UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015 | |
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OR | |
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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 |
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26-2326676 |
State or other jurisdiction of |
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I.R.S. Employer |
incorporation or organization |
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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 ☒ No ☐
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 ☒ No ☐
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 ☐ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company ☒ |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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: 8,072,655 shares of common stock outstanding as of August 11, 2015.
Oak Valley Bancorp
June 30, 2015
Table of Contents
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PART I – FINANCIAL INFORMATION |
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Item 1. |
Consolidated Financial Statements |
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Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014 (Unaudited) |
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Condensed Consolidated Statements of Income for the Three and Six Month Periods Ended June 30, 2015 and June 30, 2014 (Unaudited) |
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Condensed Consolidated Statements of Comprehensive Income for the Three and Six Month Periods Ended June 30, 2015 and June 30, 2014 (Unaudited) |
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Condensed Consolidated Statements of Changes of Shareholders’ Equity for the Year Ended December 31, 2014 and the Six-Month Period Ended June 30, 2015 (Unaudited) |
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Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2015 and June 30, 2014 (Unaudited) |
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Notes to Condensed Consolidated Financial Statements |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. |
Controls and Procedures |
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PART II – OTHER INFORMATION |
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Item 1. |
Legal Proceedings |
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. |
Defaults Upon Senior Securities |
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Item 4. |
Mine Safety Disclosures |
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Item 5. |
Other Information |
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Item 6. |
Exhibits |
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PART I – FINANCIAL STATEMENTS
Item 1. Consolidated Financial Statements (Unaudited)
OAK VALLEY BANCORP
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands) |
June 30, |
December 31, |
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2015 |
2014 |
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ASSETS |
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Cash and due from banks |
$ | 126,899 | $ | 132,078 | ||||
Federal funds sold |
15,115 | 12,210 | ||||||
Cash and cash equivalents |
142,014 | 144,288 | ||||||
Securities available for sale |
127,897 | 121,277 | ||||||
Loans, net of allowance for loan loss of $7,390 and $7,534 at June 30, 2015 and December 31, 2014, respectively |
455,674 | 446,492 | ||||||
Bank premises and equipment, net |
13,715 | 14,066 | ||||||
Other real estate owned |
834 | 884 | ||||||
Interest receivable and other assets |
23,874 | 22,658 | ||||||
$ | 764,008 | $ | 749,665 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Deposits |
$ | 683,937 | $ | 669,581 | ||||
Interest payable and other liabilities |
3,906 | 5,043 | ||||||
Total liabilities |
687,843 | 674,624 | ||||||
Commitments and contingencies |
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Shareholders’ equity |
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Preferred stock, 10,000,000 shares authorized, no shares issued and outstanding at June 30, 2015 and December 31, 2014 |
0 | 0 | ||||||
Common stock, no par value; 50,000,000 shares authorized, 8,072,655 and 8,074,855 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively |
24,682 | 24,682 | ||||||
Additional paid-in capital |
3,033 | 2,910 | ||||||
Retained earnings |
47,810 | 45,582 | ||||||
Accumulated other comprehensive income, net of tax |
640 | 1,867 | ||||||
Total shareholders’ equity |
76,165 | 75,041 | ||||||
$ | 764,008 | $ | 749,665 |
The accompanying notes are an integral part of these consolidated financial statements.
OAK VALLEY BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share amounts) |
THREE MONTHS ENDED |
SIX MONTHS ENDED |
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2015 |
2014 |
2015 |
2014 |
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INTEREST INCOME |
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Interest and fees on loans |
$ | 5,376 | $ | 5,343 | $ | 10,779 | $ | 10,648 | ||||||||
Interest on securities available for sale |
898 | 933 | 1,773 | 1,848 | ||||||||||||
Interest on federal funds sold |
9 | 10 | 17 | 24 | ||||||||||||
Interest on deposits with banks |
72 | 51 | 139 | 94 | ||||||||||||
Total interest income |
6,355 | 6,337 | 12,708 | 12,614 | ||||||||||||
INTEREST EXPENSE |
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Deposits |
155 | 162 | 307 | 335 | ||||||||||||
Total interest expense |
155 | 162 | 307 | 335 | ||||||||||||
Net interest income |
6,200 | 6,175 | 12,401 | 12,279 | ||||||||||||
(Reversal of) provision for loan losses |
0 | (1,877 | ) | (125 | ) | (1,877 | ) | |||||||||
Net interest income after (reversal of) provision for loan losses |
6,200 | 8,052 | 12,526 | 14,156 | ||||||||||||
OTHER INCOME |
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Service charges on deposits |
308 | 336 | 620 | 645 | ||||||||||||
Earnings on cash surrender value of life insurance |
106 | 110 | 214 | 211 | ||||||||||||
Mortgage commissions |
42 | 49 | 88 | 78 | ||||||||||||
Net gain on sales and calls of securities |
73 | 4 | 182 | 12 | ||||||||||||
Other |
627 | 428 | 1,079 | 791 | ||||||||||||
Total non-interest income |
1,156 | 927 | 2,183 | 1,737 | ||||||||||||
OTHER EXPENSES |
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Salaries and employee benefits |
2,955 | 2,704 | 5,938 | 5,415 | ||||||||||||
Occupancy expenses |
724 | 713 | 1,471 | 1,458 | ||||||||||||
Data processing fees |
358 | 330 | 711 | 656 | ||||||||||||
Regulatory assessments (FDIC & DBO) |
131 | 120 | 245 | 240 | ||||||||||||
Other operating expenses |
1,025 | 1,122 | 1,926 | 2,101 | ||||||||||||
Total non-interest expense |
5,193 | 4,989 | 10,291 | 9,870 | ||||||||||||
Net income before provision for income taxes |
2,163 | 3,990 | 4,418 | 6,023 | ||||||||||||
PROVISION FOR INCOME TAXES |
653 | 1,453 | 1,382 | 2,078 | ||||||||||||
NET INCOME |
$ | 1,510 | $ | 2,537 | $ | 3,036 | $ | 3,945 | ||||||||
NET INCOME PER COMMON SHARE |
$ | 0.19 | $ | 0.32 | $ | 0.38 | $ | 0.50 | ||||||||
NET INCOME PER DILUTED COMMON SHARE |
$ | 0.19 | $ | 0.32 | $ | 0.38 | $ | 0.49 |
The accompanying notes are an integral part of these consolidated financial statements.
OAK VALLEY BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED JUNE 30, |
SIX MONTHS ENDED |
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(in thousands) |
2015 |
2014 |
2015 |
2014 |
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Net income |
$ | 1,510 | $ | 2,537 | $ | 3,036 | $ | 3,945 | ||||||||
Available for sale securities: |
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Unrealized holding (losses) gains on securities arising during the current period, net of tax effect of ($824) thousand and ($783) thousand for the three and six month periods ended June 30, 2015, respectively and $637 thousand and $1.3 million for the comparable 2014 periods |
(1,178 | ) | 911 | (1,120 | ) | 1,791 | ||||||||||
Reclassification adjustment due to net gains realized on sales and calls of securities, net of tax effect of $30 thousand and $75 thousand for the three and six months ended June 30, 2015, respectively and $2 thousand and $5 thousand for the comparable 2014 periods |
(43 | ) | (2 | ) | (107 | ) | (7 | ) | ||||||||
Other comprehensive (loss) income |
(1,221 | ) | 909 | (1,227 | ) | 1,784 | ||||||||||
Comprehensive income |
$ | 289 | $ | 3,446 | $ | 1,809 | $ | 5,729 |
The accompanying notes are an integral part of these consolidated financial statements.
OAK VALLEY BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
YEAR ENDED DECEMBER 31, 2014 AND SIX MONTHS ENDED JUNE 30, 2015 |
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Accumulated |
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Additional |
Other |
Total |
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Common Stock |
Preferred Stock |
Paid-in |
Retained |
Comprehensive |
Shareholders’ |
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(dollars in thousands) |
Shares |
Amount |
Shares |
Amount |
Capital |
Earnings |
Income (Loss) |
Equity |
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Balances, January 1, 2014 |
7,929,730 | $ | 23,758 | 0 | $ | 0 | $ | 2,537 | $ | 38,985 | $ | (763 | ) | $ | 64,517 | |||||||||||||||||
Stock options exercised |
122,625 | 924 | 924 | |||||||||||||||||||||||||||||
Tax benefit on stock based compensation |
102 | 102 | ||||||||||||||||||||||||||||||
Restricted stock issued |
24,500 | |||||||||||||||||||||||||||||||
Restricted stock forfeited |
(2,000 | ) | ||||||||||||||||||||||||||||||
Cash dividends declared |
(525 | ) | (525 | ) | ||||||||||||||||||||||||||||
Stock based compensation |
271 | 271 | ||||||||||||||||||||||||||||||
Other comprehensive income |
2,630 | 2,630 | ||||||||||||||||||||||||||||||
Net income |
7,122 | 7,122 | ||||||||||||||||||||||||||||||
Balances, December 31, 2014 |
8,074,855 | $ | 24,682 | 0 | $ | 0 | $ | 2,910 | $ | 45,582 | $ | 1,867 | $ | 75,041 | ||||||||||||||||||
Restricted stock issued |
500 | |||||||||||||||||||||||||||||||
Restricted stock forfeited |
(2,700 | ) | ||||||||||||||||||||||||||||||
Cash dividends declared |
(808 | ) | (808 | ) | ||||||||||||||||||||||||||||
Stock based compensation |
123 | 123 | ||||||||||||||||||||||||||||||
Other comprehensive loss |
(1,227 | ) | (1,227 | ) | ||||||||||||||||||||||||||||
Net income |
3,036 | 3,036 | ||||||||||||||||||||||||||||||
Balances, June 30, 2015 |
8,072,655 | $ | 24,682 | 0 | $ | 0 | $ | 3,033 | $ | 47,810 | $ | 640 | $ | 76,165 |
The accompanying notes are an integral part of these consolidated financial statements
OAK VALLEY BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, |
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(dollars in thousands) |
2015 |
2014 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
$ | 3,036 | $ | 3,945 | ||||
Adjustments to reconcile net earnings to net cash from operating activities: |
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(Reversal of) provision for loan losses |
(125 | ) | (1,877 | ) | ||||
Decrease in deferred fees/costs, net |
(46 | ) | (209 | ) | ||||
Depreciation |
588 | 299 | ||||||
Amortization of investment securities, net |
87 | 85 | ||||||
Stock based compensation |
123 | 147 | ||||||
Excess tax benefits from exercised stock options |
0 | (52 | ) | |||||
Gain on sale of premises and equipment |
(5 | ) | (3 | ) | ||||
OREO write downs |
50 | 17 | ||||||
Gain on sales and calls of available for sale securities |
(182 | ) | (12 | ) | ||||
Earnings on cash surrender value of life insurance |
(214 | ) | (211 | ) | ||||
Gain on BOLI death benefit |
(66 | ) | 0 | |||||
(Decrease) increase in interest payable and other liabilities |
(1,137 | ) | 63 | |||||
(Increase) decrease in interest receivable |
(111 | ) | 81 | |||||
(Increase) decrease in other assets |
(260 | ) | 190 | |||||
Net cash from operating activities |
1,738 | 2,463 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of available for sale securities |
(25,084 | ) | (14,149 | ) | ||||
Proceeds from maturities, calls, and principal paydowns of securities available for sale |
16,475 | 10,373 | ||||||
Net increase in loans |
(9,011 | ) | (14,413 | ) | ||||
Purchase of FHLB Stock |
0 | (104 | ) | |||||
Purchase of BOLI policies |
0 | (1,029 | ) | |||||
Proceeds from redemption of BOLI policies |
292 | 0 | ||||||
Proceeds from sales of premises and equipment |
5 | 3 | ||||||
Net purchases of premises and equipment |
(237 | ) | (375 | ) | ||||
Net cash used in investing activities |
(17,560 | ) | (19,694 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
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Shareholder cash dividends paid |
(808 | ) | (793 | ) | ||||
Net increase in demand deposits and savings accounts |
15,841 | 1,796 | ||||||
Net decrease in time deposits |
(1,485 | ) | (1,451 | ) | ||||
Excess tax benefits from exercised stock options |
0 | 52 | ||||||
Proceeds from sale of common stock and exercise of stock options |
0 | 924 | ||||||
Net cash from financing activities |
13,548 | 528 | ||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(2,274 | ) | (16,703 | ) | ||||
CASH AND CASH EQUIVALENTS, beginning of period |
144,288 | 105,191 | ||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 142,014 | $ | 88,488 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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Cash paid during the period for: |
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Interest |
$ | 318 | $ | 357 | ||||
Income taxes |
$ | 1,940 | $ | 2,075 | ||||
NON-CASH INVESTING ACTIVITIES: |
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Change in unrealized (loss) gain on available-for-sale securities |
$ | (2,085 | ) | $ | 3,030 |
The accompanying notes are an integral part of these consolidated financial statements.
OAK VALLEY BANCORP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION
Oak Valley Community Bank is a California State chartered bank. The Company was incorporated under the laws of the state of California on May 31, 1990, and began operations in Oakdale on May 28, 1991. The Company operates branches in Oakdale, Sonora, Bridgeport, Bishop, Mammoth Lakes, Modesto, Manteca, Patterson, Turlock, Ripon, Stockton, Tracy and Escalon, California. The Bridgeport, Mammoth Lakes, and Bishop branches operate as a separate division, Eastern Sierra Community Bank. The Company’s primary source of revenue is providing loans to customers who are predominantly middle-market businesses.
On July 3, 2008 (the “Effective Date”), a bank holding company reorganization was completed whereby Oak Valley Bancorp (“Bancorp”) became the parent holding company for Oak Valley Community Bank ( the “Bank”). On the Effective Date, a tax-free exchange was completed whereby each outstanding share of the Company was converted into one share of Bancorp and the Company became the sole wholly-owned subsidiary of the holding company.
The consolidated financial statements include the accounts of Bancorp and its wholly-owned bank subsidiary. All material intercompany transactions have been eliminated. In the opinion of Management, the consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations, changes in shareholders’ equity and cash flows. All adjustments are of a normal, recurring nature.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company’s consolidated financial statements include the allowance for loan losses, determination of non-accrual loans, other-than-temporary impairment of investment securities, the fair value measurements, deferred compensation plans, and the determination, recognition and measurement of impaired loans. Actual results could differ from these estimates.
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 six month periods ended June 30, 2015 are not necessarily indicative of the results of a full year’s operations. Certain prior year amounts have been reclassified to conform to the current year presentation. There was no effect on net income or shareholders’ equity as a result of reclassifications. 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, 2014.
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
In January 2014, the FASB issued ASU No. 2014 – 01, Investments – Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Qualified Affordable Housing Projects. This Update provides guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments in this Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this Update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of ASU No. 2014-01 did not have a material impact on the Company's consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014 – 04, Receivables – Troubled Debt Restructurings by Creditors. This ASU provides clarification that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of ASU No. 2014-04 did not have a material impact on the Company's consolidated financial statements.
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-14 Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40), Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. This update addresses classification of government-guaranteed mortgage loans, including those where guarantees are offered by the Federal Housing Administration (“FHA”), the U.S. Department of Housing and Urban Development (“HUD”), and the U.S. Department of Veterans Affairs (“VA”). Although current accounting guidance stipulates proper measurement and classification in situations where a creditor obtains from a debtor, assets in satisfaction of a receivable (such as through foreclosure), current guidance does not specify how to measure and classify foreclosed mortgage loans that are government-guaranteed. Under the provisions of this update, a creditor would derecognize a mortgage loan that has been foreclosed upon, and recognize a separate receivable if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The amendments within this update are effective for annual and interim periods beginning after December 15, 2014. The adoption of ASU No. 2014-14 did not have a material impact on the Company's consolidated financial statements.
NOTE 3 – SECURITIES
The amortized cost and estimated fair values of debt securities as of June 30, 2015 are as follows:
(dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
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Available-for-sale securities: |
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U.S. agencies |
$ | 38,504 | $ | 1,338 | $ | (219 | ) | $ | 39,623 | |||||||
Collateralized mortgage obligations |
4,162 | 43 | (26 | ) | 4,179 | |||||||||||
Municipalities |
60,390 | 1,247 | (1,190 | ) | 60,447 | |||||||||||
SBA pools |
870 | 0 | (1 | ) | 869 | |||||||||||
Corporate debt |
8,485 | 72 | (19 | ) | 8,538 | |||||||||||
Asset backed securities |
11,272 | 33 | (55 | ) | 11,250 | |||||||||||
Mutual fund |
3,125 | 0 | (134 | ) | 2,991 | |||||||||||
$ | 126,808 | $ | 2,733 | $ | (1,644 | ) | $ | 127,897 |
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 June 30, 2015.
(dollars in thousands) |
Less than 12 months |
12 months or more |
Total |
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Description of Securities |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
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U.S. agencies |
$ | 5,849 | $ | (71 | ) | $ | 4,735 | $ | (148 | ) | $ | 10,584 | $ | (219 | ) | |||||||||
Collateralized mortgage obligations |
52 | (1 | ) | 1,361 | (26 | ) | 1,413 | (26 | ) | |||||||||||||||
Municipalities |
34,767 | (955 | ) | 3,130 | (235 | ) | 37,897 | (1,190 | ) | |||||||||||||||
SBA pools |
0 | 0 | 869 | (1 | ) | 869 | (1 | ) | ||||||||||||||||
Corporate debt |
2,154 | (19 | ) | 0 | 0 | 2,154 | (19 | ) | ||||||||||||||||
Asset backed securities |
2,979 | (13 | ) | 4,841 | (42 | ) | 7,820 | (55 | ) | |||||||||||||||
Mutual fund |
0 | 0 | 2,991 | (134 | ) | 2,991 | (134 | ) | ||||||||||||||||
Total temporarily impaired securities |
$ | 45,801 | $ | (1,059 | ) | $ | 17,927 | $ | (586 | ) | $ | 63,728 | $ | (1,644 | ) |
At June 30, 2015, there were three U.S. agencies, one collateralized mortgage obligations, five municipalities, two SBA pools, three asset backed securities and one mutual fund that comprised the total securities in an unrealized loss position for greater than 12 months and 3 U.S. agencies, one collateralized mortgage obligation, 36 municipalities, two corporate debts and one asset backed security that make up the total securities in a loss position for less than 12 months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary. This evaluation encompasses various factors including, the nature of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings and other credit related factors such as third party guarantees and volatility of the security’s fair value. Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due primarily to interest rate changes and the Company does not intend to sell the securities and it is not likely that we will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.
The amortized cost and estimated fair value of investment securities at June 30, 2015, by contractual maturity or call date, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(dollars in thousands) |
Amortized |
Fair |
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Cost |
Value |
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Available-for-sale securities: |
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Due in one year or less |
$ | 13,916 | $ | 14,178 | ||||
Due after one year through five years |
30,227 | 31,363 | ||||||
Due after five years through ten years |
47,519 | 46,901 | ||||||
Due after ten years |
35,146 | 35,455 | ||||||
$ | 126,808 | $ | 127,897 |
The amortized cost and estimated fair values of investment securities as of December 31, 2014, are as follows:
(dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
Available-for-sale securities: |
||||||||||||||||
U.S. agencies |
$ | 40,316 | $ | 1,760 | $ | (146 | ) | $ | 41,930 | |||||||
Collateralized mortgage obligations |
6,927 | 184 | (39 | ) | 7,072 | |||||||||||
Municipalities |
49,396 | 1,713 | (212 | ) | 50,897 | |||||||||||
SBA pools |
895 | 0 | (3 | ) | 892 | |||||||||||
Corporate debt |
6,726 | 95 | (17 | ) | 6,804 | |||||||||||
Asset backed securities |
10,766 | 50 | (106 | ) | 10,710 | |||||||||||
Mutual fund |
3,077 | 0 | (105 | ) | 2,972 | |||||||||||
$ | 118,103 | $ | 3,802 | $ | (628 | ) | $ | 121,277 |
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, 2014.
(dollars in thousands) |
Less than 12 months |
12 months or more |
Total |
|||||||||||||||||||||
Description of Securities |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
||||||||||||||||||
U.S. agencies |
$ | 0 | $ | 0 | $ | 8,446 | $ | (146 | ) | $ | 8,446 | $ | (146 | ) | ||||||||||
Collateralized mortgage obligations |
0 | 0 | 1,445 | (39 | ) | 1,445 | (39 | ) | ||||||||||||||||
Municipalities |
3,530 | (22 | ) | 12,791 | (190 | ) | 16,321 | (212 | ) | |||||||||||||||
SBA pools |
0 | 0 | 892 | (3 | ) | 892 | (3 | ) | ||||||||||||||||
Corporate debt |
1,983 | (17 | ) | 0 | 0 | 1,983 | (17 | ) | ||||||||||||||||
Asset backed securities |
3,798 | (79 | ) | 971 | (27 | ) | 4,769 | (106 | ) | |||||||||||||||
Mutual fund |
0 | 0 | 2,972 | (105 | ) | 2,972 | (105 | ) | ||||||||||||||||
Total temporarily impaired securities |
$ | 9,311 | $ | (118 | ) | $ | 27,517 | $ | (510 | ) | $ | 36,828 | $ | (628 | ) |
We recognized a gain of $73,000 and $182,000 for the three and six month periods ended June 30, 2015, respectively, on certain available-for-sale securities that were called or sold, which compares to $4,000 and $12,000 in the same periods of 2014. The gains in 2015 reflected in the condensed consolidated statements of income are net of $19,000 in gross realized losses related to two available-for-sale securities sold during the first quarter of 2015, compared to no sales of securities resulting in losses during the first six months of 2014.
Securities carried at $64,955,000 and $60,474,000 at June 30, 2015 and December 31, 2014, respectively, were pledged to secure deposits of public funds.
NOTE 4 – LOANS
Our customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. As of June 30, 2015, approximately 83% of the Company’s loans are commercial real estate loans which include construction loans. Approximately 9% of the Company’s loans are for general commercial uses including professional, retail, and small business. Additionally, 5% 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:
(in thousands) |
June 30, 2015 |
December 31, 2014 |
||||||
Commercial real estate: |
||||||||
Commercial real estate- construction |
$ | 18,425 | $ | 9,181 | ||||
Commercial real estate- mortgages |
330,542 | 315,506 | ||||||
Land |
8,941 | 10,620 | ||||||
Farmland |
28,065 | 23,091 | ||||||
Commercial and industrial |
43,762 | 54,051 | ||||||
Consumer |
787 | 805 | ||||||
Consumer residential |
20,173 | 25,464 | ||||||
Agriculture |
12,768 | 15,753 | ||||||
Total loans |
463,463 | 454,471 | ||||||
Less: |
||||||||
Deferred loan fees and costs, net |
(399 | ) | (445 | ) | ||||
Allowance for loan losses |
(7,390 | ) | (7,534 | ) | ||||
Net loans |
$ | 455,674 | $ | 446,492 |
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, concentration of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.
Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, our 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 June 30, 2015, commercial real estate loans equal to approximately 39.1% of the outstanding principal balance of our 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.
Agricultural production, real estate and development lending is susceptible to credit risks including adverse weather conditions, pest and disease, as well as market price fluctuations and foreign competition. Agricultural loan underwriting standards are maintained by following Company policies and procedures in place to minimize risk in this lending segment. These standards consist of limiting credit to experienced farmers who have demonstrated farm management capabilities, requiring cash flow projections displaying margins sufficient for repayment from normal farm operations along with equity injected as required by policy, as well as providing adequate secondary repayment and sponsorship including satisfactory collateral support. Credit enhancement obtained through government guarantee programs may also be used to provide further support as available.
The Company originates consumer loans utilizing common underwriting criteria specified in policy. 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 1-4 family, home equity lines and 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 Bank’s policies and procedures.
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:
(in thousands) |
June 30, 2015 |
December 31, 2014 |
||||||||
Commercial real estate: | ||||||||||
Commercial real estate- construction | $ | 0 | $ | 0 | ||||||
Commercial real estate- mortgages | 0 | 1,296 | ||||||||
Land | 2,944 | 2,995 | ||||||||
Farmland | 62 | 72 | ||||||||
Commercial and industrial | 1,357 | 337 | ||||||||
Total non-accrual loans |
$ | 4,363 | $ | 4,700 |
Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income of approximately $71,000 and $153,000 in the three and six month periods ended June 30, 2015, as compared to $59,000 and $190,000 in the same periods of 2014.
The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of June 30, 2015 (in thousands):
June 30, 2015 |
30-59 Days Past Due |
60-89 Days Past Due |
Greater Than 90 Days Past Due |
Total Past Due |
Current |
Total |
Greater Than 90 Days Past Due and Still Accruing |
|||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Commercial R.E. - construction |
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 18,425 | $ | 18,425 | $ | 0 | ||||||||||||||
Commercial R.E. - mortgages |
0 | 0 | 0 | 0 | 330,542 | 330,542 | 0 | |||||||||||||||||||||
Land |
0 | 0 | 2,452 | 2,452 | 6,489 | 8,941 | 0 | |||||||||||||||||||||
Farmland |
0 | 0 | 62 | 62 | 28,003 | 28,065 | 0 | |||||||||||||||||||||
Commercial and industrial |
0 | 0 | 1,346 | 1,346 | 42,416 | 43,762 | 0 | |||||||||||||||||||||
Consumer |
0 | 0 | 0 | 0 | 787 | 787 | 0 | |||||||||||||||||||||
Consumer residential |
0 | 0 | 0 | 0 | 20,173 | 20,173 | 0 | |||||||||||||||||||||
Agriculture |
0 | 0 | 0 | 0 | 12,768 | 12,768 | 0 | |||||||||||||||||||||
Total |
$ | 0 | $ | 0 | $ | 3,860 | $ | 3,860 | $ | 459,603 | $ | 463,463 | $ | 0 |
The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of December 31, 2014 (in thousands):
December 31, 2014 |
30-59 Days Past Due |
60-89 Days Past Due |
Greater Than 90 Days Past Due |
Total Past Due |
Current |
Total |
Greater Than 90 Days Past Due and Still Accruing |
|||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Commercial R.E. - construction |
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 9,181 | $ | 9,181 | $ | 0 | ||||||||||||||
Commercial R.E. - mortgages |
35 | 1,296 | 0 | 1,331 | 314,175 | 315,506 | 0 | |||||||||||||||||||||
Land |
0 | 0 | 2,493 | 2,493 | 8,127 | 10,620 | 0 | |||||||||||||||||||||
Farmland |
0 | 0 | 72 | 72 | 23,019 | 23,091 | 0 | |||||||||||||||||||||
Commercial and industrial |
14 | 0 | 323 | 337 | 53,714 | 54,051 | 0 | |||||||||||||||||||||
Consumer |
0 | 0 | 0 | 0 | 805 | 805 | 0 | |||||||||||||||||||||
Consumer residential |
0 | 0 | 0 | 0 | 25,464 | 25,464 | 0 | |||||||||||||||||||||
Agriculture |
0 | 0 | 0 | 0 | 15,753 | 15,753 | 0 | |||||||||||||||||||||
Total |
$ | 49 | $ | 1,296 | $ | 2,888 | $ | 4,233 | $ | 450,238 | $ | 454,471 | $ | 0 |
Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. There was no interest income realized on impaired loans for the three and six months ended June 30, 2015 and 2014. Average recorded investment in impaired loans was $4.38 million and $4.47 million for the three and six months ended June 30, 2015, as compared to $4.71 million and $4.25 million for the same periods of 2014. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Impaired loans as of June 30, 2015 and December 31, 2014 are set forth in the following table.
(in thousands) |
Unpaid Contractual Principal Balance |
Recorded Investment With No Allowance |
Recorded Investment With Allowance |
Total Recorded Investment |
Related Allowance |
Average Recorded Investment |
||||||||||||||||||
June 30, 2015 |
||||||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Commercial R.E. - mortgages |
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 324 | ||||||||||||
Land |
3,215 | 0 | 2,944 | 2,944 | 854 | 2,976 | ||||||||||||||||||
Farmland |
72 | 62 | 0 | 62 | 0 | 67 | ||||||||||||||||||
Commercial and Industrial |
1,386 | 329 | 1,028 | 1,357 | 95 | 1,105 | ||||||||||||||||||
Total |
$ | 4,674 | $ | 391 | $ | 3,972 | $ | 4,363 | $ | 949 | $ | 4,472 | ||||||||||||
December 31, 2014 |
||||||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Commercial R.E. - mortgages |
$ | 1,301 | $ | 0 | $ | 1,296 | $ | 1,296 | $ | 125 | $ | 554 | ||||||||||||
Land |
3,215 | 0 | 2,995 | 2,995 | 868 | 3,155 | ||||||||||||||||||
Farmland |
80 | 72 | 0 | 72 | 0 | 82 | ||||||||||||||||||
Commercial and Industrial |
359 | 337 | 0 | 337 | 0 | 304 | ||||||||||||||||||
Total |
$ | 4,956 | $ | 408 | $ | 4,291 | $ | 4,700 | $ | 993 | $ | 4,096 |
Troubled Debt Restructurings – In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.
At June 30, 2015, there were 5 loans that were considered to be troubled debt restructurings, all of which are considered non-accrual totaling $3,272,000. At December 31, 2014, there were 5 loans that were considered to be troubled debt restructurings, all of which are considered non-accrual totaling $3,332,000. At June 30, 2015 and December 31, 2014 there were no unfunded commitments on loans classified as a troubled debt restructures. We have allocated $854,000 and $868,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of June 30, 2015 and December 31, 2014, respectively.
The modification of the terms of such loans typically includes 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 is conceded. During the three and six month periods ended June 30, 2015, the terms of two loans were modified as troubled debt restructurings by extending the maturity dates.
The following tables presents loans by class modified as troubled debt restructurings that occurred during the three and six month periods ended June 30, 2015 and 2014:
Three Months Ended |
Three Months Ended |
|||||||||||||||||||||||
(dollars in thousands) |
June 30, 2015 |
June 30, 2014 |
||||||||||||||||||||||
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 | 0 | $ | 0 | $ | 0 | ||||||||||||||
Commercial R.E. - mortgages |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Land |
1 | 570 | 570 | 2 | 2,565 | 2,565 | ||||||||||||||||||
Farmland |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Commercial and industrial |
1 | 24 | 24 | 1 | 331 | 331 | ||||||||||||||||||
Consumer |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Consumer residential |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Agriculture |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total |
2 | $ | 594 | $ | 594 | 3 | $ | 2,896 | $ | 2,896 |
Six Months Ended |
Six Months Ended |
|||||||||||||||||||||||
(dollars in thousands) |
June 30, 2015 |
June 30, 2014 |
||||||||||||||||||||||
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 | 0 | $ | 0 | $ | 0 | ||||||||||||||
Commercial R.E. - mortgages |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Land |
1 | 570 | 570 | 3 | 3,107 | 3,107 | ||||||||||||||||||
Farmland |
0 | 0 | 0 |