Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2011

 

OR

 

o

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-34142

 

OAK VALLEY BANCORP

(Exact name of registrant as specified in its charter)

 

California

 

26-2326676

State or other jurisdiction of

 

I.R.S. Employer

incorporation or organization

 

Identification No.

 

125 N. Third Ave., Oakdale, CA  95361

(Address of principal executive offices)

 

(209) 848-2265

Issuer’s telephone number

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  7,718,469 shares of common stock outstanding as of October 31, 2011.

 

 

 



Table of Contents

 

Oak Valley Bancorp

September 30, 2011

 

Table of Contents

 

 

Page

PART I — FINANCIAL INFORMATION

3

 

 

Item 1. Consolidated Financial Statements

3

 

 

Condensed Consolidated Balance Sheets at September 30, 2011(Unaudited), and December 31, 2010

3

 

 

Condensed Consolidated Statements of Income (Unaudited) for the Three and Nine Month Periods Ended September 30, 2011 and September 30, 2010

4

 

 

Condensed Consolidated Statements of Changes of Shareholders’ Equity for the Nine-Month Period Ended September 30, 2011 (Unaudited) and the Year Ended December 31, 2010

5

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine-Month Periods Ended September 30, 2011 and September 30, 2010

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

44

 

 

Item 4. Controls and Procedures

44

 

 

PART II — OTHER INFORMATION

45

 

 

Item 1. Legal Proceedings

45

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 3. Defaults Upon Senior Securities

45

Item 4. [Removed and Reserved]

46

Item 5. Other Information

46

Item 6. Exhibits

46

 

2



Table of Contents

 

PART I — FINANCIAL STATEMENTS

 

Item 1. Consolidated Financial Statements (Unaudited)

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED BALANCE SHEETS

AT SEPTEMBER 30, 2011 (UNAUDITED) AND DECEMBER 31, 2010

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

74,468,079

 

$

28,091,916

 

Federal funds sold

 

6,360,000

 

40,845,000

 

Cash and cash equivalents

 

80,828,079

 

68,936,916

 

 

 

 

 

 

 

Securities available for sale

 

86,799,674

 

53,267,982

 

Loans, net of allowance for loan loss of $8,857,422 at September 30, 2011 and $8,254,929 at December 31, 2010

 

381,817,959

 

395,206,208

 

Bank premises and equipment, net

 

13,393,214

 

10,173,822

 

Other real estate owned

 

244,375

 

778,174

 

Interest receivable and other assets

 

20,871,569

 

24,033,316

 

 

 

 

 

 

 

 

 

$

583,954,870

 

$

552,396,418

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Deposits

 

$

505,505,125

 

$

476,738,850

 

Interest payable and other liabilities

 

2,885,838

 

2,999,836

 

Federal Home Loan Bank advances

 

6,000,000

 

8,000,000

 

Total liabilities

 

514,390,963

 

487,738,686

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Series A Preferred stock, no par value; $1,000 per share liquidation preference, 10,000,000 shares authorized and 13,500 issued and outstanding at December 31, 2010

 

0

 

13,013,945

 

Series B Preferred stock, no par value; $1,000 per share liquidation preference, 10,000,000 shares authorized and 13,500 issued and outstanding at September 30, 2011

 

13,500,000

 

0

 

Common stock, no par value; 50,000,000 shares authorized, 7,718,469 and 7,702,127 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively

 

23,180,206

 

24,003,549

 

Additional paid-in capital

 

2,121,136

 

2,080,218

 

Retained earnings

 

27,661,078

 

24,016,466

 

Accumulated other comprehensive income, net of tax

 

3,101,487

 

1,543,554

 

 

 

 

 

 

 

Total shareholders’ equity

 

69,563,907

 

64,657,732

 

 

 

 

 

 

 

 

 

$

583,954,870

 

$

552,396,418

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND SEPTEMBER 30, 2010

 

 

 

THREE MONTHS ENDED
SEPTEMBER 30,

 

NINE MONTHS ENDED
SEPTEMBER 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

5,887,031

 

$

6,405,225

 

$

17,751,393

 

$

19,232,421

 

Interest on securities available for sale

 

810,946

 

592,553

 

2,273,355

 

1,769,197

 

Interest on federal funds sold

 

4,101

 

3,346

 

30,923

 

7,220

 

Interest on deposits with banks

 

28,354

 

13,370

 

68,514

 

21,158

 

Total interest income

 

6,730,432

 

7,014,494

 

20,124,185

 

21,029,996

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Deposits

 

375,913

 

570,347

 

1,223,445

 

2,097,640

 

Federal Home Loan Bank advances

 

15,199

 

85,370

 

55,687

 

268,625

 

Federal funds purchased

 

51

 

 

51

 

110

 

Total interest expense

 

391,163

 

655,717

 

1,279,183

 

2,366,375

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

6,339,269

 

6,358,777

 

18,845,002

 

18,663,621

 

PROVISION FOR LOAN LOSSES

 

300,000

 

1,005,000

 

1,200,000

 

3,015,000

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

6,039,269

 

5,353,777

 

17,645,002

 

15,648,621

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

 

 

 

 

 

Service charges on deposits

 

306,081

 

272,136

 

846,217

 

787,142

 

Earnings on cash surrender value of life insurance

 

109,710

 

103,986

 

324,668

 

308,671

 

Mortgage commissions

 

37,080

 

30,849

 

63,900

 

74,984

 

Other

 

310,499

 

269,078

 

879,771

 

884,047

 

Total non-interest income

 

763,370

 

676,049

 

2,114,556

 

2,054,844

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSES

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

2,356,589

 

2,143,094

 

7,069,980

 

6,483,605

 

Occupancy

 

731,512

 

690,209

 

2,063,759

 

2,031,127

 

Data processing fees

 

253,438

 

233,694

 

751,965

 

706,889

 

OREO expenses

 

8,497

 

35,051

 

358,776

 

598,894

 

Regulatory assessments

 

135,000

 

258,000

 

531,000

 

774,000

 

Other

 

723,095

 

828,155

 

2,359,473

 

2,355,381

 

Total non-interest expense

 

4,208,131

 

4,188,203

 

13,134,953

 

12,949,896

 

 

 

 

 

 

 

 

 

 

 

Net income before provision for income taxes

 

2,594,508

 

1,841,623

 

6,624,605

 

4,753,569

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

845,565

 

700,700

 

2,260,925

 

1,626,221

 

NET INCOME

 

$

1,748,943

 

$

1,140,923

 

$

4,363,680

 

$

3,127,348

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends and accretion

 

571,482

 

210,412

 

992,305

 

631,236

 

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

 

$

1,177,461

 

$

930,511

 

$

3,371,375

 

$

2,496,112

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE

 

$

0.15

 

$

0.12

 

$

0.44

 

$

0.32

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER DILUTED COMMON SHARE

 

$

0.15

 

$

0.12

 

$

0.44

 

$

0.32

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2010 AND THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2011 (UNAUDITED)

 

 

 

YEAR ENDED DECEMBER 31, 2010 AND NINE MONTHS ENDED SEPTEMBER 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Preferred Stock

 

Paid-in

 

Retained

 

Comprehensive

 

Comprehensive

 

Shareholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income

 

Income

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, January 1, 2010

 

7,681,877

 

$

23,933,440

 

13,500

 

$

12,847,297

 

$

1,997,747

 

$

20,230,683

 

 

 

$

1,683,084

 

$

60,692,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

20,250

 

$

70,109

 

 

 

 

 

 

 

 

 

 

 

 

 

$

70,109

 

Preferred stock accretion

 

 

 

 

 

 

 

$

166,648

 

 

 

$

(166,648

)

 

 

 

 

0

 

Preferred stock dividend payments

 

 

 

 

 

 

 

 

 

 

 

(675,000

)

 

 

 

 

(675,000

)

Stock based compensation

 

 

 

 

 

 

 

 

 

82,471

 

 

 

 

 

 

 

82,471

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net changes in unrealized gain on available-for-sale securities (net of income tax benefit of $17,015)

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,334

)

(24,334

)

(24,334

)

Reclassification of realized gains (net of income tax benefit of $80,549)

 

 

 

 

 

 

 

 

 

 

 

 

 

(115,196

)

(115,196

)

(115,196

)

Net income

 

 

 

 

 

 

 

 

 

 

 

4,627,431

 

4,627,431

 

 

 

4,627,431

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,487,901

 

 

 

 

 

Balances, December 31, 2010

 

7,702,127

 

$

24,003,549

 

13,500

 

$

13,013,945

 

$

2,080,218

 

$

24,016,466

 

 

 

$

1,543,554

 

$

64,657,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

3,037

 

$

9,894

 

 

 

 

 

 

 

 

 

 

 

 

 

$

9,894

 

Restricted stock issued

 

13,305

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of Series A preferred stock

 

 

 

 

 

(13,500

)

$

(13,500,000

)

 

 

 

 

 

 

 

 

(13,500,000

)

Series B preferred stock issued

 

 

 

 

 

13,500

 

13,500,000

 

 

 

 

 

 

 

 

 

13,500,000

 

Preferred stock accretion

 

 

 

 

 

 

 

486,055

 

 

 

$

(486,055

)

 

 

 

 

0

 

Preferred stock dividend payments

 

 

 

 

 

 

 

 

 

 

 

(506,250

)

 

 

 

 

(506,250

)

Repurchase of U.S. Treasury Warrant

 

 

 

(833,237

)

 

 

 

 

 

 

833,237

 

 

 

 

 

0

 

Payment to repurchase U.S. Treasury Warrant

 

 

 

 

 

 

 

 

 

 

 

(560,000

)

 

 

 

 

(560,000

)

Stock based compensation

 

 

 

 

 

 

 

 

 

40,918

 

 

 

 

 

 

 

40,918

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net changes in unrealized gain on available-for-sale securities (net of income tax of $1,116,698)

 

 

 

 

 

 

 

 

 

 

 

 

 

1,597,030

 

1,597,030

 

1,597,030

 

Reclassification of realized gains (net of income tax benefit of $27,338)

 

 

 

 

 

 

 

 

 

 

 

 

 

(39,097

)

(39,097

)

(39,097

)

Net income

 

 

 

 

 

 

 

 

 

 

 

4,363,680

 

4,363,680

 

 

 

4,363,680

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,921,613

 

 

 

 

 

Balances, September 30, 2011

 

7,718,469

 

$

23,180,206

 

13,500

 

$

13,500,000

 

$

2,121,136

 

$

27,661,078

 

 

 

$

3,101,487

 

$

69,563,907

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

5



Table of Contents

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND SEPTEMBER 30, 2010

 

 

 

NINE MONTHS ENDED
SEPTEMBER 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

4,363,680

 

$

3,127,348

 

Adjustments to reconcile net earnings to net cash from operating activities:

 

 

 

 

 

Provision for loan losses

 

1,200,000

 

3,015,000

 

Depreciation

 

718,160

 

720,632

 

Amortization of investment securities, net

 

20,452

 

660

 

Stock based compensation

 

40,918

 

69,684

 

OREO write downs and losses on sale

 

290,609

 

413,275

 

Gain on called available for sale securities

 

(66,435

)

(172,561

)

Earnings on cash surrender value of life insurance

 

(324,668

)

(308,671

)

(Decrease) increase in interest payable and other liabilities

 

(121,498

)

750,553

 

(Increase) decrease in interest receivable

 

(37,872

)

76,316

 

Decrease in other assets

 

2,434,927

 

370,080

 

Net cash from operating activities

 

8,518,273

 

8,062,316

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of available for sale securities

 

(44,129,366

)

(11,090,604

)

Proceeds from maturities, calls, and principal paydowns of securities available for sale

 

13,290,950

 

8,111,950

 

Net decrease in loans

 

12,188,249

 

13,679,367

 

Proceeds from sale of OREO

 

243,190

 

1,234,752

 

Proceeds from redemption of BOLI policies

 

0

 

175,771

 

Net purchases of premises and equipment

 

(3,937,552

)

(887,968

)

Net cash (used in) from investing activities

 

(22,344,529

)

11,223,268

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

FHLB advanced funds

 

0

 

7,100,000

 

FHLB payments

 

(2,000,000

)

(20,800,000

)

Federal funds advances

 

0

 

480,000

 

Federal funds payments

 

0

 

(480,000

)

Repurchase of Series A Preferred Stock

 

(13,500,000

)

0

 

Proceeds from Series B Preferred Stock issued

 

13,500,000

 

0

 

Preferred stock dividend payment

 

(498,750

)

(506,250

)

Payment to repurchase U.S. Treasury Warrant

 

(560,000

)

0

 

Net increase in demand deposits and savings accounts

 

40,067,219

 

28,797,189

 

Net decrease in time deposits

 

(11,300,944

)

(9,103,296

)

Proceeds from sale of common stock and exercise of stock options

 

9,894

 

70,110

 

Net cash from financing activities

 

25,717,419

 

5,557,753

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

11,891,163

 

24,843,337

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

 

68,936,916

 

21,648,548

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of period

 

$

80,828,079

 

$

46,491,885

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

1,310,802

 

$

2,597,190

 

Income taxes

 

$

3,136,119

 

$

1,646,000

 

 

 

 

 

 

 

NON-CASH INVESTING ACTIVITIES:

 

 

 

 

 

Real estate acquired through foreclosure

 

$

0

 

$

641,400

 

Change in unrealized gain on available-for-sale securities

 

$

2,647,293

 

$

1,107,594

 

 

 

 

 

 

 

NON-CASH FINANCING ACTIVITIES:

 

 

 

 

 

Accretion of preferred stock

 

$

486,055

 

$

124,986

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

OAK VALLEY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — BASIS OF PRESENTATION

 

On July 3, 2008 (the “Effective Date”), a bank holding company reorganization was completed whereby Oak Valley Bancorp (the “Company”) became the parent holding company for Oak Valley Community Bank ( the “Bank”).  On the Effective Date, each outstanding share of the Bank was converted into one share of Oak Valley Bancorp and the Bank became a wholly-owned subsidiary of the holding company.

 

The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America (GAAP) and with general practices within the banking industry. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ significantly from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the estimation of compensation expense related to stock options granted to employees and directors, and valuation allowances associated with deferred tax assets, the recognition of which are based on future taxable income.

 

The interim consolidated financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and nine month periods ended September 30, 2011 are not necessarily indicative of the results of a full year’s operations.  For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2010.

 

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

 

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.  The ASU clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring (“TDR”), both for purposes of recording an impairment loss and for disclosure of a TDR. In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. The amendments to ASU Topic 310, Receivables, clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. ASU No. 2011-02 is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption.  There was no significant impact on the Company’s financial position or results of operations as a result of adopting this ASU.

 

In May 2011, the FASB issued ASU No. 2011-04 Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The ASU improves the comparability of fair value measurements presented and disclosed in accordance with U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs) by changing the wording used to describe many of the requirements in U.S GAAP for measuring fair value and disclosure of information. The amendments to this ASU provide explanation on how to measure fair value but do not require any additional fair value measurements and does not establish valuation standards or affect valuation practices outside of financial reporting. The amendments clarify existing fair value measurements and disclosure requirements to include application of the highest and best use and valuation premises concepts; measuring fair value of an instrument classified in a reporting entity’s shareholders’ equity; and disclosures requirements regarding quantitative information about unobservable inputs categorized within Level 3 of the fair value hierarchy. In addition, clarification is provided for measuring the fair value of financial instruments that are managed in a portfolio and the application of premiums and discounts in a fair value measurement. For public entities, ASU 2011-04 is effective during interim and annual periods beginning after December 15, 2011. We do not expect this ASU to have a significant impact on our financial condition or result of operations.

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05 Comprehensive Income (Topic 220) Presentation of Comprehensive Income. The ASU improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. The amendments to Topic 220, Comprehensive Income, require entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Entities are no longer permitted to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. Any adjustments for items are that reclassified from other comprehensive income to net income are to be presented on the face of the entities financial statement regardless the method of presentation for comprehensive income.  The amendments do not change items to be reported in comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor do the amendments change the option to present the components of other comprehensive income either net of related tax effects or before related tax effects. ASU 2011-05 is effective for fiscal years, and interim periods beginning on or after December 15, 2011. We do not expect this ASU to have an impact on our financial condition or result of operations as it affects presentation only.

 

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Table of Contents

 

NOTE 3 — PREFERRED STOCK REPURCHASE AND WARRANT REDEMPTION

 

In August 2011, The Company repurchased the $13,500,000 of Series A Preferred Stock originally issued to the U.S. Treasury in December 2008 in connection with the Company’s participation in the Capital Purchase Program (“CPP”).  The Company simultaneously issued $13,500,000 in Series B Preferred Stock to the U.S. Treasury under the Small Business Lending Funding (“SBLF”) program.  Subsequently, the Company fully redeemed a warrant to purchase 350,346 shares of its Common Stock, at the exercise price of $5.78 per share that the Company had granted to the U.S. Treasury pursuant to the CPP, for a purchase price of $560,000, which settled in September 2011.  So long as the preferred stock remains outstanding under SBLF, it will pay quarterly cumulative dividends at a variable rate between 1% and 5% per year for the first 2.5 years depending on growth of our small business loan portfolio.  If there is no loan growth after 2.5 years, the dividend rate could increase to 7% and if the preferred stock remains outstanding after 4.5 years, the rate increases to 9%, regardless of loan growth.

 

The repurchase of the original preferred stock shares under CPP resulted in preferred stock discount accretion of $389,000, the full remaining balance of the preferred stock discount at the time of the repurchase.  This entry was recorded in the third quarter of 2011 and is reflected in the Preferred stock dividends and accretion line of the statements of income.

 

NOTE 4 — SECURITIES

 

The amortized cost and estimated fair values of debt securities as of September 30, 2011 are as follows:

 

 

 

Amortized Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated Fair
Market Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

U.S. agencies

 

$

50,612,981

 

3,283,600

 

$

0

 

$

53,896,581

 

Collateralized mortgage obligations

 

11,613,387

 

770,147

 

(14,231

)

12,369,303

 

Municipalities

 

13,329,226

 

1,245,778

 

0

 

14,575,004

 

SBA Pools

 

1,246,015

 

0

 

(2,299

)

1,243,716

 

Corporate debt

 

2,000,000

 

0

 

(32,199

)

1,967,801

 

Mutual Fund

 

2,727,437

 

19,832

 

0

 

2,747,269

 

 

 

$

81,529,046

 

$

5,319,357

 

$

(48,729

)

$

86,799,674

 

 

The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2011.

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

Description of Securities

 

Fair Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agencies

 

$

0

 

$

0

 

$

0

 

0

 

$

0

 

$

0

 

Collateralized mortgage obligations

 

2,042,958

 

(14,231

)

0

 

0

 

2,042,958

 

(14,231

)

Municipalities

 

0

 

0

 

0

 

0

 

0

 

0

 

SBA Pools

 

0

 

0

 

1,243,716

 

(2,299

)

1,243,716

 

(2,299

)

Corporate debt

 

1,967,801

 

(32,199

)

0

 

0

 

1,967,801

 

(32,199

)

Mutual Fund

 

0

 

0

 

0

 

0

 

0

 

0

 

Total temporarily impaired securities

 

$

4,010,759

 

$

(46,430

)

$

1,243,716

 

$

(2,299

)

$

5,254,475

 

$

(48,729

)

 

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Table of Contents

 

At September 30, 2011, a total of two SBA pools make up the total amount of securities in an unrealized loss position for greater than 12 months.  Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary.  Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due solely to interest rate changes and the Company does not intend to sell the securities and it is not likely that we will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

 

The amortized cost and estimated fair value of debt securities at September 30, 2011, by contractual maturity or call date, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

 

 

Estimated

 

 

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Available-for-sale securities:

 

 

 

 

 

Due in one year or less

 

$

8,579,110

 

$

8,640,310

 

Due after one year through five years

 

9,731,982

 

10,669,401

 

Due after five years through ten years

 

22,408,617

 

24,331,252

 

Due after ten years

 

40,809,337

 

43,158,711

 

 

 

$

81,529,046

 

$

86,799,674

 

 

The amortized cost and estimated fair values of debt securities as of December 31, 2010, are as follows:

 

 

 

Amortized Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Market
Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

U.S. agencies

 

$

28,678,709

 

1,566,549

 

$

(54,870

)

$

30,190,388

 

Collateralized mortgage obligations

 

7,946,854

 

189,926

 

0

 

8,136,780

 

Municipalities

 

9,870,381

 

931,375

 

(2,257

)

10,799,499

 

SBA Pools

 

1,517,332

 

0

 

(11,236

)

1,506,096

 

Mutual Fund

 

2,631,371

 

14,063

 

(10,215

)

2,635,219

 

 

 

$

50,644,647

 

$

2,701,913

 

$

(78,578

)

$

53,267,982

 

 

The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2010.

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

Description of Securities

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agencies

 

$

3,101,384

 

$

(54,870

)

$

0

 

$

0

 

$

3,101,384

 

$

(54,870

)

Collateralized mortgage obligations

 

0

 

0

 

0

 

0

 

0

 

0

 

Municipalities

 

427,130

 

(2,257

)

0

 

0

 

427,130

 

(2,257

)

SBA Pools

 

0

 

0

 

1,499,228

 

(11,236

)

1,499,228

 

(11,236

)

Mutual Fund

 

989,786

 

(10,215

)

0

 

0

 

989,786

 

(10,215

)

Total temporarily impaired securities

 

$

4,518,300

 

$

(67,342

)

$

1,499,228

 

$

(11,236

)

$

6,017,528

 

$

(78,578

)

 

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Table of Contents

 

At December 31, 2010, two SBA pools make up the total amount of securities in an unrealized loss position for greater than 12 months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary. Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due solely to interest rate changes and the Company does not intend to sell the securities and it is not likely that we will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

 

The Company recognized a gain of $27,611 and $66,435 for the three and nine month periods ended September 30, 2011, respectively, on certain available-for-sale securities that were partially called, which compares to $46,030 and $172,561 in the same periods of 2010.  There were no sales of available-for-sale securities during the first nine months of 2011 and 2010.

 

Securities carried at $53,641,450 and $46,405,847 at September 30, 2011 and December 31, 2010, respectively, were pledged to secure deposits of public funds.

 

NOTE 5 — LOANS

 

The Company’s customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. As of September 30, 2011, approximately 82% of the Company’s loans are commercial real estate loans which includes construction loans. Approximately 8% of the Company’s loans are for general commercial uses including professional, retail, and small business. Additionally, 7% of the Company’s loans are for residential real estate and other consumer loans. The remaining 3% are agriculture loans.

 

Loan totals were as follows:

 

 

 

September 30, 2011

 

December 31, 2010

 

Commercial real estate:

 

 

 

 

 

Commercial real estate- construction

 

$

12,581,985

 

$

13,669,527

 

Commercial real estate- mortgages

 

277,078,981

 

289,208,721

 

Land

 

17,344,184

 

18,975,637

 

Farmland

 

15,797,471

 

14,876,426

 

Commercial and industrial

 

31,773,238

 

30,755,651

 

Consumer

 

1,231,189

 

1,242,300

 

Consumer residential

 

24,253,685

 

21,843,935

 

Agriculture

 

11,318,631

 

13,621,952

 

Total loans

 

391,379,364

 

404,194,149

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Deferred loan fees and costs, net

 

(703,983

)

(733,012

)

Allowance for loan losses

 

(8,857,422

)

(8,254,929

)

Net loans

 

$

381,817,959

 

$

395,206,208

 

 

Loan Origination/Risk Management.  The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

 

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Table of Contents

 

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

 

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At September 30, 2011, approximately 37.1% of the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-occupied properties.

 

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

 

The Company originates consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans follow bank policy, which include, but are not limited to, a maximum loan-to-value percentage of 80%, a maximum housing and total debt ratio of 36% and 42%, respectively and other specified credit and documentation requirements.

 

The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

 

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Table of Contents

 

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Non-accrual loans, segregated by class of loans, were as follows:

 

 

 

September 30, 2011

 

December 31, 2010

 

Commercial real estate:

 

 

 

 

 

Commercial real estate- construction

 

$

967,666

 

$

3,252,081

 

Commercial real estate- mortgages

 

4,174,385

 

4,190,665

 

Land

 

3,335,115

 

3,810,473

 

Farmland

 

0

 

0

 

Commercial and industrial

 

26,322

 

221,723

 

Consumer

 

0

 

0

 

Consumer residential

 

0

 

0

 

Agriculture

 

0

 

0

 

Total non-accrual loans

 

$

8,503,488

 

$

11,474,942

 

 

Had non-accrual loans performed in accordance with their original contract terms, the Company would have recognized additional interest income of approximately $167,000 and $529,000 in three and nine month periods ended September 30, 2011, respectively, as compared to $163,000 and $546,000 in the same periods of 2010.

 

The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of September 30, 2011:

 

 

 

30-59
Days Past
Due

 

60-89
Days Past
Due

 

Greater
Than 90
Days Past
Due

 

Total Past
Due

 

Current

 

Greater
Than 90
Days Past
Due and
Still
Accruing

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial R.E. - construction

 

$

0

 

$

549,109

 

$

0

 

$

549,109

 

$

12,032,876

 

$

0

 

Commercial R.E. - mortgages

 

0

 

0

 

4,174,386

 

4,174,386

 

272,904,595

 

0

 

Land

 

0

 

2,759,964

 

575,152

 

3,335,116

 

14,009,068

 

0

 

Farmland

 

0

 

0

 

0

 

0

 

15,797,471

 

0

 

Commercial and industrial

 

67,913

 

0

 

0

 

67,913

 

31,705,325

 

0

 

Consumer

 

0

 

0

 

0

 

0

 

1,231,189

 

0

 

Consumer residential

 

0

 

0

 

0

 

0

 

24,253,685

 

0

 

Agriculture

 

0

 

0

 

0

 

0

 

11,318,631

 

0

 

Total

 

$

67,913

 

$

3,309,073

 

$

4,749,538

 

$

8,126,524

 

$

383,252,840

 

$

0

 

 

12



Table of Contents

 

The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of December 31, 2010:

 

 

 

30-59
Days Past
Due

 

60-89
Days Past
Due

 

Greater
Than 90
Days Past
Due

 

Total Past
Due

 

Current

 

Greater
Than 90
Days Past
Due and
Still
Accruing

 

December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial R.E. - construction

 

$

0

 

$

0

 

$

2,663,126

 

$

2,663,126

 

$

11,006,401

 

$

0

 

Commercial R.E. - mortgages

 

1,473,940

 

2,865,492

 

1,325,173

 

5,664,605

 

283,544,116

 

0

 

Land

 

0

 

0

 

3,810,473

 

3,810,473

 

15,165,164

 

0

 

Farmland

 

0

 

0

 

0

 

0

 

14,876,426

 

0

 

Commercial and industrial

 

0

 

0

 

0

 

0

 

30,755,651

 

0

 

Consumer

 

0

 

0

 

0

 

0

 

1,242,300

 

0

 

Consumer residential

 

0

 

0

 

0

 

0

 

21,843,935

 

0

 

Agriculture

 

0

 

0

 

0

 

0

 

13,621,952

 

0

 

Total

 

$

1,473,940

 

$

2,865,492

 

$

7,798,772

 

$

12,138,204

 

$

392,055,945

 

$

0

 

 

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectibility of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

 

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Table of Contents

 

Impaired loans as of September 30, 2011 and December 31, 2010 are set forth in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired.

 

 

 

Unpaid
Contractual
Principal
Balance

 

Recorded
Investment
With No
Allowance

 

Recorded
Investment
With
Allowance

 

Total
Recorded
Investment

 

Related
Allowance

 

Average
Recorded
Investment

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial R.E. - construction

 

$

1,049,448

 

$

418,557

 

$

549,109

 

$

967,666

 

$

86,303

 

$

1,378,721

 

Commercial R.E. - mortgages

 

4,469,681

 

1,308,893

 

2,865,492

 

4,174,385

 

502,692

 

4,174,385

 

Land

 

7,707,585

 

703,731

 

2,631,384

 

3,335,115

 

465,798

 

3,337,616

 

Farmland

 

0

 

0

 

0

 

0

 

0

 

0

 

Commercial and Industrial

 

29,023

 

26,322

 

0

 

26,322

 

0

 

27,073

 

Consumer

 

0

 

0

 

0

 

0

 

 

 

0

 

Consumer residential

 

0

 

0

 

0

 

0

 

 

 

0

 

Agriculture

 

0

 

0

 

0

 

0

 

 

 

0

 

Total

 

$

13,255,737

 

$

2,457,503

 

$

6,045,985

 

$

8,503,488

 

$

1,054,793

 

$

8,917,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial R.E. - construction

 

$

3,405,167

 

$

1,427,776

 

$

1,824,305

 

$

3,252,081

 

$

179,725

 

$

4,430,245

 

Commercial R.E. - mortgages

 

4,469,681

 

4,190,665

 

0

 

4,190,665

 

0

 

1,900,081

 

Land

 

7,710,271

 

739,732

 

3,070,741

 

3,810,473

 

768,118

 

4,231,514

 

Farmland

 

0

 

0

 

0

 

0

 

0

 

0

 

Commercial and industrial

 

222,023

 

221,723

 

0

 

221,723

 

0

 

207,384

 

Consumer

 

0

 

0

 

0

 

0

 

0

 

0

 

Consumer residential

 

0

 

0

 

0

 

0

 

0

 

2,417

 

Agriculture

 

0

 

0

 

0

 

0

 

0

 

0

 

Total

 

$

15,807,142

 

$

6,579,896

 

$

4,895,046

 

$

11,474,942

 

$

947,843

 

$

10,771,641

 

 

Troubled Debt Restructurings —  In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

 

As a result of adopting the amendments in Accounting Standards Update No. 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the current fiscal year (January 1, 2011) for identification as troubled debt restructurings.  The Company identified as troubled debt restructurings two loans with carrying values totaling $2.6 million that was not previously identified as a troubled debt restructure.  However, the receivables were previously identified as collateral dependent impaired loans and the related allowance for loan losses of $409,000 was measured in accordance with the guidance in Section 310-10-35.  The amendments in Accounting Standards Update No. 2011-02 require prospective application of the impairment measurement guidance in Section 310-10-35 for those receivables newly identified as impaired at the end of the first interim period of adoption (September 30, 2011), there were no newly identified trouble debt restructures for which the allowance for loan losses was previously measured under general allowance for loan losses methodology and are now impaired under Section 310-10-35.

 

At September 30, 2011, there were 7 loans and leases that were considered to be troubled debt restructurings. Of these loans and leases, one is modified and is currently performing (less than ninety days past due) totaling $604,000 and 6 are considered nonperforming totaling $4,329,000. At September 30, 2011 there were unfunded commitments of $1,274,000 on one loan classified as a troubled debt restructure because of an agreement with a borrower to continue advancing funds and covering overhead costs on a residential development project.  The Company will receive proceeds to pay down the principal as the residential properties sell.  As of December 31, 2010, there were no unfunded commitments on those loans considered troubled debt restructures.

 

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Table of Contents

 

The Company has allocated $552,000 and $119,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of September 30, 2011 and December 31, 2010, respectively. The Company has commitments to lend an additional $1,274,000, as described above, to one of these borrowers as of September 30, 2011.  The Company had not committed to lend additional amounts to these borrowers as of December 31, 2010.

 

During the nine-month period ended September 30, 2011, the terms of four loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date; or a temporary payment modification in which the payment amount allocated towards principal was reduced. In some cases, a permanent reduction of the accrued interest on the loan was conceded.

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the three and nine month period ended September 30, 2011:

 

 

 

Three Months Ended
September 30, 2011

 

Nine Months Ended
September 30, 2011

 

 

 

Number
of
Loans

 

Pre-
Modification
Outstanding
Recorded
Investment

 

Post-
Modification
Outstanding
Recorded
Investment

 

Number
of
Loans

 

Pre-
Modification
Outstanding
Recorded
Investment

 

Post-
Modification
Outstanding
Recorded
Investment

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial R.E. - construction

 

0

 

$

0

 

$

0

 

2

 

$

2,294,219

 

$

2,294,219

 

Commercial R.E. - mortgages

 

0

 

0

 

0

 

0

 

0

 

0

 

Land

 

0

 

0

 

0

 

2

 

3,224,764

 

3,224,764

 

Farmland

 

0

 

0

 

0

 

0

 

0

 

0

 

Commercial and Industrial

 

0

 

0

 

0

 

0

 

0

 

0

 

Consumer

 

0

 

0

 

0

 

0

 

0

 

0

 

Consumer residential

 

0

 

0

 

0

 

0

 

0

 

0

 

Agriculture

 

0

 

0

 

0

 

0

 

0

 

0

 

Total

 

0

 

$

0

 

$

0

 

4

 

$

5,518,983

 

$

5,518,983

 

 

The troubled debt restructurings during the nine-month period ended September 30, 2011 did not increase the allowance for loan losses as a result of the loan modification and there were no charge offs as a result of the loan modifications.

 

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three and nine month periods ended September 30, 2011.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2011

 

September 30, 2011

 

 

 

Number of
Loans

 

Recorded
Investment

 

Number of
Loans

 

Recorded
Investment

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Commercial R.E. - construction

 

1

 

$

549,109

 

1

 

$

549,109

 

Commercial R.E. - mortgages

 

0

 

0

 

0

 

0

 

Land

 

2

 

2,631,384

 

2

 

2,631,384

 

Farmland

 

0

 

0

 

0

 

0

 

Commercial and Industrial

 

0

 

0

 

0

 

0

 

Consumer

 

0

 

0

 

0

 

0

 

Consumer residential

 

0

 

0

 

0

 

0

 

Agriculture

 

0

 

0

 

0

 

0

 

Total

 

3

 

$

3,180,493

 

3

 

$

3,180,493

 

 

15



Table of Contents

 

A loan is considered to be in payment default once it is ninety days contractually past due under the modified terms.

 

The troubled debt restructuring that subsequently defaulted above did not result in an increase to the allowance for loan losses or a charge-off during the three and nine month periods ended September 30, 2011.

 

Quality ratings (Risk Grades) are assigned to all commitments and stand-alone notes. Risk grades define the basic characteristics of commitments or stand-alone note in relation to their risk. All loans are graded using a system that maximizes the loan quality information contained in loan review grades, while ensuring that the system is compatible with the grades used by bank examiners.

 

We grade loans using the following letter system:

 

1 Exceptional Loan

2 Quality Loan

3A Better Than Acceptable Loan

3B Acceptable Loan

3C Marginally Acceptable Loan

4 (W) Watch Acceptable Loan

5 Other Loans Especially Mentioned

6 Substandard Loan

7 Doubtful Loan

8 Loss

 

1. Exceptional Loan - Loans with A+ credits that contain very little, if any, risk. Grade 1 loans are considered Pass.  To qualify for this rating, the following characteristics must be present:

 

·A high level of liquidity and whose debt-servicing capacity exceeds expected obligations by a substantial margin.

·Where leverage is below average for the industry and earnings are consistent or growing without severe vulnerability to economic cycles.

·Also included in this rating (but not mandatory unless one or more of the preceding characteristics are missing) are loans that are fully secured and properly margined by our own time instruments or U.S. blue chip securities. To be properly margined cash collateral must be equal to, or greater than, 110% of the loan amount.

 

2. Quality Loan - Loans with excellent sources of repayment that conform in all respects to bank policy and regulatory requirements. These are also loans for which little repayment risk has been identified. No credit or collateral exceptions. Grade 2 loans are considered Pass.  Other factors include:

 

·Unquestionable debt-servicing capacity to cover all obligations in the ordinary course of business from well-defined primary and secondary sources.

·Consistent strong earnings.

·A solid equity base.

 

3A. Better than Acceptable Loan - In the interest of better delineating the loan portfolio’s true credit risk for reserve allocation, further granularity has been sought by splitting the grade 3 category into three classifications. The distinction between the three are bank-defined guidelines and represent a further refinement of the regulatory definition of a pass, or grade 3 loan. Grade 3A is the stronger third of the pass category, but is not strong enough to be a grade 2 and is characterized by:

 

·Strong earnings with no loss in last three years and ample cash flow to service all debt well above policy guidelines.

·Long term experienced management with depth and defined management succession.

·The loan has no exceptions to policy.

·Loan-to-value on real estate secured transactions is 10% to 20% less than policy guidelines.

·Very liquid balance sheet that may have cash available to pay off our loan completely.

·Little to no debt on balance sheet.

 

3B. Acceptable Loan - 3B loans are simply defined as all loans that are less qualified than 3A loans and are stronger than 3C loans. These loans are characterized by acceptable sources of repayment that conform to bank policy and regulatory requirements. Repayment risks are acceptable for these loans. Credit or collateral exceptions are minimal, are in the process of correction, and do not represent repayment risk. These loans:

 

·Are those where the borrower has average financial strengths, a history of profitable operations and experienced management.

·Are those where the borrower can be expected to handle normal credit needs in a satisfactory manner.

 

3C. Marginally Acceptable - 3C loans have similar characteristics as that of 3Bs with the following additional characteristics:

Requires collateral. A credit facility where the borrower has average financial strengths, but usually lacks reliable secondary sources of repayment other than the subject collateral.  Other common characteristics can include some or all of the following: minimal background experience of management, lacking continuity of management, a start-up operation, erratic historical profitability (acceptable reasons-well identified), lack of or marginal sponsorship of guarantor, and government guaranteed loans.

 

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Table of Contents

 

4W Watch Acceptable - Watch grade will be assigned to any credit that is adequately secured and performing but monitored for a number of indicators. These characteristics may include any unexpected short-term adverse financial performance from budgeted projections or prior period’s results (i.e., declining profits, sales, margins, cash flow, or increased reliance on leverage, including adverse balance sheet ratios, trade debt issues, etc.). Additionally, any managerial or personal problems of company management, decline in the entire industry or local economic conditions failure to provide financial information or other documentation as requested; issues regarding delinquency, overdrafts, or renewals; and any other issues that cause concern for the company. Loans to individuals or loans supported by guarantors with marginal net worth and/or marginal collateral. Weakness identified in a Watch credit is short-term in nature.  Loans in this category are usually accounts the Company would want to retain providing a positive turnaround can be expected within a reasonable time frame.  Grade 4 loans are considered Pass.

 

5 Other Loans Especially Mentioned (Special Mention) - A special mention extension of credit is defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date result in the deterioration of the repayment prospects for the credit or the institution’s credit position. Extensions of credit that might be detailed in this category include the following:

 

·The lending officer may be unable to properly supervise the credit because of an inadequate loan or credit agreement.

·Questions exist regarding the condition of and/or control over collateral.

·Economic or market conditions may unfavorably affect the obligor in the future.

·A declining trend in the obligor’s operations or an imbalanced position in the balance sheet exists, but not to the point that repayment is jeopardized.

 

6 Substandard Loan - A “substandard” extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified substandard.

 

7 Doubtful Loan - An extension of credit classified “doubtful” has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral or refinancing plans. The entire loan need not be classified doubtful when collection of a specific portion appears highly probable. An example of proper use of the doubtful category is the case of a company being liquidated, with the trustee-in-bankruptcy indicating a minimum disbursement of 40 percent and a maximum of 65 percent to unsecured creditors, including the Company. In this situation, estimates are based on liquidation value appraisals with actual values yet to be realized. By definition, the only portion of the credit that is doubtful is the 25 percent difference between 40 and 65 percent. A proper classification of such a credit would show 40 percent substandard, 25 percent doubtful, and 35 percent loss. A credit classified as doubtful should be resolved within a ‘reasonable’ period of time. Reasonable is generally defined as the period between examinations. In other words, a credit classified doubtful at an examination should be cleared up before the next exam. However, there may be situations that warrant continuation of the doubtful classification a while longer.

 

8. Loss - Extensions of credit classified “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off, even though partial recovery may be affected in the future. It should not be the Company’s practice to attempt long-term recoveries while the credit remains on the books. Losses should be taken in the period in which they surface as uncollectible.

 

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Table of Contents

 

The following table presents weighted average risk grades of our loan portfolio:

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

Weighted Average
Risk Grade

 

Weighted Average
Risk Grade

 

Commercial real estate:

 

 

 

 

 

Commercial real estate - construction

 

3.23

 

4.83

 

Commercial real estate - mortgages

 

3.26

 

3.27

 

Land

 

5.23

 

5.37

 

Farmland

 

3.30

 

3.45

 

Commercial and Industrial

 

3.30

 

3.28

 

Consumer

 

2.71

 

2.77

 

Consumer residential

 

3.05

 

3.01

 

Agriculture

 

3.19

 

3.20

 

Total gross loans

 

3.34

 

3.42

 

 

The following table presents risk grade totals by class of loans as of September 30, 2011.  Risk grades 1 through 4 have been aggregated in the “Pass” line.

 

Dollars in thousands

 

Commercial R.E.
Construction

 

Commercial R.E.
Mortgages

 

Land

 

Farmland

 

Commercial and
Industrial

 

Consumer

 

Consumer
Residential

 

Agriculture

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

11,614,320

 

$

257,532,950

 

$

11,054,691

 

$

14,411,272

 

$

30,792,695

 

$

1,214,764

 

$

23,857,454

 

$

10,602,599

 

$

361,080,745

 

Special mention

 

 

10,010,295

 

 

 

85,549

 

 

 

 

10,095,844

 

Substandard

 

967,665

 

9,535,736

 

6,289,493

 

1,386,199

 

894,994

 

16,425

 

396,231

 

716,032

 

20,202,775

 

Doubtful

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

12,581,985