Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

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

 

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

 

FOR THE TRANSITION PERIOD FROM                        TO

 

COMMISSION FILE NUMBER: 000—31977

 

CENTRAL VALLEY COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)

 

California

 

77-0539125

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

7100 N. Financial Dr, Suite 101, Fresno, California

 

93720

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number (559) 298-1775

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 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 (§232.405 of this chapter) 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

As of November 9, 2011 there were 9,547,816 shares of the registrant’s common stock outstanding.

 

 

 



Table of Contents

 

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

 

2011 QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

PART 1: FINANCIAL INFORMATION

3

 

 

ITEM 1: FINANCIAL STATEMENTS

3

 

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

29

 

 

ITEM 4: CONTROLS AND PROCEDURES

53

 

 

PART II: OTHER INFORMATION

54

 

 

ITEM 1: LEGAL PROCEEDINGS

54

 

 

ITEM 1A: RISK FACTORS

54

 

 

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

54

 

 

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

54

 

 

ITEM 4: REMOVED AND RESERVED

54

 

 

ITEM 5: OTHER INFORMATION

54

 

 

ITEM 6: EXHIBITS

55

 

 

SIGNATURES

56

 

2



Table of Contents

 

PART 1: FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS

 

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share amounts)

 

September 30, 2011

 

December 31, 2010

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

21,014

 

$

11,357

 

Interest-earning deposits in other banks

 

76,268

 

89,042

 

Federal funds sold

 

791

 

600

 

Total cash and cash equivalents

 

98,073

 

100,999

 

Available-for-sale investment securities (Amortized cost of $254,136 at September 30, 2011 and $189,682 at December 31, 2010)

 

262,050

 

191,325

 

Loans, less allowance for credit losses of $11,031 at September 30, 2011 and $11,014 at December 31, 2010

 

414,735

 

420,583

 

Bank premises and equipment, net

 

5,950

 

5,843

 

Other real estate owned

 

270

 

1,325

 

Bank owned life insurance

 

11,563

 

11,390

 

Federal Home Loan Bank stock

 

2,893

 

3,050

 

Goodwill

 

23,577

 

23,577

 

Core deposit intangibles

 

887

 

1,198

 

Accrued interest receivable and other assets

 

14,910

 

18,304

 

Total assets

 

$

834,908

 

$

777,594

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing

 

$

194,190

 

$

173,867

 

Interest bearing

 

512,101

 

476,628

 

Total deposits

 

706,291

 

650,495

 

Short-term borrowings

 

 

10,000

 

Long-term debt

 

4,000

 

4,000

 

Junior subordinated deferrable interest debentures

 

5,155

 

5,155

 

Accrued interest payable and other liabilities

 

13,115

 

10,553

 

Total liabilities

 

728,561

 

680,203

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, no par value, $1,000 per share liquidation preference; 10,000,000 shares authorized, Series A, no par value, 7,000 issued and outstanding at December 31, 2010

 

 

6,864

 

Preferred stock, no par value, $1,000 per share liquidation preference; 10,000,000 shares authorized, Series C, no par value, 7,000 issued and outstanding at September 30, 2011

 

7,000

 

 

Common stock, no par value; 80,000,000 authorized; issued and outstanding 9,547,816 at September 30, 2011 and 9,109,154 at December 31, 2010

 

40,505

 

38,428

 

Non-voting common stock, 1,000,000 authorized; issued and outstanding 258,862 at December 31, 2010

 

 

1,317

 

Retained earnings

 

54,185

 

49,815

 

Accumulated other comprehensive income, net of tax

 

4,657

 

967

 

Total shareholders’ equity

 

106,347

 

97,391

 

Total liabilities and shareholders’ equity

 

$

834,908

 

$

777,594

 

 

See notes to unaudited consolidated financial statements.

 

3



Table of Contents

 

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

For the Three Months

 

For the Nine Months

 

 

 

Ended September 30,

 

Ended September 30,

 

(In thousands, except share and per share amounts) 

 

2011

 

2010

 

2011

 

2010

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

6,640

 

$

7,112

 

$

19,662

 

$

20,816

 

Interest on deposits in other banks

 

46

 

23

 

141

 

62

 

Interest on Federal funds sold

 

 

 

1

 

1

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

Taxable

 

1,079

 

1,304

 

3,307

 

4,282

 

Exempt from Federal income taxes

 

892

 

761

 

2,522

 

2,277

 

Total interest income

 

8,657

 

9,200

 

25,633

 

27,438

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

Interest on deposits

 

647

 

876

 

2,076

 

2,912

 

Interest on junior subordinated deferrable interest debentures

 

24

 

36

 

73

 

84

 

Other

 

37

 

115

 

143

 

353

 

Total interest expense

 

708

 

1,027

 

2,292

 

3,349

 

Net interest income before provision for credit losses

 

7,949

 

8,173

 

23,341

 

24,089

 

PROVISION FOR CREDIT LOSSES

 

400

 

1,300

 

750

 

2,900

 

Net interest income after provision for credit losses

 

7,549

 

6,873

 

22,591

 

21,189

 

NON-INTEREST INCOME:

 

 

 

 

 

 

 

 

 

Service charges

 

735

 

763

 

2,183

 

2,487

 

Appreciation in cash surrender value of bank owned life insurance

 

96

 

98

 

289

 

293

 

Loan placement fees

 

51

 

89

 

185

 

193

 

Gain on disposal of other real estate owned

 

75

 

 

608

 

 

Net realized gains (losses) on sale and calls of investment securities

 

223

 

(19

)

249

 

32

 

Total impairment on investment securities

 

214

 

(478

)

(4

)

(1,896

)

(Decrease) increase in fair value recognized in other comprehensive income

 

(214

)

478

 

(27

)

1,196

 

Net impairment loss recognized in earnings

 

 

 

(31

)

(700

)

Federal Home Loan Bank dividends

 

1

 

3

 

6

 

8

 

Other income

 

414

 

359

 

1,451

 

1,062

 

Total non-interest income

 

1,595

 

1,293

 

4,940

 

3,375

 

NON-INTEREST EXPENSES:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,058

 

3,961

 

12,134

 

11,544

 

Occupancy and equipment

 

978

 

976

 

2,848

 

2,890

 

Regulatory assessments

 

181

 

281

 

664

 

887

 

Data processing expense

 

295

 

310

 

857

 

878

 

Advertising

 

182

 

183

 

548

 

557

 

Audit and accounting fees

 

112

 

114

 

337

 

342

 

Legal fees

 

90

 

78

 

266

 

367

 

Other real estate owned, net

 

9

 

318

 

11

 

759

 

Amortization of core deposit intangibles

 

104

 

104

 

311

 

311

 

Loss on sale of assets

 

 

10

 

 

10

 

Other expense

 

1,213

 

1,074

 

3,466

 

3,210

 

Total non-interest expenses

 

7,222

 

7,409

 

21,442

 

21,755

 

Income before provision for income taxes

 

1,922

 

757

 

6,089

 

2,809

 

PROVISION (BENEFIT) FOR INCOME TAXES

 

514

 

(107

)

1,320

 

149

 

Net income

 

$

1,408

 

$

864

 

$

4,769

 

$

2,660

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,408

 

$

864

 

$

4,769

 

$

2,660

 

Preferred stock dividends and accretion

 

202

 

99

 

400

 

296

 

Net income available to common shareholders

 

$

1,206

 

$

765

 

$

4,369

 

$

2,364

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.13

 

$

0.08

 

$

0.46

 

$

0.26

 

Weighted average common shares used in basic computation

 

9,547,816

 

9,363,908

 

9,513,387

 

9,156,561

 

Diluted earnings per share

 

$

0.13

 

$

0.08

 

$

0.46

 

$

0.26

 

Weighted average common shares used in diluted computation

 

9,557,609

 

9,432,301

 

9,534,426

 

9,244,289

 

 

See notes to unaudited consolidated financial statements.

 

4



Table of Contents

 

CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

 

 

 

For the Nine Months
Ended September 30,

 

 

 

2011

 

2010

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

4,769

 

$

2,660

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Net increase in deferred loan fees

 

149

 

143

 

Depreciation

 

917

 

949

 

Accretion

 

(546

)

(758

)

Amortization

 

2,336

 

1,437

 

Stock-based compensation

 

149

 

172

 

Tax benefit from exercise of stock options

 

(117

)

(28

)

Provision for credit losses

 

750

 

2,900

 

Net other than temporary impairment losses on investment securities

 

31

 

700

 

Net realized gains on sales and calls of available-for-sale investment securities

 

(249

)

(32

)

Net gain on sale and disposal of equipment

 

 

10

 

Net (gain) loss on sale of other real estate owned

 

(608

)

14

 

Write down of other real estate owned and other property

 

 

453

 

Increase in bank owned life insurance, net of expenses

 

(112

)

(293

)

Net gain on bank owned life insurance

 

(85

)

 

Net (increase) decrease in accrued interest receivable and other assets

 

(724

)

750

 

Net decrease in prepaid FDIC Assessments

 

558

 

730

 

Net increase in accrued interest payable and other liabilities

 

2,278

 

913

 

Provision (benefit) for deferred income taxes

 

974

 

(456

)

Net cash provided by operating activities

 

10,470

 

10,264

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of available-for-sale investment securities

 

(133,308

)

(21,869

)

Proceeds from sales or calls of available-for-sale investment securities

 

43,580

 

16,718

 

Proceeds from maturity and principal repayments of available-for-sale investment securities

 

24,011

 

19,226

 

Net decrease (increase) in loans

 

4,704

 

(5,488

)

Proceeds from sale of other real estate owned

 

2,195

 

2,555

 

Purchases of premises and equipment

 

(1,024

)

(276

)

FHLB stock redeemed

 

157

 

90

 

Proceeds from bank owned life insurance

 

146

 

 

Proceeds from sale of premises and equipment

 

 

5

 

Net cash (used in) provided by investing activities

 

(59,539

)

10,961

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net increase in demand, interest bearing and savings deposits

 

70,374

 

18,467

 

Net decrease in time deposits

 

(14,578

)

(22,117

)

Repayments of short-term borrowings to Federal Home Loan Bank

 

(10,000

)

(5,000

)

Proceeds from exercise of stock options

 

680

 

550

 

Warrant purchase

 

(185

)

 

Tax benefit from exercise of stock options

 

117

 

28

 

Cash paid for preferred stock dividends

 

(265

)

(261

)

Net cash provided by (used in) financing activities

 

46,143

 

(8,333

)

Decrease in cash and cash equivalents

 

(2,926

)

12,892

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

100,999

 

48,680

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

98,073

 

$

61,572

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

 

 

 

 

 

Cash paid during the year for :

 

 

 

 

 

Interest

 

$

2,551

 

$

3,674

 

Income taxes

 

$

826

 

$

301

 

Non-Cash Investing Activities:

 

 

 

 

 

Net pre-tax change in unrealized gain on available-for-sale investment securities

 

$

6,271

 

$

6,871

 

Non-Cash Financing Activities:

 

 

 

 

 

Redemption of preferred stock Series A and issuance of preferred stock Series C

 

$

7,000

 

$

 

Transfer of loans to other real estate owned

 

$

244

 

$

3,467

 

Accrued preferred stock dividends

 

$

42

 

$

44

 

 

See notes to unaudited consolidated financial statements.

 

5



Table of Contents

 

CENTRAL VALLEY COMMUNITY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.  Basis of Presentation

 

The interim unaudited consolidated financial statements of Central Valley Community Bancorp and subsidiary have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). These interim consolidated financial statements include the accounts of Central Valley Community Bancorp and its wholly owned subsidiary Central Valley Community Bank (the Bank) (collectively, the Company). All significant intercompany accounts and transactions have been eliminated in consolidation.  Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The Company believes that the disclosures are adequate to make the information presented not misleading. These interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2010 Annual Report to Shareholders on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company’s financial position at September 30, 2011 and December 31, 2010, and the results of its operations for the three and nine month interim periods ended September 30, 2011 and September 30, 2010 and its cash flows for the nine month interim periods ended September 30, 2011 and September 30, 2010 have been included. Certain reclassifications have been made to prior year amounts to conform to the 2011 presentation. The results of operations for interim periods are not necessarily indicative of results for the full year.

 

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.

 

Recent Accounting Pronouncements

 

Determination of Whether a Restructuring is a Troubled Debt Restructuring

 

In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring .  This ASU provides for a more consistent application of the accounting guidance for troubled debt restructurings (TDRs).  This ASU clarified guidance on a creditor’s evaluation of whether it has granted a concession to a borrower, and clarified guidance to determine if a borrower is experiencing financial difficulties.  This ASU also finalized the disclosures required in a creditor’s financial statements related to TDRs.  The new provisions of this standard became effective on July 1, 2011.

 

As a result of adopting ASU 2011-02, management reassessed all restructurings that occurred on or after January 1, 2011 and identified eight loans totaling $18,739,000 that were not previously identified as TDRs which now qualify as TDRs under the guidance of ASU 2011-02.  The identification of the $18,739,000 of TDRs resulted in an increase to the specific reserves added to the allowance for credit losses of $427,000 at September 30, 2011.

 

Impact of New Financial Accounting Standards

 

Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs

 

In May 2011, FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs.  The amendments to the FASB Accounting Standards Codification ™ (Codification) in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.  Early application by public entities is not permitted.  Management does not believe the adoption of this ASU will have a significant impact on the Company’s financial position, results of operations or cash flows.

 

6



Table of Contents

 

Presentation of Comprehensive Income

 

In June 2011, FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends the FASB Accounting Standards Codification TM  (Codification) to allow an entity the option 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. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  In October 2011, FASB decided that the specific requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income will be deferred.  Therefore, those requirements will not be effective for public entities for fiscal years and interim periods with those years beginning after December 15, 2011.  The remaining provisions of ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Early adoption is permitted.  Management does not believe the adoption of this ASU will have a significant impact on the Company’s financial position, results of operations or cash flows.

 

Intangibles — Goodwill and Other Topics

 

The FASB has issued ASU 2011-08,  Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350,  Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%.  ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The Company has elected to early-adopt the provisions of ASU 2011-08 and apply the provisions to management’s annual evaluation of the Company’s Goodwill as of September 30, 2011.  The impact of adoption was not material to the Company’s financial position, results of operations or cash flows.

 

Note 2.  Share-Based Compensation

 

For the nine month periods ended September 30, 2011 and 2010, share-based compensation cost recognized was $149,000 and $172,000, respectively.  For the quarter ended September 30, 2011 and 2010, share-based compensation cost recognized for stock option compensation was $47,000 and $59,000, respectively.  The recognized tax benefit for stock option compensation expense was $27,000 and $31,000, for the nine month periods ended September 30, 2011 and 2010, respectively.  For the three month periods ended September 30, 2011 and 2010, recognized tax benefits were $9,000 and $5,000, respectively.

 

The Company bases the fair value of the options granted on the date of grant using a Black-Scholes Merton option pricing model that uses assumptions based on expected option life and the level of estimated forfeitures, expected stock volatility, risk free interest rate, and dividend yield.  The expected term of the Company’s options was determined under the applicable guidance for estimating expected term of options.  Stock volatility is based on the historical volatility of the Company’s stock.  The risk-free rate is based on the U. S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of grant.  The compensation cost for options granted is based on the weighted average grant date fair value per share.

 

No options to purchase shares of the Company’s common stock were issued in the first nine months of 2011 from any of the Company’s stock based compensation plans.  In the same period of 2010, options to purchase 67,800 shares of the Company’s common stock were issued from the Central Valley Community Bancorp 2005 Omnibus Incentive Plan and 15,200 were issued from the Central Valley Community Bancorp 2000 Stock Option Plan.  All options were issued at an exercise price equal to the fair market value at the grant date.

 

7



Table of Contents

 

A summary of the combined activity of the Company’s Stock Based Compensation Plans for the nine month period ended September 30, 2011 follows:

 

 

 

Shares

 

Weighted
Average
Exercise Price

 

Weighted
Average
Remaining
Contractual
Term (Years)

 

Aggregate
Intrinsic Value

 

Options outstanding at January 1, 2011

 

707,129

 

7.31

 

 

 

 

 

Options exercised

 

(179,800

)

$

3.78

 

 

 

 

 

Options canceled

 

(16,000

)

$

6.96

 

 

 

 

 

Options outstanding at September 30, 2011

 

511,329

 

$

8.56

 

4.17

 

$

17

 

Options vested or expected to vest at September 30, 2011

 

494,952

 

$

8.63

 

5.70

 

$

17

 

Options exercisable September 30, 2011

 

418,405

 

$

9.14

 

3.30

 

$

14

 

 

The weighted-average grant-date fair value of options granted in the nine month period ended September 30, 2010 was $2.59.

 

The total intrinsic value of 179,800 options exercised in the nine months ended September 30, 2011 was $417,000. The total intrinsic value of 159,400 options exercised in the nine months ended September 30, 2010 was $349,000.

 

Cash received from options exercised for the nine months ended September 30, 2011 was $680,000.  The actual tax benefit realized for the tax deductions from options exercised totaled $117,000 for nine months ended September 30, 2011.

 

As of September 30, 2011, there was $244,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all plans.  The cost is expected to be recognized over a weighted average period of 2.77 years.

 

Note 3. Earnings Per Share

 

Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options or warrants, stock appreciation rights settled in stock or restricted stock awards, result in the issuance of common stock which shares in the earnings of the Company.  There was no difference in the net income used in the calculation of basic earnings per share and diluted earnings per share for the three and nine month periods ended September 30, 2011 or 2010.

 

A reconciliation of the numerators and denominators of the basic and diluted EPS computations is as follows:

 

Basic Earnings Per share
In thousands (except share and per share

 

Three Months Ended
 September 30,

 

Nine Months Ended
 September 30,

 

amounts)

 

2011

 

2010

 

2011

 

2010

 

Net Income

 

$

1,408

 

$

864

 

$

4,769

 

$

2,660

 

Less: Preferred stock dividends and accretion

 

202

 

99

 

400

 

296

 

Income available to common shareholders

 

$

1,206

 

$

765

 

$

4,369

 

$

2,364

 

Weighted average shares outstanding

 

9,547,816

 

9,363,908

 

9,513,387

 

9,156,561

 

Net income per share

 

$

0.13

 

$

0.08

 

$

0.46

 

$

0.26

 

 

Diluted Earnings Per share
In thousands (except share and per share

 

Three Months Ended
 September 30,

 

Nine Months Ended
 September 30,

 

amounts)

 

2011

 

2010

 

2011

 

2010

 

Net Income

 

$

1,408

 

$

864

 

$

4,769

 

$

2,660

 

Less: Preferred stock dividends and accretion

 

202

 

99

 

400

 

296

 

Income available to common shareholders

 

$

1,206

 

$

765

 

$

4,369

 

$

2,364

 

Weighted average shares outstanding

 

9,547,816

 

9,363,908

 

9,513,387

 

9,156,561

 

Effect of dilutive stock options

 

9,793

 

68,393

 

21,039

 

87,728

 

Weighted average shares of common stock and common stock equivalents

 

9,557,609

 

9,432,301

 

9,534,426

 

9,244,289

 

Net income per diluted share

 

$

0.13

 

$

0.08

 

$

0.46

 

$

0.26

 

 

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Table of Contents

 

During the three-month periods ending September 30, 2011 and 2010, options and warrants to purchase 436,929 and 533,131 shares of common stock, respectively, were not factored into the calculation of dilutive stock options because they were anti-dilutive.  During the nine-month periods ending September 30, 2011 and 2010, options and warrants to purchase 436,929 and 533,131 shares of common stock, respectively, were not factored into the calculation of dilutive stock options because they were anti-dilutive.

 

Note 4.  Investments

 

The investment portfolio consists primarily of agency securities, mortgage backed securities, and municipal securities all of which are classified available-for-sale.  As of September 30, 2011, $112,095,000 was held as collateral for borrowing arrangements, public funds, and for other purposes.

 

The fair value of the available-for-sale investment portfolio reflected an unrealized gain of $7,914,000 at September 30, 2011 compared to an unrealized gain of $1,643,000 at December 31, 2010.

 

The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands):

 

 

 

September 30, 2011

 

Available-for-Sale Securities

 

Amortized Cost

 

Gross
Unrealized

Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

Debt securities:

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

159

 

$

2

 

$

 

$

161

 

Obligations of states and political subdivisions

 

86,950

 

7,567

 

(356

)

94,161

 

U.S. Government agencies collateralized by mortgage obligations

 

147,029

 

1,747

 

(494

)

148,282

 

Other collateralized mortgage obligations

 

12,402

 

258

 

(1,162

)

11,498

 

Other equity securities

 

7,596

 

352

 

 

7,948

 

 

 

$

254,136

 

$

9,926

 

$

(2,012

)

$

262,050

 

 

 

 

December 31, 2010

 

Available-for-Sale Securities

 

Amortized Cost

 

Gross
Unrealized

Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

Debt securities:

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

190

 

$

5

 

$

 

$

195

 

Obligations of states and political subdivisions

 

74,598

 

1,884

 

(1,432

)

75,050

 

U.S. Government agencies collateralized by mortgage obligations

 

88,105

 

2,092

 

(120

)

90,077

 

Other collateralized mortgage obligations

 

18,661

 

506

 

(1,329

)

17,838

 

Corporate debt securities

 

500

 

4

 

 

504

 

Other equity securities

 

7,628

 

33

 

 

7,661

 

 

 

$

189,682

 

$

4,524

 

$

(2,881

)

$

191,325

 

 

Investment securities with unrealized losses as of the dates indicated are summarized and classified according to the duration of the loss period as follows (in thousands):

 

 

 

September 30, 2011

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Available-for-Sale Securities

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

$

60

 

$

(4

)

$

3,023

 

$

(352

)

$

3,083

 

$

(356

)

U.S. Government agencies collateralized by mortgage obligations

 

65,253

 

(494

)

 

 

65,253

 

(494

)

Other collateralized mortgage obligations

 

1,450

 

(13

)

5,186

 

(1,149

)

6,636

 

(1,162

)

 

 

$

66,763

 

$

(511

)

$

8,209

 

$

(1,501

)

$

74,972

 

$

(2,012

)

 

9



Table of Contents

 

 

 

December 31, 2010

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Available-for-Sale Securities

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

$

24,782

 

$

(904

)

$

3,168

 

$

(528

)

$

27,950

 

$

(1,432

)

U.S. Government agencies collateralized by mortgage obligations

 

9,131

 

(120

)

 

 

9,131

 

(120

)

Other collateralized mortgage obligations

 

286

 

(2

)

10,136

 

(1,327

)

10,422

 

(1,329

)

 

 

$

34,199

 

$

(1,026

)

$

13,304

 

$

(1,855

)

$

47,503

 

$

(2,881

)

 

We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations.  As of September 30, 2011, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI).  Under ASC 320-10, the portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings.  The discount rate in this analysis is the coupon rate which approximates the current book yield.

 

As of September 30, 2011, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all available-for-sale investment securities with an unrealized loss at September 30, 2011 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at September 30, 2011 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000.  Management also analyzed any securities that may have been downgraded by credit rating agencies.  Management retained the services of a third party in May 2011 to provide independent valuation and OTTI analysis of private label residential mortgage backed securities (PLRMBS).

 

For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds.  For those bonds that were municipal debt securities with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded that no credit related impairment existed.

 

The evaluation for PLRMBS also includes estimating projected cash flows that the Company is likely to collect based on an assessment of all available information about the applicable security on an individual basis, the structure of the security, and certain assumptions, such as the remaining payment terms for the security, prepayment speeds, default rates, loss severity on the collateral supporting the security based on underlying loan-level borrower and loan characteristics, expected housing price changes, and interest rate assumptions, to determine whether the Company will recover the entire amortized cost basis of the security.  In performing a detailed cash flow analysis, the Company identified the best estimate of the cash flows expected to be collected.  If this estimate results in a present value of expected cash flows (discounted at the security’s effective yield) that is less than the amortized cost basis of the security, an OTTI is considered to have occurred.

 

To assess whether it expects to recover the entire amortized cost basis of its PLRMBS, the Company performed a cash flow analysis for all of its PLRMBS as of September 30, 2011.  In performing the cash flow analysis for each security, the Company uses a third-party model. The model considers borrower characteristics and the particular attributes of the loans underlying the Company’s securities, in conjunction with assumptions about future changes in home prices and other assumptions, to project prepayments, default rates, and loss severities.

 

The month-by-month projections of future loan performance are allocated to the various security classes in each securitization structure in accordance with the structure’s prescribed cash flow and loss allocation rules.  When the credit enhancement for the senior securities in a securitization is derived from the presence of subordinated securities, losses are allocated first to the subordinated securities until their principal balance is reduced to zero.  The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations.  The scenario of cash flows determined based on the model approach described above reflects a best-estimate scenario.

 

At each quarter end, the Company compares the present value of the cash flows expected to be collected on its PLRMBS to the amortized cost basis of the securities to determine whether a credit loss exists.

 

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Table of Contents

 

The unrealized losses associated with PLRMBS are primarily driven by higher projected collateral losses, wider credit spreads, and changes in interest rates.  The Company assesses for credit impairment using a discounted cash flow model.  The key assumptions include default rates, severities, discount rates and prepayment rates.  Losses are estimated to a security by forecasting the underlying mortgage loans in each transaction.  The forecasted loan performance is used to project cash flows to the various tranches in the structure.  Based upon management’s assessment of the expected credit losses of the security given the performance of the underlying collateral compared with our credit enhancement (which occurs as a result of credit loss protection provided by subordinated tranches), the Company expects to recover the entire amortized cost basis of these securities, with the exception of certain securities for which OTTI was previously recorded.

 

U.S. Government Agencies

 

At September 30, 2011, the Company held one U.S. Government agency security and it was not in a loss position.

 

Obligations of States and Political Subdivisions

 

At September 30, 2011, the Company held 169 obligations of states and political subdivision securities of which one was in a loss position for less than 12 months and six were in a loss position and have been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2011.

 

U.S. Government Agencies Collateralized by Mortgage Obligations

 

At September 30, 2011, the Company held 162 U.S. Government agency securities collateralized by mortgage obligation securities of which 33 were in a loss position for less than 12 months. The unrealized losses on the Company’s investments in U.S. government agencies collateralized by mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2011.

 

Other Collateralized Mortgage Obligations

 

At September 30, 2011, the Company had a total of 28 PLRMBS with a remaining principal balance of $12,402,000 and a net unrealized loss of approximately $904,000.  Nine of these securities account for $1,162,000 of the unrealized loss at September 30, 2011 offset by 19 of these securities with gains totaling $258,000.  Seven of these PLRMBS with a remaining principal balance of $6,396,000 had credit ratings below investment grade.  The Company continues to perform extensive analyses on these securities as well as all whole loan CMOs.  Several of these investment securities continue to demonstrate cash flows and credit support as expected and the expected cash flows of the security discounted at the security’s effective yield are greater than the book value of the security, therefore management does not consider these securities to be other than temporarily impaired.  No credit related OTTI charges related to PLRMBS were recorded during the nine month period ended September 30, 2011.

 

11



Table of Contents

 

Other Equity Securities

 

At September 30, 2011, the Company had a total of two mutual fund equity investments, one of which had been in an unrealized loss position for more than 12 months.  Based on management’s evaluation of the nature of the decline in net asset value on this mutual fund, the Company recorded an OTTI charge of $31,000 during the nine month period ended September 30, 2011.

 

Investment securities as of September 30, 2011 with credit ratings below investment grade are summarized in the table below (dollars in thousands):

 

Description 

 

Book
Value

 

Market Value

 

Unrealized
Gain
(Loss)

 

Rating

 

Agency

 

12 Month
Historical
Prepayment
Rates %

 

Projected
Default
Rates %

 

Projected
Severity
Rates %

 

Original
Purchase
Price %

 

Current
Credit
Enhancement
%

 

PHHAM

 

$

2,451

 

$

2,043

 

$

(408

)

C

 

Fitch

 

13.70

 

23.42

 

51.00

 

97.25

 

0.12

 

CWALT 1

 

798

 

618

 

(180

)

C

 

Fitch

 

9.47

 

27.89

 

63.95

 

100.73

 

4.63

 

CWALT 2

 

371

 

261

 

(110

)

C

 

Fitch

 

8.80

 

30.84

 

55.77

 

101.38

 

2.70

 

FHAMS

 

2,254

 

1,881

 

(373

)

D

 

Fitch

 

11.38

 

21.78

 

54.21

 

95.00

 

(0.05

)

BAALT

 

151

 

132

 

(19

)

CCC

 

Fitch

 

8.36

 

10.95

 

57.41

 

97.24

 

4.89

 

ABFS

 

310

 

253

 

(57

)

D

 

S&P

 

6.00

 

45.00

 

80.00

 

97.46

 

0.00

 

CONHE

 

61

 

75

 

14

 

B3

 

Moodys

 

0.10

 

10.00

 

60.00

 

86.39

 

0.072

 

TOTALS

 

$

6,396

 

$

5,263

 

$

(1,133

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following tables provide a roll forward for the three and nine month periods ended September 30, 2011 and 2010 of investment securities credit losses recorded in earnings. The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods.  Additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred on securities for which OTTI credit losses have been previously recognized.

 

(Dollars in thousands)

 

For the three
months ended
September
30, 2011

 

For the three
months ended
September
30, 2010

 

For the nine
months
ended September
30, 2011

 

For the nine
months
ended September
30, 2010

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

767

 

$

700

 

$

1,387

 

$

300

 

Amounts related to credit loss for which an OTTI charge was not previously recognized

 

 

 

31

 

700

 

Increases to the amount related to credit loss for which OTTI was previously recognized

 

 

 

 

 

Realized gains (losses) for securities sold

 

16

 

 

(635

)

(300

)

Ending balance

 

$

783

 

$

700

 

$

783

 

$

700

 

 

12



Table of Contents

 

The amortized cost and estimated fair value of investment securities at September 30, 2011 and December 31, 2010 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

September 30, 2011 (in thousands)

 

Amortized Cost

 

Estimated Fair
Value

 

 

 

 

 

 

 

Within one year

 

$

579

 

$

587

 

After one year through five years

 

7,946

 

8,705

 

After five years through ten years

 

18,968

 

20,377

 

After ten years

 

59,616

 

64,653

 

 

 

87,109

 

94,322

 

 

 

 

 

 

 

Investment securities not due at a single maturity date:

 

 

 

 

 

U.S. Government agencies collateralized by mortgage obligations

 

147,029

 

148,282

 

Other collateralized mortgage obligations

 

12,402

 

11,498

 

Other equity securities

 

7,596

 

7,948

 

 

 

$

254,136

 

$

262,050

 

 

December 31, 2010

 

Amortized Cost

 

Estimated Fair
Value

 

 

 

 

 

 

 

Within one year

 

$

500

 

$

504

 

After one year through five years

 

6,350

 

6,819

 

After five years through ten years

 

18,274

 

18,664

 

After ten years

 

50,164

 

49,762

 

 

 

75,288

 

75,749

 

Investment securities not due at a single maturity date:

 

 

 

 

 

U.S. Government agencies collateralized by mortgage obligations

 

88,105

 

90,077

 

Other collateralized mortgage obligations

 

18,661

 

17,838

 

Other equity securities

 

7,628

 

7,661

 

Total

 

$

189,682

 

$

191,325

 

 

13



Table of Contents

 

Note 5.  Fair Value Measurements

 

The estimated carrying and fair values of the Company’s financial instruments are as follows (in thousands):

 

 

 

September 30, 2011

 

December 31, 2010

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

 

 

(In thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

21,014

 

$

21,014

 

$

11,357

 

$

11,357

 

Interest-earning deposits in other banks

 

76,268

 

76,268

 

89,042

 

89,042

 

Federal funds sold

 

791

 

791

 

600

 

600

 

Available-for-sale investment securities

 

262,050

 

262,050

 

191,325

 

191,325

 

Loans, net

 

414,735

 

409,219

 

420,583

 

405,876

 

Bank owned life insurance

 

11,563

 

11,563

 

11,390

 

11,390

 

Federal Home Loan Bank stock

 

2,893

 

2,893

 

3,050

 

3,050

 

Accrued interest receivable

 

3,711

 

3,711

 

3,467

 

3,467

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Deposits

 

$

706,291

 

$

755,703

 

$

650,495

 

$

651,668

 

Short-term borrowings

 

 

 

10,000

 

10,000

 

Long-term debt

 

4,000

 

4,197

 

4,000

 

4,256

 

Junior subordinated deferrable interest debentures

 

5,155

 

2, 062

 

5,155

 

2,320

 

Accrued interest payable

 

216

 

216

 

475

 

475

 

 

These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments.  In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

 

These estimates are made at a specific point in time based on relevant market data and information about the financial instruments.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the fair values presented.

 

The following methods and assumptions were used to estimate the fair value of financial instruments.  For cash and due from banks, interest-earning deposits in other banks, Federal funds sold, variable-rate loans, bank owned life insurance, accrued interest receivable and payable, FHLB stock, demand deposits and short-term borrowings, the carrying amount is estimated to be fair value.  For investment securities, fair values are based on quoted market prices, quoted market prices for similar securities and indications of value provided by brokers.  The fair values for fixed-rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness. Fair values for fixed-rate certificates of deposit are estimated using discounted cash flow analyses using interest rates offered at each reporting date by the Company for certificates with similar remaining maturities.  The fair value of long-term debt and subordinated debentures was determined based on the current market for like-kind instruments of a similar maturity and structure.  The fair values of commitments are estimated using the fees currently charged to enter into similar agreements and are not significant and, therefore, not included in the above table.

 

14



Table of Contents

 

Fair Value Hierarchy

 

In accordance with applicable guidance, the Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  Valuations within these levels are based upon:

 

Level 1 — Quoted market prices for identical instruments traded in active exchange markets.

 

Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

 

Level 3 — Model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability.  Valuation techniques include management judgment and estimation which may be significant.

 

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, we report the transfer at the beginning of the reporting period.

 

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings. During the nine months ended September 30, 2011, no transfers between levels occurred.

 

Assets Recorded at Fair Value

 

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2011:

 

Recurring Basis

 

The Company is required or permitted to record the following assets at fair value on a recurring basis under other accounting pronouncements as of September 30, 2011 (in thousands).

 

Description

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

161

 

$

 

$

161

 

$

 

Obligations of states and political subdivisions

 

94,161

 

 

94,161

 

 

U.S. Government agencies collateralized by mortgage obligations

 

148,282

 

 

148,282

 

 

Other collateralized mortgage obligations

 

11,498

 

 

11,498

 

 

Other equity securities

 

7,948

 

7,948

 

 

 

Total assets and liabilities measured at fair value

 

$

262,050

 

$

7,948

 

$

254,102

 

$

 

 

Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets.  Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities.

 

The balance of Level 3 assets measured at fair value on a recurring basis was zero for the year ended December 31, 2010.  No changes occurred in the first three quarters of 2011.

 

There were no liabilities measured at fair value on a recurring basis at September 30, 2011.

 

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Table of Contents

 

Non-recurring Basis

 

The Company may be required, from time to time, to measure certain assets at fair value on a non-recurring basis.  These include assets that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at September 30, 2011 (in thousands).

 

Description

 

Fair
Value

 

Level 1

 

Level 2

 

Level 3

 

Total
Gains
(Losses)
in the
Period

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

2,468

 

$

 

$

 

$

2,468

 

$

267

 

Agricultural production

 

 

 

 

 

 

Total commercial

 

2,468

 

 

 

2,468

 

267

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

1,026

 

 

 

1,026

 

203

 

Real estate-construction and other land loans

 

4,871

 

 

 

4,871

 

(312

)

Commercial real estate

 

2,169

 

 

 

2,169

 

627

 

Agricultural real estate

 

 

 

 

 

 

Other

 

1,681

 

 

 

1,681

 

(420

)

Total real estate

 

9,747

 

 

 

9,747

 

98

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

379

 

 

 

379

 

298

 

Consumer and installment

 

 

 

 

 

 

Total consumer

 

379

 

 

 

379

 

298

 

Lease financing receivable

 

 

 

 

 

 

Total impaired loans

 

12,594

 

 

 

12,594

 

663

 

Other real estate owned

 

270

 

 

 

270

 

 

Total assets measured at fair value on a non-recurring basis

 

$

12,864

 

$

 

$

 

$

12,864

 

$

663

 

 

The fair value of impaired loans and other real estate owned is based on the fair value of the collateral for all collateral dependent loans and for other impaired loans is estimated using a discounted cash flow model.  Impaired loans and other real estate owned were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements.  There were no changes in valuation techniques used during the nine months ended September 30, 2011 or the year ended December 31, 2010.

 

Impaired loans with a carrying value of $14,908,000 were written down to their fair value of $12,594,000, resulting in a related valuation allowance of $2,314,000 at September 30, 2011.  The valuation allowance represents specific allocations of the allowance for credit losses for impaired loans.

 

The fair value of real estate is based on property appraisals at the time of transfer and as appropriate thereafter, less estimated costs to sell.  Other real estate owned is periodically reviewed to determine whether the property continues to be carried at the lower of its recorded book value or estimated fair value, net of estimated selling costs.

 

There were no liabilities measured at fair value on a non-recurring basis at September 30, 2011.

 

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Table of Contents

 

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis as of December 31, 2010:

 

Recurring Basis

 

The Company is required or permitted to record the following assets at fair value on a recurring basis under other accounting pronouncements (in thousands).

 

Description

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

195

 

$

 

$

195

 

$

 

Obligations of states and political subdivisions

 

75,050

 

 

75,050

 

 

U.S. Government agencies collateralized by mortgage obligations

 

90,077

 

 

90,077

 

 

Other collateralized mortgage obligations

 

17,838

 

 

17,838

 

 

Corporate debt securities

 

504

 

 

504

 

 

Other equity securities

 

7,661

 

7,661

 

 

 

Total assets measured at fair value

 

$

191,325

 

$

7,661

 

$

183,664

 

$

 

 

Securities in Level 1 are mutual funds and fair values are based on quoted market prices for identical instruments traded in active markets.  Fair values for available-for-sale investment securities in Level 2 are based on quoted market prices for similar securities.

 

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows for the year ended December 31, 2010 (in thousands).

 

 

 

Balance,
beginning
of year

 

Net
income

 

Other
comprehensive
income

 

Purchases,
sales, and
principal
payments

 

Transfers
into
Level 3

 

Transfers
out of
Level 3

 

Balance,
end of year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other collateralized mortgage obligations

 

$

5,724

 

$

13

 

$

93

 

$

(2,752

)

$

 

$

(3,078

)

$

 

Corporate debt securities

 

785

 

235

 

 

(1,020

)

 

 

 

Other equity securities

 

7,588

 

 

 

 

 

(7,588

)

 

Total assets and liabilities measured at fair value

 

$

14,097

 

$

248

 

$

93

 

$

(3,772

)

$

 

$

(10,666

)

$

 

 

Gains and losses (realized and unrealized) included in earnings (or changes in net assets) for the year ended December 31, 2010 totaled $248,000 and were included in non-interest income.

 

There were no liabilities measured at fair value on a recurring basis at December 31, 2010.

 

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Table of Contents

 

Non-recurring Basis

 

The Company may be required, from time to time, to measure certain assets at fair value on a non-recurring basis.  These include assets that are measured at the lower of cost or fair value that were recognized at fair value which was below cost at December 31, 2010 (in thousands).

 

Description

 

Fair
Value

 

Level 1

 

Level 2

 

Level 3

 

Total
Losses in
the Year

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

980

 

$

 

$

 

$

980

 

$

(248

)

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

1,016

 

 

 

1,016

 

(261

)

Real estate-construction and other land loans

 

4,773

 

 

 

4,773

 

(1,170

)

Commercial real estate

 

679

 

 

 

679

 

(47

)

Other real estate

 

1,865

 

 

 

1,865

 

(420

)

Total impaired loans

 

9,313

 

 

 

9,313

 

(2,146

)

Other real estate owned

 

1,325

 

 

 

1,325

 

(309

)

Other

 

98

 

 

 

98

 

 

Total assets measured at fair value on a non-recurring basis

 

$

10,736

 

$

 

$

 

$

10,736

 

$

(2,455

)

 

The fair value of impaired loans and other real estate owned is based on the fair value of the collateral for all collateral dependent loans and for other impaired loans is estimated using a discounted cash flow model.  Impaired loans and other real estate owned were determined to be collateral dependent and categorized as Level 3 due to ongoing real estate market conditions resulting in inactive market data, which in turn required the use of unobservable inputs and assumptions in fair value measurements.  There were no changes in valuation techniques used during the year ended December 31, 2010.

 

In accordance with the provisions of ASC 360-10, impaired loans with a carrying value of $11,436,000 were written down to their fair value of $9,313,000, resulting in a valuation allowance of $2,124,000.  The valuation allowance represents specific allocations for the allowance for credit losses for impaired loans.

 

The fair value of real estate is based on property appraisals at the time of transfer and as appropriate thereafter, less estimated costs to sell.  Other real estate owned is periodically reviewed to determine whether the property continues to be carried at the lower of its recorded book value or estimated fair value, net of estimated selling costs.  In 2010, other real estate properties were written down $309,000 to their estimated fair values of $1,325,000. In 2010, other repossessed assets were recorded at their estimated realizable value of $98,000.

 

There were no liabilities measured at fair value on a non-recurring basis at December 31, 2010.

 

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Table of Contents

 

Note 6.  Loans

 

Outstanding loans are summarized as follows:

 

Loan Type

 

September 30, 2011

 

% of Total
Loans

 

December 31, 2010

 

% of Total
Loans

 

 

 

(Dollars in thousands)

 

 

 

(Dollars in thousands)

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

74,305

 

17.5

%

$

87,628

 

20.3

%

Agricultural production

 

30,774

 

7.2

%

17,545

 

4.1

%

Total commercial

 

105,079

 

24.7

%

105,173

 

24.4

%

Real estate:

 

 

 

 

 

 

 

 

 

Owner occupied

 

111,038

 

26.1

%

111,890

 

25.9

%

Real estate-construction and other land loans

 

32,237

 

7.6

%

32,848

 

7.6

%

Commercial real estate

 

62,236

 

14.6

%

63,557

 

14.7

%

Agricultural real estate

 

46,008

 

10.8

%

44,205

 

10.2

%

Other

 

20,565

 

4.8

%

31,409

 

7.3

%

Total real estate

 

272,084

 

63.9

%

283,909

 

65.7

%

Consumer:

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

39,653

 

9.2

%

34,521

 

8.0

%

Consumer and installment

 

9,598

 

2.2

%

8,493

 

1.9

%

Total consumer

 

49,251

 

11.4

%

43,014

 

9.9

%

Deferred loan fees, net

 

(648

)

 

 

(499

)

 

 

Total gross loans

 

425,766

 

100.0

%

431,597

 

100.0

%

Allowance for credit losses

 

(11,031

)

 

 

(11,014

)

 

 

Total loans

 

$

414,735

 

 

 

$

420,583

 

 

 

 

At September 30, 2011 and December 31, 2010, loans originated under Small Business Administration (SBA) programs totaling $6,985,000 and $7,932,000, respectively, were included in the real estate and commercial categories.

 

Note 7.  Allowance for Credit Losses

 

The following table shows the allocation of the allowance for loan losses as of and for the three months ended September 30, 2011 by class of loan and by impairment methodology (in thousands):

 

 

 

Commercial

 

Real Estate

 

Consumer

 

Unallocated

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

Beginning balance, July 1, 2011

 

$

2,926

 

$

5,508

 

$

1,296

 

$

1,305

 

$

11,035

 

Charge-offs

 

(38

)

(286

)

(401

)

 

(725

)

Recoveries

 

69

 

178

 

74

 

 

321

 

Provision

 

(179

)

1,155

 

500

 

(1,076

)

400

 

Ending balance, September 30, 2011

 

$

2,778

 

$

6,555

 

$

1,469

 

$

229

 

$

11,031

 

 

19



Table of Contents

 

The following table shows the allocation of the allowance for loan losses as of and for the nine-month period ended September 30, 2011 by class of loan and by impairment methodology (in thousands):

 

 

 

Commercial

 

Real Estate

 

Consumer

 

Unallocated

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

Beginning balance, January 1, 2011

 

$

2,599

 

$

6,998

 

$

1,179

 

$

238

 

$

11,014

 

Charge-offs

 

(254

)

(312

)

(900

)

 

(1,466

)

Recoveries

 

219

 

257

 

257

 

 

733

 

Provision

 

214

 

(388

)

933

 

(9

)

750

 

Ending balance, September 30, 2011

 

$

2,778

 

$

6,555

 

$

1,469

 

$

229

 

$

11,031

 

Ending balance: individually evaluated for impairment

 

$

226

 

$

1,855

 

$

233

 

$

 

$

2,314

 

Ending balance: collectively evaluated for impairment

 

$

2,552

 

$

4,700

 

$

1,236

 

$

229

 

$

8,717

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

105,079

 

$

272,084

 

$

49,251

 

$

 

$

426,414

 

Ending balance: individually evaluated for impairment

 

$

3,820

 

$

21,444

 

$

612

 

$

 

$

25,876

 

Ending balance: collectively evaluated for impairment

 

$

101,259

 

$

250,640

 

$

48,639

 

$

 

$

400,538

 

 

The following table shows the allocation of the allowance for loan losses at December 31, 2010 by class of loan and by impairment methodology (in thousands):

 

 

 

Commercial

 

Real Estate

 

Consumer

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

2,599

 

$

6,998

 

$

1,179

 

$

238

 

$

11,014

 

Ending balance: individually evaluated for impairment

 

$

226

 

$

1,898

 

$

 

$

 

$

2,124

 

Ending balance: collectively evaluated for impairment

 

$

2,373

 

$

5,100

 

$

1,179

 

$

238

 

$

8,890

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

105,173

 

$

283,909

 

$

43,014

 

$

 

$

432,096

 

Ending balance: individually evaluated for impairment

 

$

2,356

 

$

15,717

 

$

488

 

$

 

$

18,561

 

Ending balance: collectively evaluated for impairment

 

$

102,817

 

$

268,192

 

$

42,526

 

$

 

$

413,535

 

 

Changes in the allowance for credit losses were as follows (in thousands):

 

 

 

For the Three
Months Ended
September 30, 2010

 

For the Nine
Months Ended
September 30, 2010

 

 

 

 

 

 

 

Balance, beginning of period

 

$

11,468

 

$

10,200

 

Provision charged to operations

 

1,300

 

2,900

 

Losses charged to allowance

 

(1,904

)

(2,574

)

Recoveries

 

242

 

580

 

Balance, end of period

 

$

11,106

 

$

11,106

 

 

20



Table of Contents

 

The following table shows the loan portfolio allocated by management’s internal risk ratings at September 30, 2011 (in thousands):

 

Commercial Credit Exposure

Credit Risk Profile by Internally Assigned Grade

 

 

 

Commercial
and Industrial

 

Agricultural
Production

 

Owner
Occupied

 

Real Estate
Construction
and Other
Land Loans

 

Commercial Real
Estate

 

Agricultural
Real Estate

 

Other Real
Estate

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

65,557

 

$

30,774

 

$

102,106

 

$

11,937

 

$

46,114

 

$

43,822

 

$

17,621

 

Special Mention

 

3,388

 

 

2,837

 

6,900

 

6,396

 

2,186

 

1,263

 

Substandard

 

5,360

 

 

6,095

 

13,400

 

9,726

 

 

1,681

 

Doubtful

 

 

 

 

 

 

 

 

Total

 

$

74,305

 

$

30,774

 

$

111,038

 

$

32,237

 

$

62,236

 

$

46,008

 

$

20,565

 

 

Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

 

 

 

Equity Loans and
Lines of Credit

 

Consumer and
Installment

 

Grade:

 

 

 

 

 

Pass

 

$

37,683

 

$

8,465

 

Special mention

 

580

 

 

Substandard

 

1,390

 

130

 

Doubtful

 

 

 

Total

 

$

39,653

 

$

8,595

 

 

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

 

 

 

Credit Cards

 

 

 

Grade:

 

 

 

 

 

Performing

 

$

1,003

 

 

 

Non-Performing

 

 

 

 

Total

 

$

1,003

 

 

 

 

The following table shows the loan portfolio allocated by management’s internal risk ratings at December 31, 2010 (in thousands):

 

Commercial Credit Exposure

Credit Risk Profile by Internally Assigned Grade

 

 

 

Commercial
and Industrial

 

Agricultural
Land
& Production

 

Owner
Occupied

 

Real Estate
Construction
and Other
Land Loans

 

Commercial
Real Estate

 

Agricultural
Real Estate

 

Other Real
Estate

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

75,478

 

$

16,437

 

$

100,280

 

$

11,096

 

$

49,224

 

$

39,599

 

$

27,571

 

Special Mention

 

4,415

 

4

 

6,336

 

6,330

 

3,118

 

1,903

 

1,308

 

Substandard

 

7,735

 

1,104

 

5,274

 

15,422

 

11,215

 

2,703

 

2,530

 

Doubtful

 

 

 

 

 

 

 

 

Total

 

$

87,628

 

$

17,545

 

$

111,890

 

$

32,848

 

$

63,557

 

$

44,205

 

$

31,409

 

 

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Table of Contents

 

Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

 

 

 

Equity
Loans and
Lines of
Credit

 

Consumer
and
Installment

 

Grade:

 

 

 

 

 

Pass

 

$

33,228

 

$

7,269

 

Special mention

 

 

 

Substandard

 

1,293

 

135

 

Doubtful

 

 

 

Total

 

$

34,521

 

$

7,404

 

 

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

 

 

 

Credit
Cards

 

Grade:

 

 

 

Performing

 

$

1,089

 

Non-Performing

 

 

Total

 

$

1,089

 

 

The following table shows an aging analysis of the loan portfolio by the time past due at September 30, 2011 (in thousands):

 

 

 

30-59 Days
Past Due

 

60-89
Days Past
Due

 

Greater
Than

90 Days
Past Due

 

Total Past
Due

 

Current

 

Total
Loans

 

Recorded
Investment
> 90 Days
Accruing

 

Non-accrual

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

$

179

 

$

149

 

$

328

 

$

73,977

 

$

74,305

 

$

 

$

361

 

Agricultural land and production

 

 

 

 

 

30,774

 

30,774

 

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

224

 

 

122

 

346

 

110,692

 

111,038

 

 

2,137

 

Real estate construction and other land loans

 

 

 

 

 

32,237

 

32,237

 

 

6,929

 

Commercial real estate

 

1,585

 

1,903

 

 

3,488

 

58,748

 

62,236

 

 

5,074

 

Agricultural real estate

 

 

 

 

 

46,008

 

46,008

 

 

 

Other

 

 

 

 

 

20,565

 

20,565

 

 

1,681

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

 

 

 

 

39,653

 

39,653

 

 

 

Consumer and installment

 

49

 

 

97

 

146

 

9,452

 

9,598

 

 

612

 

Total

 

$

1,858

 

$

2,082

 

$

368

 

$

4,308

 

$

422,106

 

$

426,414

 

$

 

$

16,794

 

 

Of the $16,794,000 in non-accrual loans, only $368,000 are over 90 days past due.

 

22



Table of Contents

 

The following table shows an aging analysis of the loan portfolio by the time past due at December 31, 2010 (in thousands):

 

 

 

30-59 Days
Past Due

 

60-89
Days Past
Due

 

Greater
Than

90 Days
Past Due

 

Total Past
Due

 

Current

 

Total
Loans

 

Recorded
Investment
> 90 Days
Accruing

 

Non-
accrual

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

164

 

$

 

$

180

 

$

344

 

$

87,284

 

$

87,628

 

$

 

$

2,355

 

Agricultural la nd and production

 

 

 

 

 

17,545

 

17,545

 

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

863

 

 

 

863

 

111,027

 

111,890

 

 

3,777

 

Real estate construction and other land loans

 

 

 

5,634

 

5,634

 

27,214

 

32,848

 

 

7,827

 

Commercial real estate

 

2,316

 

 

726

 

3,042

 

60,515

 

63,557

 

 

1,828

 

Agricultural real estate

 

 

 

 

 

44,205

 

44,205

 

 

 

 

Other

 

 

 

 

 

31,409

 

31,409

 

 

2,286

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

 

 

 

 

34,521

 

34,521

 

 

 

Consumer and installment

 

78

 

 

 

78

 

8,415

 

8,493

 

 

488

 

Total

 

$

3,421

 

$

 

$

6,540

 

$

9,961

 

$

422,135

 

$

432,096

 

$

 

$

18,561

 

 

The following table shows information related to impaired loans at and for the nine months ended September 30, 2011 (in thousands):

 

 

 

 

 

Unpaid

 

 

 

Average

 

Interest

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,943

 

$

1,943

 

$

 

$

1,404

 

$

 

Agricultural land and production

 

 

 

 

 

 

Total commercial

 

1,943

 

1,943

 

 

1,404

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

704

 

773

 

 

840

 

 

Real estate construction and other land loans

 

6,860

 

7,203

 

 

3,491

 

 

Commercial real estate

 

2,277

 

2,369

 

 

1,914

 

 

Agricultural real estate

 

 

 

 

 

 

Other

 

 

 

 

221

 

 

Total real estate

 

9,841

 

10,345

 

 

6,466

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

 

 

 

347

 

 

Consumer and installment

 

 

 

 

 

 

Total consumer

 

 

 

 

347

 

 

Total with no related allowance recorded

 

$

11,784

 

$

12,288

 

$

 

$

8,217

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,877

 

$

1,897

 

$

226

 

$

721

 

$

 

Agricultural land and production

 

 

 

 

 

 

Total commercial

 

1,877

 

1,897

 

226

 

721

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

1,433

 

1,501

 

407

 

1,182

 

 

Real estate construction and other land loans

 

5,693

 

6,196

 

821

 

5,751

 

 

Commercial real estate

 

2,796

 

2,796

 

627

 

932

 

 

Agricultural real estate

 

 

 

 

 

 

Other

 

1,681

 

1,850

 

 

2,037

 

 

Total real estate

 

11,603

 

12,343

 

1,855

 

9,902

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

612

 

632

 

233

 

219

 

 

Consumer and installment

 

 

 

 

27

 

 

Total consumer

 

612

 

632

 

233

 

246

 

 

Total with an allowance recorded

 

$

14,092

 

$

14,872

 

$

2,314

 

$

10,869

 

$

 

Total

 

$

25,876

 

$

27,160

 

$

2,314

 

$

19,086

 

$

 

 

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The following table shows information related to impaired loans at and for the year ended December 31, 2010 (in thousands):

 

 

 

 

 

Unpaid

 

 

 

Average

 

Interest

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,150

 

$

1,174

 

$

 

$

865

 

$

 

Agricultural land and production

 

 

 

 

 

 

Total commercial

 

1,150

 

1,174

 

 

865

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

1,775

 

2,147

 

 

1,125

 

 

Real estate construction and other land loans

 

1,885

 

2,056

 

 

2,653

 

 

 

Commercial real estate

 

1,828

 

1,834

 

 

1,520

 

 

Other

 

 

 

 

 

 

Total real estate

 

5,488

 

6,037

 

 

5,298

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

488

 

506

 

 

284

 

 

 

Consumer and installment

 

 

 

 

 

 

Total consumer

 

488

 

506

 

 

284

 

 

Total with no related allowance recorded

 

$

7,126

 

$

7,717

 

$

 

$

6,447

 

$

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,206

 

$

1,299

 

$

227

 

$

1,664

 

$

 

Agricultural land and production

 

 

 

 

 

 

Total commercial

 

1,206

 

1,299

 

227

 

1,664

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

1,276

 

1,284

 

260

 

1,672

 

 

 

Real estate construction and other land loans

 

5,942

 

6,290

 

1,170

 

5,995

 

 

Commercial real estate

 

726

 

824

 

47

 

243

 

 

Other

 

2,285

 

2,300

 

420

 

1,165

 

 

Total real estate

 

10,229

 

10,698

 

1,897

 

9,075

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

 

 

 

214

 

 

Consumer and installment

 

 

 

 

251

 

 

Total consumer

 

 

 

 

465

 

 

Total with an allowance recorded

 

$

11,435

 

$

11,997

 

$

2,124

 

$

11,204

 

$

 

Total

 

$

18,561

 

$

19,714

 

$

2,124

 

$

17,651

 

$

 

 

Nonaccrual loans totaled $16,794,000 and $18,561,000 at September 30, 2011 and December 31, 2010, respectively.  Foregone interest on nonaccrual loans totaled $749,000 and $897,000 for the nine month periods ended September 30, 2011 and 2010, respectively.  For the three month periods ended September 30, 2011 and 2010, foregone interest on nonaccrual loans totaled $281,000 and $376,000, respectively. There were no accruing loans past due 90 days or more at September 30, 2011 and December 31, 2010.

 

Included in the impaired and nonaccrual loans above at September 30, 2011 are 12 loans considered troubled debt restructurings totaling $25,876,000.  Included in the impaired and nonaccrual loans above are seven loans in the amount of $6,180,000 that were considered to be troubled debt restructurings at December 31, 2010.

 

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Troubled Debt Restructurings:

 

The Company has allocated $1,463,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2011.   The Company has committed to lend additional amounts totaling up to $490,000 as of September 30, 2011 to customers with outstanding loans that are classified as troubled debt restructurings.

 

During the nine month period ending September 30, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.  During the same period, there were no troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower were forgiven.

 

Modifications involving a reduction of the stated interest rate occurred on one loan which will mature the first quarter of 2012.  Modifications involving an extension of the maturity date were for periods ranging from one month to three years.

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ending September 30, 2011 (in thousands):

 

 

 

Number of
Loans

 

Pre-Modification
Outstanding Recorded
Investment

 

Post-Modification
Outstanding Recorded
Investment

 

Troubled Debt Restructurings:

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

Commercial and Industrial

 

2

 

$

3,089

 

$

3,089

 

 

 

 

 

 

 

 

 

Total commercial

 

2

 

3,089

 

3,089

 

Real Estate:

 

 

 

 

 

 

 

Owner occupied

 

1

 

1,074

 

1,074

 

Real estate-construction and other land loans

 

3

 

11,094

 

11,094

 

Commercial real estate

 

1

 

1,211

 

1,211

 

Other

 

1

 

2,271

 

2,271

 

Total real estate

 

6

 

15,650

 

15,650

 

Total

 

8

 

$

18,739

 

$

18,739

 

 

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The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within 12 months following the modification during the nine months ended September 30, 2011 (in thousands):

 

 

 

Number of
Loans

 

Recorded
Investment

 

Troubled Debt Restructurings That Subsequently Defaulted

 

 

 

 

 

Real Estate:

 

 

 

 

 

Commercial real estate

 

1

 

$

1,211

 

Total real estate

 

1

 

1,211

 

Total

 

1

 

$

1,211

 

 

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

 

The troubled debt restructurings described above resulted in an increase to the specific reserves added to the allowance for credit losses of $427,000 and resulted in no charge offs during the nine months ending September 30, 2011.

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ending September 30, 2011 (in thousands):

 

 

 

 

 

Pre-Modification
Outstanding Recorded

 

Post-Modification
Outstanding Recorded

 

 

 

Number of Loans

 

Investment

 

Investment

 

Troubled Debt Restructurings:

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

Commercial and Industrial

 

2

 

$

3,089

 

$

3,089

 

Total commercial

 

2

 

3,089

 

3,089

 

Real Estate:

 

 

 

 

 

 

 

Owner occupied

 

 

 

 

 

 

 

Real estate-construction and other land loans

 

3

 

11,094

 

11,094

 

Commercial real estate

 

1

 

1,211

 

1,211

 

Total real estate

 

4

 

12,305

 

12,305

 

Total

 

6

 

$

15,394

 

$

15,394

 

 

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within 12 months following the modification during the three months ending September 30, 2011 (in thousands):

 

 

 

Number of
Loans

 

Recorded
Investment

 

Troubled Debt Restructurings That Subsequently Defaulted

 

 

 

 

 

Real Estate:

 

 

 

 

 

Commercial real estate

 

1

 

$

1,211

 

Total real estate

 

1

 

1,211

 

Total

 

1

 

$

1,211

 

 

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

 

The troubled debt restructurings described above resulted in an increase to the specific reserves added to the allowance for credit losses of $427,000 and resulted in no charge offs during the three month period ending September 30, 2011.

 

 

Note 8.  Goodwill and Intangible Assets

 

Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill.  Total goodwill at September 30, 2011 was $23,577,000 consisting of $14,643,000 and $8,934,000 representing the excess of the cost of Service 1 st  Bank and Bank of Madera County, respectively, over the net amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting.  The value of goodwill is ultimately derived from the Bank’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes.  A decline in net

 

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earnings could be indicative of a decline in the fair value of goodwill and result in impairment.  For that reason, goodwill is assessed at least annually for impairment. In 2011, ASU 2011-08 was issued that provided additional guidance on the determination of whether an impairment of goodwill has occurred, including the introduction of a qualitative review of factors that might indicate that a goodwill impairment has occurred.  ASU 2011-08 is effective for our 2012 reporting year but allows early adoption.  As such, we early adopted this standard as of September 30, 2011.  Management performed our annual impairment test in the third quarter of 2011 utilizing qualitative factors including general economic conditions, industry and competitive environment, overall financial performance, and other relevant entity-specific events.  Management believes that factors cited in the ASU are sufficient and comprehensive and as such, no further factors need to be assessed at this time, and determined there was no impairment.

 

Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount.  No such events or circumstances arose during the first nine months of 2011.

 

The intangible assets at September 30, 2011 represent the estimated fair value of the core deposit relationships acquired in the acquisition of Service 1 st  Bank in 2008 of $1,400,000 and the 2005 acquisition of Bank of Madera County of $1,500,000.  Core deposit intangibles are being amortized by the straight-line method over an estimated life of seven years from the date of acquisition.  The carrying value of intangible assets at September 30, 2011 was $887,000 net of $2,013,000 in accumulated amortization expense.  Management evaluates the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization.  Based on the evaluation, no changes to the remaining useful lives was required in the third quarter of 2011.  Management performed our annual impairment test on core deposit intangibles as of September 30, 2011 and determined there was no impairment.  Amortization expense recognized was $104,000 for the three month periods ended September 30, 2011 and 2010 and $311,000 for the nine month periods ended September 30, 2011 and 2010.

 

Note 9.  Comprehensive Income

 

Total comprehensive income is comprised of unrealized gains, net of taxes, on available-for-sale investment securities, which is the Company’s only source of other comprehensive income. Total comprehensive income was $8,459,000 and $6,782,000 for the nine months ended September 30, 2011 and 2010, respectively.  Total comprehensive income was $2,733,000 and $3,041,000 for the three months ended September 30, 2011 and 2010, respectively.

 

At September 30, 2011 and December 31, 2010, accumulated other comprehensive income totaled $4,657,000 and $967,000, respectively, and is reflected, net of taxes, as a component of shareholders’ equity.

 

Note 10.  Commitments and Contingencies

 

In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit . These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for loans.

 

Commitments to extend credit amounting to $128,944,000 and $123,676,000 were outstanding at September 30, 2011 and December 31, 2010, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract unless waived by the bank. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

 

Included in commitments to extend credit are undisbursed lines of credit totaling $128,624,000 and $123,311,000 at September 30, 2011 and December 31, 2010, respectively.  Undisbursed lines of credit are revolving lines of credit whereby customers can repay principal and request principal advances during the term of the loan at their discretion and most expire between one and 12 months.

 

The Company has undisbursed portions of construction loans totaling $2,598,000 and $2,380,000 as of September 30, 2011 and December 31, 2010, respectively. These commitments are agreements to lend to a customer, subject to meeting certain construction progress requirements established in the contract. The underlying construction loans have fixed expiration dates.

 

Standby letters of credit and financial guarantees amounting to $320,000 and $365,000 were outstanding at September 30, 2011 and December 31, 2010 respectively. Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. Most standby letters of credit and guarantees carry a one year term or less. The fair value of the liability related to these standby letters of credit, which represents the fees received for their issuance, was not significant at September 30, 2011 and December 31, 2010.  The Company recognizes these fees as revenue over the term of the commitment or when the commitment is used.

 

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The Company generally requires collateral or other security to support financial instruments with credit risk. Management does not anticipate any material loss will result from the outstanding commitments to extend credit, standby letters of credit and financial guarantees.

 

The Company is subject to legal proceedings and claims which arise in the ordinary course of business.  In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or consolidated results of operations of the Company.

 

Note 11.  Income Taxes

 

The Company files its income taxes on a consolidated basis with its subsidiary.  The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes.  Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  On the consolidated balance sheets, net deferred tax assets are included in accrued interest receivable and other assets. The Company establishes a tax valuation allowance when it is more likely than not that a recorded tax benefit is not expected to be fully realized. The expense to create the tax valuation is recorded as an additional income tax expense in the period the tax valuation allowance is created.  Based on management’s analysis as of September 30, 2011, the Company established a deferred tax valuation allowance in the amount of $118,000 for California capital loss carryforwards.

 

Accounting for uncertainty in income taxes - The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.  The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense in the consolidated statements of income.  During the nine months ended September 30, 2011, the Company increased its reserve for uncertain tax positions attributable to tax credits and deductions related to enterprise zone activities in California.

 

Note 12.  Borrowing Arrangements

 

Federal Home Loan Bank Advances:  Advances from the Federal Home Loan Bank (FHLB) of San Francisco consisted of the following:

 

2011

 

Amount

 

Rate

 

Maturity Date

 

(Dollars in thousands)

 

 

 

 

 

 

 

$

4,000

 

3.59

%

February 12, 2013

 

 

 

 

 

 

4,000

 

 

 

 

 

 

 

 

 

 

 

 

Less short-term portion

 

 

 

$

 4,000

 

 

 

 

 

 

2010

 

Amount

 

Rate

 

Maturity Date

 

(Dollars in thousands)

 

 

 

 

 

 

 

$

 5,000

 

3.00

%

February 7, 2011

 

5,000

 

3.10

%

February 14, 2011

 

4,000

 

3.59

%

February 12, 2013

 

14,000

 

 

 

 

 

 

 

 

 

 

 

(10,000

)

Less short-term portion

 

 

 

$

 4,000

 

 

 

 

 

 

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FHLB advances are secured by investment securities with amortized costs totaling $17,157,000 and $31,918,000, and market values totaling $17,803,000 and $33,214,000 at September 30, 2011 and December 31, 2010, respectively.  The Bank’s credit limit varies according to the amount and composition of the investment and loan portfolios pledged as collateral.

 

As of September 30, 2011 and December 31, 2010, the Company had no Federal funds purchased.

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Certain matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements contained herein that are not historical facts, such as statements regarding the Company’s current business strategy and the Company’s plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties.  Such risks and uncertainties include, but are not limited to (1) significant increases in competitive pressure in the banking industry; (2) the impact of changes in interest rates, a decline in economic conditions at the international, national or local level on the Company’s results of operations, the Company’s ability to continue its internal growth at historical rates, the Company’s ability to maintain its net interest margin, and the quality of the Company’s earning assets; (3) changes in the regulatory environment; (4) fluctuations in the real estate market; (5) changes in business conditions and inflation; (6) changes in securities markets; and (7) risks associated with acquisitions, relating to difficulty in integrating combined operations and related negative impact on earnings, and incurrence of substantial expenses.  Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company.

 

When the Company uses in this Quarterly Report on Form 10-Q the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “commit,” “believe”“ and similar expressions, the Company intends to identify forward-looking statements.  Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report on Form 10-Q.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.  The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements.  Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict.  For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

The Securities and Exchange Commission (SEC) maintains a web site which contains reports, proxy statements, and other information pertaining to registrants that file electronically with the SEC, including the Company. The internet address is: www.sec.gov. In addition, our periodic and current reports are available free of charge on our website at www.cvcb.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the Company’s most critical accounting policies are those which the Company’s financial condition depends upon, and which involve the most complex or subjective decisions or assessments.

 

There have been no material changes to the Company’s critical accounting policies during 2011.  Please refer to the Company’s 2010 Annual Report to Shareholders on Form 10-K for a complete listing of critical accounting policies.

 

This discussion should be read in conjunction with our unaudited consolidated financial statements, including the notes thereto, appearing elsewhere in this report.

 

OVERVIEW

 

Third Quarter of 2011

 

In the third quarter of 2011, our consolidated net income was $1,408,000 compared to net income of $864,000 for the same period in 2010.  Diluted EPS was $0.13 for the third quarter of September 30, 2011 compared to $0.08 for the same period in 2010.  While net

 

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interest income before the provision for credit losses for the period decreased compared to net interest income for the corresponding period in 2010, net income before the provision for credit losses increased primarily as a result of lower provision for credit losses and an increase in non-interest income. The provision for credit losses was $400,000 for the third quarter of 2011 compared to $1,300,000 for the third quarter of 2010, a decrease of $900,000. Net interest income before the provision for credit losses decreased $224,000 or 2.74%.  The yield on average total interest-earning assets decreased 66 basis points comparing the quarter ended September 30, 2011 to the same period in 2010 while interest rates on deposits decreased 26 basis points resulting in a 44 basis point decrease in net interest margin.  Net interest margin (fully tax equivalent basis) was 4.66% for the quarter ended September 30, 2011 compared to 5.10% for the same period in 2010.  Non-interest income increased $302,000 or 23.36% primarily due to an increase in net realized gains on sales and calls of investment securities of $242,000. In the third quarter of 2011 non-interest income also included a $75,000 gain from sale of other real estate owned. Non-interest expense decreased $187,000 or 2.52% for the same periods mainly due to decreases in regulatory assessments and other real estate owned expenses, partially offset by increases in salary and employee benefits.  The Company recorded a provision for income taxes of $514,000 for the third quarter 2011, compared to tax benefit of $107,000 for the same period in 2010.  The effective tax rate for the third quarter was 26.74%, whereas during the same period in 2010 the Company had a tax benefit. The increase in the effective tax rate is due to the establishment of an $118,000 deferred tax asset valuation allowance related to a California capital loss carryforward, an increase in taxable income and a decrease in permanent tax differences as a percentage of taxable income.

 

Annualized return on average equity for the third quarter of 2011 was 5.34% compared to 3.53% for the same period in 2010.  Total average equity was $105,485,000 for the third quarter 2011 compared to $97,893,000 for the third quarter 2010.  The growth in capital was driven by net income during the period, an increase in other comprehensive income, and the issuance of common stock from the exercise of stock options.

 

First Nine Months of 2011

 

For the nine months ended September 30, 2011, our consolidated net income was $4,769,000 compared to net income of $2,660,000 for the same period in 2010.  Diluted EPS was $0.46 for the first nine months of 2011 compared to $0.26 for the first nine months of 2010.  While net interest income before the provision for credit losses for the period decreased compared to the corresponding period in 2010, net income after the provision for credit losses increased primarily as a result of lower provision for credit losses and an increase in non-interest income.  During the nine month period ended September 30, 2011 our net interest margin (fully tax equivalent basis) decreased 37 basis points to 4.68%.  Net interest income before the provision for credit losses decreased $748,000 or 3.11%.  Non-interest income increased $1,565,000 or 46.37%, provision for credit losses decreased $2,150,000 and non-interest expense decreased $313,000 in the first nine months of 2011 compared to 2010.

 

Annualized return on average equity for the nine months ended September 30, 2011 was 6.21% compared to 3.71% for the same period in 2010.  Annualized return on average assets for the nine months ended September 30, 2011 was 0.81% compared to 0.47% for the same period in 2010.  Total average equity was $102,321,000 for the nine months ended September 30, 2011 compared to $95,579,000 for the same period in 2010.  The growth in capital was driven by net income during the period, an increase in other comprehensive income, and the issuance of common stock from the exercise of stock options.

 

Our average total assets increased $33,511,000 or 4.45% in the first three quarters of 2011 compared to the first three quarters of 2010.  Total average interest-earning assets increased $34,857,000 or 5.22% comparing the first three quarters of 2011 compared to the first three quarters of 2010.  Average total loans decreased $26,855,000 or 5.86% while average total investments increased $60,602,000 or 27.18% in the nine month period ended September 30, 2011 compared to the same period in 2010.  Average interest-bearing liabilities decreased $2,562,000 or 0.51% over the same period.

 

Our net interest margin (fully tax equivalent basis) for the first nine months ended September 30, 2011 was 4.68% compared to 5.05% for the same period in 2010.  The margin decreased principally due to the decrease in yields on interest-earning assets outpacing the decrease in rates on interest-bearing liabilities.  The effective yield on interest earning assets decreased 61 basis points to 5.11% for the nine month period ended September 30, 2011 compared to 5.72% for the same period in 2010.  For the nine months ended September 30, 2011, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks decreased 124 basis points, while the effective yield on loans increased two basis points.  The cost of total interest-bearing liabilities decreased 28 basis points to 0.61% compared to 0.89% for the same period in 2010. The cost of total deposits, including noninterest bearing accounts decreased 20 basis points to 0.42% for the nine months ended September 30, 2011 compared to 0.62% for the same period in 2010.

 

Net interest income before the provision for credit losses for the first three quarters of 2011 was $23,341,000 compared to $24,089,000 for the same period in 2010, a decrease of $748,000 or 3.11%.  Net interest income before the provision for credit losses decreased as a result of the decrease in net interest margin as discussed above and a decrease in total average loans.  The Bank had non-accrual loans totaling $16,794,000 at September 30, 2011, compared to $18,561,000 at December 31, 2010 and $18,842,000 at September 30, 2010.  The Company had $270,000 in other real estate owned at September 30, 2011, compared to $1,325,000 at December 31, 2010, and $3,277,000 at September 30, 2010.

 

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Central Valley Community Bancorp (Company)

 

We are a central California-based bank holding company for a one-bank subsidiary, Central Valley Community Bank (Bank).  We provide traditional commercial banking services to small and medium-sized businesses and individuals in the communities along the Highway 99 corridor in the Fresno, Madera, Merced, Sacramento, Stanislaus, and San Joaquin Counties of central California.  Additionally, we have a private banking office in Sacramento County.  As a bank holding company, the Company is subject to supervision, examination and regulation by the Federal Reserve Bank.

 

At September 30, 2011, we had total net loans of $414,735,000, total assets of $834,908,000, total deposits of $706,291,000, and shareholders’ equity of $106,347,000.

 

Central Valley Community Bank (Bank)

 

The Bank commenced operations in January 1980 as a state-chartered bank.  As a state-chartered bank, the Bank is subject to primary supervision, examination and regulation by the Department of Financial Institutions.  The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the applicable limits thereof, and the Bank is subject to supervision, examination and regulations of the FDIC.

 

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act permanently raises the current standard maximum deposit insurance amount to $250,000 and extended unlimited FDIC deposit insurance to qualifying noninterest-bearing transaction accounts through December 31, 2012.

 

The Bank operates 17 branches which serve the communities of Clovis, Fresno, Kerman, Lodi, Madera, Merced, Modesto, Oakhurst, Prather, Sacramento, Stockton, and Tracy, California.  Additionally the Bank operates Real Estate, Agribusiness and SBA departments that originate loans in California. According to the June 30, 2011 FDIC data, the Bank’s branches in Fresno, Madera and San Joaquin Counties had a 3.39% combined deposit market share of all insured depositories.

 

Key Factors in Evaluating Financial Condition and Operating Performance

 

As a publicly traded community bank holding company, we focus on several key factors including:

 

·                                           Return to our stockholders;

·                                           Return on average assets;

·                                           Development of core earnings, including net interest income and non-interest income;

·                                           Asset quality;

·                                           Asset growth;

·                                           Capital adequacy;

·                                           Operating efficiency; and

·                                           Liquidity

 

Return to Our Stockholders

 

Our return to our stockholders is measured in a ratio that measures the return on average equity (ROE).  Our annualized ROE was 6.21% for the nine months ended September 30, 2011 compared to 3.41% for the year ended December 31, 2010 and 3.71% for the nine months ended September 30, 2010.  Our net income for the nine months ended September 30, 2011 increased $2,109,000 or 79.29% to $4,769,000 compared to $2,660,000 for the nine months ended September 30, 2010.  Net income increased due to decreases in the provision for credit losses and an increase in non-interest income. Net interest margin (NIM) decreased 37 basis points comparing the nine month periods ended September 30, 2011 and 2010.  Diluted EPS was $0.46 for the nine months ended September, 2011 and $0.26 for the same period in 2010.

 

Return on Average Assets

 

Our return on average assets (ROA) is a ratio that measures our performance compared with other banks and bank holding companies.  Our annualized ROA for the nine months ended September 30, 2011 was 0.81% compared to 0.43% for the year ended December 31, 2010 and 0.47% for the nine months ended September 30, 2010.  The increase in ROA compared to December 2010 is due to the increase in net income relative to total average assets.  Average assets for the nine months ended September 30, 2011 were $786,394,000 compared to $758,852,000 for the year ended December 31, 2010.  ROA for our peer group was 0.38% for the quarter ended June 30, 2011.  Peer group from SNL Financial data includes certain bank holding companies in central California with assets from $300 million to $1 billion that are not subchapter S corporations.

 

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Development of Core Earnings

 

Over the past several years, we have focused on not only improving net income, but improving the consistency of our revenue streams in order to create more predictable future earnings and reduce the effect of changes in our operating environment on our net income.  Specifically, we have focused on net interest income through a variety of processes, including increases in average interest earning assets as a result of loan generation and retention, and minimizing the effects of the recent interest rate decline on our net interest margin by focusing on core deposits and managing the cost of funds.  The Company’s net interest margin (fully tax equivalent basis) was 4.68% for the nine months ended September 30, 2011, compared to 5.05% for the same period in 2010.  The decrease in net interest margin is principally due to a decrease in the yield on earning assets which was greater than the decrease in our rates on interest-bearing liabilities.  In comparing the two periods, the effective yield on total earning assets decreased 61 basis points, while the cost of total interest bearing liabilities decreased 28 basis points and the cost of total deposits decreased 20 basis points.  The Company’s total cost of deposits for the nine months ended September 30, 2011 was 0.42% compared to 0.62% for the same period in 2010.  At September 30, 2011, 26.46% of the Company’s average deposits were non-interest bearing compared to 23.20% for the Company’s peer group as of June 30, 2011.  Net interest income before the provision for credit losses for the nine month period ended September 30, 2011 was $23,341,000 compared to $24,089,000 for the same period in 2010.

 

Our non-interest income is generally made up of service charges and fees on deposit accounts, fee income from loan placements and other services, and gains from sales of investment securities offset by other-than-temporary impairment losses.  Non-interest income for the nine months ended September 30, 2011 increased $1,565,000 or 46.37% to $4,940,000 compared to $3,375,000 for the nine months ended September 30, 2010.  The increase is mainly due to a gain on the sale of other real estate owned, a decrease in OTTI charges, and gain on sales of investment securities.  Further detail of non-interest income is provided below.

 

Asset Quality

 

For all banks and bank holding companies, asset quality has a significant impact on the overall financial condition and results of operations.  Asset quality is measured in terms of non-performing assets as a percentage of total assets, and is a key element in estimating the future earnings of a company.  The Company had non-performing loans totaling $16,794,000 or 3.94% of total loans as of September 30, 2011 and $18,561,000 or 4.30% of total loans at December 31, 2010.  Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on non-accrual status until such time as management has determined that the loans are likely to remain current in future periods and collectability has been reasonably assured.  The Company had $270,000 in other real estate owned at September 30, 2011, compared to $1,325,000 at December 31, 2010.

 

Asset Growth

 

As revenues from both net interest income and non-interest income are a function of asset size, the growth in assets has a direct impact in increasing net income and therefore ROE and ROA.  The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth.  Total assets increased by $57,314,000 or 7.37%during the nine months ended September 30, 2011 to $834,908,000 compared to $777,594,000 as of December 31, 2010.  Total gross loans decreased $5,831,000 to $425,766,000 as of September 30, 2011 compared to $431,597,000 as of December 31, 2010.  Total deposits increased 8.58% to $706,291,000 as of September 30, 2011 compared to $650,495,000 as of December 31, 2010.  Our loan to deposit ratio at September 30, 2011 was 60.28% compared to 66.35% at December 31, 2010.  The loan to deposit ratio of our peers was 78.36% at June 30, 2011.  Further discussion of loans and deposits is below.

 

Capital Adequacy

 

Capital serves as a source of funds and helps protect depositors and shareholders against potential losses.  The Company has historically maintained substantial levels of capital.  The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions.  Maintenance of adequate capital levels is integral to providing stability to the Company.  The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions including acquisition opportunities.

 

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At September 30, 2011, we had a Total Risk-Based Capital to Risk-Weighted Assets Ratio of 17.25%, a Tier 1 Risk-Based Capital Ratio of 15.95% and a Tier 1 Leverage Ratio of 10.19%.  At December 31, 2010, we had a Total Risk-Based Capital to Risk-Weighted Assets Ratio of 15.42%, a Tier 1 Risk-Based Capital Ratio of 14.16% and a Tier 1 Leverage Ratio of 9.48%.  At September 30, 2011, on a stand-alone basis, the Bank had a Total Risk-Based Capital Ratio of 17.05%, a Tier 1 Risk-Based Capital Ratio of 15.76% and a Tier 1 Leverage Ratio of 10.07%.  At December 31, 2010, the Bank had a Total Risk-Based Capital Ratio of 15.19%, a Tier 1 Risk-Based Capital Ratio of 13.92% and a Tier 1 Leverage Ratio of 9.32%.  The improvement in 2011 is due to an increase in risk adjusted capital coupled with a decrease in disallowed deferred taxes.

 

Operating Efficiency

 

Operating efficiency is the measure of how efficiently earnings before provision for credit losses and taxes are generated as a percentage of revenue.  A lower ratio is more favorable.  The Company’s efficiency ratio (operating expenses, excluding amortization of intangibles and foreclosed property expense divided by net interest income before provision for credit losses plus non-interest income, excluding gains from sales of securities and OREO) was 76.93% for the first nine months of 2011 compared to 73.49% for the first nine months of 2010.  The deterioration in the efficiency ratio is primarily due to a decrease in net interest income and an increase in operating expenses.  Further discussion of the decrease in net interest income and increase in operating expenses is below.

 

The Company’s net interest income before provision for credit losses plus non-interest income, net of OREO related gains, and investment securities related gains (losses), decreased 2.41% to $27,455,000 for the first nine months of 2011 compared to $28,132,000 for the same period in 2010, while operating expenses, net of OREO related expenses, loss on sale of assets and amortization of core deposit intangibles, increased 2.15% to $21,120,000 from $20,675,000 for the same period in 2010.

 

Liquidity

 

Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers’ credit needs, funding of securities purchases, and ongoing repayment of borrowings.  Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Directors’ Asset/Liability Committee.  This process is intended to ensure the maintenance of sufficient liquidity to meet our funding needs, including adequate cash flow for off-balance sheet commitments.  Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities and advances from the Federal Home Loan Bank of San Francisco (FHLB).  We have available unsecured lines of credit with correspondent banks totaling approximately $39,000,000 and secured borrowing lines of approximately $118,841,000 with the FHLB.  These funding sources are augmented by collection of principal and interest on loans, the routine maturities and pay downs of securities from our investment securities portfolio, the stability of our core deposits, and the ability to sell investment securities.  Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses.

 

RESULTS OF OPERATIONS

 

Net Income for the First Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010:

 

Net income increased to $4,769,000 for the nine months ended September 30, 2011 compared to $2,660,000 for the nine months ended September 30, 2010.  Basic earnings per share were $0.46 and $0.26 for the nine months ended September 30, 2011 and 2010, respectively.  Diluted earnings per share were $0.46 and $0.26 for the nine months ended September 30, 2011 and 2010, respectively.  Annualized ROE was 6.21% for the nine months ended September 30, 2011 compared to 3.71% for the nine months ended September 30, 2010.  Annualized ROA for the nine months ended September 30, 2011 was 0.81% compared to 0.47% for the nine months ended September 30, 2010.

 

The increase in net income for the nine months ended September 30, 2011 compared to the same period in 2010 can be attributed to decreases in the provision for credit losses and increases in non-interest income partially offset by decreases in net interest income.  Net interest income decreased due to a decrease in the yield on our investment securities, offset by an increase in average earning assets and interest bearing liabilities.  The increase in non-interest income is due to a gain on sale of other real estate owned, a gain related to the final distribution of the Service 1 st  escrow account, a gain related to the collection of life insurance proceeds, and a decrease in other than temporary impairment charges.  Non-interest expenses decreased due to a decrease in OREO related expenses, legal fees, and regulatory assessments, partially offset by increases in salary and employee benefits expense.  Further discussion of non-interest expenses is below.

 

Interest Income and Expense

 

Net interest income is the most significant component of our income from operations.  Net interest income (the “interest rate spread”) is the difference between the gross interest and fees earned on the loan and investment portfolio and the interest paid on deposits and other borrowings.  Net interest income depends on the volume of and interest rate earned on interest earning assets and the volume of and interest rate paid on interest bearing liabilities.

 

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The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented.  Average balances are derived from daily balances, and non-accrual loans are not included as interest earning assets for purposes of this table.

 

CENTRAL VALLEY COMMUNITY BANCORP

SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES

(Dollars in thousands)

 

 

 

FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2011

 

FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2010

 

 

 

Average
Balance

 

Interest
Income/

Expense

 

Average
Interest
Rate

 

Average
Balance

 

Interest
Income/

Expense

 

Average
Interest
Rate

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning deposits in other banks

 

$

73,148

 

$

141

 

0.26

%

$

31,609

 

$

62

 

0.26

%

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

137,466

 

3,307

 

3.21

%

125,884

 

4,282

 

4.54

%

Non-taxable securities (1)

 

72,310

 

3,821

 

7.05

%

64,757

 

3,450

 

7.10

%

Total investment securities

 

209,776

 

7,128

 

4.53

%

190,641

 

7,732

 

5.41

%

Federal funds sold

 

643

 

1

 

0.21

%

715

 

1

 

0.19

%

Total securities

 

283,567

 

7,270

 

3.42

%

222,965

 

7,795

 

4.66

%

Loans (2) (3)

 

415,983

 

19,662

 

6.32

%

441,614

 

20,816

 

6.30

%

Federal Home Loan Bank stock

 

2,981

 

6

 

0.27

%

3,095

 

8

 

0.34

%

Total interest-earning assets

 

702,531

 

$

26,938

 

5.11

%

667,674

 

$

28,619

 

5.72

%

Allowance for credit losses

 

(10,994

)

 

 

 

 

(10,796

)

 

 

 

 

Nonaccrual loans

 

15,523

 

 

 

 

 

16,747

 

 

 

 

 

Other real estate owned

 

266

 

 

 

 

 

3,089

 

 

 

 

 

Cash and due from banks

 

17,678

 

 

 

 

 

16,155

 

 

 

 

 

Bank premises and equipment

 

5,731

 

 

 

 

 

6,162

 

 

 

 

 

Other non-earning assets

 

55,659

 

 

 

 

 

53,852

 

 

 

 

 

Total average assets

 

$

786,394

 

 

 

 

 

$

752,883

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings and NOW accounts

 

$

149,292

 

$

291

 

0.26

%

$

141,203

 

$

389

 

0.37

%

Money market accounts

 

170,722

 

560

 

0.44

%

155,898

 

810

 

0.69

%

Time certificates of deposit, under $100,000

 

64,628

 

417

 

0.86

%

70,290

 

708

 

1.35

%

Time certificates of deposit, $100,000 and over

 

104,533

 

808

 

1.03

%

115,189

 

1,005

 

1.17

%

Total interest-bearing deposits

 

489,175

 

2,076

 

0.57

%

482,580

 

2,912

 

0.81

%

Other borrowed funds

 

10,639

 

216

 

2.71

%

19,796

 

437

 

2.95

%

Total interest-bearing liabilities

 

499,814

 

$

2,292

 

0.61

%

502,376

 

$

3,349

 

0.89

%

Non-interest bearing demand deposits

 

176,018

 

 

 

 

 

148,253

 

 

 

 

 

Other liabilities

 

8,241

 

 

 

 

 

6,675

 

 

 

 

 

Shareholders’ equity

 

102,321

 

 

 

 

 

95,579

 

 

 

 

 

Total average liabilities and shareholders’ equity

 

$

786,394

 

 

 

 

 

$

752,883

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income and rate earned on average earning assets

 

 

 

$

26,938

 

5.11

%

 

 

$

28,619

 

5.72

%

Interest expense and interest cost related to average interest-bearing liabilities

 

 

 

2,292

 

0.61

%

 

 

3,349

 

0.89

%

Net interest income and net interest margin (4)

 

 

 

$

24,646

 

4.68

%

 

 

$

25,270

 

5.05

%

 


(1)

Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $1,299 and $1,173 in 2011 and 2010 respectively.

(2)

Loan interest income includes loan fees of $314 in 2011 and $344 in 2010

(3)

Average loans do not include non-accrual loans.

(4)

Net interest margin is computed by dividing net interest income by total average interest-earning assets.

 

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Interest and fee income from loans decreased $1,154,000 or 5.54% for the nine months ended September 30, 2011 compared to the same period in 2010.  Average total loans, including non-accrual loans, for the nine months ended September 30, 2011 decreased $26,855,000 or 5.86% to $431,506,000 compared to $458,361,000 the same period in 2010.  The yield on average total loans increased two basis points to 6.32% for the nine months ended 2011 compared to 6.30% for the same period in 2010.  We have been successful in implementing interest rate floors on many of our adjustable rate loans to partially offset the effects of the historically low prime interest rate experienced over the last two years.  The loan floors will cause net interest margin compression in certain rising interest rate scenarios. We are committed to providing our customers with competitive pricing without sacrificing strong asset quality and value to our shareholders.

 

Interest income from total investments on a non tax equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits with other banks, and other securities) decreased $651,000 in the first nine months of 2011 to $5,971,000 compared to $6,622,000, for the same period in 2010.  The decrease is attributed to lower yields on the investment securities portfolio coupled with higher concentrations of interest bearing deposits with other banks.  The yield on average investments decreased 124 basis points to 3.42% for the nine month period ended September 30, 2011 compared to 4.66% for the same period in 2010.  Average total investments for the first nine months of 2011 increased $60,602,000 or 27.18% to $283,567,000 compared to $222,965,000 for the same period in 2010.  Income from investments represents 25.58% of net interest income for the first nine months of 2011 compared to 27.75% for the same period in 2010.

 

In an effort to increase yields, without accepting unreasonable risk, a significant portion of the investment purchases have been in mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs).  At September 30, 2011, we held $159,780,000 or 60.97% of the total fair value of the investment portfolio in MBS and CMOs with an average yield of 3.13%.  We invest in CMOs MBS as part of the overall strategy to increase our net interest margin.  CMOs and MBS by their nature react to changes in interest rates.  In a normal declining rate environment, prepayments from MBS and CMOs would be expected to increase and the expected life of the investment would be expected to shorten.  Conversely, if interest rates increase, prepayments normally would be expected to decline and the average life of the MBS and CMOs would be expected to extend.  However, in the current economic environment, prepayments may not behave according to historical norms.  Premium amortization and discount accretion of these investments affects our net interest income.  Our management monitors the prepayment speed of these investments and adjusts premium amortization and discount accretion based on several factors.  These factors include the type of investment, the investment structure, interest rates, interest rates on new mortgage loans, expectation of interest rate changes, current economic conditions, the level of principal remaining on the bond, the bond coupon rate, the bond origination date, and volume of available bonds in market.  The calculation of premium amortization and discount accretion is by nature inexact, and represents management’s best estimate of principal pay downs inherent in the total investment portfolio.

 

The net of tax effect value in fair value of the available-for-sale investment portfolio was a gain of $4,657,000 at September 30, 2011 and is reflected in the Company’s equity.  At September 30, 2011, the average life of the investment portfolio was 6.38 years and the fair value reflected a pre-tax gain of $7,194,000.  Management reviews fair value declines on individual investment securities to determine whether they represent an other-than-temporary impairment (OTTI) and recorded a $31,000 OTTI loss for the nine months ended September 30, 2011.  Refer to Note 4 of the Notes to Consolidated Financial Statements (unaudited) for more detail.  Future deterioration in the market values of our investment securities may require the Company to recognize future OTTI losses.

 

A component of the Company’s strategic plan has been to use its investment portfolio to offset, in part, its interest rate risk relating to variable rate loans.  At September 30, 2011, an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the investment portfolio by approximately $23,009,000.  Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio is $28,069,000.  The modeling environment assumes management would take no action during an immediate shock of 200 basis points.  However, the Company uses those increments to measure its interest rate risk in accordance with regulatory requirements and to measure the possible future risk in the investment portfolio.  For further discussion of the Company’s market risk, refer to Item 3 - Quantitative and Qualitative Disclosures about Market Risk.

 

Management’s review of all investments before purchase includes an analysis of how the security will perform under several interest rate scenarios to monitor whether investments are consistent with our investment policy.  The policy addresses issues of average life, duration, and concentration guidelines, prohibited investments, impairment, and prohibited practices.

 

Total interest income for the nine months ended September 30, 2011 decreased $1,805,000 or 6.58% to $25,633,000 compared to $27,438,000 for the nine months ended September 30, 2010.  The decrease was due to the 61 basis point decrease in the yield on average interest earning assets.  The yield on interest earning assets decreased to 5.11% on a fully tax equivalent basis for the nine months ended September 30, 2011 from 5.72% for the nine months ended September 30, 2010.  Average interest earning assets

 

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increased to $702,531,000 for the nine months ended September 30, 2011 compared to $667,674,000 for the nine months ended September 30, 2010.  The $34,857,000 increase in average earning assets can be attributed to the $60,602,000 increase in total investments offset by a $25,631,000 decrease in loans.

 

Interest expense on deposits for the nine months ended September 30, 2011 decreased $836,000 or 28.71% to $2,076,000 compared to $2,912,000 for the nine months ended September 30, 2010.  This decrease in interest expense was primarily due to repricing of interest bearing deposits which decreased 24 basis points to 0.57% for the nine months ended September 30, 2011 from 0.81% in 2010 as a result of the ongoing low interest rate environment.  Average interest-bearing deposits increased 1.37% or $6,595,000 to $489,175,000 for the nine months ended September 30, 2011 compared to $482,580,000 for the same period ended September 30, 2010.

 

Average other borrowed funds decreased $9,157,000 or 46.26% to $10,639,000 with an effective rate of 2.71% for the nine months ended September 30, 2011 compared to $19,796,000 with an effective rate of 2.95% for the nine months ended September 30, 2010.  As a result, total interest expense on other borrowed funds decreased $221,000 to $216,000 for the nine months ended September 30, 2011 from $437,000 for the nine months ended September 30, 2010.  Other borrowings include advances from the Federal Home Loan Bank (FHLB) and junior subordinated deferrable interest debentures.  The FHLB advances are fixed rate short-term and long term borrowings.  The effective rate of the FHLB advances was 3.59% for the nine month period ended September 30, 2011.  Advances were utilized as part of a leveraged strategy in the first quarter of 2008 to purchase investment securities.   The debentures were acquired in the merger with Service 1 st  and carry a floating rate based on the three month Libor plus a margin of 1.60%.  The rate at September 30, 2011 was 1.85%.  See the section on Financial Condition for more detail.

 

The cost of our interest-bearing liabilities decreased 28 basis points to 0.61% for the nine month period ended September 30, 2011 compared to 0.89% for 2010 while the cost of total deposits decreased to 0.42% for the nine month period ended September 30, 2011 compared to 0.62% for same period in 2010.  Average demand deposits increased 18.73% to $176,018,000 in 2011 compared to $148,253,000 for 2010.  The ratio of demand deposits to total deposits increased to 26.46% in the nine month period of 2011 compared to 23.50% for the same period in 2010.

 

Net Interest Income before Provision for Credit Losses

 

Net interest income before provision for credit losses for the nine months ended September 30, 2011 decreased by $748,000 or 3.11% to $23,341,000 compared to $24,089,000 for the same period in 2010.  The decrease was due to the 37 basis point decrease in our net interest margin and the decrease in average loans.  Average interest earning assets were $702,531,000 for the nine months ended September 30, 2011 with a net interest margin (fully tax equivalent basis) 4.68% compared to $667,674,000 with a net interest margin (fully tax equivalent basis) of 5.05% for the nine months ended September 30, 2010.  The $34,857,000 increase in average earning assets can be attributed to the $60,602,000 increase in total investments offset by a $26,855,000 decrease in average loans.  Average interest bearing liabilities decreased 0.51% to $499,814,000 for the nine months ended September 30, 2011 compared to $502,376,000 for the same period in 2010.

 

Provision for Credit Losses

 

We provide for probable credit losses by a charge to operating income based upon the composition of the loan portfolio, delinquency levels, losses and nonperforming assets, economic and environmental conditions and other factors which, in management’s judgment, deserve recognition in estimating credit losses.  Loans are charged off when they are considered uncollectible or of such little value that continuance as an active earning bank asset is not warranted.

 

The establishment of an adequate credit allowance is based on both an accurate risk rating system and loan portfolio management tools.  The Board has established initial responsibility for the accuracy of credit risk grades with the individual credit officer.  The grading is then submitted to the Chief Credit Administrator (CCA), who reviews the grades for accuracy and gives final approval.  The CCA is not involved in loan originations.  The risk grading and reserve allocation is analyzed quarterly by the CCA and the Board and at least annually by a third party credit reviewer and by various regulatory agencies.

 

Quarterly, the CCA sets the specific reserve for all adversely risk-graded credits.  This process includes the utilization of loan delinquency reports, classified asset reports, and portfolio concentration reports to assist in accurately assessing credit risk and establishing appropriate reserves.  Reserves are also allocated to credits that are not impaired.

 

The allowance for credit losses is reviewed at least quarterly by the Board’s Audit/Compliance Committee and by the Board of Directors.  Reserves are allocated to loan portfolio categories using percentages which are based on both historical risk elements such as delinquencies and losses and predictive risk elements such as economic, competitive and environmental factors.  We have adopted the specific reserve approach to allocate reserves to each impaired asset for the purpose of estimating potential loss exposure.  Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan

 

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portfolio in its entirety.  Additions may be required based on the results of independent loan portfolio examinations, regulatory agency examinations, or our own internal review process.  Additions are also required when, in management’s judgment, the allowance does not properly reflect the portfolio’s potential loss exposure.

 

The allocation of the allowance for credit losses is set forth below:

 

Loan Type (Dollars in Thousands)

 

September 30,
2011

 

% of
Total
Loans

 

December 31, 2010

 

% of
Total
Loans

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

2,279

 

17.5

%

$

2,417

 

20.3

%

Agricultural production

 

499

 

7.2

%

182

 

4.1

%

Real estate:

 

 

 

 

 

 

 

 

 

Owner occupied

 

2,275

 

26.1

%

1,978

 

25.9

%

Real estate-construction and other land loans

 

1,637

 

7.6

%

1,805

 

7.6

%

Agricultural real estate

 

746

 

10.8

%

466

 

10.2

%

Commercial real estate

 

1,533

 

14.6

%

1,387

 

14.7

%

Other

 

364

 

4.8

%

1,362

 

7.3

%

Total real estate

 

6,555

 

63.9

%

6,998

 

65.7

%

Equity loans and lines of credit

 

1,133

 

9.2

%

797

 

8.0

%

Consumer and installment

 

336

 

2.2

%

382

 

1.9

%

Unallocated reserves

 

229

 

 

 

238

 

 

 

Total allowance for credit losses

 

$

11,031

 

 

 

$

11,014

 

 

 

 

Loans are charged to the allowance for credit losses when the loans are deemed uncollectible.  It is the policy of management to make additions to the allowance so that it remains adequate to cover all probable loan charge-offs that exist in the portfolio at that time. In 2010 enhanced methodology enabled us to assign qualitative and quantitative factors (Q factors) to each loan category. Q factors include reserves held for the effects of lending policies, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio.

 

Managing credits identified through the risk evaluation methodology includes developing a business strategy with the customer to mitigate our potential losses.  Management continues to monitor these credits with a view to identifying as early as possible when, and to what extent, additional provisions may be necessary.  The unallocated reserve levels primarily relate to the continued volatility in the loan portfolio mix, agricultural real estate values, and uncertainty in collection of certain watch credits.

 

Additions to the allowance for credit losses in the first nine months of 2011 were $750,000 compared to $2,900,000 for the same period in 2010.  These provisions are primarily the result of our assessment of the overall adequacy of the allowance for credit losses considering a number of factors as discussed in the “Allowance for Credit Losses” section below.  During the nine months ended September 30, 2011, the Company had net charge offs totaling $733,000 compared $1,994,000 for the same period in 2010.  During the first three quarters of 2011, gross charge offs of $1,466,000 were partially offset by gross recoveries of $733,000.  The period-to-period decrease in provision for credit losses resulted from a decrease in the level of outstanding loans and a decrease in net charge offs.

 

Nonperforming loans were $16,794,000 and $18,561,000 at September 30, 2011 and December 31, 2010, respectively and $18,842,000 at September 30, 2010.  Nonperforming loans as a percentage of total loans were 3.94% at September 30, 2011 compared to 4.30% at December 31, 2010 and 4.10% at September 30, 2010.  Other real estate owned at September 30, 2011 was $270,000 compared to $1,325,000 net of a valuation allowance of $309,000, at December 31, 2010, and $3,277,000 net of a valuation allowance of $440,000 at September 30, 2010.

 

The annualized net charge off ratio, which reflects net charge-offs to average loans was 0.23% for the nine months ended September 30, 2011, and 0.58% for the same period in 2010.  The annual net charge off ratios for 2010, 2009, and 2008 were 0.66%, 1.56% and 0.20%, respectively.

 

We believe the significant economic downturn witnessed during 2008 that has continued through 2011 has had a considerable impact on the ability of certain borrowers to satisfy their obligations, resulting in loan downgrades and corresponding increases in credit loss provisions.  Additionally, we estimate the impact certain economic factors will have on various credits within the portfolio.

 

While the Company saw a decline in the balance of non-accruing loans when compared to that reported at December 31, 2010, non-accruing balances remain elevated relative to historical periods.  Continued increases in the level of charge-offs and the number and dollar volume of past due and non-performing loans may result in further provisions to the allowance for credit losses.

 

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We anticipate weakness in economic conditions on national, state and local levels to continue.  Continued economic pressures may negatively impact the financial condition of borrowers to whom the Company has extended credit and as a result we may be required to make further significant provisions to the allowance for credit losses during 2011.  We have been and will continue to be proactive in looking for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate any further losses.

 

As of September 30, 2011, we believe, based on all current and available information, the allowance for credit losses is adequate to absorb current estimable losses within the loan portfolio.  However, no assurance can be given that we may not sustain charge-offs which are in excess of the allowance in any given period.  Refer to “Allowance for Credit Losses” below for further information.

 

Net Interest Income after Provision for Credit Losses

 

Net interest income, after the provision for credit losses, was $22,591,000 for the nine months period ended September 30, 2011 and $21,189,000 for the same period in 2010.

 

Non-Interest Income

 

Non-interest income is comprised of customer service charges, loan placement fees, gains on sale of other real estate owned, gains on sales of investment securities, appreciation in cash surrender value of bank owned life insurance, Federal Home Loan Bank dividends, and other income.  Non-interest income was $4,940,000 for the nine months ended September 30, 2011 compared to $3,375,000 for the same period in 2010.  The $1,565,000 or 46.37% increase in non-interest income was due to an increase in gains on sale of other real estate owned, a gain related to the final distribution of the Service 1 st  escrow account, a gain related to the collection of life insurance, and a reduction in other-than temporary impairment loss, offset by a decrease in service charges.

 

During the nine months ended September 30, 2011, we realized net gain on sales and calls of investment securities of $249,000 compared to a gain of $32,000 for the same period in 2010.  During the first nine months of 2011, we also realized a gain on sale of other real estate owned of $608,000 compared to none in 2010.  For the nine month period ended September 30, 2011, we realized a $31,000 other-than-temporary impairment write down on certain investment securities.  See Note 4 of the Notes to Consolidated Financial Statements (unaudited) for more detail.

 

Customer service charges decreased $304,000 or 12.22% to $2,183,000 for the first six months of 2011 compared to 2,487,000 for the same period in 2010, mainly due to a decrease in overdraft fee income.

 

The Bank holds stock from the Federal Home Loan Bank in relationship with the borrowing capacity and generally earns quarterly dividends.  We currently hold $2,893,000 in FHLB stock.  We received dividends totaling $6,000 in the nine months ended September 30, 2011, compared to $8,000 for the same period in 2010.

 

Non-Interest Expenses

 

Salaries and employee benefits, occupancy, regulatory assessments, professional services, other real estate owned expense, and data processing are the major categories of non-interest expenses.  Non-interest expenses decreased $313,000 or 1.44% to $21,442,000 for the nine months ended September 30, 2011 compared to $21,755,000 for the nine months ended September 30, 2010.  The decrease in 2011 was primarily due to a decrease in other real estate owned expense and legal expense, partially offset by an increase in salaries and employee benefits.

 

The Company’s efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangible assets and foreclosure expenses) to net interest income before provision for credit losses plus non-interest income (exclusive of realized gains on sale and calls of investments) was 76.9% for the first nine months of 2011 compared to 73.5% for the nine months ended September 30, 2010.  The deterioration in the ratio resulted from a decrease in net interest income.  After the elimination of OREO related gains and expenses, non-interest income and operating expenses increased.

 

Salaries and employee benefits increased $590,000 or 5.11% to $12,134,000 for the first nine months of 2011 compared to $11,544,000 for the nine months ended September 30, 2010.  The increase in salaries and employee benefits for the 2011 period can be attributed to the addition of personnel in connection with the expansion of offices in Modesto and Merced and other new positions along with normal cost increases.  Full time equivalents were 211 at September 30, 2011 compared to 198 at September 30, 2010.

 

Occupancy and equipment expense decreased $42,000 or 1.45% to $2,848,000 for the nine months ended September 30, 2011 compared to $2,890,000 for the nine months ended September 30, 2010.  Utility, depreciation and repair expenses were lower in 2011 as compared to the same period in 2010. The new Modesto and Merced offices as well as the relocation of our Oakhurst office in 2010 contributed to the higher occupancy expenses for the nine months ended September 30, 2010.

 

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Regulatory assessments decreased to $664,000 for the nine month period ended September 30, 2011 compared to $887,000 for the same period in 2010.  The FDIC finalized a new assessment system which took effect the third quarter of 2011.  The final rule changed the assessment base from domestic deposits to average assets minus average tangible equity.

 

Total net other real estate owned (OREO) expenses were $11,000 for the nine months ended September 30, 2011 and $759,000 for the same period in 2010.  The decrease in 2011 is the result of the write downs of several OREO properties to their estimated fair value during 2010.

 

Other categories of non-interest expenses decreased $256,000 or 7.98% in the period under review.  The following table shows significant components of other non-interest expense as a percentage of average assets.

 

For the Nine Months Ended
September 30,

 

Other Expense
2011

 

% Average
Assets

 

Other Expense
2010

 

%
Average
Assets

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

ATM/debit card expenses

 

$

273

 

0.05

%

$

269

 

0.05

%

Consulting

 

248

 

0.04

%

136

 

0.02

%

License & maintenance contracts

 

237

 

0.04

%

198

 

0.03

%

Stationery/supplies

 

192

 

0.03

%

188

 

0.03

%

Telephone

 

187

 

0.03

%

218

 

0.04

%

Amortization of software

 

172

 

0.03

%

142

 

0.02

%

Director fees and related expenses

 

164

 

0.03

%

156

 

0.03

%

Postage

 

142

 

0.02

%

163

 

0.03

%

Donations

 

122

 

0.02

%

111

 

0.02

%

Education/training

 

116

 

0.02

%

105

 

0.02

%

Operating losses

 

104

 

0.02

%

32

 

0.01

%

General insurance

 

92

 

0.02

%

94

 

0.01

%

Appraisal fees

 

54

 

0.01

%

111

 

0.03

%

Other

 

1,363

 

0.23

%

1,287

 

0.24

%

Total other non-interest expense

 

$

3,466

 

0.59

%

$

3,210

 

0.57

%

 

Provision for Income Taxes

 

Our effective income tax rate was 21.68% for the nine months ended September 30, 2011 compared to 5.30% for the nine months ended September 30, 2010. The Company reported an income tax provision of $1,320,000 for nine months ended September 30, 2011, compared to $149,000 for the nine months ended September 30, 2010.  The increase in the effective tax rate in 2011 is due to increases in taxable income, a decrease in permanent tax differences as a percentage of taxable income, and the establishment of a deferred tax valuation allowance.

 

The Company establishes a tax valuation allowance when it is more likely than not that a recorded tax benefit is not expected to be fully realized. The expense to create the tax valuation is recorded as an additional income tax expense in the period the tax valuation allowance is created.  Based on management’s analysis as of September 30, 2011, the Company established a deferred tax valuation allowance in the amount of $118,000 for California capital loss carryforwards which increased the effective income tax rate by 1.94%.

 

Preferred Stock Dividends and Accretion

 

On January 30, 2009, we entered into a Letter Agreement with the United States Department of the Treasury under the Capital Purchase Program.  We received $7,000,000 in proceeds and the Treasury owned 7,000 shares of the Company’s Series A Fixed Rate Cumulative Perpetual Preferred Stock (“Preferred Stock”) and a warrant to purchase 79,067 shares, at $6.64 per share, of the Company’s common stock, no par value.  The Company accrued preferred stock dividends to the United States Department of the Treasury (“Treasury”) and accretion of the warrants in the amount of $400,000 and $296,000 during the nine months ended September 30, 2011 and 2010, respectively.

 

On August 18, 2011, the Company entered into a Securities Purchase Agreement with the Small Business Lending Fund of the Treasury, under which the Company issued 7,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C, to the Treasury for an aggregate purchase price of $7,000,000.  Simultaneously, the Company agreed with Treasury to redeem 7,000 shares of the Company’s Series A Preferred Stock originally issued pursuant to the Treasury’s Capital Purchase Program in 2009 for an aggregate price of $7,000,000. The redemption of the Series A Stock resulted in an acceleration of the remaining discount and caused an increase in the preferred stock dividends and accretion of $103,000 during the third quarter of 2011.

 

On September 28, 2011, the Company completed the repurchase of a warrant to purchase 79,067 shares of the Company’s common stock from the Treasury for total consideration of $185,000.

 

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Table of Contents

 

Net Income for the Third Quarter of 2011 Compared to the Third Quarter of 2010:

 

Net income was $1,408,000 for the quarter ended September 30, 2011 compared to $864,000 for the quarter ended September 30, 2010.  Basic and diluted earnings per share were $0.13 for the quarter ended September 30, 2011 compared to $0.08 for the same period in 2010.  Annualized ROE was 5.34% for the quarter ended September 30, 2011 compared to 3.53% for the quarter ended September 30, 2010.  Annualized ROA for the three months ended September 30, 2011 was 0.70% compared to 0.46% for the quarter ended September 30, 2010.

 

The increase in net income for the quarter ended September 30, 2011 compared to the same period in the prior year was due to the decreases in the provision for credit losses and increases in non-interest income, partially offset by decreases in net interest income before the provision for credit losses.  Net interest income before the provision for credit losses decreased due to a decrease in the yield of average earning assets and a decrease in the average loan balances offset by a decrease in our cost of interest bearing liabilities. Non-interest income increased primarily due to an increase in net gains on sales and calls of investment securities of $242,000 and also included a $75,000 gain from the sale of other real estate owned.

 

Interest Income and Expense

 

The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented.  Average balances are derived from daily balances, and non-accrual loans are not included as interest earning assets for purposes of this table.

 

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Table of Contents

 

CENTRAL VALLEY COMMUNITY BANCORP

SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES

(Dollars in thousands)

 

 

 

For the Three Months Ended
September 30, 2011

 

For the Three Months Ended
September 30, 2010

 

 

 

Average
Balance

 

Interest
Income/
Expense

 

Average
Interest
Rate

 

Average
Balance

 

Interest
Income/
Expense

 

Average
Interest
Rate

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning deposits in other banks

 

$

72,532

 

$

46

 

0.25

%

$

33,409

 

$

23

 

0.27

%

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

148,896

 

1,079

 

2.90

%

121,521

 

1,304

 

4.29

%

Non-taxable securities (1)

 

77,154

 

1,353

 

7.02

%

64,889

 

1,153

 

7.11

%

Total investment securities

 

226,050

 

2,432

 

4.30

%

186,410

 

2,457

 

5.27

%

Federal funds sold

 

610

 

 

0.25

%

357

 

 

0.25

%

Total securities

 

299,192

 

2,478

 

3.31

%

220,176

 

2,480

 

4.51

%

Loans (2) (3)

 

420,392

 

6,640

 

6.27

%

449,191

 

7,112

 

6.28

%

Federal Home Loan Bank stock

 

2,907

 

1

 

0.14

%

3,050

 

3

 

0.39

%

Total interest-earning assets

 

722,491

 

$

9,119

 

5.05

%

672,417

 

$

9,595

 

5.71

%

Allowance for credit losses

 

(11,024

)

 

 

 

 

(11,180

)

 

 

 

 

Non-accrual loans

 

14,593

 

 

 

 

 

15,919

 

 

 

 

 

Other real estate owned

 

128

 

 

 

 

 

3,643

 

 

 

 

 

Cash and due from banks

 

18,860

 

 

 

 

 

17,134

 

 

 

 

 

Bank premises and equipment

 

5,857

 

 

 

 

 

5,956

 

 

 

 

 

Other non-earning assets

 

56,690

 

 

 

 

 

54,591

 

 

 

 

 

Total average assets

 

$

807,595

 

 

 

 

 

$

758,480

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings and NOW accounts

 

$

155,107

 

$

89

 

0.23

%

$

140,851

 

$

115

 

0.32

%

Money market accounts

 

181,522

 

177

 

0.39

%

162,429

 

252

 

0.62

%

Time certificates of deposit, under $100,000

 

55,609

 

120

 

0.86

%

61,506

 

296

 

1.91

%

Time certificates of deposit, $100,000 and over

 

107,535

 

261

 

0.96

%

118,673

 

213

 

0.71

%

Total interest-bearing deposits

 

499,773

 

647

 

0.51

%

483,459

 

876

 

0.72

%

Other borrowed funds

 

9,155

 

61

 

2.64

%

19,155

 

151

 

3.13

%

Total interest-bearing liabilities

 

508,928

 

$

708

 

0.55

%

502,614

 

$

1,027

 

0.81

%

Non-interest bearing demand deposits

 

184,948

 

 

 

 

 

151,422

 

 

 

 

 

Other liabilities

 

8,234

 

 

 

 

 

6,551

 

 

 

 

 

Shareholders’ equity

 

105,485

 

 

 

 

 

97,893

 

 

 

 

 

Total average liabilities and shareholders’ equity

 

$

807,595

 

 

 

 

 

$

758,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income and rate earned on average earning assets

 

 

 

$

9,119

 

5.05

%

 

 

$

9,595

 

5.71

%

Interest expense and interest cost related to average interest-bearing liabilities

 

 

 

708

 

0.55

%

 

 

1,027

 

0.81

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and net interest margin (4)

 

 

 

$

8,411

 

4.66

%

 

 

$

8,568

 

5.10

%

 


(1)

Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $461 and $392 in 2011 and 2010, respectively.

(2)

Loan interest income includes loan fees of $115 in 2011 and $118 in 2010.

(3)

Average loans do not include non-accrual loans.

(4)

Net interest margin is computed by dividing net interest income by total average interest-earning assets.

 

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Interest and fee income from loans decreased $472,000 or 6.64% to $6,640,000 for the third quarter of 2011 compared to $7,112,000 for the same period in 2010.  Average total loans, including nonaccrual loans, for the third quarter of 2011 decreased $30,125,000 or 6.48% to $434,985,000 compared to $465,110,000 for the same period in 2010.  Yield on the loan portfolio was 6.27% and 6.28% for the third quarters ending September 30, 2011 and 2010, respectively.  We have been successful in implementing interest rate floors on many of our adjustable rate loans to partially offset the effects of the historically low prime interest rate experienced over the last two years.  We are committed to providing our customers with competitive pricing without sacrificing strong asset quality and value to our shareholders.

 

Income from investments represents 25.37% of net interest income for the third quarter of 2011 compared to 25.55% for the same quarter in 2010. Interest income from total investments on a non tax equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits with other banks, and other securities) decreased $71,000 in the third quarter of 2011 to $2,017,000 compared to $2,088,000, for the same period in 2010.  The decrease is attributed to lower yields on the portfolio.  The yield on average investments decreased 120 basis points to 3.31% on a fully tax equivalent basis for the third quarter of 2011 compared to 4.51% on a fully tax equivalent basis for the third quarter of 2010. We experienced a decrease in yield in our investment securities in 2011 due to purchases of lower yielding debt securities.  In 2010 we experienced large pay downs and calls of higher yielding CMOs.  Additionally, we are holding higher levels of deposits with the Federal Reserve Bank of San Francisco which have lower yields.  Average total investments for the third quarter of 2011 increased $79,016,000 or 35.89% to $299,192,000 compared to $220,176,000 for the third quarter of 2010.

 

Total interest income for the third quarter of 2011 decreased $543,000 or 5.90% to $8,657,000 compared to $9,200,000 for the third quarter ended September 30, 2010.  The decrease was due to the 66 basis point decrease in the tax equivalent yield on average interest earning assets and the decrease in average loans.  The yield on interest earning assets decreased to 5.05% on a fully tax equivalent basis for the third quarter ended September 30, 2011 from 5.71% on a fully tax equivalent basis for the third quarter ended September 30, 2010.  Average interest earning assets increased to $722,491,000 for the third quarter ended September 30, 2011 compared to $672,417,000 for the third quarter ended September 30, 2010.  The $50,074,000 increase in average earning assets can be attributed to the $79,016,000 increase in total investments offset by a $30,125,000 decrease in average loans.

 

Interest expense on deposits for the quarter ended September 30, 2011 decreased $229,000 or 26.14% to $647,000 compared to $876,000 for the quarter ended September 30, 2010.  The cost of deposits, calculated by dividing annualized interest expense on interest bearing deposits by total deposits, decreased 18 basis points to 0.37% for the quarter ended September 30, 2011 compared to 0.55% for the same period in 2010.  This decrease was due to the repricing of interest bearing deposits in the lower current interest rate environment.  Average interest bearing deposits increased 3.37% or $16,314,000 comparing the third quarter of 2011 to the same period in 2010.  Average interest-bearing deposits were $499,773,000 for the quarter ended September 30, 2011, with an effective rate paid of 0.51%, compared to $483,459,000 for the same period in 2010, with an effective rate paid of 0.72%.

 

Average other borrowed funds decreased $10,000,000 to $9,155,000 with an effective rate of 2.64% for the quarter ended September 30, 2011 compared to $19,155,000 with an effective rate of 3.13% for the quarter ended September 30, 2010.  As a result, interest expense on borrowed funds decreased $90,000 to $61,000 for the quarter ended September 30, 2011 from $151,000 for the quarter ended September 30, 2010.  Other borrowings include advances from the Federal Home Loan Bank (FHLB) and junior subordinated deferrable interest debentures.  The FHLB advances are fixed rate short-term and long term borrowings.  The debentures were acquired in the merger with Service 1 st and carry a floating rate based on the three month Libor plus a margin of 1.60%.  The rate at September 30, 2011was 1.85%.  See the section on Financial Condition for more detail.

 

The cost of our interest bearing liabilities decreased 26 basis points to 0.55% for the quarter ended September 30, 2011 compared to 0.81% for the quarter ended September 30, 2010.  The decrease is due to the lower current interest rate environment as mentioned above.  The cost of total deposits decreased to 0.37% for the quarter ended September 30, 2011 compared to 0.55% for quarter ended September 30, 2010.  Average demand deposits increased 22.14% to $184,948,000 in 2011 compared to $151,422,000 for 2010.  The ratio of demand deposits to total deposits was 27.0% in the third quarter of 2011 compared to 23.9% for 2010.

 

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Net Interest Income before Provision for Credit Losses

 

Net interest income before provision for credit losses for the quarter ended September 30, 2011 decreased $224,000 or 2.74% to $7,949,000 compared to $8,173,000 for the quarter ended September 30, 2010.  The decrease was due to the 44 basis point decrease in our net interest margin offset by an increase in average interest earning assets.  Average interest earning assets were $722,491,000 for the three months ended September 30, 2011 with a net interest margin (fully tax equivalent basis) of 4.66% compared to $672,417,000 with a net interest margin (fully tax equivalent basis) of 5.10% for the three months ended September 30, 2010.  The $50,074,000 increase in average earning assets can be attributed to the $79,016,000 increase in total investments offset by a $30,125,000 decrease in loans.  Average interest bearing liabilities increased 1.26% to $508,928,000 for the three months ended September 30, 2011 compared to $502,614,000 for the same period in 2010.

 

Provision for Credit Losses

 

Additions to the allowance for credit losses in the third quarter of 2011 were $400,000 compared to $1,300,000 for the third quarter of 2010.  These provisions are primarily the result of our assessment of the overall adequacy of the allowance for credit losses considering a number of factors as discussed in the “Allowance for Credit Losses” section below.  The annualized net charge-off ratio, which reflects net charge-offs to average loans, was 0.37% for the quarter ended September 30, 2011 compared to 1.43% for the quarter ended September 30, 2010.  During the three months ended September 30, 2011, the Company had net charge offs totaling $404,000 compared to $1,662,000 for the same period in 2010.  The period-to-period decrease in provision for credit losses resulted from a decrease in the level of outstanding loans and nonperforming loans.  Recoveries of previously charged off loan balances during the quarters ended September 30, 2011 and 2010 were $321,000 and $242,000, respectively.

 

Non-Interest Income

 

Non-interest income is comprised primarily of customer service charges, loan placement fees and other service fees, net gains on sales of investments and assets, appreciation in cash surrender value of bank owned life insurance, FHLB stock dividends, and other income.  Non-interest income was $1,595,000 for the quarter ended September 30, 2011 compared to $1,293,000 for the same period ended September 30, 2010.  The $302,000 or 23.36% increase in non-interest income comparing the quarter ended September 30, 2011 to the same period in 2010 was primarily due to net realized gain on sales of investments securities of $223,000 during the third quarter of 2011, compared to a loss of $19,000 for the same period in 2010.  The third quarter of 2011 also included a $75,000 gain from the sale of other real estate owned.

 

Customer service charges decreased $28,000 or 3.67% to $735,000 for the third quarter of 2011 compared to $763,000 for the same period in 2010 due primarily to a decrease in overdraft fee income.  Other income increased $55,000 or 15.32% to $414,000 for the third quarter of 2011 compared to $359,000 for the same period in 2010.  The increase is principally due to increase in fees from electronic funds transfers and fee income from merchant credit card services.

 

Non-Interest Expenses

 

Salaries and employee benefits, occupancy, regulatory assessments, data processing, professional services, and other real estate owned expenses are the major categories of non-interest expenses.  Non-interest expenses decreased $187,000 or 2.52% to $7,222,000, for the quarter ended September 30, 2011 compared to $7,409,000 for the same period in 2010 along.

 

The Company’s efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangible assets) to net interest income before provision for credit losses plus non-interest income (excluding net gains from sales of securities and assets), was 76.93% for the third quarter of 2011 compared to 73.49% for the third quarter of 2010.

 

Salaries and employee benefits increased $97,000 or 2.45% to $4,058,000 for the third quarter of 2011 compared to $3,961,000 for the third quarter of 2010.  The increase in salaries and employee benefits for the third quarter of 2011 can be attributed to an increase in the number of employees attributed to the opening of the Modesto office and the addition of new positions along with normal cost increases.

 

Regulatory assessments decreased $100,000 or 35.59% to $181,000 for the third quarter of 2011 compared to $281,000 for the third quarter of 2010.  The FDIC finalized a new assessment system which took effect the third quarter of 2011.  The final rule changed the assessment base from domestic deposits to average assets minus average tangible equity.

 

Other real estate owned expenses decreased $309,000 comparing the two periods due to write downs of several OREO properties to their estimated fair value during the third quarter of 2010.

 

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Provision for Income Taxes

 

The effective income tax rate was 26.74% for the third quarter of 2011 compared to (14.13%) for the same period in 2010.  Provision for income taxes totaled $514,000 for the quarter ended September 30, 2011, while there was a benefit of $107,000 for the same period in 2010.  The increase in the effective tax rate for the three months ended September 30, 2011 compared to the prior year comparable period is due to the establishment of an $118,000 deferred tax asset valuation allowance related to a California capital loss carryforward, an increase in taxable income and a decrease in permanent tax differences as a percentage of taxable income. Recording the valuation allowance increased the effective tax rate by 6.14%.

 

Preferred Stock Dividends and Accretion

 

On January 30, 2010, the Company entered into a Letter Agreement with the United States Department of the Treasury (“Treasury”) under the Capital Purchase Program.  We received $7,000,000 in proceeds and the Treasury owned 7,000 shares of the Company’s Series A Fixed Rate Cumulative Perpetual Preferred Stock (“Preferred Stock”) and a warrant to purchase 79,067 shares, at $6.64 per share, of the Company’s common stock, no par value.  The Company accrued preferred stock dividends to the Treasury and accretion of the warrants in the amount of $202,000 during the three months ended September 30, 2011.

 

On August 18, 2011, the Company entered into a Securities Purchase Agreement with the Small Business Lending Fund of the Treasury, under which the Company issued 7,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C, to the Treasury for an aggregate purchase price of $7,000,000.  Simultaneously, the Company agreed with Treasury to redeem 7,000 shares of the Company’s Series A Preferred Stock originally issued pursuant to the Treasury’s Capital Purchase Program in 2009 for an aggregate price of $7,000,000. The redemption of the Series A Stock resulted in an acceleration of the remaining discount and caused an increase in the preferred stock dividends and accretion of $103,000 during the third quarter of 2011.

 

On September 28, 2011, the Company completed the repurchase of a warrant to purchase 79,067 shares of the Company’s common stock from the Treasury for total consideration of $185,000.

 

FINANCIAL CONDITION

 

Summary of Changes in Consolidated Balance Sheets

 

September 30, 2011 compared to December 31, 2010

 

Total assets were $834,908,000 as of September 30, 2011 compared to $777,594,000 as of December 31, 2010, an increase of 7.37%, or $57,314,000.  Total gross loans were $425,766,000 as of September 30, 2011 compared to $431,597,000 as of December 31, 2010, a decrease of $5,831,000 or1.35%.  The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) increased 20.69% or $58,142,000 to $339,109,000.  Total deposits increased 8.58% or $55,796,000 to $706,291,000 as of September 30, 2011 compared to $650,495,000 as of December 31, 2010.  Stockholders’ equity increased $8,956,000 or 9.20% to $106,347,000 as of September 30, 2011 compared to $97,391,000 as of December 31, 2010 due to net income included in retained earnings, an increase in other comprehensive income, and issuance of common stock from the exercise of stock options.

 

Fair Value

 

The Company measures the fair values of its financial instruments utilizing a hierarchical framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value.  The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of the observable pricing scenario.  Financial instruments with readily available actively quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of observable pricing and a lesser degree of judgment utilized in measuring fair value.  Conversely, financial instruments rarely traded or not quoted will generally have little or no observable pricing and a higher degree of judgment utilized in measuring fair value.  Observable pricing scenarios are impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.

 

See Note 5 of the Notes to Consolidated Financial Statements (unaudited) for additional information about the level of pricing transparency associated with financial instruments carried at fair value.

 

Investments

 

Our investment portfolio consists primarily of agency securities, mortgage backed securities, municipal securities, collateralized mortgage obligations, corporate debt securities, and overnight investments in the Federal funds market and are classified at the date of acquisition as available for sale or held to maturity.  As of September 30, 2011, investment securities with a fair value of

 

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$112,095,000, or 42.78% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes.  Our investment policies are established by the Board of Directors and implemented by our Investment/Asset Liability Committee.  They are designed primarily to provide and maintain liquidity, to enable us to meet our pledging requirements for public money and borrowing arrangements, to generate a favorable return on investments without incurring undue interest rate and credit risk, and to complement our lending activities.

 

The level of our investment portfolio is generally considered higher than our peers due primarily to a comparatively low loan to deposit ratio.  Our loan to deposit ratio at September 30, 2011 was 60.28% compared to 66.35% at December 31, 2010.  The loan to deposit ratio of our peers was 78.36% at June 30, 2011.  The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, increased 20.69% or $58,142,000 to $339,109,000 at September 30, 2011 from $280,967,000 at December 31, 2010.  The market value of the portfolio reflected an unrealized gain of $7,914,000 at September 30, 2011 compared to $1,643,000 at December 31, 2010.

 

We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations.  As of September 30, 2011, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI).  Under current accounting standards, the portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings.  The discount rate in this analysis is the coupon rate which approximates the current book yield.

 

We evaluated all available-for-sale investment securities with an unrealized loss at September 30, 2011 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at September 30, 2011 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000.  Management also analyzed any securities that may have been downgraded by credit rating agencies.  Management retained the services of a third party in May 2011 to provide independent valuation and OTTI analysis of private label residential mortgage backed securities (PLRMBS).

 

For those bonds that met the evaluation criteria, we obtained and reviewed the most recently published national credit ratings for those bonds.  For those bonds that were municipal debt securities with an investment grade rating by the rating agencies, we also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded that no credit related impairment existed based on the rating.  Our evaluation for PLRMBS also includes estimating projected cash flows that the Company is likely to collect based on an assessment of all available information about the applicable security on an individual basis, the structure of the security, and certain assumptions, such as the remaining payment terms for the security, prepayment speeds, default rates, loss severity on the collateral supporting the security based on underlying loan-level borrower and loan characteristics, expected housing price changes, and interest rate assumptions, to determine whether the Company will recover the entire amortized cost basis of the security.  In performing a detailed cash flow analysis, the Company identified the best estimate of the cash flows expected to be collected.  If this estimate results in a present value of expected cash flows (discounted at the security’s effective yield) that is less than the amortized cost basis of the security, OTTI is considered to have occurred.

 

To assess whether it expects to recover the entire amortized cost basis of its PLRMBS, the Company performed a cash flow analysis for all of its PLRMBS as of September 30, 2011.  In performing the cash flow analysis for each security, the Company uses a third-party model.  The model considers borrower characteristics and the particular attributes of the loans underlying the Company’s securities, in conjunction with assumptions about future changes in home prices and other assumptions, to project prepayments, default rates, and loss severities.

 

The month-by-month projections of future loan performance are allocated to the various security classes in each securitization structure in accordance with the structure’s prescribed cash flow and loss allocation rules.  When the credit enhancement for the senior securities in a securitization is derived from the presence of subordinated securities, losses are allocated first to the subordinated securities until their principal balance is reduced to zero.  The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations.  The scenario of cash flows determined based on the model approach described above reflects a best-estimate scenario.

 

At each quarter end, the Company compares the present value of the cash flows expected to be collected on its PLRMBS to the amortized cost basis of the securities to determine whether a credit loss exists.

 

The unrealized losses associated with PLRMBS are primarily driven by higher projected collateral losses, wider credit spreads, and changes in interest rates.  The Company assesses for credit impairment using a discounted cash flow model.  The key assumptions include home price depreciation, default rates, severities, discount rates and prepayment rates.  We estimate losses to a security by forecasting the underlying mortgage loans in each transaction.  The forecasted loan performance is used to project cash flows to the various tranches in the structure.  Based upon management’s assessment of the expected credit losses of the security given the performance of the underlying collateral compared with our credit enhancement (which occurs as a result of credit loss protection provided by subordinated tranches), we expect to recover the entire amortized cost basis of these securities, with the exception of certain securities for which we recorded an OTTI.

 

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At September 30, 2011, the Company held 169 obligations of states and political subdivision securities of which one was in a loss position for less than 12 months and six were in a loss position and have been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2011

 

At September 30, 2011, the Company held 162 U.S. Government agency securities collateralized by mortgage obligation securities of which 33 were in a loss position for less than 12 months. The unrealized losses on the Company’s investments in U.S. government agencies collateralized by mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2011.

 

At September 30, 2011, the Company had a total of 28 PLRMBS with a remaining principal balance of $12,402,000 and a net unrealized loss of approximately $904,000.  Nine of these securities account for $1,162,000 of the unrealized loss at September 30, 2011 offset by 19 of these securities with gains totaling $258,000.  Seven of these PLRMBS with a remaining principal balance of $6,396,000 had credit ratings below investment grade.  The Company continues to perform extensive analyses on these securities as well as all whole loan CMOs.  Several of these investment securities continue to demonstrate cash flows and credit support as expected and the expected cash flows of the security discounted at the security’s effective yield are greater than the book value of the security, therefore management does not consider these securities to be other than temporarily impaired.  No credit related OTTI charges related to PLRMBS were recorded during the nine month period ended September 30, 2011.

 

During the first quarter of 2011, the Company recorded an OTTI charge of $31,000 related to one mutual fund investment security.

 

See Note 4 of the Notes to Consolidated Financial Statements (unaudited) included in this report for carrying values and estimated fair values of our investment securities portfolio.

 

Loans

 

Total gross loans decreased $5,831,000 or 1.35% to $425,766,000 as of September 30, 2011 compared to $431,597,000 as of December 31, 2010.

 

The following table sets forth information concerning the composition of our loan portfolio at the dates indicated:

 

Loan Type

 

September 30, 2011

 

% of Total
Loans

 

December 31, 2010

 

% of Total
Loans

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

74,305

 

17.5

%

$

87,628

 

20.3

%

Agricultural production

 

30,774

 

7.2

%

17,545

 

4.1

%

Total commercial

 

105,079

 

24.7

%

105,173

 

24.4

%

Real estate:

 

 

 

 

 

 

 

 

 

Owner occupied

 

111,038

 

26.1

%

111,890

 

25.9

%

Real estate-construction and other land loans

 

32,237

 

7.6

%

32,848

 

7.6

%

Commercial real estate

 

62,236

 

14.6

%

63,557

 

14.7

%

Agricultural real estate

 

46,008

 

10.8

%

44,205

 

10.2

%

Other

 

20,565

 

4.8

%

31,409

 

7.3

%

Total real estate

 

272,084

 

63.9

%

283,909

 

65.7

%

Consumer:

 

 

 

 

 

 

 

 

 

Equity loans and lines of credit

 

39,653

 

9.2

%

34,521

 

8.0

%

Consumer and installment

 

9,598

 

2.2

%

8,493

 

1.9

%

Total consumer

 

49,251

 

11.4

%

43,014

 

9.9

%

Deferred loan fees, net

 

(648

)

 

 

(499

)

 

 

Total gross loans

 

425,766

 

100.0

%

431,597

 

100.0

%

Allowance for credit losses

 

(11,031

)

 

 

(11,014

)

 

 

Total loans

 

$

414,735

 

 

 

$

420,583

 

 

 

 

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As of September 30, 2011, in management’s judgment, a concentration of loans existed in commercial loans and loans collateralized by real-estate-related loans, representing approximately 97.8% of total loans of which 24.7% were commercial and 73.1% were real-estate-related.  This level of concentration is consistent with 98.1% at December 31, 2010.  Although management believes the loans within this concentration have no more than the normal risk of collectability, a substantial further decline in the performance of the economy in general or a further decline in real estate values in our primary market areas, in particular, could have an adverse impact on collectability, increase the level of real estate-related non-performing loans, or have other adverse effects which alone or in the aggregate could have a material adverse effect on our business, financial condition, results of operations and cash flows.  The Company was not involved in any sub-prime mortgage lending activities at September 30, 2011 or December 31, 2010.

 

We believe that our commercial real estate loan underwriting policies and practices result in prudent extensions of credit, but recognize that our lending activities result in relatively high reported commercial real estate lending levels.  Commercial real estate loans include certain loans which represent low to moderate risk and certain loans with higher risks.

 

The Board of Directors reviews and approves concentration limits and exceptions to limitations of concentration are reported to the Board of Directors at least quarterly.

 

Nonperforming Assets

 

Nonperforming assets consist of nonperforming loans, other real estate owned (OREO), and repossessed assets.  Nonperforming loans are those loans which have (i) been placed on nonaccrual status; (ii) been classified as doubtful under our asset classification system; or (iii) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on nonaccrual status.  A loan is classified as nonaccrual when 1) it is maintained on a cash basis because of deterioration in the financial condition of the borrower; 2) payment in full of principal or interest under the original contractual terms is not expected; or 3) principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection.

 

At September 30, 2011, total nonperforming and impaired assets totaled $26,146,000, or 3.13% of total assets, compared to $19,984,000, or 2.57% of total assets at December 31, 2010.  Total nonperforming and impaired assets at September 30, 2011 include nonaccrual loans totaling $16,794,000, five troubled debt restructuring with a balance of $9,082,000 that are on an accrual basis and one OREO with a balance of $270,000.  At September 30, 2011, we had 12 loans considered troubled debt restructurings (TDRs) totaling $21,524,000 of which seven TDRs totaling $12,442,000 are included in nonaccrual loans.  At December 31, 2010, nonperforming and impaired assets included nonaccrual loans totaling $18,561,000, OREO of $1,325,000, and repossessed assets of $98,000.  We had seven restructured loans totaling $6,180,000 at December 31, 2010.  Foregone interest on nonaccrual loans totaled $749,000 and $864,000 for the nine months ended September 30, 2011 and 2010, respectively.  For the three month period ended September 30, 2011 and 2010, foregone interest on nonaccrual loans totaled $281,000 and $343,000, respectively.

 

A summary of nonperforming loans at September 30, 2011 and December 31, 2010 is set forth below.  The Company had no loans past due more than 90 days and still accruing interest at September 30, 2011 or December 31, 2010.  Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future.

 

Composition of Nonperforming Loans

 

(Dollars in thousands)

 

September 30, 2011

 

December 31, 2010

 

Non-accrual loans

 

 

 

 

 

Commercial and industrial

 

$

361

 

$

377

 

Owner occupied

 

1,103

 

1,407

 

Commercial real estate

 

2,276

 

 

Real estate construction and other land loans

 

 

5,634

 

Equity loans and lines of credit

 

612

 

488

 

Troubled debt restructured loans (non-accruing)

 

 

 

 

 

Commercial and industrial

 

 

1,978

 

Owner occupied

 

1,034

 

2,370

 

Real estate construction and other land loans

 

6,929

 

2,193

 

Commercial real estate

 

2,798

 

1,828

 

Other real estate

 

1,681

 

2,286

 

Total non-accrual

 

16,794

 

18,561

 

Accruing loans past due 90 days or more

 

 

 

Total non-performing

 

$

16,794

 

$

18,561

 

Nonperforming loans to total loans

 

3.94

%

4.30

%

Ratio of nonperforming loans to allowance for credit losses

 

152.24

%

168.52

%

 

 

 

 

 

 

Loans considered to be impaired

 

$

25,876

 

$

18,561

 

Related allowance for credit losses on impaired loans

 

$

2,314

 

$

2,124

 

 

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We measure our impaired loans by using the fair value of the collateral if the loan is collateral dependent and the present value of the expected future cash flows discounted at the loan’s effective interest rate if the loan is not collateral dependent.  As of September 30, 2011 and December 31, 2010, we had impaired loans totaling $25,876,000 and $18,561,000, respectively.  For collateral dependent loans secured by real estate, we obtain external appraisals which are updated at least annually to determine the fair value of the collateral, and, we perform quarterly internal reviews on substandard loans.  We place loans on nonaccrual status and classify them as impaired when it becomes probable that we will not receive interest and principal under the original contractual terms, or when loans are delinquent 90 days or more unless the loan is both well secured and in the process of collection. Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods.

 

The following table provides a reconciliation of the change in non-accrual loans for the first three quarters of 2011.

 

(Dollars in thousands)

 

Balances
December
31, 2010

 

Additions to
Nonaccrual
Loans

 

Net Pay
Downs

 

Transfers
to
Foreclosed
Collateral
- OREO

 

Returns to
Accrual
Status

 

Charge
Offs

 

Balances
September 30,
2011

 

Non-accrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

196

 

$

371

 

$

(34

)

$

 

$

 

$

(172

)

$

361

 

Real estate

 

1,407

 

3,135

 

(942

)

 

(195

)

(26

)

3,379

 

Equity loans and lines of credit

 

669

 

660

 

(244

)

(244

)

 

(229

)

612

 

Restructured loans (non-accruing):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

1,279

 

 

(429

)

 

(850

)

 

 

Real Estate

 

7,183

 

1,212

 

(2,882

)

 

 

 

5,513

 

Real Estate construction and other land loans

 

7,827

 

 

(612

)

 

 

(286

)

6,929

 

Consumer

 

 

82

 

 

 

 

(82

)

 

Total non-accrual

 

$

18,561

 

$

5,460

 

$

(5,143

)

$

(244

)

$

(1,045

)

$

(795

)

$

16,794

 

 

The following table provides a summary of the change in the OREO balance for the nine months ended September 30, 2011:

 

(Dollars in thousands)

 

Nine Months
Ended September
30, 2011

 

Balance, December 31, 2010

 

$

1,325

 

Additions

 

527

 

Dispositions

 

(2,190

)

Write-downs

 

 

Net gain (loss) on disposition

 

608

 

Balance, September 30, 2011

 

$

270

 

 

OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower.  OREO is carried at the lesser of cost or fair market value, less selling costs.  We had one property of $270,000 in OREO at September 30, 2011, compared to two properties totaling $1,325,000 at December 31, 2010.

 

Allowance for Credit Losses

 

We have established a methodology for the determination of provisions for credit losses.  The methodology is set forth in a formal policy and takes into consideration the need for an overall allowance for credit losses as well as specific allowances that are tied to individual loans.  Our methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance and a specific allowance for identified problem loans.

 

In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan.  The allowance is increased by provisions charged against earnings and reduced by net loan charge offs.  Loans are charged off when they are deemed to be uncollectible, or partially charged off when portions of a loan are deemed to be uncollectible.  Recoveries are generally recorded only when cash payments are received.

 

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The allowance for credit losses is maintained to cover probable losses inherent in the loan portfolio.  The responsibility for the review of our assets and the determination of the adequacy lies with management and our Audit Committee.  They delegate the authority to the Chief Credit Administrator (CCA) to determine the loss reserve ratio for each type of asset and reviews, at least quarterly, the adequacy of the allowance based on an evaluation of the portfolio, past experience, prevailing market conditions, amount of government guarantees, concentration in loan types and other relevant factors.

 

The allowance for credit losses is an estimate of the losses that may be sustained in our loan and lease portfolio.  The allowance is based on principles of accounting: (1) ASC 310-10 which requires that losses be accrued when they are probable of occurring and can be reasonably estimated and (2) ASC 450-20 which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

 

Credit Administration adheres to an internal asset review system and loss allowance methodology designed to provide for timely recognition of problem assets and adequate valuation allowances to cover expected asset losses.  The Bank’s asset monitoring process includes the use of asset classifications to segregate the assets, largely loans and real estate, into various risk categories.  The Bank uses the various asset classifications as a means of measuring risk and determining the adequacy of valuation allowances by using a nine-grade system to classify assets.  All credit facilities exceeding 90 days of delinquency require classification.

 

The following table sets forth information regarding our allowance for credit losses at the dates and for the periods indicated:

 

(Dollars in thousands)

 

For the Nine Months
Ended September 30, 2011

 

For the Year Ended
December 31, 2010

 

For the Nine Months
Ended September 30, 2010

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

11,014

 

$

10,200

 

$

10,200

 

Provision charged to operations

 

750

 

3,800

 

2,900

 

Losses charged to allowance

 

(1,466

)

(4,122

)

(2,574

)

Recoveries

 

733

 

1,136

 

580

 

Balance, end of period

 

$

11,031

 

$

11,014

 

$

11,106

 

Ratio of non-performing loans to allowance for credit losses at end of period

 

152.24

%

168.52

%

169.66

%

Allowance for credit losses to total loans at end of period

 

2.59

%

2.55

%

2.42

%

 

As of September 30, 2011 the balance in the allowance for credit losses was $11,031,000 compared to $11,014,000 as of December 31, 2010.  The increase was due to net charge offs during the nine months ended September 30, 2011 being less than the amount of the provision for credit losses.  Net charge offs totaled $733,000 while the provision for credit losses was $750,000.  The balance of commitments to extend credit on undisbursed construction and other loans and letters of credit was $128,944,000 as of September 30, 2011 compared to $123,676,000 as of December 31, 2010.  Risks and uncertainties exist in all lending transactions and our management and Directors’ Loan Committee have established reserve levels based on economic uncertainties and other risks that exist as of each reporting period.

 

As of September 30, 2011, the allowance for credit losses was 2.59% of total gross loans compared to 2.55% as of December 31, 2010.  During the nine months ended September 30, 2011 there were no major changes in loan concentrations that significantly affected the allowance for credit losses.  During the period ended September 30, 2011 the Company enhanced the process for estimating the allowance for credit losses.  The modification did not have a significant impact on the amount of the allowance for credit losses in total nor did it have a material impact on the allocation of the allowance within loan categories. In 2010 enhanced methodology enabled us to assign qualitative and quantitative factors (Q factors) to each loan category resulting in a decrease in unallocated reserves. Q factors include reserves held for the effects of lending policies, economic trends, and portfolio trends along with other dynamics which may cause additional stress to the portfolio. Assumptions regarding the collateral value of various under performing loans may affect the level and allocation of the allowance for credit losses in future periods.  The allowance may also be affected by trends in the amount of charge offs experienced or expected trends within different loan portfolios.

 

Non-performing and impaired loans totaled $25,876,000 as of September 30, 2011, and $18,561,000 as of December 31, 2010.  The allowance for credit losses as a percentage of nonperforming and impaired loans was 42.63% and 59.34% as of September 30, 2011 and December 31, 2010, respectively.  Management believes the allowance at September 30, 2011 is adequate based upon its ongoing analysis of the loan portfolio, historical loss trends and other factors.  However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.

 

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Table of Contents

 

Goodwill and Intangible Assets

 

Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill.  Total goodwill at September 30, 2011 was $23,577,000 consisting of $14,643,000 and $8,934,000 representing the excess of the cost of Service 1 st  and Bank of Madera County, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting.  The value of goodwill is ultimately derived from the Bank’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes.  A decline in net earnings could be indicative of a decline in the fair value of goodwill and result in impairment.  For that reason, goodwill is assessed at least annually for impairment.

 

In 2011, ASU 2011-08 was issued that provided additional guidance on the determination of whether an impairment of goodwill has occurred, including the introduction of a qualitative review of factors that might indicate that a goodwill impairment has occurred.  ASU 2011-08 is effective for our 2012 reporting year; however, the Company early adopted this standard as of September 30, 2011.  The Company performed our annual impairment test in the third quarter of 2011 utilizing the qualitative factors cited in the ASU.  Management believes that factors cited in the ASU are sufficient and comprehensive and as such, no further factors need to be assessed at this time. No impairment was required.

 

The intangible assets represent the estimated fair value of the core deposit relationships acquired in the acquisition of Service 1 st  in 2008 of $1,400,000 and the 2005 acquisition of Bank of Madera County of $1,500,000 at December 31, 2009.  Core deposit intangibles are being amortized using the straight-line method over an estimated life of seven years from the date of acquisition.  The carrying value of intangible assets at September 30, 2011 was $887,000, net of $2,013,000 in accumulated amortization expense.  The carrying value at December 31, 2010 was $1,198,000, net of $1,702,000 accumulated amortization expense.  We evaluate the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization.  Based on the evaluation, no changes to the remaining useful lives was required in the third quarter of 2011.  We performed our annual impairment test on core deposit intangibles as of September 30, 2010 and determined no impairment was necessary.  Amortization expense recognized was $311,000 for the nine month periods ended September 30, 2011 and 2010.

 

Deposits and Borrowings

 

The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable legal limits.  The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act permanently raises the current standard maximum deposit insurance amount to $250,000 and extended unlimited FDIC deposit insurance to qualifying noninterest-bearing transaction accounts through December 31, 2012.

 

Total deposits increased $55,796,000 or 8.58% to $706,291,000 as of September 30, 2011 compared to $650,495,000 as of December 31, 2010.  Interest-bearing deposits increased $35,473,000 or 7.44% to $512,101,000 as of September 30, 2011 compared to $476,628,000 as of December 31, 2010.  Non-interest bearing deposits increased $20,323,000 or 11.69% to $194,190,000 as of September 30, 2011 compared to $173,867,000 as of December 31, 2010.  Average non-interest bearing deposits to average total deposits was 26.46% for the nine months ended September 30, 2011 compared to 23.50% for the same period in 2010.

 

The composition of the deposits and average interest rates paid at September 30, 2011 and December 31, 2010 is summarized in the table below.

 

(Dollars in thousands)

 

September 30,
2011

 

% of
Total
Deposits

 

Effective
Rate

 

December 31,
2010

 

% of
Total
Deposits

 

Effective
Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

140,889

 

20.0

%

0.28

%

$

114,473

 

17.6

%

0.38

%

MMA accounts

 

177,829

 

25.2

%

0.44

%

157,345

 

24.2

%

0.66

%

Time deposits

 

162,554

 

23.0

%

0.97

%

177,132

 

27.2

%

1.19

%

Savings deposits

 

30,829

 

4.3

%

0.18

%

27,678

 

4.3

%

0.20

%

Total interest-bearing

 

512,101

 

72.5

%

0.57

%

476,628

 

73.3

%

0.77

%

Non-interest bearing

 

194,190

 

27.5

%

 

 

173,867

 

26.7

%

 

 

Total deposits

 

$

706,291

 

100.0

%

 

 

$

650,495

 

100.0

%

 

 

 

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Table of Contents

 

Other Borrowings

 

There were no short term borrowings as of September 30, 2011 compared to $10,000,000 as of December 31, 2010.

 

Long-term borrowings of $4,000,000 at September 30, 2011 represent FHLB advances with weighted average interest of 3.59% and weighted average maturity of 1.4 years.  Long-term borrowings at December 31, 2010 were $4,000,000.

 

The Company holds junior subordinated deferrable interest debentures (trust preferred securities).  Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis.  At September 30, 2011, all of the trust preferred securities that have been issued qualify as Tier 1 capital.  Interest on the trust preferred securities is payable and the rate is adjusted to equal the three month LIBOR plus 1.60% each January 7, April 7, July 7 or October 7 of each year.  As of September 30, 2011, the rate was 1.85%.  Interest expense recognized by the Company for the nine months ended September 30, 2011 was $73,000.

 

Capital

 

Our stockholders’ equity was $106,347,000 as of September 30, 2011 compared to $97,391,000 as of December 31, 2010.  The increase in stockholders’ equity is the result of retained earnings increase of $4,369,000 for the nine months ended September 30, 2011, an increase in other comprehensive income net of tax of $3,690,000, and proceeds from the exercise of employee stock options, including the related tax benefit of $796,000.

 

Management considers capital requirements as part of its strategic planning process.  The strategic plan calls for continuing increases in assets and liabilities, and the capital required may therefore be in excess of retained earnings.  The ability to obtain capital is dependent upon the capital markets as well as our performance.  Management regularly evaluates sources of capital and the timing required to meet its strategic objectives.  The assessment of capital adequacy is dependent on several factors including asset quality, earnings trends, liquidity and economic conditions.  Maintenance of adequate capital levels is integral to providing stability to the Company.  The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions including acquisition opportunities.

 

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Table of Contents

 

The following table presents the Company’s and the Bank’s Regulatory capital ratios as of September 30, 2011 and December 31, 2010.

 

 

 

September 30, 2011

 

December 31, 2010

 

(Dollars in thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Tier 1 Leverage Ratio

 

 

 

 

 

 

 

 

 

Central Valley Community Bancorp and Subsidiary

 

$

79,537

 

10.19

%

$

70,669

 

9.48

%

Minimum regulatory requirement

 

$

31,218

 

4.00

%

$

29,832

 

4.00

%

Central Valley Community Bank

 

$

78,546

 

10.07

%

$

69,457

 

9.32

%

Minimum requirement for “Well-Capitalized” institution

 

$

39,007

 

5.00

%

$

37,264

 

5.00

%

Minimum regulatory requirement

 

$

31,206

 

4.00

%

$

29,811

 

4.00

%

 

 

 

 

 

 

 

 

 

 

Tier 1 Risk-Based Capital Ratio

 

 

 

 

 

 

 

 

 

Central Valley Community Bancorp and Subsidiary

 

$

79,537

 

15.95

%

$

70,669

 

14.16

%

Minimum regulatory requirement

 

$

19,942

 

4.00

%

$

19,965

 

4.00

%

Central Valley Community Bank

 

$

78,546

 

15.76

%

$

69,457

 

13.92

%

Minimum requirement for “Well-Capitalized” institution

 

$

29,902

 

6.00

%

$

29,929

 

6.00

%

Minimum regulatory requirement

 

$

19,934

 

4.00

%

$

19,953

 

4.00

%

 

 

 

 

 

 

 

 

 

 

Total Risk-Based Capital Ratio

 

 

 

 

 

 

 

 

 

Central Valley Community Bancorp and Subsidiary

 

$

85,986

 

17.25

%

$

76,982

 

15.42

%

Minimum regulatory requirement

 

$

39,884

 

8.00

%

$

39,931

 

8.00

%

Central Valley Community Bank

 

$

84,993

 

17.05

%

$

75,766

 

15.19

%

Minimum requirement for “Well-Capitalized” institution

 

$

49,836

 

10.00

%

$

49,881

 

10.00

%

Minimum regulatory requirement

 

$

39,869

 

8.00

%

$

39,905

 

8.00

%

 

We are required to deduct the disallowed portion of net deferred tax assets from Tier 1 capital in calculating our capital ratios.  Generally, disallowed deferred tax assets that are dependent upon future taxable income are limited to the lesser of the amount of deferred tax assets that we expect to realize within one year, based on projected future taxable income, or 10% of the amount of our Tier 1 capital.  Disallowed deferred tax assets deducted from Tier 1 capital were $2,689,000 and $5,981,000 at September 30, 2011 and December 31, 2010, respectively.

 

Liquidity

 

Liquidity management involves our ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include funding of securities purchases, providing for customers’ credit needs and ongoing repayment of borrowings.  Our liquidity is actively managed on a daily basis and reviewed periodically by our management and Director’s Asset/Liability Committees.  This process is intended to ensure the maintenance of sufficient funds to meet our needs, including adequate cash flow for off-balance sheet commitments.

 

Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities with correspondent banks, and advances from the Federal Home Loan Bank of San Francisco.  These funding sources are augmented by payments of principal and interest on loans, the routine maturities and pay downs of securities from the securities portfolio, the stability of our core deposits and the ability to sell investment securities.  As of September 30, 2011, the Company had unpledged securities totaling $149,130,000 available as a secondary source of liquidity and total cash and cash equivalents of $98,073,000.  Cash and cash equivalents at September 30, 2011 decreased 2.90% compared to December 2010.  Primary uses of funds include withdrawal of and interest payments on deposits, originations and purchases of loans, purchases of investment securities, and payment of operating expenses. Due to the negative impact of the slow economic recovery, we have been cautiously managing our asset quality. Consequently, expanding our portfolio or finding adequate investments to utilize some of our excess liquidity has been difficult in the current economic environment.

 

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Table of Contents

 

As a means of augmenting our liquidity, we have established federal funds lines with correspondent banks.  At September 30, 2011 our available borrowing capacity includes approximately $39,000,000 in unsecured credit lines with our correspondent banks, $114,841,000 in unused FHLB advances and $743,000 secured credit line at the Federal Reserve Bank.  We believe our liquidity sources to be stable and adequate.  At September 30, 2011, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position.

 

The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at September 30, 2011 and December 31, 2010:

 

Credit Lines (In thousands)

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Unsecured Credit Lines

 

 

 

 

 

(interest rate varies with market):

 

 

 

 

 

Credit limit

 

$

39,000

 

$

39,000

 

Balance outstanding

 

$

 

$

 

 

 

 

 

 

 

Federal Home Loan Bank

 

 

 

 

 

(interest rate at prevailing interest rate):

 

 

 

 

 

Credit limit

 

$

118,841

 

$

114,659

 

Balance outstanding

 

$

4,000

 

$

14,000

 

Collateral pledged

 

$

112,553

 

$

123,717

 

Fair value of collateral

 

$

113,616

 

$

126,326

 

 

 

 

 

 

 

Federal Reserve Bank

 

 

 

 

 

(interest rate at prevailing discount interest rate):

 

 

 

 

 

Credit limit

 

$

743

 

$

1,321

 

Balance outstanding

 

$

 

$

 

Collateral pledged

 

$

731

 

$

1,278

 

Fair value of collateral

 

$

759

 

$

1,354

 

 

The liquidity of the parent company, Central Valley Community Bancorp, is primarily dependent on the payment of cash dividends by its subsidiary, Central Valley Community Bank, subject to limitations imposed by the regulations.

 

OFF-BALANCE SHEET ITEMS

 

In the ordinary course of business, the Company is a party to financial instruments with off-balance risk.  These financial instruments include commitments to extend credit and standby letters of credit.  Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.  For an expanded discussion of these financial instruments, refer to Note 8 of the Notes to Consolidated Financial Statements included herein and Note 11 of the Notes to Consolidated Financial Statements in the Company’s 2010 Annual Report to Shareholders on Form 10-K.

 

In the ordinary course of business, the Company is party to various operating leases.  For a fuller discussion of these financial instruments, refer to Note 11 of the Notes to Consolidated Financial Statements in the Company’s 2010 Annual Report to Shareholders on Form 10-K.

 

ITEM 4. CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures with respect to the information generated for use in this Quarterly Report. The evaluation was based in part upon reports provided by a number of executives.    Based upon, and as of the date of that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures, as so amended, were effective to provide reasonable assurances that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed by the Company in the reports that it files or submits is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

 

There was no change in the Company’s internal controls over financial reporting during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

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Table of Contents

 

In designing and evaluating disclosure controls and procedures, the Company’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurances of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

PART II OTHER INFORMATION

 

ITEM 1 LEGAL PROCEEDINGS

 

None to report.

 

ITEM 1A RISK FACTORS

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results.  The risks described in our Annual Report on Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS

 

None to report.

 

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

 

None to report.

 

ITEM 4 REMOVED AND RESERVED

 

ITEM 5 OTHER INFORMATION

 

None to report.

 

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Table of Contents

 

ITEM 6 EXHIBITS

 

3.1

 

Certificate of Determination for Preferred Stock (incorporated by reference to the Company’s report on Form 8-K, EDGAR filing date of August 22, 2011).

 

 

 

3.2

 

Amended By-laws of the Company.

 

 

 

10.86

 

Securities Purchase Agreement, dated August 18, 2011, between the Company and the United States Department of Treasury (incorporated by reference to the Company’s report on Form 8-K, EDGAR filing date of August 22, 2011).

 

 

 

10.87

 

Letter Agreement, dated August 18, 2011, between the Company and the United States Department of Treasury (incorporated by reference to the Company’s report on Form 8-K, EDGAR filing date of August 22, 2011).

 

 

 

10.88

 

Share Exchange Agreement, dated August 23, 2011, among the Company and Patriot Financial Partners, L.P. and Patriot Financial Partners Parallel, L.P. (incorporated by reference to the Company’s report on Form 8-K, EDGAR filing date of August 26, 2011).

 

 

 

10.89

 

Second Amended and Restated Executive Salary Continuation Agreement effective July 1, 2011 by and between Central Valley Community Bank and Daniel J. Doyle.

 

 

 

10.90

 

Second Amended and Restated Life Insurance Endorsement Method Split Dollar Plan Agreement effective July 1, 2011 by and between Central Valley Community Bank and Daniel J. Doyle.

 

 

 

31.1

 

Certification of Principal Executive Officer Pursuant to Rule 13a-14(d) / 15d-14(a) of the Securities Exchange Act of 1934.

 

 

 

31.2

 

Certification of Principal Financial Officer Pursuant to Rule 13a-14(d) / 15d-14(a) of the Securities Exchange Act of 1934.

 

 

 

32.1

 

Certification of Principal Executive Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

 

 

 

32.2

 

Certification of Principal Financial Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

 

 

 

101.LAB

 

XBRL Taxonomy Extension labels Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Link Document

 

55



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Central Valley Community Bancorp

 

 

 

Date: November 14, 2011

/s/ Daniel J. Doyle

 

Daniel J. Doyle

 

President and Chief Executive Officer

 

 

Date: November 14, 2011

/s/ David A. Kinross

 

David A. Kinross

 

Senior Vice President and Chief Financial Officer

 

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Table of Contents

 

EXHIBIT INDEX

 

Exhibit
Number

 

Description

 

 

 

3.1

 

Certificate of Determination for Preferred Stock (incorporated by reference to the Company’s report on Form 8-K, EDGAR filing date of August 22, 2011).

 

 

 

3.2

 

Amended By-laws of the Company.

 

 

 

10.86

 

Securities Purchase Agreement, dated August 18, 2011, between the Company and the United States Department of Treasury (incorporated by reference to the Company’s report on Form 8-K, EDGAR filing date of August 22, 2011).

 

 

 

10.87

 

Letter Agreement, dated August 18, 2011, between the Company and the United States Department of Treasury (incorporated by reference to the Company’s report on Form 8-K, EDGAR filing date of August 22, 2011).

 

 

 

10.88

 

Share Exchange Agreement, dated August 23, 2011, among the Company and Patriot Financial Partners, L.P. and Patriot Financial Partners Parallel, L.P. (incorporated by reference to the Company’s report on Form 8-K, EDGAR filing date of August 26, 2011).

 

 

 

10.89

 

Second Amended and Restated Executive Salary Continuation Agreement effective July 1, 2011 by and between Central Valley Community Bank and Daniel J. Doyle.

 

 

 

10.90

 

Second Amended and Restated Life Insurance Endorsement Method Split Dollar Plan Agreement effective July 1, 2011 by and between Central Valley Community Bank and Daniel J. Doyle.

 

 

 

31.1

 

Certification of Principal Executive Officer Pursuant to Rule 13a-14(d) / 15d-14(a) of the Securities Exchange Act of 1934. (1)

 

 

 

31.2

 

Certification of Principal Financial Officer Pursuant to Rule 13a-14(d) / 15d-14(a) of the Securities Exchange Act of 1934. (1)

 

 

 

32.1

 

Certification of Principal Executive Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. (2)

 

 

 

32.2

 

Certification of Principal Financial Officer Pursuant to Rule 13a-14(b) / 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. (2)

 

 

 

101.INS

 

XBRL Instance Document (2)

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document (2)

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Document (2)

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase (2)

 

 

 

101.LAB

 

XBRL Taxonomy Extension labels Linkbase Document (2)

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Link Document (2)

 


(1)           Filed herewith.

 

(2)           Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

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Exhibit 3.2

 

BYLAWS

 

OF

 

CENTRAL VALLEY COMMUNITY BANCORP

 

A CALIFORNIA CORPORATION

 

TABLE OF CONTENTS

 

ARTICLE I. OFFICES

1

 

 

SECTION 1.

Principal Office

1

SECTION 2.

Other Offices

1

 

 

 

ARTICLE II. MEETINGS OF SHAREHOLDERS

1

 

 

SECTION 3.

Place of Meetings

1

SECTION 4.

Annual Meetings

1

SECTION 5.

Special Meetings

2

SECTION 6.

Notice of Shareholders’ Meetings

2

SECTION 7.

Quorum

3

SECTION 8.

Adjourned Meeting

3

SECTION 9.

Waiver or Consent by Shareholders

3

SECTION 10.

Action Without Meeting

3

SECTION 11.

Voting Rights; Cumulative Voting

4

SECTION 12.

Proxies

4

SECTION 13.

Voting by Joint Holders or Proxies

5

SECTION 14.

Inspectors of Election

5

 

 

 

ARTICLE III. DIRECTORS; MANAGEMENT

5

 

 

SECTION 15.

Powers

5

SECTION 16.

Number and Qualification of Directors

5

SECTION 17.

Election and Term of Office

6

SECTION 18.

Removal of Directors

7

SECTION 19.

Vacancies

7

SECTION 20.

Place of Meetings

7

SECTION 21.

Organizational Meetings

7

SECTION 22.

Other Regular Meetings

8

SECTION 23.

Special Meetings

8

SECTION 24.

Quorum

8

SECTION 25.

Contents of Notice and Waiver of Notice

8

 



 

SECTION 26.

Adjournment

8

SECTION 27.

Notice of Adjournment

9

SECTION 28.

Telephone Participation

9

SECTION 29.

Action Without Meeting

9

SECTION 30.

Fees and Compensation

9

 

 

 

ARTICLE IV. OFFICERS

9

 

 

SECTION 31.

Officers

9

SECTION 32.

Election

10

SECTION 33.

Subordinate Officers

10

SECTION 34.

Removal and Resignation

10

SECTION 35.

Vacancies

10

SECTION 36.

Chairman of the Board

10

SECTION 37.

President

10

SECTION 38.

Vice Presidents

11

SECTION 39.

Secretary

11

SECTION 40.

Chief Financial Officer

11

 

 

 

ARTICLE V. GENERAL CORPORATE MATTERS

12

 

 

SECTION 41.

Record Date and Closing of Stock Books

12

SECTION 42.

Corporate Records and Inspection by Shareholders

12

SECTION 43.

Checks, Drafts, Evidences of Indebtedness

13

SECTION 44.

Corporate Contracts and Instruments; How Executed

13

SECTION 45.

Stock Certificates

13

SECTION 46.

Lost Certificates

13

SECTION 47.

Reports to Shareholders

13

SECTION 48.

Indemnity of Officers, Directors, etc.

14

SECTION 49.

Fiscal Year

14

SECTION 50.

Construction and Definitions

14

 

 

 

ARTICLE VI. AMENDMENTS

14

 

 

SECTION 51.

Amendments by Shareholders

14

SECTION 52.

Amendment by Directors

14

 



 

BYLAWS

 

OF

 

CENTRAL VALLEY COMMUNITY BANCORP

 

(A California Corporation)

 

ARTICLE I.

 

OFFICES

 

SECTION 1. PRINCIPAL OFFICE. The principal executive office in the State of California for the transaction of the business of the corporation (called the principal office) is fixed and located at 7100 N. Financial Drive, Suite 101, Fresno, California, 93720.

 

The Board of Directors shall have the authority from time to time to change the principal office from one location to another within or without the State by amending this Section 1 of the Bylaws.

 

SECTION 2. OTHER OFFICES. One or more branches or other subordinate offices may at any time be fixed and located by the Board of Directors at such place or places within or without the State of California as it deems appropriate.

 

ARTICLE II.

 

MEETING OF SHAREHOLDERS

 

SECTION 3. PLACE OF MEETINGS. Meetings of the shareholders shall be held at any place within the State of California that may be designated either by the Board of Directors in accordance with these Bylaws. If no such designation is made, the meetings shall be held at the principal office of the corporation.

 

SECTION 4. ANNUAL MEETINGS. The annual meeting of the shareholders shall be held on the fourth Thursday of May of each year. The exact date and time of such annual meeting shall be fixed by resolution of the Board of Directors; provided, however, that should such day fall on a legal holiday, then the meeting shall be held on the next succeeding business day, at which time the shareholders shall elect a Board of Directors, consider reports of the affairs of the corporation, and transact such other business as may properly be brought before the meeting.

 

If the annual meeting of shareholders shall not be held during the time above specified, the Board of Directors shall cause such a meeting to be held as soon thereafter as convenient and any business transacted or election held at such meeting shall be as valid as if transacted or held at an annual meeting during the time above specified.

 

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SECTION 5. SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose or purposes whatsoever, may be called at any time by a majority of the Board of Directors, the Chairman of the Board of Directors, the President, or by holders of shares entitled to cast not less than 10 percent (10%) of the votes at the meeting.

 

SECTION 6. NOTICE OF SHAREHOLDERS’ MEETINGS. Whenever shareholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than 10 (or, if sent by third class mail, 30) nor more than 60 days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (2) in the case of the annual meeting, those matters which the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of Section 601(f) of the California Corporations Code, any proper matter may be presented at the meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by management for election.

 

Notice of a shareholders’ meeting shall be given either personally or by first class mail, or, if the corporation has outstanding shares held of record by 500 or more persons (determined as provided in Section 605 of the California Corporations Code) on the record date for the shareholders’ meeting, notice may be sent by third class mail or other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal office of the corporation is located. The notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication.

 

If any notice addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at such address, all future notices shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder to the principal office of the corporation for a period of one year from the date of the giving of the notice to all other shareholders.

 

Upon request in writing to the Chairman of the Board of Directors, the President, or the Secretary by any person entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 nor more than 60 days after the receipt of the request.

 

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SECTION 7. QUORUM. The presence at any meeting, in person or by proxy, of persons entitled to vote a majority of the voting shares of the corporation shall constitute a quorum for the transaction of business. Shareholders present at a valid meeting at which a quorum is initially present may continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.

 

SECTION 8. ADJOURNED MEETING. Any annual or special shareholders’ meeting may be adjourned from time to time, even though a quorum is not present, by vote of the holders of a majority of the voting shares present at the meeting either in person or by proxy, provided that in the absence of a quorum, no other business may be transacted at the meeting except as provided in Section 7 of these Bylaws.

 

Notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting.

 

SECTION 9. WAIVER OR CONSENT BY SHAREHOLDERS. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by Section 6 of these Bylaws or Section 601(f) of the California Corporations Code to be included in the notice but not so included, if such objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, consent to the holding of the meeting or approval of the minutes thereof, except as provided in Section 601(f) of the California Corporations Code.

 

SECTION 10. ACTION WITHOUT MEETING. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, except that unanimous written consent shall be required for election of directors to non-vacant positions.

 

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Unless the consents of all shareholders entitled to vote have been solicited or received in writing, notice shall be given to non-consenting shareholders to the extent required by Section 603(b) of the California Corporations Code.

 

Any shareholder giving written consent, or the shareholder’s proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the Secretary of the corporation.

 

SECTION 11. VOTING RIGHTS; CUMULATIVE VOTING. Only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the record date fixed by the Board of Directors as provided in Section 41 of these Bylaws for the determination of shareholders of record shall be entitled to notice of and to vote at such meeting of shareholders.

 

Except as provided in the next following sentence and except as may be otherwise provided in the Articles of Incorporation, each shareholder entitled to vote shall be entitled to one vote for each share held on each matter submitted to a vote of shareholders. In the election of directors, each such shareholder complying with the following paragraph may cumulate such shareholder’s votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder’s shares are normally entitled, or distribute the shareholder’s votes on the same principle among as many candidates as the shareholder thinks fit.

 

No shareholder shall be entitled to cumulate votes in favor of any candidate or candidates unless such candidate’s or candidates’ names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting of the shareholder’s intention to cumulate the shareholder’s votes. If any one shareholder has given such notice, such fact shall be announced to all shareholders and proxies present, who may then cumulate their votes for candidates in nomination.

 

In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them, up to the number of directors to be elected by such shares, are elected.

 

Voting may be by voice or ballot, provided that any election of directors must be by ballot upon the demand of any shareholder made at the meeting and before the voting begins.

 

SECTION 12. PROXIES. Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares. All proxies must be in writing and must be signed by the shareholder confirming the proxy or his or her attorney-in-fact. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto, except as otherwise provided in Section 705 of the California

 

4



 

Corporations Code. Such revocation may be effected by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or as to any meeting, by attendance at such meeting and voting in person by the person executing the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed.

 

SECTION 13. VOTING BY JOINT HOLDERS OR PROXIES. Shares or proxies standing in the names of two or more persons shall be voted or represented in accordance with the provisions of Section 704 of the California Corporations Code, so that, if only one of such persons is present in person or by proxy, that person shall have the right to vote all such shares, and all of the shares standing in the names of such persons shall be deemed to be represented for the purpose of determining a quorum.

 

SECTION 14. INSPECTORS OF ELECTION. In advance of any meeting of shareholders the Board may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the Chairman of any meeting of shareholders may, and on the request of any shareholder or a shareholder’s proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse) at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all.

 

The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies; receive votes, ballots or consents; hear and determine all challenges and questions in any way arising in connection with the right to vote; count and tabulate all votes or consents; determine when the polls shall close; determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders.

 

ARTICLE III.

 

DIRECTORS; MANAGEMENT

 

SECTION 15. POWERS. Subject to any provisions of the Articles of Incorporation, of the Bylaws and of law limiting the powers of the Board of Directors or reserving powers to the shareholders, the Board of Directors shall, directly or by delegation, manage the business and affairs of the corporation and exercise all corporate powers permitted by law.

 

SECTION 16. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of directors shall be not less than seven (7) nor more than thirteen (13). The exact number of directors shall be ten (10) until changed by a resolution duly adopted by the Board of Directors. Directors need not be shareholders of the corporation. No reduction of the authorized number of directors shall have the effect of removing any director before his or her term of office expires.

 

5



 

Nomination for election of members of the Board of Directors may be made by the Board of Directors or by any shareholder of any outstanding class of capital stock of the corporation entitled to vote for the election of directors. Notice of intention to make any nominations shall be made in writing and shall be delivered or mailed to the President of the corporation not less than 21 days nor more than 60 days prior to any meeting of shareholders called for the election of directors; provided however, that if less than 21 days’ notice of the meeting is given to shareholders, such notice of intention to nominate shall be mailed or delivered to the President of  the corporation not later than the close of business on the tenth day following the day on which the notice of meeting was mailed; provided further, that if notice of such meeting is sent by third class mail as permitted by Section 6 of these Bylaws, no notice of intention to make nominations shall be required. Such notification shall contain the following information to the extent known to the notifying shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the number of shares of capital stock of the corporation owned by each proposed nominee; (d) the name and residence address of the notifying shareholder; and (e) the number of shares of capital stock of the corporation owned by the notifying shareholder.  Nominations not made in accordance herewith may, in the discretion of the Chairman of the meeting, be disregarded and upon the Chairman’s instructions, the inspectors of election can disregard all votes cast for each such nominee. A copy of this paragraph shall be set forth in a notice to shareholders of any meeting at which directors are to be elected.

 

Notwithstanding anything in these bylaws to the contrary, for so long as Central Valley Community Bancorp’s Non-Cumulative Perpetual Preferred Stock, Series C (the “Designated Preferred Stock”) is outstanding, (i) whenever, at any time or times, (a) dividends on the shares of Designated Preferred Stock have not been declared and paid in full within five (5) Business Days after each Dividend Payment Date (as defined in the Certificate of Determination of the Designated Preferred Stock, hereinafter the “Certificate of Determination”) for an aggregate of six (6) quarterly Dividend Periods (as defined in the Certificate of Determination) or more, whether or not consecutive and (b) the aggregate liquidation preference of the then outstanding shares of Designated Preferred Stock is greater than or equal to $25,000,000,  the authorized number of directors shall automatically be increased by two (but shall in no event be increased to a number of directors that is greater than the maximum number of directors set forth in Article III, Section 16 of these bylaws); and (ii) this sentence may not be modified, amended or repealed by the corporation’s board of directors (or any committee thereof) or without the affirmative vote and approval of (x) the shareholders and (y) the holders of at least a majority of the shares of Designated Preferred Stock outstanding at the time of such vote and approval.

 

SECTION 17. ELECTION AND TERM OF OFFICE. The directors shall be elected annually by the shareholders at the annual meeting of the shareholders; provided, that if for any reason, said annual meeting or an adjournment thereof is not held or the directors are not elected thereat, then the directors may be elected at any special meeting of the shareholders called and held for that purpose. The term of office of the directors shall, except as provided in Section 18 of these Bylaws, begin immediately after their election and shall continue until their respective successors are elected and qualified.

 

6



 

SECTION 18. REMOVAL OF DIRECTORS. A director may be removed from office by the Board of Directors if he or she is declared of unsound mind by an order of court or convicted of a felony. Any or all of the directors may be removed from office without cause by a vote of shareholders holding a majority of the outstanding shares entitled to vote at an election of directors; however, unless the entire Board of Directors is removed, an individual director shall not be removed if the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast, or, if such action is taken by written consent, all shares entitled to vote were voted, and the entire number of directors authorized at the time of the director’s most recent election were then being elected. A director may also be removed from office by the Superior Court of the county in which the principal office is located, at the suit of shareholders holding at least ten percent (10%) of the number of outstanding shares of any class, in case of fraudulent or dishonest acts or gross abuse of authority or discretion with reference to the corporation, in the manner provided by law.

 

SECTION 19. VACANCIES. A vacancy or vacancies on the Board of Directors shall exist on the death, resignation, or removal of any director, or if the authorized number of directors is increased or the shareholders fail to elect the full authorized number of directors.

 

Except for a vacancy created by the removal of a director, vacancies on the Board of Directors may be filled by a majority of the remaining directors although less than a quorum, or by a sole remaining director, and each director elected in this manner shall hold office until his or her successor is elected at an annual or special shareholders’ meeting.

 

The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Any such election by written consent other than to fill a vacancy created by removal requires the consent of a majority of the outstanding shares entitled to vote.

 

Any director may resign effective upon giving written notice to the Chairman of the Board of Directors, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective.

 

SECTION 20. PLACE OF MEETINGS. Regular and special meetings of the Board of Directors shall be held at any place within the State of California that is designated by resolution of the Board or, either before or after the meeting, consented to in writing by all the Board members. If the place of a regular or special meeting is not fixed by resolution or written consents of the Board, it shall be held at the corporation’s principal office.

 

SECTION 21. ORGANIZATIONAL MEETINGS. Immediately following each annual shareholders’ meeting, the Board of Directors shall hold a regular meeting to organize, elect officers, and transact other business. Notice of this meeting shall not be required.

 

7



 

SECTION 22. OTHER REGULAR MEETINGS. Other regular meetings of the Board of Directors shall be held at least once each calendar month at such time and place as the Board of Directors by resolution shall determine. Notice of these regular meetings shall not be required.

 

SECTION 23. SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose may be called at any time by the Chairman of the Board of Directors, or the President, or any Vice President, or the Secretary, or any two directors.

 

Special meetings of the Board shall be held upon four days’ notice by mail or 48 hours’ notice delivered personally or by telephone, including a voice messaging system or other technology designed to record and communicate messages, telegraph, facsimile, electronic mail or other electronic means. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States Mails, postage prepaid. Any other written notice, including facsimile, telegram or electronic mail message, shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient. Oral notice shall be deemed to have been given at the time it is communicated, in person or by telephone, including a voice messaging system or other system or technology designed to record or communicate messages, or wireless, to the recipient, including the recipient’s designated voice mailbox or address on such system, or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient.

 

SECTION 24. QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn a meeting under Section 26 of these Bylaws. Every act done or decision made by a majority of the directors present at a meeting at which a quorum is present shall be regarded as the act of the Board of Directors, unless the vote of a greater number is required by law, the Articles of Incorporation, or these Bylaws, and subject to the provisions of Section 310 and Section 317(e) of the California Corporations Code. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by a majority of the required quorum for such meeting.

 

SECTION 25. CONTENTS OF NOTICE AND WAIVER OF NOTICE. Neither the business to be transacted at, nor the purpose of, any regular or special Board meeting need be specified in the notice or waiver of notice of the meeting. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, either before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to said director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting.

 

SECTION 26. ADJOURNMENT. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place.

 

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SECTION 27. NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place are fixed at the meeting being adjourned, except that if the meeting is adjourned for more than 24 hours such notice shall be given prior to the adjourned meeting to the directors who were not present at the time of the adjournment.

 

SECTION 28. TELEPHONE PARTICIPATION. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meetings can hear one another. Such participation constitutes presence in person at such meeting.

 

SECTION 29. ACTION WITHOUT MEETING. The Board of Directors may take any action without a meeting that may be required or permitted to be taken by the Board at a meeting, if all members of the Board individually or collectively consent in writing to the action. The written consent or consents shall be filed in the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same effect as a unanimous vote of directors.

 

SECTION 30. FEES AND COMPENSATION. Directors and members of committees shall receive neither compensation for their services nor reimbursement for their expenses unless these payments are fixed by resolution of the Board. This Section shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise, and receiving compensation for those services.

 

ARTICLE IV.

 

OFFICERS

 

SECTION 31. OFFICERS. The officers of the corporation shall be a President, a Chief Financial Officer and a Secretary. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board and a Vice Chairman of the Board (each of whom shall be chosen from the Board of Directors), one or more Vice Presidents, one or more Cashiers, one or more Assistant Vice Presidents, one or more Assistant Secretaries, one or more Assistant Cashiers and/or Financial Officers, and any other officers who may be appointed under Section 33 of these Bylaws. Any two or more offices may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity unless authorized to do so generally or in the specific instance by the Board of Directors.

 

Any officer of the corporation may be excluded by resolution of the Board of Directors or by a provision of these Bylaws from participation, other than in the capacity of a director, in major policy making functions of the corporation.

 

Upon direction by the Board of Directors, any officer or employee of the corporation so designated shall give bond of suitable amount with security to be approved by the Board of Directors, conditioned on the honest and faithful discharge of his or her duties as such officer or employee. At the discretion of the Board, such bonds may be schedule or blanket form and the

 

9



 

premiums shall be paid by the corporation. The amount of such bonds, the form of coverage, and the name of the company providing the surety therefor shall be reviewed annually by the Board of Directors. Action shall be taken by the Board at that time approving the amount of the bond to be provided by each officer and employee of the corporation for the ensuing year.

 

SECTION 32. ELECTION. The officers of the corporation, except those appointed under Section 33 of these Bylaws, shall be chosen annually by the Board of Directors, and each shall hold his or her office until he or she resigns or is removed or otherwise disqualified to serve, or his or her successor is elected and qualified.

 

SECTION 33. SUBORDINATE OFFICERS. The Board of Directors may elect or appoint, and may authorize the President or the Chief Executive Officer to appoint, any other officers that the business of the corporation may require, each of whom shall hold office for the period, have the authority, and perform the duties specified in the Bylaws or by the Board of Directors.

 

SECTION 34. REMOVAL AND RESIGNATION. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed with or without cause either by the Board of Directors at any time or, except for an officer chosen by the Board, by any officer on whom the power of removal may be conferred by the Board.

 

Any officer may resign at any time by giving written notice to the Board of Directors, the President or the Secretary of the corporation, but such notice shall not prejudice the rights, if any, of the corporation under any contract of employment to which the officer is a party. An officer’s resignation shall take effect when it is received or at any later time specified in the resignation.  Unless the resignation specifies otherwise, its acceptance by the corporation shall not be necessary to make it effective.

 

SECTION 35. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause shall be filled in the manner prescribed in the Bylaws for regular election or appointment to the office.

 

SECTION 36. CHAIRMAN OF THE BOARD. The Board of Directors may appoint one of its members to be the Chairman to serve at the pleasure of the Board of Directors. If appointed, the Chairman shall preside at all meetings of the Board of Directors and of the shareholders of the corporation and shall supervise the carrying out of the policies adopted or approved by the Board of Directors; shall have general executive powers, as well as the specific powers conferred by these Bylaws; and, shall also have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned by the Board of Directors.

 

SECTION 37. PRESIDENT. The President shall be the corporation’s chief executive officer and shall, subject to the control of the Board of Directors, have general supervision, direction, and control over the corporation’s business and officers. In the absence of the Chairman, the President shall preside at any meeting of the Board of Directors or the shareholders of the corporation. The President shall have general executive powers, shall be ex officio a member of all the standing committees except the Audit Committee, and shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice, to the Office of President, or imposed by these Bylaws. The President shall also have and may exercise such further powers and duties as from time to time may be conferred, or assigned by the Board of Directors.

 

10



 

SECTION 38. VICE PRESIDENTS. If the President is absent or is unable or refuses to act, the Vice Presidents in order of their rank as fixed by the Board of Directors or, if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions on, the President.  Each Vice President shall have any other duties that are prescribed for said Vice President by the Board of Directors or the Bylaws.

 

SECTION 39. SECRETARY. The Secretary shall keep or cause to be kept and shall make available at the principal office and any other place that the Board of Directors specifies, a book of minutes of all directors’ and shareholders’ meetings. The minutes of each meeting shall state the time and place that it was held; whether it was regular or special; if a special meeting, how it was authorized; the notice given; the names of those present or represented at shareholders’ meetings; and the proceedings of the meetings. A similar minute book shall be kept for each committee of the Board.

 

The Secretary shall keep, or cause to be kept, at the principal office or at the office of the corporation’s transfer agent, a share register, or duplicate share register, showing the shareholders’ names and addresses, the number and classes of shares held by each, the number and date of each certificate issued for these shares, and the number and date of cancellation of each certificate surrendered for cancellation.

 

The Secretary shall give, or cause to be given, notice of all directors’ and shareholders’ meetings required to be given under these Bylaws or by law, shall keep the corporate seal in safe custody, and shall have any other powers and perform any other duties that are prescribed by the Board of Directors or these Bylaws.

 

The Secretary shall be deemed not to be an executive officer of the corporation and the Secretary shall be excluded from participation, other than in the capacity of director if the Secretary is also a director, in major policy making functions of the corporation.

 

SECTION 40. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall be the corporation’s chief financial officer and shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the corporation’s properties and business transactions, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares and shall file or cause to be filed all regulatory reports required pursuant to law or regulation. The books of account shall at all reasonable times be open to inspection by any director.

 

The Chief Financial Officer shall deposit all money and other valuables in the name and to the credit of the corporation with the depositories designated by the Board of Directors. The Chief Financial Officer shall disburse the corporation’s funds as ordered by the Board of Directors; shall render to the President and directors, whenever they request it, an account of all his transactions as Chief Financial Officer and of the corporation’s financial condition; and shall have any other powers and perform any other duties that are prescribed by the Board of Directors or Bylaws.

 

11



 

If required by the Board of Directors, the Chief Financial Officer shall give the corporation a bond in the amount and with the surety or sureties specified by the Board for faithful performance of the duties of that person’s office and for restoration to the corporation of all its books, papers, vouchers, money, and other property of every kind in that person’s possession or under that person’s control on that person’s death, resignation, retirement, or removal from office.

 

ARTICLE V.

 

GENERAL CORPORATE MATTERS

 

SECTION 41. RECORD DATE AND CLOSING OF STOCK BOOKS. The Board of Directors may fix a time in the future as a record date for determining shareholders entitled to notice of and to vote at any shareholders’ meeting; to receive any dividend, distribution, or allotment of rights; or to exercise rights in respect of any other lawful action, including change, conversion, or exchange of shares. The record date shall not, however, be more than 60 nor less than 10 days prior to the date of such meeting nor more than 60 days prior to any other action. If a record date is fixed for a particular meeting or event, only shareholders of record on that date are entitled to notice and to vote and to receive the dividend, distribution, or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date.

 

A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than 45 days.

 

If no record date is fixed, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board has been taken, shall be the day on which the first written consent is given; and the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later.

 

SECTION 42. CORPORATE RECORDS AND INSPECTION BY SHAREHOLDERS. Books and records of account and minutes of the proceedings of the shareholders, Board, and committees of the Board shall be kept available at the principal office for inspection by the shareholders to the extent required by Section 1601 of the California Corporations Code.

 

12



 

Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation and its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and make extracts.

 

SECTION 43. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts, or other orders for payment of money, notes, and all mortgages, or other evidences of indebtedness, issued in the name of or payable to the corporation, and all assignments and endorsements of the foregoing, shall be signed or endorsed by the person or persons and in the manner specified by the Board of Directors.

 

SECTION 44. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. Except as otherwise provided in the Bylaws, officers, agents, or employees must be authorized by the Board of Directors to enter into any contract or execute any instrument in the corporation’s name and on its behalf. This authority may be general or confined to specific instances.

 

SECTION 45. STOCK CERTIFICATES. One or more certificates for shares for the corporation’s capital stock shall be issued to each shareholder for any of such shareholder’s shares that are fully paid. The corporate seal or its facsimile may be fixed on certificates. All certificates shall be signed by the Chairman of the Board, President, Chief Financial Officer and Secretary, or Assistant Secretary. Any or all of the signatures on the certificate may be facsimile signatures.

 

SECTION 46. LOST CERTIFICATES. No new share certificate that replaces an old one shall be issued unless the old one is surrendered and canceled at the same time; provided, however, that if any share certificate is lost, stolen, mutilated or destroyed, the Board of Directors may authorize issuance of a new certificate replacing the old one on any terms and conditions, including reasonable arrangement for indemnification of the corporation, that the Board may specify.

 

Prior to the due presentment for registration of transfer in the stock transfer book of the corporation, the registered owner shall be treated as the person exclusively entitled to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner, except as expressly provided otherwise by the laws of the State of California.

 

SECTION 47. REPORTS TO SHAREHOLDERS. The requirement for the annual report to shareholders referred to in Section 1501(a) of the California Corporations Code is hereby expressly waived so long as there are less than 100 holders of record of the corporation’s shares. The Board of Directors shall cause to be sent to the shareholders such annual or other periodic reports as the Board considers appropriate or as otherwise required by law.

 

If no annual report for the last fiscal year has been sent to shareholders, the corporation shall, upon the written request of any shareholder made more than 120 days after the close of such fiscal year, deliver or mail to the person making the request within 30 days thereafter the financial statements referred to in Section 1501(a) for such year.

 

13



 

SECTION 48. INDEMNITY OF OFFICERS, DIRECTORS, ETC. The corporation shall indemnify its “agents”, as defined in Section 317 of the California Corporations Code, to the full extent permitted by said Section, as amended from time to time, or as permitted by any successor statute to said Section.

 

SECTION 49. FISCAL YEAR. The fiscal year of this corporation shall begin on the first day of January and end on the 31st day of December of each year.

 

SECTION 50. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise requires, the general provisions, rules of construction and definitions in the California Corporations Code shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular includes the plural, the plural includes the singular and the term “person” includes both a corporation and a natural person.

 

ARTICLE VI.

 

AMENDMENTS

 

SECTION 51. AMENDMENTS BY SHAREHOLDERS. New Bylaws may be adopted or these Bylaws may be amended or repealed by the affirmative vote or written consent of a majority of the outstanding shares entitled to vote.

 

SECTION 52. AMENDMENT BY DIRECTORS. Subject to the right of shareholders under the preceding Section 51, new bylaws may be adopted, or these Bylaws may be amended, or repealed by the Board of Directors, except that only the shareholders can adopt a bylaw or amendment thereto which specifies or changes the number of directors on a fixed-number Board of Directors or the minimum or maximum number of directors on a variable-number Board of Directors, or which changes from a fixed-number Board of Directors to a variable-number Board of Directors or vice versa.

 

CERTIFICATE OF SECRETARY

 

I, the undersigned, certify that:

 

1.                    I am the duly elected and acting Secretary of Central Valley Community Bancorp, a California corporation; and

 

2.                    The foregoing Bylaws, consisting of thirteen (13) pages, are the Bylaws of this corporation, as amended.

 

IN WITNESS WHEREOF, I have subscribed my name and affixed the seal of this corporation on August 18,  2011.

 

 

/s/ Cathy Ponte

 

Cathy Ponte, Assistant Secretary

 

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Exhibit 10.89

 

SECOND AMENDED AND RESTATED

EXECUTIVE SALARY CONTINUATION AGREEMENT

 

This Second Amended and Restated Executive Salary Continuation Agreement (the “ Agreement ”) is made effective July 1, 2011 (the “ Effective Date ”), and is entered into by and between Central Valley Community Bank (the “ Bank ”) and Daniel J. Doyle (the “ Executive ”), each a “ Party ” and together the “ Parties .”  This Agreement amends and restates in its entirety that certain Amended And Restated Executive Salary Continuation Agreement by and between the Bank and Executive that became effective on December 31, 2006, which was subsequently amended by the Parties on March 1, 2008 (as amended, the “ Prior Agreement ”).

 

RECITALS

 

A.                                    The Executive is a valued Executive of the Bank.

 

B.                                      In 2000, the Bank’s Board of Directors (the “ Board ”) determined that the Executive’s services to the Bank were valuable and, accordingly, agreed to make certain payments to the Executive at retirement.

 

C.                                      In 2003, the Bank agreed to increase the benefit amount.

 

D.                                     The Prior Agreement was subsequently amended several times, including amendments to comply with changes in applicable law and regulations.

 

E.                                       The Parties now desire to amend the Agreement to provide additional benefits to the Executive.

 

F.                                       It is the intent of the Parties hereto that this Agreement be considered an unfunded arrangement maintained primarily to provide supplemental retirement benefits for the Executive, and to be considered a non-qualified benefit plan for purposes of the Employee Retirement Security Act of 1974, as amended (“ ERISA ”).  The Executive is fully advised of the Bank’s financial status and has had substantial input in the design and operation of this benefit plan.

 

AGREEMENT

 

In consideration of the mutual promises, covenants, and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:

 

I.                                          DEFINITIONS

 

In addition to those terms defined elsewhere in this Agreement, the following definitions apply to this Agreement:

 

1



 

A.                                    Benefits .

 

Benefits ” means the benefits that are the subject of this Agreement, including the Normal Retirement Benefit, the Early Retirement Benefit, the Involuntary Termination Benefit, the Disability Benefit, the Change in Control Benefit, and any Death Benefit.

 

B.                                      Change in Control .

 

Change in Control ” shall be deemed to have occurred on the date that any one person, or more than one person acting as a group, acquires ownership of stock of the Bank that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Bank.  However, if any one person or more than one person acting as a group, is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of Bank, the acquisition of additional stock by the same person or persons will not be considered to cause a Change in Control of the Bank.  Further, an increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the Bank acquires its stock in exchange for property will not be considered to cause a Change in Control of the Bank.  Transfers of Bank stock on account of deaths or gifts, transfers between family members or transfers to a qualified retirement plan maintained by the Bank shall not be considered in determining whether there has been a Change in Control.  For purposes of this Section I(B), the term “Bank” shall include any holding company, meaning any corporation that is a majority shareholder of the Bank.  A “Change in Control” shall be interpreted in accordance with the definition of “Change in Ownership” under Section 409A, and to the extent that an event or series of events does not constitute a “Change in Ownership” under Section 409A, the event or series of events will not constitute a “Change in Control” under this Agreement.

 

C.                                      Change in Control Benefit .

 

Change in Control Benefit ” means a lump sum payment equal to the present value (calculated using the assumptions set forth in Section X(L) of this Agreement, determined as of the date of payment) of one hundred percent (100%) of the Normal Retirement Benefit that the Executive would have received had the Executive been employed by the Bank until the date of the Change in Control.

 

D.                                     Code .

 

Code ” means the Internal Revenue Code of 1986, as amended.

 

E.                                       Disability or Disabled .

 

Disability ” or “ Disabled ” means Executive (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less

 

2



 

than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering Bank employees.  If there is a dispute regarding whether the Executive is Disabled, such dispute shall be resolved by a mutually agreeable physician.  Such resolution shall be binding upon all Parties to this Agreement.  The determination of Disability shall be made in a uniform and nondiscriminatory manner applied to all Bank employees under similar circumstances.  Notwithstanding anything to the contrary, the terms “Disability” or “Disabled” shall be interpreted in accordance with Section 409A.

 

F.                                       Disability Benefit .

 

The “ Disability Benefit ” means an annual benefit equal to the Early Retirement Benefit or Normal Retirement Benefit that the Executive would have received had the Executive Retired from the Bank on the first day of the month during which Termination of Employment on account of Disability occurs, payable in accordance with the terms of this Agreement.  Beginning on the thirteenth month that the Disability Benefit is paid, and continuing thereafter until paid in full, the Disability Benefit shall be increased each year by three percent (3%) from the previous year’s Disability Benefit amount to account for cost of living increases.

 

G.                                      Early Retirement Benefit .

 

The “ Early Retirement Benefit ” means an annual benefit equal to the amount listed below that correlates to first day of the month during which Executive Retires, payable in accordance with the terms of this Agreement.

 

Month of Retirement

 

Amount of Early Retirement Benefit

 

December, 2006

 

$

90,000

 

January, 2007

 

$

91,250

 

February, 2007

 

$

92,500

 

March, 2007

 

$

93,750

 

April, 2007

 

$

95,000

 

May, 2007

 

$

96,250

 

June, 2007

 

$

97,500

 

July, 2007

 

$

98,750

 

August, 2007

 

$

100,000

 

September, 2007

 

$

101,250

 

October, 2007

 

$

102,500

 

November, 2007

 

$

103,750

 

December, 2007

 

$

105,000

 

January, 2008

 

$

106,250

 

February, 2008

 

$

107,500

 

March, 2008

 

$

108,750

 

April, 2008

 

$

110,000

 

May, 2008

 

$

111,250

 

June, 2008

 

$

112,500

 

July, 2008

 

$

113,750

 

August, 2008

 

$

115,000

 

September, 2008

 

$

116,250

 

October, 2008

 

$

117,500

 

 

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November, 2008

 

$

118,750

 

December, 2008

 

$

120,000

 

January, 2009

 

$

121,250

 

February, 2009

 

$

122,500

 

March, 2009

 

$

123,750

 

April, 2009

 

$

125,000

 

May, 2009

 

$

126,250

 

June, 2009

 

$

127,500

 

July, 2009

 

$

128,750

 

August, 2009

 

$

130,000

 

September, 2009

 

$

131,250

 

October, 2009

 

$

132,500

 

November, 2009

 

$

133,750

 

December, 2009

 

$

135,000

 

January, 2010

 

$

136,250

 

February, 2010

 

$

137,500

 

March, 2010

 

$

138,750

 

April, 2010

 

$

140,000

 

May, 2010

 

$

141,250

 

June, 2010

 

$

142,500

 

July, 2010

 

$

143,750

 

August, 2010

 

$

145,000

 

September, 2010

 

$

146,250

 

October, 2010

 

$

147,500

 

November, 2010

 

$

148,750

 

December, 2010

 

$

150,000

 

 

Beginning on the thirteenth month that the annual Early Retirement Benefit is paid, and continuing thereafter until paid in full, the annual Early Retirement Benefit shall be increased each year by three percent (3%) from the previous year’s Early Retirement Benefit amount to account for cost of living increases.

 

H.                                     Early Retirement Date .

 

Early Retirement Date ” means the date of Retirement if it is effective prior to December 31, 2010, provided the Executive has attained age sixty (60).

 

I.                                          For Cause .

 

For Cause ” means any of the following actions by Executive that result in an adverse effect on the Bank: (i) gross negligence or gross neglect; (ii) the commission of a felony or gross misdemeanor involving moral turpitude, fraud, or dishonesty; (iii) the willful violation of any law, rule, or regulation (other than a traffic violation or similar offense); (iv) an intentional failure to perform stated duties; or (v) a breach of fiduciary duty involving personal profit.  If a dispute arises as to whether Termination of Employment was For Cause, such dispute shall be resolved by arbitration as set forth in this Agreement.

 

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J.                                         Involuntary Termination .

 

Involuntary Termination ” means Executive’s Employment Terminates by Bank prior to Retirement, and such Termination of Employment is not For Cause.

 

K.                                     Involuntary Termination Benefit .

 

Involuntary Termination Benefit ” means an annual benefit equal to the Early Retirement Benefit or Normal Retirement Benefit that the Executive would have received had the Executive Retired from the Bank on the first day of the month during which Involuntary Termination occurs, payable in accordance with the terms of this Agreement.  Beginning on the thirteenth month that the Involuntary Termination Benefit is paid, and continuing thereafter until paid in full, the Involuntary Termination Benefit shall be increased each year by three percent (3%) from the previous year’s Involuntary Termination Benefit amount to account for cost of living increases.

 

L.                                       Normal Retirement Benefit .

 

1.                                        For Retirement  before July 1, 2013, “ Normal Retirement Benefit ” means an annual benefit equal to One Hundred Fifty Thousand Dollars and No/100 ($150,000.00) per year, payable in accordance with the terms of this Agreement.  Beginning on the thirteenth month that the Normal Retirement Benefit is paid, and continuing thereafter until paid in full, the Normal Retirement Benefit shall be increased annually by three percent (3%) from the previous year’s Normal Retirement Benefit amount to account for cost of living increases.

 

2.                                        For Retirement on or after July 1, 2013, “ Normal Retirement Benefit ” means an annual benefit equal to One Hundred Seventy Thousand Dollars and No/100 ($170,000.00) per year, payable in accordance with the terms of this Agreement.  Beginning on the thirteenth month that the Normal Retirement Benefit is paid, and continuing thereafter until paid in full, the Normal Retirement Benefit shall be increased annually by three percent (3%) from the previous year’s Normal Retirement Benefit amount to account for cost of living increases.

 

M.                                  Retirement and Retire .

 

Retirement ” and “ Retire ” mean that the Executive remains in the continuous employ of the Bank from the Effective Date and then retires from active employment (and his Employment Terminates) with the Bank, after having attained age sixty (60).

 

N.                                     Section 409A .

 

Section 409A ” means Code Section 409A together with IRS regulations and guidance promulgated thereunder, as amended from time to time.

 

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O.                                     Termination of Employment or Employment Terminates .

 

Termination of Employment ” or “ Employment Terminates “ means that the Executive’s employment with the Bank is terminated and the Executive actually separates from service with the Bank and does not continue in his prior capacity.  Termination of Employment does not include Executive’s military leave, sick leave or other bona fide leave of absence (such as temporary employment with the government) if the period of leave does not exceed six months, or if longer, so long as his right to reemployment with the Bank is provided either in contract or statute.  Notwithstanding anything to the contrary, the terms “Termination of Employment” and “Employment Terminates” shall be interpreted in accordance with Section 409A.

 

Notwithstanding the foregoing, effective January 1, 2009, Executive’s employment shall be deemed to have terminated, and Executive shall have suffered an Employment Termination, when the Parties reasonably anticipate that Executive will have a permanent reduction in the level of bona fide services provided to the Bank, to a level of service that is less than fifty percent (50%) of the average level of bona fide services provided by Executive to the Bank in the immediately preceding thirty-six (36) month period.

 

P.                                       Voluntary Termination .

 

Voluntary Termination ” means Executive’s Employment Terminates prior to Retirement by Executive’s voluntary action.

 

II.                                      EMPLOYMENT

 

The Bank agrees to employ the Executive in such capacity as the Bank may from time to time determine.  The Executive will continue in the employ of the Bank in such capacity and with such duties and responsibilities as may be assigned to him, and with such compensation as may be determined from time to time by the Board.

 

III.                                  FRINGE BENEFITS

 

The salary continuation Benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not part of any salary reduction plan or an arrangement deferring a bonus or a salary increase.  The Executive has no option to take any current payment or bonus in lieu of these salary continuation Benefits except as specifically set forth hereinafter.

 

IV.                                 RETIREMENT BENEFIT AND EARLY RETIREMENT BENEFIT

 

A.                                    Normal Retirement Benefit .

 

Provided the Executive Retires on or after the December 31, 2010, the Bank shall pay the Executive the Normal Retirement Benefit each year, in lieu of any other Benefit under this Agreement, in equal monthly installments (1/12 of the annual Normal Retirement Benefit) for a period of one hundred and eighty (180) months, commencing with the first day of the month following the date of Retirement.  In the event of death, Section V of this Agreement shall control.

 

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B.                                      Early Retirement Benefit .

 

Beginning on the Early Retirement Date, the Bank shall pay the Executive the annual Early Retirement Benefit each year, in lieu of any other Benefit under this Agreement, in equal monthly installments (1/12 of the annual Early Retirement Benefit) for a period of one hundred and eighty (180) months, commencing with the first day of the month following the date of Retirement.  In the event of death, Section V of this Agreement shall control.

 

V.                                     DEATH BENEFIT

 

A.                                    In the event of the Executive’s death before August 1, 2012, a lump sum payment shall be made to the Executive’s designated beneficiaries in an amount equal to the present value of a Normal Retirement Benefit of One Hundred Fifty Thousand Dollars and No/100 ($150,000.00) per year, payable in monthly installments beginning on the first day of the month following the Executive’s death (calculated using the assumptions set forth in Section X(L) of this Agreement, determined as of the date of payment), LESS —

 

1.                                        The total amount of payments made to the Executive under this Agreement during his lifetime (if Benefit payments to the Executive began prior to death); and

 

2.                                        The total amount payable to the Executive’s beneficiaries under the Second Amended and Restated Life Insurance Endorsement Method Split Dollar Plan between the Executive and the Bank.

 

B.                                      In the event of the Executive’s death on or after August 1, 2012, a lump sum payment shall be made to the Executive’s designated beneficiaries in an amount equal to the present value of a Normal Retirement Benefit of One Hundred Seventy Thousand Dollars and No/100 ($170,000.00) per year, payable in monthly installments beginning on the first day of the month following the Executive’s death (calculated using the assumptions set forth in Section X(L) of this Agreement, determined as of the date of payment), LESS —

 

1.                                        The total amount of payments made to the Executive under this Agreement during his lifetime (if Benefit payments to the Executive began prior to death); and

 

2.                                        The total amount payable to the Executive’s beneficiaries under the Second Amended and Restated Life Insurance Endorsement Method Split Dollar Plan between the Executive and the Bank.

 

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VI.                                 TERMINATION OF EMPLOYMENT AND DISABILITY

 

A.                                    Involuntary Termination of Employment .

 

In the event of Executive’s Involuntary Termination prior to Retirement, the Bank shall pay the Executive the Involuntary Termination Benefit each year, in lieu of any other Benefit under this Agreement, in equal monthly installments (1/12 of the annual Involuntary Termination Benefit) for a period of one hundred and eighty (180) months, commencing with the first day of the month following the date of Involuntary Termination.  In the event of death, Section V of this Agreement shall control.

 

B.                                      Termination of Employment For Cause .

 

In the event Executive’s Employment Terminates For Cause prior to Retirement, then this Agreement shall immediately terminate and the Executive shall forfeit all Benefits and shall not be entitled to receive any Benefits under this Agreement.

 

C.                                      Disability .

 

In the event the Executive becomes Disabled prior to Termination of Employment, and Executive’s Employment Terminates because of such Disability, the Bank shall pay the Executive the annual Disability Benefit each year, in lieu of any other Benefit under this Agreement, in equal monthly installments (1/12 of the annual Disability Benefit) for a period of one hundred and eighty (180) months, commencing with the first day of the month following the date of Termination of Employment on account of Disability.  In the event of death, Section V of this Agreement shall control.

 

VII.                             CHANGE OF CONTROL

 

Upon a Change In Control, the Bank shall pay the Executive the Change in Control Benefit.  The lump sum payment shall be made on the first day of the month following the date of Change In Control.  The payment of a lump sum pursuant to this Section shall be in lieu of any other benefit under this Agreement.  Any benefit payable under this Section shall be subject to reduction or elimination as provided in Section XII.

 

VIII.                         SPECIFIED EMPLOYEE REQUIREMENTS

 

A.                                    Six-Month Delay .  Notwithstanding anything to the contrary, if Executive is a Specified Employee (defined below) as of the date of Termination of Employment, payments under the Agreement upon Termination of Employment may not be made before the date that is six months after Termination of Employment (or, if earlier than the end of the six-month period, the date of death of the Executive).  Payments to which the Executive would otherwise be entitled during the first six months following Termination of Employment, but for this Six-Month Delay provision, shall be accumulated and paid on the first day of the seventh month following Termination of Employment.

 

B.                                      Specified Employee .  Executive shall be deemed to be a “ Specified Employee ” if, as of the date of Executive’s Termination of Employment, Executive is a Key Employee (defined below) of the Bank and the Bank has stock which is publicly traded on an established securities market or otherwise.

 

8



 

C.                                      Key Employee .  If Executive meets each of the requirements of Internal Revenue Code Section 416(i)(1)(A)(i), (ii), or (iii) (applied in accordance with the regulations thereunder and disregarding section 416(i)(5)) at any time during a twelve month period ending on December 31 (the “ Specified Employee Identification Date ”), then Executive shall be treated as a Key Employee for the entire twelve month period beginning on the following April 1.  Such April 1 date shall be the “ Specified Employee Effective Date ” for purposes of Section 409A.

 

IX.                                 RESTRICTIONS ON FUNDING

 

The Bank shall have no obligation to set aside, earmark or entrust any fund or money with which to pay its obligations under this Agreement.  The Executive or any successor in interest shall be and remain simply a general creditor of the Bank in the same manner as any other creditor having a general claim for matured and unpaid compensation.

 

The Bank reserves the absolute right, at its sole discretion, to purchase life insurance in amounts sufficient to secure the Benefits provided under this Agreement.  The Bank further reserves the absolute right, at its sole discretion, to establish a grantor trust which may be used to hold assets of the Bank which are maintained as reserves against the Bank’s unfunded, unsecured obligations hereunder.  Such reserves shall at all times be subject to the claims of the Bank’s creditors and the creditors of any affiliate of the Bank that is also an employer of the Executive.  To the extent such trust or other vehicle is established, the Bank’s obligations hereunder shall be reduced to the extent such assets are utilized to meet its obligations hereunder.  Any such trust and the assets held thereunder are intended to conform in substance to the terms of the model trust described in Revenue Procedure 92-64, 1992-33 IRB 11 (8-17-92).  The Bank reserves the absolute right, in its sole discretion, to terminate any such life insurance or grantor trust at any time, in whole or in part.  At no time shall any Executive be deemed to have any lien or right, title or interest in or to any specific investment or to any assets of the Bank.  If the Bank elects to invest in a life insurance, disability or annuity policy upon the life of the Executive, then the Executive shall assist the Bank by freely submitting to a physical exam and supplying such additional information necessary to obtain such insurance or annuities.

 

X.                                     MISCELLANEOUS

 

A.                                    Alienability and Assignment Prohibition .

 

Neither the Executive, nor the Executive’s spouse, nor any other beneficiary(ies) under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the Benefits payable hereunder nor shall any of such Benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Executive or the Executive’s beneficiary(ies), nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise.  In the event the Executive or any beneficiary attempts assignment, commutation, hypothecation, transfer or disposal of the Benefits hereunder, the Bank’s liabilities and obligations under this Agreement shall cease and terminate immediately.

 

9



 

B.                                      Binding Obligation of the Bank and any Successor in Interest .

 

The Bank shall not merge or consolidate into or with another bank or sell substantially all of its assets to another bank, firm or person until such bank, firm or person expressly agrees, in writing, to assume and discharge the duties and obligations of the Bank under this Agreement.  This Agreement shall be binding upon the Parties hereto, their successors, beneficiaries, heirs and personal representatives.

 

C.                                      Amendment or Revocation .

 

It is agreed by and between the Parties hereto that, during the lifetime of the Executive, this Agreement may be amended or revoked at any time or times, in whole or in part, by the mutual written consent of the Executive and the Bank.

 

D.                                     Gender .

 

Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply.

 

E.                                       Effect on Other Bank Benefit Plans .

 

Nothing contained in this Agreement shall affect the right of the Executive to participate in or be covered by any qualified or non-qualified pension, profit-sharing, group, bonus or other supplemental compensation or fringe benefit plan constituting a part of the Bank’s existing or future compensation structure.

 

F.                                       Headings .

 

Headings and subheadings in this Agreement are inserted for reference and convenience only and shall not be deemed a part of this Agreement.

 

G.                                      Applicable Law .

 

The validity and interpretation of this Agreement shall be governed by applicable federal law and the laws of the State of California.

 

H.                                     12 U.S.C. § 1828(k) .

 

Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. § 1828(k) or any regulations promulgated thereunder.

 

I.                                          Partial Invalidity .

 

If any term, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant, or condition invalid, void, or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity.

 

10



 

J.                                         Not a Contract of Employment .

 

This Agreement shall not be deemed to constitute a contract of employment between the Parties hereto, nor shall any provision hereof restrict the right of the Bank to discharge the Executive, or restrict the right of the Executive to terminate employment.

 

K.                                     Effective Date .

 

The Effective Date of this Agreement shall be December 31, 2006.

 

L.                                       Present Value .

 

All present value calculations under this Agreement shall be based on the following discount rate:

 

Discount Rate:                                                  The discount rate as used in the APB 12 calculations for this Agreement.

 

XI.                                 ERISA PROVISIONS

 

A.                                    Named Fiduciary and Plan Administrator .

 

The “ Named Fiduciary and Plan Administrator ” of this Agreement shall be Central Valley Community Bank.  The Board, in its discretion, may appoint one or more individuals to serve in this capacity.  As Named Fiduciary and Plan Administrator, the Bank shall be responsible for the management, control and administration of the Agreement.  The Named Fiduciary may delegate to others certain aspects of the management and operation responsibilities of the Agreement including the employment of advisors and the delegation of ministerial duties to qualified individuals.

 

B.                                      Claims Procedure and Arbitration .

 

In the event a dispute arises with respect to Benefits under this Agreement and the disputed Benefits are not paid, then the Executive or his beneficiaries may make a written claim to the Named Fiduciary and Plan Administrator named above within sixty (60) days from the date payments are refused.  The Named Fiduciary and Plan Administrator shall review the written claim and if the claim is denied, in whole or in part, they shall respond in writing within sixty (60) days of receipt of such claim, stating specific reasons for such denial, reference to the provisions of this Agreement upon which the denial is based and any additional material or information necessary to perfect the claim.  Such written notice shall further indicate the additional steps to be taken by claimant(s) if a further review of the claim is desired.  A claim shall be deemed denied if the Named Fiduciary and Plan Administrator fail to take any action within the aforesaid sixty-day period.

 

If claimants desire a second review they shall notify the Named Fiduciary and Plan Administrator in writing within sixty (60) days of the first claim denial.  Claimants may review this Agreement or any documents relating thereto and submit any written issues and comments it may feel appropriate.  In their sole discretion, the Named Fiduciary and Plan Administrator shall then review the second claim and provide a written decision within sixty (60) days of receipt of such claim.  This decision shall likewise state the specific reasons for the decision and shall include reference to specific provisions of this Agreement upon which the decision is based.

 

11



 

If claimants continue to dispute the Benefit denial based upon completed performance of this Agreement or the meaning and effect of the terms and conditions thereof, then claimants may submit the dispute to an Arbitrator for final arbitration.  The Arbitrator shall be selected by mutual agreement of the Bank and the claimants.  The Arbitrator shall operate under any generally recognized set of arbitration rules.  The Parties hereto agree that they and their heirs, personal representatives, successors and assigns shall be bound by the decision of such Arbitrator with respect to any controversy properly submitted to it for determination.

 

Where a dispute arises as to Benefits forfeited as a result of the Bank’s discharge of the Executive For Cause, such Benefits dispute shall likewise be submitted to arbitration as above-described and the Parties hereto agree to be bound by the decision thereunder.

 

XII.                             TERMINATION OR MODIFICATION OF AGREEMENT BY REASON OF CHANGES IN THE LAW, RULES OR REGULATIONS

 

The Bank is entering into this Agreement upon the assumption that certain existing tax laws, rules and regulations will continue in effect in their current form.  If any such assumptions should change and such change has a detrimental effect on this Agreement, then the Bank reserves the right to terminate or modify this Agreement accordingly.  Upon a Change of Control, this paragraph shall become null and void effective immediately upon such Change of Control.

 

XIII.                         EXCESS PARACHUTE PAYMENTS

 

If any Benefit payment or portion of any Benefit payment under this Agreement, alone or together with any other compensation or benefit, would result in the Executive being subject to an excise tax under Code Section 4999, the amount payable hereunder shall be increased by the amount of such excise tax, so long as such action is consistent with the terms of this Agreement and permitted by Section 409A.

 

XIV.                        COMPETITION AFTER TERMINATION OF EMPLOYMENT

 

The Bank shall not pay any Benefit under this Agreement if the Executive, without the prior written consent of the Bank, engages in, becomes interested in, directly or indirectly, as a sole proprietor, as a partner in a partnership, or as a substantial shareholder in a corporation, or becomes associated with, in the capacity of employee, director, officer, principal, agent, trustee or in any other capacity whatsoever, any enterprise conducted in the trading area (a 50 mile radius) of the business of the Bank, which enterprise is, or may deemed to be, competitive with any business carried on by the Bank as of the date of termination of the Executive’s employment or his retirement.  This section shall not apply following a Change of Control.

 

12



 

XV.                            PROHIBITION AGAINST ACCELERATION.

 

Notwithstanding anything to the contrary, neither the time nor amount of payments under this Agreement may be accelerated unless such acceleration is permissible under both applicable law and under the Agreement.

 

IN WITNESS WHEREOF, the Parties hereto acknowledge that each has carefully read this Agreement and executed the original thereof on July 21, 2011 and that, upon execution, each has received a conforming copy.

 

BANK:

EXECUTIVE:

 

 

CENTRAL VALLEY COMMUNITY BANK

DANIEL J. DOYLE

 

 

 

 

By:

/s/ Daniel N. Cunningham

 

/s/Daniel J. Doyle

Name: Daniel N. Cunningham

Daniel J. Doyle

Title: Chairman of the Board

 

 

13


Exhibit 10.90

 

SECOND AMENDED AND RESTATED LIFE INSURANCE

ENDORSEMENT METHOD SPLIT DOLLAR PLAN

AGREEMENT

 

Insurers and Policy Numbers:

 

Jefferson Pilot Life, Policy No. JP5063505

 

 

 

 

 

Mass Mutual, Policy No. 0036892

 

 

 

Bank:

 

Central Valley Community Bank

 

 

 

Insured:

 

Daniel J. Doyle

 

 

 

Relationship of Insured to Bank:

 

President and Chief Executive Officer

 

This Second Amended and Restated Life Insurance Endorsement Method Split Dollar Plan Agreement (the “ Agreement ”) is made effective as of July 1, 2011, and is entered into by and between Central Valley Community Bank (the “ Bank ”) and Daniel J. Doyle (the “ Insured ”), each a “ Party ” and together the “ Parties .”  This Agreement amends and restates in its entirety that certain Amended and Restated Life Insurance Endorsement Method Split Dollar Plan Agreement dated December 31, 2006 by and between the Bank and Insured (as amended, the “ Prior Agreement ”).

 

RECITALS

 

A.

 

In 2000, the Bank’s Board of Directors (the “ Board ”) determined that the Insured’s services to the Bank were valuable, and, accordingly, agreed to provide certain death benefits to the Insured pursuant to the Prior Agreement.

 

 

 

B.

 

In 2003, the Bank agreed to increase the death benefit.

 

 

 

C.

 

The Prior Agreement was subsequently amended several times, including amendments to comply with changes in applicable law and regulations.

 

 

 

D.

 

The Parties now desire to amend the Agreement to coordinate with the Insured’s Second Amended and Restated Executive Salary Continuation Agreement (“Salary Continuation Agreement”).

 

AGREEMENT

 

The respective rights and duties of the Bank and the Insured in the above-referenced policy shall be pursuant to the terms set forth below:

 

I.                                          DEFINITIONS

 

Refer to the policy contract for the definition of all terms in this Agreement.

 

1



 

II.                                      POLICY TITLE AND OWNERSHIP

 

Title and ownership shall reside in the Bank for its use and for the use of the Insured in accordance with this Agreement. The Bank alone may, to the extent of its interest, exercise the right to borrow or withdraw on the policy cash values. Where the Bank and the Insured (or assignee, with the consent of the Insured) mutually agree to exercise the right to increase the coverage under the subject Split Dollar policy, then, in such event, the rights, duties and benefits of the parties to such increased coverage shall continue to be subject to the terms of this Agreement.

 

III.                                  BENEFICIARY DESIGNATION RIGHTS

 

The Insured (or assignee) shall have the right and power to designate a beneficiary or beneficiaries to receive the Insured’s share of the proceeds payable upon the death of the Insured, and to elect and change a payment option for such beneficiary, subject to any right or interest the Bank may have in such proceeds, as provided in this Agreement.

 

IV.                                 PREMIUM PAYMENT METHOD

 

The Bank intends to pay an amount equal to the planned premiums and any other premium payments that might become necessary to keep the policy in force.

 

V.                                     TAXABLE BENEFIT

 

Annually the Insured will receive a taxable benefit equal to the assumed cost of insurance as required by the Internal Revenue Service. The Bank (or its administrator) will report to the Insured the amount of imputed income each year on Form W-2 or its equivalent.

 

VI.                                 DIVISION OF DEATH PROCEEDS

 

Subject to Paragraphs VII and IX herein, the division of the death proceeds of the policy is as follows:

 

A.                                    In the event of the Insured’s death before August 1, 2012, a lump sum payment shall be made to the Insured’s designated beneficiaries in an amount equal to the present value of a Normal Retirement Benefit of One Hundred Fifty Thousand Dollars and No/100 ($150,000.00) per year, payable in monthly installments beginning on the first day of the month following the Executive’s death (calculated using the assumptions set forth in Section X(L) of the Salary Continuation Agreement, determined as of the date of payment), LESS — the total amount of payments made to the Insured under the Salary Continuation Agreement during his lifetime (if Benefit payments to the Insured began prior to death).  To the extent that the policy proceeds are insufficient to pay the entire death benefit, any remaining amount will be paid by the Bank under the Salary Continuation Agreement.

 

2



 

B.                                      In the event of the Executive’s death on or after August 1, 2012, a lump sum payment shall be made to the Insured’s designated beneficiaries in an amount equal to the present value of a Normal Retirement Benefit of One Hundred Seventy Thousand Dollars and No/100 ($170,000.00) per year, payable in monthly installments beginning on the first day of the month following the Executive’s death (calculated using the assumptions set forth in Section X(L) of the Salary Continuation Agreement, determined as of the date of payment), LESS — the total amount of payments made to the Insured under the Salary Continuation Agreement during his lifetime (if Benefit payments to the Insured began prior to death).  To the extent that the policy proceeds are insufficient to pay the entire death benefit, any remaining amount will be paid by the Bank under the Salary Continuation Agreement.

 

C.                                      The Bank shall be entitled to the remainder of the policy proceeds, if any.

 

D.                                     The Bank and the Insured (or assignees) shall share in any interest due on the death proceeds on a pro rata basis as the proceeds due each respectively bears to the total proceeds, excluding any such interest.

 

VII.                             DIVISION OF THE CASH SURRENDER VALUE OF THE POLICY

 

During the Insured’s life, the Bank shall at all times be entitled to an amount equal to the policy’s cash value, as that term is defined in the policy contract, less any policy loans and unpaid interest or cash withdrawals previously incurred by the Bank and any applicable surrender charges.  Such cash value shall be determined as of the date of surrender.  Notwithstanding the foregoing, upon Insured’s death, the proceeds of the policy shall first be used to satisfy the obligations to Insured’s beneficiaries set forth in Paragraph VI.

 

VIII.                         RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS

 

In the event the policy involves an endowment or annuity element, the Bank’s right and interest in any endowment proceeds or annuity benefits, on expiration of the deferment period, shall be determined under the provisions of this Agreement by regarding such endowment proceeds or the commuted value of such annuity benefits as the policy’s cash value. Such endowment proceeds or annuity benefits shall be considered to be like death proceeds for the purposes of division under this Agreement.

 

IX.                                 TERMINATION OF AGREEMENT

 

This Agreement shall terminate upon the occurrence of any one of the following:

 

1.                                        The Insured shall be discharged from employment with the Bank for cause. The term for “cause” shall mean any of the following that result in an adverse effect on the Bank: (i) gross negligence or gross neglect; (ii) the commission of a felony or gross misdemeanor involving moral turpitude, fraud, or dishonesty; (iii) the willful violation of any law, rule, or regulation (other than a traffic violation or similar offense); (iv) an intentional failure to perform stated duties; or (v) a breach of fiduciary duty involving personal profit; or

 

3



 

2.                                        Surrender, lapse, or other termination of the Policy by the Bank.

 

Upon such termination, the Insured (or assignee) shall have a fifteen (15) day option to receive from the Bank an absolute assignment of the policy in consideration of a cash payment to the Bank, whereupon this Agreement shall terminate. Such cash payment referred to above shall be the greater of:

 

(a)                                   The Bank’s share of the cash value of the policy on the date of such assignment, as defined in this Agreement; or

 

(b)                                  The amount of the premiums which have been paid by the Bank prior to the date of such assignment, plus interest.

 

If within said fifteen (15) day period, the Insured fails to exercise said option, fails to tender the required cash payment, or dies, then the option shall terminate, and the Insured (or assignee) agrees that all of the Insured’s rights, interest and claims in the policy shall terminate as of the date of the termination of this Agreement.

 

The Insured expressly agrees that this Agreement shall constitute sufficient written notice to the Insured of the Insured’s option to receive an absolute assignment of the policy as set forth herein.

 

Except as provided above, this Agreement shall terminate upon distribution of the death benefit proceeds in accordance with Paragraph VI above.

 

X.                                     INSURED’S OR ASSIGNEE’S ASSIGNMENT RIGHTS

 

The Insured may not, without the written consent of the Bank, assign to any individual, trust or other organization, any right, title or interest in the subject policy nor any rights, options, privileges or duties created under this Agreement.

 

XI.                                 AGREEMENT BINDING UPON THE PARTIES

 

This Agreement shall bind the Insured and the Bank, their heirs, successors, personal representatives and assigns.

 

XII.                             ERISA PROVISIONS

 

The following provisions are part of this Agreement and are intended to meet the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”):

 

4



 

A.                                     Named Fiduciary and Plan Administrator .

 

The “Named Fiduciary and Plan Administrator” of this Endorsement Method Split Dollar Agreement shall be Central Valley Community Bank. As Named Fiduciary and Plan Administrator, the Bank shall be responsible for the management, control, and administration of this Split Dollar Plan as established herein. The Named Fiduciary may delegate to others certain aspects of the management and operation responsibilities of the Plan, including the employment of advisors and the delegation of any ministerial duties to qualified individuals.

 

B.                                     Funding Policy .

 

The funding policy for this Split Dollar Plan shall be to maintain the subject policy in force by paying, when due, all premiums required.

 

C.                                     Basis of Payment of Benefits .

 

Direct payment by the Insurer is the basis of payment of benefits under this Agreement, with those benefits in turn being based on the payment of premiums as provided in this Agreement.

 

D.                                     Claim Procedures .

 

Claim forms or claim information as to the subject policy can be obtained by contacting Clark Consulting at 952-893-6767. When the Named Fiduciary has a claim which may be covered under the provisions described in the insurance policy, he or she should contact the office named above, and they will either complete a claim form and forward it to an authorized representative of the Insurer or advise the named Fiduciary what further requirements are necessary. The Insurer will evaluate and make a decision as to payment. If the claim is payable, a benefit check will be issued in accordance with the terms of this Agreement.

 

In the event that a claim is not eligible under the policy, the Insurer will notify the Named Fiduciary of the denial pursuant to the requirements under the terms of the policy. If the Named Fiduciary is dissatisfied with the denial of the claim and wishes to contest such claim denial, he or she should contact the office named above and they will assist in making inquiry to the Insurer. All objections to the Insurer’s actions should be in writing and submitted to the office named above for transmittal to the Insurer.

 

XIII.                      GENDER

 

Whenever in this Agreement words are used in the masculine or neuter gender, they shall be read and construed as in the masculine, feminine or neuter gender, whenever they should so apply.

 

XIV.                      INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT

 

The Insurer shall not be deemed a party to this Agreement, but will respect the rights of the parties as herein developed upon receiving an executed copy of this Agreement. Payment or other performance in accordance with the policy provisions shall fully discharge the Insurer for any and all liability.

 

5



 

XV.                            AMENDMENT OR REVOCATION

 

It is agreed by and between the parties hereto that, during the lifetime of the Insured, this Agreement may be amended or revoked at any time or times, in whole or in part, by the mutual written consent of the Insured and the Bank, provided however that following a Change in Control of the Bank (as that term is defined in the Salary Continuation Agreement), this Agreement may only be modified by the mutual consent of the Bank and Insured.

 

XVI.                        EFFECTIVE DATE

 

The Effective Date of this Agreement shall be July 1, 2011.

 

XVII.                    SEVERABILITY AND INTERPRETATION

 

If a provision of this Agreement is held to be invalid or unenforceable, the remaining provisions shall nonetheless be enforceable according to their terms. Further, in the event that any provision is held to be over broad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to law and enforced as amended.

 

XVIII.                APPLICABLE LAW

 

The validity and interpretation of this Agreement shall be governed by applicable federal law and the laws of the State of California.

 

XIX.                        COMPETITION AFTER TERMINATION OF EMPLOYMENT

 

The Bank shall not pay any benefit under this Agreement if the Insured, without the prior written consent of the Bank, engages in, becomes interested in, directly or indirectly, as a sole proprietor, as a partner in a partnership, or as a substantial shareholder in a corporation, or becomes associated with, in the capacity of employee, director, officer, principal, agent, trustee or in any other capacity whatsoever, any enterprise conducted in the trading area (a 50 mile radius) of the business of the Bank, which enterprise is, or may deemed to be, competitive with any business carried on by the Bank as of the date of termination of the Insured’s employment or his retirement. This section shall not apply following a Change of Control.

 

Executed at Fresno, California on 7/21/2011.

 

BANK:

 

INSURED:

 

 

 

CENTRAL VALLEY COMMUNITY BANK

 

DANIEL J. DOYLE

 

 

 

 

 

/s/Daniel J. Doyle

By:

 

/s/Daniel N. Cunningham

 

Daniel J. Doyle

Name: Daniel N. Cunningham

 

 

Title: Chairman of the Board

 

 

 

6



 

BENEFICIARY DESIGNATION FORM

FOR LIFE INSURANCE ENDORSEMENT METHOD

SPLIT DOLLAR PLAN AGREEMENT

 

PRIMARY DESIGNATION:

 

Name

 

Address

 

Relationship

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECONDARY (CONTINGENT) DESIGNATION:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

All sums payable under the Life Insurance Endorsement Method Split Dollar Plan Agreement by reason of my death shall be paid to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary (Contingent) Beneficiary.

 

 

 

 

 

Daniel J. Doyle

 

Date

 

7


EXHIBIT 31.1

 

RULE 13a-14(a) [SECTION 302] CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

 

I, Daniel J. Doyle, certify that:

 

1.                I have reviewed this quarterly report on Form 10-Q for the Quarter Ended September 30, 2011 of CENTRAL VALLEY COMMUNITY BANCORP;

 

2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.                The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have:

 

a.                designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.               designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.                evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

d.               disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and;

 

5.                The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.                all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.               any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

/s/ Daniel J. Doyle

 

Date: November 14, 2011

Daniel J. Doyle,

 

 

President and Chief Executive Officer (principal executive officer)

 

 

 


EXHIBIT 31.2

 

RULE 13a-14(a) [SECTION 302] CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

 

I, David Kinross, certify that:

 

1.                I have reviewed this quarterly report on Form 10-Q for the Quarter Ended September 30, 2011 of CENTRAL VALLEY COMMUNITY BANCORP;

 

2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.                The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have:

 

a.                designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.               designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.                evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

d.               disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and;

 

5.                The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.                all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.               any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

/s/ David A. Kinross

 

Date: November 14, 2011

David A. Kinross,

 

 

Senior Vice President and Chief Financial Officer (principal accounting officer and principal financial officer)

 

 

 


EXHIBIT 32.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

The following certification accompanies the issuer’s Quarterly Report on Form 10-Q and is not filed, as provided in Release 33-8212, 34-47551 dated September 30, 2011.

 

In connection with the accompanying Quarterly Report of Central Valley Community Bancorp (“CVCB”) on Form 10-Q for the quarter ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel J. Doyle, President and Chief Executive Officer of CVCB, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

 

(1) the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

 

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CVCB.

 

A signed original of this written statement required by Section 906 has been provided to Central Valley Community Bancorp and will be retained by Central Valley Community Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

 

Dated: November 14, 2011

 

 

/s/ Daniel J. Doyle

 

DANIEL J. DOYLE

 

President and Chief Executive Officer

 


EXHIBIT 32.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

The following certification accompanies the issuer’s Quarterly Report on Form 10-Q and is not filed, as provided in Release 33-8212, 34-47551 dated September 30, 2011.

 

In connection with the accompanying Quarterly Report of Central Valley Community Bancorp (“CVCB”) on Form 10-Q for the quarter ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David A. Kinross, Senior Vice President and Chief Financial Officer of CVCB, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

 

(1) the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

 

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CVCB.

 

A signed original of this written statement required by Section 906 has been provided to Central Valley Community Bancorp and will be retained by Central Valley Community Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

 

Dated:  November 14, 2011

 

 

/s/ David A. Kinross

 

DAVID A. KINROSS

 

Senior Vice President and Chief Financial Officer