Volume and Rate Analysis of Net Interest Revenue
(Interest and Rates on a Taxable Equivalent Basis)
(in thousands)
(Interest and Rates on a Taxable Equivalent Basis) | | 2013 versus 2012 | |
(in thousands) | | Amount of Increase | |
| | (Decrease) Due to Change in: | |
Interest Earning Assets | | Volume | | | Rate | | | Net Chg. | |
Interest Bearing Deposits with Banks | | $ | (32 | ) | | $ | 1 | | | $ | (31 | ) |
| | | | | | | | | | | | |
Investment Securities: | | | | | | | | | | | | |
Government Agency & Government-Sponsored Entities | | | (264 | ) | | | (57 | ) | | | (321 | ) |
Obligations of States and Political Subdivisions - Non-Taxable | | | (92 | ) | | | (27 | ) | | | (119 | ) |
Mortgage Backed Securities | | | (540 | ) | | | (525 | ) | | | (1,065 | ) |
Other | | | 422 | | | | (6 | ) | | | 416 | |
Total Investment Securities | | | (474 | ) | | | (615 | ) | | | (1,089 | ) |
| | | | | | | | | | | | |
Loans & Leases: | | | | | | | | | | | | |
Real Estate | | | 5,554 | | | | (3,827 | ) | | | 1,727 | |
Home Equity Lines and Loans | | | (463 | ) | | | (6 | ) | | | (469 | ) |
Agricultural | | | 197 | | | | (1,370 | ) | | | (1,173 | ) |
Commercial | | | (640 | ) | | | (269 | ) | | | (909 | ) |
Consumer | | | (67 | ) | | | (76 | ) | | | (143 | ) |
Leases | | | 91 | | | | - | | | | 91 | |
Total Loans & Leases | | | 4,672 | | | | (5,548 | ) | | | (876 | ) |
Total Earning Assets | | | 4,166 | | | | (6,162 | ) | | | (1,996 | ) |
| | | | | | | | | | | | |
Interest Bearing Liabilities | | | | | | | | | | | | |
Interest Bearing Deposits: | | | | | | | | | | | | |
Interest Bearing DDA | | | 18 | | | | (66 | ) | | | (48 | ) |
Savings and Money Market | | | 83 | | | | (417 | ) | | | (334 | ) |
Time Deposits | | | (221 | ) | | | (588 | ) | | | (809 | ) |
Total Interest Bearing Deposits | | | (120 | ) | | | (1,071 | ) | | | (1,191 | ) |
Securities Sold Under Agreement to Repurchase | | | (1,018 | ) | | | - | | | | (1,018 | ) |
Other Borrowed Funds | | | 30 | | | | (50 | ) | | | (20 | ) |
Subordinated Debt | | | - | | | | (20 | ) | | | (20 | ) |
Total Interest Bearing Liabilities | | | (1,108 | ) | | | (1,141 | ) | | | (2,249 | ) |
Total Change | | $ | 5,274 | | | $ | (5,021 | ) | | $ | 253 | |
| | 2014 versus 2013 Amount of Increase (Decrease) Due to Change in: | |
Interest Earning Assets | | Volume | | | Rate | | | Net Chg. | |
Interest Bearing Deposits with Banks | | $ | 80 | | | $ | (1 | ) | | $ | 79 | |
Investment Securities: | | | | | | | | | | | | |
Government Agency & Government-Sponsored Entities | | | (96 | ) | | | 26 | | | | (70 | ) |
Obligations of States and Political Subdivisions - Non-Taxable | | | (202 | ) | | | (175 | ) | | | (377 | ) |
Mortgage Backed Securities | | | (1,366 | ) | | | 423 | | | | (943 | ) |
Other | | | (166 | ) | | | (53 | ) | | | (219 | ) |
Total Investment Securities | | | (1,830 | ) | | | 221 | | | | (1,609 | ) |
| | | | | | | | | | | | |
Loans & Leases: | | | | | | | | | | | | |
Real Estate | | | 7,941 | | | | (4,083 | ) | | | 3,858 | |
Home Equity Lines and Loans | | | (238 | ) | | | (68 | ) | | | (306 | ) |
Agricultural | | | 851 | | | | (569 | ) | | | 282 | |
Commercial | | | 1,406 | | | | (297 | ) | | | 1,109 | |
Consumer | | | 16 | | | | (22 | ) | | | (6 | ) |
Other | | | (13 | ) | | | 1 | | | | (12 | ) |
Leases | | | 1,392 | | | | 72 | | | | 1,464 | |
Total Loans & Leases | | | 11,355 | | | | (4,966 | ) | | | 6,389 | |
Total Earning Assets | | | 9,605 | | | | (4,746 | ) | | | 4,859 | |
| | | | | | | | | | | | |
Interest Bearing Liabilities | | | | | | | | | | | | |
Interest Bearing Deposits: | | | | | | | | | | | | |
Interest Bearing DDA | | | 26 | | | | 22 | | | | 48 | |
Savings and Money Market | | | 84 | | | | 20 | | | | 104 | |
Time Deposits | | | (44 | ) | | | (170 | ) | | | (214 | ) |
Total Interest Bearing Deposits | | | 66 | | | | (128 | ) | | | (62 | ) |
Other Borrowed Funds | | | (12 | ) | | | 1 | | | | (11 | ) |
Subordinated Debt | | | - | | | | (5 | ) | | | (5 | ) |
Total Interest Bearing Liabilities | | | 54 | | | | (132 | ) | | | (78 | ) |
Total Change | | $ | 9,551 | | | $ | (4,614 | ) | | $ | 4,937 | |
Notes: Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total "net change." The above figures have been rounded to the nearest whole number.
2015 Compared to 2014
Net interest income increased 10.2% to $86.8 million during 2015. On a fully tax equivalent basis, net interest income increased 9.9% and totaled $87.8 million during 2015 compared to $79.9 million for 2014. As more fully discussed below, the increase in net interest income was primarily due to an increase in average earning assets offset somewhat by a decrease in the net interest margin.
Net interest income on a tax equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin. For 2015, the Company’s net interest margin was 3.87% compared to 4.00% in 2014. This decrease in net interest margin was due primarily to declining yields on earning assets in addition to a small increase in funding costs, offset somewhat by an increase in the mix of loans & leases as a percentage of total earning assets.
Average loans & leases totaled $1.8 billion for the year ended December 31, 2015; an increase of $303.1 million compared to the year ended December 31, 2014. Loans & leases increased from 75.1% of average earning assets during 2014 to 79.5% in 2015. The year-to-date yield on the loan & lease portfolio declined to 4.52% for the year ended December 31, 2015, compared to 4.76% for the year ended December 31, 2014. This lower yield partially offset the impact of an increase in average loan & lease balances but still resulted in interest revenue from loans & leases increasing 14.4% to $81.6 million for 2015. The Company continues to experience aggressive competitor pricing for loans & leases to which it may need to respond in order to retain key customers. This could place continuing negative pressure on future loan & lease yields and net interest margin.
The investment portfolio is the other main component of the Company’s earning assets. Historically, the Company invested primarily in: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by the U.S. Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times the Company selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 5 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity without subjecting the Company to the interest rate risk associated with mortgage-backed securities. Since the risk factor for these types of investments is generally lower than that of loans & leases, the yield earned on investments is generally less than that of loans & leases.
Average investment securities decreased $35.7 million in 2015 compared to the average balance during 2014. As a result, tax equivalent interest income on securities decreased $1.9 million to $9.4 million for the year ended December 31, 2015, compared to $11.3 million for the year ended December 31, 2014. The average yield, on a tax equivalent basis, in the investment portfolio was 2.36% in 2015 compared to 2.60% in 2014. This overall decrease in yield was caused primarily by a decrease in the mix of corporate securities and mortgage-backed securities as a percentage of total securities and an increase in the mix of lower yielding short-term U.S. Treasury securities. See “Financial Condition – Investment Securities” for a discussion of the Company’s investment strategy in 2015. Net interest income on the Schedule of Year-to-Date Average Balances and Interest Rates is shown on a tax equivalent basis, which is higher than net interest income as reflected on the Consolidated Statements of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.
Interest-bearing deposits with banks and overnight investments in Federal Funds Sold are additional earning assets available to the Company. Average interest-bearing deposits with banks consisted of FRB deposits. Balances with the FRB earn interest at the Fed Funds rate, which had been 0.25% since December 2008, but increased to 0.50% in December 2015. Average interest-bearing deposits with banks for the year ended December 31, 2015, was $66.7 million, an increase of $4.3 million compared to the average balance for the year ended December 31, 2014. Interest income on interest-bearing deposits with banks for the year ended December 31, 2015, increased $14,000 to $172,000 from the year ended December 31, 2014.
Average interest-bearing liabilities increased $159.3 million or 11.5% during the twelve months ended December 31, 2015. Of that increase: (1) interest-bearing deposits increased $159.0 million; (2) FHLB Advances decreased $294,000; and (3) subordinated debt remained unchanged.
The $159.0 million increase in average interest-bearing deposits was primarily in lower cost interest-bearing DDA, and savings and money market deposits, which increased $102.4 million since 2014, as higher cost time deposits increased by $56.6 million. See “Financial Condition – Deposits” for a discussion of trends in the Company’s deposit base. Total interest expense on deposits was $3.0 million for 2015 and $2.5 million for 2014. The average rate paid on interest-bearing deposits was 0.20% in 2015 and 0.18% in 2014. Since most of the Company’s interest-bearing deposits are priced off of short-term market rates, the Company continues to benefit from the impact of lower market interest rates. See “Overview – Looking Forward: 2016 and Beyond” for a discussion of factors influencing the Company’s future deposit rates and their impact on net interest margin.
Section 627 of the Dodd-Frank Act repealed Regulation Q effective July 21, 2011, thereby eliminating the prohibition on the payment of interest on demand deposits. Given the historically low rate environment since then, this change has not had any material impact on the Company. However, when rates begin to rise this may impact the Company’s cost of deposits, particularly business checking accounts.
2014 Compared to 2013
Net interest income increased 6.9% to $78.7 million during 2014. On a fully tax equivalent basis, net interest income increased 6.6% and totaled $79.9 million during 2014 compared to $75.0 million for 2013. As more fully discussed below, the increase in net interest income was primarily due to an increase in average earning assets offset somewhat by a decrease in the net interest margin.
Net interest income on a tax equivalent basis, expressed as a percentage of average total earning assets, is referred to as the net interest margin. For 2014, the Company’s net interest margin was 4.00% compared to 4.11% in 2013. This decrease in net interest margin was due primarily to declining yields on earning assets that exceeded a corresponding drop in funding costs, offset somewhat by an increase in the mix of loans & leases as a percentage of total earning assets.
Average loans & leases totaled $1.5 billion for the year ended December 31, 2014; an increase of $230.1 million compared to the year ended December 31, 2013. Loans & leases increased from 69.6% of average earning assets during 2013 to 75.1% in 2014. Because of the impact of decreases in market interest rates from mid-September 2007 through December 2008, and the continuing low rate environment since then, the year-to-date yield on the loan & lease portfolio declined to 4.76% for the year ended December 31, 2014, compared to 5.11% for the year ended December 31, 2013. This lower yield partially offset the impact of an increase in average loan & lease balances but still resulted in interest revenue from loans & leases increasing 9.8% to $71.3 million for 2014. The Company has been experiencing aggressive competitor pricing for loans & leases to which it may need to continue to respond in order to retain key customers. This could place even greater negative pressure on future loan & lease yields and net interest margin.
The investment portfolio is the other main component of the Company’s earning assets. Historically, the Company invested primarily in: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, during 2012, when loan demand lagged deposit growth, resulting in significant liquidity, the Company began to selectively add corporate securities (floating rate and fixed rate with maturities less than 5 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity without subjecting the Company to the interest rate risk associated with mortgage-backed securities. Since the risk factor for these types of investments is generally lower than that of loans & leases, the yield earned on investments is generally less than that of loans & leases.
Average investment securities decreased $89.6 million in 2014 compared to the average balance during 2013. As a result, tax equivalent interest income on securities decreased $1.6 million to $11.3 million for the year ended December 31, 2014, compared to $12.9 million for the year ended December 31, 2013. The average yield, on a tax equivalent basis, in the investment portfolio was 2.60% in 2014 compared to 2.46% in 2013. This overall increase in yield was caused primarily by a decrease in the mix of corporate securities as a percentage of total securities and an increase in the yield on the Company’s mortgage-backed securities portfolio due to the sale of certain lower yielding MBS. See “Financial Condition – Investment Securities” for a discussion of the Company’s investment strategy in 2014. Net interest income on the Schedule of Year-to-Date Average Balances and Interest Rates is shown on a tax equivalent basis, which is higher than net interest income as reflected on the Consolidated Statements of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.
Interest-bearing deposits with banks and overnight investments in Federal Funds Sold are additional earning assets available to the Company.Average interest-bearing deposits with banks consisted of FRB deposits. Balances with the FRB earn interest at the Fed Funds rate, which has been 0.25% since December 2008. Average interest-bearing deposits with banks for the year ended December 31, 2014, was $62.5 million, an increase of $31.7 million compared to the average balance for the year ended December 31, 2013. Interest income on interest-bearing deposits with banks for the year ended December 31, 2014, increased $79,000 to $158,000 from the year ended December 31, 2013.
Average interest-bearing liabilities increased $80.2 million or 6.2% during the twelve months ended December 31, 2014. Of that increase: (1) interest-bearing deposits increased $88.8 million; (2) FHLB Advances decreased $8.6 million; and (3) subordinated debt remained unchanged.
The $88.8 million increase in average interest-bearing deposits was primarily in lower cost interest-bearing DDA, and savings and money market deposits, which increased $102.5 million since 2013, as higher cost time deposits decreased by $13.6 million. See “Financial Condition – Deposits” for a discussion of trends in the Company’s deposit base. Total interest expense on deposits was $2.5 million for 2014 and 2013. The average rate paid on interest-bearing deposits was 0.18% in 2014 and 0.20% in 2013. Since most of the Company’s interest-bearing deposits are priced off of short-term market rates, the Company is benefiting from the impact of these lower market rates. See “Overview – Looking Forward: 2015 and Beyond” for a discussion of factors influencing the Company’s future deposit rates and their impact on net interest margin.
Section 627 of the Dodd-Frank Act repealed Regulation Q effective July 21, 2011, thereby eliminating the prohibition on the payment of interest on demand deposits. Given the historically low rate environment since then, this change has not had any material impact on the Company. However, when rates begin to rise this may impact the Company’s cost of deposits, particularly business checking accounts.
2013 Compared to 2012
Net interest income increased 0.4% to $73.6 million during 2013. On a fully tax equivalent basis, net interest income increased 0.3% and totaled $75.0 million during 2013 compared to $74.8 million for 2012. As more fully discussed below, the increase in net interest income was primarily due to an increase in average earning assets offset somewhat by a decrease in the net interest margin.
For 2013, the Company’s net interest margin was 4.11% compared to 4.23% in 2012. This decrease in net interest margin was due primarily to declining yields on earning assets that exceeded a corresponding drop in funding costs, offset somewhat by an increase in the mix of loans & leases as a percentage of total earning assets.
Average loans & leases totaled $1.3 billion for the year ended December 31, 2013; an increase of $86.2 million compared to the year ended December 31, 2012. Loans & leases increased from 66.9% of average earning assets during 2012 to 69.6% in 2013. Because of the impact of decreases in market interest rates from mid-September 2007 through December 2008, and the continuing low rate environment since then, the year-to-date yield on the loan & lease portfolio declined to 5.11% for the year ended December 31, 2013, compared to 5.56% for the year ended December 31, 2012. This lower yield offset the impact of an increase in average loan & lease balances resulting in interest revenue from loans & leases decreasing 1.3% to $64.9 million for 2013.
Average investment securities decreased $17.2 million in 2013 compared to the average balance during 2012. As a result, tax equivalent interest income on securities decreased $1.1 million to $12.9 million for the year ended December 31, 2013, compared to $14.0 million for the year ended December 31, 2012. The average yield, on a tax equivalent basis, in the investment portfolio was 2.46% in 2013 compared to 2.58% in 2012. This overall decrease in yield was caused primarily by a decrease in the mix of mortgage-backed securities as a percentage of total securities and a decline in the yield on the Company’s mortgage-backed securities portfolio due to a shift in mix from 30 year MBS to 10, 15 and 20 year MBS. Net interest income on the Schedule of Year-to-Date Average Balances and Interest Rates is shown on a tax equivalent basis, which is higher than net interest income as reflected on the Consolidated Statements of Income because of adjustments that relate to income on securities that are exempt from federal income taxes.
Average interest-bearing deposits with banks consisted of: (1) $611,000 in Community Reinvestment Act (‘CRA’) qualified CD’s with various banks; and (2) $30.1 million in FRB deposits. The average rate paid on CRA qualified CD’s for 2013 was 0.38% and balances with the FRB earn interest at the Fed Funds rate, which has been 0.25% since December 2008. Average interest-bearing deposits with banks for the year ended December 31, 2013, was $30.7 million, a decrease of $12.6 million compared to the average balance for the year ended December 31, 2012. Interest income on interest-bearing deposits with banks for the year ended December 31, 2013, decreased $31,000 to $79,000 from the year ended December 31, 2012.
Average interest-bearing liabilities decreased $6.7 million or 0.5% during the twelve months ended December 31, 2013. Of that decrease: (1) interest-bearing deposits increased $12.9 million; (2) FHLB Advances increased $8.6 million; and (3) securities sold under agreement to repurchase and subordinated debt decreased $28.2 million.
The $12.9 million increase in average interest-bearing deposits was primarily in lower cost interest-bearing DDA, and savings and money market deposits, which increased $64.7 million since 2012, as higher cost time deposits decreased by $51.7 million. See “Financial Condition – Deposits” for a discussion of trends in the Company’s deposit base. Total interest expense on deposits was $2.5 million for 2013 as compared to $3.7 million for 2012. The average rate paid on interest-bearing deposits was 0.20% in 2013 and 0.29% in 2012. Since most of the Company’s interest-bearing deposits are priced off of short-term market rates, the Company is benefiting from the impact of these lower market rates.
Provision and Allowance for Credit Losses
As a financial institution that assumes lending and credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction), and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Credit Risk.” Management reports regularly to the Board of Directors regarding trends and conditions in the loan & lease portfolio and regularly conducts credit reviews of individual loans & leases. Loans & leases that are performing but have shown some signs of weakness are subject to more stringent reporting and oversight.
Allowance for Credit Losses
The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance sheet date. The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors.
A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Loans & leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan’s or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.
A restructuring of a loan or lease constitutes a troubled debt restructuring (“TDR”) under ASC 310-40, if the Company for economic or legal reasons related to the borrower's financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans or leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become a TDR, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment.
The determination of the general reserve for loans or leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors that include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.
The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer & other; and (9) equipment leases. See “Financial Condition – Loans & Leases” for examples of loans & leases made by the Company. The allowance for credit losses attributable to each portfolio segment, which includes both impaired loans & leases and loans & leases that are not impaired, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.
The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:
Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.
Special Mention – A special mention loan or lease has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease position at some future date. Special mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard – A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans or leases classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans or leases classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable.
Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will estimate its probable loss and immediately charge-off some or all of the balance.
The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:
Commercial Real Estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.
Real Estate Construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.
Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term; typically made to relationship customers; generally underwritten to existing cash flows of operating businesses; and may be collateralized by fixed assets, inventory and/or accounts receivable. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.
Agricultural Real Estate and Agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate. These loans are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.
Leases – Equipment leases are generally considered to possess a moderate inherent risk of loss. As Lessor, the company is subject to both the credit risk of the borrower and the residual value risk of the equipment. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.
Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a low inherent risk of loss, although this is not always true as evidenced by the weaknesscorrection in residential real estate values over the past five years.that occurred between 2007 and 2012. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.
Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.
In addition, the Company's and Bank's regulators, including the FRB, DBO and FDIC, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.
Provision for Credit Losses
Changes in the provision for credit losses between years are the result of management’s evaluation, based upon information currently available, of the adequacy of the allowance for credit losses relative to factors such as the credit quality of the loan & lease portfolio, loan & lease growth, current credit losses, and the prevailing economic climate and its effect on borrowers’ ability to repay loans & leases in accordance with the terms of the notes.
The Central Valley of California was one of the hardest hit areas in the country during the recession. In many areas, housing prices declined as much as 60% and unemployment reached 15% or more. Although the economy has stabilized throughout most of the Central Valley, housing prices for the most part have not fully recovered significantly and unemployment levels remain well above those in other areas of the state and country. While, in management’s opinion, the Company’s levels of net charge-offs and non-performing assets as of December 31, 2014,2015, compare very favorably to our peers at the present time, carefully managing credit risk remains a key focus of the Company.
The state of California has experienced drought conditions during much of 2013 and 2014. Importantly, most of the Company’s agricultural customers have access to their own ground water supplies and, therefore, are not as dependent on the delivery of surface water as growers in other parts of California.since 2013. Although Management continues to believe that current conditions willdid not have a material impact on credit quality during the 2015 growing season, and rain and snow levels in early 2016 have increased, the lack of rain willcontinues to have a continuingan adverse impact on some of our agricultural customers’ operating costs, crop yields and crop quality. The longer the drought continues, the more significant this impact will become, particularly if ground water levels reach critical stage.begin to significantly deteriorate or riparian rights are further curtailed. See “Item 1A. Risk Factors” for additional information.
The provision for credit losses totaled $750,000 in 2015 compared to $1.2 million in 2014 and $425,000 in 2013. Net recoveries during 2015 were $5.4 million compared to $425,000net charge-offs of $48,000 in 20132014 and $1.9 million in 2012. Net charge-offs during 2014 were $48,000 compared to $368,000 in 20132013. During 2015, the Company was able to fully recover $5.2 million that was charged-off in 2010 on restructured commercial real estate and $650,000 in 2012. Net charge-offs represented 0.0% of average loans & leases during 2014, a level that in management’s opinion compares very favorablyconstruction loans. In addition to the Company’s peers atfull recovery of the present time. The increasecharged off principal, this transaction also resulted in the provision overrecovery of $353,000 in interest income and the past year reflects the growth that occurred in the loan portfolio during 2014.client’s payment of a financing fee of $1.1 million. See “Overview – Looking Forward: 20152016 and Beyond,” “Critical Accounting Policies and Estimates – Allowance for Credit Losses” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk.”
The following tables summarizetable summarizes the activity and the allocation of the allowance for credit losses for the years indicated. (in thousands)
| | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Allowance for Credit Losses Beginning of Year | | $ | 34,274 | | | $ | 34,217 | | | $ | 33,017 | | | $ | 32,261 | | | $ | 29,813 | | | $ | 35,401 | | | $ | 34,274 | | | $ | 34,217 | | | $ | 33,017 | | | $ | 32,261 | |
Provision Charged to Expense | | | 1,175 | | | | 425 | | | | 1,850 | | | | 6,775 | | | | 14,735 | | | | 750 | | | | 1,175 | | | | 425 | | | | 1,850 | | | | 6,775 | |
Charge-Offs: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | | - | | | | 6 | | | | - | | | | 25 | | | | 1,629 | | | | - | | | | - | | | | 6 | | | | - | | | | 25 | |
Agricultural Real Estate | | | - | | | | 575 | | | | - | | | | 384 | | | | 559 | | | | - | | | | - | | | | 575 | | | | - | | | | 384 | |
Real Estate Construction | | | - | | | | - | | | | - | | | | - | | | | 4,095 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential 1st Mortgages | | | 73 | | | | 16 | | | | 152 | | | | 449 | | | | 759 | | | | - | | | | 73 | | | | 16 | | | | 152 | | | | 449 | |
Home Equity Lines and Loans | | | 70 | | | | 91 | | | | 259 | | | | 751 | | | | 310 | | | | - | | | | 70 | | | | 91 | | | | 259 | | | | 751 | |
Agricultural | | | - | | | | 23 | | | | 294 | | | | 3,559 | | | | 916 | | | | - | | | | - | | | | 23 | | | | 294 | | | | 3,559 | |
Commercial | | | 1 | | | | 60 | | | | 198 | | | | 788 | | | | 4,143 | | | | 12 | | | | 1 | | | | 60 | | | | 198 | | | | 788 | |
Consumer & Other | | | 132 | | | | 120 | | | | 145 | | | | 190 | | | | 112 | | | | 84 | | | | 132 | | | | 120 | | | | 145 | | | | 190 | |
Total Charge-Offs | | | 276 | | | | 891 | | | | 1,048 | | | | 6,146 | | | | 12,523 | | | | 96 | | | | 276 | | | | 891 | | | | 1,048 | | | | 6,146 | |
Recoveries: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | | 11 | | | | - | | | | - | | | | - | | | | - | | | | 2,939 | | | | 11 | | | | - | | | | - | | | | - | |
Agricultural Real Estate | | | - | | | | - | | | | 90 | | | | 18 | | | | 2 | | | | - | | | | - | | | | - | | | | 90 | | | | 18 | |
Real Estate Construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,225 | | | | - | | | | - | | | | - | | | | - | |
Residential 1st Mortgages | | | - | | | | - | | | | 53 | | | | 4 | | | | 7 | | | | 8 | | | | - | | | | - | | | | 53 | | | | 4 | |
Home Equity Lines and Loans | | | 58 | | | | 115 | | | | 14 | | | | 13 | | | | - | | | | 87 | | | | 58 | | | | 115 | | | | 14 | | | | 13 | |
Agricultural | | | 8 | | | | 42 | | | | 61 | | | | 10 | | | | 68 | | | | 4 | | | | 8 | | | | 42 | | | | 61 | | | | 10 | |
Commercial | | | 86 | | | | 312 | | | | 117 | | | | 21 | | | | 92 | | | | 136 | | | | 86 | | | | 312 | | | | 117 | | | | 21 | |
Consumer & Other | | | 65 | | | | 54 | | | | 63 | | | | 61 | | | | 67 | | | | 69 | | | | 65 | | | | 54 | | | | 63 | | | | 61 | |
Total Recoveries | | | 228 | | | | 523 | | | | 398 | | | | 127 | | | | 236 | | | | 5,468 | | | | 228 | | | | 523 | | | | 398 | | | | 127 | |
Net Charge-Offs | | | (48 | ) | | | (368 | ) | | | (650 | ) | | | (6,019 | ) | | | (12,287 | ) | |
Net Recoveries (Charge-Offs) | | | | 5,372 | | | | (48 | ) | | | (368 | ) | | | (650 | ) | | | (6,019 | ) |
Total Allowance for Credit Losses | | $ | 35,401 | | | $ | 34,274 | | | $ | 34,217 | | | $ | 33,017 | | | $ | 32,261 | | | $ | 41,523 | | | $ | 35,401 | | | $ | 34,274 | | | $ | 34,217 | | | $ | 33,017 | |
Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for Credit Losses to: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Loans & Leases at Year End | | | 2.06 | % | | | 2.46 | % | | | 2.74 | % | | | 2.83 | % | | | 2.74 | % | | | 2.07 | % | | | 2.06 | % | | | 2.00 | % | | | 2.46 | % | | | 2.64 | % |
Average Loans & Leases | | | 2.36 | % | | | 2.70 | % | | | 2.89 | % | | | 2.82 | % | | | 2.73 | % | | | 2.30 | % | | | 2.36 | % | | | 2.70 | % | | | 2.89 | % | | | 2.82 | % |
Consolidated Net Charge-Offs to: | | | | | | | | | | | | | | | | | | | | | |
Consolidated Net (Recoveries) Charge-Offs to: | | | | | | | | | | | | | | | | | | | | | |
Total Loans & Leases at Year End | | | 0.00 | % | | | 0.03 | % | | | 0.05 | % | | | 0.52 | % | | | 1.04 | % | | | (0.27 | %) | | | 0.00 | % | | | 0.02 | % | | | 0.05 | % | | | 0.48 | % |
Average Loans & Leases | | | 0.00 | % | | | 0.03 | % | | | 0.05 | % | | | 0.51 | % | | | 1.04 | % | | | (0.30 | %) | | | 0.00 | % | | | 0.03 | % | | | 0.05 | % | | | 0.51 | % |
The table below breaks out year-to-date activity by portfolio segment (in thousands):
December 31, 2014 | | Commercial Real Estate | | | Agricultural Real Estate | | | Real Estate Construction | | | Residential 1st Mortgages | | | Home Equity Lines & Loans | | | Agricultural | | | Commercial | | | Consumer & Other | | | Leases | | | Unallocated | | | Total | | |
December 31, 2015 | | | Commercial Real Estate | | | Agricultural Real Estate | | | Real Estate Construction | | | Residential 1st Mortgages | | | Home Equity Lines & Loans | | | Agricultural | | | Commercial | | | Consumer & Other | | | Leases | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year-To-Date Allowance for Credit Losses: | Year-To-Date Allowance for Credit Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year-To-Date Allowance for Credit Losses: | |
Beginning Balance- January 1, 2014 | | $ | 5,178 | | | $ | 3,576 | | | $ | 654 | | | $ | 1,108 | | | $ | 2,767 | | | $ | 12,205 | | | $ | 5,697 | | | $ | 176 | | | $ | 639 | | | $ | 2,274 | | | $ | 34,274 | | |
Beginning Balance- January 1, 2015 | | | $ | 7,842 | | | $ | 4,185 | | | $ | 1,669 | | | $ | 1,022 | | | $ | 2,426 | | | $ | 6,104 | | | $ | 8,195 | | | $ | 218 | | | $ | 2,211 | | | $ | 1,529 | | | $ | 35,401 | |
Charge-Offs | | | - | | | | - | | | | - | | | | (73 | ) | | | (70 | ) | | | - | | | | (1 | ) | | | (132 | ) | | | - | | | | - | | | | (276 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (12 | ) | | | (84 | ) | | | - | | | | - | | | | (96 | ) |
Recoveries | | | 11 | | | | - | | | | - | | | | - | | | | 58 | | | | 8 | | | | 86 | | | | 65 | | | | - | | | | - | | | | 228 | | | | 2,939 | | | | - | | | | 2,225 | | | | 8 | | | | 87 | | | | 4 | | | | 136 | | | | 69 | | | | - | | | | - | | | | 5,468 | |
Provision | | | 2,653 | | | | 609 | | | | 1,015 | | | | (13 | ) | | | (329 | ) | | | (6,109 | ) | | | 2,413 | | | | 109 | | | | 1,572 | | | | (745 | ) | | | 1,175 | | | | (718 | ) | | | 2,696 | | | | (1,409 | ) | | | (241 | ) | | | (367 | ) | | | 200 | | | | (483 | ) | | | (28 | ) | | | 1,083 | | | | 17 | | | | 750 | |
Ending Balance- December 31, 2014 | | $ | 7,842 | | | $ | 4,185 | | | $ | 1,669 | | | $ | 1,022 | | | $ | 2,426 | | | $ | 6,104 | | | $ | 8,195 | | | $ | 218 | | | $ | 2,211 | | | $ | 1,529 | | | $ | 35,401 | | |
Ending Balance- December 31, 2015 | | | $ | 10,063 | | | $ | 6,881 | | | $ | 2,485 | | | $ | 789 | | | $ | 2,146 | | | $ | 6,308 | | | $ | 7,836 | | | $ | 175 | | | $ | 3,294 | | | $ | 1,546 | | | $ | 41,523 | |
Overall, the Allowance for Credit Losses as of December 31, 20142015 increased $1.1$6.1 million from December 31, 2013.2014. The allowance allocated to the following categories of loans changed as followsindicated during the twelve months ended December 31, 2014:2015:
· | While Commercial Real Estate Agricultural Real Estate, Real Estate Construction, Commercial and Lease allowance balances increased $2.2 million primarily as a result ofdue to increased loan and lease balances.balances, a $2.9 million recovery on a previously charged off loan resulted in a decrease of $718,000 in the required provision. |
· | Agricultural Real Estate allowance balances decreased $6.1increased $2.7 million primarily due to the impact on reserveincreased loan balances in this segment and increased qualitative factors of an improvement in the overall credit qualityCompany’s allowance calculation related to the longer-term impact of the portfolio during the past three years.continuing drought conditions in California. |
· | UnallocatedReal Estate Construction allowance balances decreased $745,000increased $816,000 primarily due to the imprecisionincreased loan balances. A $2.2 million recovery on a previously charged off loan resulted in estimating and allocating allowance balances associated with macro factors such as: (1) the continuing sluggish economic conditionsa decrease of $1.4 million in the Central Valley (see Item 1A. Risk Factors – Risks Associated With Our Business - Continuing Difficult Economic Conditions In Our Service Areas Could Adversely Affect Our Operations And/Or Cause Us To Sustain Losses); and (2) the long term impact of drought conditions currently being experienced in California (see Item 1A. Risk Factors – Risks Associated With Our Business - Our Financial Results Can Be Impacted By The Cyclicality and Seasonality Of Our Agricultural Business And The Risks Related Thereto).required provision. |
| | Allowance Allocation at December 31, | |
(in thousands) | | 2014 Amount | | | Percent of Loans in Each Category to Total Loans | | | 2013 Amount | | | Percent of Loans in Each Category to Total Loans | | | 2012 Amount | | | Percent of Loans in Each Category to Total Loans | | | 2011 Amount | | | Percent of Loans in Each Category to Total Loans | | | 2010 Amount | | | Percent of Loans in Each Category to Total Loans | |
Commercial Real Estate | | $ | 7,842 | | | | 28.9 | % | | $ | 5,178 | | | | 29.5 | % | | $ | 6,464 | | | | 28.2 | % | | $ | 5,823 | | | | 26.4 | % | | $ | 7,631 | | | | 27.0 | % |
Agricultural Real Estate | | | 4,185 | | | | 20.8 | % | | | 3,576 | | | | 23.6 | % | | | 2,877 | | | | 25.0 | % | | | 2,583 | | | | 24.0 | % | | | 1,539 | | | | 21.6 | % |
Real Estate Construction | | | 1,669 | | | | 5.6 | % | | | 654 | | | | 3.0 | % | | | 986 | | | | 2.6 | % | | | 1,933 | | | | 2.5 | % | | | 2,160 | | | | 3.2 | % |
Residential 1st Mortgages | | | 1,022 | | | | 10.0 | % | | | 1,108 | | | | 10.9 | % | | | 1,219 | | | | 11.2 | % | | | 1,251 | | | | 9.2 | % | | | 1,164 | | | | 8.8 | % |
Home Equity Lines and Loans | | | 2,426 | | | | 1.9 | % | | | 2,767 | | | | 2.5 | % | | | 3,235 | | | | 3.4 | % | | | 3,746 | | | | 4.4 | % | | | 3,724 | | | | 5.0 | % |
Agricultural | | | 6,104 | | | | 16.4 | % | | | 12,205 | | | | 18.4 | % | | | 10,437 | | | | 17.7 | % | | | 8,127 | | | | 18.6 | % | | | 6,733 | | | | 19.6 | % |
Commercial | | | 8,195 | | | | 13.5 | % | | | 5,697 | | | | 10.8 | % | | | 7,963 | | | | 11.5 | % | | | 8,733 | | | | 14.2 | % | | | 9,084 | | | | 14.0 | % |
Consumer & Other | | | 218 | | | | 0.3 | % | | | 176 | | | | 0.4 | % | | | 182 | | | | 0.4 | % | | | 207 | | | | 0.7 | % | | | 216 | | | | 0.8 | % |
Leases | | | 2,211 | | | | 2.6 | % | | | 639 | | | | 0.9 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % |
Unallocated | | | 1,529 | | | | | | | | 2,274 | | | | | | | | 854 | | | | | | | | 614 | | | | | | | | 10 | | | | | |
Total | | $ | 35,401 | | | | 100.0 | % | | $ | 34,274 | | | | 100.0 | % | | $ | 34,217 | | | | 100.0 | % | | $ | 33,017 | | | | 100.0 | % | | $ | 32,261 | | | | 100.0 | % |
· | The allowance allocated to leases increased $1.1 million due primarily to increased lease balances in this segment. |
| | Allowance Allocation at December 31, | |
(in thousands) | | 2015 Amount | | | Percent of Loans in Each Category to Total Loans | | | 2014 Amount | | | Percent of Loans in Each Category to Total Loans | | | 2013 Amount | | | Percent of Loans in Each Category to Total Loans | | | 2012 Amount | | | Percent of Loans in Each Category to Total Loans | | | 2011 Amount | | | Percent of Loans in Each Category to Total Loans | |
Commercial Real Estate | | $ | 10,063 | | | | 30.4 | % | | $ | 7,842 | | | | 28.9 | % | | $ | 5,178 | | | | 28.9 | % | | $ | 6,464 | | | | 29.4 | % | | $ | 5,823 | | | | 26.4 | % |
Agricultural Real Estate | | | 6,881 | | | | 21.2 | % | | | 4,185 | | | | 20.8 | % | | | 3,576 | | | | 20.8 | % | | | 2,877 | | | | 23.6 | % | | | 2,583 | | | | 24.0 | % |
Real Estate Construction | | | 2,485 | | | | 7.6 | % | | | 1,669 | | | | 5.6 | % | | | 654 | | | | 5.6 | % | | | 986 | | | | 3.0 | % | | | 1,933 | | | | 2.5 | % |
Residential 1st Mortgages | | | 789 | | | | 10.3 | % | | | 1,022 | | | | 10.0 | % | | | 1,108 | | | | 10.0 | % | | | 1,219 | | | | 10.9 | % | | | 1,251 | | | | 9.2 | % |
Home Equity Lines and Loans | | | 2,146 | | | | 1.7 | % | | | 2,426 | | | | 1.9 | % | | | 2,767 | | | | 1.9 | % | | | 3,235 | | | | 2.5 | % | | | 3,746 | | | | 4.4 | % |
Agricultural | | | 6,308 | | | | 14.7 | % | | | 6,104 | | | | 16.4 | % | | | 12,205 | | | | 16.4 | % | | | 10,437 | | | | 18.4 | % | | | 8,127 | | | | 18.6 | % |
Commercial | | | 7,836 | | | | 10.5 | % | | | 8,195 | | | | 13.5 | % | | | 5,697 | | | | 13.5 | % | | | 7,963 | | | | 10.8 | % | | | 8,733 | | | | 14.2 | % |
Consumer & Other | | | 175 | | | | 0.3 | % | | | 218 | | | | 0.3 | % | | | 176 | | | | 0.3 | % | | | 182 | | | | 0.4 | % | | | 207 | | | | 0.7 | % |
Leases | | | 3,294 | | | | 3.3 | % | | | 2,211 | | | | 2.6 | % | | | 639 | | | | 2.6 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % |
Unallocated | | | 1,546 | | | | | | | | 1,529 | | | | | | | | 2,274 | | | | | | | | 854 | | | | | | | | 614 | | | | | |
Total | | $ | 41,523 | | | | 100.0 | % | | $ | 35,401 | | | | 100.0 | % | | $ | 34,274 | | | | 100.0 | % | | $ | 34,217 | | | | 99.0 | % | | $ | 33,017 | | | | 100.0 | % |
As of December 31, 2015, the allowance for credit losses was $41.5 million, which represented 2.07% of the total loan & lease balance. At December 31, 2014, the allowance for credit losses was $35.4 million which representedor 2.06% of the total loan & lease balance. At December 31, 2013, the allowance for credit losses was $34.3 million or 2.46% of the total loan & lease balance. After reviewing all factors above, based upon information currently available, management concluded that the allowance for credit losses as of December 31, 2014,2015, was adequate.
Non-Interest Income
Non-interest income includes: (1) service charges and fees from deposit accounts; (2) net gains and losses from investment securities; (3) increases in the cash surrender value of bank owned life insurance; (4) debit card and ATM fees; (5) net gains and losses on non-qualified deferred compensation plan investments; and (6) fees from other miscellaneous business services. See “Overview – Looking Forward: 20152016 and Beyond.”
2015 Compared to 2014
Non‑interest income totaled $14.6 million, an increase of $246,000 or 1.7% from non-interest income of $14.3 million for 2014.
Service charges on deposit accounts totaled $3.5 million, a decrease of $465,000 or 11.9% from service charges on deposit accounts of $3.9 million in 2014. This was due primarily to a decrease in fees related to the Company’s Overdraft Privilege Service.
Net gain on investment securities was $275,000 in 2015 compared to a net gain of $90,000 for 2014. See “Financial Condition-Investment Securities” for a discussion of the Company’s investment strategy.
Net gains on deferred compensation plan investments were $1.4 million in 2015 compared to net gains of $2.1 million in 2014. See Note 16, located in “Item 8. Financial Statements and Supplementary Data” for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income.
Other non-interest income was $4.4 million, an increase of $1.2 million or 35.9% over 2014. This increase was primarily comprised of (1) a $1.1 million financing fee related to the full recovery of a loan previously charged off; (2) a $392,000 gain on the sale of our Sacramento branch building; and (3) a $284,000 increase in FHLB dividends as a result of the FHLB declaring a one-time special dividend. These increases were somewhat offset by a $483,000 decrease in gain on sale of leases.
2014 Compared to 2013
Non‑interest income totaled $14.3 million, a decrease of $1.6 million or 10.1% from non-interest income of $15.9 million for 2013.
Service charges on deposit accounts totaled $3.9 million, a decrease of $427,000 or 9.8% from service charges on deposit accounts of $4.4 million in 2013. This was due primarily to a decrease in fees related to the Company’s Overdraft Privilege Service.
Net gain on investment securities was $90,000 in 2014 compared to a net loss of $229,000 for 2013. See “Financial Condition-Investment Securities” for a discussion of the Company’s investment strategy.
Net gains on deferred compensation plan investments were $2.1 million in 2014 compared to net gains of $3.4 million in 2013. See Note 16, located in “Item 8. Financial Statements and Supplementary Data” for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no effect on the Company’s net income.
Other non-interest income was $3.2 million, a decrease of $306,000 or 8.9% over 2013. This decrease was primarily due to the gain on sale of our Modesto Village branch building in the amount offor $706,000, which took place in 2013. The absence of this gain in 2014 was partially offset by a $483,000 gain on the early termination of a lease agreement.
2013 Compared to 2012
Non‑interest income totaled $15.9 million, an increase of $1.8 million or 13.0% from non-interest income of $14.1 million for 2012.
Service charges on deposit accounts totaled $4.4 million, a decrease of $541,000 or 11.1% from service charges on deposit accounts of $4.9 million in 2012. This was due primarily to a decrease in fees related to the Company’s Overdraft Privilege Service.
Net loss on investment securities was $229,000 in 2013 compared to a net gain of $158,000 for 2012.
Debit Card and ATM fees totaled $3.1 million, an increase of $131,000 or 4.5% over fees in 2012. These are: (1) fees paid to the Company by card associations and networks (such as Visa, Pulse, etc. when the Company’s cardholders (ATM Card or Debit Card) use their cards to complete transactions; (2) fees earned by the Company when non-customers use our ATM’s; and (3) monthly transaction fees paid by our customers.
Net gains on deferred compensation investments were $3.4 million in 2013 compared to net gains of $1.7 million in 2012.
Other non-interest income was $3.5 million, an increase of $925,000 or 35.6% over 2012. This increase was primarily due to: (1) the gain on sale of our Modesto Village branch building in the amount of $706,000; and (2) an increase of $227,000 in FHLB cash dividends.
Non-Interest Expense
Non-interest expense for the Company includes expenses for: (1) salaries and employee benefits; (2) net gains and losses on non-qualified deferred compensation plan investments; (3) occupancy; (4) equipment; (5) supplies; (6) legal fees; (7) professional services; (8) data processing; (9) marketing; (10) deposit insurance; and (11) other miscellaneous expenses.
20142015 Compared to 20132014
Overall, non-interest expense totaled $51.4$56.3 million, an increase of $496,000$4.9 million or 1.0%9.5% for the year ended December 31, 2014.2015.
Salaries and employee benefits increased $2.8$3.2 million or 8.3%8.9% primarily related to: (1) new staff added for the then loan production officesbranches in Walnut Creek and Irvine;Concord, CA and the Company’s equipment leasing activities; (2) bank wide raises; and (3) increased medical insurance premiums.contributions to employee benefit plans.
Net Gainsgains on deferred compensation plan investments were $2.1$1.4 million in 20142015 compared to net gains of $3.4$2.1 million in 2013.2014. See Note 16, located in “Item 8. Financial Statements and Supplementary Data” for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although Generally Accepted Accounting Principles require these investment gains/losses be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no effect on the Company’s net income.
Occupancy expense in 2015 totaled $2.9 million, an increase of $194,000 or 7.2% from 2014 and equipment expense in 2015 totaled $3.2 million, an increase of $368,000 or 13.2% from 2014. Both of these increases were primarily related to operating lease payments and depreciation expense associated with: (1) expanding into Walnut Creek and Concord, CA and the equipment leasing business; (2) remodeling existing branch offices; and (3) replacing all ATM’s with the newest generation of technology.
Marketing expenses increased $902,000 from 2014 and totaled $1.3 million. This increase was due to: (1) product development and promotional expenses related to the Company’s expansion of its branch network in the San Francisco East Bay area; (2) development of new deposit products; and (3) the Bank’s 100th anniversary.
The Company’s total FDIC insurance costs increased $145,000 in 2015 to $1.2 million, a 13.8% from 2014.
Other non-interest expense increased $802,000, or 13.6%, to $6.7 million in 2015 compared to $5.9 million in 2014. The major components of this increase were: (1) a $141,000 increase in CRA qualified contributions; (2) a $166,000 increase in legal fees; (3) a $113,000 increase in Debit Card and ATM expenses; and (4) $254,000 in amortization expense related to low income housing tax credit investments.
2014 Compared to 2013
Overall, non-interest expense totaled $51.4 million, an increase of $496,000 or 1.0% for the year ended December 31, 2014.
Salaries and employee benefits increased $2.8 million or 8.3% primarily related to: (1) new staff added for the then loan production office in Walnut Creek and the Company’s equipment leasing activities; (2) bank wide raises; and (3) increased medical insurance premiums.
Net Gains on deferred compensation investments were $2.1 million in 2014 compared to net gains of $3.4 million in 2013.
Occupancy expense in 2014 totaled $2.7 million, an increase of $177,000 or 7.0% from 2013. This increase iswas primarily due to lease payments related to our twothe new branchesbranch in Irvine and Walnut Creek, CA.CA and the Company’s equipment leasing activities.
Legal fee expense decreased $441,000 or 77.5% from 2013. This decrease iswas primarily related to reimbursement of certain prior years’ legal fees by the Company’s insurance company.
Other non-interest expense decreased $869,000, or 12.4%, to $6.1 million in 2014 compared to $7.0 million in 2013, primarily due to a $681,000 drop in operating losses.
2013 Compared to 2012
Overall, non-interest expense totaled $50.9 million, an increase of $2.6 million or 5.4% for the year ended December 31, 2013.
Salaries and employee benefits increased $2.0 million or 6.4% primarily related to: (1) new staff added for the LPO’s in Walnut Creek and Irvine; (2) bank wide raises; and (3) increased medical insurance premiums.
Net Gains on deferred compensation investments were $3.4 million in 2013 compared to net gains of $1.7 million in 2012.
Equipment expense in 2013 totaled $2.8 million, a decrease of $345,000 or 11.0% from 2012. This decrease is primarily due to reduced software maintenance contracts and Americans with Disabilities Act (‘ADA’) upgrades to all of our ATM machines that took place in 2012.
ORE holding costs in 2013 totaled $91,000, a decrease of $31,000 or 25.4% as compared to $122,000 in 2012. This decrease is primarily due to a decrease in the number of ORE properties the Company owns and stabilization of real estate values.
The Company’s total FDIC insurance costs increased $13,000 in 2013 to $981,000, a 1.3% increase from $968,000 in 2012.
Legal fee expense decreased $470,000 or 45.2% from 2012. This decrease is primarily related to the decline in the level of the Company’s problem loans.
On June 21, 2012, the Company terminated repurchase agreements with Citigroup resulting in an early termination fee totaling $1.7 million. The Company determined that the time was appropriate to replace these relatively “high-cost” borrowings with short-term FHLB advances at substantially lower rates.
Other non-interest expense increased $1.4 million, or 25.0%, to $7.0 million in 2013 compared to $5.6 million in 2012. During 2013, the Company incurred increased expenses related to employee training, ATM/Debit card activities, consulting services and customer operating losses.
Income Taxes
The provision for income taxes increased $873,000$1.8 million during 2014.2015. The effective tax rate in 20142015 was 37.3%38.2% compared to 37.3% in 2014 and 37.2% in 2013 and 37.5% in 2012.2013. The effective rates were lower than the statutory rate of 42% due primarily to benefits regarding the cash surrender value of life insurance, California enterprise zone interest income exclusion, and tax-exempt interest income on municipal securities and loans.
Current tax law causes the Company’s current taxes payable to approximate or exceed the current provision for taxes on the income statement. Three provisions have had a significant effect on the Company’s current income tax liability: (1) the restrictions on the deductibility of credit losses; (2) deductibility of pension and other long-term employee benefits only when paid; and (3) the statutory deferral of deductibility of California franchise taxes on the Company’s federal return.
Financial Condition
Investment Securities and Federal Funds Sold
The investment portfolio provides the Company with an income alternative to loans & leases. The debt securities in the Company’s investment portfolio have historically been comprised primarily of: (1) mortgage-backed securities issued by federal government-sponsored entities; (2) debt securities issued by US Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, during 2012, when loan demand lagged deposit growth resulting in significant liquidity,at certain times, the Company began tohas selectively addadded investment grade corporate securities (floating rate and fixed rate with maturities less than 5 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity without subjecting the Company to the interest rate risk associated with mortgage-backed securities. This portfolio
43
The Company’s investment portfolio at December 31, 20142015 was $430.4$430.5 million compared to $473.1$430.4 million at December 31, 2013,2014, a decrease of $42.7$128,000 or 0.03%. Between December 29, 2015 and December 30, 2015, the Company purchased $28.0 million or 9.0%.of investment securities. These trades had not settled by December 31, 2015. Since the Company accounts for securities purchases and sales using trade date accounting, they are reflected on the year-end balance sheet, which resulted in a comparable increase in other liabilities at December 31, 2015 when compared to December 31, 2014. To protect against future increases in market interest rates, while at the same time generating some reasonable level of current yields, the Company has investedcurrently invests most of its available funds in either shorter term corporate, US Treasury, government agency & government-sponsored entity securities andor shorter term (10, 15, and 20 year) mortgage-backed securities.
The Company's total investment portfolio currently represents 18.2%16.5% of the Company’s total assets as compared to 22.8%18.2% at December 31, 2013.2014.
As of December 31, 20142015, the Company held $61.7$61.4 million of municipal investments, of which $48.3$43.7 million were bank-qualified municipal bonds, all classified as held-to-maturity (“HTM”). The continuing financial problems being experienced by certain municipalities, along with the financial stresses exhibited by some of the large monoline bond insurers, has increased the overall risk associated with bank-qualified municipal bonds. This situation caused the Company not to purchase any municipal bonds between late 2006 and year-end 2011. However, during the first quarter of 2012 the Company began investing in bank-qualified municipals that were rated AA or better. In order to comply with Section 939A of the Dodd-Frank Act, the Company performs its own credit analysis on new purchases of municipal bonds. As of December 31, 2014, ninety-seven2015, ninety-eight percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or issuer level, and all of these ratings are “investment grade.” The Company monitors the status of all municipal investments with particular attention paid to the approximately threetwo percent ($1.4 million)539,000) of the portfolio that is not rated, and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security. In June 2014, the Company sold $375,000 of municipal bonds from a single issuer. The Company took this action under the provisions of ASC 320-10-25-6(a), which allow for the sale of HTM securities where there is “evidence of a significant deterioration in the issuer’s creditworthiness.”
Not included in the investment portfolio are interest bearing deposits with banks and overnight investments in Federal Funds Sold. Interest bearing deposits with banks consist of FRB deposits. The FRB currently pays interest on the deposits that banks maintain in their FRB accounts, whereas historically banks had to sell these Federal Funds to other banks in order to earn interest. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest bearing deposits with banks totaled $9.5 million at December 31, 2015 and $34.8 million at December 31, 2014 and $42.7 million at December 31, 2013.2014.
The Company classifies its investments as held-to-maturity, trading, or available-for-sale (“AFS”). Securities are classified as held-to-maturity and are carried at amortized cost when the Company has the intent and ability to hold the securities to maturity. Trading securities are securities acquired for short-term appreciation and are carried at fair value, with unrealized gains and losses recorded in non-interest income. As of December 31, 20142015 and December 31, 2013,2014, there were no securities in the trading portfolio. Securities classified as available-for-sale include securities, which may be sold to effectively manage interest rate risk exposure, prepayment risk, satisfy liquidity demands and other factors. These securities are reported at fair value with aggregate, unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, net of related income taxes.
Investment Portfolio
The following table summarizes the balances and distributions of the investment securities held on the dates indicated.
| | | | | | | | | | | | | | | | | | | | Available for Sale | | | Held to Maturity | | | Available for Sale | | | Held to Maturity | | | Available for Sale | | | Held to Maturity | |
December 31: (in thousands) | | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | |
U.S. Treasury Notes | | | $ | 72,884 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Government Agency & Government Sponsored Entities | | $ | 78,109 | | | $ | - | | | $ | 28,436 | | | $ | - | | | $ | 26,823 | | | $ | - | | | | 33,251 | | | | - | | | | 78,109 | | | | - | | | | 28,436 | | | | - | |
Obligations of States and Political Subdivisions - Non-Taxable | | | - | | | | 61,716 | | | | - | | | | 65,685 | | | | 5,665 | | | | 65,694 | | | | - | | | | 61,396 | | | | - | | | | 61,716 | | | | - | | | | 65,685 | |
Mortgage Backed Securities | | | 287,948 | | | | - | | | | 324,929 | | | | 45 | | | | 352,772 | | | | 484 | | | | 262,493 | | | | - | | | | 287,948 | | | | - | | | | 324,929 | | | | 45 | |
Corporate Securities | | | - | | | | - | | | | 49,380 | | | | - | | | | 22,558 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 49,380 | | | | - | |
Other | | | 485 | | | | 2,147 | | | | 1,894 | | | | 2,775 | | | | 10,173 | | | | 2,214 | | | | 509 | | | | - | | | | 485 | | | | 2,147 | | | | 1,894 | | | | 2,775 | |
Total Book Value | | $ | 366,542 | | | $ | 63,863 | | | $ | 404,639 | | | $ | 68,505 | | | $ | 417,991 | | | $ | 68,392 | | | $ | 369,137 | | | $ | 61,396 | | | $ | 366,542 | | | $ | 63,863 | | | $ | 404,639 | | | $ | 68,505 | |
Fair Value | | $ | 366,542 | | | $ | 64,635 | | | $ | 404,639 | | | $ | 68,689 | | | $ | 417,991 | | | $ | 70,697 | | | $ | 369,137 | | | $ | 62,388 | | | $ | 366,542 | | | $ | 64,635 | | | $ | 404,639 | | | $ | 68,689 | |
Analysis of Investment Securities Available-for-Sale
The following table is a summary of the relative maturities and yields of the Company's investment securities Available-for-Sale as of December 31, 2014. Non-taxable Obligations of States and Political Subdivisions have been calculated on a fully taxable equivalent basis.2015.
December 31, 2014 (in thousands) | | | | | | | |
December 31, 2015 (in thousands) | | | Fair Value | | | Average Yield | |
U.S. Treasury | | | | | | | |
One year or less | | | $ | 27,998 | | | | 0.14 | % |
After one year through five years | | | | 44,886 | | | | 1.32 | % |
Total U.S. Treasury Securities | | | | 72,884 | | | | 0.86 | % |
Government Agency & Government Sponsored Entities | | | | | | | | | | | | | | |
One year or less | | $ | 76,985 | | | | 0.18 | % | |
After one year through five years | | | 1,124 | | | | 2.82 | % | | | 33,251 | | | | 1.35 | % |
Total Government Agency & Government Sponsored Entities | | | 78,109 | | | | 0.22 | % | | | 33,251 | | | | 1.35 | % |
Other | | | | | | | | | | | | | | | | |
One year or less | | | 485 | | | | 0.68 | % | | | 509 | | | | 0.63 | % |
Total Other Securities | | | 485 | | | | 0.68 | % | | | 509 | | | | 0.63 | % |
Mortgage Backed Securities | | | 287,948 | | | | 2.26 | % | | | 262,493 | | | | 2.25 | % |
Total Investment Securities Available-for-Sale | | $ | 366,542 | | | | 1.82 | % | | $ | 369,137 | | | | 1.89 | % |
Note: The average yield for floating rate securities is calculated using the current stated yield.
Analysis of Investment Securities Held-to-Maturity
The following table is a summary of the relative maturities and yields of the Company's investment securities Held-to-Maturity as of December 31, 2014.2015. Non-taxable Obligations of States and Political Subdivisions have been calculated on a fully taxable equivalent basis.
December 31, 2014 (in thousands) | | | | | | | |
December 31, 2015 (in thousands) | | | Book Value | | | Average Yield | |
Obligations of States and Political Subdivisions - Non-Taxable | | | | | | | | | | | | |
One year or less | | $ | 600 | | | | 5.35 | % | |
After one year through five years | | | 16,426 | | | | 6.20 | % | | $ | 12,793 | | | | 5.34 | % |
After five years through ten years | | | 9,845 | | | | 5.00 | % | | | 10,211 | | | | 4.11 | % |
After ten years | | | 34,845 | | | | 4.83 | % | | | 38,392 | | | | 4.88 | % |
Total Obligations of States and Political Subdivisions - Non-Taxable | | | 61,716 | | | | 5.23 | % | | | 61,396 | | | | 4.85 | % |
Other | | | | | | | | | |
After one year through five years | | | 2,147 | | | | 0.57 | % | |
Total Other Securities | | | 2,147 | | | | 0.27 | % | |
Total Investment Securities Held-to-Maturity | | $ | 63,863 | | | | 5.06 | % | | $ | 61,396 | | | | 4.85 | % |
Loans & Leases
Loans & Leasesleases can be categorized by borrowing purpose and use of funds. Common examples of loans & leases made by the Company include:
Commercial and Agricultural Real Estate - These are loans secured by farmland, commercial real estate, multifamily residential properties, and other non-farm, non-residential properties generally within our market area. Commercial mortgage term loans can be made if the property is either income producing or scheduled to become income producing based upon acceptable pre-leasing, and the income will be the Bank's primary source of repayment for the loan. Loans are made both on owner occupied and investor properties; generally do not exceed 1510 years (and may have pricing adjustments on a shorter timeframe); have debt service coverage ratios of 1.00 or better with a target of greater than 1.20;1.25; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.
Real Estate Construction - These are loans for development and construction (the Company generally requires the borrower to fund the land acquisition) and are secured by commercial or residential real estate. These loans are generally made only to experienced local developers with whom the Bank has a successful track record; for projects in our service area; with Loan To Value (LTV) below 75%; and where the property can be developed and sold within 2 years. Commercial construction loans are made only when there is a written take-out commitment from the Bank or an acceptable financial institution or government agency. Most acquisition, development and construction loans are tied to the prime rate or LIBOR with an appropriate spread based on the amount of perceived risk in the loan.
Residential 1st Mortgages - These are loans primarily made on owner occupied residences; generally underwritten to income and LTV guidelines similar to those used by FNMA and FHLMC; however, we will make loans on rural residential properties up to 2040 acres. Most residential loans have terms from ten to twenty years and carry fixed rates priced off of treasury rates. The Company has always underwritten mortgage loans based upon traditional underwriting criteria and does not make loans that are known in the industry as “subprime,” “no or low doc,” or “stated income.”
Home Equity Lines and Loans - These are loans made to individuals for home improvements and other personal needs. Generally, amounts do not exceed $250,000; Combined Loan To Value (CLTV) does not exceed 80%; FICO scores are at or above 670; Total Debt Ratios do not exceed 43%; and in some situations the Company is in a 1st lien position.
Agricultural - These are loans and lines of credit made to farmers to finance agricultural production. Lines of credit are extended to finance the seasonal needs of farmers during peak growing periods; are usually established for periods no longer than 12 to 2436 months; are often secured by general filing liens on livestock, crops, crop proceeds and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a processing plant, or orchard/vineyard development; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.
Commercial - These are loans and lines of credit to businesses that are sole proprietorships, partnerships, LLC’s and corporations. Lines of credit are extended to finance the seasonal working capital needs of customers during peak business periods; are usually established for periods no longer than 12 to 24 months; are often secured by general filing liens on accounts receivable, inventory and equipment; and are most often tied to the prime rate with an appropriate spread based on the amount of perceived risk in the loan. Term loans are primarily made for the financing of equipment, expansion or modernization of a plant or purchase of a business; have maturities from five to seven years; and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk in the loan.
Consumer - These are loans to individuals for personal use, and primarily include loans to purchase automobiles or recreational vehicles, and unsecured lines of credit. The Company has a very minimal consumer loan portfolio, and loans are primarily made as an accommodation to deposit customers.
Leases –These are leases to businesses or individuals, for the purpose of financing the acquisition of equipment. They can be either “finance leases” where the lessee retains the tax benefits of ownership but obtains 100% financing on their equipment purchases; or “true tax leases” where the Company, as lessor, places reliance on equipment residual value and in doing so obtains the tax benefits of ownership. Leases typically have a maturity of three to ten years, and fixed rates that are most often tied to treasury indices with an appropriate spread based on the amount of perceived risk. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.
The Company accounts for leases with Investment Tax Credits (ITC) under the deferred method as established in Accounting Standard Codification (ASC)ASC 740-10. ITC are viewed and accounted for as a reduction of the cost of the related assets and presented as deferred income on the Company’s financial statement.
See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Credit Risk” for a discussion about the credit risks the Company assumes and its overall credit risk management practices.
Each loan or lease type involves risks specific to the: (1) borrower; (2) collateral; and (3) loan & lease structure. See “Results of Operations - Provision and Allowance for Credit Losses” for a more detailed discussion of risks by loan & lease type. The Company’s current underwriting policies and standards are designed to mitigate the risks involved in each loan & lease type. The Company’s policies require that loans & leases are approved only to those borrowers exhibiting a clear source of repayment and the ability to service existing and proposed debt. The Company’s underwriting procedures for all loan & lease types require careful consideration of the borrower, the borrower’s financial condition, the borrower’s management capability, the borrower’s industry, and the economic environment affecting the loan or lease.
Most loans & leases made by the Company are secured, but collateral is the secondary or tertiary source of repayment; cash flow is our primary source of repayment. The quality and liquidity of collateral are important and must be confirmed before the loan is made.
In order to be responsive to borrower needs, the Company prices loans & leases: (1) on both a fixed rate and adjustable rate basis; (2) over different terms; and (3) based upon different rate indices; as long as these structures are consistent with the Company’s interest rate risk management policies and procedures. See “Item 7A.3. Quantitative and Qualitative Disclosures About Market Risk-Interest Rate Risk.”Risk” for further details.
Overall, the Company's loan & lease portfolio at December 31, 2014, increased $324.02015 totaled $2.0 billion, an increase of $284.1 million or 23.3% from16.6% over December 31, 2013.2014. This increase has occurred despite the continuing sluggish economic conditions in the Central Valley of California and is a result of: (1) the Company’s intensified business development efforts directed toward credit-qualified borrowers; (2) entry into the equipment leasing business; and (3) expansion of our service area into Walnut Creek and Irvine.Concord. No assurances can be made that this growth in the loan & lease portfolio will continue.
The following table sets forth the distribution of the loan & lease portfolio by type and percent as of December 31 of the years indicated.
| | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
(in thousands) | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | |
Commercial Real Estate | | $ | 495,316 | | | | 28.9 | % | | $ | 411,037 | | | | 29.5 | % | | $ | 353,109 | | | | 28.3 | % | | $ | 307,670 | | | | 26.4 | % | | $ | 318,341 | | | | 27.0 | % | | $ | 609,602 | | | | 30.4 | % | | $ | 495,316 | | | | 28.9 | % | | $ | 411,037 | | | | 29.5 | % | | $ | 353,109 | | | | 28.3 | % | | $ | 307,670 | | | | 26.4 | % |
Agricultural Real Estate | | | 357,207 | | | | 20.8 | % | | | 328,264 | | | | 23.6 | % | | | 311,992 | | | | 25.0 | % | | | 280,139 | | | | 24.0 | % | | | 254,575 | | | | 21.6 | % | | | 424,034 | | | | 21.2 | % | | | 357,207 | | | | 20.8 | % | | | 328,264 | | | | 23.6 | % | | | 311,992 | | | | 25.0 | % | | | 280,139 | | | | 24.0 | % |
Real Estate Construction | | | 96,519 | | | | 5.6 | % | | | 41,092 | | | | 3.0 | % | | | 32,680 | | | | 2.6 | % | | | 29,607 | | | | 2.5 | % | | | 37,486 | | | | 3.2 | % | | | 151,974 | | | | 7.6 | % | | | 96,519 | | | | 5.6 | % | | | 41,092 | | | | 3.0 | % | | | 32,680 | | | | 2.6 | % | | | 29,607 | | | | 2.5 | % |
Residential 1st Mortgages | | | 171,880 | | | | 10.0 | % | | | 151,292 | | | | 10.9 | % | | | 140,257 | | | | 11.2 | % | | | 107,421 | | | | 9.2 | % | | | 103,574 | | | | 8.8 | % | | | 206,405 | | | | 10.3 | % | | | 171,880 | | | | 10.0 | % | | | 151,292 | | | | 10.9 | % | | | 140,257 | | | | 11.2 | % | | | 107,421 | | | | 9.2 | % |
Home Equity Lines and Loans | | | 33,017 | | | | 1.9 | % | | | 35,477 | | | | 2.5 | % | | | 42,042 | | | | 3.4 | % | | | 50,956 | | | | 4.4 | % | | | 58,971 | | | | 5.0 | % | | | 33,056 | | | | 1.7 | % | | | 33,017 | | | | 1.9 | % | | | 35,477 | | | | 2.5 | % | | | 42,042 | | | | 3.4 | % | | | 50,956 | | | | 4.4 | % |
Agricultural | | | 281,963 | | | | 16.4 | % | | | 256,414 | | | | 18.4 | % | | | 221,032 | | | | 17.7 | % | | | 217,227 | | | | 18.6 | % | | | 231,150 | | | | 19.6 | % | | | 293,966 | | | | 14.7 | % | | | 281,963 | | | | 16.4 | % | | | 256,414 | | | | 18.4 | % | | | 221,032 | | | | 17.7 | % | | | 217,227 | | | | 18.6 | % |
Commercial | | | 230,819 | | | | 13.5 | % | | | 150,398 | | | | 10.8 | % | | | 143,293 | | | | 11.5 | % | | | 165,089 | | | | 14.2 | % | | | 165,263 | | | | 14.0 | % | | | 210,804 | | | | 10.5 | % | | | 230,819 | | | | 13.5 | % | | | 150,398 | | | | 10.8 | % | | | 143,293 | | | | 11.5 | % | | | 165,089 | | | | 14.2 | % |
Consumer & Other | | | 4,719 | | | | 0.3 | % | | | 5,052 | | | | 0.4 | % | | | 5,058 | | | | 0.3 | % | | | 6,935 | | | | 0.7 | % | | | 8,712 | | | | 0.8 | % | | | 6,592 | | | | 0.3 | % | | | 4,719 | | | | 0.3 | % | | | 5,052 | | | | 0.4 | % | | | 5,058 | | | | 0.3 | % | | | 6,935 | | | | 0.7 | % |
Leases | | | 44,217 | | | | 2.6 | % | | | 12,733 | | | | 0.9 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % | | | 65,054 | | | | 3.3 | % | | | 44,217 | | | | 2.6 | % | | | 12,733 | | | | 0.9 | % | | | - | | | | 0.0 | % | | | - | | | | 0.0 | % |
Total Gross Loans & Leases | | | 1,715,657 | | | | 100.0 | % | | | 1,391,759 | | | | 100.0 | % | | | 1,249,463 | | | | 100.0 | % | | | 1,165,044 | | | | 100.0 | % | | | 1,178,072 | | | | 100.0 | % | | | 2,001,487 | | | | 100.0 | % | | | 1,715,657 | | | | 100.0 | % | | | 1,391,759 | | | | 100.0 | % | | | 1,249,463 | | | | 100.0 | % | | | 1,165,044 | | | | 100.0 | % |
Less: Unearned Income | | | 3,413 | | | | | | | | 3,523 | | | | | | | | 2,561 | | | | | | | | 1,966 | | | | | | | | 2,070 | | | | | | | | 5,128 | | | | | | | | 3,413 | | | | | | | | 3,523 | | | | | | | | 2,561 | | | | | | | | 1,966 | | | | | |
Subtotal | | | 1,712,244 | | | | | | | | 1,388,236 | | | | | | | | 1,246,902 | | | | | | | | 1,163,078 | | | | | | | | 1,176,002 | | | | | | | | 1,996,359 | | | | | | | | 1,712,244 | | | | | | | | 1,388,236 | | | | | | | | 1,246,902 | | | | | | | | 1,163,078 | | | | | |
Less: Allowance for Credit Losses | | | 35,401 | | | | | | | | 34,274 | | | | | | | | 34,217 | | | | | | | | 33,017 | | | | | | | | 32,261 | | | | | | | | 41,523 | | | | | | | | 35,401 | | | | | | | | 34,274 | | | | | | | | 34,217 | | | | | | | | 33,017 | | | | | |
Loans & Leases, Net | | $ | 1,676,843 | | | | | | | $ | 1,353,962 | | | | | | | $ | 1,212,685 | | | | | | | $ | 1,130,061 | | | | | | | $ | 1,143,741 | | | | | | | $ | 1,954,836 | | | | | | | $ | 1,676,843 | | | | | | | $ | 1,353,962 | | | | | | | $ | 1,212,685 | | | | | | | $ | 1,130,061 | | | | | |
There were no concentrations of loans exceeding 10% of total loans which were not otherwise disclosed as a category of loans in the above table.
The following table shows the maturity distribution and interest rate sensitivity of the loan portfolio of the Company on December 31, 2014.2015.
(in thousands) | | | | | | | | | | | Total | | | One Year or Less | | | Over One Year to Five Years | | | Over Five Years | | | Total | |
Commercial Real Estate | | $ | 23,276 | | | $ | 156,972 | | | $ | 311,655 | | | $ | 491,903 | | | $ | 15,678 | | | $ | 199,033 | | | $ | 388,939 | | | $ | 603,650 | |
Agricultural Real Estate | | | 12,597 | | | | 91,079 | | | | 253,531 | | | | 357,207 | | | | 25,272 | | | | 66,059 | | | | 332,703 | | | | 424,034 | |
Real Estate Construction | | | 48,486 | | | | 46,615 | | | | 1,418 | | | | 96,519 | | | | 58,049 | | | | 89,600 | | | | 4,325 | | | | 151,974 | |
Residential 1st Mortgages | | | 391 | | | | 3,201 | | | | 168,288 | | | | 171,880 | | | | - | | | | 3,357 | | | | 203,048 | | | | 206,405 | |
Home Equity Lines and Loans | | | 24 | | | | 871 | | | | 32,122 | | | | 33,017 | | | | 48 | | | | 651 | | | | 32,357 | | | | 33,056 | |
Agricultural | | | 157,717 | | | | 89,002 | | | | 35,244 | | | | 281,963 | | | | 143,191 | | | | 111,941 | | | | 38,834 | | | | 293,966 | |
Commercial | | | 80,487 | | | | 98,869 | | | | 51,463 | | | | 230,819 | | | | 67,642 | | | | 99,917 | | | | 43,245 | | | | 210,804 | |
Consumer & Other | | | 903 | | | | 3,301 | | | | 515 | | | | 4,719 | | | | 668 | | | | 4,149 | | | | 1,775 | | | | 6,592 | |
Leases | | | - | | | | 3,628 | | | | 40,589 | | | | 44,217 | | | | - | | | | 5,892 | | | | 59,986 | | | | 65,878 | |
Total | | $ | 323,881 | | | $ | 493,538 | | | $ | 894,825 | | | $ | 1,712,244 | | | $ | 310,548 | | | $ | 580,599 | | | $ | 1,105,212 | | | $ | 1,996,359 | |
Rate Sensitivity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed Rate | | $ | 71,836 | | | $ | 158,713 | | | $ | 388,068 | | | $ | 618,617 | | | $ | 24,901 | | | $ | 198,243 | | | $ | 506,353 | | | $ | 729,497 | |
Variable Rate | | | 252,046 | | | | 334,824 | | | | 506,757 | | | | 1,093,627 | | | | 285,648 | | | | 382,356 | | | | 598,858 | | | | 1,266,862 | |
Total | | $ | 323,882 | | | $ | 493,537 | | | $ | 894,825 | | | $ | 1,712,244 | | | $ | 310,549 | | | $ | 580,599 | | | $ | 1,105,211 | | | $ | 1,996,359 | |
Percent | | | 18.92 | % | | | 28.82 | % | | | 52.26 | % | | | 100.00 | % | | | 15.56 | % | | | 29.08 | % | | | 55.36 | % | | | 100.00 | % |
Classified Loans & Leases and Non-Performing Assets
All loans & leases are assigned a credit risk grade using grading standards developed by bank regulatory agencies. See “Results of Operations - Provision and Allowance for Credit Losses” for more detail on risk grades. The Company utilizes the services of a third-party independent loan & lease review firm to perform evaluations of individual loans & leases and review the credit risk grades the Company places on loans & leases. Loans & leases that are judged to exhibit a higher risk profile are referred to as “classified” and these loans & leases receive increased management attention. As of December 31, 2014,2015, classified loans & leases totaled $3.6$6.1 million compared to $5.8$3.6 million at December 31, 2013.2014.
Classified loans & leases with higher levels of credit risk can be further designated as “impaired” loans & leases. A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. See “Results of Operations - Provision and Allowance for Credit Losses” for further details. Impaired loans & leases consist of: (1) non-accrual loans & leases; and/or (2) restructured loans & leases that are still performing (i.e., accruing interest).
Non-Accrual Loans & Leases - Accrual of interest on loans & leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans & leases are 90 days past due, but in management's judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans & leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. As of December 31, 20142015 and 2013,2014, non-accrual loans & leases totaled $2.3$2.2 million and $2.6$2.3 million.
Restructured Loans & Leases - A restructuring of a loan or lease constitutes a troubled debt restructuring (“TDR”)TDR under ASC 310-40, if the Company for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. Restructured loans or leases typically present an elevated level of credit risk, as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR loans, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment.
As ofAt both December 31, 2015 and 2014, restructured loans totaled $6.6 million with $5.0 million performing. At December 31, 2013, restructured loans totaled $6.8 million with $4.6 million performing.
Other Real Estate - Loans where the collateral has been repossessed are classified as other real estate ("ORE") or, if the collateral is personal property, the loan is classified as other assets on the Company's financial statements.
The following table sets forth the amount of the Company's non-performing loans & leases and ORE as of December 31 of the years indicated.
| | December 31, | | | December 31, | |
(in thousands) | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
Non-Accrual Loans & Leases | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | $ | - | | | $ | - | | | $ | - | | | $ | 1,354 | | | $ | 2,348 | | | $ | 19 | | | $ | - | | | $ | - | | | $ | - | | | $ | 1,354 | |
Agricultural Real Estate | | | - | | | | - | | | | 5,423 | | | | 954 | | | | 1,797 | | | | - | | | | - | | | | - | | | | 5,423 | | | | 954 | |
Real Estate Construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential 1st Mortgages | | | 77 | | | | 324 | | | | 445 | | | | 284 | | | | 954 | | | | 65 | | | | 77 | | | | 324 | | | | 445 | | | | 284 | |
Home Equity Lines and Loans | | | 576 | | | | 406 | | | | 213 | | | | 194 | | | | - | | | | 538 | | | | 576 | | | | 406 | | | | 213 | | | | 194 | |
Agricultural | | | 18 | | | | 35 | | | | 3,198 | | | | 1,202 | | | | - | | | | - | | | | 18 | | | | 35 | | | | 3,198 | | | | 1,202 | |
Commercial | | | 1,586 | | | | 1,815 | | | | - | | | | 217 | | | | 207 | | | | 1,524 | | | | 1,586 | | | | 1,815 | | | | - | | | | 217 | |
Consumer & Other | | | 13 | | | | 16 | | | | 19 | | | | 23 | | | | 2 | | | | 10 | | | | 13 | | | | 16 | | | | 19 | | | | 23 | |
Total Non-Accrual Loans & Leases | | | 2,270 | | | | 2,596 | | | | 9,298 | | | | 4,228 | | | | 5,308 | | | | 2,156 | | | | 2,270 | | | | 2,596 | | | | 9,298 | | | | 4,228 | |
Accruing Loans & Leases Past Due 90 Days or More | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Agricultural Real Estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Real Estate Construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential 1st Mortgages | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Home Equity Lines and Loans | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Agricultural | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer & Other | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total Accruing Loans & Leases Past Due 90 Days or More | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total Non-Performing Loans & Leases | | $ | 2,270 | | | $ | 2,596 | | | $ | 9,298 | | | $ | 4,228 | | | $ | 5,308 | | | $ | 2,156 | | | $ | 2,270 | | | $ | 2,596 | | | $ | 9,298 | | | $ | 4,228 | |
Other Real Estate Owned | | $ | 3,299 | | | $ | 4,611 | | | $ | 2,553 | | | $ | 2,924 | | | $ | 8,039 | | | $ | 2,441 | | | $ | 3,299 | | | $ | 4,611 | | | $ | 2,553 | | | $ | 2,924 | |
Total Non-Performing Assets | | $ | 5,569 | | | $ | 7,207 | | | $ | 11,851 | | | $ | 7,152 | | | $ | 13,347 | | | $ | 4,597 | | | $ | 5,569 | | | $ | 7,207 | | | $ | 11,851 | | | $ | 7,152 | |
Restructured Loans & Leases (Performing) | | $ | 4,955 | | | $ | 4,649 | | | $ | 2,300 | | | $ | 4,710 | | | $ | 27,652 | | | $ | 4,953 | | | $ | 4,955 | | | $ | 4,649 | | | $ | 2,300 | | | $ | 4,710 | |
Non-Performing Loans & Leases as a Percent of Total Loans & Leases | | | 0.13 | % | | | 0.19 | % | | | 0.74 | % | | | 0.36 | % | | | 0.45 | % | | | 0.11 | % | | | 0.13 | % | | | 0.19 | % | | | 0.74 | % | | | 0.36 | % |
Although management believes that non-performing loans & leases are generally well-secured and that potential losses are provided for in the Company’s allowance for credit losses, there can be no assurance that future deterioration in economic conditions and/or collateral values will not result in future credit losses. See Note 5, located in “Item 8. Financial Statements and Supplementary Data” for an allocation of the allowance classified to impaired loans & leases.
The Company reported $3.3$2.4 million of ORE at December 31, 2014,2015, and $4.6$3.3 million at December 31, 2013. The decrease in ORE during 2014 was a result of the Company selling an agricultural real estate property previously acquired through foreclosure.2014. The December 31, 2014,2015, carrying value of $3.3$2.4 million is net of a $3.7 million reserve for ORE valuation adjustments. ORE at December 31, 20142015 includes a mix of agricultural real estate, raw land and residential finished lots.
Except for those classified and non-performing loans & leases discussed above, the Company’s management is not aware of any loans & leases as of December 31, 2014,2015, for which known financial problems of the borrower would cause serious doubts as to the ability of these borrowers to materially comply with their present loan or lease repayment terms, or any known events that would result in the loan or lease being designated as non-performing at some future date. However:
| · | The Central Valley was one of the hardest hit areas in the country during the recession. In many areas, housing prices declined as much as 60% and unemployment reached 15% or more. Although the economy has stabilized throughout most of the Central Valley, housing prices for the most part have not fully recovered significantly and unemployment levels remain well above those in other areas of the state and country. |
| · | The state of California has experienced drought conditions during much of 2013 and 2014. Importantly, most of the Company’s agricultural customers have access to their own ground water supplies and, therefore, are not as dependent on the delivery of surface water as growers in other parts of California.since 2013. Although management continues to believe that current conditions, which have improved as a result of increased levels of rain and snow during the early months of 2016, will not have a material impact on credit quality during 2015,the 2016 growing season, the lack of rain willcontinues to have a continuingan adverse impact on some of our agricultural customers’ operating costs, crop yields and crop quality. The longerIf the drought continues, the more significant this impact will become more significant, particularly if ground water levels reach critical stage.begin to significantly deteriorate or riparian rights are further curtailed. See “Item 1A. Risk Factors” for additional information. |
See “Part I, Item 1A. Risk Factors.”
Deposits
One of the key sources of funds to support earning assets is the generation of deposits from the Company’s customer base. The ability to grow the customer base and subsequently deposits is a significant element in the performance of the Company.
The following table sets forth, by time remaining to maturity, the Company’s time deposits in amounts of $250,000 or more at December 31, 2014.2015.
(in thousands) | | | | | | |
Time Deposits of $250,000 or More | | | | | | |
Three Months or Less | | $ | 186,073 | | | $ | 184,967 | |
Over Three Months Through Six Months | | | 8,899 | | | | 11,011 | |
Over Six Months Through Twelve Months | | | 25,906 | | | | 22,708 | |
Over Twelve Months | | | 18,771 | | | | 18,277 | |
Total Time Deposits of $250,000 or More | | $ | 239,649 | | | $ | 236,963 | |
Refer to the Year-To-Date Average Balances and Rate Schedules located in this "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for information on separate deposit categories.
At December 31, 2014,2015, deposits totaled $2.1$2.3 billion. This represents an increase of 14.2%10.3% or $256.4$213.5 million from December 31, 2013.2014. In addition to the Company’s ongoing business development activities for deposits, the following factors positively impacted year-over-year deposit growth: (1) the Federal government’s decision to permanently increase FDIC deposit insurance limits from $100,000 to $250,000 per depositor; and (2) the Company’s strong financial results and position and F&M Bank’s reputation as one of the most safe and sound banks in its market territory.area; and (2) the Company’s expansion of its service area into Walnut Creek and Concord. The Company expects that, at some point, deposit customers may begin to diversify how they invest their money (e.g., move funds back into the stock market or other investments) and this could impact future deposit growth.
Although total deposits have increased 14.2%10.3% since December 31, 2013,2014, the Company’s focus has beencontinues to be on increasing low cost transaction and savings accounts, which have grown at a faster pace:
· | Demand and interest-bearing transaction accounts increased $163.8$137.1 million or 20.8%14.4% since December 31, 2013.2014. |
· | Savings and money market accounts have increased $54.7$63.6 million or 9.3%9.9% since December 31, 2013.2014. |
· | Time deposit accounts have increased $37.9$12.7 million or 8.8%2.7% since December 31, 2013.2014. |
Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings
Lines of Credit with the Federal Reserve Bank and Federal Home Loan Bank are other key sources of funds to support earning assets. These sources of funds are also used to manage the Bank’s interest rate risk exposure; and, as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio. There were no FHLB advances at December 31, 20142015 or 2013.2014. There were no Federal Funds purchased or advances from the FRB at December 31, 20142015 or 2013.
Securities Sold Under Agreement to Repurchase
Securities Sold Under Agreement to Repurchase are used as secured borrowing alternatives to FHLB Advances or FRB Borrowings.2014.
At December 31, 2014 and December 31, 2013, the Company had no securities sold under agreement to repurchase.
Long-Term Subordinated Debentures
On December 17, 2003, the Company raised $10.0 million through the sale of subordinated debentures to an off-balance sheet trust and its sale of trust-preferred securities. See Note 13, located in “Item 8. Financial Statements and Supplementary Data.” Under current regulatory guidelines, these subordinated debentures will continue to qualify as regulatory capital (See “Basel III Regulatory Capital Rules” for a discussion of the potential impact of proposed regulatory guidelines on this qualification). These securities accrue interest at a variable rate based upon 3-month London InterBank Offered Rate (“LIBOR”) plus 2.85%. Interest rates reset quarterly (the next reset is March 16, 2015)2016) and the rate was 3.09%3.38% as of December 31, 2014.2015. The average rate paid for these securities was 3.19% in 2015 and 3.12% in 2014 and 3.17% in 2013.2014. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.
Capital
The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders’ Equity totaled $233.2$251.8 million at December 31, 2014,2015, and $209.9$233.2 million at the end of 2013.2014.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a material effect on the Company and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Totaltotal, Tier 1, and common equity Tier 1 capital to risk-weighted assets (as defined in the regulations), and of Tier 1 capital to average assets (as defined in the regulations). Management believes, as of December 31, 2014,2015, that the Company and the Bank meet all capital adequacy requirements to which they are subject. In addition, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category. For further information on the Company’s and the Bank’s risk-based capital ratios, see Note 14, located in “Item 8. Financial Statements and Supplementary Data.”
As previously discussed, in order to supplement its regulatory capital base, during December 2003, the Company issued $10.0 million of trust preferred securities. In accordance with the provisions of the “Consolidation” topic of the FASB Accounting Standards Codification (“ASC”), the Company does not consolidate the subsidiary trust, which has issued the trust-preferred securities.
In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on SeptemberAugust 11, 2012,2015, the Board of Directors approved increasingan extension of the funds available for the Company’s common$20 million stock repurchase program to $20 million over the three-year period ending September 30, 2015.2018. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
In 20142015 and 2013,2014, the Company did not repurchase any shares under the Stock Repurchase Program. The remaining dollar value of shares that may yet be purchased under the Company’s Stock Repurchase Program is approximately $20 million.
On August 5, 2008, the Board of Directors approved a Share Purchase Rights Plan (the “Rights Plan”), pursuant to which the Company entered into a Rights Agreement dated August 5, 2008, with Computershare (formerly Registrar and Transfer Company) as Rights Agent. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for further explanation.
On January 28, 2016, the Company issued 1,600 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. These shares were issued at a price of $525 per share based upon a valuation completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds from this issuance was contributed to the Bank as equity capital.
Throughout 2015, the Company issued 6,705 shares of common stock. All of these shares were contributed to the Bank’s non-qualified defined contribution retirement plans. The average share price of these newly issued shares was $501 per share. The share price for each issuance was based upon a valuation completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds from these issuances were contributed to the Bank as equity capital.
In December 4, 2014, the Company issued 6,200 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. See Note 16, located in “Item 8. Financial Statements and Supplementary Data.” These shares were issued at a price of $450 per share based upon a valuation completed by a nationally recognized bank consulting and advisory firm.firm and in reliance upon the exemption in Section 4(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds from this issuance was contributed to the Bank as equity capital.
Basel III Regulatory Capital Rules
Both the FRB and FDIC have approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. These rules would implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.Act, and became effective as applied to the Company and Bank on January 1, 2015, with a phase-in period through January 1, 2019.
The final rules include new minimum risk-based capital and leverage ratios, which would be phased in over time. The new minimum capital level requirements applicable to the Company and the Bank under the final rules will be: (i) a common equity Tier 1 capital ratio of 4.5% of Risk Weighted Assets (“RWA”); (ii) a Tier 1 capital ratio of 6% of RWA; (iii) a total capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. The final rules also establish a "capital conservation buffer" of 2.5% above each of the new regulatory minimum capital ratios, which would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA, and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount.
The finalUnder the new rules, also implement other revisions to the current capital rules but, in general, those revisions are not as onerous as originally thought when the proposed rules were issued in June 2012. For instance, the Company’s subordinated debentures will continue to qualify for Tier 1 under the rules. 1.
The Company believes that it is currently in compliance with all of these new capital requirements (as fully phased-in) and that they will not result in any restrictions on the Company’s business activity.
Critical Accounting Policies and Estimates
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the Company’s financial statements management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Management believes that the most significant subjective judgments that it makes include the following:
Allowance for Credit Losses - As a financial institution, which assumes lending and credit risks as a principal element in its business, the Company anticipates that credit losses will be experienced in the normal course of business. Accordingly, the allowance for credit losses is maintained at a level considered adequate by management to provide for losses that are inherent in the portfolio. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. Management employs a systematic methodology for determining the allowance for credit losses. On a quarterly basis, management reviews the credit quality of the loan & lease portfolio and considers problem loans & leases, delinquencies, internal credit reviews, current economic conditions, loan & lease loss experience, and other factors in determining the adequacy of the allowance balance.
While the Company utilizes a systematic methodology in determining its allowance, the allowance is based on estimates, and ultimate losses may vary from current estimates. The estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the periods in which they become known. For additional information, see Note 5, located in “Item 8. Financial Statements and Supplementary Data.”
Fair Value - The Company discloses the fair value of financial instruments and the methods and significant assumptions used to estimate those fair values. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period of time between origination of the instrument and its expected realization. For additional information, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Credit Risk” and Notes 17 and 18 located in “Item 8. Financial Statements and Supplementary Data.”
Income Taxes - The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year. For additional information, see Note 1, located in “Item 8. Financial Statements and Supplementary Data.”
Off-Balance-Sheet Arrangements
Off-balance-sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity, or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or research and development services with the Company. The Company had the following off balance sheet commitments as of the dates indicated.
(in thousands) | | December 31, 2014 | | | December 31, 2013 | | | December 31, 2015 | | | December 31, 2014 | |
Commitments to Extend Credit | | $ | 539,288 | | | $ | 445,294 | | | $ | 708,122 | | | $ | 539,288 | |
Letters of Credit | | | 9,734 | | | | 7,393 | | | | 14,745 | | | | 9,734 | |
Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties | | | 2,042 | | | | - | | | | 2,758 | | | | 2,042 | |
The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party. Most standby letters of credit are issued for 12 months or less. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Additionally, the Company maintains a reserve for off balance sheet commitments, which totaled $167,000 at December 31, 2015 and $142,000 at December 31, 2014 and December 31, 2013.2014. We do not anticipate any material losses as a result of these transactions.
Aggregate Contractual Obligations and Commitments
The following table presents, as of December 31, 2014,2015, our significant and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts, hedge basis adjustments, or other similar carrying value adjustments. For further information on the nature of each obligation type, see applicable note disclosures located in “Item 8. Financial Statements and Supplementary Data.”
(in thousands) | | Total | | | 1 Year or Less | | | 2-3 Years | | | 4-5 Years | | | More Than 5 Years | | | Total | | | 1 Year or Less | | | 2-3 Years | | | 4-5 Years | | | More Than 5 Years | |
Operating Lease Obligations | | $ | 2,051 | | | $ | 540 | | | $ | 568 | | | $ | 386 | | | $ | 557 | | | $ | 2,040 | | | $ | 548 | | | $ | 593 | | | $ | 576 | | | $ | 323 | |
Long-Term Subordinated Debentures | | | 10,310 | | | | - | | | | - | | | | - | | | | 10,310 | | | | 10,310 | | | | - | | | | - | | | | - | | | | 10,310 | |
Deferred Compensation (1) | | | 37,546 | | | | 679 | | | | 1,129 | | | | 389 | | | | 35,349 | | | | 42,057 | | | | 1,841 | | | | 3,323 | | | | 2,780 | | | | 34,113 | |
Total | | $ | 49,907 | | | $ | 1,219 | | | $ | 1,697 | | | $ | 775 | | | $ | 46,216 | | | $ | 54,407 | | | $ | 2,389 | | | $ | 3,916 | | | $ | 3,356 | | | $ | 44,746 | |
(1)These amounts represent obligations to participants under the Company's various non-qualified deferred compensation plans. See Note 16 located in “Item 8. Financial Statements and Supplementary Data.”
Quarterly Unaudited Financial Data
The following tables set forth certain unaudited historical quarterly financial data for each of the eight consecutive quarters in 20142015 and 2013.2014. This information is derived from unaudited consolidated financial statements that include, in management’s opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation when read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.
2014 | | First | | | Second | | | Third | | | Fourth | | | | | |
2015 | | | First | | | Second | | | Third | | | Fourth | | | | |
(in thousands except per share data) | | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Total | | | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Total | |
Total Interest Income | | $ | 19,047 | | | $ | 19,458 | | | $ | 20,614 | | | $ | 22,402 | | | $ | 81,521 | | | $ | 21,293 | | | $ | 21,756 | | | $ | 23,038 | | | $ | 23,988 | | | $ | 90,075 | |
Total Interest Expense | | | 680 | | | | 678 | | | | 708 | | | | 747 | | | | 2,813 | | | | 792 | | | | 835 | | | | 860 | | | | 838 | | | | 3,325 | |
Net Interest Income | | | 18,367 | | | | 18,780 | | | | 19,906 | | | | 21,655 | | | | 78,708 | | | | 20,501 | | | | 20,921 | | | | 22,178 | | | | 23,150 | | | | 86,750 | |
Provision for Credit Losses | | | - | | | | - | | | | - | | | | 1,175 | | | | 1,175 | | | | 600 | | | | 50 | | | | - | | | | 100 | | | | 750 | |
Net Interest Income After | | | | | | | | | | | | | | | | | | | | | |
Provision for Credit Losses | | | 18,367 | | | | 18,780 | | | | 19,906 | | | | 20,480 | | | | 77,533 | | |
Net Interest Income After Provision for Credit Losses | | | | 19,901 | | | | 20,871 | | | | 22,178 | | | | 23,050 | | | | 86,000 | |
Total Non-Interest Income | | | 3,162 | | | | 3,943 | | | | 2,920 | | | | 4,304 | | | | 14,329 | | | | 4,664 | | | | 2,826 | | | | 3,710 | | | | 3,375 | | | | 14,575 | |
Total Non-Interest Expense | | | 11,640 | | | | 13,034 | | | | 12,542 | | | | 14,150 | | | | 51,366 | | | | 14,218 | | | | 12,761 | | | | 14,488 | | | | 14,792 | | | | 56,259 | |
Income Before Income Taxes | | | 9,889 | | | | 9,689 | | | | 10,284 | | | | 10,634 | | | | 40,496 | | | | 10,347 | | | | 10,936 | | | | 11,400 | | | | 11,633 | | | | 44,316 | |
Provision for Income Taxes | | | 3,607 | | | | 3,585 | | | | 3,852 | | | | 4,050 | | | | 15,094 | | | | 3,944 | | | | 4,187 | | | | 4,360 | | | | 4,433 | | | | 16,924 | |
Net Income | | $ | 6,282 | | | $ | 6,104 | | | $ | 6,432 | | | $ | 6,584 | | | $ | 25,402 | | | $ | 6,403 | | | $ | 6,749 | | | $ | 7,040 | | | $ | 7,200 | | | $ | 27,392 | |
Basic Earnings Per Common Share | | $ | 8.08 | | | $ | 7.84 | | | $ | 8.27 | | | $ | 8.45 | | | $ | 32.64 | | | $ | 8.15 | | | $ | 8.59 | | | $ | 8.96 | | | $ | 9.12 | | | $ | 34.82 | |
| | | | | | | | | | | | | | | | | | | | | |
2013 | | First | | | Second | | | Third | | | Fourth | | | | | | |
(in thousands except per share data) | | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Total | | |
Total Interest Income | | $ | 18,255 | | | $ | 18,945 | | | $ | 19,615 | | | $ | 19,716 | | | $ | 76,531 | | |
Total Interest Expense | | | 764 | | | | 719 | | | | 721 | | | | 687 | | | | 2,891 | | |
Net Interest Income | | | 17,491 | | | | 18,226 | | | | 18,894 | | | | 19,029 | | | | 73,640 | | |
Provision for Credit Losses | | | - | | | | 250 | | | | - | | | | 175 | | | | 425 | | |
Net Interest Income After | | | | | | | | | | | | | | | | | | | | | |
Provision for Credit Losses | | | 17,491 | | | | 17,976 | | | | 18,894 | | | | 18,854 | | | | 73,215 | | |
Total Non-Interest Income | | | 5,497 | | | | 2,964 | | | | 3,448 | | | | 4,028 | | | | 15,937 | | |
Total Non-Interest Expense | | | 12,959 | | | | 12,102 | | | | 12,185 | | | | 13,624 | | | | 50,870 | | |
Income Before Income Taxes | | | 10,029 | | | | 8,838 | | | | 10,157 | | | | 9,258 | | | | 38,282 | | |
Provision for Income Taxes | | | 3,778 | | | | 3,273 | | | | 3,805 | | | | 3,365 | | | | 14,221 | | |
Net Income | | $ | 6,251 | | | $ | 5,565 | | | $ | 6,352 | | | $ | 5,893 | | | $ | 24,061 | | |
Basic Earnings Per Common Share | | $ | 8.04 | | | $ | 7.15 | | | $ | 8.17 | | | $ | 7.57 | | | $ | 30.93 | | |
2014 | | First | | | Second | | | Third | | | Fourth | | | | |
(in thousands except per share data) | | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Total | |
Total Interest Income | | $ | 19,047 | | | $ | 19,458 | | | $ | 20,614 | | | $ | 22,402 | | | $ | 81,521 | |
Total Interest Expense | | | 680 | | | | 678 | | | | 708 | | | | 747 | | | | 2,813 | |
Net Interest Income | | | 18,367 | | | | 18,780 | | | | 19,906 | | | | 21,655 | | | | 78,708 | |
Provision for Credit Losses | | | - | | | | - | | | | - | | | | 1,175 | | | | 1,175 | |
Net Interest Income After Provision for Credit Losses | | | 18,367 | | | | 18,780 | | | | 19,906 | | | | 20,480 | | | | 77,533 | |
Total Non-Interest Income | | | 3,162 | | | | 3,943 | | | | 2,920 | | | | 4,304 | | | | 14,329 | |
Total Non-Interest Expense | | | 11,640 | | | | 13,034 | | | | 12,542 | | | | 14,150 | | | | 51,366 | |
Income Before Income Taxes | | | 9,889 | | | | 9,689 | | | | 10,284 | | | | 10,634 | | | | 40,496 | |
Provision for Income Taxes | | | 3,607 | | | | 3,585 | | | | 3,852 | | | | 4,050 | | | | 15,094 | |
Net Income | | $ | 6,282 | | | $ | 6,104 | | | $ | 6,432 | | | $ | 6,584 | | | $ | 25,402 | |
Basic Earnings Per Common Share | | $ | 8.08 | | | $ | 7.84 | | | $ | 8.27 | | | $ | 8.45 | | | $ | 32.64 | |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Risk Management
The Company has adopted risk management policies and procedures, which aim to ensure the proper control and management of all risk factors inherent in the operation of the Company, most importantly credit risk, interest rate risk and liquidity risk. These risk factors are not mutually exclusive. It is recognized that any product or service offered by the Company may expose the Company to one or more of these risk factors.
Credit Risk
Credit risk is the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer, or borrower performance.
Credit risk in the investment portfolio and correspondent bank accounts is addressed through defined limits in the Company’s policy statements. In addition, certain securities carry insurance to enhance credit quality of the bond.
In order to control credit risk in the loan & lease portfolio the Company has established credit management policies and procedures that govern both the approval of new loans & leases and the monitoring of the existing portfolio. The Company manages and controls credit risk through comprehensive underwriting and approval standards, dollar limits on loans & leases to one borrower, and by restricting loans & leases made primarily to its principal market area where management believes it is best able to assess the applicable risk. Additionally, management has established guidelines to ensure the diversification of the Company’s credit portfolio such that even within key portfolio sectors such as real estate or agriculture, the portfolio is diversified across factors such as location, building type, crop type, etc. However, as a financial institution that assumes credit risks as a principal element of its business, credit losses will be experienced in the normal course of business. The allowance for credit losses is maintained at a level considered by management to be adequate to provide for risks inherent in the loan & lease portfolio. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs.
The Company’s methodology for assessing the appropriateness of the allowance is applied on a regular basis and considers all loans & leases. The systematic methodology consists of three parts.
Part 1 - includes a detailed analysis of the loan & lease portfolio in two phases. The first phase is conducted in accordance with the “Receivables” topic of the FASB ASC. Individual loans & leases are reviewed to identify them for impairment. A loan or lease is impaired when principal and interest are deemed uncollectible in accordance with the original contractual terms of the loan or lease. Impairment is measured as either the expected future cash flows discounted at each loan’s or lease’s effective interest rate, the fair value of the loan’s or lease’s collateral if the loan or lease is collateral dependent, or an observable market price of the loan or lease, if one exists. Upon measuring the impairment, the Company will ensure an appropriate level of allowance is present or established.
Central to the first phase of the analysis of the loan & lease portfolio is the risk rating system. The originating credit officer assigns each borrower an initial risk rating, which is based primarily on a thorough analysis of that borrower’s financial position in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior credit administration personnel. Credits are monitored by credit administration personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary. Risk ratings are reviewed by both the Company’s independent third-party credit examiners and bank examiners from the DBO and FDIC.
Based on the risk rating system, specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates that the loan or lease is impaired and there is a probability of loss. Management performs a detailed analysis of these loans & leases, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral, and assessment of the guarantors. Management then determines the inherent loss potential and allocates a portion of the allowance for losses as a specific allowance for each of these credits.
The second phase is conducted by segmenting the loan & lease portfolio by risk rating and into groups of loans & leases with similar characteristics in accordance with the “Contingency” topic of the FASB ASC. In this second phase, groups of loans & leases with similar characteristics are reviewed and the appropriate allowance factor is applied based on the historical average charge-off rate for each particular group of loans or leases.
Part 2 - considers qualitative internal and external factors that may affect a loan or lease’s collectability, is based upon management’s evaluation of various conditions, the effects of which are not directly measured in the determination of the historical and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the second element of the analysis of the allowance include, but are not limited to the following conditions that existed as of the balance sheet date:
§ | general economic and business conditions affecting the key service areas of the Company; |
§ | credit quality trends (including trends in collateral values, delinquencies and non-performing loans & leases); |
§ | loan & lease volumes, growth rates and concentrations; |
§ | loan & lease portfolio seasoning; |
§ | specific industry and crop conditions; |
§ | recent loss experience; and |
§ | duration of the current business cycle. |
Part 3 - An unallocated allowance often occurs due to the imprecision in estimating and allocating allowance balances associated with macro factors such as: (1) the continuing sluggish economic conditions in the Central Valley; and (2) the long termlong-term impact of drought conditions currently being experienced in California.
Management reviews all of these conditions in discussion with the Company’s senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable impaired credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable impaired credit or portfolio segment as of the evaluation date, management’s evaluation of the inherent loss related to such condition is reflected in the second element of the allowance or in the unallocated allowance.
Management believes, that based upon the preceding methodology, and using information currently available, the allowance for credit losses at December 31, 20142015 was adequate. No assurances can be given that future events may not result in increases in delinquencies, non-performing loans & leases, or net loan & lease charge-offs that would require increases in the provision for credit losses and thereby adversely affect the results of operations.
Interest Rate Risk
The mismatch between maturities of interest sensitive assets and liabilities results in uncertainty in the Company’s earnings and economic value and is referred to as interest rate risk. The Company does not attempt to predict interest rates and positions the balance sheet in a manner, which seeks to minimize, to the extent possible, the effects of changing interest rates.
The Company measures interest rate risk in terms of potential impact on both its economic value and earnings. The methods for governing the amount of interest rate risk include: (1) analysis of asset and liability mismatches (Gap analysis); (2) the utilization of a simulation model; and (3) limits on maturities of investment, loan & lease, and deposit products, which reduces the market volatility of those instruments.
The Gap analysis measures, at specific time intervals, the divergence between earning assets and interest bearing liabilities for which repricing opportunities will occur. A positive difference, or Gap, indicates that earning assets will reprice faster than interest-bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates and a lower net interest margin during periods of declining interest rates. Conversely, a negative Gap will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates.
The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans & leases. In addition, the magnitude of changes in the rates charged on loans & leases is not always proportionate to the magnitude of changes in the rate paid for deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease in the net interest margin solely as a result of the differences between repricing opportunities of earning assets or interest bearing liabilities.
The Company also utilizes the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of the Company’s net interest income is measured over a rolling one-year horizon.
The simulation model estimates the impact of changing interest rates on interest income from all interest earning assets and the interest expense paid on all interest bearing liabilities reflected on the Company’s balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and a 100 basis point downward shift in interest rates. A shift in rates over a 12-month period is assumed. Results that exceed policy limits, if any, are analyzed for risk tolerance and reported to the Board with appropriate recommendations. At December 31, 2014,2015, the Company’s estimated net interest income sensitivity to changes in interest rates, as a percent of net interest income was an increase in net interest income of 2.98%3.88% if rates increase by 200 basis points and a decrease in net interest income of 0.17%1.67% if rates decline 100 basis points.
The estimated sensitivity does not necessarily represent a Company forecast and the results may not be indicative of actual changes to the Company’s net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape; prepayments on loans & leases and securities; pricing strategies on loans & leases and deposits; replacement of asset and liability cash flows; and other assumptions. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.
Liquidity Risk
Liquidity risk is the risk to earnings or capital resulting from the Company’s inability to meet its obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the Company’s ability to liquidate assets or acquire funds quickly and with minimum loss of value. The Company endeavors to maintain a cash flow adequate to fund operations, handle fluctuations in deposit levels, respond to the credit needs of borrowers, and to take advantage of investment opportunities as they arise.
The Company’s principal operating sources of liquidity include (see “Item 8. Financial Statements and Supplementary Data – Consolidated Statements of Cash Flows”) cash and cash equivalents, cash provided by operating activities, principal payments on loans & leases, proceeds from the maturity or sale of investments, and growth in deposits. To supplement these operating sources of funds the Company maintains Federal Funds credit lines of $71$74 million and repurchase lines of $100 million with major banks. As of December 31, 2014,2015, the Company has additional borrowing capacity of $257.0$335.7 million with the Federal Home Loan Bank and $340.8$365.6 million with the Federal Reserve Bank. Borrowings under these lines are collateralized with loans or securities that have been accepted for pledging at the FHLB and FRB.
At December 31, 2014,2015, the Company had available sources of liquidity, which included cash and cash equivalents and unpledged investment securities available-for-sale of approximately $309.6$253.7 million, which represents 13.1%9.7% of total assets.
Item 8. | Financial Statements and Supplementary Data |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
| Page |
| |
Report of Management on Internal Control Over Financial Reporting | 60 |
Reports of Independent Registered Public Accounting FirmsFirm | 61 |
Consolidated Financial Statements | |
| Consolidated Balance Sheets – December 31, 2014,2015, and 20132014 | 6362 |
| Consolidated Statements of Income – Years ended December 31, 2015, 2014 2013 and 20122013 | 6463 |
| Consolidated Statements of Comprehensive Income – Years Ended December 31, 2015, 2014 2013 and 20122013 | 6564 |
| Consolidated Statements of Changes in Shareholders' Equity – Years ended December 31, 2014,2015, 2014and 2013 and 2012 | 6665 |
| Consolidated Statements of Cash Flows - Years Ended December 31, 2015, 2014 2013 and 20122013 | 6766 |
Notes to Consolidated Financial Statements | 6867 |
Farmers & Merchants Bancorp
Report of Management on Internal Control Over Financial Reporting
Management of Farmers & Merchants Bancorp and Subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting at Farmers & Merchants Bancorp (“as defined in Rules 13a-15(f) and 15d-15(f) under the Company”). InternalSecurities Exchange Act of 1934, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2015. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
The Company’s system of internal control over financial reporting includes controls overpolicies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the instructionsUnited States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and fair presentation. Further, because of changes in conditions, the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to complyeffectiveness of internal control may vary over time.
Under the supervision and with the reporting requirements of Part 363participation of the Federal Deposit Insurance Corporation RulesCompany’s management, including the Company’s Chief Executive Officer and Regulations.
Management has assessedChief Financial Officer, the Company performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, based on criteria2015 as described in “Internal“Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on thatCommission. As a result of this assessment, management has concluded that the Company maintained effectiveCompany’s internal control over financial reporting was effective as of December 31, 2014.2015.
Moss Adams LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report, was engaged to express an opinion as to the fairness of presentation of such financial statements. Moss Adams LLP was also engaged to audit the effectiveness of the Company’s internal control over financial reporting. The report of Moss Adams LLP follows this report.
/s/ Kent A. Steinwert | /s/ Stephen W. Haley |
| |
Kent A. Steinwert | Stephen W. Haley |
Chairman, President & Chief Executive Officer | Executive Vice President & Chief Financial Officer |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To theThe Board of Directors and Stockholders
Farmers & Merchants Bancorp
We have audited the accompanying consolidated balance sheets of Farmers & Merchants Bancorp and subsidiaries (the Company)“Company”) as of December 31, 20142015 and 20132014, and the related consolidated statements of income, comprehensive income, changes in shareholders’stockholders’ equity, and cash flows for each of the twothree years in the period ended December 31, 2014.2015. We also have also audited the Company’s internal control over financial reporting as of December 31, 2014,2015, based on criteria established in Internal Control –- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement Report Onon Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our auditaudits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Farmers & Merchants Bancorp and subsidiaries as of December 31, 20142015 and 20132014, and the consolidated results of theirits operations and its cash flows for each of the twothree years in the period ended December 31, 20142015, in conformity with accounting principles generally accepted accounting principles in the United States of America. Also in our opinion, Farmers & Merchants Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,2015, based on criteria established in Internal Control –- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Moss Adams LLP
Stockton, California
March 13, 201514, 2016
![](https://capedge.com/proxy/10-K/0001140361-15-011673/image00007.jpg) | | |
| | Crowe Horwath LLP |
| | Independent Member Crowe Horwath International |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Directors
Farmers & Merchants Bancorp
Lodi, California
We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows of Farmers & Merchants Bancorp and subsidiaries (the "Company") for the year ended December 31, 2012. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
| /s/ Crowe Horwath LLP |
| |
| Crowe Horwath LLP |
San Francisco, California
March 13, 2013
Farmers & Merchants Bancorp |
Consolidated Balance Sheets |
(in thousands except share and per share data) |
| | December 31, | | | December 31, | |
Assets | | 2014 | | | 2013 | | | 2015 | | | 2014 | |
Cash and Cash Equivalents: | | | | | | | | | | | | |
Cash and Due from Banks | | $ | 42,375 | | | $ | 40,966 | | | $ | 49,913 | | | $ | 42,375 | |
Interest Bearing Deposits with Banks | | | 34,750 | | | | 42,711 | | | | 9,533 | | | | 34,750 | |
Total Cash and Cash Equivalents | | | 77,125 | | | | 83,677 | | | | 59,446 | | | | 77,125 | |
| | | | | | | | | | | | | | | | |
Investment Securities: | | | | | | | | | | | | | | | | |
Available-for-Sale | | | 366,542 | | | | 404,639 | | | | 369,137 | | | | 366,542 | |
Held-to-Maturity | | | 63,863 | | | | 68,505 | | | | 61,396 | | | | 63,863 | |
Total Investment Securities | | | 430,405 | | | | 473,144 | | | | 430,533 | | | | 430,405 | |
| | | | | | | | | | | | | | | | |
Loans & Leases: | | | 1,712,244 | | | | 1,388,236 | | | | 1,996,359 | | | | 1,712,244 | |
Less: Allowance for Credit Losses | | | 35,401 | | | | 34,274 | | | | 41,523 | | | | 35,401 | |
Loans& Leases, Net | | | 1,676,843 | | | | 1,353,962 | | | | 1,954,836 | | | | 1,676,843 | |
| | | | | | | | | | | | | | | | |
Premises and Equipment, Net | | | 25,821 | | | | 22,887 | | | | 26,575 | | | | 25,821 | |
Bank Owned Life Insurance | | | 53,990 | | | | 52,109 | | | | 55,898 | | | | 53,990 | |
Interest Receivable and Other Assets | | | 96,367 | | | | 90,294 | | | | 88,057 | | | | 96,367 | |
Total Assets | | $ | 2,360,551 | | | $ | 2,076,073 | | | $ | 2,615,345 | | | $ | 2,360,551 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | |
Demand | | $ | 610,133 | | | $ | 495,963 | | | $ | 711,029 | | | $ | 610,133 | |
Interest-Bearing Transaction | | | 341,397 | | | | 291,795 | | | | 377,594 | | | | 341,397 | |
Savings and Money Market | | | 644,260 | | | | 589,511 | | | | 707,885 | | | | 644,260 | |
Time | | | 468,283 | | | | 430,422 | | | | 481,024 | | | | 468,283 | |
Total Deposits | | | 2,064,073 | | | | 1,807,691 | | | | 2,277,532 | | | | 2,064,073 | |
| | | | | | | | | | | | | | | | |
Subordinated Debentures | | | 10,310 | | | | 10,310 | | | | 10,310 | | | | 10,310 | |
Interest Payable and Other Liabilities | | | 52,990 | | | | 48,168 | | | | 75,668 | | | | 52,990 | |
Total Liabilities | | | 2,127,373 | | | | 1,866,169 | | | | 2,363,510 | | | | 2,127,373 | |
| | | | | | | | | | | | | | | | |
Commitments & Contingencies (See Note 19) | | | | | | | | | | | | | | | | |
Shareholders' Equity | | | | | | | | | | | | | | | | |
Preferred Stock: No Par Value, 1,000,000 Shares Authorized, None Issued or Outstanding | | | - | | | | - | | | | - | | | | - | |
Common Stock: Par Value $0.01, 7,500,000 Shares Authorized, 784,082 and 777,882 Shares Issued and Outstanding at December 31, 2014 and 2013, respectively. | | | 8 | | | | 8 | | |
Common Stock: Par Value $0.01, 7,500,000 Shares Authorized, 790,787 and 784,082 Shares Issued and Outstanding at December 31, 2015 and 2014, respectively. | | | | 8 | | | | 8 | |
Additional Paid-In Capital | | | 77,804 | | | | 75,014 | | | | 81,164 | | | | 77,804 | |
Retained Earnings | | | 152,833 | | | | 137,350 | | | | 170,068 | | | | 152,833 | |
Accumulated Other Comprehensive Income (Loss) | | | 2,533 | | | | (2,468 | ) | |
Accumulated Other Comprehensive Income | | | | 595 | | | | 2,533 | |
Total Shareholders' Equity | | | 233,178 | | | | 209,904 | | | | 251,835 | | | | 233,178 | |
Total Liabilities and Shareholders' Equity | | $ | 2,360,551 | | | $ | 2,076,073 | | | $ | 2,615,345 | | | $ | 2,360,551 | |
The accompanying notes are an integral part of these consolidated financial statements
Farmers & Merchants Bancorp |
Consolidated Statements of Income |
(in thousands except per share data) |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | |
Interest Income | | | | | | | | | | | | | | | | | | |
Interest and Fees on Loans & Leases | | $ | 71,310 | | | $ | 64,921 | | | $ | 65,798 | | | $ | 81,558 | | | $ | 71,310 | | | $ | 64,921 | |
Interest on Deposits with Banks | | | 158 | | | | 79 | | | | 110 | | | | 172 | | | | 158 | | | | 79 | |
Interest on Investment Securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 7,739 | | | | 8,971 | | | | 9,940 | | | | 6,311 | | | | 7,739 | | | | 8,971 | |
Exempt from Federal Tax | | | 2,314 | | | | 2,560 | | | | 2,643 | | | | 2,034 | | | | 2,314 | | | | 2,560 | |
Total Interest Income | | | 81,521 | | | | 76,531 | | | | 78,491 | | | | 90,075 | | | | 81,521 | | | | 76,531 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest Expense | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | | 2,486 | | | | 2,548 | | | | 3,739 | | | | 2,989 | | | | 2,486 | | | | 2,548 | |
Borrowed Funds | | | 5 | | | | 16 | | | | 1,054 | | | | 7 | | | | 5 | | | | 16 | |
Subordinated Debentures | | | 322 | | | | 327 | | | | 347 | | | | 329 | | | | 322 | | | | 327 | |
Total Interest Expense | | | 2,813 | | | | 2,891 | | | | 5,140 | | | | 3,325 | | | | 2,813 | | | | 2,891 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net Interest Income | | | 78,708 | | | | 73,640 | | | | 73,351 | | | | 86,750 | | | | 78,708 | | | | 73,640 | |
Provision for Credit Losses | | | 1,175 | | | | 425 | | | | 1,850 | | | | 750 | | | | 1,175 | | | | 425 | |
Net Interest Income After Provision for Credit Losses | | | 77,533 | | | | 73,215 | | | | 71,501 | | | | 86,000 | | | | 77,533 | | | | 73,215 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non-Interest Income | | | | | | | | | | | | | | | | | | | | | | | | |
Service Charges on Deposit Accounts | | | 3,923 | | | | 4,350 | | | | 4,891 | | | | 3,458 | | | | 3,923 | | | | 4,350 | |
Net Gain (Loss) on Investment Securities | | | 90 | | | | (229 | ) | | | 158 | | |
Net Gain (Loss)on Investment Securities | | | | 275 | | | | 90 | | | | (229 | ) |
Increase in Cash Surrender Value of Life Insurance | | | 1,881 | | | | 1,856 | | | | 1,836 | | | | 1,908 | | | | 1,881 | | | | 1,856 | |
Debit Card and ATM Fees | | | 3,087 | | | | 3,069 | | | | 2,938 | | | | 3,183 | | | | 3,087 | | | | 3,069 | |
Net Gain on Deferred Compensation Investments | | | 2,129 | | | | 3,366 | | | | 1,687 | | | | 1,375 | | | | 2,129 | | | | 3,366 | |
Other | | | 3,219 | | | | 3,525 | | | | 2,600 | | | | 4,376 | | | | 3,219 | | | | 3,525 | |
Total Non-Interest Income | | | 14,329 | | | | 15,937 | | | | 14,110 | | | | 14,575 | | | | 14,329 | | | | 15,937 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non-Interest Expense | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries and Employee Benefits | | | 36,446 | | | | 33,658 | | | | 31,635 | | | | 39,683 | | | | 36,446 | | | | 33,658 | |
Net Gain on Deferred Compensation Investments | | | 2,129 | | | | 3,366 | | | | 1,687 | | | | 1,375 | | | | 2,129 | | | | 3,366 | |
Occupancy | | | 2,690 | | | | 2,513 | | | | 2,565 | | | | 2,884 | | | | 2,690 | | | | 2,513 | |
Equipment | | | 2,794 | | | | 2,783 | | | | 3,128 | | | | 3,162 | | | | 2,794 | | | | 2,783 | |
Marketing | | | | 1,254 | | | | 353 | | | | 263 | |
FDIC Insurance | | | 1,048 | | | | 981 | | | | 968 | | | | 1,193 | | | | 1,048 | | | | 981 | |
Legal Fees | | | 128 | | | | 569 | | | | 1,039 | | |
Termination Fee Related to Repurchase Agreement | | | - | | | | - | | | | 1,657 | | |
Other | | | 6,131 | | | | 7,000 | | | | 5,598 | | | | 6,708 | | | | 5,906 | | | | 7,306 | |
Total Non-Interest Expense | | | 51,366 | | | | 50,870 | | | | 48,277 | | | | 56,259 | | | | 51,366 | | | | 50,870 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income Before Income Taxes | | | 40,496 | | | | 38,282 | | | | 37,334 | | | | 44,316 | | | | 40,496 | | | | 38,282 | |
Provision for Income Taxes | | | 15,094 | | | | 14,221 | | | | 13,985 | | | | 16,924 | | | | 15,094 | | | | 14,221 | |
Net Income | | $ | 25,402 | | | $ | 24,061 | | | $ | 23,349 | | | $ | 27,392 | | | $ | 25,402 | | | $ | 24,061 | |
Basic Earnings Per Common Share | | $ | 32.64 | | | $ | 30.93 | | | $ | 29.99 | | | $ | 34.82 | | | $ | 32.64 | | | $ | 30.93 | |
The accompanying notes are an integral part of these consolidated financial statements
FarmersFARMERS & Merchants BancorpMERCHANTS BANCORP |
Consolidated Statements of Comprehensive Income |
(in thousands) |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | |
Net Income | | $ | 25,402 | | | $ | 24,061 | | | $ | 23,349 | | | $ | 27,392 | | | $ | 25,402 | | | $ | 24,061 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other Comprehensive Income (Loss) | | | | | | | | | | | | | | | | | | | | | | | | |
Increase (Decrease) in Net Unrealized Gain (Loss) on Available-for-Sale Securities | | | 8,719 | | | | (16,564 | ) | | | 4,182 | | |
Deferred Tax (Expense) Benefit Related to Unrealized Gains (Losses) | | | (3,666 | ) | | | 6,965 | | | | (1,759 | ) | |
(Decrease) Increase in Net Unrealized (Loss) Gain on Available-for-Sale Securities | | | | (3,069 | ) | | | 8,719 | | | | (16,564 | ) |
Deferred Tax Benefit (Expense) Related to Unrealized Gains (Losses) | | | | 1,290 | | | | (3,666 | ) | | | 6,965 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Reclassification Adjustment for Realized (Gain) Loss on Available-for-Sale Securities Included in Net Income | | | (90 | ) | | | 229 | | | | (158 | ) | | | (275 | ) | | | (90 | ) | | | 229 | |
Tax Expense (Benefit) Related to Reclassification Adjustment | | | 38 | | | | (97 | ) | | | 67 | | | | 116 | | | | 38 | | | | (97 | ) |
Change in Net Unrealized Gain (Loss) on Available-for-Sale Securities, Net of Tax | | | 5,001 | | | | (9,467 | ) | | | 2,332 | | |
Change in Net Unrealized (Loss) Gain on Available-for-Sale Securities, Net of Tax | | | | (1,938 | ) | | | 5,001 | | | | (9,467 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total Other Comprehensive Income (Loss) | | | 5,001 | | | | (9,467 | ) | | | 2,332 | | |
Total Other Comprehensive (Loss) Income | | | | (1,938 | ) | | | 5,001 | | | | (9,467 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive Income | | $ | 30,403 | | | $ | 14,594 | | | $ | 25,681 | | | $ | 25,454 | | | $ | 30,403 | | | $ | 14,594 | |
The accompanying notes are an integral part of these consolidated financial statements
Farmers & Merchants Bancorp |
Consolidated Statements of Changes in Shareholders' Equity |
(in thousands except share and per share data) |
| | | | | | | | | | | | | | | | | | | | Common Shares Outstanding | | | Common Stock | | | Additional Paid-In Capital | | | Retained Earnings | | | Accumulated Other Comprehensive (Loss) Income | | | Total Shareholders' Equity | |
Balance, January 1, 2012 | | | 779,424 | | | $ | 8 | | | $ | 75,590 | | | $ | 109,081 | | | $ | 4,667 | | | $ | 189,346 | | |
Net Income | | | | | | | | | | | | | | | 23,349 | | | | | | | | 23,349 | | |
Cash Dividends Declared on Common Stock ($12.10 per share) | | | | | | | | | | | | | | | (9,418 | ) | | | | | | | (9,418 | ) | |
Repurchase of Common Stock | | | (1,542 | ) | | | | | | | (576 | ) | | | | | | | | | | | (576 | ) | |
Change in Net Unrealized Gain on Securities Available-for-Sale | | | | | | | | | | | | | | | | | | | 2,332 | | | | 2,332 | | |
Balance, December 31, 2012 | | | 777,882 | | | $ | 8 | | | $ | 75,014 | | | $ | 123,012 | | | $ | 6,999 | | | $ | 205,033 | | |
Balance, January 1, 2013 | | | | 777,882 | | | $ | 8 | | | $ | 75,014 | | | $ | 123,012 | | | $ | 6,999 | | | $ | 205,033 | |
Net Income | | | | | | | | | | | | | | | 24,061 | | | | | | | | 24,061 | | | | | | | | | | | | | | | | 24,061 | | | | | | | | 24,061 | |
Cash Dividends Declared on Common Stock ($12.50 per share) | | | | | | | | | | | | | | | (9,723 | ) | | | | | | | (9,723 | ) | | | | | | | | | | | | | | | (9,723 | ) | | | | | | | (9,723 | ) |
Repurchase of Common Stock | | | | | | | | | | | - | | | | | | | | | | | | - | | | | | | | | | | | | - | | | | | | | | | | | | - | |
Change in Net Unrealized (Loss) on Securities Available-for-Sale | | | | | | | | | | | | | | | | | | | (9,467 | ) | | | (9,467 | ) | | | | | | | | | | | | | | | | | | | (9,467 | ) | | | (9,467 | ) |
Balance, December 31, 2013 | | | 777,882 | | | $ | 8 | | | $ | 75,014 | | | $ | 137,350 | | | $ | (2,468 | ) | | $ | 209,904 | | | | 777,882 | | | $ | 8 | | | $ | 75,014 | | | $ | 137,350 | | | $ | (2,468 | ) | | $ | 209,904 | |
Net Income | | | | | | | | | | | | | | | 25,402 | | | | | | | | 25,402 | | | | | | | | | | | | | | | | 25,402 | | | | | | | | 25,402 | |
Cash Dividends Declared on Common Stock ($12.70 per share) | | | | | | | | | | | | | | | (9,919 | ) | | | | | | | (9,919 | ) | | | | | | | | | | | | | | | (9,919 | ) | | | | | | | (9,919 | ) |
Issuance of Common Stock | | | 6,200 | | | | | | | | 2,790 | | | | | | | | | | | | 2,790 | | | | 6,200 | | | | | | | | 2,790 | | | | | | | | | | | | 2,790 | |
Change in Net Unrealized Gain on Securities Available-for-Sale | | | | | | | | | | | | | | | | | | | | 5,001 | | | | 5,001 | |
Balance, December 31, 2014 | | | | 784,082 | | | $ | 8 | | | $ | 77,804 | | | $ | 152,833 | | | $ | 2,533 | | | $ | 233,178 | |
Net Income | | | | | | | | | | | | | | | | 27,392 | | | | | | | | 27,392 | |
Cash Dividends Declared on Common Stock ($12.90 per share) | | | | | | | | | | | | | | | | (10,157 | ) | | | | | | | (10,157 | ) |
Issuance of Common Stock | | | | 6,705 | | | | | | | | 3,360 | | | | | | | | | | | | 3,360 | |
Change in Net Unrealized (Loss) on Securities Available-for-Sale | | | | | | | | | | | | | | | | | | | 5,001 | | | | 5,001 | | | | | | | | | | | | | | | | | | | | (1,938 | ) | | | (1,938 | ) |
Balance, December 31, 2014 | | | 784,082 | | | $ | 8 | | | $ | 77,804 | | | $ | 152,833 | | | $ | 2,533 | | | $ | 233,178 | | |
Balance, December 31, 2015 | | | | 790,787 | | | $ | 8 | | | $ | 81,164 | | | $ | 170,068 | | | $ | 595 | | | $ | 251,835 | |
The accompanying notes are an integral part of these consolidated financial statements
Farmers & Merchants Bancorp |
Consolidated Statements of Cash Flows |
(in thousands) |
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | |
Operating Activities | | | | | | | | | | | | | | | | | | |
Net Income | | $ | 25,402 | | | $ | 24,061 | | | $ | 23,349 | | | $ | 27,392 | | | $ | 25,402 | | | $ | 24,061 | |
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Provision for Credit Losses | | | 1,175 | | | | 425 | | | | 1,850 | | | | 750 | | | | 1,175 | | | | 425 | |
Depreciation and Amortization | | | 1,325 | | | | 1,506 | | | | 1,704 | | | | 1,685 | | | | 1,325 | | | | 1,506 | |
Provision for Deferred Income Taxes | | | 6,436 | | | | (8,501 | ) | | | (2,548 | ) | | | (907 | ) | | | 6,436 | | | | (8,501 | ) |
Net Amortization of Investment Security Premium & Discounts | | | 1,659 | | | | 3,068 | | | | 3,944 | | | | 1,554 | | | | 1,659 | | | | 3,068 | |
Net Loss (Gain) on Investment Securities | | | (90 | ) | | | 229 | | | | (158 | ) | |
Net (Gain) Loss on Investment Securities | | | | (275 | ) | | | (90 | ) | | | 229 | |
Net Gain on Sale of Property & Equipment | | | (22 | ) | | | (721 | ) | | | - | | | | (383 | ) | | | (22 | ) | | | (721 | ) |
Net Change in Operating Assets & Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Net Increase in Interest Receivable and Other Assets | | | (15,070 | ) | | | (3,719 | ) | | | (434 | ) | | | 5,542 | | | | (15,070 | ) | | | (3,719 | ) |
Net Increase in Interest Payable and Other Liabilities | | | 4,822 | | | | 10,851 | | | | 4,016 | | | | 1,015 | | | | 4,822 | | | | 10,851 | |
Net Cash Provided by Operating Activities | | | 25,637 | | | | 27,199 | | | | 31,723 | | | | 36,373 | | | | 25,637 | | | | 27,199 | |
Investing Activities | | | | | | | | | | | | | | | | | | | | | | | | |
Purchase of Investment Securities Available-for-Sale | | | (132,619 | ) | | | (221,745 | ) | | | (143,295 | ) | | | (203,996 | ) | | | (132,619 | ) | | | (221,745 | ) |
Proceeds from Sold, Matured, or Called Securities Available-for-Sale | | | 177,324 | | | | 208,962 | | | | 205,374 | | | | 227,157 | | | | 177,324 | | | | 208,962 | |
Purchase of Investment Securities Held-to-Maturity | | | (17,692 | ) | | | (2,077 | ) | | | (10,739 | ) | | | (17,747 | ) | | | (17,692 | ) | | | (2,077 | ) |
Proceeds from Matured, or Called Securities Held-to-Maturity | | | 22,628 | | | | 8,443 | | | | 5,419 | | | | 18,031 | | | | 22,628 | | | | 8,443 | |
Purchase of Life Insurance Contracts | | | - | | | | - | | | | (1,000 | ) | |
Net Loans & Leases Paid, Originated or Acquired | | | (324,284 | ) | | | (142,225 | ) | | | (84,872 | ) | | | (284,211 | ) | | | (324,284 | ) | | | (142,225 | ) |
Principal Collected on Loans & Leases Previously Charged Off | | | 228 | | | | 523 | | | | 398 | | | | 5,468 | | | | 228 | | | | 523 | |
Additions to Premises and Equipment | | | (4,274 | ) | | | (1,614 | ) | | | (547 | ) | | | (2,726 | ) | | | (4,274 | ) | | | (1,614 | ) |
Proceeds from Sale of Property & Equipment | | | 37 | | | | 843 | | | | - | | | | 670 | | | | 37 | | | | 843 | |
Net Cash Used by Investing Activities | | | (278,652 | ) | | | (148,890 | ) | | | (29,262 | ) | | | (257,354 | ) | | | (278,652 | ) | | | (148,890 | ) |
Financing Activities | | | | | | | | | | | | | | | | | | | | | | | | |
Net Increase in Deposits | | | 256,382 | | | | 85,665 | | | | 95,829 | | | | 213,459 | | | | 256,382 | | | | 85,665 | |
Net Change in Other Borrowings | | | - | | | | - | | | | (530 | ) | |
Net Decrease in Securities Sold Under Agreement to Repurchase | | | - | | | | - | | | | (60,000 | ) | |
Stock Repurchases | | | - | | | | - | | | | (576 | ) | |
Cash Dividends | | | (9,919 | ) | | | (9,723 | ) | | | (9,418 | ) | | | (10,157 | ) | | | (9,919 | ) | | | (9,723 | ) |
Net Cash Provided by Financing Activities | | | 246,463 | | | | 75,942 | | | | 25,305 | | | | 203,302 | | | | 246,463 | | | | 75,942 | |
(Decrease) Increase in Cash and Cash Equivalents | | | (6,552 | ) | | | (45,749 | ) | | | 27,766 | | |
Decrease in Cash and Cash Equivalents | | | | (17,679 | ) | | | (6,552 | ) | | | (45,749 | ) |
Cash and Cash Equivalents at Beginning of Year | | | 83,677 | | | | 129,426 | | | | 101,660 | | | | 77,125 | | | | 83,677 | | | | 129,426 | |
Cash and Cash Equivalents at End of Year | | $ | 77,125 | | | $ | 83,677 | | | $ | 129,426 | | | $ | 59,446 | | | $ | 77,125 | | | $ | 83,677 | |
Supplementary Data | | | | | | | | | | | | | | | | | | | | | | | | |
Loans Transferred to Foreclosed Assets (ORE) | | $ | - | | | $ | 4,403 | | | $ | 58 | | | $ | - | | | $ | - | | | $ | 4,403 | |
Cash Payments Made for Income Taxes | | $ | 15,030 | | | $ | 17,285 | | | $ | 17,472 | | | $ | 8,475 | | | $ | 15,030 | | | $ | 17,285 | |
Issuance of Common Stock | | $ | 2,790 | | | $ | - | | | $ | - | | |
Issuance of Common Stock to the Bank's Non-Qualified Retirement Plans | | | $ | 3,360 | | | $ | 2,790 | | | $ | - | |
Interest Paid | | $ | 2,787 | | | $ | 3,037 | | | $ | 5,553 | | | $ | 3,190 | | | $ | 2,787 | | | $ | 3,037 | |
The accompanying notes are an integral part of these consolidated financial statements
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Farmers & Merchants Bancorp (the “Company”) was organized March 10, 1999. Primary operations are related to traditional banking activities through its subsidiary Farmers & Merchants Bank of Central California (the “Bank”) which was established in 1916. The Bank’s wholly owned subsidiaries include Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Farmers & Merchants Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts as trustee on deeds of trust originated by the Bank.
The Company’s other subsidiaries include F & M Bancorp, Inc. and FMCB Statutory Trust I. F & M Bancorp, Inc. was created in March 2002 to protect the name F & M Bank. During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name “F & M Bank” as part of a larger effort to enhance the Company’s image and build brand name recognition. In December 2003, the Company formed a wholly owned subsidiary, FMCB Statutory Trust I. FMCB Statutory Trust I is a non-consolidated subsidiary per Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”) and was formed for the sole purpose of issuing Trust Preferred Securities and related subordinated debentures.
The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practice within the banking industry. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements.
Basis of Presentation
The accompanying consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America for financial information.
The accompanying consolidated financial statements include the accounts of the Company and the Company’s wholly owned subsidiaries, F & M Bancorp, Inc. and the Bank, along with the Bank’s wholly owned subsidiaries, Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Significant inter-company transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Certain amounts in the prior years' financial statements and related footnote disclosures have been reclassified to conform to the current-year presentation. These reclassifications had no effect on previously reported net income or total shareholders’ equity. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the periods presented.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company has defined cash and cash equivalents as those amounts included in the balance sheet captions Cash and Due from Banks, Interest Bearing Deposits with Banks, Federal Funds Sold and Securities Purchased Under Agreements to Resell. For these instruments, the carrying amount is a reasonable estimate of fair value.
Investment Securities
Investment securities are classified at the time of purchase as held-to-maturity (“HTM”) if it is management’s intent and the Company has the ability to hold the securities until maturity. These securities are carried at cost, adjusted for amortization of premium and accretion of discount using a level yield of interest over the estimated remaining period until maturity. Losses, reflecting a decline in value judged by the Company to be other than temporary, are recognized in the period in which they occur.
Securities are classified as available-for-sale (“AFS”) if it is management’s intent, at the time of purchase, to hold the securities for an indefinite period of time and/or to use the securities as part of the Company’s asset/liability management strategy. These securities are reported at fair value with aggregate unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, net of related income taxes. Fair values are based on quoted market prices or broker/dealer price quotations on a specific identification basis. Gains or losses on the sale of these securities are computed using the specific identification method.
Trading securities, if any, are acquired for short-term appreciation and are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in non-interest income.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement; and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
Loans & Leases
Loans & leases are reported at the principal amount outstanding net of unearned discounts and deferred loan & lease fees and costs. Interest income on loans & leases is accrued daily on the outstanding balances using the simple interest method. Loan & lease origination fees are deferred and recognized over the contractual life of the loan or lease as an adjustment to the yield. Loans & leases are placed on non-accrual status when the collection of principal or interest is in doubt or when they become past due for 90 days or more unless they are both well-secured and in the process of collection. For this purpose, a loan or lease is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or lease or is guaranteed by a financially capable party. When a loan or lease is placed on non-accrual status, the accrued and unpaid interest receivable is reversed and charged against current income; thereafter, interest income is recognized only as it is collected in cash. Additionally, cash would be applied to principal if all principal was not expected to be collected. Loans & leases placed on non-accrual status are returned to accrual status when the loans or leases are paid current as to principal and interest and future payments are expected to be made in accordance with the contractual terms of the loan or lease.
A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Impaired loans & leases are either: (1) non-accrual loans & leases; or (2) restructured loans & leases that are still accruing interest. Loans or leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.
A restructuring of a loan or lease constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the borrower’s (the term “borrower” is used herein to describe a customer who has entered into either a loan or lease transaction) financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans & leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. If the restructured loan or lease was current on all payments at the time of restructure and management reasonably expects the borrower will continue to perform after the restructure, management may keep the loan or lease on accrual. Loans & leases that are on nonaccrual status at the time they become TDR, remain on nonaccrual status until the borrower demonstrates a sustained period of performance, which the Company generally believes to be six consecutive months of payments, or equivalent. A loan or lease can be removed from TDR status if it was restructured at a market rate in a prior calendar year and is currently in compliance with its modified terms. However, these loans or leases continue to be classified as impaired and are individually evaluated for impairment as described above.
Generally, the Company will not restructure loans or leases for borrowers unless: (1) the existing loan or lease is brought current as to principal and interest payments; and (2) the restructured loan or lease can be underwritten to reasonable underwriting standards. If these standards are not met other actions will be pursued (e.g., foreclosure) to collect outstanding loan or lease amounts. After restructure a determination is made whether the loan or lease will be kept on accrual status based upon the underwriting and historical performance of the restructured credit.
Allowance for Credit Losses
The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance sheet date. The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of three primary components: specific reserves related to impaired loans & leases; general reserves for inherent losses related to loans & leases that are not impaired; and an unallocated component that takes into account the imprecision in estimating and allocating allowance balances associated with macro factors.
The determination of the general reserve for loans & leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, qualitative factors that include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.
The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer and other; and (9) equipment leases. The allowance for credit losses attributable to each portfolio segment, which includes both individually evaluated impaired loans & leases and loans & leases that are collectively evaluated for impairment, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.
The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and assess overall collectability. For smaller balance loans & leases, such as consumer and residential real estate, a credit grade is established at inception, and then updated only when the loan or lease becomes contractually delinquent or when the borrower requests a modification. For larger balance loans, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:
Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.
Special Mention – A special mention loan or lease has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company's credit position at some future date. Special mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard – A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans or leases classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well definedWell-defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans or leases classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable.
Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance.
The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:
Commercial Real Estate – Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.
Real Estate Construction – Real estate construction loans, including land loans, are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.
Commercial – These loans are generally considered to possess a moderate inherent risk of loss because they are shorter-term; typically made to relationship customers; generally underwritten to existing cash flows of operating businesses; and may be collateralized by fixed assets, inventory and/or accounts receivable. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.
Agricultural Real Estate and Agricultural – These loans are generally considered to possess a moderate inherent risk of loss since they are typically made to relationship customers and are secured by crop production, livestock and related real estate. These loans are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.
Leases – Equipment leases are generally considered to possess a moderate inherent risk of loss. As Lessor, the company is subject to both the credit risk of the borrower and the residual value risk of the equipment. Credit risks are underwritten using the same credit criteria the Company would use when making an equipment term loan. Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.
Residential 1st Mortgages and Home Equity Lines and Loans – These loans are generally considered to possess a low inherent risk of loss, although this is not always true as evidenced by the weaknesscorrection in residential real estate values over the past five years.that occurred between 2007 and 2012. The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.
Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.
At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company's and Bank's regulators, including the Federal Reserve Bank (“FRB”), the California Department of Business Oversight (“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”), as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.
Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in Interest Payable and Other Liabilities on the Company’s Consolidated Balance Sheet.
Premises and Equipment
Premises, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight linestraight-line method over the estimated useful lives of the assets. Estimated useful lives of buildings range from 30 to 40 years, and for furniture and equipment from 3 to 7 years. Leasehold improvements are amortized over the lesser of the terms of the respective leases, or their useful lives, which are generally 5 to 10 years. Remodeling and capital improvements are capitalized while maintenance and repairs are charged directly to occupancy expense.
Other Real Estate
Other real estate, which is included in other assets, is expected to be sold and is comprised of properties no longer utilized for business operations and property acquired through foreclosure in satisfaction of indebtedness. These properties are recorded at fair value less estimated selling costs upon acquisition. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the allowance for credit losses at the time of acquisition. Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest expense as incurred.
Income Taxes
The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year.
The Company follows the standards set forth in the “Income Taxes” topic of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
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When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest expense and penalties associated with unrecognized tax benefits, if any, are included in the provision for income taxes in the Unaudited Consolidated Statements of Income.
Dividends and Basic Earnings Per Common Share
The Company’s common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. There are no common stock equivalent shares. Therefore, there is no presentation of diluted basic earnings per common share. See Note 15 for additional information.
Segment Reporting
The “Segment Reporting” topic of the FASB ASC requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a holding company for a community bank, which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change. Therefore, the Company only reports one segment.
Derivative Instruments and Hedging Activities
The “Derivatives and Hedging” topic of the FASB ASC establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. Changes in the fair value of those derivatives are accounted for depending on the intended use of the derivative and the resulting designation under specified criteria. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, designed to minimize interest rate risk, the effective portions of the change in the fair value of the derivative are recorded in other comprehensive income (loss), net of related income taxes. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.
From time to time, the Company utilizes derivative financial instruments such as interest rate caps, floors, swaps, and collars. These instruments are purchased and/or sold to reduce the Company’s exposure to changing interest rates. The Company marks to market the value of its derivative financial instruments and reflects gain or loss in earnings in the period of change or in other comprehensive income (loss). The Company was not utilizing any derivative instruments as of or for the years ended December 31, 2015, 2014 2013 and 2012.2013.
Comprehensive Income
The “Comprehensive Income” topic of the FASB ASC establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income (loss) refers to revenues, expenses, gains, and losses that generally accepted accounting principlesU.S. GAAP recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
2. Investment Securities
The amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale are as follows:
(in thousands)
| | Amortized | | | Gross Unrealized | | | Fair/Book | | | Amortized | | | Gross Unrealized | | | Fair/Book | |
December 31, 2014 | | Cost | | | Gains | | | Losses | | | Value | | |
December 31, 2015 | | | Cost | | | Gains | | | Losses | | | Value | |
Government Agency & Government-Sponsored Entities | | $ | 78,051 | | | $ | 61 | | | $ | 3 | | | $ | 78,109 | | | $ | 33,536 | | | $ | 134 | | | $ | 419 | | | $ | 33,251 | |
US Treasury Notes | | | | 73,048 | | | | - | | | | 164 | | | | 72,884 | |
Mortgage Backed Securities (1) | | | 283,636 | | | | 4,969 | | | | 657 | | | | 287,948 | | | | 261,016 | | | | 2,708 | | | | 1,231 | | | | 262,493 | |
Other | | | 485 | | | | - | | | | - | | | | 485 | | | | 509 | | | | - | | | | - | | | | 509 | |
Total | | $ | 362,172 | | | $ | 5,030 | | | $ | 660 | | | $ | 366,542 | | | $ | 368,109 | | | $ | 2,842 | | | $ | 1,814 | | | $ | 369,137 | |
| | | | | | | | | | | | | | | | | |
| | Amortized | | | Gross Unrealized | | | Fair/Book | | |
December 31, 2013 | | Cost | | | Gains | | | Losses | | | Value | | |
Government Agency & Government-Sponsored Entities | | $ | 28,287 | | | $ | 149 | | | $ | - | | | $ | 28,436 | | |
Mortgage Backed Securities (1) | | | 329,469 | | | | 3,026 | | | | 7,566 | | | | 324,929 | | |
Corporate Securities | | | 49,247 | | | | 280 | | | | 147 | | | | 49,380 | | |
Other | | | 1,894 | | | | - | | | | - | | | | 1,894 | | |
Total | | $ | 408,897 | | | $ | 3,455 | | | $ | 7,713 | | | $ | 404,639 | | |
| | Amortized | | | Gross Unrealized | | | Fair/Book | |
December 31, 2014 | | Cost | | | Gains | | | Losses | | | Value | |
Government Agency & Government-Sponsored Entities | | $ | 78,051 | | | $ | 61 | | | $ | 3 | | | $ | 78,109 | |
Mortgage Backed Securities (1) | | | 283,636 | | | | 4,969 | | | | 657 | | | | 287,948 | |
Other | | | 485 | | | | - | | | | - | | | | 485 | |
Total | | $ | 362,172 | | | $ | 5,030 | | | $ | 660 | | | $ | 366,542 | |
(1) All Mortgage Backed Securities were issued by an agency or government sponsored entity of the U.S. government.
The book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows: (in thousands)
| | Book | | | Gross Unrealized | | | Fair | |
December 31, 2014 | | Value | | | Gains | | | Losses | | | Value | |
Obligations of States and Political Subdivisions | | $ | 61,716 | | | $ | 782 | | | $ | 10 | | | $ | 62,488 | |
Other | | | 2,147 | | | | - | | | | - | | | | 2,147 | |
Total | | $ | 63,863 | | | $ | 782 | | | $ | 10 | | | $ | 64,635 | |
| | | | | | | | | | | | | | | | |
| | Book | | | Gross Unrealized | | | Fair | |
December 31, 2013 | | Value | | | Gains | | | Losses | | | Value | |
Obligations of States and Political Subdivisions | | $ | 65,685 | | | $ | 812 | | | $ | 627 | | | $ | 65,870 | |
Mortgage Backed Securities (1) | | | 45 | | | | - | | | | - | | | | 45 | |
Other | | | 2,775 | | | | - | | | | - | | | | 2,775 | |
Total | | $ | 68,505 | | | $ | 812 | | | $ | 627 | | | $ | 68,690 | |
| | Book | | | Gross Unrealized | | | Fair | |
December 31, 2015 | | Value | | | Gains | | | Losses | | | Value | |
Obligations of States and Political Subdivisions | | $ | 61,396 | | | $ | 993 | | | $ | 1 | | | $ | 62,388 | |
Total | | $ | 61,396 | | | $ | 993 | | | $ | 1 | | | $ | 62,388 | |
(1) All Mortgage Backed Securities were issued by an agency or government sponsored entity of the U.S. government.
| | Book | | | Gross Unrealized | | | Fair | |
December 31, 2014 | | Value | | | Gains | | | Losses | | | Value | |
Obligations of States and Political Subdivisions | | $ | 61,716 | | | $ | 782 | | | $ | 10 | | | $ | 62,488 | |
Other | | | 2,147 | | | | - | | | | - | | | | 2,147 | |
Total | | $ | 63,863 | | | $ | 782 | | | $ | 10 | | | $ | 64,635 | |
Fair values are based on quoted market prices or dealer quotes. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities.
In June 2014, the Company sold $375,000 of municipal bonds from a single issuer. The Company took this action under the provisions of ASC 320-10-25-6(a), which allow for the sale of held-to-maturity securities where there is “evidence of a significant deterioration in the issuer’s creditworthiness.” The resulting income statement impact was not material.
The amortized cost and estimated fair values of investment securities at December 31, 20142015 by contractual maturity are shown in the following tables. (in thousands)
| | Available-for-Sale | | | Held-to-Maturity | | | Available-for-Sale | | | Held-to-Maturity | |
| | Amortized | | | Fair/Book | | | Book | | | Fair | | |
December 31, 2014 | | Cost | | | Value | | | Value | | | Value | | |
December 31, 2015 | | | Amortized Cost | | | Fair/Book Value | | | Book Value | | | Fair Value | |
Within One Year | | $ | 77,462 | | | $ | 77,470 | | | $ | 2,747 | | | $ | 2,748 | | | $ | 28,507 | | | $ | 28,507 | | | $ | - | | | $ | - | |
After One Year Through Five Years | | | 1,074 | | | | 1,124 | | | | 16,426 | | | | 16,633 | | | | 78,586 | | | | 78,137 | | | | 12,793 | | | | 12,853 | |
After Five Years Through Ten Years | | | - | | | | - | | | | 9,845 | | | | 9,931 | | | | - | | | | - | | | | 10,211 | | | | 10,343 | |
After Ten Years | | | - | | | | - | | | | 34,845 | | | | 35,323 | | | | - | | | | - | | | | 38,392 | | | | 39,192 | |
| | | 78,536 | | | | 78,594 | | | | 63,863 | | | | 64,635 | | | | 107,093 | | | | 106,644 | | | | 61,396 | | | | 62,388 | |
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Investment Securities Not Due at a Single Maturity Date: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage Backed Securities | | | 283,636 | | | | 287,948 | | | | - | | | | - | | | | 261,016 | | | | 262,493 | | | | - | | | | - | |
Total | | $ | 362,172 | | | $ | 366,542 | | | $ | 63,863 | | | $ | 64,635 | | | $ | 368,109 | | | $ | 369,137 | | | $ | 61,396 | | | $ | 62,388 | |
Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
The following tables show those investments with gross unrealized losses and their market value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at the dates indicated. (in thousands)
| | Less Than 12 Months | | | 12 Months or More | | | Total | | | Less Than 12 Months | | | 12 Months or More | | | Total | |
December 31, 2014 | | | | | | | | | | | | | | | | | | | |
December 31, 2015 | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities Available-for-Sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Government Agency & Government-Sponsored Entities | | $ | 66,980 | | | $ | 3 | | | $ | - | | | $ | - | | | $ | 66,980 | | | $ | 3 | | | $ | 29,944 | | | $ | 419 | | | $ | - | | | $ | - | | | $ | 29,944 | | | $ | 419 | |
US Treasury Notes | | | | 44,887 | | | | 164 | | | | - | | | | - | | | | 44,887 | | | | 164 | |
Mortgage Backed Securities | | | 14,487 | | | | 151 | | | | 33,574 | | | | 506 | | | | 48,061 | | | | 657 | | | | 78,899 | | | | 1,089 | | | | 7,277 | | | | 142 | | | | 86,176 | | | | 1,231 | |
Total | | $ | 81,467 | | | $ | 154 | | | $ | 33,574 | | | $ | 506 | | | $ | 115,041 | | | $ | 660 | | | $ | 153,730 | | | $ | 1,672 | | | $ | 7,277 | | | $ | 142 | | | $ | 161,007 | | | $ | 1,814 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities Held-to-Maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of States and Political Subdivisions | | $ | 849 | | | $ | 5 | | | $ | 876 | | | $ | 5 | | | $ | 1,725 | | | $ | 10 | | | $ | 839 | | | $ | 1 | | | $ | - | | | $ | - | | | $ | 839 | | | $ | 1 | |
Total | | $ | 849 | | | $ | 5 | | | $ | 876 | | | $ | 5 | | | $ | 1,725 | | | $ | 10 | | | $ | 839 | | | $ | 1 | | | $ | - | | | $ | - | | | $ | 839 | | | $ | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Months | | | 12 Months or More | | | Total | | |
December 31, 2013 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Securities Available-for-Sale | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage Backed Securities | | $ | 195,736 | | | $ | 7,566 | | | $ | - | | | $ | - | | | $ | 195,736 | | | $ | 7,566 | | |
Corporate Securities | | | 15,297 | | | | 106 | | | | 2,457 | | | | 41 | | | | 17,754 | | | | 147 | | |
Total | | $ | 211,033 | | | $ | 7,672 | | | $ | 2,457 | | | $ | 41 | | | $ | 213,490 | | | $ | 7,713 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Securities Held-to-Maturity | | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of States and Political Subdivisions | | $ | 9,518 | | | $ | 627 | | | $ | - | | | $ | - | | | $ | 9,518 | | | $ | 627 | | |
Total | | $ | 9,518 | | | $ | 627 | | | $ | - | | | $ | - | | | $ | 9,518 | | | $ | 627 | | |
| | Less Than 12 Months | | | 12 Months or More | | | Total | |
December 31, 2014 | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | |
| | | | | | | | | | | | | | | | | | |
Securities Available-for-Sale | | | | | | | | | | | | | | | | | | |
Government Agency & Government-Sponsored Entities | | $ | 66,980 | | | $ | 3 | | | $ | - | | | $ | - | | | $ | 66,980 | | | $ | 3 | |
Mortgage Backed Securities | | | 14,487 | | | | 151 | | | | 33,574 | | | | 506 | | | | 48,061 | | | | 657 | |
Total | | $ | 81,467 | | | $ | 154 | | | $ | 33,574 | | | $ | 506 | | | $ | 115,041 | | | $ | 660 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Securities Held-to-Maturity | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of States and Political Subdivisions | | $ | 849 | | | $ | 5 | | | $ | 876 | | | $ | 5 | | | $ | 1,725 | | | $ | 10 | |
Total | | $ | 849 | | | $ | 5 | | | $ | 876 | | | $ | 5 | | | $ | 1,725 | | | $ | 10 | |
As of December 31, 2014,2015, the Company held 264254 investment securities of which 724 were in an unrealized loss position for less than twelve months. Six securities wereOne security was in an unrealized loss position for twelve months or more. Management periodically evaluates each investment security for other-than-temporary impairment relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities.
Securities of Government Agency and Government Sponsored Entities – At December 31, 2015, three securities of government agency and government sponsored entities were in a loss position for less than 12 months and none were in a loss position for 12 months or more. The unrealized losses on the Company's investments in securities of government agency and government sponsored entities were $419,000 at December 31, 2015 and $3,000 at December 31, 2014 and $0 at December 31, 2013.2014. The unrealized loss was caused by interest rate fluctuations. Repayment of these investments is guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2014.2015.
Mortgage Backed Securities - At December 31, 2015, eleven mortgage backed security investments were in a loss position for less than 12 months and one was in a loss position for 12 months or more. The unrealized losses on the Company's investment in mortgage-backed securities were $1.2 million at December 31, 2015 and $657,000 at December 31, 2014 and $7.6 million at December 31, 2013.2014. The unrealized losses were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 20142015 or 2013.2014.
Obligations of States and Political Subdivisions - The continuing financial problems being experienced by certain municipalities, along with the financial stresses exhibited by someAt December 31, 2015, two obligations of the large monoline bond insurers have increased the overall risk associated with bank-qualified municipal bonds.states and political subdivisions were in a loss position for less than 12 months. None were in a loss position for 12 months or more. As of December 31, 2014,2015, over ninety-sevenninety-eight percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or the issuer level, and all of these ratings are “investment grade.” The Company monitors the status of the three percent of the portfolio that is not rated and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.
The unrealized losses on the Company’s investment in obligation of states and political subdivision were $1,400 at December 31, 2015 and $10,000 at December 31, 2014 and $627,000 at December 31, 2013.2014. Management believes that any unrealized losses on the Company's investments in obligations of states and political subdivisions were caused by interest rate fluctuations. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company did not intend to sell the securities and it is more likely than not that the Company would not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 20142015 and December 31, 2013.2014.
Corporate Securities -U.S. Treasury Notes – At December 31, 2015, eight U.S. Treasury Note security investments were in a loss position for less than 12 months and none were in a loss position for 12 months or more. The unrealized losses on the Company's investment in US treasury notes were $164,000 at December 31, 2015. The Company did not hold any corporate securitiesU.S. treasury notes at December 31, 2014. The unrealized losses onwere caused by interest rate fluctuations. Because the Company’s investmentdecline in corporatemarket value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2013 were $147,000. Changes in the prices2015. The Company did not hold any U.S. Treasury note security investments at December 31, 2014.
75
Proceeds from sales and calls of securities were as follows:
(in thousands) | | Gross Proceeds | | | Gross Gains | | | Gross Losses | | | Gross Proceeds | | | Gross Gains | | | Gross Losses | |
2015 | | | $ | 61,335 | | | $ | 275 | | | $ | - | |
2014 | | $ | 130,174 | | | $ | 1,204 | | | $ | 1,114 | | | $ | 130,174 | | | $ | 1,204 | | | $ | 1,114 | |
2013 | | $ | 81,390 | | | $ | 1,208 | | | $ | 1,437 | | | $ | 81,390 | | | $ | 1,208 | | | $ | 1,437 | |
2012 | | $ | 55,986 | | | $ | 158 | | | | - | | |
Pledged Securities
As of December 31, 2014,2015, securities carried at $178.8$189.2 million were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) borrowings, and other government agency deposits as required by law. This amount was $334.8$178.8 million at December 31, 2013.
The decrease in pledged securities in 2014 was due to the Company’s use of a $165 million standby Letter of Credit (“LC”) issued by the Federal Home Loan Bank as collateral for Public Deposits. The LC was issued December 4, 2014, and matures December 2, 2016, with a maintenance fee of 10 basis points per annum.2014.
3. Federal Home Loan Bank of San Francisco Stock
The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. FHLB stock is reported in Other Assets and Interest Receivable on the Company’s Consolidated Balance Sheets and totaled $7.8 million at December 31, 2015 and $7.7 million at December 31, 2014 and $7.2 million at December 31, 2013.2014.
4. Loans & Leases
Loans & leases as of December 31 consisted of the following:
(in thousands) | | 2014 | | | 2013 | | | 2015 | | | 2014 | |
Commercial Real Estate | | $ | 495,316 | | | $ | 411,037 | | | $ | 609,602 | | | $ | 495,316 | |
Agricultural Real Estate | | | 357,207 | | | | 328,264 | | | | 424,034 | | | | 357,207 | |
Real Estate Construction | | | 96,519 | | | | 41,092 | | | | 151,974 | | | | 96,519 | |
Residential 1st Mortgages | | | 171,880 | | | | 151,292 | | | | 206,405 | | | | 171,880 | |
Home Equity Lines and Loans | | | 33,017 | | | | 35,477 | | | | 33,056 | | | | 33,017 | |
Agricultural | | | 281,963 | | | | 256,414 | | | | 293,966 | | | | 281,963 | |
Commercial | | | 230,819 | | | | 150,398 | | | | 210,804 | | | | 230,819 | |
Consumer & Other | | | 4,719 | | | | 5,052 | | | | 6,592 | | | | 4,719 | |
Leases | | | 44,217 | | | | 12,733 | | | | 65,054 | | | | 44,217 | |
Total Gross Loans & Leases | | | 1,715,657 | | | | 1,391,759 | | | | 2,001,487 | | | | 1,715,657 | |
Less: Unearned Income | | | 3,413 | | | | 3,523 | | | | 5,128 | | | | 3,413 | |
Subtotal | | | 1,712,244 | | | | 1,388,236 | | | | 1,996,359 | | | | 1,712,244 | |
Less: Allowance for Credit Losses | | | 35,401 | | | | 34,274 | | | | 41,523 | | | | 35,401 | |
Loans & Leases, Net | | $ | 1,676,843 | | | $ | 1,353,962 | | | $ | 1,954,836 | | | $ | 1,676,843 | |
At December 31, 2014,2015, the portion of loans that were approved for pledging as collateral on borrowing lines with the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank (“FRB”) were $516.6$588.3 million and $537.5$595.9 million, respectively. The borrowing capacity on these loans was $256.6$500.4 million from FHLB and $340.5$365.6 million from the FRB.
5. Allowance for Credit Losses
The following tables show the allocation of the allowance for credit losses at December 31, 20142015 and December 31, 20132014 by portfolio segment and by impairment methodology (in thousands):
December 31, 2015 | | Commercial Real Estate | | | Agricultural Real Estate | | | Real Estate Construction | | | Residential 1st Mortgages | | | Home Equity Lines & Loans | | | Agricultural | | | Commercial | | | Consumer & Other | | | Leases | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year-To-Date Allowance for Credit Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance- January 1, 2015 | | $ | 7,842 | | | $ | 4,185 | | | $ | 1,669 | | | $ | 1,022 | | | $ | 2,426 | | | $ | 6,104 | | | $ | 8,195 | | | $ | 218 | | | $ | 2,211 | | | $ | 1,529 | | | $ | 35,401 | |
Charge-Offs | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (12 | ) | | | (84 | ) | | | - | | | | - | | | | (96 | ) |
Recoveries | | | 2,939 | | | | - | | | | 2,225 | | | | 8 | | | | 87 | | | | 4 | | | | 136 | | | | 69 | | | | - | | | | - | | | | 5,468 | |
Provision | | | (718 | ) | | | 2,696 | | | | (1,409 | ) | | | (241 | ) | | | (367 | ) | | | 200 | | | | (483 | ) | | | (28 | ) | | | 1,083 | | | | 17 | | | | 750 | |
Ending Balance- December 31, 2015 | | $ | 10,063 | | | $ | 6,881 | | | $ | 2,485 | | | $ | 789 | | | $ | 2,146 | | | $ | 6,308 | | | $ | 7,836 | | | $ | 175 | | | $ | 3,294 | | | $ | 1,546 | | | $ | 41,523 | |
Ending Balance Individually Evaluated for Impairment | | | 61 | | | | - | | | | - | | | | 69 | | | | 35 | | | | 115 | | | | 905 | | | | 28 | | | | - | | | | - | | | | 1,213 | |
Ending Balance Collectively Evaluated for Impairment | | | 10,002 | | | | 6,881 | | | | 2,485 | | | | 720 | | | | 2,111 | | | | 6,193 | | | | 6,931 | | | | 147 | | | | 3,294 | | | | 1,546 | | | | 40,310 | |
Loans & Leases: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 603,650 | | | $ | 424,034 | | | $ | 151,974 | | | $ | 206,405 | | | $ | 33,056 | | | $ | 293,966 | | | $ | 210,804 | | | $ | 6,592 | | | $ | 65,878 | | | $ | - | | | $ | 1,996,359 | |
Ending Balance Individually Evaluated for Impairment | | | 3,420 | | | | - | | | | - | | | | 2,010 | | | | 1,214 | | | | 606 | | | | 4,760 | | | | 34 | | | | - | | | | - | | | | 12,044 | |
Ending Balance Collectively Evaluated for Impairment | | | 600,230 | | | | 424,034 | | | | 151,974 | | | | 204,395 | | | | 31,842 | | | | 293,360 | | | | 206,044 | | | | 6,558 | | | | 65,878 | | | | - | | | | 1,984,315 | |
December 31, 2014 | | Commercial Real Estate | | | Agricultural Real Estate | | | Real Estate Construction | | | Residential 1st Mortgages | | | Home Equity Lines & Loans | | | Agricultural | | | Commercial | | | Consumer & Other | | | Leases | | | Unallocated | | | Total | | | Commercial Real Estate | | | Agricultural Real Estate | | | Real Estate Construction | | | Residential 1st Mortgages | | | Home Equity Lines & Loans | | | Agricultural | | | Commercial | | | Consumer & Other | | | Leases | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year-To-Date Allowance for Credit Losses: | Year-To-Date Allowance for Credit Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year-To-Date Allowance for Credit Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance- January 1, 2014 | | $ | 5,178 | | | $ | 3,576 | | | $ | 654 | | | $ | 1,108 | | | $ | 2,767 | | | $ | 12,205 | | | $ | 5,697 | | | $ | 176 | | | $ | 639 | | | $ | 2,274 | | | $ | 34,274 | | | $ | 5,178 | | | $ | 3,576 | | | $ | 654 | | | $ | 1,108 | | | $ | 2,767 | | | $ | 12,205 | | | $ | 5,697 | | | $ | 176 | | | $ | 639 | | | $ | 2,274 | | | $ | 34,274 | |
Charge-Offs | | | - | | | | - | | | | - | | | | (73 | ) | | | (70 | ) | | | - | | | | (1 | ) | | | (132 | ) | | | - | | | | - | | | | (276 | ) | | | - | | | | - | | | | - | | | | (73 | ) | | | (70 | ) | | | - | | | | (1 | ) | | | (132 | ) | | | - | | | | - | | | | (276 | ) |
Recoveries | | | 11 | | | | - | | | | - | | | | - | | | | 58 | | | | 8 | | | | 86 | | | | 65 | | | | - | | | | - | | | | 228 | | | | 11 | | | | - | | | | - | | | | - | | | | 58 | | | | 8 | | | | 86 | | | | 65 | | | | - | | | | - | | | | 228 | |
Provision | | | 2,653 | | | | 609 | | | | 1,015 | | | | (13 | ) | | | (329 | ) | | | (6,109 | ) | | | 2,413 | | | | 109 | | | | 1,572 | | | | (745 | ) | | | 1,175 | | | | 2,653 | | | | 609 | | | | 1,015 | | | | (13 | ) | | | (329 | ) | | | (6,109 | ) | | | 2,413 | | | | 109 | | | | 1,572 | | | | (745 | ) | | | 1,175 | |
Ending Balance- December 31, 2014 | | $ | 7,842 | | | $ | 4,185 | | | $ | 1,669 | | | $ | 1,022 | | | $ | 2,426 | | | $ | 6,104 | | | $ | 8,195 | | | $ | 218 | | | $ | 2,211 | | | $ | 1,529 | | | $ | 35,401 | | | $ | 7,842 | | | $ | 4,185 | | | $ | 1,669 | | | $ | 1,022 | | | $ | 2,426 | | | $ | 6,104 | | | $ | 8,195 | | | $ | 218 | | | $ | 2,211 | | | $ | 1,529 | | | $ | 35,401 | |
Ending Balance Individually Evaluated for Impairment | | | 377 | | | | - | | | | - | | | | 422 | | | | 329 | | | | 114 | | | | 914 | | | | 41 | | | | - | | | | - | | | | 2,197 | | | | 377 | | | | - | | | | - | | | | 422 | | | | 329 | | | | 114 | | | | 914 | | | | 41 | | | | - | | | | - | | | | 2,197 | |
Ending Balance Collectively Evaluated for Impairment | | | 7,465 | | | | 4,185 | | | | 1,669 | | | | 600 | | | | 2,097 | | | | 5,990 | | | | 7,281 | | | | 177 | | | | 2,211 | | | | 1,529 | | | | 33,204 | | | | 7,465 | | | | 4,185 | | | | 1,669 | | | | 600 | | | | 2,097 | | | | 5,990 | | | | 7,281 | | | | 177 | | | | 2,211 | | | | 1,529 | | | | 33,204 | |
Loans & Leases: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 491,903 | | | $ | 357,207 | | | $ | 96,519 | | | $ | 171,880 | | | $ | 33,017 | | | $ | 281,963 | | | $ | 230,819 | | | $ | 4,719 | | | $ | 44,217 | | | $ | - | | | $ | 1,712,244 | | | $ | 491,903 | | | $ | 357,207 | | | $ | 96,519 | | | $ | 171,880 | | | $ | 33,017 | | | $ | 281,963 | | | $ | 230,819 | | | $ | 4,719 | | | $ | 44,217 | | | $ | - | | | $ | 1,712,244 | |
Ending Balance Individually Evaluated for Impairment | | | 20,066 | | | | - | | | | 4,386 | | | | 2,108 | | | | 1,643 | | | | 461 | | | | 4,874 | | | | 46 | | | | - | | | | - | | | | 33,584 | | | | 20,066 | | | | - | | | | 4,386 | | | | 2,108 | | | | 1,643 | | | | 461 | | | | 4,874 | | | | 46 | | | | - | | | | - | | | | 33,584 | |
Ending Balance Collectively Evaluated for Impairment | | | 471,837 | | | | 357,207 | | | | 92,133 | | | | 169,772 | | | | 31,374 | | | | 281,502 | | | | 225,945 | | | | 4,673 | | | | 44,217 | | | | - | | | | 1,678,660 | | | | 471,837 | | | | 357,207 | | | | 92,133 | | | | 169,772 | | | | 31,374 | | | | 281,502 | | �� | | 225,945 | | | | 4,673 | | | | 44,217 | | | | - | | | | 1,678,660 | |
December 31, 2013 | | Commercial Real Estate | | | Agricultural Real Estate | | | Real Estate Construction | | | Residential 1st Mortgages | | | Home Equity Lines & Loans | | | Agricultural | | | Commercial | | | Consumer & Other | | | Leases | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year-To-Date Allowance for Credit Losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance- January 1, 2013 | | $ | 6,464 | | | $ | 2,877 | | | $ | 986 | | | $ | 1,219 | | | $ | 3,235 | | | $ | 10,437 | | | $ | 7,963 | | | $ | 182 | | | $ | - | | | $ | 854 | | | $ | 34,217 | |
Charge-Offs | | | (6 | ) | | | (575 | ) | | | - | | | | (16 | ) | | | (91 | ) | | | (23 | ) | | | (60 | ) | | | (120 | ) | | | - | | | | - | | | | (891 | ) |
Recoveries | | | - | | | | - | | | | - | | | | - | | | | 115 | | | | 42 | | | | 312 | | | | 54 | | | | - | | | | - | | | | 523 | |
Provision | | | (1,280 | ) | | | 1,274 | | | | (332 | ) | | | (95 | ) | | | (492 | ) | | | 1,749 | | | | (2,518 | ) | | | 60 | | | | 639 | | | | 1,420 | | | | 425 | |
Ending Balance- December 31, 2013 | | $ | 5,178 | | | $ | 3,576 | | | $ | 654 | | | $ | 1,108 | | | $ | 2,767 | | | $ | 12,205 | | | $ | 5,697 | | | $ | 176 | | | $ | 639 | | | $ | 2,274 | | | $ | 34,274 | |
Ending Balance Individually Evaluated for Impairment | | | - | | | | - | | | | - | | | | 414 | | | | 209 | | | | 122 | | | | 820 | | | | 51 | | | | - | | | | - | | | | 1,616 | |
Ending Balance Collectively Evaluated for Impairment | | | 5,178 | | | | 3,576 | | | | 654 | | | | 694 | | | | 2,558 | | | | 12,083 | | | | 4,877 | | | | 125 | | | | 639 | | | | 2,274 | | | | 32,658 | |
Loans & Leases: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance | | $ | 407,514 | | | $ | 328,264 | | | $ | 41,092 | | | $ | 151,292 | | | $ | 35,477 | | | $ | 256,414 | | | $ | 150,398 | | | $ | 5,052 | | | $ | 12,733 | | | $ | - | | | $ | 1,388,236 | |
Ending Balance Individually Evaluated for Impairment | | | 22,176 | | | | - | | | | 4,500 | | | | 2,072 | | | | 1,045 | | | | 522 | | | | 5,250 | | | | 51 | | | | - | | | | - | | | | 35,616 | |
Ending Balance Collectively Evaluated for Impairment | | | 385,338 | | | | 328,264 | | | | 36,592 | | | | 149,220 | | | | 34,432 | | | | 255,892 | | | | 145,148 | | | | 5,001 | | | | 12,733 | | | | - | | | | 1,352,620 | |
The ending balance of loans individually evaluated for impairment includes restructured loans in the amount of $26.4$4.9 million and $28.4$26.4 million at December 31, 20142015 and 2013,2014, respectively, which are no longer disclosed or classified as TDR’s.
The following tables show the loan & lease portfolio allocated by management’s internal risk ratings at December 31, 20142015 and December 31, 20132014 (in thousands):
December 31, 2014 | | Pass | | | Special Mention | | | Substandard | | | Total Loans | | |
December 31, 2015 | | | Pass | | | Special Mention | | | Substandard | | | Total Loans | |
Loans & Leases: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | $ | 483,146 | | | $ | 8,651 | | | $ | 106 | | | $ | 491,903 | | | $ | 595,011 | | | $ | 7,917 | | | $ | 722 | | | $ | 603,650 | |
Agricultural Real Estate | | | 357,207 | | | | - | | | | - | | | | 357,207 | | | | 424,034 | | | | - | | | | - | | | | 424,034 | |
Real Estate Construction | | | 94,887 | | | | 1,632 | | | | - | | | | 96,519 | | | | 150,379 | | | | 1,595 | | | | - | | | | 151,974 | |
Residential 1st Mortgages | | | 170,462 | | | | 744 | | | | 674 | | | | 171,880 | | | | 205,135 | | | | 413 | | | | 857 | | | | 206,405 | |
Home Equity Lines and Loans | | | 32,054 | | | | 85 | | | | 878 | | | | 33,017 | | | | 32,419 | | | | 75 | | | | 562 | | | | 33,056 | |
Agricultural | | | 281,232 | | | | 679 | | | | 52 | | | | 281,963 | | | | 293,325 | | | | 9 | | | | 632 | | | | 293,966 | |
Commercial | | | 211,036 | | | | 18,143 | | | | 1,640 | | | | 230,819 | | | | 199,467 | | | | 8,160 | | | | 3,177 | | | | 210,804 | |
Consumer & Other | | | 4,449 | | | | - | | | | 270 | | | | 4,719 | | | | 6,411 | | | | - | | | | 181 | | | | 6,592 | |
Leases | | | 44,217 | | | | - | | | | - | | | | 44,217 | | | | 65,878 | | | | - | | | | - | | | | 65,878 | |
Total | | $ | 1,678,690 | | | $ | 29,934 | | | $ | 3,620 | | | $ | 1,712,244 | | | $ | 1,972,059 | | | $ | 18,169 | | | $ | 6,131 | | | $ | 1,996,359 | |
December 31, 2013 | | Pass | | | Special Mention | | | Substandard | | | Total Loans | | |
December 31, 2014 | | | Pass | | | Special Mention | | | Substandard | | | Total Loans | |
Loans & Leases: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | $ | 398,488 | | | $ | 7,979 | | | $ | 1,047 | | | $ | 407,514 | | | $ | 483,146 | | | $ | 8,651 | | | $ | 106 | | | $ | 491,903 | |
Agricultural Real Estate | | | 325,926 | | | | 2,338 | | | | - | | | | 328,264 | | | | 357,207 | | | | - | | | | - | | | | 357,207 | |
Real Estate Construction | | | 39,460 | | | | 1,632 | | | | - | | | | 41,092 | | | | 94,887 | | | | 1,632 | | | | - | | | | 96,519 | |
Residential 1st Mortgages | | | 149,798 | | | | 774 | | | | 720 | | | | 151,292 | | | | 170,462 | | | | 744 | | | | 674 | | | | 171,880 | |
Home Equity Lines and Loans | | | 34,821 | | | | - | | | | 656 | | | | 35,477 | | | | 32,054 | | | | 85 | | | | 878 | | | | 33,017 | |
Agricultural | | | 255,443 | | | | 889 | | | | 82 | | | | 256,414 | | | | 281,232 | | | | 679 | | | | 52 | | | | 281,963 | |
Commercial | | | 132,008 | | | | 15,426 | | | | 2,964 | | | | 150,398 | | | | 211,036 | | | | 18,143 | | | | 1,640 | | | | 230,819 | |
Consumer & Other | | | 4,763 | | | | - | | | | 289 | | | | 5,052 | | | | 4,449 | | | | - | | | | 270 | | | | 4,719 | |
Leases | | | 12,733 | | | | - | | | | - | | | | 12,733 | | | | 44,217 | | | | - | | | | - | | | | 44,217 | |
Total | | $ | 1,353,440 | | | $ | 29,038 | | | $ | 5,758 | | | $ | 1,388,236 | | | $ | 1,678,690 | | | $ | 29,934 | | | $ | 3,620 | | | $ | 1,712,244 | |
See Note 1. Significant Accounting Policies – Allowance for Credit Losses for a description of the internal risk ratings used by the Company. There were no loans & leases outstanding at December 31, 20142015 and 20132014 rated doubtful or loss.
The following tables show an aging analysis of the loan & lease portfolio by the time past due at December 31, 20142015 and December 31, 20132014 (in thousands):
December 31, 2014 | | | | | | | | 90 Days and Still Accruing | | | Nonaccrual | | | | | | Current | | | | | |
December 31, 2015 | | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | 90 Days and Still Accruing | | | Nonaccrual | | | Total Past Due | | | Current | | | Total Loans & Leases | |
Loans & Leases: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 491,903 | | | $ | 491,903 | | | $ | 705 | | | $ | - | | | $ | - | | | $ | 19 | | | $ | 724 | | | $ | 602,926 | | | $ | 603,650 | |
Agricultural Real Estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | 357,207 | | | | 357,207 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 424,034 | | | | 424,034 | |
Real Estate Construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | 96,519 | | | | 96,519 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 151,974 | | | | 151,974 | |
Residential 1st Mortgages | | | - | | | | - | | | | - | | | | 77 | | | | 77 | | | | 171,803 | | | | 171,880 | | | | 97 | | | | 194 | | | | - | | | | 65 | | | | 356 | | | | 206,049 | | | | 206,405 | |
Home Equity Lines and Loans | | | 79 | | | | - | | | | - | | | | 576 | | | | 655 | | | | 32,362 | | | | 33,017 | | | | - | | | | - | | | | - | | | | 538 | | | | 538 | | | | 32,518 | | | | 33,056 | |
Agricultural | | | - | | | | - | | | | - | | | | 18 | | | | 18 | | | | 281,945 | | | | 281,963 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 293,966 | | | | 293,966 | |
Commercial | | | - | | | | - | | | | - | | | | 1,586 | | | | 1,586 | | | | 229,233 | | | | 230,819 | | | | - | | | | - | | | | - | | | | 1,524 | | | | 1,524 | | | | 209,280 | | | | 210,804 | |
Consumer & Other | | | 10 | | | | - | | | | - | | | | 13 | | | | 23 | | | | 4,696 | | | | 4,719 | | | | 7 | | | | - | | | | - | | | | 10 | | | | 17 | | | | 6,575 | | | | 6,592 | |
Leases | | | - | | | | - | | | | - | | | | - | | | | - | | | | 44,217 | | | | 44,217 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 65,878 | | | | 65,878 | |
Total | | $ | 89 | | | $ | - | | | $ | - | | | $ | 2,270 | | | $ | 2,359 | | | $ | 1,709,885 | | | $ | 1,712,244 | | | $ | 809 | | | $ | 194 | | | $ | - | | | $ | 2,156 | | | $ | 3,159 | | | $ | 1,993,200 | | | $ | 1,996,359 | |
December 31, 2013 | | | | | | | | 90 Days and Still Accruing | | | Nonaccrual | | | | | | Current | | | | | |
December 31, 2014 | | | 30-59 Days Past Due | | | 60-89 Days Past Due | | | 90 Days and Still Accruing | | | Nonaccrual | | | Total Past Due | | | Current | | | Total Loans & Leases | |
Loans & Leases: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | $ | 773 | | | $ | - | | | $ | - | | | $ | - | | | $ | 773 | | | $ | 406,741 | | | $ | 407,514 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 491,903 | | | $ | 491,903 | |
Agricultural Real Estate | | | 607 | | | | - | | | | - | | | | - | | | | 607 | | | | 327,657 | | | | 328,264 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 357,207 | | | | 357,207 | |
Real Estate Construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | 41,092 | | | | 41,092 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 96,519 | | | | 96,519 | |
Residential 1st Mortgages | | | - | | | | - | | | | - | | | | 324 | | | | 324 | | | | 150,968 | | | | 151,292 | | | | - | | | | - | | | | - | | | | 77 | | | | 77 | | | | 171,803 | | | | 171,880 | |
Home Equity Lines and Loans | | | - | | | | 52 | | | | - | | | | 406 | | | | 458 | | | | 35,019 | | | | 35,477 | | | | 79 | | | | - | | | | - | | | | 576 | | | | 655 | | | | 32,362 | | | | 33,017 | |
Agricultural | | | - | | | | - | | | | - | | | | 35 | | | | 35 | | | | 256,379 | | | | 256,414 | | | | - | | | | - | | | | - | | | | 18 | | | | 18 | | | | 281,945 | | | | 281,963 | |
Commercial | | | - | | | | - | | | | - | | | | 1,815 | | | | 1,815 | | | | 148,583 | | | | 150,398 | | | | - | | | | - | | | | - | | | | 1,586 | | | | 1,586 | | | | 229,233 | | | | 230,819 | |
Consumer & Other | | | 19 | | | | - | | | | - | | | | 16 | | | | 35 | | | | 5,017 | | | | 5,052 | | | | 10 | | | | - | | | | - | | | | 13 | | | | 23 | | | | 4,696 | | | | 4,719 | |
Leases | | | - | | | | - | | | | - | | | | - | | | | - | | | | 12,733 | | | | 12,733 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 44,217 | | | | 44,217 | |
Total | | $ | 1,399 | | | $ | 52 | | | $ | - | | | $ | 2,596 | | | $ | 4,047 | | | $ | 1,384,189 | | | $ | 1,388,236 | | | $ | 89 | | | $ | - | | | $ | - | | | $ | 2,270 | | | $ | 2,359 | | | $ | 1,709,885 | | | $ | 1,712,244 | |
Non-accrual loans & leases at December 31, 2015 and 2014 and 2013 were $2.3$2.2 million and $2.6$2.3 million, respectively. Interest income forgone on loans & leases placed on non-accrual status was $92,000,$109,000, $52,000,92,000, and $209,000$52,000 for the years ended December 31, 2015, 2014, 2013,and 2012,2013, respectively.
The following tables show information related to impaired loans & leases at and for the year ended December 31, 20142015 and December 31, 20132014 (in thousands):
December 31, 2014 | | | | | | | | | | | | | | | | |
December 31, 2015 | | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | $ | - | | | $ | - | | | $ | - | | | $ | 49 | | | $ | 4 | | | $ | 102 | | | $ | 104 | | | $ | - | | | $ | 479 | | | $ | 7 | |
Agricultural Real Estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Real Estate Construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential 1st Mortgages | | | - | | | | - | | | | - | | | | - | | | | - | | | | 551 | | | | 618 | | | | - | | | | 560 | | | | 16 | |
Home Equity Lines and Loans | | | - | | | | - | | | | - | | | | 169 | | | | - | | | | 581 | | | | 646 | | | | - | | | | 620 | | | | 3 | |
Agricultural | | | - | | | | - | | | | - | | | | 15 | | | | - | | | | 193 | | | | 193 | | | | - | | | | 105 | | | | 3 | |
Commercial | | | - | | | | - | | | | - | | | | 1,620 | | | | 54 | | | | 3,103 | | | | 3,103 | | | | - | | | | 2,349 | | | | 85 | |
Consumer & Other | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | $ | - | | | $ | - | | | $ | - | | | $ | 1,853 | | | $ | 58 | | | $ | 4,530 | | | $ | 4,664 | | | $ | - | | | $ | 4,113 | | | $ | 114 | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | $ | 92 | | | $ | 92 | | | $ | 2 | | | $ | 47 | | | $ | 4 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Agricultural Real Estate | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Real Estate Construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential 1st Mortgages | | | 937 | | | | 1,069 | | | | 187 | | | | 612 | | | | 9 | | | | 348 | | | | 420 | | | | 17 | | | | 354 | | | | 16 | |
Home Equity Lines and Loans | | | 951 | | | | 1,020 | | | | 190 | | | | 803 | | | | 10 | | | | 134 | | | | 151 | | | | 7 | | | | 136 | | | | 5 | |
Agricultural | | | 461 | | | | 473 | | | | 114 | | | | 473 | | | | 28 | | | | 412 | | | | 413 | | | | 115 | | | | 431 | | | | 28 | |
Commercial | | | 4,742 | | | | 4,813 | | | | 910 | | | | 3,182 | | | | 54 | | | | 1,657 | | | | 1,798 | | | | 905 | | | | 2,456 | | | | 31 | |
Consumer & Other | | | 46 | | | | 51 | | | | 41 | | | | 46 | | | | 2 | | | | 34 | | | | 40 | | | | 29 | | | | 39 | | | | 3 | |
| | $ | 7,229 | | | $ | 7,518 | | | $ | 1,444 | | | $ | 5,163 | | | $ | 107 | | | $ | 2,585 | | | $ | 2,822 | | | $ | 1,073 | | | $ | 3,416 | | | $ | 83 | |
Total | | $ | 7,229 | | | $ | 7,518 | | | $ | 1,444 | | | $ | 7,016 | | | $ | 165 | | | $ | 7,115 | | | $ | 7,486 | | | $ | 1,073 | | | $ | 7,529 | | | $ | 197 | |
December 31, 2013 | | | | | | | | | | | | | | | | |
December 31, 2014 | | | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | $ | 102 | | | $ | 101 | | | $ | - | | | $ | 865 | | | $ | 8 | | | $ | - | | | $ | - | | | $ | - | | | $ | 49 | | | $ | 4 | |
Agricultural Real Estate | | | - | | | | - | | | | - | | | | 2,185 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Real Estate Construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential 1st Mortgages | | | - | | | | - | | | | - | | | | 450 | | | | 11 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Home Equity Lines and Loans | | | - | | | | - | | | | - | | | | 228 | | | | 5 | | | | - | | | | - | | | | - | | | | 169 | | | | - | |
Agricultural | | | 35 | | | | 43 | | | | - | | | | 586 | | | | - | | | | - | | | | - | | | | - | | | | 15 | | | | - | |
Commercial | | | 3,474 | | | | 3,532 | | | | - | | | | 939 | | | | 13 | | | | - | | | | - | | | | - | | | | 1,620 | | | | 54 | |
| | $ | 3,611 | | | $ | 3,676 | | | $ | - | | | $ | 5,253 | | | $ | 37 | | | $ | - | | | $ | - | | | $ | - | | | $ | 1,853 | | | $ | 58 | |
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | $ | - | | | $ | - | | | $ | - | | | $ | 2 | | | $ | - | | | $ | 92 | | | $ | 92 | | | $ | 2 | | | $ | 47 | | | $ | 4 | |
Agricultural Real Estate | | | - | | | | - | | | | - | | | | 823 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Real Estate Construction | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential 1st Mortgages | | | 769 | | | | 826 | | | | 154 | | | | 254 | | | | 6 | | | | 937 | | | | 1,069 | | | | 187 | | | | 612 | | | | 9 | |
Home Equity Lines and Loans | | | 689 | | | | 821 | | | | 138 | | | | 332 | | | | 3 | | | | 951 | | | | 1,020 | | | | 190 | | | | 803 | | | | 10 | |
Agricultural | | | 488 | | | | 488 | | | | 122 | | | | 1,002 | | | | 31 | | | | 461 | | | | 473 | | | | 114 | | | | 473 | | | | 28 | |
Commercial | | | 1,641 | | | | 1,657 | | | | 820 | | | | 1,072 | | | | 6 | | | | 4,742 | | | | 4,813 | | | | 910 | | | | 3,182 | | | | 54 | |
Consumer & Other | | | 50 | | | | 53 | | | | 50 | | | | 126 | | | | 3 | | | | 46 | | | | 51 | | | | 41 | | | | 46 | | | | 2 | |
| | $ | 3,637 | | | $ | 3,845 | | | $ | 1,284 | | | $ | 3,611 | | | $ | 49 | | | $ | 7,229 | | | $ | 7,518 | | | $ | 1,444 | | | $ | 5,163 | | | $ | 107 | |
Total | | $ | 7,248 | | | $ | 7,521 | | | $ | 1,284 | | | $ | 8,864 | | | $ | 86 | | | $ | 7,229 | | | $ | 7,518 | | | $ | 1,444 | | | $ | 7,016 | | | $ | 165 | |
Total recorded investment shown in the prior table will not equal the total ending balance of loans & leases individually evaluated for impairment on the allocation of allowance table. This is because the calculation of recorded investment takes into account charge-offs, net unamortized loan & lease fees & costs, unamortized premium or discount, and accrued interest. This table also excludes impaired loans that were previously modified in a troubled debt restructuring, are currently performing and are no longer disclosed or classified as TDR’s.
At December 31, 2015, the Company allocated $1.1 million of specific reserves to $6.6 million of troubled debt restructured loans, of which $5.0 million were performing. At December 31, 2014, the Company allocated $1.3 million of specific reserves to $6.6 million of troubled debt restructured loans, of which $5.0 million were performing. At December 31, 2013, the Company allocated $1.2 million of specific reserves to $6.8 million of troubled debt restructured loans, of which $4.6 million were performing. The Company had no commitments at December 31, 20142015 and December 31, 20132014 to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.
During the period ending December 31, 2014,2015, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 4 to 30 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 30 years.
The following table presents loans by class modified as troubled debt restructured loans for the period ended December 31, 20142015 (in thousands):
| | December 31, 2014 | | | December 31, 2015 | |
Troubled Debt Restructurings | | Number of Loans | | | Pre-Modification Outstanding Recorded Investment | | | Post-Modification Outstanding Recorded Investment | | | Number of Loans | | | Pre-Modification Outstanding Recorded Investment | | | Post-Modification Outstanding Recorded Investment | |
Residential 1st Mortgages | | | 5 | | | $ | 857 | | | $ | 804 | | |
Home Equity Lines and Loans | | | 3 | | | | 98 | | | | 89 | | |
Agricultural | | | 1 | | | | 32 | | | | 32 | | | | 1 | | | $ | 194 | | | $ | 194 | |
Commercial | | | 1 | | | | 18 | | | | 18 | | | | 1 | | | | 131 | | | | 119 | |
Consumer & Other | | | 1 | | | | 7 | | | | 7 | | |
Total | | | 11 | | | $ | 1,012 | | | $ | 950 | | | | 2 | | | $ | 325 | | | $ | 313 | |
The troubled debt restructurings described above increased the allowance for credit losses by $28,000$70,000 and resulted in charge-offs of $63,000$12,000 for the twelve months ended December 31, 2014.2015.
During the period ended December 31, 2014,2015, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan to be in payment default once it is greater than 90 days contractually past due under the modified terms.
During the period ending December 31, 2013,2014, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
Modifications involving a reduction of the stated interest rate of the loan were for periods of 5ranging from 4 to 30 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 1030 years.
The following table presents loans by class modified as troubled debt restructured loans for the period ended December 31, 20132014 (in thousands):
| | December 31, 2013 | | | December 31, 2014 | |
Troubled Debt Restructurings | | Number of Loans | | | Pre-Modification Outstanding Recorded Investment | | | Post-Modification Outstanding Recorded Investment | | | Number of Loans | | | Pre-Modification Outstanding Recorded Investment | | | Post-Modification Outstanding Recorded Investment | |
Residential 1st Mortgages | | | 4 | | | $ | 306 | | | $ | 290 | | | | 5 | | | $ | 857 | | | $ | 804 | |
Home Equity Lines and Loans | | | 4 | | | | 414 | | | | 387 | | | | 3 | | | | 98 | | | | 89 | |
Agricultural | | | | 1 | | | | 32 | | | | 32 | |
Commercial | | | 4 | | | | 5,016 | | | | 5,016 | | | | 1 | | | | 18 | | | | 18 | |
Consumer & Other | | | | 1 | | | | 7 | | | | 7 | |
Total | | | 12 | | | $ | 5,736 | | | $ | 5,693 | | | | 11 | | | $ | 1,012 | | | $ | 950 | |
The troubled debt restructurings described above did not increaseincreased the allowance for credit losses but did resultby $28,000 and resulted in charge-offs of $43,000$63,000 for the twelve months ended December 31, 2013.2014.
As of December 31, 2013, there was one commercial loan with an outstanding balance of $174,000 that was previously modified as a troubled debt restructuring withinDuring the previous 12 months that subsequently defaulted during the twelve monthsperiod ended December 31, 2013. This defaulted2014, there were no payment defaults on loans modified as troubled debt restructurings within twelve months following the modification. The Company considers a loan did not increaseto be in payment default once it is greater than 90 days contractually past due under the allowance for credit loss and did not result in any charge offs during the twelve-month period ending December 31, 2013.modified terms.
6. Premises and Equipment
Premises and equipment as of December 31, consisted of the following:
(in thousands) | | 2014 | | | 2013 | | | 2015 | | | 2014 | |
Land and Buildings | | $ | 33,527 | | | $ | 33,354 | | | $ | 33,530 | | | $ | 33,527 | |
Furniture, Fixtures, and Equipment | | | 20,244 | | | | 16,770 | | | | 19,125 | | | | 20,244 | |
Leasehold Improvements | | | 1,763 | | | | 2,060 | | | | 2,437 | | | | 1,763 | |
Subtotal | | | 55,534 | | | | 52,184 | | | | 55,092 | | | | 55,534 | |
Less: Accumulated Depreciation and Amortization | | | 29,713 | | | | 29,297 | | | | 28,517 | | | | 29,713 | |
Total | | $ | 25,821 | | | $ | 22,887 | | | $ | 26,575 | | | $ | 25,821 | |
Depreciation and amortization on premises and equipment included in occupancy and equipment expense amounted to $1,685,000, $1,325,000, $1,506,000, and $1,704,000$1,506,000 for the years ended December 31, 2015, 2014 2013, and 2012,2013, respectively. Total rental expense for premises was $604,000, $530,000, $411,000, and $391,000$411,000 for the years ended December 31, 2015, 2014, 2013, and 2012,2013, respectively. Rental income was $94,000, $81,000, $102,000, and $148,000$102,000 for the years ended December 31, 2015, 2014, 2013, and 2012,2013, respectively.
7. Other Real Estate
The Bank reported $3.3$2.4 million, net of $3.7 million reserve, in other real estate at December 31, 2014,2015, and $4.6$3.3 million, net of $3.7 million reserve, in 2013.2014. Other real estate includes property no longer utilized for business operations and property acquired through foreclosure proceedings. These properties are carried at fair value less selling costs determined at the date acquired. Losses, if any, arising from properties acquired through foreclosure are charged against the allowance for loan losses at the time of foreclosure. Subsequent declines in value, periodic holding costs, and net gains or losses on disposition are included in other operating expense as incurred. Other real estate is reported in Interest Receivable and Other Assets on the Company’s Consolidated Balance Sheets.
8. Time Deposits
Time Deposits of $250,000 or more as of December 31 were as follows:
(in thousands) | | 2014 | | | 2013 | | | 2015 | | | 2014 | |
Balance | | $ | 239,649 | | | $ | 206,189 | | | $ | 236,963 | | | $ | 239,649 | |
At December 31, 2014,2015, the scheduled maturities of time deposits were as follows:
(in thousands) | | Scheduled Maturities | | | Scheduled Maturities | |
2015 | | $ | 410,487 | | |
2016 | | | 34,330 | | | $ | 432,551 | |
2017 | | | 20,355 | | | | 41,865 | |
2018 | | | 2,021 | | | | 4,994 | |
2019 | | | 1,090 | | | | 871 | |
2020 | | | | 743 | |
Total | | $ | 468,283 | | | $ | 481,024 | |
9. Income Taxes
Current and deferred income tax expense (benefit) provided for the years ended December 31 consisted of the following:
(in thousands) | | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | |
Current | | | | | | | | | | | | | | | | | | |
Federal | | $ | 7,941 | | | $ | 11,497 | | | $ | 12,252 | | | $ | 11,979 | | | $ | 7,941 | | | $ | 11,497 | |
State | | | 4,345 | | | | 4,357 | | | | 4,281 | | | | 4,446 | | | | 4,345 | | | | 4,357 | |
Total Current | | | 12,286 | | | | 15,854 | | | | 16,533 | | | | 16,425 | | | | 12,286 | | | | 15,854 | |
Deferred | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | | 3,116 | | | | (998 | ) | | | (2,041 | ) | | | 383 | | | | 3,116 | | | | (998 | ) |
State | | | (308 | ) | | | (635 | ) | | | (507 | ) | | | 116 | | | | (308 | ) | | | (635 | ) |
Total Deferred | | | 2,808 | | | | (1,633 | ) | | | (2,548 | ) | | | 499 | | | | 2,808 | | | | (1,633 | ) |
Total Provision for Taxes | | $ | 15,094 | | | $ | 14,221 | | | $ | 13,985 | | | $ | 16,924 | | | $ | 15,094 | | | $ | 14,221 | |
The total provision for income taxes differs from the federal statutory rate as follows:
| | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | |
(in thousands) | | Amount | | | Rate | | | Amount | | | Rate | | | Amount | | | Rate | | | Amount | | | Rate | | | Amount | | | Rate | | | Amount | | | Rate | |
Tax Provision at Federal Statutory Rate | | $ | 14,174 | | | | 35.0 | % | | $ | 13,399 | | | | 35.0 | % | | $ | 13,067 | | | | 35.0 | % | | $ | 15,510 | | | | 35.0 | % | | $ | 14,174 | | | | 35.0 | % | | $ | 13,399 | | | | 35.0 | % |
Interest on Obligations of States and Political | | | | | | | | | | | | | | | | | | | | | | | | | |
Subdivisions exempt from Federal Taxation | | | (805 | ) | | | (2.0 | %) | | | (894 | ) | | | (2.3 | %) | | | (917 | ) | | | (2.5 | %) | |
Interest on Obligations of States and Political Subdivisions exempt from Federal Taxation | | | | (711 | ) | | | (1.6 | %) | | | (805 | ) | | | (2.0 | %) | | | (894 | ) | | | (2.3 | %) |
State and Local Income Taxes, Net of Federal Income Tax Benefit | | | 2,624 | | | | 6.5 | % | | | 2,419 | | | | 6.3 | % | | | 2,453 | | | | 6.6 | % | | | 2,966 | | | | 6.7 | % | | | 2,624 | | | | 6.5 | % | | | 2,419 | | | | 6.3 | % |
Bank Owned Life Insurance | | | (696 | ) | | | (1.7 | %) | | | (702 | ) | | | (1.8 | %) | | | (675 | ) | | | (1.8 | %) | | | (712 | ) | | | (1.6 | %) | | | (696 | ) | | | (1.7 | %) | | | (702 | ) | | | (1.8 | %) |
Low-Income Housing Tax Credit | | | (126 | ) | | | (0.3 | %) | | | (129 | ) | | | (0.3 | %) | | | - | | | | - | | | | (291 | ) | | | (0.7 | %) | | | (126 | ) | | | (0.3 | %) | | | (129 | ) | | | (0.3 | %) |
Other, Net | | | (77 | ) | | | (0.2 | %) | | | 128 | | | | 0.3 | % | | | 57 | | | | 0.2 | % | | | 162 | | | | 0.4 | % | | | (77 | ) | | | (0.2 | %) | | | 128 | | | | 0.3 | % |
Total Provision for Taxes | | $ | 15,094 | | | | 37.3 | % | | $ | 14,221 | | | | 37.1 | % | | $ | 13,985 | | | | 37.5 | % | | $ | 16,924 | | | | 38.2 | % | | $ | 15,094 | | | | 37.3 | % | | $ | 14,221 | | | | 37.1 | % |
The components of net deferred tax assets as of December 31 are as follows:
(in thousands) | | 2014 | | | 2013 | | | 2015 | | | 2014 | |
Deferred Tax Assets | | | | | | | | | | | | |
Allowance for Credit Losses | | $ | 14,944 | | | $ | 14,470 | | | $ | 17,529 | | | $ | 14,944 | |
Accrued Liabilities | | | 8,184 | | | | 7,723 | | | | 8,614 | | | | 8,184 | |
Deferred Compensation | | | 10,006 | | | | 8,859 | | | | 11,586 | | | | 10,006 | |
State Franchise Tax | | | 1,521 | | | | 1,525 | | | | 1,549 | | | | 1,521 | |
Interest on Non-Accrual Loans | | | 2 | | | | 15 | | | | 46 | | | | 2 | |
ORE Writedown and Holding Costs | | | 1,724 | | | | 1,713 | | | | 1,547 | | | | 1,724 | |
Unrealized Loss on Securities Available-for-Sale | | | - | | | | 1,790 | | |
Low-Income Housing Investment | | | 58 | | | | 21 | | | | 73 | | | | 58 | |
Total Deferred Tax Assets | | $ | 36,439 | | | $ | 36,116 | | | $ | 40,944 | | | $ | 36,439 | |
Deferred Tax Liabilities | | | | | | | | | | | | | | | | |
Premises and Equipment | | | (286 | ) | | | (213 | ) | | | (869 | ) | | | (286 | ) |
Securities Accretion | | | (298 | ) | | | (966 | ) | | | (310 | ) | | | (298 | ) |
Unrealized Gain on Securities Available-for-Sale | | | (1,838 | ) | | | - | | | | (432 | ) | | | (1,838 | ) |
Leasing Activities | | | (7,018 | ) | | | (1,501 | ) | | | (11,469 | ) | | | (7,018 | ) |
Other | | | (786 | ) | | | (787 | ) | | | (744 | ) | | | (786 | ) |
Total Deferred Tax Liabilities | | | (10,226 | ) | | | (3,467 | ) | | | (13,824 | ) | | | (10,226 | ) |
Net Deferred Tax Assets | | $ | 26,213 | | | $ | 32,649 | | | $ | 27,120 | | | $ | 26,213 | |
The net deferred tax assets are reported in Interest Receivable and Other Assets on the Company's Consolidated Balance Sheet.
The Company and its subsidiaries file income tax returns in the U.S. federal and California jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2008.2011.
10. Short Term Borrowings
As of December 31, 20142015 and 2013,2014, the Company had unused lines of credit available for short-term liquidity purposes of $597.8$701.4 million and $887.8$597.8 million, respectively. Federal Funds purchased and advances are generally issued on an overnight basis. There were no advances from the FHLB at December 31, 20142015 or 2013.2014. There were no Federal Funds purchased or advances from the FRB at December 31, 20142015 or 2013.2014.
11. Securities Sold Under Agreement to Repurchase
Securities Sold Under Agreement to Repurchase are used as secured borrowing alternatives to FHLB Advances or FRB Borrowings.
At December 31, 20142015 and December 31, 2013,2014, the Company had no securities sold under agreement to repurchase.
12. Federal Home Loan Bank Advances
The Company had no short-term or long-term advances from the Federal Home Loan Bank of San Francisco at December 31, 2014, 20132015 or 2012.2014.
In accordance with the Collateral Pledge and Security Agreement, advances are secured by all FHLB stock held by the Company and by government agency & government-sponsored entity securities and mortgage-backed securities with borrowing capacity of $500,000.$300,000. At December 31, 2014, $516.62015, $588.3 million in loans were approved for pledging as collateral on borrowing lines with the FHLB. The borrowing capacity on these loans was $256.6$500.4 million.
13. Long-term Subordinated Debentures
In December 2003, the Company formed a wholly owned Connecticut statutory business trust, FMCB Statutory Trust I (“Statutory Trust I”), which issued $10.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures (the “Trust Preferred Securities”). The Company is not considered the primary beneficiary of the trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. These debentures qualify as Tier 1 capital under current regulatory guidelines. All of the common securities of Statutory Trust I are owned by the Company. The proceeds from the issuance of the common securities and the Trust Preferred Securities were used by FMCB Statutory Trust to purchase $10.3 million of junior subordinated debentures of the Company, which carry a floating rate based on three-month LIBOR plus 2.85%. The debentures represent the sole asset of Statutory Trust I. The Trust Preferred Securities accrue and pay distributions at a floating rate of three-month LIBOR plus 2.85% per annum of the stated liquidation value of $1,000 per capital security. The Company has entered into contractual arrangements which, taken collectively, fully and unconditionally guarantee payment to the extent that Statutory Trust I has funds available therefore of: (i) accrued and unpaid distributions required to be paid on the Trust Preferred Securities; (ii) the redemption price with respect to any Trust Preferred Securities called for redemption by Statutory Trust I; and (iii) payments due upon a voluntary or involuntary dissolution, winding up, or liquidation of Statutory Trust I. The Trust Preferred Securities are mandatorily redeemable upon maturity of the subordinated debentures on December 17, 2033, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the subordinated debentures purchased by Statutory Trust I, in whole or in part, on or after December 17, 2008. As specified in the indenture, if the subordinated debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.
14. Shareholders' Equity
In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on SeptemberAugust 11, 2012,2015, the Board of Directors approved increasingan extension of the funds available for the Company’s common$20 million stock repurchase program to $20 million over the three-year period ending September 30, 2015.2018.
Repurchases under the program may be made from time to time on the open market or through private transactions. The repurchase program also requires that no purchases may be made if the Bank would not remain “well-capitalized” after the repurchase.
Dividends from the Bank constitute the principal source of cash to the Company. The Company is a legal entity separate and distinct from the Bank. Under regulations controlling California state chartered banks, the Bank is, to some extent, limited in the amount of dividends that can be paid to the Company without prior approval of the California DBO. These regulations require approval if total dividends declared by a state chartered bank in any calendar year exceed the bank's net profits for that year combined with its retained net profits for the preceding two calendar years.
On December 4, 2014, the Company issued 6,200 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. See Note 16, located in “Item 8. Financial Statements and Supplementary Data.” These shares were issued at a price of $450 per share based upon a valuation completed by a nationally recognized bank consulting and advisory firm.firm and in reliance upon the exemption in Section 4(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder.
During 2015, the Company issued 6,705 shares of common stock. All of these shares were contributed to the Bank’s non-qualified defined contribution retirement plans. The shares issued had prices ranging from $450 per share to $525 per share. These share prices were based upon valuations completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds from these issuances were contributed to the Bank as equity capital.
The Company and the Bank are subject to various federal regulatory capital requirements administered byunder the federal banking agencies.Basel III Capital Rules. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensureBasel III requirements will increase the required capital adequacy require the Company and the Bank to maintain minimum amounts and ratios set forth in the following table of Total and Tier 1 capital to risk-weighted assets (as defined in the regulations), and of Tier 1 capital to average assets (as defined in the regulations). Management believes, as of December 31, 2014,levels that the Company and the Bank meetmust maintain. The final rules include new minimum risk-based capital and leverage ratios, which would be phased in over time. The new minimum capital level requirements applicable to the Company and the Bank under the final rules will be: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets (“RWA”); (ii) a Tier 1 capital ratio of 6% of RWA; (iii) a total capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. The final rules also establish a "capital conservation buffer" of 2.5% above each of the new regulatory minimum capital ratios, which would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA; and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. The final rules also permit the Company’s subordinated debentures issued in 2003 to continue to be counted as Tier 1 capital.
The final rules became effective as applied to the Company and the Bank on January 1, 2015, with a phase in period through January 1, 2019. The Company believes that it is currently in compliance with all of these new capital adequacy requirements to which(as fully phased-in) and that they are subject.will not result in any restrictions on the Company’s business activity.
In addition, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since that notification that management believes have changed the Bank’s category.
(in thousands) | | Actual | | | Regulatory Capital Requirements | | | Well Capitalized Under Prompt Corrective Action | | | Actual | | | Current Regulatory Capital Requirements | | | Well Capitalized Under Prompt Corrective Action | |
December 31, 2014 | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | |
December 31, 2015 | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
Total Bank Capital to Risk Weighted Assets | | $ | 266,203 | | | | 12.92 | % | | $ | 164,887 | | | | 8.0 | % | | $ | 206,109 | | | | 10.0 | % | | $ | 290,941 | | | | 12.22 | % | | $ | 190,480 | | | | 8.0 | % | | $ | 238,101 | | | | 10.0 | % |
Total Consolidated Capital to Risk Weighted Assets | | $ | 266,533 | | | | 12.93 | % | | $ | 164,911 | | | | 8.0 | % | | | N/ | A | | | N/ | A | | $ | 291,152 | | | | 12.23 | % | | $ | 190,493 | | | | 8.0 | % | | | N/A | | | | N/A | |
Total Bank Common Equity Tier 1 Capital Ratio | | | $ | 261,031 | | | | 10.96 | % | | $ | 107,145 | | | | 4.5 | % | | $ | 154,765 | | | | 6.5 | % |
Total Consolidated Common Equity Tier 1 Capital Ratio | | | $ | 251,240 | | | | 10.55 | % | | $ | 107,152 | | | | 4.5 | % | | | N/A | | | | N/A | |
Tier 1 Bank Capital to Risk Weighted Assets | | $ | 240,319 | | | | 11.66 | % | | $ | 82,444 | | | | 4.0 | % | | $ | 123,665 | | | | 6.0 | % | | $ | 261,031 | | | | 10.96 | % | | $ | 142,860 | | | | 6.0 | % | | $ | 190,480 | | | | 8.0 | % |
Tier 1 Consolidated Capital to Risk Weighted Assets | | $ | 240,645 | | | | 11.67 | % | | $ | 82,456 | | | | 4.0 | % | | | N/ | A | | | N/ | A | | $ | 261,240 | | | | 10.97 | % | | $ | 142,870 | | | | 6.0 | % | | | N/A | | | | N/A | |
Tier 1 Bank Capital to Average Assets | | $ | 240,319 | | | | 10.56 | % | | $ | 91,062 | | | | 4.0 | % | | $ | 113,827 | | | | 5.0 | % | | $ | 261,031 | | | | 10.30 | % | | $ | 101,402 | | | | 4.0 | % | | $ | 126,753 | | | | 5.0 | % |
Tier 1 Consolidated Capital to Average Assets | | $ | 240,645 | | | | 10.55 | % | | $ | 91,219 | | | | 4.0 | % | | | N/ | A | | | N/ | A | | $ | 261,240 | | | | 10.29 | % | | $ | 101,525 | | | | 4.0 | % | | | N/A | | | | N/A | |
(in thousands) | | Actual | | | Regulatory Capital Requirements | | | Well Capitalized Under Prompt Corrective Action | |
December 31, 2013 | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
Total Bank Capital to Risk Weighted Assets | | $ | 244,087 | | | | 13.98 | % | | $ | 139,674 | | | | 8.0 | % | | $ | 174,593 | | | | 10.0 | % |
Total Consolidated Capital to Risk Weighted Assets | | $ | 244,354 | | | | 13.99 | % | | $ | 139,689 | | | | 8.0 | % | | | N/ | A | | | N/ | A |
Tier 1 Bank Capital to Risk Weighted Assets | | $ | 222,108 | | | | 12.72 | % | | $ | 69,837 | | | | 4.0 | % | | $ | 104,756 | | | | 6.0 | % |
Tier 1 Consolidated Capital to Risk Weighted Assets | | $ | 222,372 | | | | 12.74 | % | | $ | 69,845 | | | | 4.0 | % | | | N/ | A | | | N/ | A |
Tier 1 Bank Capital to Average Assets | | $ | 222,108 | | | | 11.02 | % | | $ | 80,633 | | | | 4.0 | % | | $ | 100,791 | | | | 5.0 | % |
Tier 1 Consolidated Capital to Average Assets | | $ | 222,372 | | | | 11.01 | % | | $ | 80,755 | | | | 4.0 | % | | | N/ | A | | | N/ | A |
(in thousands) | | Actual | | | Current Regulatory Capital Requirements | | | Well Capitalized Under Prompt Corrective Action | |
December 31, 2014 | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
Total Bank Capital to Risk Weighted Assets | | $ | 266,203 | | | | 12.92 | % | | $ | 164,887 | | | | 8.0 | % | | $ | 206,109 | | | | 10.0 | % |
Total Consolidated Capital to Risk Weighted Assets | | $ | 266,533 | | | | 12.93 | % | | $ | 164,911 | | | | 8.0 | % | | | N/A | | | | N/A | |
Tier 1 Bank Capital to Risk Weighted Assets | | $ | 240,319 | | | | 11.66 | % | | $ | 82,444 | | | | 4.0 | % | | $ | 123,665 | | | | 6.0 | % |
Tier 1 Consolidated Capital to Risk Weighted Assets | | $ | 240,645 | | | | 11.67 | % | | $ | 82,456 | | | | 4.0 | % | | | N/A | | | | N/A | |
Tier 1 Bank Capital to Average Assets | | $ | 240,319 | | | | 10.56 | % | | $ | 91,062 | | | | 4.0 | % | | $ | 113,827 | | | | 5.0 | % |
Tier 1 Consolidated Capital to Average Assets | | $ | 240,645 | | | | 10.55 | % | | $ | 91,219 | | | | 4.0 | % | | | N/A | | | | N/A | |
15. Dividends and Basic Earnings Per Common Share
Total cash dividends during 20142015 were $9,919,000$10,157,000 or $12.70$12.90 per share of common stock, an increase of 1.6% per share from $9,723,000$9,919,000 or $12.50$12.70 per share in 2013.2014. In 2012,2013, cash dividends totaled $9,418,000$9,723,000 or $12.10$12.50 per share.
Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. The following table calculates the basic earnings per common share for the periods indicated.
(net income in thousands) | | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | |
Net Income | | $ | 25,402 | | | $ | 24,061 | | | $ | 23,349 | | | $ | 27,392 | | | $ | 25,402 | | | $ | 24,061 | |
Weighted Average Number of Common Shares Outstanding | | | 778,358 | | | | 777,882 | | | | 778,648 | | | | 786,582 | | | | 778,358 | | | | 777,882 | |
Basic Earnings Per Common Share | | $ | 32.64 | | | $ | 30.93 | | | $ | 29.99 | | | $ | 34.82 | | | $ | 32.64 | | | $ | 30.93 | |
16. Employee Benefit Plans
Profit Sharing Plan
The Company, through the Bank, sponsors a Profit Sharing Plan for substantially all full-time employees of the Company with one or more years of service. Participants receive up to two annual employer contributions, one is discretionary and the other is mandatory. The discretionary contributions to the Profit Sharing Plan are determined annually by the Board of Directors. The discretionary contributions totaled $925,000, $875,000, $825,000, and $800,000$825,000 for the years ended December 31, 2015, 2014, 2013, and 2012,2013, respectively. The mandatory contributions to the Profit Sharing Plan are made according to a predetermined set of criteria. Mandatory contributions totaled $1.1 million, $1.0 million, $952,000, and $941,000$952,000 for the years ended December 31, 2015, 2014, 2013, and 2012,2013, respectively. Company employees are permitted, within limitations imposed by tax law, to make pretax contributions and after tax (Roth) contributions to the 401(k) feature of the Profit Sharing Plan. The Company does not match employee contributions within the 401(k) feature of the Profit Sharing Plan and the Company can terminate the Profit Sharing Plan at any time. Benefits pursuant to the Profit Sharing Plan vest 0% during the first year of participation, 25% per full year thereafter and after five years such benefits are fully vested.
Executive Retirement Plan and Life Insurance Arrangements
The Company, through the Bank, sponsors an Executive Retirement Plan for certain executive level employees. The Executive Retirement Plan is a non-qualified defined contribution plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service. The Plan is comprised of: (1) a Performance Component which makes contributions based upon long-term cumulative profitability and increase in market value of the Company; (2) a Retention Component applicable to participants employed by the Company as of January 1, 2005 (contributions to this component were frozen effective December 31, 2010); (3) a Salary Component which makes contributions based upon participant salary levels; and (4) an Equity Component for which contributions are discretionary and subject to Board of Directors approval. Executive Retirement Plan contributions are invested in a mix of financial instruments; however Equity Component contributions are invested primarily in stock of the Company.
The Company expensed $2.7$3.5 million to the Executive Retirement Plan during the year ended December 31, 2014,2015, $2.7 million during the year ended December 31, 20132014 and $2.6$2.7 million during the year ended December 31, 2012.2013. The Company’s total accrued liability under the Executive Retirement Plan was $31.3 million as of December 31, 2015 and $27.3 million as of December 31, 2014 and $24.1 million2014. All amounts have been fully funded in to a Rabbi Trust as of December 31, 2013.2015.
The Company has purchased single premium life insurance policies on the lives of certain key employees of the Company. These policies provide: (1) financial protection to the Company in the event of the death of a key employee; and (2) significant income to the Company to offset the expense associated with the Executive Retirement Plan and other employee benefit plans, since the interest earned on the cash surrender value of the policies is tax exempt as long as the policies are used to finance employee benefits, significant income to the Company to offset the expense associated with the Executive Retirement Plan and other employee benefit plans.benefits. As compensation to each employee for agreeing to allow the Company to purchase an insurance policy on his or her life, split dollar agreements have been entered into with those employees. These agreements provide for a division of the life insurance death proceeds between the Company and each employee’s designated beneficiary or beneficiaries.
The Company earned tax-exempt interest on the life insurance policies of $1.9 million for the year ended December 31, 2014, $1.9 million for the year ended December 31, 2013, and $1.8 million for the years ended December 31, 2012.2015, 2014, and 2013. As of December 31, 20142015 and 2013,2014, the total cash surrender value of the insurance policies was $54.0$55.9 million and $52.1$54.0 million, respectively.
Senior Management Retention Plan
The Company, through the Bank, sponsors a Senior Management Retention Plan (“SMRP”) for certain senior level employees. The SMRP is a non-qualified defined contribution plan and was developed to supplement the Company’s Profit Sharing Plan, which, as a qualified retirement plan, has a ceiling on benefits as set by the Internal Revenue Service. All contributions are discretionary and subject to the Board of Directors approval. Contributions are invested primarily in stock of the Company. The Company expensed $475,000$530,000 to the SMRP during the year ended December 31, 2015, $475,000 during the year ended December 31, 2014 and $536,000 during the year ended December 31, 2013 and $206,000 during2013. The Company’s total accrued liability under the year endedSMRP was $2.3 million as of December 31, 2012.2015 and $1.5 million as of December 31, 2014. All amounts have been fully funded in to a Rabbi Trust as of December 31, 2015.
17. Fair Value Measurements
The Company follows the “Fair Value Measurement and Disclosures” topic of the FASB ASC, which establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. This standard applies whenever other standards require, or permit, assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, this standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:
Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.
Securities classified as available-for-sale are reported at fair value on a recurring basis utilizing Level 1, 2 and 3 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things.
The Company does not record all loans & leases at fair value on a recurring basis. However, from time to time, a loan or lease is considered impaired and an allowance for credit losses is established. Once a loan or lease is identified as individually impaired, management measures impairment in accordance with the “Receivable” topic of the FASB ASC. The fair value of impaired loans or leases is estimated using one of several methods, including collateral value when the loan is collateral dependent, market value of similar debt, enterprise value, and discounted cash flows. Impaired loans & leases not requiring an allowance represent loans & leases for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans & leases. Impaired loans & leases where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The fair value of collateral dependent impaired loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring impaired loans is primarily the sales comparison approach less selling costs of 10%.
Other Real Estate (“ORE”) is reported at fair value on a non-recurring basis. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including sales comparison, cost and the income approach. Adjustments are often made in the appraisal process by the appraisers to take in to account differences between the comparable sales and income and other available data. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value. The valuation technique used for Level 3 nonrecurring ORE is primarily the sales comparison approach less selling costs of 10%.
At December 31, 2015, formal foreclosure proceedings were in process for $538,000 of consumer mortgage loans secured by residential real estate properties.
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated.
| | | | | Fair Value Measurements | | |
| | | | | At December 31, 2014, Using | | |
| | Fair Value | | | Quoted Prices in Active Markets for Identical Assets | | | Other Observable Inputs | | | Significant Unobservable Inputs | | | | | | Fair Value Measurements At December 31, 2015, Using | |
(in thousands) | | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Fair Value Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Available-for-Sale Securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Government Agency & Government-Sponsored Entities | | $ | 78,109 | | | $ | 10,005 | | | $ | 68,104 | | | $ | - | | | $ | 33,251 | | | $ | - | | | $ | 33,251 | | | $ | - | |
US Treasury Notes | | | | 72,884 | | | | 72,884 | | | | - | | | | - | |
Mortgage Backed Securities | | | 287,948 | | | | - | | | | 287,948 | | | | - | | | | 262,493 | | | | - | | | | 262,493 | | | | - | |
Other | | | 485 | | | | 175 | | | | 310 | | | | - | | | | 509 | | | | 199 | | | | 310 | | | | - | |
Total Assets Measured at Fair Value On a Recurring Basis | | $ | 366,542 | | | $ | 10,180 | | | $ | 356,362 | | | $ | - | | | $ | 369,137 | | | $ | 73,083 | | | $ | 296,054 | | | $ | - | |
| | | | | | | | |
| | | | | | Fair Value Measurements | | |
| At December 31, 2013, Using | | |
| | Fair Value | | | Quoted Prices in Active Markets for Identical Assets | | | Other Observable Inputs | | | Significant Unobservable Inputs | | |
(in thousands) | | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | | |
Available-for-Sale Securities: | | | | | | | | | | | | | | | | | |
Government Agency & Government-Sponsored Entities | | $ | 28,436 | | | $ | 23,394 | | | $ | 5,042 | | | $ | - | | |
Mortgage Backed Securities | | | 324,929 | | | | - | | | | 324,929 | | | | - | | |
Corporate Securities | | | 49,380 | | | | 8,191 | | | | 41,189 | | | | - | | |
Other | | | 1,894 | | | | 1,584 | | | | 310 | | | | - | | |
Total Assets Measured at Fair Value On a Recurring Basis | | $ | 404,639 | | | $ | 33,169 | | | $ | 371,470 | | | $ | - | | |
| | | | | Fair Value Measurements At December 31, 2014, Using | |
(in thousands) | | Fair Value Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Available-for-Sale Securities: | | | | | | | | | | | | |
Government Agency & Government-Sponsored Entities | | $ | 78,109 | | | $ | 10,005 | | | $ | 68,104 | | | $ | - | |
Mortgage Backed Securities | | | 287,948 | | | | - | | | | 287,948 | | | | - | |
Other | | | 485 | | | | 175 | | | | 310 | | | | - | |
Total Assets Measured at Fair Value On a Recurring Basis | | $ | 366,542 | | | $ | 10,180 | | | $ | 356,362 | | | $ | - | |
Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the year ended December 31, 2014,2015, there were no transfers in or out of level 1, 2, to levelor 3. During the year ended December 31, 2013, $5.6 million were transferred out of level 3 available-for-sale investment securities into held-to-maturity investment securities. The following table presents information about the activity of level 3 assets.
(in thousands) | | 2014 | | | 2013 | |
Balance at Beginning of Period | | $ | - | | | $ | 5,665 | |
Total Realized and Unrealized Gains/(Losses) Included in Income | | | - | | | | - | |
Total Unrealized Gains/(Losses) Included in Other Comprehensive Income | | | - | | | | - | |
Purchase of Securities | | | - | | | | - | |
Sales, Maturities, and Calls of Securities | | | - | | | | (84 | ) |
Net Transfers out of Available for Sale Securities | | | - | | | | (5,581 | ) |
Balance at End of Period | | $ | - | | | $ | - | |
Available for sale investments securities categorized as Level 3 assets primarily consist of obligations of states and political subdivisions. These bonds were issued by local housing authorities and have no active market. These bonds are carried at historical cost, which approximates fair value, unless economic conditions for the municipality changes to a degree requiring a valuation adjustment.
The following tables present information about the Company’s impaired loans & leases and other real estate, classes of assets or liabilities that the Company carries at fair value on a non-recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value for the periods indicated. Not all impaired loans & leases are carried at fair value. Impaired loans & leases are only included in the following tables when their fair value is based upon an appraisal of the collateral, and if that appraisal results in a partial charge-off or the establishment of a specific reserve.
| | | | | Fair Value Measurements | |
| | | | | At December 31, 2014, Using | |
| | Fair Value | | | Quoted Prices in Active Markets for Identical Assets | | | Other Observable Inputs | | | Significant Unobservable Inputs | |
(in thousands) | | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Impaired Loans: | | | | | | | | | | | | |
Commercial Real Estate | | $ | 90 | | | $ | - | | | $ | - | | | $ | 90 | |
Residential 1st Mortgage | | | 748 | | | | - | | | | - | | | | 748 | |
Home Equity Lines and Loans | | | 759 | | | | - | | | | - | | | | 759 | |
Agricultural | | | 346 | | | | - | | | | - | | | | 346 | |
Commercial | | | 3,832 | | | | - | | | | - | | | | 3,832 | |
Consumer | | | 6 | | | | - | | | | - | | | | 6 | |
Total Impaired Loans | | | 5,781 | | | | - | | | | - | | | | 5,781 | |
Other Real Estate: | | | | | | | | | | | | | | | | |
Real Estate Construction | | | 2,441 | | | | - | | | | - | | | | 2,441 | |
Agricultural Real Estate | | | 858 | | | | - | | | | - | | | | 858 | |
Total Other Real Estate | | | 3,299 | | | | - | | | | - | | | | 3,299 | |
Total Assets Measured at Fair Value On a Non-Recurring Basis | | $ | 9,080 | | | $ | - | | | $ | - | | | $ | 9,080 | |
| | | | | Fair Value Measurements | | |
| | | | | At December 31, 2013, Using | | |
| | Fair Value | | | Quoted Prices in Active Markets for Identical Assets | | | Other Observable Inputs | | | Significant Unobservable Inputs | | | | | | Fair Value Measurements At December 31, 2015, Using | |
(in thousands) | | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Fair Value Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Impaired Loans: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential 1st Mortgage | | $ | 614 | | | $ | - | | | $ | - | | | $ | 614 | | | $ | 329 | | | $ | - | | | $ | - | | | $ | 329 | |
Home Equity Lines and Loans | | | 551 | | | | - | | | | - | | | | 551 | | | | 125 | | | | - | | | | - | | | | 125 | |
Agricultural | | | 366 | | | | - | | | | - | | | | 366 | | | | 298 | | | | - | | | | - | | | | 298 | |
Commercial | | | 820 | | | | - | | | | - | | | | 820 | | | | 752 | | | | - | | | | - | | | | 752 | |
Consumer | | | | 5 | | | | - | | | | - | | | | 5 | |
Total Impaired Loans | | | 2,351 | | | | - | | | | - | | | | 2,351 | | | | 1,509 | | | | - | | | | - | | | | 1,509 | |
Other Real Estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Real Estate Construction | | | 2,399 | | | | - | | | | - | | | | 2,399 | | | | 2,441 | | | | - | | | | - | | | | 2,441 | |
Agricultural Real Estate | | | 2,212 | | | | - | | | | - | | | | 2,212 | | |
Total Other Real Estate | | | 4,611 | | | | - | | | | - | | | | 4,611 | | | | 2,441 | | | | - | | | | - | | | | 2,441 | |
Total Assets Measured at Fair Value On a Non-Recurring Basis | | $ | 6,962 | | | $ | - | | | $ | - | | | $ | 6,962 | | | $ | 3,950 | | | $ | - | | | $ | - | | | $ | 3,950 | |
| | | | | Fair Value Measurements At December 31, 2014, Using | |
(in thousands) | | Fair Value Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Impaired Loans: | | | | | | | | | | | | |
Commercial Real Estate | | $ | 90 | | | $ | - | | | $ | - | | | $ | 90 | |
Residential 1st Mortgage | | | 748 | | | | - | | | | - | | | | 748 | |
Home Equity Lines and Loans | | | 759 | | | | - | | | | - | | | | 759 | |
Agricultural | | | 346 | | | | - | | | | - | | | | 346 | |
Commercial | | | 3,832 | | | | - | | | | - | | | | 3,832 | |
Consumer | | | 6 | | | | - | | | | - | | | | 6 | |
Total Impaired Loans | | | 5,781 | | | | - | | | | - | | | | 5,781 | |
Other Real Estate: | | | | | | | | | | | | | | | | |
Real Estate Construction | | | 2,441 | | | | - | | | | - | | | | 2,441 | |
Agricultural Real Estate | | | 858 | | | | - | | | | - | | | | 858 | |
Total Other Real Estate | | | 3,299 | | | | - | | | | - | | | | 3,299 | |
Total Assets Measured at Fair Value On a Non-Recurring Basis | | $ | 9,080 | | | $ | - | | | $ | - | | | $ | 9,080 | |
The Company’s property appraisals are primarily based on the sales comparison approach and the income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each property. Additionally, the quality and volume of market information available at the time of the appraisal can vary from period to period and cause significant changes to the nature and magnitude of comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at December 31, 2014:2015:
(in thousands) | | Fair Value | | Valuation Technique | Unobservable Inputs | | Range, Weighted Avg. | | | Fair Value | | Valuation Technique | Unobservable Inputs | | Range, Weighted Avg. | |
Impaired Loans: | | | | | | | | | | | | | | |
Commercial Real Estate | | $ | 90 | | Sales Comparison Approach | Adjustment for Difference Between Comparable Sales | | | 1% -1%, 1 | % | |
| | | | | | | | |
Residential 1st Mortgages | | $ | 748 | | Sales Comparison Approach | Adjustment for Difference Between Comparable Sales | | | 11% -21%, 17 | % | | $ | 329 | | Sales Comparison Approach | Adjustment for Difference Between Comparable Sales | | | 1% -5%, 3 | % |
| | | | | | | | | | | |
Home Equity Lines and Loans | | $ | 759 | | Sales Comparison Approach | Adjustment for Difference Between Comparable Sales | | | 1% - 14%, 11 | % | | $ | 125 | | Sales Comparison Approach | Adjustment for Difference Between Comparable Sales | | | 1% - 3%, 2 | % |
| | | | | | | | | | | |
Agricultural | | $ | 331 | | Income Approach | Capitalization Rate | | | 14% - 14%, 14 | % | | $ | 298 | | Income Approach | Capitalization Rate | | | 16% - 16%, 16 | % |
Agricultural | | $ | 15 | | Sales Comparison Approach | Adjustment for Difference Between Comparable Sales | | | 1% -1%, 1 | % | |
| | | | | | | | | | |
Commercial | | $ | 3,832 | | Sales Comparison Approach | Adjustment for Difference Between Comparable Sales | | | 1% - 13%, 4 | % | | $ | 752 | | Income Approach | Capitalization Rate | | | 16% - 16%, 16 | % |
| | | | | | | | | | |
Consumer | | $ | 6 | | Sales Comparison Approach | Adjustment for Difference Between Comparable Sales | | | 8% - 8%, 8 | % | | $ | 5 | | Sales Comparison Approach | Adjustment for Difference Between Comparable Sales | | | 2% - 2%, 2 | % |
| | | | | | | | | | | |
Other Real Estate: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
Real Estate Construction | | $ | 2,441 | | Sales Comparison Approach | Adjustment for Difference Between Comparable Sales | | | 10% - 10%, 10 | % | | $ | 2,441 | | Sales Comparison Approach | Adjustment for Difference Between Comparable Sales | | | 10% - 10%, 10 | % |
Agricultural Real Estate | | $ | 858 | | Sales Comparison Approach | Adjustment for Difference Between Comparable Sales | | | 10% - 10%, 10 | % | |
18. Fair Value of Financial Instruments
U.S. GAAP requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. In some cases, book value is a reasonable estimate of fair value due to the relatively short period of time between origination of the instrument and its expected realization.
The following tables summarize the book value and estimated fair value of financial instruments for the periods indicated:
| | | | | Fair Value of Financial Instruments Using | | | | | | | | | Fair Value of Financial Instruments Using | | | | |
December 31, 2014 (in thousands) | | Carrying Amount | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total Estimated Fair Value | | |
December 31, 2015 (in thousands) | | | Carrying Amount | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total Estimated Fair Value | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and Cash Equivalents | | $ | 77,125 | | | $ | 77,125 | | | $ | - | | | $ | - | | | $ | 77,125 | | | $ | 59,446 | | | $ | 59,446 | | | $ | - | | | $ | - | | | $ | 59,446 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment Securities Available-for-Sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Government Agency & Government-Sponsored Entities | | | 78,109 | | | | 10,005 | | | | 68,104 | | | | - | | | | 78,109 | | | | 33,251 | | | | - | | | | 33,251 | | | | - | | | | 33,251 | |
U.S. Treasury Notes | | | | 72,884 | | | | 72,884 | | | | - | | | | | | | | 72,884 | |
Mortgage Backed Securities | | | 287,948 | | | | - | | | | 287,948 | | | | - | | | | 287,948 | | | | 262,493 | | | | - | | | | 262,493 | | | | - | | | | 262,493 | |
Other | | | 485 | | | | 175 | | | | 310 | | | | - | | | | 485 | | | | 509 | | | | 199 | | | | 310 | | | | - | | | | 509 | |
Total Investment Securities Available-for-Sale | | | 366,542 | | | | 10,180 | | | | 356,362 | | | | - | | | | 366,542 | | | | 369,137 | | | | 73,083 | | | | 296,054 | | | | - | | | | 369,137 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment Securities Held-to-Maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of States and Political Subdivisions | | | 61,716 | | | | - | | | | 49,085 | | | | 13,403 | | | | 62,488 | | | | 61,396 | | | | - | | | | 44,675 | | | | 17,713 | | | | 62,388 | |
Other | | | 2,147 | | | | - | | | | 2,147 | | | | - | | | | 2,147 | | |
Total Investment Securities Held-to-Maturity | | | 63,863 | | | | - | | | | 51,232 | | | | 13,403 | | | | 64,635 | | | | 61,396 | | | | - | | | | 44,675 | | | | 17,713 | | | | 62,388 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FHLB Stock | | | 7,677 | | | | N/ | A | | | N/ | A | | | N/ | A | | | N/ | A | | | 7,795 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Loans & Leases, Net of Deferred Fees & Allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | | 484,061 | | | | - | | | | - | | | | 481,037 | | | | 481,037 | | | | 593,587 | | | | - | | | | - | | | | 591,271 | | | | 591,271 | |
Agricultural Real Estate | | | 353,022 | | | | - | | | | - | | | | 353,288 | | | | 353,288 | | | | 417,153 | | | | - | | | | - | | | | 405,295 | | | | 405,295 | |
Real Estate Construction | | | 94,850 | | | | - | | | | - | | | | 95,022 | | | | 95,022 | | | | 149,489 | | | | - | | | | - | | | | 149,371 | | | | 149,371 | |
Residential 1st Mortgages | | | 170,858 | | | | - | | | | - | | | | 173,916 | | | | 173,916 | | | | 205,616 | | | | - | | | | - | | | | 207,431 | | | | 207,431 | |
Home Equity Lines and Loans | | | 30,591 | | | | - | | | | - | | | | 32,456 | | | | 32,456 | | | | 30,910 | | | | - | | | | - | | | | 32,360 | | | | 32,360 | |
Agricultural | | | 275,859 | | | | - | | | | - | | | | 274,195 | | | | 274,195 | | | | 287,658 | | | | - | | | | - | | | | 285,733 | | | | 285,733 | |
Commercial | | | 222,624 | | | | - | | | | - | | | | 222,175 | | | | 222,175 | | | | 202,968 | | | | - | | | | - | | | | 201,105 | | | | 201,105 | |
Consumer & Other | | | 4,501 | | | | - | | | | - | | | | 4,535 | | | | 4,535 | | | | 6,417 | | | | - | | | | - | | | | 6,416 | | | | 6,416 | |
Leases | | | 42,006 | | | | - | | | | - | | | | 40,298 | | | | 40,298 | | | | 62,584 | | | | - | | | | - | | | | 62,139 | | | | 62,139 | |
Unallocated Allowance | | | (1,529 | ) | | | - | | | | - | | | | (1,529 | ) | | | (1,529 | ) | | | (1,546 | ) | | | - | | | | - | | | | (1,546 | ) | | | (1,546 | ) |
Total Loans & Leases, Net of Deferred Fees & Allowance | | | 1,676,843 | | | | - | | | | - | | | | 1,675,393 | | | | 1,675,393 | | | | 1,954,836 | | | | - | | | | - | | | | 1,939,575 | | | | 1,939,575 | |
Accrued Interest Receivable | | | 7,797 | | | | - | | | | 7,797 | | | | - | | | | 7,797 | | | | 9,240 | | | | - | | | | 9,240 | | | | - | | | | 9,240 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand | | | 610,133 | | | | 610,133 | | | | - | | | | - | | | | 610,133 | | | | 711,029 | | | | 711,029 | | | | - | | | | - | | | | 711,029 | |
Interest Bearing Transaction | | | 341,397 | | | | 341,397 | | | | - | | | | - | | | | 341,397 | | | | 377,594 | | | | 377,594 | | | | - | | | | - | | | | 377,594 | |
Savings and Money Market | | | 644,260 | | | | 644,260 | | | | - | | | | - | | | | 644,260 | | | | 707,885 | | | | 707,885 | | | | - | | | | - | | | | 707,885 | |
Time | | | 468,283 | | | | - | | | | 468,161 | | | | - | | | | 468,161 | | | | 481,024 | | | | - | | | | 480,334 | | | | - | | | | 480,334 | |
Total Deposits | | | 2,064,073 | | | | 1,595,790 | | | | 468,161 | | | | - | | | | 2,063,951 | | | | 2,277,532 | | | | 1,796,508 | | | | 480,334 | | | | - | | | | 2,276,842 | |
Subordinated Debentures | | | 10,310 | | | | - | | | | 6,227 | | | | - | | | | 6,227 | | | | 10,310 | | | | - | | | | 6,424 | | | | - | | | | 6,424 | |
Accrued Interest Payable | | | 378 | | | | - | | | | 378 | | | | - | | | | 378 | | | | 513 | | | | - | | | | 513 | | | | - | | | | 513 | |
| | | | | Fair Value of Financial Instruments Using | | | | | | | | | Fair Value of Financial Instruments Using | | | | |
December 31, 2013 (in thousands) | | Carrying Amount | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total Estimated Fair Value | | |
December 31, 2014 (in thousands) | | | Carrying Amount | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total Estimated Fair Value | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and Cash Equivalents | | $ | 83,677 | | | $ | 83,677 | | | $ | - | | | $ | - | | | $ | 83,677 | | | $ | 77,125 | | | $ | 77,125 | | | $ | - | | | $ | - | | | $ | 77,125 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment Securities Available-for-Sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Government Agency & Government-Sponsored Entities | | | 28,436 | | | | 23,394 | | | | 5,042 | | | | - | | | | 28,436 | | | | 78,109 | | | | 10,005 | | | | 68,104 | | | | - | | | | 78,109 | |
Mortgage Backed Securities | | | 324,929 | | | | - | | | | 324,929 | | | | - | | | | 324,929 | | | | 287,948 | | | | - | | | | 287,948 | | | | - | | | | 287,948 | |
Corporate Securities | | | 49,380 | | | | 8,191 | | | | 41,189 | | | | - | | | | 49,380 | | |
Other | | | 1,894 | | | | 1,584 | | | | 310 | | | | - | | | | 1,894 | | | | 485 | | | | 175 | | | | 310 | | | | - | | | | 485 | |
Total Investment Securities Available-for-Sale | | | 404,639 | | | | 33,169 | | | | 371,470 | | | | - | | | | 404,639 | | | | 366,542 | | | | 10,180 | | | | 356,362 | | | | - | | | | 366,542 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment Securities Held-to-Maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Obligations of States and Political Subdivisions | | | 65,685 | | | | - | | | | 51,563 | | | | 14,307 | | | | 65,870 | | | | 61,716 | | | | - | | | | 49,085 | | | | 13,403 | | | | 62,488 | |
Mortgage Backed Securities | | | 45 | | | | - | | | | 45 | | | | - | | | | 45 | | |
Other | | | 2,775 | | | | - | | | | 2,775 | | | | - | | | | 2,775 | | | | 2,147 | | | | - | | | | 2,147 | | | | - | | | | 2,147 | |
Total Investment Securities Held-to-Maturity | | | 68,505 | | | | - | | | | 54,383 | | | | 14,307 | | | | 68,690 | | | | 63,863 | | | | - | | | | 51,232 | | | | 13,403 | | | | 64,635 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FHLB Stock | | | 7,187 | | | | N/ | A | | | N/ | A | | | N/ | A | | | N/ | A | | | 7,677 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Loans & Leases Net of Deferred Fees & Allowance: | | | | | | | | | | | | | | | | | | | | | |
Loans & Leases, Net of Deferred Fees & Allowance: | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate | | | 402,336 | | | | - | | | | - | | | | 403,790 | | | | 403,790 | | | | 484,061 | | | | - | | | | - | | | | 481,037 | | | | 481,037 | |
Agricultural Real Estate | | | 324,688 | | | | - | | | | - | | | | 328,704 | | | | 328,704 | | | | 353,022 | | | | - | | | | - | | | | 353,288 | | | | 353,288 | |
Real Estate Construction | | | 40,438 | | | | - | | | | - | | | | 40,800 | | | | 40,800 | | | | 94,850 | | | | - | | | | - | | | | 95,022 | | | | 95,022 | |
Residential 1st Mortgages | | | 150,184 | | | | - | | | | - | | | | 153,352 | | | | 153,352 | | | | 170,858 | | | | - | | | | - | | | | 173,916 | | | | 173,916 | |
Home Equity Lines and Loans | | | 32,710 | | | | - | | | | - | | | | 35,250 | | | | 35,250 | | | | 30,591 | | | | - | | | | - | | | | 32,456 | | | | 32,456 | |
Agricultural | | | 244,209 | | | | - | | | | - | | | | 242,950 | | | | 242,950 | | | | 275,859 | | | | - | | | | - | | | | 274,195 | | | | 274,195 | |
Commercial | | | 144,701 | | | | - | | | | - | | | | 145,131 | | | | 145,131 | | | | 222,624 | | | | - | | | | - | | | | 222,175 | | | | 222,175 | |
Consumer & Other | | | 4,876 | | | | - | | | | - | | | | 4,912 | | | | 4,912 | | | | 4,501 | | | | - | | | | - | | | | 4,535 | | | | 4,535 | |
Leases | | | | 42,006 | | | | - | | | | - | | | | 40,298 | | | | 40,298 | |
Unallocated Allowance | | | 12,094 | | | | - | | | | - | | | | 11,851 | | | | 11,851 | | | | (1,529 | ) | | | - | | | | - | | | | (1,529 | ) | | | (1,529 | ) |
Total Loans & Leases Net of Deferred Fees & Allowance | | | (2,274 | ) | | | - | | | | - | | | | (2,274 | ) | | | (2,274 | ) | |
Total Loans & Leases, Net of Deferred Fees & Allowance | | | | 1,676,843 | | | | - | | | | - | | | | 1,675,393 | | | | 1,675,393 | |
Accrued Interest Receivable | | | 1,353,962 | | | | - | | | | - | | | | 1,364,466 | | | | 1,364,466 | | | | 7,797 | | | | - | | | | 7,797 | | | | - | | | | 7,797 | |
| | | 6,941 | | | | - | | | | 6,941 | | | | - | | | | 6,941 | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Demand | | | 495,963 | | | | 495,963 | | | | - | | | | - | | | | 495,963 | | | | 610,133 | | | | 610,133 | | | | - | | | | - | | | | 610,133 | |
Interest Bearing Transaction | | | 291,795 | | | | 291,795 | | | | - | | | | - | | | | 291,795 | | | | 341,397 | | | | 341,397 | | | | - | | | | - | | | | 341,397 | |
Savings and Money Market | | | 589,511 | | | | 589,511 | | | | - | | | | - | | | | 589,511 | | | | 644,260 | | | | 644,260 | | | | - | | | | - | | | | 644,260 | |
Time | | | 430,422 | | | | - | | | | 430,752 | | | | - | | | | 430,752 | | | | 468,283 | | | | - | | | | 468,161 | | | | - | | | | 468,161 | |
Total Deposits | | | 1,807,691 | | | | 1,377,269 | | | | 430,752 | | | | - | | | | 1,808,021 | | | | 2,064,073 | | | | 1,595,790 | | | | 468,161 | | | | - | | | | 2,063,951 | |
Subordinated Debentures | | | 10,310 | | | | - | | | | 6,224 | | | | - | | | | 6,224 | | | | 10,310 | | | | - | | | | 6,227 | | | | - | | | | 6,227 | |
Accrued Interest Payable | | | 352 | | | | - | | | | 352 | | | | - | | | | 352 | | | | 378 | | | | - | | | | 378 | | | | - | | | | 378 | |
Fair value estimates presented herein are based on pertinent information available to management as of December 31, 20142015 and December 31, 2013.2014. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purpose of these financial statements since that date, and; therefore, current estimates of fair value may differ significantly from the amounts presented above. The methods and assumptions used to estimate the fair value of each class of financial instrument listed in the table above are explained below.
Cash and Cash Equivalents - The carrying amounts reported in the balance sheet for cash and due from banks, interest-bearing deposits with banks, federal funds sold, and securities purchased under agreements to resell are a reasonable estimate of fair value. All cash and cash equivalents are classified as Level 1.
Investment Securities - Fair values for investment securities consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. Based on the available market information the classification level could be 1, 2, or 3.
Federal Home Loan Bank Stock - It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Loans & Leases, Net of Deferred Loan & Lease Fees & Allowance - Fair values of loans & leases are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans & leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans & leases are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans & leases do not necessarily represent an exit price.
Deposit Liabilities - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed-maturity certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
Subordinated Debentures - The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
Accrued Interest Receivable and Payable - The carrying amount of accrued interest receivable and payable approximates their fair value resulting in a Level 2 classification.
19. Commitments and Contingencies
In the normal course of business, the Company enters in to financial instruments with off balance sheet risk in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These instruments include commitments to extend credit, letters of credit, and other types of financial guarantees. The Company had the following off balance sheet commitments as of the dates indicated.
(in thousands) | | December 31, 2014 | | | December 31, 2013 | | | December 31, 2015 | | | December 31, 2014 | |
Commitments to Extend Credit | | $ | 539,288 | | | $ | 445,294 | | | $ | 708,122 | | | $ | 539,288 | |
Letters of Credit | | | 9,734 | | | | 7,393 | | | | 14,745 | | | | 9,734 | |
Performance Guarantees Under Interest Rate Swap Contracts Entered Into Between Our Borrowing Customers and Third Parties | | | 2,042 | | | | - | | | | 2,758 | | | | 2,042 | |
The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third party. Outstanding standby letters of credit have maturity dates ranging from 1 to 46 months with final expiration in October 2018. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
The Company is obligated under a number of noncancellable operating leases for premises and equipment used for banking purposes. Minimum future rental commitments under noncancellable operating leases as of December 31, 2014,2015, were $540,000,$548,000, $371,000,314,000, $197,000, $190,000,$279,000, $288,000, and $196,000$288,000 for the years 20152016 through 2019,2020, and $557,000$323,000 for the remaining term of the leases.
In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material in relation to the financial position of the Company.
The Company may be required to maintain average reserves on deposit with the Federal Reserve Bank primarily based on deposits outstanding. There were no reserve requirements during 20142015 or 2013.2014.
20. Recent Accounting Developments
In May, 2014, the FASB has made available Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers: Topic 606. ASU 2014-09 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company does not anticipate that the adoption of this ASU will have a material impact on the Company’s financial position, results of operation, cash flows, or disclosure.
In January 2014, the FASB issued Accounting Standards Update (ASU) 2014-04 - Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. This Update clarifies when an in-substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The objective of the amendments in this Update is to reduce diversity in practice. An in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company does not anticipate that the adoption of this ASU willdid not have a material impact on the Company’s financial position, results of operation, cash flows, or disclosure.
In May 2014, the FASB issued ASU 2014-09 - Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Accounting Standards Codification. The amendments in this update affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts, including leases and insurance contracts, are within the scope of other standards. The amendments establish a core principle requiring the recognition of revenue to depict the transfer of goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. The amendments also require expanded disclosures concerning the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. For public entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and must be applied retrospectively. Early application is not permitted. Management is currently evaluating the impact of adoption.
In August 2015, the FASB issued ASU 2015-14 - Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date. The amendments in this Update defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard requires that a lessee recognize assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, the standard will require both types of leases to be recognized on the balance sheet. It also requires disclosures to better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The new standard applies to public business entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Management is currently evaluating the impact of adoption.
21. Parent Company Financial Information
The following financial information is presented as of December 31 for the periods indicated.
Farmers & Merchants Bancorp
Condensed Balance Sheets
(in thousands) | | 2014 | | | 2013 | | | 2015 | | | 2014 | |
Cash | | $ | 363 | | | $ | 416 | | | $ | 308 | | | $ | 363 | |
Investment in Farmers & Merchants Bank of Central California | | | 242,852 | | | | 219,640 | | | | 261,626 | | | | 242,852 | |
Investment Securities | | | 410 | | | | 410 | | | | 409 | | | | 410 | |
Other Assets | | | 201 | | | | 87 | | | | 60 | | | | 201 | |
Total Assets | | $ | 243,826 | | | $ | 220,553 | | | $ | 262,403 | | | $ | 243,826 | |
| | | | | | | | | | | | | | | | |
Subordinated Debentures | | $ | 10,310 | | | $ | 10,310 | | | $ | 10,310 | | | $ | 10,310 | |
Liabilities | | | 338 | | | | 339 | | | | 258 | | | | 338 | |
Shareholders' Equity | | | 233,178 | | | | 209,904 | | | | 251,835 | | | | 233,178 | |
Total Liabilities and Shareholders' Equity | | $ | 243,826 | | | $ | 220,553 | | | $ | 262,403 | | | $ | 243,826 | |
Farmers & Merchants Bancorp
Condensed Statements of Income
| | Year Ended December 31, | | | Year Ended December 31, | |
(in thousands) | | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | |
Equity in Undistributed Earnings in Farmers & Merchants Bank of Central California | | $ | 18,211 | | | $ | 14,352 | | | $ | 13,247 | | | $ | 17,352 | | | $ | 18,211 | | | $ | 14,352 | |
Dividends from Subsidiary | | | 8,000 | | | | 10,450 | | | | 10,900 | | | | 10,875 | | | | 8,000 | | | | 10,450 | |
Interest Income | | | 10 | | | | 10 | | | | 10 | | | | 10 | | | | 10 | | | | 10 | |
Other Expenses, Net | | | (1,406 | ) | | | (1,288 | ) | | | (1,386 | ) | | | (1,451 | ) | | | (1,406 | ) | | | (1,288 | ) |
Tax Benefit | | | 587 | | | | 537 | | | | 578 | | | | 606 | | | | 587 | | | | 537 | |
Net Income | | $ | 25,402 | | | $ | 24,061 | | | $ | 23,349 | | | $ | 27,392 | | | $ | 25,402 | | | $ | 24,061 | |
Farmers & Merchants Bancorp
Condensed Statements of Cash Flows
| | Year Ended December 31, | | | Year Ended December 31, | |
(in thousands) | | 2014 | | | 2013 | | | 2012 | | | 2015 | | | 2014 | | | 2013 | |
Cash Flows from Operating Activities: | | | | | | | | | | | | | | | | | | |
Net Income | | $ | 25,402 | | | $ | 24,061 | | | $ | 23,349 | | | $ | 27,392 | | | $ | 25,402 | | | $ | 24,061 | |
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Equity in Undistributed Net Earnings from Subsidiary | | | (18,211 | ) | | | (14,352 | ) | | | (13,247 | ) | | | (17,352 | ) | | | (18,211 | ) | | | (14,352 | ) |
Net Decrease (Increase) in Other Assets | | | (114 | ) | | | 38 | | | | (216 | ) | |
Net (Decrease) Increase in Liabilities | | | (1 | ) | | | 180 | | | | (78 | ) | |
Net (Increase) Decrease in Other Assets | | | | (79 | ) | | | (114 | ) | | | 38 | |
Net Increase (Decrease) in Liabilities | | | | 141 | | | | (1 | ) | | | 180 | |
Net Cash Provided by Operating Activities | | | 7,076 | | | | 9,927 | | | | 9,808 | | | | 10,102 | | | | 7,076 | | | | 9,927 | |
Investing Activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Securities Purchased | | | - | | | | - | | | | - | | |
Securities Sold or Matured | | | - | | | | - | | | | - | | |
Payments for Investments in Subsidiaries | | | | (3,360 | ) | | | - | | | | - | |
Net Cash Used by Investing Activities | | | - | | | | - | | | | - | | | | (3,360 | ) | | | - | | | | - | |
Financing Activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Stock Repurchased | | | - | | | | - | | | | (576 | ) | |
Issuance of Common Stock | | | 2,790 | | | | - | | | | - | | | | 3,360 | | | | 2,790 | | | | - | |
Cash Dividends | | | (9,919 | ) | | | (9,723 | ) | | | (9,418 | ) | | | (10,157 | ) | | | (9,919 | ) | | | (9,723 | ) |
Net Cash Used by Financing Activities | | | (7,129 | ) | | | (9,723 | ) | | | (9,994 | ) | | | (6,797 | ) | | | (7,129 | ) | | | (9,723 | ) |
(Decrease) Increase in Cash and Cash Equivalents | | | (53 | ) | | | 204 | | | | (186 | ) | | | (55 | ) | | | (53 | ) | | | 204 | |
Cash and Cash Equivalents at Beginning of Year | | | 416 | | | | 212 | | | | 398 | | | | 363 | | | | 416 | | | | 212 | |
Cash and Cash Equivalents at End of Year | | $ | 363 | | | $ | 416 | | | $ | 212 | | | $ | 308 | | | $ | 363 | | | $ | 416 | |
22. Subsequent Events
On January 23, 2015,28, 2016, the Company issued 1,7001,600 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. See Note 16, located in “Item 8. Financial Statements and Supplementary Data.” These shares were issued at a price of $450$525 per share based upon a valuation dated December 1, 2014, completed by a nationally recognized bank consulting and advisory firm.firm and in reliance upon the exemption in Section 4(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None
The Company maintains controls and procedures designed to ensure that all relevant information is recorded and reported in all filings of financial reports. Such information is reported to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer to allow timely and accurate disclosure based on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of December 31, 2014,2015, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of December 31, 2014.2015.
There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.
Management’s report on internal control over financial reporting is set forth in “Item 8. Financial Statements and Supplementary Data,” and is incorporated herein by reference. Moss Adams LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report, was engaged to audit the effectiveness of the Company’s internal control over financial reporting. The report of Moss Adams LLP, which is set forth in “Item 8. Financial Statements and Supplementary Data,” is incorporated herein by reference.
None
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Set forth below is certain information regarding the Named Executive Officers of the Company and/or Bank:
Name and Position(s) | Age | Principal Occupation during the Past Five Years |
| | |
Kent A. Steinwert Chairman, President & Chief Executive Officer of the Company and Bank | 6263 | Chairman, President & Chief Executive Officer of the Company and Bank since May 1, 2010.Bank. President & Chief Executive Officer of the Company and Bank up to April 30, 2010.
|
| | |
Deborah E. Skinner Executive Vice President & Chief Chief Administrative Officer of the Bank | 5253 | Executive Vice President & Chief Administrative Officer of the Bank. |
| | |
Stephen W. Haley Executive Vice President & & Chief Financial Officer & Secretary
Secretary of the Company and Bank
| 6162 | Executive Vice President & Chief Financial Officer of the Company and Bank. |
| | |
Kenneth W. Smith Executive Vice President & Senior Credit Officer of the Company and Bank | 5556 | Executive Vice President & Senior Credit Officer of the Company and Bank since August 9, 2011. Executive Vice President & Head of Business Markets of the Bank up to August 8, 2011. |
| | |
James P. Daugherty Executive Vice President, Wholesale Banking Division of the Bank | 6364 | Executive Vice President, Wholesale Banking Division since November 15, 2013. Senior Vice President, Commercial Credit Administrator of the Bank up to November 14, 2013. |
| | |
Jay J. Colombini Executive Vice President, Wholesale Banking Division Ofof the Bank
| 5253 | Executive Vice President, Wholesale Banking Division since November 15, 2013. Senior Vice President and Manager – Lodi Main Branch from August 1, 2012 through November 14, 2013. Senior Vice President and Manager – Linden Branch up to July 31, 2012 |
Also, see “Election of Directors” and “Compliance with Section 16(a) of the Exchange Act” in the Company’s definitive proxy statement for the 20152016 Annual Meeting of Stockholders which will be filed with the SEC and which is incorporated herein by reference. During 20142015, there were no changes in procedures for the election of directors.
The Company has adopted a Code of Conduct, which complies with the Code of Ethics requirements of the SEC. A copy of the Code of Conduct is posted on the Company’s website. The Company intends to disclose promptly any amendment to, or waiver from any provision of, the Code of Conduct applicable to senior financial officers, and any waiver from any provision of the Code of Conduct applicable to directors, on its website on the About Us page. The Company’s website address is www.fmbonline.com.
The information required by Item 11 of Form 10-K is incorporated by reference from the information contained in the Company’s definitive proxy statement for the 20152016 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by Item 12 of Form 10-K is incorporated by reference from the information contained in the Company’s definitive proxy statement for the 20152016 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A. The Company does not have any equity compensation plans, which require disclosure under Item 201(d) of Regulation S-K.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by Item 13 of Form 10-K is incorporated by reference from the information contained in the Company’s definitive proxy statement for the 20152016 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A.
Item 14. | Principal Accounting Fees and Services |
The information required by Item 14 of Form 10-K is incorporated by reference from the information contained in the Company’s definitive proxy statement for the 20152016 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A.
PART IV
Item 15. | Exhibits and Financial Statement Schedules |
(a) (1) Financial Statements. Incorporated herein by reference, are listed in Item 8 hereof.
(2) Financial Statement Schedules. Not applicable.
(3) Exhibits.
Exhibit | | |
Number | | Description |
| | |
3.1 | | Amended Certificate of Incorporation (incorporated by reference to Proposal #2 in the Registrant’s Definitive Proxy Statement on Schedule 14A for its 2012 Annual Meeting of Stockholders, Appendices 1 and 2 to the Registrant's Definitive Proxy Statement on Schedule 14A for its 2007 Annual Meeting of Stockholders, and Exhibit 3(i) to the Registrant's Current Report on Form 8-K dated April 30, 1999). |
3.2 | | Amended By-Laws (incorporated by reference to the Registrant’s Current Report on Form 8-K dated September 19, 2008, Appendix 3 to the Registrant's Definitive Proxy Statement on Schedule 14A for its 2007 Annual Meeting of Stockholders, Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated June 7, 2005, and Exhibit 3(ii) to the Registrant's Current Report on Form 8-K dated April 30, 1999). |
3.3 | | Certificate of Designation for the Series A Junior Participating Preferred Stock (included as Exhibit A to the Rights Agreement between Farmers & Merchants Bancorp and Registrar and Transfer Company, dated as of August 5, 2008, filed as Exhibit 4.1 below), filed on the Registrant’s Form 10-Q for the quarter ended June 30, 2008, is incorporated herein by reference. |
4.1 | | Rights Agreement between Farmers & Merchants Bancorp and Registrar and Transfer Company, dated as of August 5, 2008, including Form of Right Certificate attached thereto as Exhibit B, filed on the Registrant’s Form 10-Q for the quarter ended June 30, 2008, is incorporated herein by reference. |
4.2 | | Amendment No. 1 to Rights Agreement between Farmers & Merchants Bancorp and Computershare Trust, N.A., as Rights Agent, dated as of February 18, 2016, incorporated herein by reference to Exhibit 4.2 of the Registrant’s Form 8-A/A filed on February 19, 2016. |
10.1 | | Amended and Restated Employment Agreement effective AprilJuly 1, 2014,2015, between Farmers & Merchants Bank of Central California and Kent A. Steinwert, filed on Registrant’s Form 10-K10-Q for the yearquarter ended December 31, 2013,June 30, 2015, is incorporated herein by reference. |
10.3 | | Amended and Restated Employment Agreement effective AprilJuly 1, 2014,2015, between Farmers & Merchants Bank of Central California and Deborah E. Skinner, filed on Registrant’s Form 10-K10-Q for the yearquarter ended December 31, 2013,June 30, 2015, is incorporated herein by reference. |
10.4 | | Amended and Restated Employment Agreement effective AprilJuly 1, 2014,2015, between Farmers & Merchants Bank of Central California and Kenneth W. Smith, filed on Registrant’s Form 10-K10-Q for the yearquarter ended December 31, 2013,June 30, 2015, is incorporated herein by reference. |
10.6 | | Amended and Restated Employment Agreement effective AprilJuly 1, 2014,2015, between Farmers & Merchants Bank of Central California and Stephen W. Haley, filed on Registrant’s Form 10-K10-Q for the yearquarter ended December 31, 2013,June 30, 2015, is incorporated herein by reference. |
10.8 | | Employment Agreement effective AprilJuly 1, 2014,2015, between Farmers & Merchants Bank of Central California and Jay J. Colombini, filed on Registrant’s Form 10-K10-Q for the yearquarter ended December 31, 2013,June 30, 2015, is incorporated herein by reference. |
10.9 | | Employment Agreement effective AprilJuly 1, 2014,2015, between Farmers & Merchants Bank of Central California and James P. Daugherty, filed on Registrant’s Form 10-K10-Q for the yearquarter ended December 31, 2013,June 30, 2015, is incorporated herein by reference. |
10.10 | | Employment Agreement effective June 2, 2014,July 1, 2015, between Farmers & Merchants Bank of Central California and Ryan J. Misasi, filed on Registrant’s Form 10-Q for the Registrants Form 8-K datedquarter ended June 11, 2014,30, 2015, is incorporated herein by reference. |
10.15 | | Executive Retirement Plan – Performance Component as amended on November 5, 2010, filed on Registrant’s Form 10-Q for the period ended September 30, 2010, is incorporated herein by reference. |
10.16 | | Executive Retirement Plan – Retention Component as amended on November 5, 2010, filed on Registrant’s Form 10-Q for the period ended September 30, 2010, is incorporated herein by reference. |
10.17 | | Executive Retirement Plan – Salary Component, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014.2014, is incorporated herein by reference. |
10.18 | | Deferred Compensation Plan of Farmers & Merchants Bank of Central California, as amended on November 5, 2010, filed on Registrant’s Form 10-Q for the period ended September 30, 2010, is incorporated herein by reference. |
10.19 | | Executive Retirement Plan – Equity Component, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014.2014, is incorporated herein by reference. |
10.20 | | Senior Management Retention Plan, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014.2014, is incorporated herein by reference. |
14 | | Code of Conduct of Farmers & Merchants Bancorp, filed on Registrant’s Form 10-K for the year ended December 31, 2003, is incorporated herein by reference. |
21 | | Subsidiaries of the Registrant, filed on Registrant’s Form 10-K for the year ended December 31, 2003, is incorporated herein by reference. |
31(a) | | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31(b) | | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 | | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | | XBRL Instance Document |
101.SCH | | XBRL Schema Document |
101.CAL | | XBRL Calculation Linkbase Document |
101.LAB | | XBRL Label Linkbase Document |
101.PRE | | XBRL Presentation Linkbase Document |
101.DEF | | XBRL Definition Linkbase Document |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | Farmers & Merchants Bancorp | |
| | (Registrant) | |
| | | |
| By | /s/ Stephen W. Haley | |
Dated: March 13, 201514, 2016 | | Stephen W. Haley | |
| | Executive Vice President & | |
| | Chief Financial Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 13, 2015.14, 2016.
/s/ Kent A. Steinwert | | Chairman, President & Chief Executive Officer |
Kent A. Steinwert | | (Principal Executive Officer) |
| | |
/s/ Stephen W. Haley | | Executive Vice President & Chief Financial Officer |
Stephen W. Haley | | (Principal Financial and Accounting Officer) |
| | | |
/s/ Bruce A. Mettler | | /s/ Calvin Suess | |
Bruce A. Mettler, Director | | Calvin Suess, Director | |
| | | |
/s/ Stewart C. Adams, Jr. | | /s/ Kevin Sanguinetti | |
Stewart C. Adams, Jr., Director | | Kevin Sanguinetti, Director | |
| | | |
/s/ Edward Corum, Jr. | | /s/ Gary Long | |
Edward Corum, Jr., Director | | Gary Long, Director | |
| |
| |
| Executive Retirement Plan – Salary Component, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014. |
| Executive Retirement Plan – Equity Component, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014. |
| Senior Management Retention Plan, amended and restated on November 29, 2014, filed on Registrant’s Form 10-K for the year ended December 31, 2014. |
| Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |