stock of Central Valley Community Bank, the Company’s banking subsidiary. The Company may prepay the loan without penalty with one exception. If the loan is prepaid prior to August 30, 2025 with funds received from a financing source other than Bell Bank, the Company will incur a 2% prepayment penalty. The loan contains customary representations, covenants, and events of default.
Interest expense recognized by the Company for the Subordinated and Senior Debt for the twelve months ended December 31, 2022 and 2021 was $1,783,000 and $173,000, respectively.
12. COMMITMENTS AND CONTINGENCIES
Correspondent Banking Agreements - The Bank maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements. Uninsured deposits totaled $1,696,000 at December 31, 2022.
Financial Instruments With Off-Balance-Sheet Risk - The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments consist of commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet.
The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and standby letters of credit as it does for loans included on the balance sheet.
The following financial instruments represent off-balance-sheet credit risk (in thousands):
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Commitments to extend credit | | $ | 286,925 | | | $ | 325,674 | |
Standby letters of credit | | $ | 1,216 | | | $ | 434 | |
Commitments to extend credit consist primarily of unfunded commercial loan commitments and revolving lines of credit, single-family residential equity lines of credit and commercial and residential real estate construction loans.
Construction loans are established under standard underwriting guidelines and policies and are secured by deeds of trust, with disbursements made over the course of construction. Commercial revolving lines of credit have a high degree of industry diversification. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are generally secured and are issued by the Bank to guarantee the financial obligation or performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at December 31, 2022 and 2021. The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used.
At December 31, 2022, commercial loan commitments represent 45% of total commitments and are generally secured by collateral other than real estate or unsecured. Real estate loan commitments represent 45% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%. Consumer loan commitments represent the remaining 10% of total commitments and are generally unsecured. In addition, the majority of the Bank’s loan commitments have variable interest rates.
At December 31, 2022 and 2021, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $110,000 and $115,000, respectively. The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using an appropriate, systematic, and consistently applied process. While related to credit losses, this allocation is not a part of the allowance for credit losses and is considered separately as a liability for accounting and regulatory reporting purposes. Changes in this contingent allocation are recorded in other non-interest expense.
Concentrations of Credit Risk - At December 31, 2022, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 96.8% of total loans of which 14.3% were commercial and 82.5% were real-estate-related.
At December 31, 2021, in management’s judgment, a concentration of loans existed in commercial loans and real-estate-related loans, representing approximately 96.4% of total loans of which 17.1% were commercial and 79.3% were real-estate-related.
Management believes the loans within these concentrations have no more than the typical risks of collectability. However, in light of the current economic environment, additional declines in the performance of the economy in general, or a continued decline in real estate values or drought-related decline in agricultural business in the Company’s primary market area could have an adverse impact on collectability, increase the level of real-estate-related nonperforming loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on the financial condition, results of operations and cash flows of the Company.
Contingencies - The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or consolidated results of operations of the Company.
Investments in Low Income Housing Tax Credit Funds - The unfunded commitments as of December 31, 2022 and 2021 in low income housing tax credit funds were $4,949,000 and $203,000, respectively. All commitments will be paid by the Company by 2038.
13. SHAREHOLDERS’ EQUITY
Regulatory Capital - The Company and the Bank are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the FDIC. Failure to meet these minimum capital requirements could result in mandatory or, discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.
The Company and the Bank each meet specific capital guidelines that involve quantitative measures of their respective 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 Bank is also subject to additional capital guidelines 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 table. The most recent notification from the FDIC categorized the Bank as well capitalized under these guidelines. Management knows of no conditions or events since that notification that would change the Bank’s category.
Capital ratios are reviewed by Management on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs. For all periods presented, the Bank’s ratios exceed the
regulatory definition of well capitalized under the regulatory framework for prompt correct action and the Company’s ratios exceed the required minimum ratios for capital adequacy purposes.
Bank holding companies with consolidated assets of $3 billion or more and banks like Central Valley Community Bank must comply with minimum capital ratio requirements which consist of the following: (i) a new common equity Tier 1 capital to total risk weighted assets ratio of 4.5%; (ii) a Tier 1 capital to total risk weighted assets ratio of 6%; (iii) a total capital to total risk weighted assets ratio of 8%; and (iv) a Tier 1 capital to adjusted average total assets (“leverage”) ratio of 4%.
In addition, a “capital conservation buffer” is established which requires maintenance of a minimum of 2.5% of common equity Tier 1 capital to total risk weighted assets in excess of the regulatory minimum capital ratio requirements described above. The 2.5% buffer increases the minimum capital ratios to (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. If the capital ratio levels of a banking organization fall below the capital conservation buffer amount, the organization will be subject to limitations on (i) the payment of dividends; (ii) discretionary bonus payments; (iii) discretionary payments under Tier 1 instruments; and (iv) engaging in share repurchases.
Management believes that the Company and the Bank met all their capital adequacy requirements as of December 31, 2022 and 2021. There are no conditions or events since those notifications that management believes have changed those categories. The capital ratios for the Company and the Bank are presented in the table below (exclusive of the capital conservation buffer).
The following table presents the Company’s and the Bank’s actual capital ratios as of December 31, 2022 and December 31, 2021, as well as the minimum capital ratios for capital adequacy for the Bank.
| | | | | | | | | | | | | | |
(Dollars in thousands) | | Actual Ratio |
December 31, 2022 | | Amount | | Ratio |
Tier 1 Leverage Ratio | | $ | 205,154 | | | 8.37 | % |
Common Equity Tier 1 Ratio (CET 1) | | $ | 200,154 | | | 11.92 | % |
Tier 1 Risk-Based Capital Ratio | | $ | 205,154 | | | 12.22 | % |
Total Risk-Based Capital Ratio | | $ | 250,556 | | | 14.92 | % |
| | | | |
December 31, 2021 | | | | |
Tier 1 Leverage Ratio | | $ | 189,020 | | | 8.03 | % |
Common Equity Tier 1 Ratio (CET 1) | | $ | 184,020 | | | 12.48 | % |
Tier 1 Risk-Based Capital Ratio | | $ | 189,020 | | | 12.82 | % |
Total Risk-Based Capital Ratio | | $ | 233,034 | | | 15.80 | % |
The following table presents the Bank’s regulatory capital ratios as of December 31, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Actual Ratio | | Minimum regulatory requirement (1) | | | |
December 31, 2022 | | Amount | | Ratio | | Amount | | Ratio | | | |
Tier 1 Leverage Ratio | | $ | 266,373 | | | 10.86 | % | | $ | 98,075 | | | 4.00 | % | | | |
Common Equity Tier 1 Ratio (CET 1) | | $ | 266,373 | | | 15.87 | % | | $ | 75,516 | | | 7.00 | % | | | |
Tier 1 Risk-Based Capital Ratio | | $ | 266,373 | | | 15.87 | % | | $ | 100,688 | | | 8.50 | % | | | |
Total Risk-Based Capital Ratio | | $ | 277,331 | | | 16.53 | % | | $ | 134,251 | | | 10.50 | % | | | |
| | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | |
Tier 1 Leverage Ratio | | $ | 199,329 | | | 8.47 | % | | $ | 94,156 | | | 4.00 | % | | | |
Common Equity Tier 1 Ratio (CET 1) | | $ | 199,329 | | | 13.52 | % | | $ | 66,355 | | | 7.00 | % | | | |
Tier 1 Risk-Based Capital Ratio | | $ | 199,329 | | | 13.52 | % | | $ | 88,473 | | | 8.50 | % | | | |
Total Risk-Based Capital Ratio | | $ | 209,044 | | | 14.18 | % | | $ | 117,964 | | | 10.50 | % | | | |
(1) The minimum regulatory requirement threshold includes the capital conservation buffer of 2.50%. | | | |
Dividends - During 2022, the Company paid dividends to the Bank in the amount of $38,000,000 in connection with the senior and subordinated debt proceeds approved by the Company’s Board of Directors. The Company declared and paid a total of
$5,638,000 or $0.48 per common share cash dividend to shareholders of record during the year ended December 31, 2022. During the year ended December 31, 2022, the Company repurchased and retired common stock in the amount of $6,814,000.
During 2021, the Bank declared and paid cash dividends to the Company in the amount of $7,679,000, in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $5,757,000 or $0.47 per common share cash dividend to shareholders of record during the year ended December 31, 2021. During the year ended December 31, 2021, the Company repurchased and retired common stock in the amount of $13,619,000.
During 2020, the Bank declared and paid cash dividends to the Company in the amount of $15,622,000, in connection with the cash dividends to the Company’s shareholders approved by the Company’s Board of Directors. The Company declared and paid a total of $5,530,000 or $0.44 per common share cash dividend to shareholders of record during the year ended December 31, 2020. During the year ended December 31, 2020, the Company repurchased and retired common stock in the amount of $11,052,000.
The Company’s primary source of income with which to pay cash dividends is dividends from the Bank. The California Financial Code restricts the total amount of dividends payable by a bank at any time without obtaining the prior approval of the California Department of Business Oversight to the lesser of (1) the Bank’s retained earnings or (2) the Bank’s net income for its last three fiscal years, less distributions made to shareholders during the same three-year period. At December 31, 2022, $69,699,000 of the Bank’s retained earnings were free of these restrictions.
A reconciliation of the numerators and denominators of the basic and diluted earnings per common share computations is as follows (in thousands, except share and per-share amounts):
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Basic Earnings Per Common Share: | | | | | | |
Net income | | $ | 26,645 | | | $ | 28,401 | | | $ | 20,347 | |
| | | | | | |
| | | | | | |
Weighted average shares outstanding | | 11,715,376 | | | 12,237,424 | | | 12,534,078 | |
Net income per common share | | $ | 2.27 | | | $ | 2.32 | | | $ | 1.62 | |
Diluted Earnings Per Common Share: | | | | | | |
Net income | | $ | 26,645 | | | $ | 28,401 | | | $ | 20,347 | |
| | | | | | |
| | | | | | |
Weighted average shares outstanding | | 11,715,376 | | | 12,237,424 | | | 12,534,078 | |
Effect of dilutive stock options and warrants | | 23,698 | | | 44,508 | | | 42,241 | |
Weighted average shares of common stock and common stock equivalents | | 11,739,074 | | | 12,281,932 | | | 12,576,319 | |
Net income per diluted common share | | $ | 2.27 | | | $ | 2.31 | | | $ | 1.62 | |
No outstanding options and restricted stock awards were anti-dilutive at December 31, 2022, 2021, and 2020.
14. EQUITY-BASED COMPENSATION
On December 31, 2022, the Company had two equity-based compensation plans, which are described below. The Plans do not provide for the settlement of awards in cash and new shares are issued upon option exercise or restricted share grants.
In May 2015, the Company adopted the Central Valley Community Bancorp 2015 Omnibus Incentive Plan (2015 Plan). The plan provides for awards in the form of incentive stock options, non-statutory stock options, stock appreciation rights, and restricted stock. The plan also allows for performance awards that may be in the form of cash or shares of the Company’s common stock, including restricted stock. The 2015 plan requires that the exercise price may not be less than the fair market value of the stock at the date the option is granted, and that the option price must be paid in full at the time it is exercised. The options and awards under the plan expire on dates determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period for the options, restricted common stock awards and option related stock appreciation rights is determined by the Board of Directors and is over one to five years. The maximum number of shares that can be issued with respect to all awards under the plan is 875,000. Currently under the 2015 Plan, 737,311 shares remain reserved for future grants as of December 31, 2022.
Effective June 2, 2017, the Company adopted an Employee Stock Purchase Plan whereby our employees may purchase Company common shares through payroll deductions of between one percent and 15 percent of pay in each pay period. Shares are purchased at the end of an offering period at a discount of ten percent from the lower of the closing market price on the Offering Date (first trading day of each offering period) or the Investment Date (last trading day of each offering period). The plan calls for 500,000 common shares to be set aside for employee purchases, and there were 432,056 shares available for future purchase under the plan as of December 31, 2022.
For the years ended December 31, 2022, 2021, and 2020, the compensation cost recognized for share-based compensation was $497,000, $405,000, and $470,000, respectively. The recognized tax benefit for share-based compensation expense was $87,000, $50,000, and $76,000 for 2022, 2021, and 2020 respectively.
No options to purchase shares of the Company’s common stock were granted during the years ending December 31, 2022, 2021 and 2020 from any of the Company’s stock based compensation plans.
A summary of the combined activity of the Plans during the years then ended is presented below (dollars in thousands, except per-share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Options outstanding at January 1, 2020 | | 121,120 | | | $ | 8.73 | | | | | |
| | | | | | | | |
Options exercised | | (43,500) | | | $ | 6.39 | | | | | |
Options forfeited | | (550) | | | $ | 7.40 | | | | | |
Options outstanding at December 31, 2020 | | 77,070 | | | $ | 10.06 | | | 1.51 | | $ | 382 | |
Options exercised | | (24,265) | | | $ | 10.6 | | | | | |
| | | | | | | | |
Options outstanding at December 31, 2021 | | 52,805 | | | $ | 9.81 | | | 0.57 | | $ | 581 | |
| | | | | | | | |
| | | | | | | | |
Options exercised | | (50,205) | | | $ | 9.74 | | | | | |
Options forfeited | | (2,600) | | | $ | 11.12 | | | | | |
Options outstanding at December 31, 2022 | | — | | | $ | — | | | 0.00 | | $ | — | |
| | | | | | | | |
| | | | | | | | |
Information related to the stock option plan during each year follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
Intrinsic value of options exercised | | $ | 496 | | | $ | 253 | | | $ | 433 | |
Cash received from options exercised | | $ | 489 | | | $ | 257 | | | $ | 279 | |
Excess tax benefit realized for option exercises | | $ | 87 | | | $ | 50 | | | $ | 76 | |
As of December 31, 2022, there is no unrecognized compensation cost related to stock options granted under all Plans. All options are fully vested.
Restricted Common Stock Awards - The 2015 Plan provide for the issuance of shares to directors and officers. Restricted common stock grants typically vest over a one to five-year period. Restricted common stock (all of which are shares of our common stock) is subject to forfeiture if employment terminates prior to vesting. The cost of these awards is recognized over the vesting period of the awards based on the fair value of our common stock on the date of the grant.
The following table presents the restricted common stock activity during the years presented:
| | | | | | | | | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
Nonvested outstanding shares at January 1, 2020 | | 45,160 | | | $ | 17.38 | |
Granted | | 21,397 | | | $ | 16.42 | |
Vested | | (34,703) | | | $ | 18.23 | |
Forfeited | | (1,841) | | | $ | 19.16 | |
Nonvested outstanding shares at December 31, 2020 | | 30,013 | | | $ | 15.60 | |
Granted | | 31,496 | | | $ | 18.83 | |
Vested | | (37,085) | | | $ | 15.12 | |
Forfeited | | (247) | | | $ | 20.26 | |
Nonvested outstanding shares at December 31, 2021 | | 24,177 | | | $ | 20.50 | |
Granted | | 56,089 | | | $ | 17.75 | |
Vested | | (33,316) | | | $ | 20.39 | |
Forfeited | | (244) | | | $ | 20.50 | |
Nonvested outstanding shares at December 31, 2022 | | 46,706 | | | $ | 17.28 | |
The shares awarded to employees and directors under the restricted stock agreements vest on applicable vesting dates only to the extent the recipient of the shares is then an employee or a director of the Company or one of its subsidiaries, and each recipient will forfeit all of the shares that have not vested on the date his or her employment or service is terminated.
As of December 31, 2022, there were 46,706 shares of restricted stock that are nonvested and expected to vest. Share-based compensation cost charged against income for restricted stock awards was $474,000, $385,000, and $449,000 for the year ended December 31, 2022, 2021, and 2020 respectively.
As of December 31, 2022, there was $505,000 of total unrecognized compensation cost related to nonvested restricted common stock. Restricted stock compensation expense is recognized on a straight-line basis over the vesting period. This cost is expected to be recognized over a weighted average remaining period of 2.01 years and will be adjusted for subsequent changes in estimated forfeitures. Restricted common stock awards had an intrinsic value of $3,825,000 at December 31, 2022.
15. EMPLOYEE BENEFITS
401(k) and Profit Sharing Plan - The Bank has established a 401(k) and profit sharing plan. The 401(k) plan covers substantially all employees who have completed a one-month employment period. Participants in the profit sharing plan are eligible to receive employer contributions after completion of two years of service. Bank contributions to the profit sharing plan are determined at the discretion of the Board of Directors. Participants are automatically vested 100% in all employer contributions. The Bank contributed $1,000,000, $1,050,000, and $370,000 to the profit sharing plan in 2022, 2021, and 2020, respectively.
Additionally, the Bank may elect to make a matching contribution to the participants’ 401(k) plan accounts. The amount to be contributed is announced by the Bank at the beginning of the plan year. For the years ended December 31, 2022 2021 and 2020, the Bank made a 100% matching contribution on all deferred amounts up to 5% of eligible compensation. For the years ended December 31, 2022, 2021, and 2020, the Bank made matching contributions totaling $1,046,000, $1,014,000, and $1,008,000, respectively.
Deferred Compensation Plans - The Bank has a nonqualified Deferred Compensation Plan which provides directors with an unfunded, deferred compensation program. Under the plan, eligible participants may elect to defer some or all of their current compensation or director fees. Deferred amounts earn interest at an annual rate determined by the Board of Directors (2.26% at December 31, 2022). At December 31, 2022 and 2021, the total net deferrals included in accrued interest payable and other liabilities were $4,023,000 and $4,230,000, respectively.
In connection with the implementation of the above plan, single premium universal life insurance policies on the life of each participant were purchased by the Bank, which is the beneficiary and owner of the policies. The cash surrender value of the policies totaled $10,915,000 and $10,637,000 and at December 31, 2022 and 2021, respectively. Income recognized on these policies, net of related expenses, for the years ended December 31, 2022, 2021, and 2020, was $278,000, $264,000, and $245,000, respectively.
In October 2015, the Board of Directors of the Company and the Bank adopted a board resolution to create the Central Valley Community Bank Executive Deferred Compensation Plan (the Executive Plan). Pursuant to the Executive Plan, all
eligible executives of the Bank may elect to defer up to 50 percent of their compensation for each deferral year. Deferred amounts earn interest at an annual rate determined by the Board of Directors (2.26% at December 31, 2022). At December 31, 2022 and 2021, the total net deferrals included in accrued interest payable and other liabilities were $300,000 and $233,000, respectively.
Salary Continuation Plans - The Board of Directors has approved salary continuation plans for certain key executives. Under these plans, the Bank is obligated to provide the executives with annual benefits for 10-15 years after retirement. In connection with the acquisitions of Folsom Lake Bank (FLB), Service 1st Bank, and Visalia Community Bank (VCB), the Bank assumed a liability for the estimated present value of future benefits payable to former key executives of FLB, Service 1st, and VCB. The liability relates to change in control benefits associated with their salary continuation plans. The benefits are payable to the individuals when they reach retirement age. These benefits are substantially equivalent to those available under split-dollar life insurance policies purchased by the Bank on the life of the executives. The (benefit)/expense recognized under these plans for the years ended December 31, 2022, 2021, and 2020, totaled $(430,000), $377,000, and $1,624,000, respectively. Note, the expense is effected by the changing discount rate used to calculate the liability. Accrued compensation payable under the salary continuation plans totaled $9,554,000 and $10,881,000 at December 31, 2022 and 2021, respectively. These benefits are substantially equivalent to those available under split-dollar life insurance policies acquired.
In connection with these plans, the Bank purchased single-premium life insurance policies with cash surrender values totaling $29,622,000 and $28,916,000 at December 31, 2022 and 2021, respectively. Income recognized on these policies, net of related expense, for the years ended December 31, 2022, 2021, and 2020 totaled $706,000, $576,000, and $466,000, respectively.
Employee Stock Purchase Plan - During 2017, the Company adopted an Employee Stock Purchase Plan which allows employees to purchase the Company’s stock at a discount to fair market value as of the date of purchase. The Company bears all costs of administering the plan, including broker’s fees, commissions, postage and other costs actually incurred.
16. LOANS TO RELATED PARTIES
During the normal course of business, the Bank enters into loans with related parties, including executive officers and directors. The following is a summary of the aggregate activity involving related-party borrowers (in thousands):
| | | | | |
Balance, January 1, 2022 | $ | 13,310 | |
Disbursements | 12,913 | |
| |
Amounts repaid | (2,496) | |
Balance, December 31, 2022 | $ | 23,727 | |
Undisbursed commitments to related parties, December 31, 2022 | $ | 1,707 | |
17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 2022 and 2021
| | | | | | | | | | | | | | |
(In thousands) | | 2022 | | 2021 |
ASSETS | | | | |
Cash and cash equivalents | | $ | 3,202 | | | $ | 24,060 | |
Investment in Bank subsidiary | | 241,034 | | | 263,310 | |
Other assets | | 834 | | | 347 | |
Total assets | | $ | 245,070 | | | $ | 287,717 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Liabilities: | | | | |
Senior debt and subordinated debentures | | $ | 69,599 | | | $ | 39,454 | |
Other liabilities | | 811 | | | 418 | |
Total liabilities | | 70,410 | | | 39,872 | |
Shareholders’ equity: | | | | |
| | | | |
| | | | |
| | | | |
Common stock | | 61,487 | | | 66,820 | |
Retained earnings | | 194,400 | | | 173,393 | |
Accumulated other comprehensive income, net of tax | | (81,227) | | | 7,632 | |
Total shareholders’ equity | | 174,660 | | | 247,845 | |
Total liabilities and shareholders’ equity | | $ | 245,070 | | | $ | 287,717 | |
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE (LOSS) INCOME
For the Years Ended December 31, 2022, 2021, and 2020
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2022 | | 2021 | | 2020 |
Income: | | | | | | |
Dividends declared by (Company) Subsidiary - eliminated in consolidation | | $ | (38,000) | | | $ | 7,679 | | | $ | 15,622 | |
Other income | | 6 | | | 3 | | | 4 | |
Total income | | (37,994) | | | 7,682 | | | 15,626 | |
Expenses: | | | | | | |
Interest on subordinated debentures and borrowings | | 1,971 | | | 266 | | | 130 | |
Professional fees | | 239 | | | 296 | | | 283 | |
Other expenses | | 601 | | | 560 | | | 555 | |
Total expenses | | 2,811 | | | 1,122 | | | 968 | |
(Loss) income before equity in undistributed net income of Subsidiary | | (40,805) | | | 6,560 | | | 14,658 | |
Equity in undistributed net income of Subsidiary, net of distributions | | 66,583 | | | 21,496 | | | 5,328 | |
Income before income tax benefit | | 25,778 | | | 28,056 | | | 19,986 | |
Benefit from income taxes | | 867 | | | 345 | | | 361 | |
| | | | | | |
| | | | | | |
Net income | | $ | 26,645 | | | $ | 28,401 | | | $ | 20,347 | |
| | | | | | |
Comprehensive (loss) income | | $ | (62,214) | | | $ | 21,177 | | | $ | 32,386 | |
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2022, 2021, and 2020
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | | |
Net income | | $ | 26,645 | | | $ | 28,401 | | | $ | 20,347 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Undistributed net income of subsidiary, net of distributions | | (66,583) | | | (21,496) | | | (5,328) | |
Equity-based compensation | | 497 | | | 405 | | | 470 | |
Amortization of unamortized issuance cost | | 145 | | | — | | | — | |
Net (increase) decrease in other assets | | (499) | | | 1 | | | (208) | |
Net increase (decrease) in other liabilities | | 669 | | | 464 | | | (31) | |
Benefit for deferred income taxes | | 15 | | | 6 | | | 75 | |
Net cash (used in) provided by operating activities | | (39,111) | | | 7,781 | | | 15,325 | |
Cash flows used in investing activities: | | | | | | |
Investment in subsidiary | | — | | | — | | | — | |
Cash flows from financing activities: | | | | | | |
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Proceeds from issuance of subordinated and senior debt | | 30,000 | | | 34,299 | | | — | |
Cash dividend payments on common stock | | (5,638) | | | (5,757) | | | (5,530) | |
| | | | | | |
Purchase and retirement of common stock | | (6,814) | | | (13,619) | | | (11,052) | |
Proceeds from exercise of stock options | | 489 | | | 256 | | | 279 | |
Proceeds from stock issued under employee stock purchase plan | | 216 | | | 204 | | | 199 | |
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Net cash used in financing activities | | 18,253 | | | 15,383 | | | (16,104) | |
(Decrease) increase in cash and cash equivalents | | (20,858) | | | 23,164 | | | (779) | |
Cash and cash equivalents at beginning of year | | 24,060 | | | 896 | | | 1,675 | |
Cash and cash equivalents at end of year | | $ | 3,202 | | | $ | 24,060 | | | $ | 896 | |
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Supplemental Disclosure of Cash Flow Information: | | | | | | |
Cash paid during the year for interest | | $ | 1,431 | | | $ | 119 | | | $ | 153 | |
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