UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20006
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
COMMUNITY VALLEY BANCORP
(Exact name of registrant as specified in its charter)
California | | 68-0479553 |
State of incorporation | | I.R.S. Employer Identification Number |
| | |
2041 Forest Avenue
Chico, California | | 95928 |
Address of principal executive offices | | Zip Code |
(530) 899-2344
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act)
Large accelerated filer o | | Accelerated filer o | | Non-accelerated filer ý |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of June 30, 2005, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $73.1 million, based on the sales price reported to the Registrant on that date of $15.40 per share.
Shares of Common Stock held by each officer and director and each person owning more than five percent of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of the affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares of Common Stock of the registrant outstanding as of March 1, 2006 was 7,439,877.
Documents incorporated by reference
PART I
Item 1. Business
Forward Looking Statements
Certain statements contained in this Annual Report on Form 10-K that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified. These statements are based on management’s beliefs and assumptions, and on information available to management as of the date of this document. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “consider” or similar expressions are used. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions, including the risks discussed under the heading “Risk Factors” and elsewhere in this report. The Company’s actual future results and shareholder values may differ materially from those anticipated and expressed in these forward-looking statements. Many of the factors that will determine these results and values, including those discussed under the heading “Risk Factors That May Affect Results,” are beyond the Company’s ability to control or predict. Investors are cautioned not to put undue reliance on any forward-looking statements. In addition, the Company does not have any intention or and assumes no obligation to update forward-looking statements after the date of the filing of this report, even if new information, future events or other circumstances have made such statements incorrect or misleading. Except as specifically noted herein all referenced to the “Company” refer to Community Valley Bancorp, a California corporation, and its consolidated subsidiaries.
General
The Company
Community Valley Bancorp (the “Company”) is a California corporation registered as a financial holding company under the Financial Holding Company Act of 1956, as amended (the “BHC Act”), and is headquartered in Chico, California. The Company was incorporated in July, 2001 and acquired all of the outstanding shares of Butte Community Bank (the “Bank”) in May, 2002. The Company’s principal subsidiary is the Bank. The Company also has a subsidiary in the name of Community Valley Bancorp Trust I, which was formed in December, 2002 solely to facilitate the issuance of capital trust pass-through securities. The Company also has an insurance subsidiary in the name of Community Valley Bancorp Insurance Agency, LLC which was formed in December 2004 to provide a full service insurance agency offering all lines of coverage. The Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries as it may acquire or establish.
The Company’s principal source of income is currently dividends from the Bank, but the Company intends to explore additional supplemental sources of income in the future. The expenditures of the Company, including (but not limited to) the payment of dividends to shareholders, if and when declared by the Board of Directors, and the cost of servicing debt will generally be paid from such payments made to the Company by the Bank.
At December 31, 2005, the Company had consolidated assets of $494.8 million, deposits of $434.0 million and shareholders’ equity of $41.6 million.
The Company’s Administrative Offices are located at 2041 Forest Avenue, Chico, California and its telephone number is
(530) 899-2344. References herein to the “Company” include the Company and the Bank, unless the context indicates otherwise.
The Company files annual, quarterly and other reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission. These reports are posted and are available at no cost on the Company’s website, www.communityvalleybancorp.com through the reports link, as soon as reasonably practicable after the Company files such documents with the SEC. The Company’s filings are also available through the SEC’s website at www.sec.gov.
The Bank
Butte Community Bank was incorporated under the laws of the State of California on May 11, 1990 and commenced operations as a California state-chartered commercial bank on December 14, 1990. The Bank’s Administrative Office is located at 2041 Forest Avenue, Chico, California. The Bank is an insured bank under the Federal Deposit Insurance Act up to the maximum limits thereof. The Bank is not a member of the Federal Reserve System. At December 31, 2005, the Bank had approximately $495.2 million in assets, $408.1 million in loans and $439.2 million in deposits.
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We operate seven full-service branch offices in four Butte County communities, one full-service branch office in Sutter County, two full-service branches in Tehama County, one full-service branch in Yuba County, one full-service branch in Colusa County, one full-service branch in Shasta County, one Loan Production office in Sacramento County, and one Loan Production office in Butte County. We offer a full range of banking services to individuals and various-sized businesses in the communities we serve. The locations of those offices are:
Chico: | | Main Office | | Paradise | | South Paradise Branch |
| | 2041 Forest Avenue | | | | 672 Pearson Road |
| | | | | | |
| | Administrative Headquarters
2041 Forest Avenue | | | | North Paradise Branch |
| | 2041 Forest Avenue | | | | 6653 Clark Road |
| | | | | | |
| | North Chico Branch | | Oroville | | Oroville Branch |
| | 237 West East Avenue | | | | 2227 Myers Street |
| | | | | | |
| | Central Chico Branch | | Magalia | | Magalia Branch |
| | 900 Mangrove Avenue | | | | 14001 Lakeridge Circle |
| | | | | | |
Citrus Heights | | Citrus Heights Loan Office | | Yuba City | | Yuba City Branch |
| | 5959 Greenback Lane #450 | | | | 1600 Butte House Road |
| | | | | | |
Redding | | Redding Branch | | Red Bluff | | Red Bluff Branch |
| | 100 East Cypress Ave. | | | | 84 Belle Mill Road |
| | Suite # 150 | | | | |
| | | | | | |
Marysville | | Marysville Branch | | Colusa | | Colusa Branch |
| | 812 B Street | | | | 1017 Bridge Street |
| | | | | | |
Gridley | | Gridley Loan Office | | Corning | | Corning Branch |
| | 1010 Spruce Street | | | | 908 Hwy 99W |
In addition, our Real Estate Loan Center, Data Processing, Call Center, Central Note Department and Bank Card Center are located at 1390 Ridgewood Drive, Chico. We also have specialized credit centers for agricultural lending and construction and real estate lending within a number of these branch offices. These facilities are located in the cities of Chico, Paradise, and Oroville in Butte County, the city of Yuba City in Sutter County, The cities of Red Bluff and Corning in Tehama County, the city of Marysville in Yuba County, the city of Colusa in Colusa County, the city of Citrus Heights in Sacramento County, and the city of Redding in Shasta County.
Throughout the history of Butte Community Bank, our growth has been exclusively by establishing de novo full-service branch offices and credit centers in various locations in California’s Northern Sacramento Valley and foothill region.
With a predominant focus on personal service, Butte Community Bank has positioned itself as a multi-community independent bank serving the financial needs of individuals and businesses, including agricultural and real estate customers in Butte and other surrounding counties. Our principal retail lending services include home equity and consumer loans. In addition, we have two other significant dimensions which surround this core of retail community banking: Agricultural lending, and real estate financing (both construction and long term).
The Agricultural Credit Centers located in Yuba City, Chico, and Red Bluff provide a complete line of credit services in support of the agricultural activities which are key to the continued economic development of the communities we serve. “Ag lending” clients include a full range of individual farming customers and small business farming organizations.
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The Bank Card Center, headquartered in Chico, provides a range of credit, debit and ATM card services, which are made available to each of the customers served by the branch banking offices. In addition, we staff our Chico, Paradise, Oroville, Red Bluff and Yuba City offices with real estate lending specialists. These officers are responsible for a complete line of land acquisition and development loans, construction loans for residential and commercial development, and the origination of multifamily credit facilities. Secondary market services are provided though the Bank’s affiliations with Fannie Mae and various non-governmental programs. The Bank services these real estate loans sold on the secondary market, and as of year end the portfolio was in excess of $157 million. We also have an orientation toward Small Business Administration lending and have been designated as a Preferred Lender since 1998. The Bank’s SBA program generated approximately $7.9 million in loans during the past year. It is anticipated that loans under this program will be an increasing segment of our loan portfolio over the next few years. The Bank was also recognized as the number two USDA Business and Industry Lender in California and number nine in the nation during 2005. The Bank originated $10.8 million in loans through this program during 2005.
As of December 31, 2005, the principal areas in which we directed our lending activities, and the percentage of our total loan portfolio for which each of these areas was responsible, were as follows: (i) agricultural loans (6%); (ii) commercial and industrial (including SBA) loans (15%); (iii) real estate loans (mortgage and construction) (70%); (iv) consumer loans (9%).
In addition to the lending activities noted above, we offer a wide range of deposit products for the retail banking market including checking, interest bearing transaction, savings, time certificates of deposit and retirement accounts, as well as telephone banking and internet banking with bill pay options. As of December 31, 2005, we had 30,097 deposit accounts with balances totaling approximately $434 million, compared to 26,242 deposit accounts with balances totaling approximately $399 million at December 31, 2004. Butte Community Bank attracts deposits through its customer-oriented product mix, competitive pricing, convenient locations, extended hours and drive-up banking, all provided with the highest level of customer service.
We also offer other products and services to our customers, which complement the lending and deposit services previously reviewed. These include cashier’s checks, traveler’s checks, bank-by-mail, ATM, night depository, safe deposit boxes, direct deposit, automated payroll services and other customary banking services. Shared ATM and Point of Sale (POS) networks allow customers access to the national and international funds transfer networks. During the past few years we have substantially enhanced our ATM locations to include off-site areas not previously served by cash or deposit facilities. We now have a total of five such remote ATM’s at five different locations, including two hospitals, two convenience stores, and an entertainment center. These locations facilitate cash advances which would not otherwise be available to consumers at non-branch locations, thereby increasing consumer convenience. In addition to such specifically oriented customer applications, we provide safe deposit, wire transfer capabilities and a convenient customer service group in our Call Center to answer questions and assure a high level of customer satisfaction with the level of services and products we provide.
Most of the Bank’s deposits are attracted from individuals, business-related sources and smaller municipal entities. This results in a relatively modest average deposit balance of approximately $14,000 at December 31, 2005, but makes the Bank less subject to adverse effects from the loss of a substantial depositor who may be seeking higher yields in other markets or who may have need of money otherwise on deposit with the Bank, especially during periods of inflation or conservative monetary policies. The Bank has had a relationship with a local title company for many years. They have kept substantial deposit balances which have increased consistently with new home purchases and refinancing activity. Management believes this relationship to be very secure and does not anticipate this business leaving the Bank.
For non-deposit services, we have a strategic alliance with Linsco Private Ledger Financial Services. Through this arrangement, our registered and licensed representatives provide Bank customers with convenient access to annuities, insurance products, mutual funds, and a full range of investment products which are not FDIC insured. They conduct business from all of our full service offices.
We do not believe there is a significant demand for additional trust services in our service areas, and we do not operate or have any present intention to seek authority to operate a Trust Department. We believe that the cost of establishing and operating such a department would not be justified by the potential income to be gained there from.
The officers and employees of the Bank are continually engaged in marketing activities, including the evaluation and development of new products and services, which enable the Bank to retain and improve its competitive position in its service area. All of these developments are meant to increase public convenience and enhance public access to the electronic payments system. The cost to the Bank for these development, implementation, and marketing activities cannot expressly be calculated with any degree of certainty.
The Bank holds no patents or licenses (other than licenses required by appropriate bank regulatory agencies), franchises, or concessions. The Bank is not dependent on a single customer or group of related customers for a material portion of its deposits, nor is a material portion of the Bank’s loans concentrated within a single industry or group of related industries. There has been no material effect upon the Bank’s capital expenditures, earnings, or competitive position as a result of Federal, state, or local environmental regulation.
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Recent Developments
On September 29, 2004 the Company filed for Financial Holding Company status with the Federal Reserve Bank of San Francisco with subsequent approval granted on October 29, 2004. On October 15, 2004 the Company filed with the California Department of Insurance for permission to operate a subsidiary of Community Valley Bancorp called CVB Insurance Agency LLC which was formed in December 2004 with a capital investment of $1 million down streamed from the Company.
On October 28, 2004 the Company filed applications with the California Department of Financial Institutions and the Federal Deposit Insurance Corporation for permission to establish a branch office in the city of Colusa. This branch was subsequently opened on December 20, 2004.
On February 2, 2005 the Company filed applications with the California Department of Financial Institutions and the Federal Deposit Insurance Corporation for permission to establish a branch office in the city of Corning and was subsequently approved on February 25, 2005. This branch subsequently opened for business on March 7, 2005.
On June 10, 2005 the Company filed applications with the California Department of Financial Institutions and the Federal Deposit Insurance Corporation for permission to discontinue our Loan Production Office and establish a branch office in the city of Redding. These applications were subsequently approved on June 13, 2005. This branch opened for business on September 6, 2005.
On June 15, 2005 the Company filed applications with the California Department of Financial Institutions to establish a Loan Production Office place of business at 1010 Spruce Street in the city of Gridley. This Loan Production Office was subsequently approved on June 16, 2005 and opened for business on July 18, 2005.
Competition
The banking business in California generally, and specifically in our market areas, is highly competitive with respect to virtually all products and services and has become increasingly more so in recent years. The industry continues to consolidate and strong, unregulated competitors have entered banking markets with focused products targeted at highly profitable customer segments. Many largely unregulated competitors are able to compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services in nearly all significant products. These competitive trends are likely to continue.
With respect to commercial bank competitors, the business is largely dominated by a relatively small number of major banks with many offices operating over a wide geographical area, which banks have, among other advantages, the ability to finance wide-ranging and effective advertising campaigns and to allocate their investment resources to regions of highest yield and demand. Many of the major banks operating in the area offer certain services which we do not offer directly but may offer indirectly through correspondent institutions. By virtue of their greater total capitalization, such banks also have substantially higher lending limits than we do.
In addition to other banks, competitors include savings institutions, credit unions, and numerous non-banking institutions such as finance companies, leasing companies, insurance companies, brokerage firms, and investment banking firms. In recent years, increased competition has also developed from specialized finance and non-finance companies that offer wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal finance software. Strong competition for deposit and loan products affects the rates of those products as well as the terms on which they are offered to customers. Mergers between financial institutions have placed additional pressure on banks within the industry to streamline their operations, reduce expenses, and increase revenues to remain competitive. Competition has also intensified due to recently enacted federal and state interstate banking laws, which permit banking organizations to expand geographically, and the California market has been particularly attractive to out-of-state institutions. The Financial Modernization Act, which, effective March 11, 2000, has made it possible for full affiliations to occur between banks and securities firms, insurance companies, and other financial companies, is also expected to intensify competitive conditions.
Technological innovation has also resulted in increased competition in financial services markets. Such innovation has, for example, made it possible for non-depository institutions to offer customers automated transfer payment services that previously have been considered traditional banking products. In addition, many customers now expect a choice of several delivery systems and channels, including telephone, mail, home computer, ATMs, self service branches, and/or in-store branches. In addition to other banks, the sources of competition for such products include savings associations, credit unions, brokerage firms, money market and other mutual funds, asset management groups, finance and insurance companies, internet-only financial intermediaries, and mortgage banking firms.
For many years, we have countered this increasing competition by providing our own style of community-oriented, personalized service. We rely upon local promotional activity, personal contacts by our officers, directors, employees, and shareholders, automated 24-hour banking, and the individualized service which we can provide through our flexible policies. In addition, to meet the needs of customers with electronic access requirements, the Company has embraced the electronic age and installed telephone banking and personal computer and internet banking with bill payment capabilities. This high tech and high touch approach allows the individual to customize the Bank’s contact methodologies to their particular preference. Moreover, for customers whose loan demands exceed our legal lending limit, we attempt to arrange for such loans on a participation basis with correspondent banks. We also assist our customers in obtaining from our correspondent banks other services that the Bank may not offer.
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Our credit card business is subject to an even higher level of competitive pressure than our general banking business. There are a number of major banks and credit card issuers that are able to finance often highly successful advertising campaigns with which community banks generally do not have the resources to compete. As a result, our credit card balances outstanding are much more likely to increase at a slower rate than that which might be seen in nationwide issuers’ year-end statistics. Additional competition comes from many non-financial institutions, such as providers of various retail products, which offer many types of credit cards.
Employees
As of December 31, 2005 the Company had 161 full-time and 114 part-time employees. On a full time equivalent basis, the Company’s staff level was 241 at December 31, 2005, as compared to 204 at December 31, 2004. None of our employees is concurrently represented by a union or covered by a collective bargaining agreement. Management of the Company believes its employee relations are satisfactory.
Regulation and Supervision
The Company and the Bank are subject to significant regulation by federal and state regulatory agencies. The following discussion of statutes and regulations is only a brief summary and does not purport to be complete. This discussion is qualified in its entirety by reference to such statutes and regulations. No assurance can be given that such statutes or regulations will not change in the future.
The Company
The Company is a financial holding company within the meaning of the Financial Holding Company Act of 1956 and is registered as such with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). A financial holding company is required to file with the Federal Reserve Board annual reports and other information regarding its business operations and those of its subsidiaries. It is also subject to examination by the Federal Reserve Board and is required to obtain Federal Reserve Board approval before acquiring, directly or indirectly, ownership or control of any voting shares of any bank if, after such acquisition, it would directly or indirectly own or control more than 5% of the voting stock of that bank, unless it already owns a majority of the voting stock of that bank.
The Federal Reserve Board has by regulation determined certain activities in which a financial holding company may or may not conduct business. A financial holding company must engage, with certain exceptions, in the business of banking or managing or controlling banks or furnishing services to or performing services for its subsidiary banks. The permissible activities and affiliations of certain bank holding companies have recently been expanded. (See “Financial Modernization Act” below.)
The Bank
As a California state-chartered bank whose accounts are insured by the FDIC up to a maximum of $100,000 per depositor, the Bank is subject to regulation, supervision and regular examination by the Department of Financial Institutions (the “DFI”) and the FDIC. In addition, while the Bank is not a member of the Federal Reserve System, it is subject to certain regulations of the Federal Reserve Board. The regulations of these agencies govern most aspects of the Bank’s business, including the making of periodic reports by the Bank, and the Bank’s activities relating to dividends, investments, loans, borrowings, capital requirements, certain check-clearing activities, branching, mergers and acquisitions, reserves against deposits and numerous other areas. Supervision, legal action and examination of the Bank by the FDIC are generally intended to protect depositors and are not intended for the protection of shareholders.
The earnings and growth of the Bank are largely dependent on its ability to maintain a favorable differential or “spread” between the yield on its interest-earning assets and the rate paid on its deposits and other interest-bearing liabilities. As a result, the Bank’s performance is influenced by general economic conditions, both domestic and foreign, the monetary and fiscal policies of the federal government, and the policies of the regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (such as seeking to curb inflation and combat recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements and by varying the discount rate applicable to borrowings by banks which are members of the Federal Reserve System. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and deposits. The nature and impact of any future changes in monetary policies cannot be predicted.
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Capital Adequacy Requirements
The Company and the Bank are subject to the regulations of the Federal Reserve Board and the FDIC, respectively, governing capital adequacy. Those regulations incorporate both risk-based and leverage capital requirements. Each of the federal regulators has established risk-based and leverage capital guidelines for the banks or bank holding companies it regulates, which set total capital requirements and define capital in terms of “core capital elements,” or Tier 1 capital; and “supplemental capital elements,” or Tier 2 capital. Tier 1 capital is generally defined as the sum of the core capital elements less goodwill and certain other deductions, notably the unrealized net gains or losses (after tax adjustments) on available for sale investment securities carried at fair market value. The following items are defined as core capital elements: (i) common shareholders’ equity; (ii) trust preferred securities are a form of long-term borrowing that currently qualifies as Tier 1 capital not to exceed 25% of pro-forma Tier 1 capital; (iii) qualifying non-cumulative perpetual preferred stock and related surplus (not to exceed 25% of pro-forma Tier 1 capital); and (iv) minority interests in the equity accounts of consolidated subsidiaries. Supplementary capital elements include: (i) allowance for loan and lease losses (but not more than 1.25% of an institution’s risk-weighted assets); (ii) perpetual preferred stock and related surplus not qualifying as core capital; (iii) hybrid capital instruments, perpetual debt and mandatory convertible debt instruments; and (iv) term subordinated debt and intermediate-term preferred stock and related surplus. The maximum amount of supplemental capital elements which qualifies as Tier 2 capital is limited to 100% of Tier 1 capital, net of goodwill.
The minimum required ratio of qualifying total capital to total risk-weighted assets is 8.0% (“Total Risk-Based Capital Ratio”), at least one half of which must be in the form of Tier 1 capital, and the minimum required ratio of Tier 1 capital to total risk-weighted assets is 4.0% (“Tier 1 Risk-Based Capital Ratio”). Risk-based capital ratios are calculated to provide a measure of capital that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are recorded as off-balance sheet items. Under the risk-based capital guidelines, the nominal dollar amounts of assets and credit-equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U. S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans. As of December 31, 2005 and 2004, the Bank’s Total Risk-Based Capital Ratios were 11.3% and 11.3%, respectively and its Tier 1 Risk-Based Capital Ratios were 10.1% and 10.2%, respectively. As of December 31, 2005 and 2004, the Company’s Total Risk-Based Capital was 12.5% and 12.5% respectively, and its Tier 1 Risk-Based Capital Ratio was 11.4% and 11.3% respectively. The risk-based capital requirements also take into account concentrations of credit (i.e., relatively large proportions of loans involving one borrower, industry, location, collateral or loan type) and the risks of “non-traditional” activities (those that have not customarily been part of the banking business). The regulations require institutions with high or inordinate levels of risk to operate with higher minimum capital standards, and authorize the regulators to review an institution’s management of such risks in assessing an institution’s capital adequacy.
The risk-based capital regulations also include exposure to interest rate risk as a factor that the regulators will consider in evaluating a bank’s capital adequacy. Interest rate risk is the exposure of a bank’s current and future earnings and equity capital arising from adverse movements in interest rates. While interest risk is inherent in a bank’s role as financial intermediary, it introduces volatility to bank earnings and to the economic value of the bank.
The FDIC and the Federal Reserve Board also require the maintenance of a leverage capital ratio designed to supplement the risk-based capital guidelines. Banks and bank holding companies that have received the highest rating of the five categories used by regulators to rate banks and are not anticipating or experiencing any significant growth must maintain a ratio of Tier 1 capital (net of all intangibles) to adjusted total assets (“Leverage Capital Ratio”) of at least 3%. All other institutions are required to maintain a leverage ratio of at least 100 to 200 basis points above the 3% minimum, for a minimum of 4% to 5%. Pursuant to federal regulations, banks must maintain capital levels commensurate with the level of risk to which they are exposed, including the volume and severity of problem loans, and federal regulators may, however, set higher capital requirements when a bank’s particular circumstances warrant. As of December 31, 2005 and 2004, the Bank’s Leverage Capital Ratios were 9.5% and 8.6%, respectively. As of December 31, 2005 and 2004, the Company’s leverage capital ratios were 9.8% and 9.5%, respectively, exceeding regulatory minimums. At December 31, 2005 and 2004 the Company met all of its capital adequacy guidelines and the Bank was considered “well capitalized” under the prompt corrective action provisions. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation — Liquidity and Market Risk Management.
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Prompt Corrective Action Provisions
Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured financial institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The federal banking agencies have by regulation defined the following five capital categories: “well capitalized” (Total Risk-Based Capital Ratio of 10%; Tier 1 Risk-Based Capital Ratio of 6%; and Leverage Ratio of 5%); “adequately capitalized” (Total Risk-Based Capital Ratio of 8%; Tier 1 Risk-Based Capital Ratio of 4%; and Leverage Ratio of 4%) (or 3% if the institution receives the highest rating from its primary regulator); “undercapitalized” (Total Risk-Based Capital Ratio of less than 8%; Tier 1 Risk-Based Capital Ratio of less than 4%; or Leverage Ratio of less than 4%) (or 3% if the institution receives the highest rating from its primary regulator); “significantly undercapitalized” (Total Risk-Based Capital Ratio of less than 6%; Tier 1 Risk-Based Capital Ratio of less than 3%; or Leverage Ratio less than 3%); and “critically undercapitalized” (tangible equity to total assets less than 2%). A bank may be treated as though it were in the next lower capital category if after notice and the opportunity for a hearing, the appropriate federal agency finds an unsafe or unsound condition or practice so warrants, but no bank may be treated as “critically undercapitalized” unless its actual capital ratio warrants such treatment.
At each successively lower capital category, an insured bank is subject to increased restrictions on its operations. For example, a bank is generally prohibited from paying management fees to any controlling persons or from making capital distributions if to do so would make the bank “undercapitalized.” Asset growth and branching restrictions apply to undercapitalized banks, which are required to submit written capital restoration plans meeting specified requirements (including a guarantee by the parent holding company, if any). “Significantly undercapitalized” banks are subject to broad regulatory authority, including among other things, capital directives, forced mergers, restrictions on the rates of interest they may pay on deposits, restrictions on asset growth and activities, and prohibitions on paying certain bonuses without FDIC approval. Even more severe restrictions apply to critically undercapitalized banks. Most importantly, except under limited circumstances, not later than 90 days after an insured bank becomes critically undercapitalized, the appropriate federal banking agency is required to appoint a conservator or receiver for the bank.
In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the issuance of cease and desist orders, termination of insurance of deposits (in the case of a bank), the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal agreements, or removal and prohibition orders against “institution-affiliated” parties.
Safety and Soundness Standards
The federal banking agencies have also adopted guidelines establishing safety and soundness standards for all insured depository institutions. Those guidelines relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan and institute enforcement proceedings if an acceptable compliance plan is not submitted.
Premiums for Deposit Insurance
The FDIC regulations also implement a risk-based premium system, whereby insured depository institutions are required to pay insurance premiums depending on their risk classification. Under this system, institutions such as the Bank which are insured by the Bank Insurance Fund (“BIF”) are categorized into one of three capital categories (well capitalized, adequately capitalized, and undercapitalized) and one of three supervisory categories based on federal regulatory evaluations. The three supervisory categories are: financially sound with only a few minor weaknesses (Group A), demonstrates weaknesses that could result in significant deterioration (Group B), and poses a substantial probability of loss (Group C). The capital ratios used by the FDIC to define well capitalized, adequately capitalized and undercapitalized are the same in the FDIC’s prompt corrective action regulations. The current BIF base assessment rates (expressed as cents per $100 of deposits) are summarized as follows:
| | Group A | | Group B | | Group C | |
| | | | | | | |
Well Capitalized | | 0 | | 3 | | 17 | |
Adequately Capitalized | | 3 | | 10 | | 24 | |
Undercapitalized | | 10 | | 24 | | 27 | |
In addition, BIF member banks (such as the Bank) must pay an amount which fluctuates but is currently 1.34 basis points, or cents per $100 of insured deposits, toward the retirement of the Financing Corporation bonds issued in the 1980’s to assist in the recovery of the savings and loan industry.
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Dividends
The Company is entitled to receive dividends, when and as declared by its subsidiary banks’ Boards of Directors. Those dividends may come from funds legally available for those dividends, as specified and limited by the California Financial Code and the U.S. Code. Under the California Financial Code, funds available for cash dividends by a California-chartered bank are restricted to the lesser of:(i) the bank’s retained earnings; or (ii) the bank’s net income for its last three fiscal years (less any distributions to shareholders made during such period). With the prior approval of the California Department of Financial Institutions (“DFI”) , cash dividends may also be paid out of the greater of: (i) the bank’s retained earnings; (ii) net income for the bank’s last preceding fiscal year; or (iii) net income for the bank’s current fiscal year. If the DFI determines that the shareholders’ equity of the bank paying the dividend is not adequate or that the payment of the dividend would be unsafe or unsound for the bank, the DFI may order the bank not to pay the dividend.
It is also possible, depending upon its financial condition and other factors, that a regulatory agency could assert that the payment of dividends or other payments might, under some circumstances, constitute an unsafe or unsound practice and thereby prohibit such payments.
California Corporations Code Section 500 allows the Company to pay a dividend to its shareholders only to the extent that it has retained earnings and, after the dividend, its:
• assets (exclusive of goodwill and other intangible assets) would be 1.25 times its liabilities (exclusive of deferred taxes, deferred income and other deferred credits); and
• current assets would be at least equal to current liabilities.
Additionally, the FRB’s policy regarding dividends provides that a bank holding company should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The FRB also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.
Transactions With Affiliates
The Company and any of its subsidiaries and certain related interests are deemed to be affiliates of its subsidiary banks within the meaning of Sections 23A and 23B of the Federal Reserve Act. Under those terms, loans by a subsidiary bank to affiliates, investments by them in affiliates’ stock, and taking affiliates’ stock as collateral for loans to any borrower is limited to 10% of the particular banking subsidiary’s capital, in the case of any one affiliate, and is limited to 20% of the banking subsidiary’s capital, in the case of all affiliates. In addition, such transactions must be on terms and conditions that are consistent with safe and sound banking practices; in particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act. These restrictions also prevent a bank holding company and its other affiliates from borrowing from a banking subsidiary of the bank holding company unless the loans are secured by marketable collateral of designated amounts. The Company and its subsidiary banks are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities.
Recent Legislation
From time to time legislation is enacted which has the effect of increasing the cost of doing business and changing the competitive balance between banks and other financial and non-financial institutions. Various federal laws enacted over the past several years have provided, among other things, for:
• the maintenance of mandatory reserves with the Federal Reserve Bank on deposits by depository institutions;
• the phasing-out of the restrictions on the amount of interest which financial institutions may pay on certain types of accounts; and
• the authorization of various types of new deposit accounts, such as “NOW” accounts, “Money Market Deposit” accounts and “Super NOW” accounts, designed to be competitive with money market mutual funds and other types of accounts and services offered by various financial and non-financial institutions.
The lending authority and permissible activities of certain non-bank financial institutions such as savings and loan associations and credit unions have been expanded, and federal regulators have been given increased enforcement authority. These laws have generally had the effect of altering competitive relationships existing among financial institutions, reducing the historical distinctions between the services offered by banks, savings and loan associations and other financial institutions, and increasing the cost of funds to banks and other depository institutions.
9
Amendments to Regulation H and Y for Trust Preferred Securities. The Federal Reserve Board issued a final rule on March 1, 2005 that amends Regulation H and Regulation Y to limit restricted core capital elements (including trust preferred securities) which count as Tier 1 capital to 25 percent of all core capital elements, net of goodwill less any associated deferred tax liability. Internationally active bank holding companies, will be subject to a 15 percent limit, but they may include qualifying mandatory convertible preferred securities up to the generally applicable 25 percent limit. Amounts of restricted core capital elements in excess of these limits generally may be included in Tier 2 capital. The final rule provides a five-year transition period, ending March 31, 2009, for application of the quantitative limits.
Community Reinvestment Act
The Bank is subject to certain requirements and reporting obligations involving Community Reinvestment Act (“CRA”) activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low and moderate income neighborhoods. The CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, consummating mergers or acquisitions, or holding company formations. In measuring a bank’s compliance with its CRA obligations, the regulators utilize a performance-based evaluation system which bases CRA ratings on the bank’s actual lending service and investment performance, rather than on the extent to which the institution conducts needs assessments, documents community outreach activities or complies with other procedural requirements. In connection with its assessment of CRA performance, the FDIC assigns a rating of “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” The Bank was last examined for CRA compliance in January 2004 and received a “satisfactory” CRA Assessment Rating.
Other Consumer Protection Laws and Regulations
The bank regulatory agencies are increasingly focusing attention on compliance with consumer protection laws and regulations. Examination and enforcement has become intense, and banks have been advised to carefully monitor compliance with various consumer protection laws and their implementing regulations. The federal Interagency Task Force on Fair Lending issued a policy statement on discrimination in home mortgage lending describing three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment, and evidence of disparate impact. In addition to CRA and fair lending requirements, the Bank is subject to numerous other federal consumer protection statutes and regulations. Due to heightened regulatory concern related to compliance with consumer protection laws and regulations generally, the Bank may incur additional compliance costs or be required to expend additional funds for investments in the local communities it serves.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking Act”) regulates the interstate activities of banks and bank holding companies and establishes a framework for nationwide interstate banking and branching. Since June 1, 1997, a bank in one state has generally been permitted to merge with a bank in another state without the need for explicit state law authorization. However, states were given the ability to prohibit interstate mergers with banks in their own state by “opting-out” (enacting state legislation applying equality to all out-of-state banks prohibiting such mergers) prior to June 1, 1997.
Since 1995, adequately capitalized and managed bank holding companies have been permitted to acquire banks located in any state, subject to two exceptions: first, any state may still prohibit bank holding companies from acquiring a bank which is less than five years old; and second, no interstate acquisition can be consummated by a bank holding company if the acquirer would control more than 10% of the deposits held by insured depository institutions nationwide or 30% percent or more of the deposits held by insured depository institutions in any state in which the target bank has branches.
A bank may establish and operate de novo branches in any state in which the bank does not maintain a branch if that state has enacted legislation to expressly permit all out-of-state banks to establish branches in that state.
In 1995 California enacted legislation to implement important provisions of the Interstate Banking Act discussed above and to repeal California’s previous interstate banking laws, which were largely preempted by the Interstate Banking Act.
The changes effected by Interstate Banking Act and California laws have increased competition in the environment in which the Bank operates to the extent that out-of-state financial institutions directly or indirectly enter the Bank’s market areas. It appears that the Interstate Banking Act has contributed to the accelerated consolidation of the banking industry. While many large out-of-state banks have already entered the California market as a result of this legislation, it is not possible to predict the precise impact of this legislation on the Bank and the Company and the competitive environment in which they operate.
10
Financial Modernization Act
Effective March 11, 2000 the Gramm-Leach-Bliley Act eliminated most barriers to affiliations among banks and securities firms, insurance companies, and other financial service providers, and enabled full affiliations to occur between such entities. This legislation permits bank holding companies to become “financial holding companies” and thereby acquire securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under the FDICIA prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the CRA by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The Company became a financial holding company in 2004 for the purpose of establishing the subsidiary CVB Insurance Agency.
The Gramm-Leach-Bliley Act defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Board has determined to be closely related to banking. A national bank (and therefore, a state bank as well) may also engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory CRA rating. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a CRA rating of satisfactory or better.
The Gramm-Leach-Bliley Act also imposes significant new requirements on the sharing of customer information between financial institutions. The Company has responded to these new restrictions.
The Company and the Bank must file periodic reports with the various regulators to keep them informed of their financial condition and operations as well as their compliance with all the various regulations. Three regulatory agencies - the Federal Reserve Bank of San Francisco for the Company, and the FDIC and the California Department of Financial Institutions - conduct periodic examinations of the Company and the Bank to verify their reporting is accurate and to ascertain that they are in compliance with regulations.
A banking agency may take action against a financial holding company or a bank should it find the financial institution has failed to maintain adequate capital. This action has usually taken the form of restrictions on the payment of dividends to shareholders, requirements to obtain more capital from investors, and restrictions on operations. The FDIC may also take action against a bank that is not acting in a safe and sound manner. Given the strong capital position and performance of the Company and the Bank, Management does not expect to be impacted by these types of restrictions in the foreseeable future.
Sarbanes-Oxley Act
In 2002, the Sarbanes-Oxley Act was enacted as Federal legislation. This legislation imposes a number of new requirements on financial reporting and corporate governance on all corporations. Passed in response to corporate accounting and reporting failures, the act requires all public companies to document their internal controls over financial reporting, evaluate the design and effectiveness of those controls, periodically test all significant controls to ensure they are functioning, and provide a certification by the Chief Executive Officer and Chief Financial Officer of the documentation, evaluation, and testing. Among the new requirements is the inclusion in the Company’s Annual Report of a report by Management on the Company’s internal controls over financial reporting and the safeguarding of assets. The report must be evaluated by the Company’s independent auditors. The Company is not yet subject to this legislation but is in the process of documenting these internal controls, evaluating their effectiveness, and ensuring that adequate testing is performed to ensure that they are functioning as intended.
Regulatory Capital Treatment of Equity Investments.
In December of 2001 and January of 2002, the OCC, the FRB and the FDIC adopted final rules governing the regulatory capital treatment of equity investments in non-financial companies held by banks, bank holding companies and financial holding companies. The new capital requirements apply symmetrically to equity investments made by banks and their holding companies in non-financial companies under the legal authorities specified in the final rules. Among others, these include the merchant banking authority granted by the Gramm-Leach-Bliley Act and the authority to invest in small business investment companies (“SBICs”) granted by the Small Business Investment Act. Covered equity investments will be subject to a series of marginal Tier 1 capital charges, with the size of the charge increasing as the organization’s level of concentration in equity investments increases. The highest marginal charge specified in the final rules requires a 25 percent deduction from Tier 1 capital for covered investments that aggregate more than 25 percent of an organization’s Tier 1 capital. Equity investments through SBICs will be exempt from the new charges to the extent such investments, in the aggregate, do not exceed 15 percent of the banking organization’s Tier 1 capital. Grandfathered investments made by state banks under section 24(f) of the Federal Deposit Insurance Act also are exempted from coverage.
11
Other Pending and Proposed Legislation
Other legislative and regulatory initiatives which could affect the Company, the Bank and the banking industry in general are pending, and additional initiatives may be proposed or introduced before the United States Congress, the California legislature and other governmental bodies in the future. Such proposals, if enacted, may further alter the structure, regulation and competitive relationship among financial institutions, and may subject the Bank to increased regulation, disclosure and reporting requirements. In addition, the various banking regulatory agencies often adopt new rules and regulations to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation or regulations may be enacted or the extent to which the business of the Company or the Bank would be affected thereby.
Recent Accounting Pronouncements
Other-Than-Temporary Impairment of Securities
In March 2004, the Financial Accounting Standards Board (FASB) and Emerging Issues Task Force (EITF) reached consensus on several issues being addressed in EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The consensus provides guidance for evaluating whether an investment is other-than-temporarily impaired and was effective for other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. The disclosure provisions of EITF 03-1 continue to be effective for the Company’s consolidated financial statements for the year ended December 31, 2005.
On November 3, 2005, the FASB issued FASB Staff Position (FSP) Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP nullifies certain requirements of EITF Issue 03-1, and supersedes EITF Topic No. D-44, Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. The guidance in this FSP amends FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. The FSP is effective for reporting periods beginning after December 15, 2005. The Company does not anticipate any material impact to its financial condition or results of operations as a result of the adoption of this guidance.
Share-Based Payments
In December 2004 the FASB issued Statement No. 123 (revised 2004) (FAS 123 (R)), Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. The Company may elect to adopt FAS 123 (R) using a modified prospective method or modified retrospective method. Under the modified retrospective method, the Company would restate previously issued financial statements, basing the expense on that previously reported in their pro forma disclosures required by FAS 123. The modified prospective method would require the Company to record compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption as these awards continue to vest. FAS 123 (R) is effective for the first fiscal year beginning after June 15, 2005. Management has elected to use the modified prospective method and has completed its evaluation of the effect that FAS 123 (R) will have, and believes that the effect of its implementation will be consistent with the pro forma disclosures included in the audited consolidated financial statements in Item 8 of this Annual
Accounting Changes and Error Corrections
On June 7, 2005, the FASB issued Statement No. 154 (FAS 154), Accounting Changes and Error Corrections - a replacement of Accounting Principles Board (APB) Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Under the provisions of FAS 154, voluntary changes in accounting principles are applied retrospectively to prior periods’ financial statements unless it would be impractical to do so. FAS 154 supersedes APB Opinion No. 20, which required that most voluntary changes in accounting principles be recognized by including in the current period’s net in come the cumulative effect of the change. FAS 154 also makes a distinction between “retrospective application” of a change in accounting principle and the “restatement” of financial statements to reflect the correction of an error. The provisions of FAS 154 are effective for accounting changes made in fiscal years beginning after December 15, 2005. Management of the Company does not expect the adoption of this standard to have a material impact on its financial position or results of operations.
12
RISK FACTORS
This discussion and analysis provides insight into Management’s assessment of the operating trends over the last several years and its expectations for 2006. Such expressions of expectations are not historical in nature and are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual future results to differ materially from those expressed in any forward-looking statement. Such risks and uncertainties with respect to the Company include:
• increased competitive pressure among financial services companies;
• changes in the interest rate environment reducing interest margins or increasing interest rate risk;
• deterioration in general economic conditions, internationally, nationally or in the State of California;
• the occurrence of future events such as the terrorist acts of September 11, 2001;
• the availability of sources of liquidity at a reasonable cost; and
• legislative or regulatory changes adversely affecting the business in which the Company engages.
Competition
The Company faces competition from other financial institutions and from businesses in other industries that have developed financial products. Banks once had an almost exclusive franchise for deposit products and provided the majority of business financing. With deregulation in the 1980’s, other kinds of financial institutions began to offer competing products. Also, increased competition in consumer financial products has come from companies not typically associated with the banking and financial services industry, such as AT &T, General Motors and various software developers. Similar competition is faced for commercial financial products from insurance companies and investment bankers. Community banks, including the Company, attempt to offset this trend by developing new products that capitalize on the service quality that a local institution can offer. Among these are new loan, deposit, and investment products. The Company’s primary competitors are different for each specific product and market area. While this offers special challenges for the marketing of our products, it offers protection from one competitor dominating the Company in its market areas. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than we do, which creates certain competitive disadvantages for the Company.
Economic Conditions
Beginning in the summer of 2004 the Fed began raising its target rate and by year end it had increased by 1.25% to 5.25%. Throughout 2005 the Fed continued to increase its target rate and by year end it reached 7.25%. These changes impacted the Company as market rates for loans, investments and deposits respond to the Fed’s actions. From a national perspective, the most significant economic factors impacting the Company in the last three years have been the slow growth in 2003 followed by more healthy economic expansion during 2004 and 2005. The Federal Reserve expects the economies of 2006 to mirror that of 2005. Their self assessment of the monetary policy is accommodative; with financial conditions generally advantageous to households and firms. We are also affected by certain industry -specific economic factors. For example, a significant portion of our total loan portfolio is related to real estate obligations, particularly residential real estate loans. Our local economies continue to grow and prosper as people keep moving into our service areas. The smaller towns in close proximity to Chico such as Orland and Oroville are growing at a much faster than normal pace due to the lower cost of land acquisition for new housing. The areas around Redding such as Cottonwood and Anderson are also experiencing increasing growth.
Risk Management
The Company sees the process of addressing the potential impacts of the external factors listed above as part of its management of risk. In addition to common business risks such as disasters, theft, and loss of market share, the Company is subject to special types of risk due to the nature of its business. New and sophisticated financial products are continually appearing with different types of risk which need to be defined and managed if the Company chooses to offer them to its customers. Also, the risks associated with existing products must be reassessed periodically. The Company cannot operate risk-free and make a profit. Instead, the process of risk definition and assessment allows the Company to select the appropriate level of risk for the anticipated level of reward and then decide on the steps necessary to manage this risk. The Company’s Risk Officer and the other members of its Senior Management Team under the direction and oversight of the Board of Directors lead the risk management process.
Some of the risks faced by the Company are those faced by most enterprises — reputational risk, operational risk, and legal risk. The special risks related to financial products are credit risk and interest rate risk. Credit risk relates to the possibility that a debtor will not repay according to the terms of the debt contract. Credit risk is discussed in the sections related to loans. Interest rate risk is discussed in the sections related to Liquidity and Market Risk Management and relates to the adverse impacts of changes in interest rates. The effective management of these and other risks mentioned above is the backbone of the Company’s business strategy.
13
Managing Our Growth
Our Company’s(1) total assets increased from $450 million at December 31, 2004 to $495 million at December 31, 2005. Management’s intention is to leverage the Company’s current infrastructure to sustain the momentum achieved in 2005, although no assurance can be provided that this strategy will result in significant growth. Our ability to manage growth will depend primarily on our ability to:
• monitor operations;
• control funding costs and operating expenses;
• maintain positive customer relations; and
• attract, assimilate and retain qualified personnel.
(1) Inasmuch as the Company did not acquire the outstanding shares of the Bank until May, 2002, the financial information contained throughout this Annual Report for 2001 and earlier is for the Bank only. Information for 2002, 2003, 2004, and 2005 is for the Company on a consolidated basis unless otherwise stated.
The Impact of Changes in Assets and Liabilities to Net Interest Income and Net Interest Margin
The Company earns income from two sources. The primary source is from the management of its financial assets and liabilities and the second is from charging fees for services provided. The first source involves functioning as a financial intermediary, that is, the Company accepts funds from depositors or obtains funds from other creditors and then either lends the funds to borrowers or invests those funds in securities or other financial instruments. Income is earned as a spread between the interest earned from the loans or investments and the interest paid on the deposits and other borrowings. The second source, fee income, is discussed in other sections of this analysis, specifically in “Noninterest Revenue.”
Changes in Net Interest Income and Net Interest Margin
Net interest income is the difference or spread between the interest and fees earned on loans and investments (the Company’s earning assets) and the interest expense paid on deposits and other liabilities. The amount by which interest income will exceed interest expense depends on two factors: (1) the volume or balance of earning assets compared to the volume or balance of interest-bearing deposits and liabilities, and (2) the interest rate earned on those interest earning assets compared with the interest rate paid on those interest-bearing deposits and liabilities.
Net interest margin is net interest income expressed as a percentage of average earning assets. It is used to measure the difference between the average rate of interest earned on assets and the average rate of interest that must be paid on liabilities used to fund those assets. To maintain its net interest margin, the Company must manage the relationship between interest earned and paid. A shift in the relative size of the major balance sheet categories has an impact on net interest income and net interest margin. To the extent that funds invested in securities can be repositioned into loans, earnings increase because of the higher rates paid on loans. However, additional credit risk is incurred with loans compared to the very low risk of loss on securities, and the Company must carefully monitor the underwriting process to ensure that the benefit of the additional interest earned is not offset by additional credit losses. In general, depositors are willing to accept a lower rate on their funds than are other providers of funds because of the Federal Deposit Insurance Corporation (“FDIC”) insurance coverage. To the extent that the Company can fund asset growth by deposits, especially the lower cost transaction accounts, rather than borrowing funds from other financial institutions, the average rates paid on funds will be less, and net interest income more.
The Allowance for Loan Losses May Not Cover Actual Loan Losses. We attempt to limit the risk that borrowers will fail to repay loans by carefully underwriting the loans, nevertheless losses can and do occur. We create an allowance for loan losses in our accounting records, based on estimates of the following:
• industry standards;
• historical experience with our loans;
• evaluation of qualitative factors such as loan concentrations and local economic conditions;
• regular reviews of the quality, mix and size of the overall loan portfolio;
• regular reviews of delinquencies; and
• the quality of the collateral underlying our loans;
• loan impairment.
14
We maintain an allowance for loan losses at a level which we believe is adequate to absorb any specifically identified losses as well as any other losses inherent in our loan portfolio. However, changes in economic, operating and other conditions, including changes in interest rates, which are beyond our control, may cause our actual loan losses to exceed our current allowance estimates. If the actual loan losses exceed the amount reserved, it will hurt our business. In addition, the FDIC and the Department of Financial Institutions, as part of their supervisory functions, periodically review our allowance for loan losses. Such agencies may require us to increase our provision for loan losses or to recognize further loan losses, based on their judgments, which may be different from those of our management. Any increase in the allowance required by the FDIC or the California Department of Financial Institutions could also impact our business.
Item 2. Properties
The following properties (real properties and/or improvements thereon) are owned by the Company(1) and are unencumbered. In the opinion of Management, all properties are adequately covered by insurance.
(1) As used throughout this Annual Report, the term “Company” includes, where appropriate, both Community Valley Bancorp and its consolidated subsidiaries, Butte Community Bank and CVB Insurance Agency LLC.
On June 1, 2005, Community Valley Bancorp entered into a short term, unsecured note payable in a principal amount of $800,000 in conjunction with the purchase of real property. The interest rate on the note at December 31, 2005 was 4.5%. The note was paid in full on January 4, 2006. This real property is a 14,000 square foot building in Chico that will serve as the corporate administrative headquarters and also house other service departments. This building is currently being remodeled and should be ready for occupancy in the third quarter of 2006.
Location | | Use of Facilities | | Square Feet of
Office Space | | Land and
Building Cost | |
| | | | | | | |
672 Pearson Road | | Branch Office | | 4,200 | | $ | 612,261 | |
Paradise, California | | | | | | | |
(Opened December 1990) | | | | | | | |
| | | | | | | |
2227 Myers Street | | Branch Office | | 9,800 | | $ | 1,029,737 | |
Oroville, California | | | | | | | |
(Opened December 1990) | | | | | | | |
| | | | | | | |
2041 Forest Avenue | | Branch Office | | 8,000 | | $ | 1,543,845 | |
Chico, California | | | | | | | |
(Opened September, 1996) | | | | | | | |
| | | | | | | |
1390 Ridgewood Drive | | Central Services | | 8,432 | | $ | 1,098,293 | |
Chico, California | | | | | | | |
(Opened May, 1998) | | | | | | | |
| | | | | | | |
1600 Butte House Road | | Branch Office | | 6,580 | | $ | 1,448,340 | |
Yuba City, California (Opened September, 1997) | | | | | | | |
| | | | | | | |
237 West East Ave Chico, California | | Branch Office | | 4,771 | | $ | 845,493 | |
(Opened June, 1999, moved to this location November 2003) | | | | | | | |
Building is owned, land is leased | | | | | | | |
15
The following facilities are leased by the Company:
Location | | Use of Facilities | | Square Feet of
Office Space | | Monthly Rent
as of 12/31/04 | | Term of
Lease | |
| | | | | | | | | |
14001 Lakeridge Circle | | Branch Office | | 600 | | $ | 570 | | 3/31/2008 (1) | |
Magalia, California | | | | | | | | | |
| | | | | | | | | |
237 West East Ave. | | Branch Office | | | | $ | 3,958 | | 10/31/2028 (2) | |
Chico, California | | | | | | | | | |
land lease only | | | | | | | | | |
| | | | | | | | | |
900 Mangrove Ave. | | Branch Office | | 6,000 | | $ | 6,623 | | 9/30/2011 (3) | |
Chico, California | | | | | | | | | |
| | | | | | | | | |
6653 Clark Road | | Branch Office | | 4,640 | | $ | 5,170 | | 3/31/2013 (4) | |
Paradise, California | | | | | | | | | |
| | | | | | | | | |
100 East Cypress #150 | | Branch Office | | 1,850 | | $ | 2,334 | | 4/30/2006 (5) | |
Redding, California | | | | | | | | | |
| | | | | | | | | |
5959 Greenback #450 | | Loan Office | | 1,315 | | $ | 2,038 | | 7/31/2006 (6) | |
Citrus Heights, California | | | | | | | | | |
| | | | | | | | | |
936 Mangrove Ave. | | General Offices | | 6,000 | | $ | 4,600 | | 2/28/2013 (7) | |
Chico, California | | | | | | | | | |
| | | | | | | | | |
84 Belle Mill Rd | | Branch office | | 3,825 | | $ | 4,972 | | 5/31/2007 (8) | |
Red Bluff CA | | | | | | | | | |
| | | | | | | | | |
812 B Street | | Branch Office | | 1,651 | | $ | 2,888 | | 6/30/2006 (9) | |
Marysville, California | | | | | | | | | |
Opened July 2004 | | | | | | | | | |
| | | | | | | | | |
1017 Bridge Street | | Branch Office | | 1,500 | | $ | 1,300 | | 2/28/2014 (10) | |
Colusa, California | | | | | | | | | |
Opened December 2004 | | | | | | | | | |
| | | | | | | | | |
1010 Spruce Street | | Loan Office | | 960 | | $ | 900 | | Month to month | |
Gridley, California
Opened July 2005 | | | | | | | | | |
| | | | | | | | | |
908 Hwy. 99W | | Branch Office | | 1,556 | | $ | 3,190 | | January 31, 2006 (11) | |
Corning, California | | | | | | | | | |
Opened March 2005 | | | | | | | | | |
Additionally, the Bank has five remote ATM locations. The amount of monthly rent at these locations is minimal.
16
(1) This is the termination date of the current 5-year lease. The Company also has two renewal options for five years each.
(2) This is the termination date of the current 25-year lease. The Company also has three renewal options for five years each.
(3) This is the termination date of the current 10-year lease. The Company also has four renewal options for five years each.
(4) This is the termination date of the current 10-year lease. The Company also has two renewal options for five years each.
(5) This is the termination date of the current 3-year lease. The Company does not have renewal options on this property.
(6) This is the termination date of the current 3-year lease. The Company does not have renewal options on this property.
(7) This is the termination date of the current 10-year lease. The Company also has one renewal option for ten years.
(8) This is the termination date of the current 3-year lease. The Company has one renewal option for three years.
(9) This is the termination date of the first option period. The Company has two renewal options for five years each.
(10) This is the termination date of the current 10-year lease. The Company does not have renewal options on the property.
(11) This is the termination date of the current 1-year lease. The Company will continue to occupy this building on a month to month basis pending completion of construction of the new building
Item 3. Legal Proceedings
From time to time, the Company is a party to claims and legal proceedings arising in the ordinary course of business. After taking into consideration information furnished by counsel to the Company as to the current status of these claims or proceedings to which the Company is a party, management is of the opinion that the ultimate aggregate liability represented thereby, if any, will not have a material adverse affect on the financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to our shareholders’ during the fourth quarter of the fiscal year ended December 31, 2005.
17
PART II
Item 5. Market for Common Equity and Related Shareholder Matters
(a) Market Information
Community Valley Bancorp has been listed on the Nasdaq OTC Bulletin Board since June 17, 2002 (the effective date of the holding company reorganization), and Butte Community Bank was previously also listed on the Nasdaq OTC Bulletin Board. Our Common Stock trades under the symbol CVLL and the CUSIP number for such common stock is #20415P101. Previously the Butte Community Bank CUSIP number for the common stock was #12406Q107. Trading in the Company has not been extensive and such trades cannot be characterized as amounting to an active trading market. Management is aware of the following securities dealers who make a market in the Company’s stock: Hoefer & Arnett, San Francisco, California, Wachovia First Union Securities, Grass Valley, California, and Wedbush Morgan Securities, Portland, Oregon (the “Securities Dealers”).
The following table summarizes trades of the Company setting forth the approximate high and low sales prices and volume of trading for the periods indicated, based upon information provided by public sources. The information in the following table does not include trading activity between dealers. The stock prices and approximate trading volumes and cash dividends have been adjusted to give effect to the four-for-three stock split issued in March 2004 and the two-for-one stock split issued in May 2005.
Calendar | | Sale Price of the
Company’s
Common Stock | | Approximate
Trading Volume | |
Quarter Ended | | High | | Low | | Shares | |
March 31, 2004 | | 16.61 | | 13.39 | | 185,172 | |
June 30, 2004 | | 16.86 | | 12.93 | | 229,268 | |
September 30, 2004 | | 14.21 | | 12.22 | | 112,006 | |
December 31, 2004 | | 13.87 | | 13.02 | | 218,190 | |
March 31, 2005 | | 14.59 | | 12.85 | | 135,200 | |
June 30, 2005 | | 15.27 | | 13.26 | | 322,700 | |
September 30, 2005 | | 15.41 | | 13.92 | | 186,500 | |
December 31, 2005 | | 15.00 | | 13.21 | | 80,600 | |
(b) Holders
On March 1, 2006 there were approximately 541 shareholders of record of the Company.
(c) Dividends
As a financial holding company which currently has no significant assets other than its equity interest in the Bank and the proceeds from the issuance of the Trust Preferred Securities previously mentioned, the Company’s ability to declare dividends depends primarily upon dividends it receives from the Bank. The Bank’s dividend practices in turn depend upon the Bank’s earnings, financial position, current and anticipated cash requirements and other factors deemed relevant by the Bank’s Board of Directors at that time.
The Company paid cash dividends quarterly totaling $1.2 million or $0.16 per share in 2005 and $1.09 million or $0.15 per share in 2004, representing 16% and 19%, respectively of the prior year’s earnings. The Company anticipates paying dividends in the future consistent with the general dividend policy which declares that dividends must meet applicable legal requirements while maintaining the minimum capital ratios established by the Company.
The policy is to declare and pay dividends of no more than 40% of its previous years net income to shareholders. However, no assurance can be given that the Bank’s and the Company’s future earnings and/or growth expectations in any given year will justify the payment of such a dividend.
The ability of the Bank’s Board of Directors to declare cash dividends is also limited by statutory and regulatory restrictions which restrict the amount available for cash dividends depending upon the earnings, financial condition and cash needs of the Bank, as well as general business conditions. A detailed discussion is located in Item 1 above.
18
(d) Stock Repurchase Plan
The Board of Directors approved a plan to repurchase up to $3,000,000 of the outstanding common stock of the Company in 2003. Stock repurchases may be made from time to time on the open market or through privately negotiated transactions. The timing of purchases and the exact number of shares to be purchased will depend on market conditions. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. No shares were repurchased under this program in 2005. During 2004, 38,470 shares of the Company’s common stock were repurchased for $502,200. No shares were repurchased under this program in 2003.
(e) Equity Compensation Plan Information
The following chart sets forth information for the fiscal year ended December 31, 2005, regarding equity based compensation plans of the Company.
| | Number of securities to be
Issued upon exercise of
outstanding options,
warrants and rights | | Weighted average exercise
price of outstanding
options, warrants and
rights | | Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a)). | |
Plan category | | (a) | | (b) | | (c) | |
Equity
compensation
plans approved
by security
holders | | 841,942 | | $ | 6.51 | | 74,677 | |
| | | | | | | |
Equity
compensation
plans not
approved by
security
holders | | None | | None | | None | |
| | | | | | | |
Total | | 841,942 | | $ | 6.51 | | 74,677 | |
During 2005, the Company did not conduct any unregistered offerings or sales of its securities. The Company did not repurchase any shares of its outstanding securities.
(f) Recent Sales of Unregistered Securities
On December 19, 2002, the Company issued an aggregate of $8,248,000 in principal amount of its Floating Rate Junior Subordinated Deferrable Interest Debentures due 2032 (the “Subordinated Debt Securities”). All of the Subordinated Debt Securities were issued to Community Valley Trust I, a Delaware statutory business trust and a wholly-owned but unconsolidated subsidiary of the Company (the “Trust”). The Subordinated Debt Securities were not registered under the Securities Act in reliance on the exemption set forth in Section 4(2) thereof. The Subordinated Debt Securities were issued to the Trust in consideration for the receipt of the net proceeds (approximately $7.75 million) raised by the Trust from the sale of $8,000,000 in principal amount of the Trust’s Floating Rate Capital Trust Pass-through Securities (the “Trust Preferred Securities”). Bear Stearns & Co. Inc. acted as the placement agent in connection with the offering of the Trust Preferred Securities for aggregate commissions of $240,000 payable by the Trust. The sale of the Trust Preferred Securities was part of a larger transaction arranged by Bear Stearns & Co. pursuant to which the Trust Preferred Securities were deposited into a special purpose vehicle along with similar securities issued by a number of other banks and the special purpose vehicle then issued its securities to the public (the “Pooled Trust Preferred Securities”). The Pooled Trust Preferred Securities were sold by Bear Stearns & Co. Inc. only (i) to those entities Bear Stearns & Co. Inc. reasonably believed were qualified institutional buyers (as defined in Rule 144A under the Securities Act), (ii) to “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) or Regulation D promulgated under the Securities Act) or (iii) in offshore transactions in compliance with Rule 903 of Regulation S under the Securities Act. The Trust Preferred Securities were not registered under the Securities Act in reliance on exemptions set forth in Rule 144A, Regulation D and Regulation S, as applicable.
19
Item 6. Selected Financial Data
The “selected financial data” for 2005 which follows is derived from the audited Consolidated Financial Statements of the Company and other data from our internal accounting system. The selected financial data should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 below. Statistical information below is generally based on average daily amounts.
Selected Financial Data
| | As of December 31, | |
| | (Dollars in thousands, except per share data) | |
| | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
Income Statement Summary | | | | | | | | | | | |
Interest income | | $ | 32,438 | | $ | 24,980 | | $ | 21,517 | | $ | 18,977 | | $ | 19,756 | |
Interest expense | | $ | 5,331 | | $ | 4,056 | | $ | 4,396 | | $ | 4,774 | | $ | 7,344 | |
Net interest income before provision for | | | | | | | | | | | |
loan losses | | $ | 27,107 | | $ | 20,924 | | $ | 17,121 | | $ | 14,203 | | $ | 12,411 | |
Provision for loan losses | | $ | 724 | | $ | 734 | | $ | 586 | | $ | 603 | | $ | 500 | |
Non-interest income | | $ | 6,711 | | $ | 6,019 | | $ | 5,950 | | $ | 6,164 | | $ | 3,659 | |
Non-interest expense | | $ | 20,925 | | $ | 16,795 | | $ | 13,877 | | $ | 12,539 | | $ | 9,335 | |
Income before provision for income taxes | | $ | 12,169 | | $ | 9,413 | | $ | 8,598 | | $ | 7,225 | | $ | 6,235 | |
Provision for income taxes | | $ | 4,971 | | $ | 3,803 | | $ | 3,329 | | $ | 2,375 | | $ | 2,424 | |
Net Income | | $ | 7,198 | | $ | 5,610 | | $ | 5,269 | | $ | 4,850 | | $ | 3,811 | |
| | | | | | | | | | | |
Balance Sheet Summary | | | | | | | | | | | |
Total loans, net | | $ | 401,221 | | $ | 339,174 | | $ | 270,231 | | $ | 229,699 | | $ | 197,875 | |
Allowance for loan losses | | $ | (4,716 | ) | $ | (4,381 | ) | $ | (3,587 | ) | $ | (3,007 | ) | $ | (2,397 | ) |
Investment securities held to maturity | | $ | 2,332 | | $ | 2,582 | | $ | 3,823 | | $ | 2,873 | | $ | 2,507 | |
Investment securities available for sale | | $ | 4,344 | | $ | 4,379 | | $ | 502 | | $ | 514 | | $ | 500 | |
Interest-bearing deposits in banks | | $ | 6,636 | | $ | 8,715 | | $ | 7,925 | | $ | 4,061 | | $ | 694 | |
Cash and due from banks | | $ | 18,988 | | $ | 21,778 | | $ | 26,205 | | $ | 15,621 | | $ | 12,402 | |
Federal funds sold | | $ | 29,015 | | $ | 46,440 | | $ | 50,605 | | $ | 57,410 | | $ | 37,270 | |
Other real estate | | | | | | $ | — | | $ | — | | $ | 12 | |
Premises and equipment, net | | $ | 11,221 | | $ | 9,027 | | $ | 8,554 | | $ | 6,653 | | $ | 5,642 | |
Total interest-earning assets | | $ | 443,548 | | $ | 401,290 | | $ | 333,086 | | $ | 294,557 | | $ | 238,846 | |
Total assets | | $ | 494,777 | | $ | 449,675 | | $ | 386,723 | | $ | 337,483 | | $ | 272,464 | |
Total interest-bearing deposits | | $ | 350,682 | | $ | 318,266 | | $ | 274,048 | | $ | 243,092 | | $ | 201,434 | |
Total deposits | | $ | 434,018 | | $ | 399,059 | | $ | 342,511 | | $ | 297,981 | | $ | 246,420 | |
Total liabilities | | $ | 453,222 | | $ | 415,144 | | $ | 356,774 | | $ | 312,103 | | $ | 251,644 | |
Total shareholders’ equity | | $ | 41,555 | | $ | 34,531 | | $ | 29,949 | | $ | 25,380 | | $ | 20,820 | |
Per Share Data (1) | | | | | | | | | | | |
Net Income | | $ | 1.00 | | $ | 0.79 | | $ | 0.75 | | $ | 0.70 | | $ | 0.57 | |
Book value per weighted average share | | $ | 5.76 | | $ | 4.86 | | $ | 4.26 | | $ | 3.67 | | $ | 3.13 | |
Cash Dividends | | $ | 0.16 | | $ | 0.15 | | $ | 0.15 | | $ | 0.11 | | $ | 0.09 | |
Weighted Average Common Shares Outstanding, Basic | | 7,166,258 | | 7,112,386 | | 7,025,290 | | 6,922,230 | | 6,646,858 | |
Weighted Average Common Shares Outstanding, Diluted | | 7,611,704 | | 7,601,092 | | 7,430,516 | | 7,279,858 | | 7,147,480 | |
| | | | | | | | | | | |
Key Operating Ratios: | | | | | | | | | | | |
Performance Ratios: | | | | | | | | | | | |
Return on Average Equity (2) | | 18.82 | % | 17.20 | % | 19.07 | % | 20.82 | % | 19.73 | % |
Return on Average Assets (3) | | 1.51 | % | 1.34 | % | 1.44 | % | 1.69 | % | 1.54 | % |
Net Interest Margin (4) | | 6.32 | % | 5.70 | % | 5.32 | % | 5.52 | % | 5.49 | % |
Dividend Payout Ratio (5) | | 16.04 | % | 20.28 | % | 20.67 | % | 17.84 | % | 14.83 | % |
Equity to Assets Ratio (6) | | 8.02 | % | 7.82 | % | 7.54 | % | 8.12 | % | 7.85 | % |
Net Loans to Total Deposits at Period End | | 92.44 | % | 84.99 | % | 78.90 | % | 77.09 | % | 80.30 | % |
Asset Quality Ratios: | | | | | | | | | | | |
Non Performing Loans to Total Loans | | 0.00 | % | 0.03 | % | 0.02 | % | 0.25 | % | 0.88 | % |
Nonperforming Assets to Total Loans and | | | | | | | | | | | |
Other Real Estate | | 0.00 | % | 0.03 | % | 0.02 | % | 0.22 | % | 0.88 | % |
Net Charge-offs to Average Loans | | 0.00 | % | 0.00 | % | 0.03 | % | 0.00 | % | 0.05 | % |
Allowance for Loan Losses to Net Loans
at Period End | | 1.16 | % | 1.16 | % | 1.19 | % | 1.16 | % | 1.07 | % |
Capital Ratios: | | | | | | | | | | | |
Tier 1 Capital to Adjusted Total Assets | | 9.8 | % | 9.5 | % | 9.9 | % | 10.4 | % | 7.7 | % |
Tier 1 Capital to Total Risk-Weighted Assets | | 11.4 | % | 11.3 | % | 12.2 | % | 12.8 | % | 10.4 | % |
Total Capital to Total Risk-Weighted Assets | | 12.5 | % | 12.5 | % | 13.3 | % | 14.0 | % | 11.6 | % |
(1) All per share data and the average number of shares outstanding have been retroactively restated on a split-adjusted basis.
(2) Net income divided by average shareholders’ equity.
(3) Net income divided by average total assets.
(4) Net interest income divided by average earning assets.
(5) Dividends declared per share divided by net income per share.
(6) Average equity divided by average total assets.
20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion presents Management’s analysis of the financial condition as of December 31, 2005 and 2004 and results of operations of the Company for each of the years in the three-year period ended December 31, 2005.(1) The discussion should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes related thereto presented elsewhere in this Form 10-K Annual Report (see Item 8).
Statements contained in this report that are not purely historical are forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, including the Company’s expectations, intentions, beliefs, or strategies regarding the future. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this document are based on information available to the Company on the date noted, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company’s actual results could materially differ from those in such forward-looking statements. Factors that could cause actual results to differ materially from those in such forward-looking statements are fluctuations in interest rates, inflation, government regulations, economic conditions, customer disintermediation and competitive product and pricing pressures in the geographic and business areas in which the Company conducts its operations.
(1) As the holding company reorganization pursuant to which the Company became the sole shareholder of the Bank was effective during June 2002, all financial information as of and for the years ended December 31, 2001 and any earlier years or periods relates to the Bank rather than the Company. Information as of and for the years ending December 31, 2002 and beyond is provided for the Bank and the Company on a consolidated basis.
Critical Accounting Policies
General
The Company’s significant accounting principles are described in Note 1 of the consolidated financial statements and are essential to understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. Community Valley Bancorp’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. Some of the Company’s accounting principles require significant judgment to estimate values of assets or liabilities. In addition, certain accounting principles require significant judgment in applying the complex accounting principles to transactions to determine the most appropriate treatment. The following is a summary of the more judgmental and complex accounting estimates and principles.
Allowance for Loan Losses (ALL)
The allowance for loan losses is management’s best estimate of the probable losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (1) SFAS No.5 which requires that losses be accrued when they are probable of occurring and estimable and (2) SFAS No. 114, which requires that losses be accrued on impaired loans based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The Company performs periodic and systematic detailed evaluations of its lending portfolio to identify and estimate the inherent risks and assess the overall collectibility. These evaluations include general conditions such as the portfolio composition, size and maturities of various segmented portions of the portfolio such as secured, unsecured, construction, and Small Business Administration (“SBA”).
21
Additional factors include concentrations of borrowers, industries, geographical sectors, loan product, loan classes and collateral types, volume and trends of loan delinquencies and non-accrual, criticized and classified assets and trends in the aggregate in significant credits identified as watch list items. There are several components to the determination of the adequacy of the ALL. Each of these components is determined based upon estimates that can and do change when the actual events occur. The Company estimates the SFAS No. 5 portion of the ALL based on the segmentation of its portfolio. For those segments that require an ALL, the Company estimates loan losses on a monthly basis based upon its ongoing loan review process and analysis of loan performance. The Company follows a systematic and consistently applied approach to select the most appropriate loss measurement methods and support its conclusions and rationale with written documentation. One method of estimating loan losses for groups of loans is through the application of loss rates to the groups’ aggregate loan balances. Such rates typically reflect historical loss experience for each group of loans, adjusted for relevant economic factors over a defined period of time. The Company evaluates and modifies its loss estimation model as needed to ensure that the resulting loss estimate is consistent with GAAP.
For individually impaired loans, SFAS No. 114 provides guidance on the acceptable methods to measure impairment. Specifically, SFAS No. 114 states that when a loan is impaired, the Company should measure impairment based on the present value of expected future principal and interest cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price or the fair value of collateral, if the loan is collateral dependent. When developing the estimate of future cash flows for a loan, the Company considers all available information reflecting past events and current conditions, including the effect of existing environmental factors.
Loan Sales and Servicing
The Company originates government guaranteed loans and mortgage loans that may be sold in the secondary market. The amounts of gains recorded on sales of loans and the initial recording of servicing assets and interest only (I/O) strips is based on the estimated fair values of the respective components. In recording the initial value of the servicing assets and the fair value of the I/O strips receivable, the Company uses estimates which are made based on management’s expectations of future prepayment and discount rates. Servicing assets are amortized over the estimated life of the related loan. I/O strips are not significant at December 31, 2005. These prepayment and discount rates were based on current market conditions and historical performance of the various pools of serviced loans. If actual prepayments with respect to sold loans occur more quickly than projected the carrying value of the servicing assets may have to be adjusted through a charge to earnings.
Stock-Based Compensation
The Company uses the intrinsic value based method for measuring compensation cost related to stock options. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date over the amount an employee must pay to acquire the stock. This cost is amortized on a straight-line basis over the vesting period of the options granted. The Company applies Accounting Principles Board Opinion (“APB”) No. 25 Accounting for Stock Issued to Employees and related interpretations in accounting for stock options. No compensation cost has been recorded in the accompanying financial statements because all options have been granted at an exercise price of no less than the fair market value at date of grant.
Revenue Recognition
The Company’s primary source of revenue is interest income, which is the difference between the interest income it receives on interest-earning assets and the interest expense it pays on interest-bearing liabilities, and (ii) fee income, which includes fees earned on deposit services, income from SBA lending, electronic-based cash management services, mortgage brokerage fee income and merchant credit card processing services. Interest income is recorded on an accrual basis. Note 1 to the Consolidated Financial Statements offers an explanation of the process for determining when the accrual of interest income is discontinued on an impaired loan.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using currently enacted tax rates applied to such taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If future income should prove non-existent or less than the amount of deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced.
22
Summary of Performance
For 2005, net income was $7.20 million, compared to the $5.61 million earned in 2004 and net income of $5.27 million in 2003. Net income per diluted share was $.95 for 2005, as compared to $.74 during 2004 and $.71 in 2003. The Company’s Return on Average Assets (“ROAA”) was 1.51% and Return on Average Equity (“ROAE”) was 18.82% in 2005, as compared to 1.34% and 17.20%, respectively, in 2004 and 1.44% and 19.07%, respectively, for 2003.
Beginning in June of 2004 the Federal Reserve Board began increasing its target rate and by year end the rate had increased by 1.25% to 5.25%. During 2005 this trend continued with the target rate reaching 7.25% by year end. This upward movement in rates helped the Company achieve a better net interest margin throughout the year. Net interest income, generated by a higher level of average earning assets and favorable changes in the Company’s deposit mix, increased by $6.2 million from 2004 to 2005. Moreover, the relatively stable long-term market rates allowed the Company to maintain a steady volume of mortgage loans, which we were able to sell at substantial gains. The Company was also able to sell several USDA Business and Industry guaranteed loans and SBA loans for substantial gains.
Results of Operations
Net Interest Income and Net Interest Margin
The Company earns income from two primary sources. The first is net interest income brought about by income from the successful deployment of earning assets less the costs of interest-bearing liabilities. The second is non-interest income, which generally comes from customer service charges and fees, but can also result from non-customer sources such as gains on loan sales. The majority of the Company’s expenses are operating costs which relate to providing a full range of banking services to our customers.
Net interest income, which is simply total interest income (including fees) less total interest expense, was $27.1 million in 2005 compared to $20.9 million and $17.1 million in 2004 and 2003, respectively. This represents an increase of 29.7% in 2005 over 2004 and an increase of 22.2% in 2004 over 2003. The amount by which interest income exceeds interest expense depends on several factors. Among those factors are yields on earning assets, the cost of interest-bearing liabilities, the relative volume of total earning assets and total interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. Change in the amount and mix of interest-earning assets and interest-bearing liabilities is referred to as “volume change.” Change in interest rates earned on assets and rates paid on deposits and other borrowed funds is referred to as “rate change.”
The Volume and Rate Variances table which follows sets forth the dollar amount of changes in interest earned and paid for each major category of interest-earning assets and interest-bearing liabilities and the amount of change attributable to changes in average balances (volume) or changes in average interest rate. The calculation is as follows: the change due to increase or decrease in volume is equal to the increase or decrease in the average balance times the prior period’s rate. The change due to an increase or decrease in the rate is equal to the increase or decrease in the average rate times the current period’s balance. The variances attributable to both the volume and rate changes have been allocated to the change in rate.
23
| | Years Ended December 31, | |
| | 2005 over 2004 | | 2004 over 2003 | |
| | Increase(decrease) due to | | Increase(decrease) due to | |
Volume & Rate Variances | | Volume | | Rate | | Net | | Volume | | Rate | | Net | |
(dollars in thousands) | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Earning Assets: | | | | | | | | | | | | | |
Loans | | $ | 5,201 | | $ | 1,701 | | $ | 6,902 | | $ | 4,795 | | $ | (1,280 | ) | $ | 3,515 | |
Federal funds sold | | $ | (111 | ) | $ | 566 | | $ | 455 | | $ | (207 | ) | $ | 61 | | $ | (146 | ) |
Investment Securities: | | | | | | $ | — | | | | | | $ | — | |
Taxable | | $ | 40 | | $ | 9 | | $ | 49 | | $ | 102 | | $ | (55 | ) | $ | 47 | |
Non-taxable(1) | | $ | 65 | | $ | (8 | ) | $ | 57 | | $ | 7 | | $ | (2 | ) | $ | 5 | |
Deposits in banks | | $ | (26 | ) | $ | 21 | | $ | (5 | ) | $ | 79 | | $ | (37 | ) | $ | 42 | |
Total earning assets | | $ | 5,169 | | $ | 2,289 | | $ | 7,458 | | $ | 4,776 | | $ | (1,313 | ) | $ | 3,463 | |
| | | | | | | | | | | | | |
Interest-Bearing Liabilities | | | | | | | | | | | | | |
Interest bearing deposits: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Demand - interest bearing | | $ | 69 | | $ | 138 | | $ | 207 | | $ | 233 | | $ | (544 | ) | $ | (311 | ) |
Savings Accounts | | $ | 36 | | $ | (1 | ) | $ | 35 | | $ | 38 | | $ | (14 | ) | $ | 24 | |
Certificates of Deposit | | $ | 502 | | $ | 339 | | $ | 841 | | $ | 118 | | $ | (170 | ) | $ | (52 | ) |
Total interest bearing deposits | | $ | 607 | | $ | 476 | | $ | 1,083 | | $ | 389 | | $ | (728 | ) | $ | (339 | ) |
Borrowed funds: | | | | | | $ | — | | | | | | $ | — | |
Other Borrowings | | $ | 8 | | $ | 184 | | $ | (1 | ) | $ | (5 | ) | $ | 4 | | $ | (1 | ) |
Total Borrowed Funds | | $ | 8 | | $ | 184 | | $ | 192 | | $ | (5 | ) | $ | 4 | | $ | (1 | ) |
Total Interest Bearing Liabilities | | $ | 615 | | $ | 660 | | $ | 1,275 | | $ | 384 | | $ | (724 | ) | $ | (340 | ) |
Net Interest Margin/Income | | $ | 4,554 | | $ | 1,629 | | $ | 6,183 | | $ | 4,392 | | $ | (589 | ) | $ | 3,803 | |
(1) Yields on tax exempt income have not been computed on a tax equivalent basis.
The Company’s net interest margin is its net interest income expressed as a percentage of average earning assets. The Company’s net interest margin for 2005 was 6.32% an increase of 62 basis points from the 5.70% reported in 2004. For the year 2003, this margin was 5.32%. The following Distribution, Rate and Yield table shows, for each of the past three years, the rates earned on each component of the Company’s investment and loan portfolio and the rates paid on each segment of the Company’s interest bearing liabilities. That same table also shows the Company’s average daily balances for each principal category of assets, liabilities and shareholders’ equity, the amount of interest income or interest expense, and the average yield or rate for each category of interest-earning asset and interest-bearing liability along with the net interest margin for each of the reported periods.
24
Distribution, Rate & Yield
| | Year Ended December 31, | |
| | 2005(a) | | 2004(a) | | 2003(a) | |
(dollars in thousands) | | Average
Balance | | Income/
Expense | | Average
Rate | | Average
Balance | | Income/
Expense | | Average
Rate | | Average
Balance | | Income/
Expense | | Average
Rate | |
Assets | | | | | | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | | | | |
Federal Funds Sold | | $ | 30,066 | | $ | 943 | | 3.14 | % | $ | 38,945 | | $ | 488 | | 1.25 | % | $ | 57,811 | | $ | 634 | | 1.10 | % |
Taxable | | $ | 5,793 | | $ | 199 | | 3.45 | % | $ | 4,575 | | $ | 151 | | 3.30 | % | $ | 2,308 | | $ | 104 | | 4.51 | % |
Non-taxable(1) | | $ | 2,289 | | $ | 111 | | 4.85 | % | $ | 1,039 | | $ | 54 | | 5.20 | % | $ | 902 | | $ | 49 | | 5.43 | % |
Deposits in Banks | | $ | 7,918 | | $ | 239 | | 3.02 | % | $ | 8,862 | | $ | 244 | | 2.75 | % | $ | 6,371 | | $ | 201 | | 3.15 | % |
Total Investments | | $ | 46,066 | | $ | 1,492 | | 3.24 | % | $ | 53,421 | | $ | 937 | | 1.75 | % | $ | 67,392 | | $ | 988 | | 1.47 | % |
Loans: | | | | | | | | | | | | | | | | | | | |
Agricultural | | $ | 25,388 | | $ | 2,032 | | 8.00 | % | $ | 26,287 | | $ | 1,909 | | 7.26 | % | $ | 22,573 | | $ | 1,671 | | 7.40 | % |
Commercial | | $ | 63,051 | | $ | 5,827 | | 9.24 | % | $ | 60,261 | | $ | 4,996 | | 8.29 | % | $ | 55,694 | | $ | 4,605 | | 8.27 | % |
Real Estate | | $ | 263,141 | | $ | 20,967 | | 7.97 | % | $ | 203,675 | | $ | 15,579 | | 7.65 | % | $ | 156,452 | | $ | 12,866 | | 8.22 | % |
Consumer | | $ | 31,079 | | $ | 2,120 | | 6.82 | % | $ | 23,689 | | $ | 1,559 | | 6.58 | % | $ | 19,963 | | $ | 1,386 | | 6.94 | % |
Total Loans | | $ | 382,659 | | $ | 30,946 | | 8.09 | % | $ | 313,912 | | $ | 24,043 | �� | 7.66 | % | $ | 254,682 | | $ | 20,528 | | 8.06 | % |
Total Earning Assets(2) | | $ | 428,725 | | $ | 32,438 | | 7.57 | % | $ | 367,333 | | $ | 24,980 | | 6.80 | % | $ | 322,074 | | $ | 21,516 | | 6.68 | % |
Non-Earning Assets | | $ | 48,167 | | | | | | $ | 49,825 | | | | | | $ | 44,259 | | | | | |
Total Assets | | $ | 476,892 | | | | | | $ | 417,158 | | | | | | $ | 366,333 | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | | | | |
Interest-Bearing Deposits: | | | | | | | | | | | | | | | | | | | |
NOW | | $ | 143,250 | | $ | 934 | | 0.65 | % | $ | 136,612 | | $ | 811 | | 0.59 | % | $ | 121,289 | | $ | 1,050 | | 0.87 | % |
Savings | | $ | 36,759 | | $ | 181 | | 0.49 | % | $ | 29,463 | | $ | 145 | | 0.49 | % | $ | 22,409 | | $ | 121 | | 0.54 | % |
Money Market | | $ | 41,795 | | $ | 368 | | 0.88 | % | $ | 37,820 | | $ | 284 | | 0.75 | % | $ | 29,494 | | $ | 356 | | 1.21 | % |
TDOA’s, and IRA’s | | $ | 6,434 | | $ | 183 | | 2.84 | % | $ | 6,895 | | $ | 177 | | 2.57 | % | $ | 7,117 | | $ | 201 | | 2.82 | % |
Certificates of Deposit < $100,000 | | $ | 54,005 | | $ | 1,510 | | 2.80 | % | $ | 45,681 | | $ | 1,032 | | 2.26 | % | $ | 50,744 | | $ | 1,343 | | 2.65 | % |
Certificates of Deposit > $100,000 | | $ | 47,417 | | $ | 1,492 | | 3.15 | % | $ | 36,854 | | $ | 1,136 | | 3.08 | % | $ | 28,300 | | $ | 853 | | 3.01 | % |
Total Interest-Bearing Deposits | | $ | 329,660 | | $ | 4,668 | | 1.42 | % | $ | 293,325 | | $ | 3,585 | | 1.22 | % | $ | 259,353 | | $ | 3,924 | | 1.51 | % |
Borrowed Funds: | | | | | | | | | | | | | | | | | | | |
Other Borrowings | | $ | 9,095 | | $ | 663 | | 7.29 | % | $ | 8,935 | | $ | 471 | | 5.27 | % | $ | 9,038 | | $ | 472 | | 5.22 | % |
Total Borrowed Funds | | $ | 9,095 | | $ | 663 | | 7.29 | % | $ | 8,935 | | $ | 471 | | 5.27 | % | $ | 9,038 | | $ | 472 | | 5.22 | % |
Total Interest Bearing Liabilities | | $ | 338,755 | | $ | 5,331 | | 1.57 | % | $ | 302,260 | | $ | 4,056 | | 1.34 | % | $ | 268,391 | | $ | 4,396 | | 1.64 | % |
Demand Deposits | | $ | 89,325 | | | | | | $ | 77,225 | | | | | | $ | 66,347 | | | | | |
Other Liabilities | | $ | 10,560 | | | | | | $ | 5,066 | | | | | | $ | 3,961 | | | | | |
Shareholders’ Equity | | $ | 38,252 | | | | | | $ | 32,607 | | | | | | $ | 27,634 | | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 476,892 | | | | | | $ | 417,158 | | | | | | $ | 366,333 | | | | | |
| | | | | | | | | | | | | | | | | | | |
Interest Income/Earning Assets | | | | | | 7.57 | % | | | | | 6.80 | % | | | | | 6.68 | % |
Interest Expense/Earning Assets | | | | | | 1.24 | % | | | | | 1.10 | % | | | | | 1.36 | % |
Net Interest Margin(3) | | | | $ | 27,107 | | 6.32 | % | | | $ | 20,924 | | 5.70 | % | | | $ | 17,120 | | 5.32 | % |
(a) Average balances are obtained from the best available daily or monthly data.
(1) Yields on tax exempt income have not been computed on a tax equivalent basis.
(2) Non-accrual loans have been included in total loans for purposes of total earning assets.
(3) Represents net interest income as a percentage of average interest-earning assets.
(4) Yields and amounts earned on loans include loan fees of $2,453,000, $2,303,000 and $1,954,000 for the years ended December 31, 2005, 2004 and 2003 respectively.
During 2005, the Company’s net interest margin improved primarily as a result of the growth in and change in the mix of earning assets both investments and loans that contributed to an overall increase in net interest margin. On an average basis, the rates on loans increased by 43 basis points resulting in an increase in interest income of $1.7 million. This increase in rates was augmented by the increase in the average volume of loans of $69 million that generated an additional $5.2 million in loan related interest income. Overall interest income on earning assets increased by $7.5 million.
25
A large portion of the Bank’s loans carry variable rates and re-price immediately, versus a large base of core deposits which are generally slower to re-price. Due to the favorable changes in the Company’s mix of deposits from the growth in average balances of NOW, savings and money market accounts, the Company was able to increase the overall level of deposits while controlling interest expense. The average rates paid on interest bearing deposits for 2005 was 1.42% compared to 1.22% in 2004 and 1.51% in 2003. The changes in rates in 2005 compared to 2004 were primarily due to the changes in interest rate brought on by Fed actions as discussed previously. The average rates that are paid on deposits generally trail behind these money market rate changes for three reasons: (1) financial institutions do not try to change deposit rates with each small increase or decrease in short-term rates; (2) in the low interest rate environment of 2002 through 2004, banks were not able to decrease deposit rates as much as the Fed decreased its Federal funds target rates; and (3) with time deposit accounts, even when new offering rates are established, the average rates paid during the year are a blend of the rate paid on individual accounts. Only new accounts and those that mature and are renewed will bear the new rate. On an average basis, NOW account deposits were up $6.6 million, savings account deposits were up $7.3 million, money market account deposits were up $4.0 million and certificate of deposit balances were up $18.8 million. Average non interest bearing demand deposits balances also increased by $12.1 million or 15.7%, from 2004 to 2005.
From 2004 to 2005, the Company’s average loan portfolio grew by approximately $69 million, or 23.3%, building on the growth of $59 million, or 23.3% from 2003 to 2004. The earnings on that growth, net of associated funding costs, are a significant contributor to net interest income. Additionally, loan balances, which are the highest yielding component of the Company’s earning assets, increased during 2005 as a portion of the Company’s average asset base. During 2005, the loan portfolio averaged 80.2% of total assets, while for 2004 and 2003 such balances represented 75.3% and 69.5%, respectively, of average assets.
Based on these indications and current economic conditions, the Company expects moderate increases in the rates paid on interest-bearing liabilities and rates earned on both the investment and loan portfolio during 2006. In order to fund the loan portfolio growth anticipated in 2006, it is anticipated that the Company’s net interest margin will experience some compression as we will have to pay higher rates on deposits to attract the funds necessary for that growth. Net interest income should increase if loans grow as planned even if the loan growth is funded by higher priced deposits. However, no assurance can be given that this will, in fact, occur.
Non-interest Income and Non-interest Expense
For the year 2005, non-interest income increased by $693,000 or (11.5%) to $6,711,000 as compared to $6,019,000 for 2004. Non interest income in 2003 was $5,950,000. The primary traditional sources of non-interest income for the Company are service charges on deposit accounts, gains on the sale of loans, loan servicing income, alternative investment fees earned on the sales of non-deposit investment products and merchant credit card fees. Service charges on deposit accounts and loan sales income in 2005 accounted for 35.0% and 27.8%, respectively, of total non-interest income, as compared to 34.7% and 30.3%, respectively, for 2004 and 23.5% and 46.8%, respectively, for 2003. Loan servicing income, alternative investment fees and merchant credit card fees for 2005 were 6.3%, 7.7% and 5.8% respectively, of total non-interest income, as compared to 6.4%, 7.1% and 5.1%, respectively, for 2004 and 6.4%, 3.7% and 5.8%, respectively, for 2003.
The primary source of non-interest income during 2005 was from service charges on deposit accounts followed closely by the gain recognized on the sale of loans. The increase in service charges on deposit accounts was primarily a result of the fees charged on additional deposit accounts opened during the year, an overall increase in the fee structure charged for services and the overdraft privilege deposit product which on a year over year basis increased $361,000. Loan sales income increased $169,000 from $1,637,000 in 2004 to $1,806,000 in 2005. This was a result of the higher volume of mortgage loans and government guaranteed loans originated and sold during 2005. Mortgage loan activity was still vigorous in 2005 and fees derived from the sale of these loans increased. We anticipate sales of existing homes continuing throughout 2006 as mortgage rates remain attractive and the construction of new homes continues. The loan portfolio also includes loans which are 75% to 90% guaranteed by the Small Business Administration (SBA), U.S. Department of Agriculture, Rural Business-Cooperative Service (RBS) and Farm Services Agency (FSA). The guaranteed portion of these loans may be sold to a third party, with the Company retaining the unguaranteed portion. The Company generally receives a premium in excess of the adjusted carrying value of the loan at the time of sale.
The portfolio of real estate loans being serviced by the Company declined by 3% from 2004 to 2005. The portfolio of SBA, RBS and FSA government guaranteed loans being serviced by the Company declined by 8% from 2004 to 2005. These reductions resulted in a decrease in loan servicing income of $90,000 from $571,000 in 2004 to $481,000 in 2005.
Alternative investment fees earned on the sales of non-deposit investment products increased by $92,000 in 2005 compared to 2004 primarily as a result of aggressive sales techniques and excellent referrals from the branch network.
26
Merchant credit card fees increased by $53,000 from 2004 to 2005, but were approximately the same percentage of average earning assets. Through more aggressive marketing efforts of this product, management expects income from this area to increase somewhat in 2006.
The Company is increasingly focused on enhancing its fee income. Based on the Company’s efficiency ratio of 61.6% for 2005, 62.1% for 2004, and 60% for 2003 as compared to the 55% and lower ratios of certain major financial institutions, it is expected that this activity will continue for the foreseeable future.
The Company’s total non-interest expense increased to $20.9 million in 2005, as compared to $16.8 million in 2004, and $13.9 million in 2003.
The largest dollar increase in non-interest expense was in salaries and employee benefits, which increased by $2,290,000, or 22.9% from 2004 to 2005. This increase resulted from normal cost of living raises, salaries paid to employees for a full year in 2005 at the three branch offices opened during 2004 in Red Bluff, Marysville and Colusa as well as the branch office in Corning opened in March, 2005 and the branch office opened in Redding in September, 2005. We also opened a Loan Production Office in the city of Gridley in July, 2005. Commissions paid to Butte Community Bank’s Real Estate Loan agents and staffing additions made during the year as the Company continued to grow also contributed to the increase. The increase in salaries and benefits in 2004 compared to 2003 was $1,829,000 or 22.4%. Full time equivalent employees increased to 240 at December 31, 2005 from 204 at December 31, 2004 and 177 at December 31, 2003. Benefit costs and employer taxes increased commensurate with the salaries. It is management’s opinion that the Company can achieve significant growth in loans and deposits with the staff as it exists. Additional increases in staff will take place during 2006 as the Company moves its branches in Red Bluff, Marysville, and Corning to new larger locations and with the opening of an additional full service branch in Redding during the third quarter.
Occupancy and equipment expenses were $2,969,000, an increase of $444,000 or 18% when compared to the 2004 total of $2,525,000. Much of the increase in occupancy expense was related to furniture, fixtures and equipment for the new Red Bluff, Marysville, Colusa opened during 2004, and the Corning and Redding branch offices opened in 2005. The lease agreements and remodeling costs associated with these offices, also added to the year over year increase. The increase in occupancy expenses in 2004 compared to 2003 was $488,000 or 24%.
The majority of the increase in professional services costs of $402,000 from 2004 to 2005 relates to outsourcing audit work and the application process for the Company to join the NASDAQ exchange. The increase in 2004 compared to 2003 was due to outsourcing of audit work. We anticipate these costs may go up substantially in 2006 as we go through the process of implementing Sarbanes-Oxley 404 compliance. Advertising and marketing expenses increased by 36% in 2005 from 2004 after a slight increase in 2004 from 2003 as we promoted the Bank within the areas we expanded to.
Expenses representing telephone and data communications, postage and mail, stationery and supplies, director fees and retirement accruals, advertising and promotion, and other expenses totaled $4,651,000 for 2005 compared to $3,657,000 in 2004 and $3,162,000 in 2003, an increase of 27.2% and 15.7% on a year over year basis. Management considers this increase in expenses commensurate with the growth of the Company.
27
Non Interest Income/Expense
(dollars in thousands, unaudited)
| | 2005 | | % of Total | | 2004 | | % of Total | | 2003 | | % of Total | |
OTHER OPERATING INCOME: | | | | | | | | | | | | | |
Service charges on deposit accounts | | $ | 2,351 | | 35.03 | % | $ | 2,086 | | 34.66 | % | $ | 1,397 | | 23.48 | % |
Gain on sale of loans | | $ | 1,806 | | 26.91 | % | $ | 1,637 | | 27.20 | % | $ | 1,978 | | 33.24 | % |
Loan servicing income | | $ | 481 | | 7.17 | % | $ | 571 | | 9.49 | % | $ | 1,185 | | 19.92 | % |
Alternative investment fees | | $ | 520 | | 7.75 | % | $ | 428 | | 7.11 | % | $ | 218 | | 3.66 | % |
Merchant card processing fees | | $ | 390 | | 5.81 | % | $ | 337 | | 5.60 | % | $ | 343 | | 5.76 | % |
Earnings from cash surrender value of bank owned life insurance | | $ | 294 | | 4.38 | % | $ | 284 | | 4.72 | % | $ | 380 | | 6.39 | % |
Other | | $ | 869 | | 12.95 | % | $ | 675 | | 11.22 | % | $ | 449 | | 7.55 | % |
Total non-interest income | | $ | 6,711 | | 100.00 | % | $ | 6,018 | | 100.00 | % | $ | 5,950 | | 100.00 | % |
As a percentage of average earning assets | | | | 1.57 | % | | | 1.64 | % | | | 1.85 | % |
| | | | | | | | | | | | | |
OTHER OPERATING EXPENSES: | | | | | | | | | | | | | |
Salaries and employee benefits | | $ | 12,270 | | 58.64 | % | $ | 9,980 | | 59.42 | % | $ | 8,151 | | 58.70 | % |
Occupancy and equipment | | $ | 2,969 | | 14.19 | % | $ | 2,525 | | 15.03 | % | $ | 2,037 | | 14.67 | % |
Professional fees | | $ | 1,035 | | 4.95 | % | $ | 633 | | 3.77 | % | $ | 537 | | 3.87 | % |
Telephone and postage | | $ | 580 | | 2.77 | % | $ | 511 | | 3.04 | % | $ | 498 | | 3.59 | % |
Stationery & supply costs | | $ | 545 | | 2.60 | % | $ | 521 | | 3.10 | % | $ | 549 | | 3.95 | % |
Director fees and retirement accrual | | $ | 469 | | 2.24 | % | $ | 408 | | 2.43 | % | $ | 357 | | 2.57 | % |
Advertising and promotion | | $ | 412 | | 1.97 | % | $ | 302 | | 1.80 | % | $ | 277 | | 1.99 | % |
Other | | $ | 2,645 | | 12.64 | % | $ | 1,915 | | 11.40 | % | $ | 1,481 | | 10.66 | % |
Total non-interest expense | | $ | 20,925 | | 100.00 | % | $ | 16,795 | | 100.00 | % | $ | 13,887 | | 100.00 | % |
As a % of average earning assets | | | | 5.70 | % | | | 4.57 | % | | | 4.31 | % |
Provision for Loan Losses
Credit risk is inherent in the business of making loans. The Company sets aside an allowance for loan losses through charges to earnings. The charges are shown in the income statements as provisions for loan losses, and specifically identifiable and quantifiable losses are immediately charged off against the allowance.
The Company’s provisions for loan losses and undisbursed commitments in 2005, 2004, and 2003 were $825,000, $790,000, and $655,000 respectively. The loan loss provision is determined by conducting a monthly evaluation of the adequacy of the Company’s allowance for loan losses, and charging the shortfall, if any, to the current month’s expense. This has the effect of creating variability in the amount and frequency of charges to the Company’s earnings. The procedures for monitoring the adequacy of the allowance, as well as detailed information concerning the allowance itself, are included below under “Allowance for Loan Losses.”
Income Taxes
As indicated in Note 13 in the Notes to the Consolidated Financial Statements, the provision for income taxes is the sum of two components, the provision for current taxes and deferred taxes. The provision for current taxes results from applying the current tax rate to taxable income, and is in essence the actual current income tax liability. Some items of income and expense are recognized in different years for tax purposes than when applying accounting principles generally accepted in the United States of America, however, leading to differences between the Company’s actual tax liability and the amount accrued for this liability based on book income. These temporary timing differences comprise the deferred portion of the Company’s tax provision.
Most of the Company’s temporary differences involve recognizing more expenses in its financial statements than it has been allowed to deduct for tax purposes, and therefore the Company normally carries a net deferred tax asset on its books. At December 31, 2005, the Company’s $4.2 million net deferred tax asset was primarily due to temporary differences in the reported allowance for loan losses, deferred compensation, and future benefit of state tax deduction offset by the temporary differences related to certain deferred tax liabilities.
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Financial Condition
The following discussion of the financial condition of the Company is grouped into earning assets, comprised of loans and investments; non-earning assets, comprised of cash and due from banks, premises and equipment and other assets; liabilities, consisting of deposits and other borrowings; capital resources; and liquidity and market risk. Each section provides details where applicable on volume, rates of change, and significance relative to the overall activities of the Company.
A comparison between the summary year-end balance sheets for 2005 through 2001 was presented previously in the table of Selected Financial Data (see Item 6 above). As indicated in that table, the Company’s total assets, loans, deposits, and shareholders’ equity have grown each year for the past four years, with asset growth, in terms of total dollars, most pronounced in 2002 when the Company grew by $65 million, or 23.8%. Growth in the Company’s total assets over the past year approximated $45 million, or 10.0%, as compared to growth in 2004 of $63 million or 16.3%.
On the liability side, the deposit mix remained relatively unchanged in 2005. The average rates paid only increased 23 basis points as the re-pricing of time sensitive deposits lagged the increases in the interest rate environment. This resulted in a positive impact on the Company’s net interest margin. Throughout 2005 deposit growth was achieved in our newer markets in Red Bluff and Corning and in our more seasoned Yuba City and Chico branches. In our Paradise market we realized a decline in deposits which is being addressed during 2006 with campaigns to recapture the lost market share. The Oroville market share remained stable during 2005.
Loan Portfolio
The Company offers a wide variety of loan types and terms to customers along with very competitive pricing and quick delivery of the credit decision. The Company’s loan portfolio represents the single largest portion of invested assets, substantially greater than the investment portfolio or any other asset category. At December 31, 2005, gross loans represented 82.3% of total assets, as compared to 76.4% and 70.8% at December 31, 2004 and 2003, respectively. The quality and diversification of the Company’s loan portfolio are important considerations when reviewing the Company’s results of operations.
The Selected Financial Data table in Item 6 reflects the net amount of loans outstanding at December 31st for each year between 2001 and 2005. The Loan Distribution table which follows sets forth the amount of the Company’s total loans outstanding in each category at the dates indicated.
Loan Portfolio Composition
The following table sets forth the composition of the Company’s loan portfolio by type as of the dates indicated:
Loan Distribution
(dollars in thousands)
| | As of December 31, | |
| | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
Agricultural | | $ | 24,803 | | $ | 22,177 | | $ | 20,820 | | $ | 18,935 | | $ | 19,407 | |
Commercial | | $ | 61,162 | | $ | 58,662 | | $ | 57,739 | | $ | 48,661 | | $ | 42,517 | |
Real estate - mortgage | | $ | 173,449 | | $ | 146,876 | | $ | 111,249 | | $ | 82,057 | | $ | 52,315 | |
Real estate - construction | | $ | 111,130 | | $ | 90,643 | | $ | 63,345 | | $ | 64,565 | | $ | 68,943 | |
Installment | | $ | 36,501 | | $ | 26,219 | | $ | 21,698 | | $ | 19,325 | | $ | 17,764 | |
| | $ | 407,045 | | $ | 344,577 | | $ | 274,851 | | $ | 233,543 | | $ | 200,946 | |
| | | | | | | | | | | |
Deferred loan origination fees, net | | $ | (1,108 | ) | $ | (1,022 | ) | $ | (1,033 | ) | $ | (837 | ) | $ | (674 | ) |
Allowance for loan losses | | $ | (4,716 | ) | $ | (4,000 | ) | $ | (3,262 | ) | $ | (3,007 | ) | $ | (2,397 | ) |
| | $ | 401,221 | | $ | 339,555 | | $ | 270,556 | | $ | 229,699 | | $ | 197,875 | |
| | | | | | | | | | | |
Percentage of Total Loans | | | | | | | | | | | |
Agricultural | | 6.09 | % | 6.44 | % | 7.58 | % | 8.11 | % | 9.66 | % |
Commercial | | 15.03 | % | 17.02 | % | 21.01 | % | 20.84 | % | 21.16 | % |
Real Estate - mortgage | | 42.61 | % | 42.63 | % | 40.48 | % | 35.13 | % | 26.03 | % |
Real Estate - construction | | 27.30 | % | 26.31 | % | 23.05 | % | 27.65 | % | 34.31 | % |
Installment | | 8.97 | % | 7.60 | % | 7.88 | % | 8.27 | % | 8.84 | % |
| | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % |
29
As reflected in the Loan Distribution table, aggregate loan balances have increased $203 million, or 103%, over the last four years. The largest percentage growth during 2005 came in installment loans while real estate mortgages showed the largest dollar volume increase.
Loan growth in the Company’s immediate market has been oriented toward loans secured by real estate, commercial loans, including Small Business Administration loans, as well as consumer loans. As a result, these areas have comprised the major portion of the Company’s loan growth over the past few years. Loans secured by real estate grew by $47 million, or 20%, and commercial loans grew by $2.5 million, or 4.3%, during 2005. Loans secured by real estate and commercial loans comprised 69.9% and 15%, respectively, of the Bank’s total loan portfolio at the end of 2005.
The Company’s commercial loans are centered in locally oriented commercial activities in the markets where the Company has a presence. Additionally, the Company has a Government Lending Division dedicated to its SBA product and its Business and Industry (B&I) Guaranteed Loan Program. For the fiscal year ended September 30, 2004, the Company was named the number two USDA Business and Industry lender in California and the number nine lender for the entire United States by originating over $10.8 million in loans. The Company is also designated as an SBA Preferred Lender, which means it has the authority to underwrite and approve SBA loans locally. This recognition lends credence to the Company’s success in meeting the needs of smaller business owners in the communities in which the Company conducts its banking activities.
The most significant shift in the loan portfolio mix over the past five years has been in loans secured by real estate mortgages, which increased from 26.0% of total loans at the end of 2001 to 42.6% of total loans at the end of 2005. Real estate lending is an important part of the Company’s focus, and is likely to remain so for the immediate future. Commercial loans, however, declined to just 15.0% of total loan balances by the end of 2005 from 21.2% at the end of 2001, and agricultural loans dropped during the same period to 6.1% of the Company’s total loan balances from 9.7%. The decline in the percentage of agricultural loans to total loans over the last few years has been due to the growth in the other lending areas outpacing the growth in the agricultural lending. We continue to have the same borrowing relationships year after year and have not substantially expanded this part of our business.
Another important aspect of the Company’s loan business has been that of residential real estate loans which were generated internally by the real estate mortgage loan department and then sold in the secondary market to government sponsored enterprises or other long-term lenders. The Company has consistently been among the largest real estate mortgage lenders in Butte County for the past several years. During 2005, the Company originated and sold aggregate balances of approximately $78 million of such loans, a $9 million increase from the $69 million originated and sold in 2004. The Company services the mortgage loans sold to the Federal National Mortgage Association (FNMA). As of December 31, 2005, aggregate balances of $157 million were being serviced as compared to $162 million at the end of 2004.
In the normal course of business, the Company makes commitments to extend credit as long as there are no violations of any condition established in the contractual arrangement. Total unused commitments to extend credit were $201 million at December 31, 2005 as compared to $148 million at December 31, 2004. These commitments represented 49% of outstanding gross loans at December 31, 2005 and 44% at December 31, 2004, respectively. The Company’s stand-by letters of credit at December 31, 2005 and 2004 were $4.9 million and $4.6 million, respectively, which represented approximately 2.4% and 3.1% of total commitments outstanding at the end of 2005 and 2004 respectively. It is not anticipated that all of these stand-by letters of credit will fund.
Approximately one half of the loans held by the Company have floating rates of interest tied to the Company’s base lending rate or to another market rate indicator so that they may be re-priced as interest rates change. The same interest rate and liquidity risks that apply to securities are also applicable to lending activity. Fixed-rate loans are subject to market risk: they decline in value as interest rates rise. The Company’s loans that have fixed rates generally have relatively short maturities or amortize monthly, which effectively lessens the market risk. The table in Note 16 to the consolidated financial statements shows that at December 31, 2005, the difference in the carrying amount of loans, i.e., their face value, is about $ 6.4 million or 1.6 % less than their fair value. At the end of 2004, the fair value of loans was about $4.3 million or 1.3% less than the carrying amount.
Because the Company is not involved with chemicals or toxins that might have an adverse effect on the environment, its primary exposure to environmental legislation is through its lending activities. The Company’s lending procedures include steps to identify and monitor this exposure to avoid any significant loss or liability related to environmental regulations.
30
Loan Maturities
The following Loan Maturity table shows the amounts of total loans outstanding as of December 31, 2005, which, based on remaining scheduled repayments of principal, are due within one year, after one year but less than five years, and in more than five years. (Non-accrual loans are intermixed within each category.)
Loan Maturity
(dollars in thousands)
| | | | | | | | | | Floating | | Fixed | |
| | One | | One | | Over | | | | rate: | | rate: | |
| | year or | | to five | | five | | | | due after | | due after | |
| | less | | years | | years | | Total | | one year | | one year | |
Agricultural | | $ | 15,560 | | $ | 8,566 | | $ | 677 | | $ | 24,803 | | $ | — | | $ | 9,243 | |
Commercial | | $ | 22,945 | | $ | 16,716 | | $ | 21,501 | | $ | 61,162 | | $ | 727 | | $ | 37,490 | |
Real Estate Mortgage | | $ | 76,222 | | $ | 87,058 | | $ | 10,169 | | $ | 173,449 | | $ | 1,306 | | $ | 95,921 | |
Real Estate Construction | | $ | 102,987 | | $ | 8,143 | | $ | — | | $ | 111,130 | | $ | — | | $ | 8,143 | |
Installment | | $ | 4,124 | | $ | 30,552 | | $ | 1,825 | | $ | 36,501 | | $ | — | | $ | 32,377 | |
| | | | | | | | | | | | | |
TOTAL | | $ | 221,838 | | $ | 151,035 | | $ | 34,172 | | $ | 407,045 | | $ | 2,033 | | $ | 183,174 | |
This schedule, which aggregates contractual principal repayments by time period, can be used in combination with the Investment Maturities table in the Investment Securities section and the Deposit Maturities table in the Deposits section to identify time periods with potential liquidity exposure. The referenced maturity schedules do not convey a complete picture of the Company’s re-pricing exposure or interest rate risk, however. For details on the re-pricing characteristics of the Company’s balance sheet and a more comprehensive discussion of the Company’s sensitivity to changes in interest rates, see the “Liquidity and Market Risk” section.
Non-performing Assets
Banks have generally suffered their most severe earnings declines as a result of customers’ inability to generate sufficient cash flow to service their debts, or as a result of the downturns in national and regional economies which have brought about declines in overall property values. In addition, certain investments which the Company may purchase have the potential of becoming less valuable as the conditions change in the obligor’s financial capacity to repay, based on regional economies or industry downturns. As a result of these types of failures, an institution may suffer asset quality risk, and may lose the ability to obtain full repayment of an obligation to the Company. Since loans are the most significant assets of the Company and generate the largest portion of revenues, the Company’s management of asset quality risk is focused primarily on loan quality.
The Company achieves a certain level of loan quality by establishing a sound credit plan, which includes defining goals and objectives and devising and documenting credit policies and procedures. These policies and procedures identify certain markets, set goals for portfolio growth or contraction, and establish limits on industry and geographic concentrations. In addition, these policies establish the Company’s underwriting standards and the methods of monitoring ongoing credit quality. Unfortunately, however, the Company’s asset-quality risk may be affected by external factors such as the level of interest rates, employment, general economic conditions, real estate values and trends in particular industries or certain geographic markets. The Company’s internal factors for controlling risk are centered in underwriting practices, credit granting procedures, training, risk management techniques, and familiarity with our loan customers as well as the relative diversity and geographic concentration of our loan portfolio.
As a multi-community, independent bank headquartered in and serving Butte County (with a smaller presence in each of Colusa, Sutter, Sacramento, Shasta, Tehama, and Yuba counties); the Company has mitigated its risk to any one segment of these Northern Sacramento Valley markets. The Company’s asset quality continues to be excellent with delinquency ratios at very low levels. The Company is optimistic that the local and regional economy will continue to perform, but no assurance can be given that this performance will in fact continue.
From time to time, Management has reason to believe that certain borrowers may not be able to repay their loans within the parameters of the present repayment term, even though, in some cases, the loans are current at the time. These loans are regarded as potential problem loans, and a portion of the allowance is assigned and/or allocated, as discussed below, to cover the Company’s exposure to loss would the borrowers indeed fail to perform according to the terms of the notes. This class of loans does not include loans in a nonaccrual status or 90 days or more delinquent but still accruing, which are shown in the table below.
31
Non-performing assets are comprised of loans on non-accrual status, loans 90 days or more past due and still accruing interest, loans restructured where the terms of repayment have been renegotiated resulting in a deferral of interest or principal and other real estate (“ORE”). Loans are generally placed on non-accrual status when they become 90 days past due as to principal or interest. Loans may be restructured by management when a borrower has experienced some change in financial status causing an inability to meet the original repayment terms and where the Company believes the borrower will eventually overcome those circumstances and repay the loan in full. ORE consists of properties acquired by foreclosure or similar means that management intends to offer for sale.
Management’s classification of a loan as non-accrual is an indication that there is reasonable doubt as to the full collectibility of principal or interest on the loan; at that point, the Company stops recognizing income from the interest on the loan and reverses any uncollected interest that had been accrued but unpaid. These loans may or may not be collateralized, but collection efforts are continuously pursued.
The following table provides information with respect to components of the Company’s non-performing assets at the date indicated. The Company has not had any loans 90 days past due and still accruing interest in any periods presented.
Non-performing Assets
(dollars in thousands)
| | As of December 31, | |
| | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
Nonaccrual Loans: | | | | | | | | | | | |
Agricultural | | $ | — | | $ | 17 | | $ | — | | $ | — | | $ | — | |
Commercial and Industrial | | $ | — | | | | $ | 46 | | $ | 134 | | $ | 1,554 | |
Real Estate | | | | | | | | | | | |
Secured by Commercial/Professional Office | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | |
Properties Including Construction and Development | | $ | — | | $ | — | | $ | — | | | | $ | 221 | |
Secured by Residential Properties | | $ | — | | $ | 84 | | $ | — | | $ | — | | $ | — | |
Secured by Farmland | | $ | — | | $ | — | | | | $ | 460 | | $ | — | |
Consumer Loans | | $ | 9 | | | | $ | 8 | | $ | — | | $ | — | |
SUBTOTAL | | $ | 9 | | $ | 101 | | $ | 54 | | $ | 594 | | $ | 1,765 | |
| | | | | | | | | | | |
Other Real Estate (ORE) | | $ | — | | $ | — | | $ | — | | | | $ | 13 | |
Total non-performing Assets | | $ | 9 | | $ | 101 | | $ | 54 | | $ | 594 | | $ | 1,778 | |
Restructured Loans | | N/A | | N/A | | N/A | | N/A | | N/A | |
Non-performing loans as % of total gross loans | | 0.00 | % | 0.03 | % | 0.02 | % | 0.25 | % | 0.88 | % |
Non-performing assets as a % of total gross | | | | | | | | | | | |
loans and other real estate | | 0.00 | % | 0.03 | % | 0.02 | % | 0.22 | % | 0.88 | % |
Total non-performing balances stood at $9,000 at the end of 2005, which was an automobile loan. This vehicle had been recovered through repossession and was expected to be sold in the first quarter of 2006. There was no ORE outstanding at December 31, 2005, 2004 or 2003. Other than the loans included as non-performing assets at December 31, 2005, the company has not identified any potential problem loans that would result in any loan being included as a non-performing asset at a future date.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of known and inherit risk in our loan portfolio. The allowance is increased by provisions charged against current earnings and reduced by net charge-offs. Loans are charged off when they are deemed to be uncollectible; recoveries are generally recorded only when cash payments are received subsequent to the charge off. The following table summarizes the activity in the allowance for loan losses for the past five years.
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Allowance For Loan Losses
(dollars in thousands)
| | As of December 31, | |
| | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
Balances: | | | | | | | | | | | |
Average gross loans outstanding during period | | $ | 382,659 | | $ | 313,912 | | $ | 254,682 | | $ | 216,953 | | $ | 194,448 | |
Gross loans outstanding at end of period | | $ | 407,045 | | $ | 344,577 | | $ | 274,851 | | $ | 233,542 | | $ | 200,946 | |
| | | | | | | | | | | |
Allowance for Loan Losses: | | | | | | | | | | | |
Balance at beginning of period | | $ | 4,000 | | $ | 3,587 | | $ | 3,007 | | $ | 2,397 | | $ | 2,000 | |
Adjustments | | | | | | | | | | | |
Provision Charged to Expense | | $ | 825 | | $ | 790 | | $ | 655 | | $ | 603 | | $ | 500 | |
| | | | | | | | | | | |
Loan Charge-offs | | | | | | | | | | | |
Agricultural | | | | | | | | | | | |
Commercial & Industrial Loans | | $ | — | | $ | 11 | | $ | 77 | | $ | — | | $ | 29 | |
Real Estate Loans | | | | | | $ | — | | $ | 4 | | $ | — | |
Consumer Loans | | $ | 9 | | $ | 12 | | $ | 4 | | $ | 3 | | $ | 95 | |
Credit Card Loans | | | | | | $ | — | | $ | — | | $ | 9 | |
Total | | $ | 9 | | $ | 23 | | $ | 81 | | $ | 7 | | $ | 133 | |
| | | | | | | | | | | |
Recoveries | | | | | | | | | | | |
Agricultural | | | | | | $ | — | | $ | — | | $ | — | |
Commercial & Industrial Loans | | $ | 1 | | $ | 15 | | $ | — | | $ | 14 | | $ | 16 | |
Real Estate Loans | | | | | | $ | — | | $ | — | | $ | — | |
Consumer Loans | | $ | — | | $ | 12 | | $ | 6 | | $ | — | | $ | 10 | |
Credit Card Loans | | | | | | $ | — | | $ | — | | $ | 4 | |
Total | | $ | 1 | | $ | 27 | | $ | 6 | | $ | 14 | | $ | 30 | |
Net Loan Charge-offs | | $ | 8 | | $ | (4 | ) | $ | 75 | | $ | (7 | ) | $ | 103 | |
Reserve for unfunded commitments | | $ | (100 | ) | $ | (381 | ) | | | | | | |
Balance at end of period | | $ | 4,717 | | $ | 4,000 | | $ | 3,587 | | $ | 3,007 | | $ | 2,397 | |
| | | | | | | | | | | |
Ratios: | | | | | | | | | | | |
Net Loan Charge-offs to Average Loans | | 0.00 | % | 0.00 | % | 0.03 | % | 0.05 | % | 0.13 | % |
Allowance for Loan Losses to Gross Loans at End of Period | | 1.16 | % | 1.16 | % | 1.31 | % | 1.29 | % | 1.19 | % |
Allowance for Loan Losses to Non-Performing Loans | | 52411.11 | % | 3960.40 | % | 6642.59 | % | 506.23 | % | 134.81 | % |
Net Loan Charge-offs to Allowance for Loan Losses at End of Period | | 0.17 | % | -0.10 | % | 2.09 | % | -0.23 | % | 4.30 | % |
Net Loan Charge-offs to Provision Charged to Operating Expense | | 0.97 | % | -0.51 | % | 11.45 | % | -1.16 | % | 20.60 | % |
We employ a systematic methodology for determining the allowance for loan losses that includes a monthly review process and monthly adjustment of the allowance. Our process includes a periodic review of individual loans that have been specifically identified as problem loans or have characteristics which could lead to impairment, as well as detailed reviews of other loans (either individually or in pools). While this methodology utilizes historical and other objective information, the establishment of the allowance for loan losses and the classification of loans are, to some extent, based on management’s judgment and experience.
Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan losses that management believes is appropriate at each reporting date. Quantitative factors include our historical loss experience, delinquency and charge-off trends, collateral values, changes in non-performing loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers’ sensitivity to interest rate movements and borrowers’ sensitivity to quantifiable external factors including commodity prices as well as acts of nature (freezes, earthquakes, fires, etc.) that occur in a particular period.
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Qualitative factors include the general economic environment in our markets and, in particular, the state of the agriculture industry and other key industries in the Northern Sacramento Valley. The way a particular loan might be structured, the extent and nature of waivers of existing loan policies, loan concentrations and the rate of portfolio growth are other qualitative factors that are considered.
Our methodology is, and has been, consistently followed. However, as we add new products, increase in complexity, and expand our geographic coverage, we expect to enhance our methodology to keep pace with the size and complexity of the loan portfolio. On an ongoing basis we engage outside firms to independently assess our methodology, and to perform independent credit reviews of our loan portfolio. The FDIC and the California Department of Financial Institutions review the allowance for loan losses as an integral part of the examination processes. Management believes that our current methodology is appropriate given our size and level of complexity. Further, management believes that the allowance for loan losses is adequate as of December 31, 2005 to cover known and inherent risks in the loan portfolio. However, fluctuations in credit quality, or changes in economic conditions or other factors could cause management to increase or decrease the allowance for loan losses as necessary.
The following table provides a summary of the allocation of the allowance for loan losses for specific loan categories at the dates indicated. The allocation presented should not be interpreted as an indication that charges to the allowance for loan losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each loan category represents the total amounts available for charge-offs that may occur within these categories. The unallocated portion of the allowance for loan losses and the total allowance is applicable to the entire loan portfolio.
Allocation of Loan Loss Allowance
(dollars in thousands)
| | As of December 31, | |
| | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
| | | | % Total (1) | | | | % Total (1) | | | | % Total (1) | | | | % Total (1) | | | | % Total (1) | |
| | Amount | | Loans | | Amount | | Loans | | Amount | | Loans | | Amount | | Loans | | Amount | | Loans | |
Agricultural | | $ | 200 | | 6.09 | % | $ | 244 | | 6.44 | % | $ | 179 | | 7.58 | % | $ | 146 | | 8.11 | % | $ | 142 | | 9.66 | % |
Commercial | | $ | 1,123 | | 15.03 | % | $ | 690 | | 17.02 | % | $ | 1,258 | | 21.01 | % | $ | 735 | | 20.84 | % | $ | 494 | | 21.16 | % |
Real Estate | | $ | 3,488 | | 69.91 | % | $ | 3,027 | | 68.93 | % | $ | 1,815 | | 63.52 | % | $ | 1,379 | | 62.78 | % | $ | 1,201 | | 60.34 | % |
Installment Loans | | $ | 386 | | 8.97 | % | $ | 420 | | 7.61 | % | $ | 335 | | 7.89 | % | $ | 747 | | 8.27 | % | $ | 560 | | 8.84 | % |
Reserve for Unfunded Commitments | | $ | (481 | ) | | | $ | (381 | ) | | | $ | (325 | ) | | | $ | (256 | ) | | | $ | (205 | ) | | |
TOTAL | | $ | 4,716 | | 100.00 | % | $ | 4,000 | | 100.00 | % | $ | 3,262 | | 100.00 | % | $ | 2,751 | | 100.00 | % | $ | 2,192 | | 100.00 | % |
(1) Represents percentage of loans in category to total loans.
At December 31, 2005, the Company’s allowance for loan losses was $4.7 million. The loan loss and undisbursed commitment provisions in 2005, 2004, and 2003 totaled $825,000, $790,000, and $655,000, respectively. Over the past five years, net charge-offs have averaged $35,000. Through the diligent efforts of our loan officers and collection personnel, the Company ended 2005 with net loan losses of $8,000, compared to net recoveries of $4,000 during 2004.
Other Loan Portfolio Information
Loan Concentrations: The concentration profile of the Company’s loans is discussed in Note 10 to the accompanying Consolidated Financial Statements.
Loan Sales and Mortgage Servicing Rights: The Company sells or brokers some of the fixed-rate single family mortgage loans it originates as well as other selected portfolio loans. Some are sold “servicing released” and the purchaser takes over the collection of the payments. However, most are sold with “servicing retained” and the Company continues to receive the payments from the borrower and forwards the funds to the purchaser. The Company earns a fee for this service. The sales are made without recourse, that is, the purchaser cannot look to the Company in the event the borrower does not perform according to the terms of the note. The Company recognizes the rights to service mortgage loans for others as separate assets. For loans originated for sale, a portion of the investment in the loan is attributed to the right to receive this fee for servicing and this value is recorded as a separate asset. Mortgage servicing assets are carried at their amortized cost, which approximates fair value. At December 31, 2005 and 2004, the amortized cost of these assets was $1,073,000 and $1,348,000 respectively.
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Investment Portfolio
The investment securities portfolio had a carrying value of $6.7 million at December 31, 2005. The Company classified its investments into two portfolios: “held-to-maturity”, and “available-for-sale”. The Company does not have any investments classified as trading. The held-to-maturity portfolio should consist only of investments that the Company has both the intention and ability to hold until maturity, to be sold only in the event of concerns with an issuer’s creditworthiness, a change in tax law that eliminates their tax exempt status or other infrequent situations as permitted under GAAP. Given the small and non complex nature of the portfolio, management does not rely heavily on these investments as a source of funds for growth in the loan portfolio.
Securities pledged as collateral on repurchase agreements, public deposits and for other purposes as required or permitted by law were $3,357,000 and $2,304,000, for December 31, 2005 and 2004, respectively.
The total investment portfolio decreased in size in 2005 to $6.7 million at the end of the year from its starting balance of $6.9 million. The Company’s investment portfolio is composed primarily of: (1) U.S. Treasury and Agency issues for liquidity and pledging; and (2) state, county and municipal obligations which provide tax free income and pledging potential. The relative distribution of these groups within the overall portfolio changed in 2005, with most of the securities purchased being classified as available-for-sale. The U.S. Treasury and Agency issues continue to be the largest portion of the total portfolio at 80%, up from 79% at the end of 2004. Municipal issues comprised 20% of total investments at the end of 2005, down slightly from 21% at the end of 2004.
The following Investment Portfolio table reflects the amortized cost and fair market values for the total portfolio for each of the categories of investments for the past three years.
Investment Portfolio
(dollars in thousands)
| | As of December 31, | |
| | 2005 | | 2004 | | 2003 | |
| | Amortized | | Fair Market | | Amortized | | Fair Market | | Amortized | | Fair Market | |
| | Cost | | Value | | Cost | | Value | | Cost | | Value | |
Held to maturity | | | | | | | | | | | | | |
US Government Agencies & Corporations | | 2,317 | | 2,332 | | 2,481 | | 2,482 | | 3,277 | | 3,270 | |
State & political subdivisions | | | | | | 101 | | 101 | | 545 | | 554 | |
Total held to maturity | | $ | 2,317 | | $ | 2,332 | | $ | 2,582 | | $ | 2,583 | | $ | 3,822 | | $ | 3,824 | |
Available for sale | | | | | | | | | | | | | |
US Government Agencies & Corporations | | 3,009 | | 2,964 | | 3,004 | | 3,002 | | 300 | | 302 | |
State & political subdivisions | | 1,356 | | 1,380 | | 1,356 | | 1,377 | | 200 | | 200 | |
Total available for sale | | $ | 4,365 | | $ | 4,344 | | $ | 4,360 | | $ | 4,379 | | $ | 500 | | $ | 502 | |
Total Investment Securities | | $ | 6,682 | | $ | 6,676 | | $ | 6,942 | | $ | 6,962 | | $ | 4,322 | | $ | 4,326 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The investment maturities table below summarizes the maturity of the Company’s investment securities and their weighted average yields at December 31, 2005. Expected remaining maturities may differ from remaining contractual maturities because obligors may have the right to repay certain obligations with or without penalties.
Investment Maturities
(dollars in thousands)
| | As of December 31, 2005 | |
| | Within One
Year | | After One
But Within Five Years | | After Five Years But
Within Ten Years | | After Ten
Years | | Total | |
| | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | |
Held to maturity | | | | | | | | | | | | | | | | | | | | | |
US Government agencies & corporations | | | | — | | 1,000 | | 3.50 | % | 1,212 | | 5.01 | % | 120 | | 5.88 | % | 2,332 | | 4.41 | % |
State & political subdivisions | | | | — | | | | | | — | | — | | — | | — | | — | | | |
Total held to maturity | | $ | — | | — | | $ | 1,000 | | 3.50 | % | 1,212 | | | | $ | 120 | | 5.88 | % | $ | 2,332 | | 4.41 | % |
Available for sale | | | | | | | | | | | | | | | | | | | | | |
US Government agencies & corporations | | 993 | | 3.01 | % | 984 | | 3.22 | % | 987 | | 4.94 | % | — | | — | | 2,964 | | 3.72 | % |
State & political subdivisions | | — | | — | | — | | | | — | | — | | 1,380 | | 4.75 | % | 1,380 | | 4.75 | % |
Total available for sale | | $ | 993 | | 3.01 | % | $ | 984 | | 3.22 | % | $ | 987 | | 4.94 | % | $ | 1,380 | | 4.75 | % | $ | 4,344 | | 4.05 | % |
Total investment securities | | $ | 993 | | 3.01 | % | $ | 1,984 | | 3.36 | % | $ | 2,199 | | 4.98 | % | $ | 1,500 | | 4.84 | % | $ | 6,676 | | 4.17 | % |
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Cash and Due From Banks
Cash on hand and balances due from correspondent banks represent the major portion of the Company’s non-earning assets. At December 31, 2005 these areas comprised 3.8% of total assets, as compared to 4.8% of total assets at December 31, 2004. The Company strives to maintain vault cash at a level consistent with the withdrawal needs of the customers. The vault cash amount for December 31, 2005 was $3.6 million.
The Company’s operating branches lie within the Federal Reserve Bank (FRB) of San Francisco’s responsibility area of check clearing activities, while the Company’s item processing activities are performed in Chico. As a result of the Federal Reserve Banks’ new Check 21 services the Company could take advantage of quicker clearing times to offset time zone and geography challenges and improve availability. With traditional paper check clearing, all non-local and country items in the 12th District receive availability that is at least one day deferred. Under the new programs becoming available from the Federal Reserve Banks, many of these items will receive immediate availability if received by the 1:00 a.m. Pacific time deadline. With file deposit deadlines starting as early as 5:00 p.m. Pacific through 9:00 a.m. Pacific time, image cash letters enable institutions on the West Coast to reduce the clearing time of many high value East Coast items by at least one business day, thereby increasing funds available for investment and reducing risk.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is charged to income over the estimated useful lives of the assets and leasehold improvements are amortized over the terms of the related lease, or the estimated useful lives of the improvements, whichever is shorter. Depreciation expense was $1,574,000 for the year ended December 31, 2005 as compared to $1,313,000 during 2004 and $934,000 during 2003. The following premises and equipment table reflects the balances by major category of fixed assets:
Premises & Equipment
(dollars in thousands)
| | As of December 31, | |
| | 2005 | | 2004 | | 2003 | |
| | Cost | | Accumulated
Depreciation | | Net Book
Value | | Cost | | Accumulated
Depreciation | | Net Book
Value | | Cost | | Accumulated
Depreciation | | Net
Book
Value | |
Land | | $ | 2,176 | | $ | — | | $ | 2,176 | | $ | 1,519 | | $ | — | | $ | 1,519 | | $ | 1,193 | | $ | — | | $ | 1,193 | |
Buildings | | $ | 6,908 | | $ | 1,425 | | $ | 5,483 | | $ | 5,761 | | $ | 1,172 | | $ | 4,589 | | $ | 5,667 | | $ | 946 | | $ | 4,721 | |
Leasehold Improvements | | $ | 994 | | $ | 386 | | $ | 608 | | $ | 841 | | $ | 248 | | $ | 593 | | $ | 690 | | $ | 168 | | $ | 522 | |
Construction in progress | | $ | 622 | | $ | — | | $ | 622 | | $ | 75 | | $ | — | | $ | 75 | | $ | 138 | | $ | — | | $ | 138 | |
Furniture and Equipment | | $ | 7,384 | | $ | 5,052 | | $ | 2,332 | | $ | 6,242 | | $ | 3,991 | | $ | 2,251 | | $ | 5,106 | | $ | 3,126 | | $ | 1,980 | |
Total | | $ | 18,084 | | $ | 6,863 | | $ | 11,221 | | $ | 14,438 | | $ | 5,411 | | $ | 9,027 | | $ | 12,794 | | $ | 4,240 | | $ | 8,554 | |
The net book value of the Company’s premises and equipment increased by $2,193,000 in 2005, primarily due to the opening of the new branches in Corning and Redding , and the Loan Office in Gridley. The Company also purchased a 14,000 square foot building in Chico that will serve as the corporate administrative headquarters and also house other service departments. This building is currently being remodeled and should be ready for occupancy in the third quarter of 2006. As a percentage of total assets, the Company’s premises and equipment was 2.3%, at the end of 2005, 2.0% at the end of 2004 and 2.2% at the end of 2003.
Deposits
The composition and cost of the Company’s deposit base are important components in analyzing the Company’s net interest margin and balance sheet liquidity characteristics, both of which are discussed in greater detail in other sections herein. Net interest margin is improved to the extent that growth in deposits can be concentrated in historically lower-cost core deposits, namely non-interest-bearing demand, NOW accounts, savings accounts and money market deposit accounts. Liquidity is impacted by the volatility of deposits or other funding instruments, or in other words their propensity to leave the institution for rate-related or other reasons. Potentially, the most volatile deposits in a financial institution are large certificates of deposit, which generally mean time deposits with balances exceeding $100,000. Because these deposits (particularly when considered together with a customer’s other specific deposits) may exceed FDIC insurance limits, depositors may select shorter maturities to offset perceived risk elements associated with deposits over $100,000. The Company’s community-oriented deposit gathering activities in Butte, Colusa, Shasta, Sutter, Tehama, and Yuba counties, however, have engendered a less volatile than usual base of depositor certificates over $100,000.
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The Company’s total deposit volume increased to $434 million at the end of 2005, as compared to $399 million at the end of 2004. Deposit growth of $35 million was achieved during 2005, both as a result of the newer branches opening and the growth of the other more established branches within the system. The mix of the deposits changed very little from 2004 to 2005. Lower cost core deposit accounts (demand deposits, NOW accounts, money market, and savings) increased by 6 % or $18 million while the higher cost certificates of deposit balances increased by 16% or $17 million. We expect increasing deposit rates and pressure from competition will impact the Company’s cost of funds and net interest margin in 2006.
As deposit rates continued to rise in 2005 from their extremely low levels in 2003, depositors gradually moved their funds out of liquid transaction accounts back into certificates of deposit. The average rates that are paid on deposits generally trail behind money market rates because financial institutions do not try to change deposit rates with each small increase or decrease in short-term rates. This trailing characteristic is stronger with time deposits, such as certificates of deposit that pay a fixed rate for some specified term, than with deposit types that have administered rates. With time deposits accounts, even when new offering rates are established, the average rates paid during the year are a blend of the rates paid on individual accounts. Only new accounts and those that mature and are renewed will bear the new rate.
The scheduled maturity distribution of the Company’s time deposits, including IRA accounts as of December 31, 2005 was as follows:
Deposit Maturity Distribution
(dollars in thousands)
| | As of December 31, 2005 | |
| | Three | | Three | | One | | Over | | | |
| | months | | to twelve | | to three | | three | | | |
| | or less | | months | | years | | Years | | Total | |
Time Certificates of Deposits < $100,000 | | $ | 12,398 | | $ | 33,988 | | $ | 13,645 | | $ | 1,131 | | $ | 61,162 | |
Other Time Deposits > $100,000 | | $ | 7,097 | | $ | 24,670 | | $ | 27,283 | | $ | 450 | | $ | 59,500 | |
| | | | | | | | | | | | | | | | |
TOTAL | | $ | 19,495 | | $ | 58,658 | | $ | 40,928 | | $ | 1,581 | | $ | 120,662 | |
| | | | | | | | | | | | | | | | | | | | | |
Notes Payable and Other Borrowings
The Company has $15 million in unsecured borrowing arrangements with two of its correspondent banks to meet short-term liquidity needs. There were no borrowings outstanding under these arrangements at December 31, 2005 and 2004.
The following summarizes the note payable to the Company’s subsidiary grantor trust at December 31, 2005:
| | (Dollars in thousands) | |
Subordinated debentures due to Community Valley Bancorp Trust I With interest adjusted and payable quarterly based on 3-month Libor plus 3.30% to a maximum of 12.5% (7.45% at December 31, 2005), redeemable beginning December 31, 2007, due December 31, 2032. | | $ | 8,248 | |
| | | | |
The Company has guaranteed, on a subordinated basis, distributions and other payments due on the trust preferred securities issued by the subsidiary grantor trust. Interest expense recognized by the Company for the years ended December 31, 2005, 2004 and 2003 related to the junior subordinated debentures was $592,000, $438,000 and $439,000, respectively. These junior subordinated debentures currently qualify as Tier 1 capital when determining regulatory risk-based capital ratios.
The ESOP obtained financing through a $1.2 million unsecured line of credit from another financial institution with the Company acting as the guarantor. The note has a variable interest rate, based on an independent index, and a maturity date of November 12, 2012. At December 31, 2005, the interest rate was 7.00%. Advances on the line of credit totaled $981,000, $835,000 at December 31, 2005 and 2004, respectively. A summary of the activity in this line of credit follows.
ESOP Note Payable | | 2005 | | 2004 | | 2003 | |
(dollars in thousands) | | | | | | | |
Balance at December 31 | | $ | 981 | | $ | 835 | | $ | 832 | |
| | | | | | | |
Average amount outstanding | | $ | 865 | | $ | 778 | | $ | 786 | |
| | | | | | | |
Maximum amount outstanding at any month end | | $ | 1,080 | | $ | 848 | | $ | 843 | |
| | | | | | | |
Average interest rate for the year | | 6.13 | % | 4.31 | % | 4.15 | % |
On June 1, 2005, Community Valley Bancorp entered into a short term, unsecured note payable in a principal amount of $800,000 in conjunction with the purchase of real property. The interest rate on the note at December 31, 2005 was 4.5%. The note was paid in full on January 4, 2006.
37
Capital Resources
At December 31, 2005, the Company had total shareholders equity of $41.6 million, comprised of $7.7 million in common stock, and $33.9 million in retained earnings. Total shareholders equity at the end of 2004 was $34.5 million. Net income has provided $18.1 million in capital over the last three years, of which $3 million or approximately 17% was distributed in dividends. The retention of earnings has been the Company’s main source of capital since 1990, however the Company issued $8.2 million in Subordinated Debentures in 2002, the proceeds of which are considered Tier 1 capital for regulatory purposes but long-term debt in accordance with GAAP.
The Company paid quarterly cash dividends totaling $1,092,000 or $.16 per share in 2005 and $1,091,000 or $.153 per share in 2004, representing 15.8% and 19.5%, respectively of the prior year’s earnings. (As the holding company reorganization became effective on May 23, 2002, all of the dividends paid prior to that date were paid by the Bank, rather than the Company.) Since the second quarter of 2001, the Bank (or the Company, as applicable) has adhered to a policy of paying quarterly cash dividends totaling about 17% of the prior year’s net earnings to the extent consistent with general considerations of safety and soundness, provided that such payments do not adversely affect the Bank’s or the Company’s financial condition and are not overly restrictive to its growth capacity. The Company anticipates paying dividends in the future consistent with the general dividend policy as described above. However, no assurance can be given that the Bank’s and the Company’s future earnings and/or growth expectations in any given year will justify the payment of such a dividend.
The Company uses a variety of measures to evaluate capital adequacy. Management reviews various capital measurements on a monthly basis and takes appropriate action to ensure that such measurements are within established internal and external guidelines. The external guidelines, which are issued by the FDIC, establish a risk-adjusted ratio relating capital to different categories of assets and off balance sheet exposures. There are two categories of capital under the FDIC guidelines: Tier 1 and Tier 2 Capital. Tier 1 Capital includes common shareholders’ equity and the proceeds from the issuance of trust-preferred securities (subject to the limitations previously discussed), less goodwill and certain other deductions, notably the unrealized net gains or losses (after tax adjustments) on securities available for sale, which are carried at fair market value. Tier 2 Capital includes preferred stock and certain types of debt equity, which the Company does not hold, as well as the allowance for loan losses, subject to certain limitations. (For a more detailed definition, see “Item 1, Business-Supervision and Regulation — Capital Adequacy Requirements” herein.)
At December 31, 2005, the Company had a Tier 1 risk based capital ratio of 11.4%, a total capital to risk-weighted assets ratio of 12.6%, and a leverage ratio of 9.8%. The Company had a Tier 1 risk-based capital ratio of 11.3%, a total risk-based capital ratio of 12.5%, and a leverage ratio of 9.5% at December 31, 2004. Note 11 of the Notes to Consolidated Financial Statements provides more detailed information concerning the Company’s capital amounts and ratios as of December 31, 2005 and 2004.
At the current time, the Bank is considered “well capitalized” under the Prompt Corrective Action standards. With the accumulation of retained earnings and the addition of regulatory capital via the issuance of Trust Preferred Securities in 2002, the Company’s regulatory capital ratios improved substantially. It is anticipated that the current level of capital will allow the Company to grow substantially and remain well capitalized, although no assurance can be given that this will be the case.
Off-Balance Sheet Items and Contractual Obligations
The Company has certain ongoing commitments under operating leases. See Note 10 to the consolidated financial statements at Item 8 of this report for the terms. These commitments do not significantly impact operating results. As of December 31, 2005 commitments to extend credit were the Company’s only financial instruments with off-balance sheet risk. Loan commitments increased to $201 million from $148 million at December 31, 2004. The commitments represent 49% of the total loans outstanding at year-end 2005 versus 44% at December 31, 2004.
38
The following chart summarizes certain contractual obligations of the Company as of December 31, 2005:
| | Less than | | | | | | More than | | | |
| | 1 year | | 1-3 years | | 3-5 years | | 5 years | | Total | |
| | | | | | | | | | | |
Subordinated debentures | | — | | — | | — | | 8,248 | | 8,248 | |
Operating lease obligations | | 630 | | 1,351 | | 1,330 | | 5,612 | | 8,923 | |
Deferred compensation (1) | | — | | — | | — | | 3,037 | | 3,037 | |
Supplemental retirement plans (1) | | 116 | | 242 | | 390 | | 1,412 | | 2,160 | |
Notes payable | | 800 | | | | | | 981 | | 1781 | |
Total contractual obligations | | $ | 1,546 | | $ | 1,593 | | $ | 1,720 | | $ | 19,290 | | $ | 24,149 | |
| | | | | | | | | | | | | | | | |
(1) These amounts represent the accrued liabilities as of December 31, 2005 under the Company’s deferred compensation and supplemental retirement plans. See Note 15 to the consolidated financial statements at Item 8 of this report for additional information related to the Company’s deferred compensation and supplemental retirement plan liabilities.
Liquidity and Market Risk Management
The Company must address on a daily basis the various and sundry factors which impact its continuing operations. Three of these factors, the economic climate which encompasses our business environment, the regulatory framework which governs our practices and procedures, and credit risk have been previously discussed. There are other risks specific to the operation of a financial institution which also need to be managed, and this section will address liquidity risk and market risk.
Liquidity refers to the Company’s ability to maintain a cash flow adequate to fund operations, and to meet obligations and other commitments in a timely and cost-effective fashion. At various times the Company requires funds to meet short-term cash requirements brought about by loan growth or deposit outflows, the purchase of assets, or liability repayments. To manage liquidity needs properly, cash inflows must be timed to coincide with anticipated outflows, or sufficient liquidity resources must be available to meet varying demands. The Company manages its own liquidity in such a fashion as to be able to meet unexpected sudden changes in levels of its assets or deposit liabilities, without maintaining excessive amounts of on-balance sheet liquidity. Excess balance sheet liquidity can negatively impact the interest margin.
An integral part of the Company’s ability to manage its liquidity position appropriately is provided by the Company’s large base of core deposits, which were generated by offering traditional banking services in the communities in its service area and which have, historically, been a very stable source of funds.
Additionally, the Company maintains $15 million in unsecured borrowing arrangements with two of its correspondent banks. The Company also has the ability to raise deposits through various deposit brokers, sell investment securities, or sell loans if required for liquidity purposes
Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company’s market risk exposure is primarily that of interest rate risk, and it has risk management policies to monitor and limit earnings and balance sheet exposure to changes in interest rates. The Company does not engage in the trading of financial instruments.
The principal objective of interest rate risk management (often referred to as “asset/liability management”) is to manage the financial components of the Company in a manner that will optimize the risk/reward equation for earnings and capital in relation to changing interest rates. In order to identify areas of potential exposure to rate changes, the Company calculates its re-pricing gap on a monthly basis. It also performs an earnings simulation analysis and a market value of portfolio equity calculation on a monthly basis to identify more dynamic interest rate risk exposures than those apparent in the standard re-pricing gap analysis.
39
Modeling software is used by the Company for asset/liability management in order to simulate the effects of potential interest rate changes on the Company’s net interest margin. These simulations can also provide both static and dynamic information on the projected fair market values of the Company’s financial instruments under differing interest rate assumptions. The simulation program utilizes specific individual loan and deposit maturities, embedded options, rates and re-pricing characteristics to determine the effects of a given interest rate change on the Company’s interest income and interest expense. Rate scenarios consisting of key rate and yield curve projections are run against the Company’s investment, loan, deposit and borrowed funds portfolios. These rate projections can be shocked (an immediate and sustained change in rates, up or down), ramped (an incremental increase or decrease in rates over a specified time period), economic (based on current trends and econometric models) or stable (unchanged from current actual levels). The Company typically uses seven standard interest rate scenarios in conducting the simulation, namely stable, an upward shock of 100, 200, and 300 basis points, and a downward shock of 100, 200, and 300 basis points.
The Company’s policy is to limit the change in the Company’s net interest margin and economic value to plus or minus 5%, 15%, and 25% upon application of interest rate shocks of 100 bp, 200 bp, and 300 bp as compared to a base rate scenario. As of December 31, 2005, the Company had the following estimated net interest margin sensitivity profile:
| | Immediate Change in Rate | | Immediate Change in Rate | | Immediate Change in Rate | |
| | +100 bp | | -100 bp | | +200 bp | | -200 bp | | +300 bp | | -300 bp | |
Net Int. Income Change | | $ | 864,000 | | $ | -901,000 | | $ | 1,732,000 | | $ | -2,380,000 | | $ | 2,604,000 | | $ | -2,659,000 | |
| | | | | | | | | | | | | | | | | | | |
The above profile illustrates that if there were an immediate increase of 200 basis points in interest rates, the Company’s annual net interest income would likely increase by about $1,732,000, or approximately 6.04%. Likewise, if there were an immediate downward adjustment of 200 basis points in interest rates, the Company’s net interest income would likely decrease by approximately $2,380,000, or 8.29%, over the next year.
The results for the Company’s December 31, 2005, balances indicate that the Company’s net interest income at risk over a one-year period and net economic value at risk from 2% shocks are within normal expectations for such sudden changes.
The amount of change is based on the profiles of each loan and deposit class, which include the rate, the likelihood of prepayment or repayment, whether its rate is fixed or floating, the maturity of the instrument and the particular circumstances of the customer. The quantification of the change in economic value is somewhat apparent in Note 16, Fair Value of Financial Instruments, in the consolidated financial statements; however such values change over time based on certain assumptions about interest rates and likely changes in the yield curve.
Selected Quarterly Financial Data
(Dollars in thousands, except per share data)
2005 Quarter | | 1st | | 2nd | | 3rd | | 4th | |
| | | | | | | | | |
Interest income | | $ | 7,054 | | $ | 7,675 | | $ | 8,583 | | $ | 9,126 | |
Net Interest income | | $ | 5,907 | | $ | 6,506 | | $ | 7,177 | | $ | 7,514 | |
Net interest income after provision for loan losses | | $ | 5,682 | | $ | 6,281 | | $ | 6,952 | | $ | 7,367 | |
| | | | | | | | | |
Net income | | $ | 1,454 | | $ | 1,730 | | $ | 2,159 | | $ | 1,855 | |
| | | | | | | | | |
Net income per share, basic | | $ | 0.20 | | $ | 0.24 | | $ | 0.30 | | $ | 0.26 | |
| | | | | | | | | |
Net income per share, diluted | | $ | 0.19 | | $ | 0.23 | | $ | 0.29 | | $ | 0.24 | |
| | | | | | | | | |
Dividends declared | | $ | 0.040 | | $ | 0.040 | | $ | 0.040 | | $ | 0.040 | |
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2004 Quarter | | 1st | | 2nd | | 3rd | | 4th | |
| | | | | | | | | |
Interest income | | $ | 5,575 | | $ | 5,840 | | $ | 6,306 | | $ | 7,259 | |
Net Interest income | | $ | 4,587 | | $ | 4,881 | | $ | 5,521 | | $ | 5,935 | |
Net interest income after provision for loan losses | | $ | 4,362 | | $ | 4,691 | | $ | 5,296 | | $ | 5,785 | |
| | | | | | | | | |
Net Income | | $ | 1,088 | | $ | 1,465 | | $ | 1,594 | | $ | 1,463 | |
| | | | | | | | | |
Net income per share, basic | | $ | 0.15 | | $ | 0.20 | | $ | 0.23 | | $ | 0.20 | |
| | | | | | | | | |
Net income per share, diluted | | $ | 0.15 | | $ | 0.19 | | $ | 0.21 | | $ | 0.19 | |
| | | | | | | | | |
Dividends Declared | | $ | 0.0375 | | $ | 0.0375 | | $ | 0.0375 | | $ | 0.0375 | |
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information require by Item 7a of Form 10-K is contained in the Liquidity and Market Risk Management section of Item 7 – Managements Discussion and Analysis of Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data
The financial statements begin on page 57 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes or disagreements with Accountants for the year 2005.
Item 9a. Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth, as of February 15, 2006, the names of, and certain information regarding, the directors of Community Valley Bancorp.
| | | | Year First | | Principal Occupation |
Name and Title | | | | Appointed | | During the |
Other than Director | | Age | | Director | | Past Five Years |
| | | | | | |
M. Robert Ching, M.D. | | 60 | | 2002 | | Orthopedic surgeon. |
| | | | | | |
John F. Coger
Executive V.P. CFO/COO | | 56 | | 2004 | | Executive Vice President Chief Financial Officer and Chief Operating Officer of the Bank. |
| | | | | | |
Eugene B. Even | | 78 | | 2002 | | Retired. |
| | | | | | |
John D. Lanam | | 71 | | 2002 | | Retired. Former attorney and senior partner of McKernan, Lanam, Bakke, Benson & Bodney, a law firm. |
| | | | | | |
Donald W. Leforce
Chairman of the Board | | 58 | | 2002 | | Retired. Past President and Secretary/Treasurer of Compass Equipment, Inc., a distributor of mining and heavy construction equipment. |
| | | | | | |
Charles J. Mathews | | 68 | | 2003 | | Owner of Mathews Farms and Partner in Mathews Rice Dryer. |
| | | | | | |
Ellis L. Matthews | | 72 | | 2002 | | Retired. |
| | | | | | |
Robert L. Morgan, M.D. | | 78 | | 2002 | | Retired. |
| | | | | | |
Luther McLaughlin | | 61 | | 2005 | | President and managing director of Matson and Isom an accountancy firm. |
| | | | | | |
James S. Rickards
Secretary | | 55 | | 2002 | | Real estate broker associated with Century 21 Select since April, 2000. |
| | | | | | |
Keith C. Robbins
President/CEO | | 64 | | 2002 | | President and Chief Executive Officer of the Bank. |
| | | | | | |
Gary B. Strauss, M.D.
Vice Chairman | | 75 | | 2002 | | Retired. |
| | | | | | |
Jack Schmelke | | 83 | | 2005 | | Retired. |
| | | | | | |
Hubert I. Townshend | | 69 | | 2002 | | Retired. Formerly involved in general engineering, contracting and equipment rental. |
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None of the directors were selected pursuant to any arrangement or understanding other than with the directors and executive officers (1) of Community Valley Bancorp acting within their capacities as such. There are no family relationships between any of the directors of Community Valley Bancorp. No director of Community Valley Bancorp serves as a director of any company which has a class of securities registered under, or which is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, or of any company registered as an investment company under the Investment Company Act of 1940.
(1) As used in this statement, the term “executive officer” of Community Valley Bancorp includes the President/Chief Executive Officer and the Executive Vice President/Chief Financial Officer-Chief Operating Officer.
Compensation of Directors
During 2005, directors, other than Mr. Robbins and Mr. Coger, received a base fee of $900.00 per month for serving as directors (provided the director attends 75% of the meetings) and received additional fees for chairing meetings and attending meetings. Mr. Robbins and Mr. Coger (appointed to the Board of Directors in September 2004) also received a base fee of $900.00 per month for serving as a director. Community Valley Bancorp’s Chairman of the Board also received an additional $500 per month for serving as the Chairman. Any director, other than Mr. Robbins and Mr. Coger, who chaired a Board of Directors or committee meeting, which met during the month, received an additional $50.00 per month for serving as the chairman. In addition, directors, other than Mr. Robbins and Mr. Coger, but including the chairman, who attended any Board meeting, also received an additional $365.00 per Board of Directors meeting attended. Directors, other than Mr. Robbins and Mr. Coger, but including the chairman of any committee, who attended any committee meeting held at the same gathering as a Board of Director’s meeting (other than one committee meeting held concurrently with the Board meeting) also received an additional $50.00 per committee meeting attended. Directors, other than Mr. Robbins and Mr. Coger, but including the chairman of any committee, who attended any other committee meeting received $350 per committee meeting attended. In addition, if any Board of Directors or committee meeting extended beyond three hours, directors, other than Mr. Robbins and Mr. Coger, received an additional $105.00 per hour for each hour the meeting extended over three hours, subject to a maximum additional $210.00 per meeting. Directors, other than Mr. Robbins and Mr. Coger, who traveled to a Board of Directors or committee meeting held outside the town of the director’s residence received an additional $15.00 travel fee per meeting and all other travel in connection with the Board of Director’s or Community Valley Bancorp’s activities was compensated at the Internal Revenue Service’s rate per mile.
During 2006, the compensation to directors will remain the same as above except Community Valley Bancorp’s Chairman of the Board of Directors will receive $800.00 for serving as the Chairman.
In May, 1997, each director of Community Valley Bancorp received a stock option under Community Valley Bancorp’s 1997 Stock Option Plan to acquire 26,394 shares of common stock, giving effect to all stock dividends and splits. The exercise price for these shares is $2.30 per share, giving effect to all stock dividends and splits. The options are for a term of ten years expiring in May, 2007 and are 100% vested.
In addition, in May, 2000, each director of Community Valley Bancorp, received a stock option under Community Valley Bancorp’s 2000 Stock Option Plan to acquire 26,666 shares of common stock, giving effect to all stock dividends and splits after May 2000. The exercise price for these shares is $4.71 per share. The options are for a term of ten years expiring in May, 2010. The vesting of the director options is 20% of the total option amount per year with the first 20% amount having vested in May, 2001. In October 2003, Director Charles Mathews received a stock option under Community Valley Bancorp’s 2000 stock option plan to acquire 5,332 shares of common stock, giving effect to all stock dividends and splits after October, 2003. The exercise price for these shares is $7.24 per share. The options are for a term of ten years expiring in October, 2013. The vesting of the director options is 20% of the total option amount per year with the first 20% amount having vested in October, 2004. In March 2005, Director Luther McLaughlin received a stock option under Community Valley Bancorp’s 2000 stock option plan to acquire 4,000 shares of common stock, giving effect to all stock dividends and splits after March, 2005. The exercise price for these shares is $13.25 per share. The options are for a term of ten years expiring in March, 2015. The vesting of the director options is 20% of the total option amount per year with the first 20% amount vesting in March, 2006.
Director Retirement Agreements
In April, 1998, each director of Community Valley Bancorp, other than Mr. Robbins and subsequently Mr. Coger, entered into a Director Retirement Agreement which provides for the payment of a monthly retirement benefit for a period of sixty months based upon an individualized vesting schedule which takes into account the years of service as a director and each director’s individual retirement age. The agreement also pays in the event of a change in control of Community Valley Bancorp or disability or death of the director. The vesting schedule provides for a maximum payment of $500 per month.
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Director Deferred Fee Agreements
Directors of Community Valley Bancorp have the option of participating in Community Valley Bancorp’s Director Deferred Fee Program. Pursuant to the Director Deferred Fee Program, directors make an initial deferral election by filing with Community Valley Bancorp a signed election form which sets forth the amount of the director’s fees to be deferred. Community Valley Bancorp then establishes a Deferral Account on its books for the director and credits to the Deferral Account the fees deferred by the director and interest on the account balance at a rate equal to Community Valley Bancorp’s prime lending rate as of December 31 of the previous year plus one-half percent compounded each December 31 and assuming all deferrals have been made as of January 1 of such year. The Deferral Account is not a trust fund of any kind and the director is a general unsecured creditor of Community Valley Bancorp for the payment of the benefits. Benefits under the Director Deferred Fee Program are payable upon the director’s termination of service. The amount of benefit payable is the Deferral Account balance at the date of termination of service. This amount shall be paid to the director in 120 monthly installments commencing on the first day of the month following the director’s termination of service. Dr. Ching and Mr. Leforce have each entered into Director Deferred Fee Agreements with Community Valley Bancorp.
Director Emeritus Plan
During 2001, Community Valley Bancorp also established a Directors Emeritus Plan. Those directors who have served ten or more consecutive years as an outside director and any outside directors who have served five or more consecutive years as an outside director and immediately prior thereto served five or more years as an inside director, are eligible to participate in the Directors Emeritus Plan. Each Director Emeritus will be a five year position or until a Director Emeritus shall sell a majority of his or her ownership in Community Valley Bancorp. Directors Emeritus will receive a monthly fee equal to a percent of the base director fee they were receiving for serving as a director at the time they became Director Emeritus. For the first year, they shall receive 90%, for the second year, they shall receive 80%, for the third year, they shall receive 60%, for the fourth year, they shall receive 50%, and for the fifth year, they shall receive 40%. In the event of any merger, consolidation of acquisition where Community Valley Bancorp is not the surviving entity, the Director Emeritus Plan shall remain in full force and effect; provided, however, the resulting corporation may elect to pay the Director Emeritus a lump sum amount in cash equal to 50% of the remaining benefits due the Director Emeritus.
Executive Officers
The following table sets forth information, as of February 15, 2006, concerning executive officers of Community Valley Bancorp:
Name | | Age | | Position and Principal Occupation
For the Past Five Years | |
Keith C. Robbins | | 64 | | President and Chief Executive Officer of Community Valley Bancorp | |
| | | | | |
John F. Coger | | 56 | | Executive Vice President and Chief Financial Officer and Chief Operating Officer of Community Valley Bancorp. | |
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Item 11. Executive Compensation
The persons serving as the executive officers of Community Valley Bancorp received during 2005, and are expected to continue to receive in 2006, cash compensation in their capacities as executive officers of Community Valley Bancorp
The following Summary Compensation Table indicates the compensation of Community Valley Bancorp’s executive officers.
2005
Summary Compensation Table
Annual Compensation | | Long Term Compensation | | | |
| | | | | | | | | | Awards | | Payouts | | | |
(a) | | (b) | | (c) | | (d) | | (e) | | (f) | | (g) | | (h) | | (i) | |
Name and
Principal Position | | Year | | Salary
($) | | Bonus
($) | | Other
Annual
Compensation
($) | | Restricted
Stock
Award(s)
($) | | Options/
SARS | | LTIP
Payouts
($) | | All Other
Compensation
($)(4)(5) | |
Keith C Robbins | | 2005 | | $ | 255,918 | (1) | $ | 250,592 | | 0 | | 0 | | 0 | | 0 | | $ | 17,464 | |
President and Chief | | 2004 | | $ | 234,108 | (2) | $ | 249,605 | | 0 | | 0 | | 0 | | 0 | | $ | 20,998 | |
Executive Officer | | 2003 | | $ | 234,108 | (2) | $ | 237,527 | | 0 | | 0 | | 0 | | 0 | | $ | 19,129 | |
John F Coger | | 2005 | | $ | 160,293 | (1) | $ | 191,645 | | 0 | | 0 | | 0 | | 0 | | $ | 14,445 | |
Executive Vice President, Chief Financial Officer and | | 2004 | | $ | 147,540 | (3) | $ | 190,891 | | 0 | | 0 | | 0 | | 0 | | $ | 13,460 | |
Chief Operating Officer | | 2003 | | $ | 145,140 | | $ | 181,654 | | 0 | | 0 | | 0 | | 0 | | $ | 10,948 | |
(1) Includes $10,800 in directors fees
(2) Includes $9,600 in directors fees
(3) Includes $2,400 in directors fees
(4) This amount represents Butte Community Bank’s contribution under Butte Community Bank’s Employee Stock Ownership Plan, and the cost of premiums for excess medical, dental and life insurance
(5) This amount does not include Butte Community Bank’s contribution under Butte Community Bank’s Employee Stock Ownership Plan as such amount has not yet been determined.
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2005
Option/SAR Exercises and Year-End Value Table
Aggregated Option/SAR Exercises in Last Fiscal Year and Year-End Option/SAR Value
(a) | | (b) | | (c) | | (d) | | (e) | |
Name | | Shares Acquired on
Exercise (#) | | Value Realized
($) | | Number of
Unexercised
Options/SARs at
Year-End (#)
Exercisable/
Unexercisable | | Value of
Unexercised In-
the-Money
Options/SARs at
Year-End ($)
Exercisable/
Unexercisable | |
Keith C Robbins | | -0- | | -0- | | Options Only
50,610/0 | | Options Only
$540,668/$0 | |
| | | | | | | | | |
John F Coger | | -0- | | -0- | | Options Only
441/0 | | Options Only
$4,207/$0 | |
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Mr. Robbins has a three year employment contract with Community Valley Bancorp beginning April 27, 1995 and which currently expires April 27, 2007. In addition, unless the employment contract is otherwise terminated, the term of the employment contract shall automatically extend in annual increments of one year so as to always remain a three year employment contract. Mr. Robbins’ annual salary is currently fixed at $255,918 and may be renegotiated. Under the terms of the employment contract, Mr. Robbins is entitled to incentive compensation provided that Community Valley Bancorp attains a minimum 10% return on equity each year, as well as other criteria. In the event Community Valley Bancorp attains the minimum 10% return on equity, as well as meeting other requirements, a bonus pool will be established in an amount equal to 22.5% of the amount in excess of the 10% return on equity. Mr. Robbins will be entitled to incentive compensation in the amount of 36.75% of the bonus pool. Mr. Robbins’ employment contract provides that in the event he becomes disabled, he shall be entitled to 100% of his salary for ninety days. In addition, if Community Valley Bancorp is merged, sold or acquired and the merging, purchasing or acquiring entity elects not to employ Mr. Robbins in a like position, he shall paid an amount equal to the remaining term of the employment contract.
Mr. Robbins has a salary continuation agreement with Community Valley Bancorp which provides that Community Valley Bancorp will pay him $150,000 plus a 3% cost of living adjustment per year for 20 years following his retirement from Community Valley Bancorp at age 65 (“Retirement Age”), or until the death of the Employee whichever event last occurs. In the event of disability while Mr. Robbins is actively employed prior to Retirement Age, he will have the option to take the $150,000 plus a 3% cost of living adjustment per year for 20 years beginning at the earlier of the time when he reaches age 65 or the date on which he is no longer entitled to disability benefits under his principal disability insurance policy. If termination of service occurs due to a change in control of Community Valley Bancorp, Mr. Robbins shall be entitled to receive $150,000 plus a 3% cost of living adjustment per year for 20 years payable on the first day of each month commencing within six months of the date of his termination of employment. In the event Mr. Robbins dies while actively employed by Community Valley Bancorp prior to Retirement Age, his beneficiary will receive from Community Valley Bancorp $150,000 plus a 3% cost of living adjustment per year for 20 years beginning one month after his death. In the event of termination without cause, early retirement, or voluntary termination, Mr. Robbins shall receive $150,000 plus a 3% cost of living adjustment per year for 20 years beginning with the month following the month in which Mr. Robbins terminates employment and attains age 65. In the event Mr. Robbins is terminated for cause he will forfeit any benefits from the salary continuation agreement.
Mr. Robbins has an Executive Supplemental Retirement Plan Agreement that provides him with the option of deferring a portion of his salary. Mr. Robbins has elected to defer $20,000 per year. Community Valley Bancorp has established a Deferral Account on its books for Mr. Robbins and credits to the Deferral Account the fees deferred by Mr. Robbins and interest on the account balance at a rate equal to Community Valley Bancorp’s prime lending rate as of December 31 of the previous year plus one-half percent compounded each December 31 and assuming all deferrals have been made as of January 1 of such year. In addition, Community Valley Bancorp has purchased an annuity for protection of the benefits. All earnings received above Community Valley Bancorp’s normal anticipated after tax return earnings on the annuity and the cost of an insurance policy related to this benefit are also credited to Mr. Robbins’ Deferral Account. The Deferral Account is not a trust fund of any kind and Mr. Robbins is a general unsecured creditor of Community Valley Bancorp for the payment of the benefits. Benefits under the Supplemental Retirement Plan Agreement are payable upon Mr. Robbins’ termination of service. Upon Mr. Robbins’ retirement at age 65, he will be entitled to the Deferral Account balance in two hundred forty (240) monthly installments beginning on the first day of the month following his retirement, unless Mr. Robbins elects one year prior to receiving any benefits to take benefits in a lump sum or otherwise. If Mr. Robbins retires or terminates service prior to the age of 65, the amount of benefit payable is also the Deferral Account balance at the date of termination of service in two hundred forty (240) monthly installments beginning on the first day of month following his attaining age 65, unless Mr. Robbins elects one year prior to receiving any benefits to take benefits in a lump sum or otherwise.
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If termination of service occurs due to disability, the amount of benefit payable is also the Deferral Account balance at the date of termination of service in two hundred forty (240) monthly installments beginning on the first day of month following his disability, unless Mr. Robbins elects one year prior to receiving any benefits to take benefits in a lump sum or otherwise. If termination of service occurs due to a change in control of Community Valley Bancorp, Community Valley Bancorp shall credit Mr. Robbins’ Deferral Account with the entire amount that Mr. Robbins would have deferred for the entire deferral period, and the amount of benefit shall be paid to Mr. Robbins within 30 days of the change in control. If Mr. Robbins suffers hardship, Community Valley Bancorp may distribute to him all or a portion of the Deferral Account balance as necessary to relieve the financial hardship.
Finally, if termination of service occurs due to Mr. Robbins’ death, Community Valley Bancorp shall credit Mr. Robbins’ Deferral Account with the entire amount that Mr. Robbins would have deferred for the entire deferral period utilizing the proceeds from the insurance policy which Community Valley Bancorp purchased in connection with this agreement. The amount shall be paid in two hundred forty (240) monthly installments beginning on the first day of the month following his death. Interest accrues on all amounts deferred until final payment.
Mr. Coger has a three year employment contract with Community Valley Bancorp beginning April 27, 1995 and which currently expires April 27, 2007. In addition, unless the employment contract is otherwise terminated, the term of the employment contract shall automatically extend in annual increments of one year so as to always remain a three year employment contract. Mr. Coger’s annual salary is currently fixed at $169,263 and may be renegotiated. Under the terms of the employment contract, Mr. Coger is entitled to incentive compensation provided that Community Valley Bancorp attains a minimum 10% return on equity each year, as well as other criteria. In the event Community Valley Bancorp attains the minimum 10% return on equity, as well as meeting other requirements, a bonus pool will be established in an amount equal to 22.5% of the amount in excess of the 10% return on equity. Mr. Coger will be entitled to incentive compensation in the amount of 28.10% of the bonus pool. Mr. Coger’s employment contract provides that in the event he becomes disabled, he shall be entitled to 100% of his salary for ninety days. In addition, if Community Valley Bancorp is merged, sold or acquired and the merging, purchasing or acquiring entity elects not to employ Mr. Coger in a like position, he shall paid an amount equal to the remaining term of the employment contract.
Mr. Coger has a salary continuation agreement with Community Valley Bancorp which provides that Community Valley Bancorp will pay him $125,000 plus a 3% cost of living adjustment per year for 20 years following his retirement from Community Valley Bancorp at age 65 (“Retirement Age”), or until the death of the Employee whichever event last occurs. In the event of disability while Mr. Coger is actively employed prior to Retirement Age, he will have the option to take the $125,000 plus a 3% cost of living adjustment per year for 20 years beginning at the earlier of the time when he reaches age 65 or the date on which he is no longer entitled to disability benefits under his principal disability insurance policy. If termination of service occurs due to a change in control of Community Valley Bancorp, Mr. Coger shall be entitled to receive $125,000 plus a 3% cost of living adjustment per year for 20 years payable on the first day of each month commencing within six months of the date of his termination of employment. In the event Mr. Coger dies while actively employed by Community Valley Bancorp prior to Retirement Age, his beneficiary will receive from Community Valley Bancorp $125,000 plus a 3% cost of living adjustment per year for 20 years beginning one month after his death. In the event of termination without cause, early retirement, or voluntary termination, Mr. Coger shall receive $125,000 plus a 3% cost of living adjustment per year for 20 years beginning with the month following the month in which Mr. Coger terminates employment and attains age 65. In the event Mr. Coger is terminated for cause he will forfeit any benefits from the salary continuation agreement.
Mr. Coger has an Executive Supplemental Retirement Plan Agreement that provides him with the option of deferring a portion of his salary. Mr. Coger has elected to defer $10,000 per year. Community Valley Bancorp has established a Deferral Account on its books for Mr. Coger and credits to the Deferral Account the fees deferred by Mr. Coger and interest on the account balance at a rate equal to Community Valley Bancorp’s prime lending rate as of December 31 of the previous year plus one-half percent compounded each December 31 and assuming all deferrals have been made as of January 1 of such year. In addition, Community Valley Bancorp has purchased an annuity for protection of the benefits.
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All earnings received above Community Valley Bancorp’s normal anticipated after tax return earnings on the annuity and the cost of an insurance policy related to this benefit are also credited to Mr. Coger’s Deferral Account. The Deferral Account is not a trust fund of any kind and Mr. Coger is a general unsecured creditor of Community Valley Bancorp for the payment of the benefits. Benefits under the Supplemental Retirement Plan Agreement are payable upon Mr. Coger’s termination of service. Upon Mr. Coger’s retirement at age 65, he will be entitled to the Deferral Account balance in two hundred forty (240) monthly installments beginning on the first day of the month following his retirement, unless Mr. Coger elects one year prior to receiving any benefits to take benefits in a lump sum or otherwise. If Mr. Coger retires or terminates service prior to the age of 65, the amount of benefit payable is also the Deferral Account balance at the date of termination of service in two hundred forty (240) monthly installments beginning on the first day of month following his attaining age 65, unless Mr. Coger elects one year prior to receiving any benefits to take benefits in a lump sum or otherwise. If termination of service occurs due to disability, the amount of benefit payable is also the Deferral Account balance at the date of termination of service in two hundred forty (240) monthly installments beginning on the first day of month following his disability, unless Mr. Coger elects one year prior to receiving any benefits to take benefits in a lump sum or otherwise.
If termination of service occurs due to a change in control of Community Valley Bancorp, Community Valley Bancorp shall credit Mr. Coger’s Deferral Account with the entire amount that Mr. Coger would have deferred for the entire deferral period, and the amount of benefit shall be paid to Mr. Coger within 30 days of the change in control. If Mr. Coger suffers hardship, Community Valley Bancorp may distribute to him all or a portion of the Deferral Account balance as necessary to relieve the financial hardship. Finally, if termination of service occurs due to Mr. Coger’s death, Community Valley Bancorp shall credit Mr. Coger’s Deferral Account with the entire amount that Mr. Coger would have deferred for the entire deferral period utilizing the proceeds from the insurance policy which Community Valley Bancorp purchased in connection with this agreement. The amount shall be paid in two hundred forty (240) monthly installments beginning on the first day of the month following his death. Interest accrues on all amounts deferred until final payment.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Management of Community Valley Bancorp knows of no person who owns, beneficially or of record, either individually or together with associates, 5 percent or more of the outstanding shares of common stock, except as set forth in the table below. The following table sets forth, as of February 15, 2006, the number and percentage of shares of outstanding common stock beneficially owned, directly or indirectly, by each of Community Valley Bancorp’s directors and principal shareholders and by the directors and officers of Community Valley Bancorp as a group. The shares “beneficially owned” are determined under Securities and Exchange Commission Rules, and do not necessarily indicate ownership for any other purpose. In general, beneficial ownership includes shares over which the director, principal shareholder or officer has sole or shared voting or investment power and shares which such person has the right to acquire within 60 days of February 15, 2006. Unless otherwise indicated, the persons listed below have sole voting and investment powers of the shares beneficially owned. Management is not aware of any arrangements which may, at a subsequent date, result in a change of control of Community Valley Bancorp.
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Amount and Nature of
Beneficial Owner | | Beneficial Ownership | | Percent of Class(1) | |
| | | | | |
Directors and Named Officers: | | | | | |
M. Robert Ching, M.D. | | 193,972 | (2) | 2.59 | |
John F. Coger | | 170,660 | (3) | 2.30 | |
Eugene B. Even | | 118,796 | (4) | 1.59 | |
John D. Lanam | | 176,574 | (5) | 2.36 | |
Donald W. Leforce | | 208,464 | (6) | 2.79 | |
Charles J. Mathews | | 5,862 | (7) | 0.08 | |
Ellis L. Matthews | | 98,348 | (8) | 1.32 | |
Luther W. McLaughlin | | 6,804 | (9) | 0.09 | |
Robert L. Morgan, M.D | | 277,916 | (10) | 3.72 | |
James S. Rickards | | 159,462 | (11) | 2.14 | |
Keith C. Robbins | | 195,948 | (12) | 2.62 | |
Jack B. Schmelke | | 400,354 | (13) | 5.38 | |
Gary B. Strauss, M.D. | | 310,964 | (14) | 4.16 | |
Hubert I. Townshend | | 236,914 | (15) | 3.18 | |
| | | | | |
Principal Shareholder | | | | | |
Community Valley Bancorp ESOP | | 423,863 | (15) | 5.70 | |
| | | | | |
All Directors and Officers as a Group (14 in all) | | 2,561,038 | | 32.81 | |
(1) Includes shares subject to options held by each director and the directors and officers as a group that are exercisable within 60 days of February 15, 2006. These are treated as issued and outstanding for the purpose of computing the percentage of each director and the directors and officers as a group but not for the purpose of computing the percentage of class of any other person.
(2) Dr. Ching has shared voting and investment powers as to 25,332 these shares and has 53,060 acquirable by exercise of stock options.
(3) Mr. Coger has shared voting and investment powers as to 125,612 of these shares and has 411 shares acquirable by exercise of stock options.
(4) Mr. Even has 26,666 shares acquirable by exercise of stock options.
(5) Mr. Lanam has shared voting and investment powers as to 117,252 shares and has 31,890 shares acquirable by exercise of stock options.
(6) Mr. Leforce has shared voting and investment powers as to 166,130 shares and has 35,740shares acquirable by exercise of stock options.
(7) Mr. C. Mathews has shared voting and investment powers as to 3,730 shares and has 2,132 shares acquirable by exercise of stock options.
(8) Mr. E. Matthews has 33,230 shares acquirable by exercise of stock options.
(9) Mr. McLaughlin has shared voting and investment powers as to 6,004 shares and has 800 shares acquirable by exercise of stock options.
(10) Dr. Morgan has shared voting and investment powers as to 244,053 shares and has 33,863 shares acquirable by exercise of stock options.
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(11) Mr. Rickards has shared voting and investment powers as to 127,272 shares and has 32,190 shares acquirable by exercise of stock options.
(12) Mr. Robbins has shared voting and investment powers as to 40,094 shares and has 50,610 shares acquirable by exercise of stock options.
(13) Mr. Schmelke has shared voting and investment powers as to 400,354 shares.
(14) Dr. Strauss has shared voting and investment powers as to 207,982 shares and has 43,060 shares acquirable by exercise of stock options.
(15) Mr. Townshend has shared voting and investment powers as to 16,112 shares and 26,666 shares acquirable by exercise of stock options.
(16) Community Valley Bancorp ESOP’s address is c/o Community Valley Bancorp, 2041 Forest Avenue, Chico, California 95928.
Item 13. Certain Relationships and Related Transactions
Some of the directors and officers of Community Valley Bancorp and the companies with which they are associated are customers of, or have had banking transactions with, Community Valley Bancorp in the ordinary course of Community Valley Bancorp’s business, and Community Valley Bancorp expects to have banking transactions with such persons in the future. In the opinion of Community Valley Bancorp’s management, all loans and commitments to lend in such transactions were made in compliance with applicable laws and on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other persons of similar creditworthiness and did not involve more than a normal risk of collectibility or present other unfavorable features.
Item 14. Principal Accountant Fees and Services
The information required by this item can be found in the Company’s Definitive Proxy Statement pursuant to Regulation 14A under the Securities and Exchange Act of 1934 and is by this reference incorporated herein.
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PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List of documents filed as part of this report
(1) Financial Statements
The following financial statements and independent auditor’s reports are included in this Annual Report on Form 10-K immediately following.
(2) Financial Statement Schedules
Schedules to the financial statements are omitted because the required information is not applicable or because the required information is presented in the Company’s Consolidated Financial Statements or related notes.
(3) Exhibits
Exhibit | | |
Number | | Document Description |
| | |
| (3.1) | | Articles of Incorporation incorporated by reference from the Company’s Registration Statement Form S-4EF,
file #333-85950. |
| | | |
| (3.2) | | Bylaws incorporated by reference from the Company’s Registration Statement Form S-4EF, file #333-85950. |
| | | |
| (4) | | Specimen of Company’s Common Stock Certificate incorporated by reference from the Company’s Registration Statement Form S-4EF, file #333-85950. |
| | | |
| (10.1) | | Employment Agreement with Keith C. Robbins dated April 27, 1995. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.2) | | Salary Continuation Agreement dated April 14, 1998, and Amendment to Salary Continuation Agreement dated January 10, 2002, for Keith C. Robbins. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.2)1. | | Amendment to Salary Continuation Agreement of April 14, 1998 for Keith C Robbins dated January 1, 2004. Incorporated by reference to the Company’s Annual Report on Form 10-K for the period ended December 31, 2003, filed with the Commission on March 20, 2004. |
| | | |
| (10.3) | | Executive Supplemental Retirement Plan dated August 1, 2000, and Amendment to Executive Supplement Retirement Plan dated January 10, 2002, for Keith C. Robbins. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.4) | | 1997 Stock Option Agreement for Keith C. Robbins dated May 1, 1997. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
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| (10.5) | | 2000 Stock Option Agreement for Keith C. Robbins dated March 14, 2000. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.6) | | Employment Agreement with John F. Coger dated April 27, 1995. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.7) | | Salary Continuation Agreement dated April 14, 1998, and Amendment to Salary Continuation Agreement dated January 10, 2002, for John F. Coger. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.7)1. | | Amendment to Salary Continuation Agreement of April 14, 1998 for John F. Coger dated January 1, 2004. Incorporated by reference to the Company’s Annual Report on Form 10-K for the period ended December 31, 2003, filed with the Commission on March 20, 2004. |
| | | |
| (10.8) | | Executive Supplemental Retirement Plan dated August 1, 2000, and Amendment to Executive Supplement Retirement Plan dated January 10, 2002, for John F. Coger. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.9) | | 2000 Stock Option Agreement for John F. Coger dated March 14, 2000 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.10) | | 1997 Stock Option Agreement for M. Robert Ching dated May 1, 1997 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.11) | | 2000 Stock Option Agreement for M. Robert Ching dated May 1, 2000. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.12) | | 1997 Stock Option Agreement for Eugene B. Even dated May 1, 1997 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.13) | | 2000 Stock Option Agreement for Eugene B. Even dated May 1, 2000. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.14) | | 1997 Stock Option Agreement for John D. Lanam dated May 1, 1997. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.15) | | 2000 Stock Option Agreement for John D. Lanam dated May 1, 2000. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.16) | | 1997 Stock Option Agreement for Donald W. Leforce dated May 1, 1997. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.17) | | 2000 Stock Option Agreement for Donald W. Leforce dated May 1, 2000 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.18) | | 1997 Stock Option Agreement for Ellis L. Matthews dated May 1, 1997 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.19) | | 2000 Stock Option Agreement for Ellis L. Matthews dated May 1, 2000 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.20) | | 1997 Stock Option Agreement for Robert L. Morgan dated May 1, 1997 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
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| (10.21) | | 2000 Stock Option Agreement for Robert L. Morgan dated May 1, 2000 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.22) | | 1997 Stock Option Agreement for James S. Rickards dated May 1, 1997. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.23) | | 2000 Stock Option Agreement for James S. Rickards dated May 1, 2000 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.24) | | 1997 Stock Option Agreement for Gary B. Strauss dated May 1, 1997 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.25) | | 2000 Stock Option Agreement for Gary B. Strauss dated May 1, 2000. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.26) | | 1997 Stock Option Agreement for Hubert I. Townshend dated May 1, 1997 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.27) | | 2000 Stock Option Agreement for Hubert I. Townshend dated May 1, 2000 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.28) | | Director Deferred Fee Agreement for M. Robert Ching dated April 8, 1998 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.29) | | Director Retirement Agreement for M. Robert Ching dated April 14, 1998 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.30) | | Director Retirement Agreement for Eugene B. Even dated April 14, 1998 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.31) | | Director Retirement Agreement for John D. Lanam dated April 14, 1998. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.32) | | Director Deferred Fee Agreement for Donald W. Leforce dated April 14, 1998 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002 |
| | | |
| (10.33) | | Director Retirement Agreement for Donald W. Leforce dated April 14, 1998 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.34) | | Director Retirement Agreement for Ellis L. Matthews dated April 14, 1998. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.35) | | Director Retirement Agreement for Robert L. Morgan dated April 14, 1998 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.36) | | Director Retirement Agreement James S. Rickards dated April 14, 1998 Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.37) | | Director Retirement Agreement for Gary B. Strauss dated April 14, 1998. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.38) | | Director Retirement Agreement for Hubert I. Townshend dated April 14, 1998. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
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| (10.39) | | Lease agreement between Butte Community Bank and Anna Laura Schilling Trust dated March 20, 2001, related to 900 Mangrove Ave., Chico, California. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
| | | |
| (10.40) | | 2000 Stock Option Agreement for Charles J. Mathews dated October 21, 2003 filed herewith. |
| | | |
| (10.41) | | 2000 Stock Option Agreement for Luther W. McLaughlin dated March 10, 2005 filed herewith. |
| | | |
| (11) | | See Item 6. Selected Financial Data Note 1 for Statement re computation of earnings per share |
| | | |
| (12) | | See Item 6. Selected Financial Data Notes 2 through 6 for Statements re computation of ratios |
| | | |
| (23.1) | | Consent of Indpendent Registered Public Accounting Firm |
| | | |
| (31.1) | | Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer |
| | | |
| (31.2) | | Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer |
| | | |
| (32.1) | | Section 1350 certification of Chief Executive Officer |
| | | |
| (32.2) | | Section 1350 certification of Chief Financial Officer |
| | | |
| (99.1) | | 1997 Stock Option Plan is incorporated by reference from the Company’s Registration Statement Form S-8, filed August 14, 2002. |
| | | |
| (99.2) | | 2000 Stock Option Plan is incorporated by reference from the Company’s Registration Statement Form S-8, filed August 14, 2002. |
| | | |
| (99.3) | | Director Emeritus Plan dated March 20, 2001. Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2002, filed with the Commission on August 14, 2002. |
(b) Reports on Form 8-K
On March 16, 2005 the company issued a press release announcing the payment of a seven and one-half cent dividend to shareholders of record as of March 31, 2005. The payment date for the dividend was April 22, 2005.
On April 13, 2005 the Company issued a press release announcing a two-for-one stock split to shareholders of record as of May 2, 2005.
On April 19, 2005 the Company issued a press release announcing first quarter 2005 earnings.
On April 28, 2005 the Company issued a press release announcing its plans to apply for listing on the NASDAQ Small Cap Market.
On July 1, 2005 the Company issued a press release announcing the appointment of Jack Schmelke to it’s Board of Directors effective June 22, 2005.
On July 1, 2005 the Company issued a press release announcing the payment of a four cent dividend to shareholders of record as of July 8, 2005. The payment date for the dividend was July 29, 2005.
On July 21, 2005 the Company issued a press release announcing second quarter 2005 earnings.
On September 26, 2005 the Company issued a press release announcing the payment of a four cent dividend to shareholders of record as of September 30, 2005. The payment date for the dividend was October 28, 2005.
On October 18, 2005 the Company issued a press release announcing third quarter 2005 earnings.
On December 23, 2005 the Company issued a press release announcing the payment of a four cent dividend to shareholders of record as of December 30, 2005. The payment date for the dividend was January 27, 2005.
On January 20, 2006 the Company issued a press release announcing fourth quarter 2005 earnings.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: March 16, 2006 | COMMUNITY VALLEY BANCORP |
| a California corporation |
| |
| By: | /s/ Keith C. Robbins | |
| | Keith C. Robbins |
| | President and Chief Executive Officer |
| | |
| By: | /s/ John F. Coger | |
| | John F. Coger |
| | Executive Vice President
and 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 and on the dates indicated.
Signature | | Title | | Date |
| | | | |
/s/ M. Robert Ching | | | Director | | March 16, 2006 |
M. Robert Ching | | | | | |
| | | | | |
/s/ John F. Coger | | | Executive Vice President, CFO/COO | | March 16, 2006 |
John F. Coger | | | and Director | | |
| | | | | |
/s/Eugene B. Even | | | Director | | March 16, 2006 |
Eugene B. Even | | | | | |
| | | | | |
/s/ John D. Lanam | | | Director | | March 16, 2006 |
John D. Lanam | | | | | |
| | | | | |
/s/ Donald W. Leforce | | | Chairman of the Board | | March 16, 2006 |
Donald W. Leforce | | | | | |
| | | | | |
/s/ Charles Mathews | | | Director | | March 16, 2006 |
Charles Mathews | | | | | |
| | | | | |
/s/ Ellis L. Matthews | | | Director | | March 16, 2006 |
Ellis L. Matthews | | | | | |
| | | | | |
/s/ Luther McLaughlin | | | Director | | March 16, 2006 |
Luther McLaughlin | | | | | |
| | | | | |
/s/ Robert L. Morgan | | | Director | | March 16, 2006 |
Robert L. Morgan | | | | | |
| | | | | |
/s/ Keith C. Robbins | | | President, Chief Executive | | March 16, 2006 |
Keith C. Robbins | | | Officer and Director | | |
| | | | | |
/s/ James S. Rickards | | | Director and | | March 16, 2006 |
James S. Rickards | | | Corporate Secretary | | |
| | | | | |
/s/ Gary B. Strauss | | | Director | | March 16, 2006 |
Gary B. Strauss | | | Vice Chairman | | |
| | | | | |
/s/ Jack B. Schmelke | | | Director | | March 16, 2006 |
Jack B. Schmelke | | | | | |
| | | | | |
/s/ Hubert Townshend | | | Director | | March 16, 2006 |
Hubert Townshend | | | | | |
56
COMMUNITY VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004
AND FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004 AND 2003
AND
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Community Valley Bancorp
We have audited the accompanying consolidated balance sheet of Community Valley Bancorp and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005. 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 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 audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Community Valley Bancorp and subsidiaries as of December 31, 2005 and 2004 and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
Sacramento, California
February 17, 2006
58
COMMUNITY VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2005 and 2004
| | 2005 | | 2004 | |
ASSETS | | | | | |
| | | | | |
Cash and due from banks | | $ | 18,988,000 | | $ | 21,778,000 | |
Federal funds sold | | 29,015,000 | | 46,440,000 | |
| | | | | |
Total cash and cash equivalents | | 48,003,000 | | 68,218,000 | |
| | | | | |
Interest-bearing deposits in banks | | 6,636,000 | | 8,715,000 | |
Loans held for sale, at lower of cost or market | | 2,197,000 | | 1,490,000 | |
Investment securities (Note 2): | | | | | |
Available-for-sale, at fair value | | 4,344,000 | | 4,379,000 | |
Held-to-maturity, at cost | | 2,332,000 | | 2,582,000 | |
Loans, less allowance for loan losses of $4,716,000 in 2005 and $4,000,000 in 2004 (Notes 3, 10 and 14) | | 401,221,000 | | 339,555,000 | |
Premises and equipment, net (Note 5) | | 11,221,000 | | 9,027,000 | |
Bank owned life insurance (Note 15) | | 8,447,000 | | 6,703,000 | |
Accrued interest receivable and other assets (Notes 4 and 13) | | 10,376,000 | | 9,387,000 | |
| | | | | |
Total assets | | $ | 494,777,000 | | $ | 450,056,000 | |
| | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
| | | | | |
Deposits: | | | | | |
Non-interest bearing | | $ | 83,336,000 | | $ | 80,793,000 | |
Interest bearing (Note 6) | | 350,682,000 | | 318,266,000 | |
| | | | | |
Total deposits | | 434,018,000 | | 399,059,000 | |
| | | | | |
Notes Payable (Notes 8 and 15) | | 1,782,000 | | 833,000 | |
Junior subordinated debentures (Note 9) | | 8,248,000 | | 8,248,000 | |
Accrued interest payable and other liabilities (Note 15) | | 9,174,000 | | 7,385,000 | |
| | | | | |
Total liabilities | | 453,222,000 | | 415,525,000 | |
| | | | | |
Commitments and contingencies (Note 10) | | | | | |
| | | | | |
Shareholders’ equity (Note 11): | | | | | |
Common stock - no par value; authorized – 20,000,000 shares, outstanding – 7,408,047 shares in 2005 and 7,273,582 shares in 2004 | | 9,051,000 | | 7,862,000 | |
Unallocated ESOP shares (185,051 shares in 2005 and 179,256 shares in 2004, at cost) (Note 15) | | (1,391,000 | ) | (1,144,000 | ) |
Retained earnings | | 33,908,000 | | 27,802,000 | |
Accumulated other comprehensive (loss) income, net of taxes (Note 2) | | (13,000 | ) | 11,000 | |
| | | | | |
Total shareholders’ equity | | 41,555,000 | | 34,531,000 | |
| | | | | |
Total liabilities and shareholders’ equity | | $ | 494,777,000 | | $ | 450,056,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
59
COMMUNITY VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 2005, 2004 and 2003
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Interest income: | | | | | | | |
Interest and fees on loans | | $ | 30,946,000 | | $ | 24,043,000 | | $ | 20,528,000 | |
Interest on Federal funds sold | | 943,000 | | 488,000 | | 634,000 | |
Interest on deposits in banks | | 239,000 | | 244,000 | | 201,000 | |
Interest on investment securities: | | | | | | | |
Taxable | | 199,000 | | 151,000 | | 105,000 | |
Exempt from Federal income taxes | | 111,000 | | 54,000 | | 49,000 | |
| | | | | | | |
Total interest income | | 32,438,000 | | 24,980,000 | | 21,517,000 | |
| | | | | | | |
Interest expense: | | | | | | | |
Interest expense on deposits (Note 6) | | 4,668,000 | | 3,585,000 | | 3,924,000 | |
Interest expense on junior subordinated debentures (Note 9) | | 592,000 | | 438,000 | | 439,000 | |
Interest expense on notes payable (Notes 8 and 15) | | 71,000 | | 33,000 | | 33,000 | |
| | | | | | | |
Total interest expense | | 5,331,000 | | 4,056,000 | | 4,396,000 | |
| | | | | | | |
Net interest income before provision for loan losses | | 27,107,000 | | 20,924,000 | | 17,121,000 | |
| | | | | | | |
Provision for loan losses (Note 3) | | 724,000 | | 734,000 | | 586,000 | |
| | | | | | | |
Net interest income after provision for loan losses | | 26,383,000 | | 20,190,000 | | 16,535,000 | |
| | | | | | | |
Non-interest income: | | | | | | | |
Service charges and fees | | 2,351,000 | | 2,086,000 | | 1,397,000 | |
Gain on sale of loans | | 1,806,000 | | 1,637,000 | | 1,978,000 | |
Loan servicing income | | 481,000 | | 571,000 | | 1,185,000 | |
Other (Note 12) | | 2,073,000 | | 1,724,000 | | 1,390,000 | |
| | | | | | | |
Total non-interest income | | 6,711,000 | | 6,018,000 | | 5,950,000 | |
| | | | | | | |
Non-interest expenses: | | | | | | | |
Salaries and employee benefits (Notes 3 and 15) | | 12,270,000 | | 9,980,000 | | 8,151,000 | |
Occupancy and equipment (Notes 5 and10) | | 2,969,000 | | 2,525,000 | | 2,037,000 | |
Other (Note 12) | | 5,686,000 | | 4,290,000 | | 3,699,000 | |
| | | | | | | |
Total non-interest expenses | | 20,925,000 | | 16,795,000 | | 13,887,000 | |
| | | | | | | |
Income before provision for income taxes | | 12,169,000 | | 9,413,000 | | 8,598,000 | |
| | | | | | | |
Provision for income taxes (Note 13) | | 4,971,000 | | 3,803,000 | | 3,329,000 | |
| | | | | | | |
Net income | | $ | 7,198,000 | | $ | 5,610,000 | | $ | 5,269,000 | |
| | | | | | | |
Basic earnings per share (Note 11) | | $ | 1.00 | | $ | .79 | | $ | .75 | |
| | | | | | | |
Diluted earnings per share (Note 11) | | $ | .95 | | $ | .74 | | $ | .71 | |
The accompanying notes are an integral part of these consolidated financial statements.
60
COMMUNITY VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2005, 2004 and 2003
| | | | | | | | | | Accumulated | | | | | |
| | | | | | | | | | Other | | | | | |
| | | | Unallocated | | | | Comprehensive | | Total | | Total | |
| | Common Stock | | ESOP | | Retained | | Income | | Shareholders’ | | Comprehensive | |
| | Shares | | Amount | | Shares | | Earnings | | Net of Taxes | | Equity | | Income | |
| | | | | | | | | | | | | | | |
Balance, January 1, 2003 | | 7,160,936 | | $ | 6,660,000 | | $ | (851,000 | ) | $ | 19,558,000 | | $ | 14,000 | | $ | 25,381,000 | | | |
| | | | | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | | | | | | | | 5,269,000 | | | | 5,269,000 | | $ | 5,269,000 | |
Other comprehensive loss: | | | | | | | | | | | | | | | |
Net change in unrealized gains on available-for-sale investment securities | | | | | | | | | | (12,000 | ) | (12,000 | ) | (12,000 | ) |
| | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | $ | 5,257,000 | |
| | | | | | | | | | | | | | | |
Exercise of stock options and related tax benefit (Note 11) | | 82,712 | | 462,000 | | | | | | | | 462,000 | | | |
Amortization of stock compensation - ESOP shares (Note 15) | | | | 150,000 | | 102,000 | | | | | | 252,000 | | | |
Shares acquired or redeemed by ESOP (Note 15) | | | | | | (321,000 | ) | | | | | (321,000 | ) | | |
Cash dividends - $0.15 per share | | | | | | | | (1,082,000 | ) | | | (1,082,000 | ) | | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2003 | | 7,243,648 | | 7,272,000 | | (1,070,000 | ) | 23,745,000 | | 2,000 | | 29,949,000 | | | |
| | | | | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | | | | | | | | 5,610,000 | | | | 5,610,000 | | $ | 5,610,000 | |
Other comprehensive income: | | | | | | | | | | | | | | | |
Net change in unrealized gains on available-for-sale investment securities | | | | | | | | | | 9,000 | | 9,000 | | 9,000 | |
| | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | $ | 5,619,000 | |
| | | | | | | | | | | | | | | |
Exercise of stock options and related tax benefit (Note 11) | | 68,404 | | 532,000 | | | | | | | | 532,000 | | | |
Amortization of stock compensation - ESOP shares (Note 15) | | | | 104,000 | | 76,000 | | | | | | 180,000 | | | |
Shares acquired or redeemed by ESOP (Note 15) | | | | | | (150,000 | ) | | | | | (150,000 | ) | | |
Cash dividends - $0.15 per share | | | | | | | | (1,091,000 | ) | | | (1,091,000 | ) | | |
Cash in lieu of fractional shares in four- for-three stock split (Note 11) | | | | (6,000 | ) | | | | | | | (6,000 | ) | | |
Repurchase and retirement of common stock | | (38,470 | ) | (40,000 | ) | | | (462,000 | ) | | | (502,000 | ) | | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2004 | | 7,273,582 | | 7,862,000 | | (1,144,000 | ) | 27,802,000 | | 11,000 | | 34,531,000 | | | |
| | | | | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | | | | | | | | 7,198,000 | | | | 7,198,000 | | $ | 7,198,000 | |
Other comprehensive loss: | | | | | | | | | | | | | | | |
Net change in unrealized gains on available-for-sale investment securities | | | | | | | | | | (24,000 | ) | (24,000 | ) | (24,000 | ) |
| | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | $ | 7,174,000 | |
| | | | | | | | | | | | | | | |
Exercise of stock options and related tax benefit (Note 11) | | 134,465 | | 1,039,000 | | | | | | | | 1,039,000 | | | |
Amortization of stock compensation - ESOP shares (Note 15) | | | | 150,000 | | 101,000 | | | | | | 251,000 | | | |
Shares acquired or redeemed by ESOP (Note 15) | | | | | | (348,000 | ) | | | | | (348,000 | ) | | |
Cash dividends - $.16 per share | | | | | | | | (1,092,000 | ) | | | (1,092,000 | ) | | |
| | | | | | | | | | | | | | | |
Balance, December 31, 2005 | | 7,408,047 | | $ | 9,051,000 | | $ | (1,391,000 | ) | $ | 33,908,000 | | $ | (13,000 | ) | $ | 41,555,000 | | | |
The accompanying notes are an integral part of these consolidated financial statements.
61
COMMUNITY VALLEY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Cash flows from operating activities: | | | | | | | |
Net income | | $ | 7,198,000 | | $ | 5,610,000 | | $ | 5,269,000 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Provision for loan losses | | 724,000 | | 734,000 | | 586,000 | |
Increase (decrease) in loan origination fees, net | | 86,000 | | (11,000 | ) | 196,000 | |
Depreciation, amortization and accretion, net | | 1,556,000 | | 1,350,000 | | 973,000 | |
Increase in cash surrender value of bank owned life insurance, net | | (294,000 | ) | (284,000 | ) | (380,000 | ) |
Non-cash compensation cost associated with the ESOP | | 251,000 | | 180,000 | | 252,000 | |
(Gain) loss on disposition of equipment | | (31,000 | ) | | | 8,000 | |
(Increase) decrease in loans held for sale | | (707,000 | ) | 789,000 | | 5,633,000 | |
Decrease (increase) in accrued interest receivable and other assets | | 871,000 | | 1,218,000 | | (1,019,000 | ) |
Increase in accrued interest payable and other liabilities | | 1,767,000 | | 1,876,000 | | 107,000 | |
Provision for deferred income taxes | | (1,331,000 | ) | (64,000 | ) | (639,000 | ) |
| | | | | | | |
Net cash provided by operating activities | | 10,090,000 | | 11,398,000 | | 10,986,000 | |
| | | | | | | |
Cash flows from investing activities: | | | | | | | |
Purchases of held-to-maturity investment securities | | (1,234,000 | ) | (1,013,000 | ) | (4,542,000 | ) |
Purchases of available-for-sale investment securities | | (2,008,000 | ) | (4,145,000 | ) | | |
Proceeds from called available-for-sale investment securities | | 2,027,000 | | 300,000 | | | |
Proceeds from matured or called held-to- maturity investment securities | | 1,119,000 | | 1,870,000 | | 3,440,000 | |
Proceeds from principal repayments of held-to-maturity investment securities | | 358,000 | | 332,000 | | 113,000 | |
Net increase (decrease) in interest-bearing deposits in banks | | 2,079,000 | | (790,000 | ) | (3,864,000 | ) |
Net increase in loans | | (62,477,000 | ) | (69,722,000 | ) | (41,383,000 | ) |
Premiums paid for life insurance policies | | (1,450,000 | ) | (122,000 | ) | (1,626,000 | ) |
Purchases of premises and equipment | | (3,802,000 | ) | (1,786,000 | ) | (2,870,000 | ) |
Proceeds from sale of equipment | | 65,000 | | | | 27,000 | |
| | | | | | | |
Net cash used in investing activities | | (65,323,000 | ) | (75,076,000 | ) | (50,705,000 | ) |
| | | | | | | | | | |
62
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Cash flows from financing activities: | | | | | | | |
Net increase in demand, interest-bearing and savings deposits | | $ | 17,561,000 | | $ | 37,110,000 | | $ | 43,927,000 | |
Net increase in time deposits | | 17,398,000 | | 19,438,000 | | 604,000 | |
Proceeds from note payable | | 800,000 | | | | | |
Proceeds from ESOP note payable | | 348,000 | | 879,000 | | 321,000 | |
Repayments of ESOP note payable | | (199,000 | ) | (878,000 | ) | (221,000 | ) |
Purchase of unallocated ESOP shares | | (348,000 | ) | (150,000 | ) | (321,000 | ) |
Proceeds from exercise of stock options | | 527,000 | | 284,000 | | 267,000 | |
Cash paid for fractional shares | | | | (6,000 | ) | | |
Payment of cash dividends | | (1,069,000 | ) | (1,089,000 | ) | (1,079,000 | ) |
Repurchase of common stock | | | | (502,000 | ) | | |
| | | | | | | |
Net cash provided by financing activities | | 35,018,000 | | 55,086,000 | | 43,498,000 | |
| | | | | | | |
(Decrease) increase in cash and cash equivalents | | (20,215,000 | ) | (8,592,000 | ) | 3,779,000 | |
| | | | | | | |
Cash and cash equivalents at beginning of year | | 68,218,000 | | 76,810,000 | | 73,031,000 | |
| | | | | | | |
Cash and cash equivalents at end of year | | $ | 48,003,000 | | $ | 68,218,000 | | $ | 76,810,000 | |
| | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | |
| | | | | | | |
Cash paid during the year for: | | | | | | | |
Interest | | $ | 5,158,000 | | $ | 4,084,000 | | $ | 4,396,000 | |
Income taxes | | $ | 5,780,000 | | $ | 2,830,000 | | $ | 4,350,000 | |
| | | | | | | |
Non-cash investing activities: | | | | | | | |
Net change in unrealized loss on available-for-sale investment securities | | $ | (24,000 | ) | $ | 9,000 | | $ | (12,000 | ) |
| | | | | | | |
Non-cash financing activities: | | | | | | | |
Release of unallocated ESOP shares | | $ | 101,000 | | $ | 76,000 | | $ | 102,000 | |
Accrual of cash dividend declared | | $ | 296,000 | | $ | 273,000 | | $ | 271,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
63
COMMUNITY VALLEY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
In May 2002, Community Valley Bancorp (“Community Valley”) was incorporated as a bank holding company for the purpose of acquiring Butte Community Bank (the “Bank”) in a one bank holding company reorganization. In 2004, Community Valley changed it’s status to a Financial Holding Company for the purpose of establishing CVB Insurance Agency LLC (“CVBIA”). The new corporate structure gives Community Valley, the Bank and CVBIA greater flexibility in terms of operation, expansion and diversification.
Founded in 1990, the Bank is a state-chartered financial institution with thirteen branches in ten cities including Chico, Magalia, Oroville, Paradise, Redding, Red Bluff, Colusa, Corning, Marysville, and Yuba City and loan production offices in Citrus Heights and Gridley. The Bank provides traditional deposit and lending services including commercial and construction loans, government guaranteed loans such as those available from the USDA and SBA, merchant services and investment services.
On December 19, 2002, Community Valley formed a wholly-owned subsidiary, Community Valley Bancorp Trust I (the “Trust”), a Delaware statutory business trust, for the purpose of issuing trust preferred securities (see Note 9).
On December 1, 2004, Community Valley formed a wholly-owned subsidiary, CVB Insurance Agency LLC for the purpose of providing insurance related services.
The accounting and reporting policies of Community Valley Bancorp and its subsidiaries (collectively, the “Company”) conform with accounting principles generally accepted in the United States of America and prevailing practice within the banking industry. The more significant of these policies applied in the preparation of the accompanying consolidated financial statements are discussed below.
Segment Information
Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Community Valley and its wholly-owned subsidiaries, Butte Community Bank and CVB Insurance Agency LLC. Significant intercompany transactions and balances have been eliminated in consolidation.
For financial reporting purposes, the Company’s investment in the Trust of $248,000 (see Note 9) is accounted for under the equity method and is included in accrued interest receivable and other assets on the consolidated balance sheet. The junior subordinated debentures issued and guaranteed by the Company and held by the Trust are reflected as debt in the Company’s consolidated balance sheet.
64
Stock Splits
On March 10, 2005, the Board of Directors declared a two-for-one stock split effective May 16, 2005, for shareholders of record on May 2, 2005. On February 20, 2004, the Board of Directors declared a four-for-three stock split effective March 26, 2004 for shareholders of record on March 2, 2004. All share and per share data has been retroactively adjusted to reflect these stock splits.
Reclassifications
Certain reclassifications have been made to prior years’ balances to conform to classifications used in 2005.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, cash and cash equivalents include cash and due from banks and Federal funds sold. Federal funds are generally sold for one-day periods.
Investment Securities
Investment securities are classified into the following categories:
• Available-for-sale securities, reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of taxes, as accumulated other comprehensive (loss) income within shareholders’ equity.
• Held-to-maturity securities, which management has the positive intent and ability to hold, reported at amortized cost, adjusted for the accretion of discounts and amortization of premiums.
Management determines the appropriate classification of its investments at the time of purchase and may only change the classification in certain limited circumstances. All transfers between categories are accounted for at fair value. As of December 31, 2005 and 2004 the Company did not have any investment securities classified as trading.
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Gains or losses on the sale of investment securities are computed using the specific identification method. Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts and amortization of premiums.
Investment securities are evaluated for impairment on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline and the intent and ability of the Company to retain its investment in the issues for a period of time sufficient to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
Loans
Loans are stated at principal balances outstanding, except for loans transferred from loans held for sale which are carried at the lower of principal balance or market value at the date of transfer, adjusted for accretion of discounts. Interest is accrued daily based upon outstanding loan balances. However, when, in the opinion of management, loans are considered to be impaired and the future collectibility of interest and principal is in serious doubt, loans are placed on nonaccrual status and the accrual of interest income is suspended. Any interest accrued but unpaid is charged against income. Payments received are applied to reduce principal to the extent necessary to ensure collection. Subsequent payments on these loans, or payments received on nonaccrual loans for which the ultimate collectibility of principal is not in doubt, are applied first to earned but unpaid interest and then to principal.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (including both principal and interest) in accordance with the contractual terms of the loan agreement. An impaired loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical matter, at the loan’s observable market price or the fair value of collateral if the loan is collateral dependent. Interest income on impaired loans, if appropriate, is recognized on a cash basis.
Substantially all loan origination fees, commitment fees, direct loan origination costs and purchase premiums and discounts on loans are deferred and recognized as an adjustment of yield, to be amortized to interest income over the contractual term of the loan. The unamortized balance of deferred fees and costs is reported as a component of net loans.
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The Company may acquire loans through a business combination or a purchase for which differences may exist between the contractual cash flows and the cash flows expected to be collected due, at least in part, to credit quality. When the Company acquires such loans, the yield that may be accreted (accretable yield) is limited to the excess of the Company’s estimate of undiscounted cash flows expected to be collected over the Company’s initial investment in the loan. The excess of contractual cash flows over cash flows expected to be collected may not be recognized as an adjustment to yield, loss, or a valuation allowance. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as an impairment. The Company may not “carry over” or create a valuation allowance in the initial accounting for loans acquired under these circumstances. At December 31, 2005, there were no such loans being accounted for under this policy.
Loans Held for Sale, Loan Sales and Servicing Rights
The Company accounts for the transfer and servicing of financial assets based on the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished.
Servicing rights acquired through 1) a purchase or 2) the origination of loans which are sold with servicing rights retained are recognized as separate assets or liabilities. Servicing assets or liabilities are recorded at the difference between the contractual servicing fees and adequate compensation for performing the servicing, and are subsequently amortized in proportion to and over the period of the related net servicing income or expense. Servicing assets are periodically evaluated for impairment. Fair values are estimated using discounted cash flows based on current market interest rates. For purposes of measuring impairment, servicing assets are stratified based on note rate and term. The amount of impairment recognized, if any, is the amount by which the servicing assets for a stratum exceed their fair value.
Any servicing assets in excess of the contractually specified servicing fees have been reclassified at fair value as an interest-only (IO) strip receivable and treated like an available-for-sale security. The servicing asset, net of any required valuation allowance, and IO strip receivable are included in accrued interest and other assets. At December 31, 2005 and 2004, IO strips were not significant.
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Government Guaranteed Loans
Included in the loan portfolio are loans which are 85% to 90% guaranteed by the Small Business Administration (SBA), U.S. Department of Agriculture, Rural Business – Cooperative Service (RBS) and Farm Services Agency (FSA). The guaranteed portion of these loans may be sold to a third party, with the Company retaining the unguaranteed portion. The Company generally receives a premium in excess of the adjusted carrying value of the loan at the time of sale. The Company may be required to refund a portion of the sales premium if the borrower defaults or the loan prepays within ninety days of the settlement date.
The Company’s investment in the loan is allocated between the retained portion of the loan, the servicing asset, the IO strip, and the sold portion of the loan based on their relative fair values on the date the loan is sold. The gain on the sold portion of the loan is recognized as income at the time of sale. The carrying value of the retained portion of the loan is discounted based on the estimated value of a comparable non-guaranteed loan. The servicing asset and IO strip is recognized as discussed above. Significant future prepayments of these loans will result in the recognition of additional amortization of related servicing assets and an adjustment to the carrying value of related IO strips.
The Company serviced SBA, RBS and FSA government guaranteed loans for others totaling $70,894,000 and $68,609,000 as of December 31, 2005 and 2004, respectively.
Mortgage Loans
The Company originates mortgage loans that are either held in the Company’s loan portfolio or sold in the secondary market. Loans held for sale are carried at the lower of cost or market value. Market value is determined by the specific identification method as of the balance sheet date or the date which the purchasers have committed to purchase the loans. At the time the loan is sold, the related right to service the loan is either retained, with the Company recognizing the servicing asset, or released in exchange for a one-time servicing-released premium. Loans subsequently transferred to the loan portfolio are transferred at the lower of cost or market value at the date of transfer. Any difference between the carrying amount of the loan and its outstanding principal balance is recognized as an adjustment to yield by the interest method.
The Company serviced loans for the Federal National Mortgage Association (FNMA) totaling $157,210,000 and $161,832,000 as of December 31, 2005 and 2004, respectively.
Participation Loans
The Company also serviced loans which it has participated with other financial institutions totaling $1,540,000 and $2,616,000 as of December 31, 2005 and 2004, respectively.
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Allowance for Loan Losses
The allowance for loan losses is maintained to provide for losses related to impaired loans and other losses that can be reasonably expected to occur in the normal course of business. The determination of the allowance for loan losses is based on estimates made by management, to include consideration of the character of the loan portfolio, specifically identified problem loans, potential losses inherent in the portfolio taken as a whole and economic conditions in the Company’s service area.
Classified loans and loans determined to be impaired are evaluated by management for specific risk of loss. In addition, a reserve factor is assigned to currently performing loans based on management’s assessment of the following for each identified loan type: (1) inherent credit risk, (2) historical losses and, (3) where the Company has not experienced losses, the loss experience of peer banks. These estimates are particularly susceptible to changes in the economic environment and market conditions.
The Company’s Board of Directors reviews the adequacy of the allowance for loan losses at least quarterly, to include consideration of the relative risks in the portfolio and current economic conditions. The allowance for loan losses is adjusted based on that review if, in the judgment of the Board of Directors and management, changes are warranted.
The allowance for loan losses is established through a provision for loan losses which is charged to expense. Additions to the allowance for loan losses are expected to maintain the adequacy of the total allowance after loan losses and loan growth. The allowance for loan losses at December 31, 2005 and 2004 reflects management’s estimate of possible losses in the portfolio.
Allowance for Losses Related to Undisbursed Loan Commitments
The Company maintains a separate allowance for losses related to undisbursed loan commitments. Management estimates the amount of probable losses by applying the loss factors used in the allowance for loan loss methodology to an estimate of the expected usage and applies the factor to the unused portion of undisbursed lines of credit. The allowance totaled $481,000 and $381,000 at December 31, 2005 and 2004, respectively, and is included in accrued interest payable and other liabilities on the balance sheet.
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Premises and Equipment
Premises and equipment are carried at cost. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. The useful lives of premises are estimated to be thirty to thirty-nine years. Leasehold improvements are amortized over the life of the improvement or the life of the related lease, whichever is shorter. The useful lives of furniture, fixtures and equipment are estimated to be three to ten years. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred.
The Company evaluates premises and equipment for financial impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable.
Income Taxes
The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense (benefit) represents each entity’s proportionate share of the consolidated provision for income taxes.
The Company accounts for income taxes using the liability or balance sheet method. Under this method, deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.
Earnings Per Share
Basic earnings per share (EPS), which excludes dilution, is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period, excluding the effect of unallocated shares of the Employee Stock Ownership Plan. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted EPS.
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Comprehensive Income
Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of other comprehensive income (loss) that historically has not been recognized in the calculation of net income. Unrealized gains or losses on the Company’s available-for-sale investment securities and IO strip are the principle source of other comprehensive income or loss. Total comprehensive income and the components of accumulated other comprehensive income (loss) are presented in the consolidated statement of changes in shareholders’ equity.
Stock-Based Compensation
At December 31, 2005, the Company has three stock-based compensation plans, which are described more fully in Note 11. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation. Pro forma adjustments to the Company’s consolidated net earnings and earnings per share are disclosed during the years in which the options become vested.
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Net income, as reported | | $ | 7,198,000 | | $ | 5,610,000 | | $ | 5,269,000 | |
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects | | 353,000 | | 311,000 | | 265,000 | |
| | | | | | | |
Pro forma net income | | $ | 6,845,000 | | $ | 5,299,000 | | $ | 5,004,000 | |
| | | | | | | |
Basic earnings per share -as reported | | $ | 1.00 | | $ | .79 | | $ | .75 | |
Basic earnings per share - pro forma | | $ | .95 | | $ | .74 | | $ | .71 | |
| | | | | | | |
Diluted earnings per share - as reported | | $ | .95 | | $ | .74 | | $ | .71 | |
Diluted earnings per share - pro forma | | $ | .90 | | $ | .70 | | $ | .68 | |
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The fair value of each option is estimated on the date of grant using an option-pricing model with the following assumptions:
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Expected volatility | | 12.38 | % | 15.21 | % | 30.09 | % |
Risk-free interest rate | | 4.0 | % | 4.02 | % | 4.52 | % |
Expected option life | | 7.5 years | | 10 years | | 10 years | |
Expected dividend yield | | 1.11 | % | 1.36 | % | 1.72 | % |
Weighted average fair value of options granted during the year | | $ | 3.25 | | $ | 3.35 | | $ | 3.66 | |
| | | | | | | | | | |
Impact of New Financial Accounting Standards
Other-Than-Temporary Impairment of Securities
In March 2004, the Financial Accounting Standards Board (FASB) and Emerging Issues Task Force (EITF) reached consensus on several issues being addressed in EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The consensus provides guidance for evaluating whether an investment is other-than-temporarily impaired and was effective for other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. The disclosure provisions of EITF 03-1 continue to be effective for the Company’s consolidated financial statements for the year ended December 31, 2005.
On November 3, 2005, the FASB issued FASB Staff Position (FSP) Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP nullifies certain requirements of EITF Issue 03-1, and supersedes EITF Topic No. D-44, Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. The guidance in this FSP amends FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. The FSP is effective for reporting periods beginning after December 15, 2005. The Company does not anticipate any material impact to its financial condition or results of operations as a result of the adoption of this guidance.
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Share-Based Payments
In December 2004 the FASB issued Statement No. 123 (revised 2004) (FAS 123 (R)), Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees. The Company may elect to adopt FAS 123 (R) using a modified prospective method or modified retrospective method. Under the modified retrospective method, the Company would restate previously issued financial statements, basing the expense on that previously reported in their pro forma disclosures required by FAS 123. The modified prospective method would require the Company to record compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption as these awards continue to vest. FAS 123 (R) is effective for the first fiscal year beginning after June 15, 2005. Management has elected to use the modified prospective method and has completed its evaluation of the effect that FAS 123 (R) will have and believes that the effect of its implementation will be consistent with the pro forma disclosures noted above.
Accounting Changes and Error Corrections
On June 7, 2005, the FASB issued Statement No. 154 (FAS 154), Accounting Changes and Error Corrections - a replacement of Accounting Principles Board (APB) Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Under the provisions of FAS 154, voluntary changes in accounting principles are applied retrospectively to prior periods’ financial statements unless it would be impractical to do so. FAS 154 supersedes APB Opinion No. 20, which required that most voluntary changes in accounting principles be recognized by including in the current period’s net income the cumulative effect of the change. FAS154 also makes a distinction between “retrospective application” of a change in accounting principle and the “restatement” of financial statements to reflect the correction of an error. The provisions of FAS 154 are effective for accounting changes made in fiscal years beginning after December 15, 2005. Management of the Company does not expect the adoption of this standard to have a material impact on its financial position or results of operations.
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2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at December 31, 2004 and 2005 consisted of the following:
Available for Sale
| | 2005 | |
| | | | Gross | | Gross | | Estimated | |
| | Amortized | | Unrealized | | Unrealized | | Fair | |
| | Cost | | Gains | | Losses | | Value | |
| | | | | | | | | |
Debt securities: | | | | | | | | | |
U.S. Government agencies | | $ | 3,009,000 | | | | $ | (45,000 | ) | $ | 2,964,000 | |
Obligations of states and political subdivisions | | 1,356,000 | | $ | 24,000 | | | | 1,380,000 | |
| | $ | 4,365,000 | | $ | 24,000 | | $ | (45,000 | ) | $ | 4,344,000 | |
| | 2004 | |
| | | | Gross | | Gross | | Estimated | |
| | Amortized | | Unrealized | | Unrealized | | Fair | |
| | Cost | | Gains | | Losses | | Value | |
| | | | | | | | | |
Debt securities: | | | | | | | | | |
U.S. Government agencies | | $ | 2,000,000 | | | | $ | (9,000 | ) | $ | 1,991,000 | |
Obligations of states and political subdivisions | | 1,356,000 | | $ | 21,000 | | | | 1,377,000 | |
U.S. Treasuries | | 1,004,000 | | 7,000 | | | | 1,011,000 | |
| | | | | | | | | |
| | $ | 4,360,000 | | $ | 28,000 | | $ | (9,000 | ) | $ | 4,379,000 | |
Net unrealized (losses) and gains on available-for-sale investment securities totaling $(21,000) and $19,000 were recorded, net of $8,000 and $(8,000) in tax benefits (expenses), respectively, as accumulated other comprehensive (loss) income within shareholders’ equity at December 31, 2005 and 2004, respectively. There were no sales or transfers of available-for-sale investment securities for the years ended December 31, 2005, 2004 and 2003.
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Held to Maturity
| | 2005 | |
| | | | Gross | | Gross | | Estimated | |
| | Amortized | | Unrealized | | Unrealized | | Fair | |
| | Cost | | Gains | | Losses | | Value | |
| | | | | | | | | |
Debt securities: | | | | | | | | | |
U.S. Government agencies | | $ | 2,090,000 | | $ | 6,000 | | $ | (40,000 | ) | 2,056,000 | |
U.S. Treasuries | | 242,000 | | | | (2,000 | ) | 240,000 | |
| | | | | | | | | |
| | $ | 2,332,000 | | $ | 6,000 | | $ | (42,000 | ) | $ | 2,296,000 | |
| | | | | | | | | | | | | |
| | 2004 | |
| | | | Gross | | Gross | | Estimated | |
| | Amortized | | Unrealized | | Unrealized | | Fair | |
| | Cost | | Gains | | Losses | | Value | |
| | | | | | | | | |
Debt securities: | | | | | | | | | |
U.S. Government agencies | | $ | 2,481,000 | | $ | 10,000 | | $ | (8,000 | ) | $ | 2,483,000 | |
Obligations of states and political subdivisions | | 101,000 | | | | | | 101,000 | |
| | | | | | | | | |
| | $ | 2,582,000 | | $ | 10,000 | | $ | (8,000 | ) | $ | 2,584,000 | |
There were no sales or transfers of held-to-maturity investment securities for the years ended December 31, 2005, 2004 and 2003.
Investment securities with unrealized losses at December 31, 2005 are summarized and classified according to the duration of the loss period as follows:
| | Less than 12 Months | | 12 Months or More | | Total | |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | |
| | Value | | Losses | | Value | | Losses | | Value | | Losses | |
Debt securities: | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 987,000 | | $ | (22,000 | ) | $ | 2,953,000 | | $ | (47,000 | ) | $ | 3,940,000 | | $ | (69,000 | ) |
Obligations of states and political subdivisions | | | | | | 736,000 | | (16,000 | ) | 736,000 | | (16,000 | ) |
U.S. Treasuries | | 240,000 | | (2,000 | ) | | | | | 240,000 | | (2,000 | ) |
| | | | | | | | | | | | | |
| | $ | 1,227,000 | | $ | (24,000 | ) | $ | 3,689,000 | | $ | (63,000 | ) | $ | 4,916,000 | | $ | (87,000 | ) |
At December 31, 2005, the Company held 11 investment securities of which 2 were in a loss position for less than twelve months and 4 were in a loss position and had been in a loss position for twelve months or more.
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Management periodically evaluates each investment security for other than temporary impairment relying primarily on industry analyst reports, observation 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 and that the noted decline in fair value is considered temporary and due only to interest rate fluctuations.
The amortized cost and estimated fair value of investment securities at December 31, 2005, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of securities may have the right to call or prepay obligations with or without prepayment penalties.
| | Available for Sale | | Held to Maturity | |
| | | | Estimated | | | | Estimated | |
| | Amortized | | Fair | | Amortized | | Fair | |
| | Cost | | Value | | Cost | | Value | |
| | | | | | | | | |
Within one year | | $ | 1,000,000 | | $ | 993,000 | | | | | |
After one year through five years | | 1,000,000 | | 984,000 | | $ | 1,242,000 | | $ | 1,216,000 | |
After five years through ten years | | | | | | | | | |
After ten years | | 1,356,000 | | 1,380,000 | | | | | |
| | | | | | | | | |
| | 3,356,000 | | 3,357,000 | | 1,242,000 | | 1,216,000 | |
| | | | | | | | | |
Investment securities not due at a single maturity date: | | | | | | | | | |
SBA pools | | 1,009,000 | | 987,000 | | 1,090,000 | | 1,080,000 | |
| | | | | | | | | |
| | $ | 4,365,000 | | $ | 4,344,000 | | $ | 2,332,000 | | $ | 2,296,000 | |
Investment securities with amortized costs totaling $3,357,000 and $2,304,000 and fair values totaling $3,349,000 and $2,297,000 were pledged to secure public deposits and treasury, tax and loan accounts at December 31, 2005 and 2004, respectively.
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3. LOANS AND ALLOWANCE FOR LOAN LOSSES
Outstanding loans are summarized as follows:
| | December 31, | |
| | 2005 | | 2004 | |
| | | | | |
Real estate - mortgage | | $ | 173,450,000 | | $ | 146,876,000 | |
Real estate - construction | | 111,130,000 | | 90,643,000 | |
Commercial | | 61,162,000 | | 58,662,000 | |
Agricultural | | 24,803,000 | | 22,177,000 | |
Installment | | 36,500,000 | | 26,219,000 | |
| | | | | |
| | 407,045,000 | | 344,577,000 | |
| | | | | |
Deferred loan origination fees, net | | (1,108,000 | ) | (1,022,000 | ) |
Allowance for loan losses | | (4,716,000 | ) | (4,000,000 | ) |
| | | | | |
| | $ | 401,221,000 | | $ | 339,555,000 | |
Changes in the allowance for loan losses were as follows:
| | Year Ended December 31, | |
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Balance, beginning of year | | $ | 4,000,000 | | $ | 3,262,000 | | $ | 2,750,000 | |
Provision charged to operations | | 724,000 | | 734,000 | | 586,000 | |
Losses charged to allowance | | (9,000 | ) | (24,000 | ) | (81,000 | ) |
Recoveries | | 1,000 | | 28,000 | | 7,000 | |
| | | | | | | |
Balance, end of year | | $ | 4,716,000 | | $ | 4,000,000 | | $ | 3,262,000 | |
At December 31, 2005 and 2004, nonaccrual loans totaled $9,000 and $101,000, which were considered impaired loans. There was no valuation allowance related to these loans in 2005 and 2004. Interest foregone on nonaccrual loans totaled $1,000 for each the years ended December 31, 2005, 2004 and 2003. Interest recognized for cash payment received on nonaccrual loans was not significant for the years ended December 31, 2005, 2004 and 2003, respectively.
The Company did not hold any real estate acquired by foreclosure at December 31, 2005 or 2004.
Salaries and employee benefits totaling $1,766,000, $1,190,000 and $1,032,000 have been deferred as loan origination costs for the years ended December 31, 2005, 2004 and 2003, respectively.
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4. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable and other assets consisted of the following:
| | December 31, | |
| | 2005 | | 2004 | |
| | | | | |
Accrued interest receivable | | $ | 3,424,000 | | $ | 2,758,000 | |
Deferred tax assets, net (Note 13) | | 4,190,000 | | 2,844,000 | |
Mortgage servicing assets | | 1,073,000 | | 1,348,000 | |
Prepaid expenses | | 1,008,000 | | 1,019,000 | |
Other | | 681,000 | | 1,418,000 | |
| | | | | |
| | $ | 10,376,000 | | $ | 9,387,000 | |
Originated mortgage servicing assets totaling $142,000, $515,000 and $1,111,000 were recognized during the years ended December 31, 2005, 2004 and 2003, respectively. Amortization of mortgage servicing assets totaled $417,000, $381,000 and $476,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
5. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
| | December 31, | |
| | 2005 | | 2004 | |
| | | | | |
Land | | $ | 2,176,000 | | $ | 1,519,000 | |
Buildings and improvements | | 6,908,000 | | 5,761,000 | |
Furniture, fixtures and equipment | | 7,384,000 | | 6,242,000 | |
Leasehold improvements | | 994,000 | | 842,000 | |
Construction in progress | | 622,000 | | 75,000 | |
| | | | | |
| | 18,084,000 | | 14,439,000 | |
Less accumulated depreciation and amortization | | 6,863,000 | | 5,411,000 | |
| | | | | |
| | $ | 11,221,000 | | $ | 9,027,000 | |
Depreciation and amortization included in occupancy and equipment expense totaled $1,574,000, $1,313,000 and $934,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
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6. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
| | December 31, | |
| | 2005 | | 2004 | |
| | | | | |
Savings | | $ | 36,061,000 | | $ | 33,824,000 | |
Money market | | 42,029,000 | | 40,119,000 | |
NOW accounts | | 151,930,000 | | 140,271,000 | |
Individual retirement accounts | | 6,030,000 | | 6,818,000 | |
Time, $100,000 or more | | 58,573,000 | | 46,120,000 | |
Other time | | 56,059,000 | | 51,114,000 | |
| | | | | |
| | $ | 350,682,000 | | $ | 318,266,000 | |
Aggregate annual maturities of time deposits at December 31, 2005 are as follows:
Year Ending | | | |
December 31, | | | |
| | | |
2006 | | $ | 74,449,000 | |
2007 | | 34,070,000 | |
2008 | | 5,280,000 | |
2009 | | 551,000 | |
2010 | | 282,000 | |
| | | |
| | $ | 114,632,000 | |
Interest expense recognized on interest-bearing deposits consisted of the following:
| | Year Ended December 31, | |
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Savings | | $ | 181,000 | | $ | 145,000 | | $ | 121,000 | |
Money market | | 368,000 | | 285,000 | | 357,000 | |
NOW accounts | | 934,000 | | 811,000 | | 1,050,000 | |
Individual retirement accounts | | 183,000 | | 161,000 | | 185,000 | |
Time, $100,000 or more | | 1,492,000 | | 1,136,000 | | 853,000 | |
Other time | | 1,510,000 | | 1,047,000 | | 1,358,000 | |
| | | | | | | |
| | $ | 4,668,000 | | $ | 3,585,000 | | $ | 3,924,000 | |
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7. SHORT-TERM BORROWING ARRANGEMENTS
The Company has $15,000,000 in unsecured borrowing arrangements with two of its correspondent banks to meet short-term liquidity needs. There were no borrowings outstanding under these arrangements at December 31, 2005 and 2004.
8. NOTES PAYABLE
Note Payable
On June 1, 2005, Community Valley Bancorp entered into a short term, unsecured note payable in a principal amount of $800,000 in conjunction with the purchase of real property. The interest rate on the note at December 31, 2005 was 4.5%. The note was paid in full on January 4, 2006.
Employee Stock Ownership Plan (ESOP) Note
The ESOP obtained financing through a $1,200,000 unsecured line of credit from another financial institution with the Company acting as the guarantor (see Note 15). The note has a variable interest rate, based on an independent index, and a maturity date of November 12, 2012. At December 31, 2005, the interest rate was 7.0%. Advances on the line of credit totaled $982,000 and $833,000 at December 31, 2005 and 2004, respectively.
9. JUNIOR SUBORDINATED DEBENTURES
Community Valley Bancorp Trust I (CVB Trust I) is a Delaware statutory business trust formed by the Company for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company. Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to twenty-five percent of the Company’s Tier 1 capital on a pro forma basis. At December 31, 2005, all of the trust preferred securities that have been issued qualify as Tier 1 capital.
In December 2002, the Company issued to CVB Trust I Subordinated Debentures due December 31, 2032. Simultaneously, CVB Trust I issued 8,000 floating rate trust preferred securities, with liquidation values of $1,000 per security, for gross proceeds of $8,000,000. The Subordinated Debentures represent the sole assets of the Trust. The Subordinated Debentures are redeemable by the Company, subject to receipt by the Company of prior approval from the Federal Reserve Bank (FRB), if then required under applicable capital guidelines or policies of the FRB. The Company may redeem the Subordinated Debentures held by CVB Trust I on any December 31st on or after December 31, 2007. The redemption price shall be par plus accrued and unpaid interest, except in the case of redemption under a special event, which is defined in the debenture. The floating rate trust preferred securities are subject to mandatory redemption to the extent of any early redemption of the Subordinated Debentures and upon maturity of the Subordinated Debentures on December 31, 2032.
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Holders of the trust preferred securities are entitled to cumulative cash distributions on the liquidation amount of $1,000 per security. Interest rates on the trust preferred securities and Subordinated Debentures are the same and are computed on a 360-day basis. The stated interest rate is the three-month London Interbank Offered Rate (LIBOR) plus 3.30% (7.45% at December 31, 2005) with a maximum rate of 12.5% annually, adjustable quarterly.
Interest expense recognized by the Company for the years ended December 31, 2005, 2004 and 2003 related to the subordinated debentures was $592,000, $438,000 and $439,000 respectively. The amount of deferred costs at December 31, 2005 and 2004 was $96,000 and $144,000, respectively. The amortization of the deferred costs was $48,000 for the years ended December 31, 2005, 2004 and 2003.
10. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain of its branch offices and certain equipment under noncancellable operating leases. These leases expire on various dates through 2014 and have various renewal options ranging from five to fifteen years. Rental payments include minimum rentals, plus adjustments for changing price indexes. Future minimum lease payments and sublease rental income are as follows:
| | | | Minimum | |
| | Minimum | | Sublease | |
Year Ending | | Lease | | Rental | |
December 31, | | Payments | | Income | |
| | | | | |
2006 | | $ | 631,000 | | $ | 138,000 | |
2007 | | 689,000 | | 142,000 | |
2008 | | 662,000 | | 137,000 | |
2009 | | 665,000 | | 125,000 | |
2010 | | 665,000 | | 120,000 | |
Thereafter | | 5,611,000 | | 176,000 | |
| | | | | |
| | $ | 8,923,000 | | $ | 838,000 | |
Rental expense included in occupancy and equipment expense totaled $524,000, $458,000 and $391,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Sublease income included in occupancy expense totaled $134,000, $132,000 and $91,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
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Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet.
The Company’s exposure to credit loss in the event of nonperformance by the other party for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and standby letters of credit as it does for loans included on the consolidated balance sheet.
The following financial instruments represent off-balance-sheet credit risk:
| | December 31, | |
| | 2005 | | 2004 | |
| | | | | |
Commitments to extend credit | | $ | 200,693,000 | | $ | 147,751,000 | |
Standby letters of credit | | $ | 4,895,000 | | $ | 4,649,000 | |
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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include deposit accounts, accounts receivable, inventory, equipment and deeds of trust on residential real estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The fair value of the liability related to these standby letters of credit, which represents the fees received for issuing the guarantees, was not significant at December 31, 2005 and 2004. The Company recognizes these fees as revenues over the term of the commitment or when the commitment is used.
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Commercial loan commitments and standby letters of credit represent approximately 12% of total commitments and are generally unsecured or secured by collateral other than real estate and have variable interest rates. Agricultural loan commitments represent approximately 6% of total commitments and are generally secured by crop assignments, accounts receivable and farm equipment and have variable interest rates. Real estate loan commitments represent approximately 71% of total commitments and are generally secured by property with a loan-to-value ratio not to exceed 80%. The majority of real estate commitments also have variable interest rates. Personal lines of credit and home equity lines of credit represent the remaining 11% of total commitments and are generally unsecured or secured by residential real estate and have both variable and fixed interest rates.
Concentrations of Credit Risk
The Company grants real estate mortgage, real estate construction, commercial, agricultural and consumer loans to customers throughout Butte, Sutter, Yuba, Tehama, Shasta, Colusa and Placer Counties.
Although the Company has a diversified loan portfolio, a substantial portion of its portfolio is secured by commercial and residential real estate. However, personal and business income represent the primary source of repayment for a majority of these loans.
In addition, the Company’s real estate and construction loans represent approximately 70% of outstanding loans at December 31, 2005, compared to approximately 69% at December 31, 2004. Collateral values associated with this lending concentration can vary significantly based on the general level of interest rates and both local and regional economic conditions. In management’s opinion, although this concentration has no more than the normal risk of collection, a substantial decline in the performance of the economy in general or a decline in real estate values in the Company’s primary market areas, in particular, could have an adverse impact on the collectibility of these loans.
Correspondent Banking Agreements
The Company maintains funds on deposit with other federally insured financial institutions under correspondent banking agreements. Uninsured deposits totaled $1,445,000 at December 31, 2005.
Federal Reserve Requirements
Banks are required to maintain reserves with the Federal Reserve Bank equal to a percentage of their reservable deposits less vault cash. The Bank’s vault cash fulfilled its reserve requirement at December 31, 2005.
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Contingencies
The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or consolidated results of operations of the Company.
11. SHAREHOLDERS’ EQUITY
Dividends
The shareholders of the Company will be entitled to receive dividends when and as declared by its Board of Directors, out of funds legally available for the payment of dividends, as provided in the California General Corporation Law. The California general corporation law prohibits the Company from paying dividends on its common stock unless: (i) its retained earnings, immediately prior to the dividend payment, equals or exceeds the amount of the dividend or (ii) immediately after giving effect to the dividend, the sum of the Company’s assets (exclusive of goodwill and deferred charges) would be at least equal to 125% of its liabilities (not including deferred taxes, deferred income and other deferred liabilities) and the current assets of the Company would be at least equal to its current liabilities, or, if the average of its earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of its interest expense for the two preceding fiscal yeas, at least equal to 125% of its current liabilities. In certain circumstances, the Company may be required to obtain the prior approval of the Federal Reserve Board to make capital distributions to shareholders of the Company.
The California Financial Code restricts the total dividend payment of any bank in any calendar year to the lesser of (1) the bank’s retained earnings or (2) the bank’s net income for its last three fiscal years, less distributions made to shareholders during the same three-year period. At December 31, 2005, retained earnings of $13,655,000 were free of such restrictions. In addition the Company’s ability to pay dividends is subject to certain covenants contained in the indentures relating to Trust Preferred Securities issued by the business trust (see Note 9).
Stock Repurchase Plan
The Board of Directors approved a plan to repurchase up to $3,000,000 of the outstanding common stock of the Company in 2003. Stock repurchases may be made from time to time on the open market or through privately negotiated transactions. The timing of purchases and the exact number of shares to be purchased will depend on market conditions. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. During 2005 and 2003, no shares of the Company’s common stock were repurchased. During 2004, 38,470 shares of the Company’s common stock were repurchased for $502,000.
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Stock Options
The Company has established stock option plans for which shares of common stock have been reserved for issuance to employees and directors under incentive and nonstatutory agreements. The plans require that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the option is exercised. The options expire on a date determined by the Board of Directors, but not later than ten years from the date of grant. The vesting period is determined by the Board of Directors and is generally over five years; however, nonstatutory options granted during 1997 vested immediately. Under the 1997 and 1991 plans, 293,641 shares of common stock remain reserved for issuance to employees and directors, and the related options are exercisable until their expiration. However, no new options will be granted under these plans. Under the Company’s 2000 stock option plan, 711,345 shares of common stock remain reserved for issuance to employees and directors, of which 74,677 shares are available for future grants.
| | 2005 | | 2004 | | 2003 | |
| | | | Weighted | | | | Weighted | | | | Weighted | |
| | | | Average | | | | Average | | | | Average | |
| | | | Exercise | | | | Exercise | | | | Exercise | |
| | Shares | | Price | | Shares | | Price | | Shares | | Price | |
| | | | | | | | | | | | | |
Incentive Options | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Options outstanding, beginning of year | | 551,348 | | $ | 6.28 | | 481,070 | | $ | 4.71 | | 532,226 | | $ | 4.42 | |
| | | | | | | | | | | | | |
Options granted | | 30,000 | | $ | 14.48 | | 107,618 | | $ | 12.99 | | 13,334 | | $ | 9.65 | |
Options exercised | | (69,765 | ) | $ | 5.28 | | (37,340 | ) | $ | 5.31 | | (57,378 | ) | $ | 2.97 | |
Options cancelled | | (23,621 | ) | $ | 9.79 | | | | | | (7,112 | ) | $ | 6.86 | |
| | | | | | | | | | | | | |
Options outstanding, end of year | | 487,962 | | $ | 6.76 | | 551,348 | | $ | 6.28 | | 481,070 | | $ | 4.70 | |
| | | | | | | | | | | | | |
Options exercisable, end of year | | 352,016 | | $ | 4.94 | | 326,954 | | $ | 5.15 | | 321,062 | | $ | 3.68 | |
| | | | | | | | | | | | | |
Non-Qualified Options | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Options outstanding, beginning of year | | 414,680 | | $ | 3.82 | | 445,744 | | $ | 3.75 | | 465,744 | | $ | 3.67 | |
| | | | | | | | | | | | | |
Options granted | | 4,000 | | $ | 13.25 | | | | | | 5,334 | | $ | 9.65 | |
Options exercised | | (64,700 | ) | $ | 2.45 | | (31,064 | ) | $ | 2.79 | | (25,334 | ) | $ | 3.82 | |
| | | | | | | | | | | | | |
Options outstanding, end of year | | 353,980 | | $ | 4.17 | | 414,680 | | $ | 3.81 | | 445,744 | | $ | 3.74 | |
| | | | | | | | | | | | | |
Options exercisable, end of year | | 347,892 | | $ | 4.04 | | 361,554 | | $ | 3.82 | | 170,072 | | $ | 3.36 | |
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A summary of options outstanding at December 31, 2005 follows:
| | Number of | | Weighted | | Number of | |
| | Options | | Average | | Options | |
| | Outstanding | | Remaining | | Exercisable | |
| | December 31, | | Contractual | | December 31, | |
Range of Exercise Prices | | 2005 | | Life | | 2005 | |
| | | | | | | |
Incentive Options | | | | | | | |
| | | | | | | |
$ | 2.29 | - | $ | 3.80 | | | 177,238 | | 2.5 years | | 177,238 | |
$ | 4.54 | - | $ | 5.27 | | | 68,850 | | 4.1 years | | 68,850 | |
$ | 7.13 | - | $ | 9.65 | | | 114,210 | | 6.5 years | | 70,913 | |
$ | 12.37 | - | $ | 14.75 | | | 127,664 | | 8.2 years | | 35,015 | |
| | | | | | | | | | | | |
| | | | | | | 487,962 | | | | 352,016 | |
| | | | | | | | | | | | |
Non-qualified Options | | | | | | | |
| | | | | | | | | | | | |
$ | 2.29 | | | | | | 104,656 | | 1.4 years | | 104,656 | |
$ | 4.71 | | | | | | 239,994 | | 4.3 years | | 239,994 | |
$ | 7.24 | | | | | | 5,330 | | 7.8 years | | 2,486 | |
$ | 13.25 | | | | | | 4,000 | | 9.3 years | | 756 | |
| | | | | | | | | | | | |
| | | | | | | 353,980 | | | | 347,892 | |
| | | | | | | | | | | | | |
Earnings Per Share
A reconciliation of the numerators and denominators of the basic and diluted earnings per share computations is as follows:
| | | | Weighted | | | |
| | | | Average | | | |
| | | | Number of | | | |
| | Net | | Shares | | Per Share | |
For the Year Ended | | Income | | Outstanding | | Amount | |
| | | | | | | |
December 31, 2005 | | | | | | | |
| | | | | | | |
Basic earnings per share | | $ | 7,198,000 | | 7,166,258 | | $ | 1.00 | |
| | | | | | | |
Effect of dilutive stock options | | | | 445,446 | | | |
| | | | | | | |
Diluted earnings per share | | $ | 7,198,000 | | 7,611,704 | | $ | .95 | |
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| | | | Weighted | | | |
| | | | Average | | | |
| | | | Number of | | | |
| | Net | | Shares | | Per Share | |
For the Year Ended | | Income | | Outstanding | | Amount | |
| | | | | | | |
December 31, 2004 | | | | | | | |
| | | | | | | |
Basic earnings per share | | $ | 5,610,000 | | 7,112,386 | | $ | .79 | |
| | | | | | | |
Effect of dilutive stock options | | | | 488,706 | | | |
| | | | | | | |
Diluted earnings per share | | $ | 5,610,000 | | 7,601,092 | | $ | .74 | |
| | | | | | | |
December 31, 2003 | | | | | | | |
| | | | | | | |
Basic earnings per share | | $ | 5,269,000 | | 7,025,290 | | $ | .75 | |
| | | | | | | |
Effect of dilutive stock options | | | | 405,226 | | | |
| | | | | | | |
Diluted earnings per share | | $ | 5,269,000 | | 7,430,516 | | $ | .71 | |
During 2005, 14,000 options were excluded from the computation of diluted earnings per share as they were anti-dilutive. All other stock options outstanding were included in the computation of diluted earnings per share for the years ended December 31, 2005, 2004 and 2003 as none of those stock options were anti-dilutive.
Regulatory Capital
The Company and the Bank are subject to certain regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and the Federal Depository Insurance Corporation (FDIC). Failure to meet these minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
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Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets as set forth in the following table. Each of these components is defined in the regulations. Management believes that the Company and the Bank meet all their capital adequacy requirements as of December 31, 2005 and 2004.
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 below. There are no conditions or events since that notification that management believes have changed the Bank’s category.
| | | | | | | | | | To Be Well Capitalized | |
| | | | | | For Capital | | Under Prompt Corrective | |
| | | | Adequacy Purposes | | Action Provisions | |
| | Actual | | Minimum | | Minimum | | Minimum | | Minimum | |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
| | | | | | | | | | | | | |
December 31, 2005 | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Company: | | | | | | | | | | | | | |
Total capital (to risk-weighted assets) | | $ | 55,014,000 | | 12.5 | % | $ | 34,916,000 | | 8.0 | % | n/a | | n/a | |
Tier 1 capital (to risk-weighted assets) | | $ | 49,568,000 | | 11.4 | % | $ | 17,458,000 | | 4.0 | % | n/a | | n/a | |
Tier 1 capital (to average assets) | | $ | 49,568,000 | | 9.8 | % | $ | 20,216,000 | | 4.0 | % | n/a | | n/a | |
| | | | | | | | | | | | | |
Bank: | | | | | | | | | | | | | |
Total capital (to risk-weighted assets) | | $ | 49,142,000 | | 11.3 | % | $ | 34,878,000 | | 8.0 | % | $ | 43,597,000 | | 10.0 | % |
Tier 1 capital (to risk-weighted assets) | | $ | 43,944,000 | | 10.1 | % | $ | 17,439,000 | | 4.0 | % | $ | 26,158,000 | | 6.0 | % |
Tier 1 capital (to average assets) | | $ | 43,944,000 | | 8.8 | % | $ | 20,000,000 | | 4.0 | % | $ | 25,000,000 | | 5.0 | % |
| | | | | | | | | | | | | |
December 31, 2004 | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Company: | | | | | | | | | | | | | |
Total capital (to risk-weighted assets) | | $ | 46,742,000 | | 12.5 | % | $ | 29,895,000 | | 8.0 | % | N/A | | N/A | |
Tier 1 capital (to risk- weighted assets) | | $ | 42,361,000 | | 11.3 | % | $ | 14,947,000 | | 4.0 | % | N/A | | N/A | |
Tier 1 capital (to average assets) | | $ | 42,361,000 | | 9.5 | % | $ | 17,770,000 | | 4.0 | % | N/A | | N/A | |
| | | | | | | | | | | | | |
Bank: | | | | | | | | | | | | | |
Total capital (to risk-weighted assets) | | $ | 42,337,000 | | 11.3 | % | $ | 29,853,000 | | 8.0 | % | $ | 37,317,000 | | 10.0 | % |
Tier 1 capital (to risk-weighted assets) | | $ | 37,956,000 | | 10.2 | % | $ | 14,927,000 | | 4.0 | % | $ | 22,390,000 | | 6.0 | % |
Tier 1 capital (to average Assets) | | $ | 37,956,000 | | 8.6 | % | $ | 17,656,000 | | 4.0 | % | $ | 22,070,000 | | 5.0 | % |
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12. OTHER NON-INTEREST INCOME AND EXPENSES
Other non-interest income consisted of the following:
| | Year Ended December 31, | |
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Alternative investment fees | | $ | 520,000 | | $ | 428,000 | | $ | 218,000 | |
Merchant card processing fees | | 390,000 | | 337,000 | | 343,000 | |
Earnings from cash surrender value of bank owned life insurance | | 294,000 | | 284,000 | | 380,000 | |
Other | | 867,000 | | 675,000 | | 449,000 | |
| | | | | | | |
| | $ | 2,071,000 | | $ | 1,724,000 | | $ | 1,390,000 | |
Other expenses consisted of the following: | | | | | | | |
| | Year Ended December 31, | |
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Professional fees | | $ | 1,035,000 | | $ | 633,000 | | $ | 537,000 | |
Telephone and postage | | 580,000 | | 511,000 | | 498,000 | |
Stationery and supplies | | 545,000 | | 521,000 | | 549,000 | |
Director fees and retirement accrual | | 469,000 | | 408,000 | | 357,000 | |
Advertising and promotion | | 412,000 | | 302,000 | | 277,000 | |
Other | | 2,645,000 | | 1,915,000 | | 1,481,000 | |
| | | | | | | |
| | $ | 5,686,000 | | $ | 4,290,000 | | $ | 3,699,000 | |
13. INCOME TAXES
The provision for income taxes for the years ended December 31, 2005, 2004 and 2003 consisted of the following:
| | Federal | | State | | Total | |
2005 | | | | | | | |
| | | | | | | |
Current | | $ | 4,643,000 | | $ | 1,659,000 | | $ | 6,302,000 | |
Deferred | | (992,000 | ) | (339,000 | ) | (1,331,000 | ) |
| | | | | | | |
Provision for income taxes | | $ | 3,651,000 | | $ | 1,320,000 | | $ | 4,971,000 | |
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2004 | | | | | | | |
| | | | | | | |
Current | | $ | 2,837,000 | | $ | 1,030,000 | | $ | 3,867,000 | |
Deferred | | (21,000 | ) | (43,000 | ) | (64,000 | ) |
| | | | | | | |
Provision for income taxes | | $ | 2,816,000 | | $ | 987,000 | | $ | 3,803,000 | |
| | | | | | | |
2003 | | | | | | | |
| | | | | | | |
Current | | $ | 2,944,000 | | $ | 1,024,000 | | $ | 3,968,000 | |
Deferred | | (487,000 | ) | (152,000 | ) | (639,000 | ) |
| | | | | | | |
Provision for income taxes | | $ | 2,457,000 | | $ | 872,000 | | $ | 3,329,000 | |
Deferred tax assets (liabilities) are comprised of the following at December 31, 2005 and 2004:
| | 2005 | | 2004 | |
| | | | | |
Deferred tax assets: | | | | | |
Allowance for loan losses | | $ | 2,267,000 | | $ | 1,800,000 | |
Deferred compensation | | 2,157,000 | | 1,644,000 | |
Future benefit of state tax deduction | | 487,000 | | 391,000 | |
Premises and equipment | | 60,000 | | | |
Unrealized losses on available-for-sale investment securities | | 8,000 | | | |
Other | | 9,000 | | 5,000 | |
| | | | | |
Total deferred tax assets | | 4,988,000 | | 3,840,000 | |
| | | | | |
Deferred tax liabilities: | | | | | |
Future liability of state deferred tax assets | | (354,000 | ) | (230,000 | ) |
Premises and equipment | | | | (182,000 | ) |
Accrual to cash - deferred loan costs | | (225,000 | ) | (573,000 | ) |
Prepaid expenses | | (219,000 | ) | | |
Unrealized gains on available-for-sale investment securities | | | | (7,000 | ) |
Other | | | | (4,000 | ) |
| | | | | |
Total deferred tax liabilities | | (798,000 | ) | (996,000 | ) |
| | | | | |
Net deferred tax assets | | $ | 4,190,000 | | $ | 2,844,000 | |
The Company believes that it is more likely than not that it will realize the above deferred tax assets in future periods; therefore, no valuation allowance has been provided against its deferred tax assets.
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The provision for income taxes differs from amounts computed by applying the statutory Federal income tax rate to operating income before income taxes. The items comprising these differences are as follows:
| | Year Ended December 31, | |
| | 2005 | | 2004 | | 2003 | |
| | Amount | | Rate % | | Amount | | Rate % | | Amount | | Rate % | |
| | | | | | | | | | | | | |
Federal income tax expense, at statutory rate | | $ | 4,261,000 | | 35.0 | | $ | 3,200,000 | | 34.0 | | $ | 2,923,000 | | 34.0 | |
State franchise tax, net of Federal tax effect | | 871,000 | | 7.2 | | 673,000 | | 7.1 | | 589,000 | | 6.9 | |
Tax-exempt income from life insurance policies | | (99,000 | ) | (.8 | ) | (117,000 | ) | (1.2 | ) | (137,000 | ) | (1.6 | ) |
Other | | (62,000 | ) | (.6 | ) | 47,000 | | .5 | | (46,000 | ) | (.6 | ) |
| | | | | | | | | | | | | |
| | $ | 4,971,000 | | 40.8 | | $ | 3,803,000 | | 40.4 | | $ | 3,329,000 | | 38.7 | |
| | | | | | | | | | | | | | | | | | | | |
14. RELATED PARTY TRANSACTIONS
During the normal course of business, the Company enters into transactions with related parties, including Directors and executive officers. These transactions include borrowings with substantially the same terms, including rates and collateral, as loans to unrelated parties. The following is a summary of the aggregate activity involving related party borrowers during 2005:
Balance, January 1, 2005 | | $ | 3,596,000 | |
| | | |
Disbursements | | 7,541,000 | |
Amounts repaid | | (4,788,000 | ) |
| | | |
Balance, December 31, 2005 | | $ | 6,349,000 | |
| | | |
Undisbursed commitments to related parties, December 31, 2005 | | $ | 2,533,000 | |
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15. EMPLOYEE BENEFIT PLANS
Salary Continuation and Retirement Plans
Salary continuation plans are in place for twelve key executives. In addition, a retirement plan is in place for members of the Board of Directors. Under these plans, the directors and executives, or designated beneficiaries, will receive monthly payments for five to twenty years after retirement or death. These benefits are substantially equivalent to those available under insurance policies purchased by the Company on the lives of the directors and executives. In addition, the estimated present value of these future benefits is accrued over the period from the effective dates of the plans until their expected retirement dates. The expense recognized under these plans for the years ended December 31, 2005, 2004 and 2003 totaled $741,000, $715,000 and $574,000, respectively.
In connection with these plans, the Company purchased single premium life insurance policies with cash surrender values totaling $8,447,000 and $6,703,000 at December 31, 2005 and 2004, respectively. Income earned on these policies, net of expenses, totaled $294,000, $284,000 and $380,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
Savings Plan
The Butte Community Bank 401(k) Savings Plan commenced January 1, 1993 and is available to employees meeting certain service requirements. Under the plan, employees may defer a selected percentage of their annual compensation. The Bank may make a discretionary contribution to the plan which would be allocated as follows:
• A matching contribution to be determined by the Board of Directors each plan year under which the Bank will match a percentage of each participant’s contribution.
• A basic contribution that would be allocated in the same ratio as each participant’s contribution bears to total compensation.
There were no employer contributions for the years ended December 31, 2005, 2004 or 2003.
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Employee Stock Ownership Plan
Under the Butte Community Bank Employee Stock Ownership Plan (“ESOP”), employees who have been credited with at least 1,000 hours of service during a twelve month period and who have attained age eighteen are eligible to participate. The ESOP has funded purchases of the Bank’s common stock through a line of credit from another financial institution (see Note 8). The line of credit is repaid from discretionary contributions to the ESOP determined by the Bank’s Board of Directors. Annual contributions are limited on a participant-by-participant basis to the lesser of $30,000 or twenty-five percent of the participant’s compensation for the year. Employee contributions are not permitted.
As a leveraged ESOP, interest expense is recognized on the line of credit in the Company’s consolidated financial statements. Shares are allocated on the basis of eligible compensation, as defined in the ESOP plan document, in the year of allocation. Benefits generally become 100% vested after seven years of credited service. Employees with at least three, but fewer than seven, years of credited service receive a partial vesting according to a sliding schedule. However, in the event of normal retirement, disability, or death, any unvested portion of benefits vest immediately.
As shares are purchased by the ESOP with proceeds from the line of credit, the Company records the cost of these unearned ESOP shares as a contra-equity account. These amounts are shown as a reduction of shareholders’ equity in the Company’s consolidated balance sheet. As the debt is repaid, the shares are released from unallocated ESOP shares in proportion to the debt service paid during the year and allocated to eligible employees. As shares are released from unallocated ESOP shares, the Company reports compensation expense equal to the current market price of the shares, and the shares are recognized as outstanding for earnings per share computations. Benefits are distributed in the form of qualifying Company securities. However, the Company will issue a put option to each participant upon distribution of the securities which, if exercised, requires the Company to purchase the qualifying securities at fair market value.
During 2005 and 2004, the ESOP purchased 23,637 and 11,320 shares of the Company’s common stock at a cost of $348,000 and $150,000, respectively, using the proceeds from the line of credit to the ESOP. Additionally, during 2003, the ESOP redeemed 12,974 shares of the Company’s common stock previously allocated to participants under the put option described above. The cost of these shares totaled $135,000 and was funded by the proceeds from the same line of credit. Interest expense of $50,000, $33,000 and $33,000 was recognized in connection with the line of credit during the years ended December 31, 2005, 2004 and 2003, respectively.
Compensation expense of $251,000, $180,000 and $252,000 was recognized for the years ended December 31, 2005, 2004 and 2003.
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Allocated and unallocated ESOP shares at December 31, 2005, 2004 and 2003, adjusted for stock splits, were as follows:
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Allocated shares | | 238,812 | | 223,020 | | 210,374 | |
Unallocated shares | | 185,051 | | 179,256 | | 181,818 | |
| | | | | | | |
Total ESOP shares | | 423,863 | | 402,276 | | 392,192 | |
| | | | | | | |
Fair value of unallocated shares | | $ | 2,637,000 | | $ | 2,487,000 | | $ | 1,841,000 | |
| | | | | | | | | | |
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented.
The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at December 31, 2005 and 2004:
Cash and cash equivalents: For cash and cash equivalents, the carrying amount is estimated to be fair value.
Interest-bearing deposits in banks: The fair values of interest-bearing deposits in banks are estimated by discounting their future cash flows using rates at each reporting date for instruments with similar remaining maturities offered by comparable financial institutions.
Investment securities: For investment securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers.
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Loans: For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Fair values of loans held for sale are estimated using quoted market prices for similar loans or the amount that purchasers have committed to purchase the loans. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness adjusted for the allowance for loan losses. The carrying amount of accrued interest receivable approximates its fair value.
Other investments: Other investments include non-marketable equity securities. The carrying value of these investments approximates their fair value.
Bank owned life insurance: The fair values of life insurance policies are based on cash surrender values at each reporting date provided by the insurers.
Mortgage servicing rights: The fair value of mortgage servicing rights is estimated using projected cash flows, adjusted for the effects of anticipated prepayments, using a market discount rate.
Deposits: The fair values for demand deposits are, by definition, equal to the amount payable on demand at each reporting date represented by their carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis using interest rates offered at each reporting date by the Bank for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.
Notes payable: The notes payable reprice based upon an independent index. The carrying amount of the notes payable approximates its fair value.
Junior subordinated debentures: The fair value of the junior subordinated debentures was determined based on the current market for like-kind instruments of a similar maturity and structure.
Commitments to extend credit and standby letters of credit: Commitments to extend credit are primarily for variable rate loans and standby letters of credit. For these commitments, there is no difference between the committed amounts and their fair values. The fair value of the commitments at each reporting date were not significant and not included in the accompanying table.
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The estimated fair values of the Company’s financial instruments are as follows:
| | December 31, 2005 | | December 31, 2004 | |
| | Carrying | | Fair | | Carrying | | Fair | |
| | Amount | | Value | | Amount | | Value | |
| | | | | | | | | |
Financial assets: | | | | | | | | | |
Cash and due from banks | | $ | 18,988,000 | | $ | 18,988,000 | | $ | 21,778,000 | | $ | 21,778,000 | |
Federal funds sold | | 29,015,000 | | 29,015,000 | | 46,440,000 | | 46,440,000 | |
Interest-bearing deposits in banks | | 6,636,000 | | 6,597,000 | | 8,715,000 | | 8,723,000 | |
Loans held for sale | | 2,197,000 | | 2,212,000 | | 1,490,000 | | 1,513,000 | |
Investment securities | | 6,676,000 | | 6,640,000 | | 6,961,000 | | 6,963,000 | |
Loans | | 401,221,000 | | 399,544,000 | | 339,174,000 | | 334,910,000 | |
Other investments | | 118,000 | | 118,000 | | 118,000 | | 118,000 | |
Accrued interest receivable | | 3,424,000 | | 3,424,000 | | 2,578,000 | | 2,578,000 | |
Cash surrender value of life insurance policies | | 8,447,000 | | 8,447,000 | | 6,703,000 | | 6,703,000 | |
Mortgage servicing assets | | 1,073,000 | | 1,073,000 | | 1,348,000 | | 1,348,000 | |
| | | | | | | | | |
Financial liabilities: | | | | | | | | | |
Deposits | | $ | 434,018,000 | | $ | 433,780,000 | | $ | 399,059,000 | | $ | 398,950,000 | |
Notes payable | | 1,782,000 | | 1,782,000 | | 833,000 | | 833,000 | |
Junior subordinated debentures | | 8,248,000 | | 8,248,000 | | 8,248,000 | | 8,248,000 | |
Accrued interest payable | | 652,000 | | 652,000 | | 479,000 | | 479,000 | |
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17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
December 31, 2005 and 2004
| | 2005 | | 2004 | |
| | | | | |
ASSETS | | | | | |
| | | | | |
Cash and cash equivalents | | $ | 4,358,000 | | $ | 3,296,000 | |
Investment in bank subsidiary | | 43,931,000 | | 38,126,000 | |
Investment in non-bank subsidiary | | 865,000 | | 987,000 | |
Other assets | | 2,084,000 | | 1,589,000 | |
| | | | | |
Total assets | | $ | 51,238,000 | | $ | 43,998,000 | |
| | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
| | | | | |
Liabilities: | | | | | |
ESOP note payable | | $ | 982,000 | | $ | 833,000 | |
Junior subordinated debentures | | 8,248,000 | | 8,248,000 | |
Other liabilities | | 453,000 | | 386,000 | |
| | | | | |
Total liabilities | | 9,683,000 | | 9,467,000 | |
| | | | | |
Shareholders’ equity: | | | | | |
Common stock | | 9,051,000 | | 7,862,000 | |
Unallocated ESOP shares | | (1,391,000 | ) | (1,144,000 | ) |
Retained earnings | | 33,908,000 | | 27,802,000 | |
Accumulated other comprehensive income, net of taxes | | (13,000 | ) | 11,000 | |
| | | | | |
Total shareholders’ equity | | 41,555,000 | | 34,531,000 | |
| | | | | |
Total liabilities and shareholders’ equity | | $ | 51,238,000 | | $ | 43,998,000 | |
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17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED STATEMENT OF INCOME
For the Years Ended December 31, 2005, 2004 and 2003
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Income: | | | | | | | |
Dividends declared by bank subsidiary | | $ | 2,258,000 | | $ | 1,857,000 | | $ | 2,064,000 | |
| | | | | | | |
Expenses: | | | | | | | |
Professional fees | | 231,000 | | 180,000 | | 147,000 | |
Interest expense | | 642,000 | | 439,000 | | 439,000 | |
Other expenses | | 374,000 | | 142,000 | | 101,000 | |
| | | | | | | |
Total expenses | | 1,247,000 | | 761,000 | | 687,000 | |
| | | | | | | |
Income before equity in undistributed income of subsidiaries | | 1,011,000 | | 1,096,000 | | 1,377,000 | |
| | | | | | | |
Equity in undistributed income of subsidiaries | | 5,707,000 | | 4,235,000 | | 3,578,000 | |
| | | | | | | |
Income before income tax benefit | | 6,718,000 | | 5,331,000 | | 4,955,000 | |
| | | | | | | |
Income tax benefit | | 480,000 | | 279,000 | | 314,000 | |
| | | | | | | |
Net income | | $ | 7,198,000 | | $ | 5,610,000 | | $ | 5,269,000 | |
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17. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
CONDENSED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003
| | 2005 | | 2004 | | 2003 | |
| | | | | | | |
Cash flows from operating activities: | | | | | | | |
Net income | | $ | 7,198,000 | | $ | 5,610,000 | | $ | 5,269,000 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Undistributed net income of subsidiary | | (5,707,000 | ) | (4,235,000 | ) | (3,578,000 | ) |
Increase in other assets | | 268,000 | | (111,000 | ) | (375,000 | ) |
Increase in other liabilities | | 44,000 | | 67,000 | | 92,000 | |
| | | | | | | |
Net cash provided by operating activities | | 1,803,000 | | 1,331,000 | | 1,408,000 | |
| | | | | | | |
Cash flows from investing activities: | | | | | | | |
Investment in Butte Community Bank | | | | | | (4,760,000 | ) |
Investment in CVB Insurance Agency LLC | | | | (1,000,000 | ) | | |
Investment in Community Valley Bancorp Trust I | | | | | | | |
| | | | | | | |
Net cash used in investing activities | | | | (1,000,000 | ) | (4,760,000 | ) |
| | | | | | | |
Cash flows from financing activities: | | | | | | | |
Proceed from ESOP note payable | | 348,000 | | 849,000 | | | |
Repayments of ESOP note payable | | (199,000 | ) | (16,000 | ) | | |
Purchase of unallocated ESOP shares | | (348,000 | ) | (150,000 | ) | | |
Proceeds from exercise of stock options | | 527,000 | | 284,000 | | 267,000 | |
Cash paid for fractional shares | | | | (6,000 | ) | | |
Payment of cash dividends | | (1,069,000 | ) | (1,089,000 | ) | (1,079,000 | ) |
Repurchase of common stock | | | | (502,000 | ) | | |
| | | | | | | |
Net cash used in financing activities | | (741,000 | ) | (630,000 | ) | (812,000 | ) |
| | | | | | | |
Decrease in cash and cash equivalents | | 1,062,000 | | (299,000 | ) | (4,164,000 | ) |
| | | | | | | |
Cash and cash equivalents at beginning of year | | 3,296,000 | | 3,595,000 | | 7,759,000 | |
| | | | | | | |
Cash and cash equivalents at end of year | | $ | 4,358,000 | | $ | 3,296,000 | | $ | 3,595,000 | |
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