UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[|X|] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
COMMISSION FILE NUMBER: 000-31977
CENTRAL VALLEY COMMUNITY BANCORP
------------------------------------------------------------------------------
(Name of small business issuer in its charter)
CALIFORNIA 77-0539125
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
600 POLLASKY AVENUE, CLOVIS, CALIFORNIA 93612
- ------------------------------------------- ---------------
(Address of principal executive offices) (Zip code)
Issuer's telephone number (559) 298-1775
---------------
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES XX No____
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB.
[ ]
State issuer's revenues for its most recent fiscal year: $ 17,088,177.
State the aggregate market value of the voting and non-voting common equity held
by nonaffiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of March
15, 2001: $12,441,959.
State the number of shares of Common Stock outstanding as of March 15, 2001:
1,310,057
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement which will be filed
within 120 days after December 31, 2000, in connection with the solicitation of
proxies for its 2001 Annual Meeting of Shareholders, are incorporated by
reference in Items 9, 10, 11 and 12 of part III hereof. The portions of such
document that are not incorporated by reference shall not be deemed to be filed
with the Commission as part of this Form 10-KSB.
Transitional Small Business Disclosure Format (Check one): Yes No [X]
--- ---
TABLE OF CONTENTS
ITEM 1 - DESCRIPTION OF BUSINESS.............................................................................1
ITEM 2 - DESCRIPTION OF PROPERTY............................................................................26
ITEM 3 - LEGAL PROCEEDINGS..................................................................................27
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................27
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........................................27
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..........................................28
ITEM 7 - FINANCIAL STATEMENTS...............................................................................38
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............78
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT................................................................................78
ITEM 10 - EXECUTIVE COMPENSATION.............................................................................78
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....................................78
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................78
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K...................................................................79
SIGNATURES ......................................................................................................80
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS.
GENERAL
Central Valley Community Bancorp (the "Company") was incorporated on
February 7, 2000 as a California corporation, for the purpose of becoming the
holding company for Clovis Community Bank (the "Bank"), a California state
chartered bank, through a corporate reorganization. In the reorganization, the
Bank became the wholly-owned subsidiary of the Company, and the shareholders of
the Bank became the shareholders of the Company. The Company is registered as a
bank holding company under the Bank Holding Company Act of 1956, as amended (the
"BHC Act"), and is subject to supervision and regulation by the Board of
Governors of the Federal Reserve System (the "Board of Governors").
At December 31, 2000, the Company had one banking subsidiary, the Bank.
The Company's principal business is to provide, through its banking subsidiary,
financial services in its primary market area in California. The Company serves
the City of Clovis, Fresno County and its surrounding area through the Bank. The
Company does not currently conduct any operations other than through the Bank.
Unless the context otherwise requires, references to the Company refer to the
Company and the Bank on a consolidated basis. At December 31, 2000, the Company
had consolidated total assets of approximately $202,167,000. See Items 6 and 7 -
Management's Discussion and Analysis or Plan of Operation and - Financial
Statements.
As of March 15, 2001, the Company had a total of 108 employees and 90
full time equivalent employees, including the employees of the Bank.
Certain matters discussed in this Annual Report on Form 10-KSB (the
"Annual Report") including, but not limited to, those described in Item 6 -
Management's Discussion and Analysis or Plan of Operation, are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Such risks and uncertainties include, among others, (1) significant
increases in competitive pressure in the financial services industry; (2)
changes in the interest rate environment resulting in reduced margins; (3)
general economic conditions, either nationally or regionally, are less favorable
than expected, resulting in, among other things, a deterioration in credit
quality; (4) changes in the regulatory environment; (5) fluctuations in the real
estate market; (6) changes in business conditions and inflation; and (7) changes
in securities markets. Therefore, the information set forth in such
forward-looking statements should be carefully considered when evaluating the
business prospects of the Company.
When the Company uses in this Annual Report the words "anticipate,"
"estimate," "expect," "project," "intend," "commit," "believe" and similar
expressions, the Company intends to identify forward-looking statements. Such
statements are not guarantees of performance and are subject to certain risks,
uncertainties and assumptions, including those described in this Annual Report.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated, expected, projected, intended, committed or
believed. The future results and shareholder values of the Company may differ
materially from those expressed in these forward-looking statements. Many of the
factors that will determine these results and values are beyond the Company's
ability to control or predict. For those statements, the Company claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
THE BANK
The Bank was organized in 1979 and commenced business as a California
state chartered bank in 1980. The deposits of the Bank are insured by the
Federal Deposit Insurance Corporation (the "FDIC") up to applicable limits. The
Bank is not a member of the Federal Reserve System.
The Bank operates six full-service banking offices in Clovis, Fresno,
Shaver Lake and Prather California. One of the offices is in a Save Mart
Supermarket and offers extended banking hours, including Saturday and Sunday
hours, for the convenience of the Bank's customers. The Bank established a Real
-1-
Estate Division in 1995 in a freestanding facility in downtown Clovis. All real
estate related transactions are conducted and processed through the Real Estate
Division, including interim construction loans for single family residences and
commercial buildings. All types of permanent single family residential loans are
also offered.
During 2000, the Bank received approval from the California Department
of Financial Institutions (the "DFI") and the FDIC for approval to establish
full-service banking offices in the Fig Garden area and the River Park area of
Fresno. The Fig Garden branch was opened to expand the Bank's market area and to
better serve existing customers. The River Park Branch is currently located in
temporary quarters until an appropriate building site can be obtained in the
same area. The Bank's plan is to build a free-standing building with a drive-up
window. This facility will also offer safe deposit boxes. Except for the
foregoing, the Bank does not currently plan to establish any additional branches
or other offices. The Company has filed notice of its intention to close the
Bank's Shaver Lake branch in June 2001.
The Bank conducts a commercial banking business, which includes
accepting demand, savings and time deposits and making commercial, real estate
and consumer loans. It also offers installment note collections, issues
cashier's checks, sells traveler's checks and provides safe deposit boxes and
other customary banking services. The Bank began offering Internet Banking in
the third quarter of 2000. Internet Banking consists of inquiry, account status,
bill paying, account transfers, and cash management. The Bank does not offer
trust services or international banking services and does not currently plan to
do so in the near future.
Since August of 1995 the Bank has been a party to an agreement with
Investment Centers of America, pursuant to which Investment Centers of America
provides Bank customers with access to investment services. In connection with
entering into this agreement, the Bank adopted a policy intended to comply with
FDIC Regulation Section 337.4, which outlines the guidelines under which an
insured nonmember bank may be affiliated with a company that directly engages in
the sale, distribution, or underwriting of stock, bonds, debentures, notes, or
other securities.
There have been no other significant changes in the kinds of services
rendered, the principal markets for or the methods of distribution of such
services during the Bank's past three fiscal years.
The Bank's operating policy since its inception has emphasized serving
the banking needs of individuals and the business and professional communities
in Clovis, California and its surrounding area. At December 31, 2000, the total
of the Company's commercial and industrial loans outstanding was $41,226,000;
the total of the Company's real estate construction loans outstanding was
$12,829,000; the total of the Company's other real estate loans outstanding was
$33,534,000, and the total of consumer installment loans outstanding was
$7,731,000. The Company accepts real estate, listed and unlisted securities,
savings and time deposits, automobiles, inventory, machinery and equipment as
collateral for loans.
No individual or single group of related accounts is considered
material in relation to the Bank's assets or deposits, or in relation to the
overall business of the Company. However, at December 31, 2000 approximately
48.2% of the Company's loan portfolio held for investment consisted of real
estate-related loans, including construction loans, real estate mortgage loans
and commercial loans secured by real estate and 42.8% consisted of commercial
loans. At December 31, 2000, the Company had approximately 7.5% of its loan
portfolio concentrated in the residential construction industry. See Item 6 -
Management's Discussion and Analysis or Plan of Operation. The Company believes
that these concentrations are mitigated by the diversification of the loan
portfolio among commercial, commercial and residential construction, commercial
mortgage, home equity and consumer loans. No borrower had aggregate credit
commitments exceeding 4.0% of the loan portfolio. In addition, the business
activities of the Company currently are concentrated in Fresno County,
California. Consequently, the results of operations and financial condition of
the Company are dependent upon the general trends in this part of the California
economy and, in particular, the residential and commercial real estate markets.
In addition, the concentration of the Company's operations in this area of
California exposes it to greater risk than other banking companies with a wider
geographic base in the event of catastrophes, such as earthquakes, fires and
floods in this region or as a result of energy shortages in California.
-2-
The Company's deposits are attracted from individual and commercial
customers. A material portion of the Company's deposits has not been obtained
from a single person or a few persons, the loss of any one or more of which
would have a material adverse effect on the business of the Company.
In order to attract loan and deposit business from individuals and
small businesses, the Company maintains the following lobby hours at its
branches:
Branch Monday - Thursday Friday Saturday Sunday
- ----------------------- --------------------------- ---------------------------- -------------------------- ----------------------
Clovis Main 9:00 a.m. to 6:00 p.m. 9:00 a.m. to 6:00 p.m. None None
Clovis Main Drive Up 8:00 a.m. to 6:00 p.m. 8:00 a.m. to 6:00 p.m. None None
Shaver Lake 9:00 a.m. to 3:30 p.m. 9:00 a.m. to 3:30 p.m. None None
Foothill 9:00 a.m. to 4.00 p.m. 9:00 a.m. to 6:00 p.m. 9:00 a.m. To 1:00 p.m. None
Clovis/Herndon 10:00 a.m. to 7:00 p.m. 10:00 a.m. to 7:00 p.m. 10:00 a.m. to 5:00 p.m. 10:00 a.m. to 3:00 p.m.
Fig Garden Village 9:00 a.m. to 5:00 p.m. 9:00 a.m. to 6:00 p.m. 10:00 a.m. to 3:00 p.m. None
River Park 9:00 a.m. to 5:00 p.m. 9:00 a.m. to 6:00 p.m. 9:00 a.m. to 3:00 p.m. None
Automated teller machines operate at all branch locations 24 hours per
day, seven days per week. The Company's Real Estate and Small Business
Administration ("SBA") Departments maintain business hours of 8:00 A.M. to 5:00
P.M., Monday through Friday, and extended hours are available at customer
request.
The Bank relies substantially on local promotional activity, personal
contacts by its officers, directors and employees, referrals by its
shareholders, extended hours, personalized service and its reputation in the
communities it serves to compete effectively.
In addition to the Company's six branch locations, as of December 31,
2000 there were twenty eight (28) operating banking offices in the Company's
primary service area, which consists of the cities of Clovis, Fresno, Shaver
Lake and Prather, California, of which twenty-one (21) were offices of regional
and major chain banking systems and three (3) were offices of other community
banks. Shaver Lake and Prather do not contain any banking offices other than the
Company's offices. The Company's primary service area contains seven (7) savings
and loan association offices. Business activity in the Company's primary service
area is oriented towards light industry, small business and agriculture.
The banking business in California generally, and in the Company's
primary service area specifically, is highly competitive with respect to both
loans and deposits, and is dominated by a relatively small number of major banks
with many offices operating over a wide geographic area. Among the advantages
such major banks have over the Company is their ability to finance wide-ranging
advertising campaigns and to allocate their investment assets, including loans,
to regions of higher yield and demand. Such banks offer certain services such as
international banking and trust services which are not offered directly by the
Bank but which usually can be offered indirectly through correspondent
institutions. In addition, by virtue of their greater total capitalization, such
banks have substantially higher lending limits than the Bank. Legal lending
limits to an individual customer are limited to a percentage of a bank's total
capital accounts. As of December 31, 2000, the Bank's loan limits to individual
customers were $3,096,000 for unsecured loans and $5,160,000 for unsecured and
secured loans combined. For borrowers desiring loans in excess of the Bank's
lending limits, the Bank makes and may, in the future,
-3-
make such loans on a participation basis with other community banks taking the
amount of loans in excess of the Bank's lending limits. In other cases, the Bank
may refer such borrowers to larger banks or other lending institutions.
Other entities, both governmental and in private industry, seeking to
raise capital through the issuance and sale of debt or equity securities also
provide competition for the Bank in the acquisition of deposits. Banks also
compete with money market funds and other money market instruments, which are
not subject to interest rate ceilings. 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. Competition for deposit
and loan products remains strong, from both banking and non-banking firms, and
affects the rates of those products as well as the terms on which they are
offered to customers.
Technological innovation continues to contribute to greater competition
in domestic and international financial services markets. Technological
innovation has, for example, made it possible for non-depository institutions to
offer customers automated transfer payment services that previously have been
traditional banking products. In addition, customers now expect a choice of
several delivery systems and channels, including telephone, mail, home computer,
ATMs, self-service branches, and in-store branches.
Mergers between financial institutions have placed additional pressure
on banks to streamline their operations, reduce expenses, and increase revenues
to remain competitive. In addition, competition has intensified due to federal
and state interstate banking laws, which permit banking organizations to expand
geographically with fewer restrictions than in the past. Such laws allow banks
to merge with other banks across state lines, thereby enabling banks to
establish or expand banking operations in the Company's market. The competitive
environment also is significantly impacted by federal and state legislation,
which may make it easier for non-bank financial institutions to compete with the
Company.
CLOVEST CORPORATION
The Bank has engaged in real estate investment and development
activities since 1987 through a wholly-owned subsidiary, Clovest Corporation
("Clovest"). The Bank's ability to continue to engage in real estate development
activities is governed by an order issued by the FDIC pursuant to Section 24(d)
of the Federal Deposit Insurance Act, which imposes significant conditions on
such activities. On July 15, 1998 the Board of Directors approved the
discontinuance of Clovest's operations. During 2000, Clovest was a partner in
two California limited liability companies and one general partnership, and as
of December 31, 2000, all operations of those entities have been wound up and
all investments liquidated. See Item 6 - Management's Discussion and Analysis or
Plan of Operation for further information regarding Clovest.
Clovis Securities Corporation
The Bank has another wholly-owned subsidiary, Clovis Securities
Corporation, which has been inactive since December 31, 1993.
STATISTICAL DISCLOSURE
This information should be read in conjunction with Item 6 -
Management's Discussion and Analysis or Plan of Operation and Item 7 - Financial
Statements, which have been incorporated herein by reference.
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
Table A sets forth the Company's average consolidated balance sheets
for the years ended December 31, 2000, 1999 and 1998 and an analysis of interest
rates and the interest rate differential for the years then ended. Table B sets
forth the changes in interest income and interest expense in 2000 and 1999
resulting from changes in volume and changes in rates.
-4-
INVESTMENT PORTFOLIO
The book value of investment securities at December 31, 2000, 1999 and
1998 and the book value, maturities and weighted average yield of investment
securities at December 31, 2000 are set forth in Table C.
LOAN PORTFOLIO
The composition of the loan portfolio at December 31, 2000, 1999, 1998,
1997 and 1996 is summarized in Table D.
Maturities and sensitivity to changes in interest rates in the loan
portfolio at December 31, 2000 are summarized in Table E.
Table F shows the composition of non-accrual, past due and restructured
loans at December 31, 2000, 1999, 1998, 1997 and 1996. Set forth in the text
accompanying Table F is a discussion of the Company's policy for placing loans
on non-accrual status.
SUMMARY OF LOAN LOSS EXPERIENCE
Table G sets forth an analysis of loan loss experience as of and for
the years ended December 31, 2000, 1999, 1998, 1997 and 1996.
Set forth in the text accompanying Table G is a description of the
factors which influenced management's judgment in determining the amount of the
additions to the allowance charged to operating expense in each fiscal year, a
table showing the allocation of the allowance for credit losses to the various
types of loans in the portfolio, as well as a discussion of management's policy
for establishing and maintaining the allowance for credit losses.
DEPOSITS
Table H sets forth the average amount of and the average rate paid on
major deposit categories for the years ended December 31, 2000, 1999 and 1998.
Table I sets forth the maturity of time certificates of deposit of
$100,000 or more at December 31, 2000.
RETURN ON EQUITY AND ASSETS
Table J sets forth certain financial ratios for the years ended
December 31, 2000, 1999 and 1998.
-5-
TABLE A
DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND SHAREHOLDERS'
EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
The following table sets forth consolidated average assets, liabilities
and shareholders' equity; interest income earned and interest expense paid; and
the average yields earned or rates paid thereon for the years ended December 31,
2000, 1999 and 1998. The average balances reflect daily averages except
non-accrual loans which were computed using quarterly averages.
2000 1999
----------------------------------- -------------------------------------
Interest Average Interest Average
Average Income/ Rates Average Income/ Rates
(Dollars in Thousands) Balance Expense Earned Balance Expense Earned
------- ------- ------ ------- ------- ------
ASSETS:
Interest-earning deposits in other
banks $343 $25 7.29% $263 $15 5.70%
Investment securities:
Taxable 54,457 3,506 6.44% 52,954 2,825 5.33%
Non-taxable (1) 8,804 485 5.51% 8,275 466 5.63%
----- --- ----- ---
Total investment securities 63,261 3,991 6.31% 61,229 3,291 5.37%
Federal funds sold 9,491 602 6.34% 6,792 327 4.81%
Loans (2)(3) 84,149 8,942 10.63% 72,974 7,720 10.58%
------ ----- ------ -----
Total interest-earning assets (1) 157,244 $13,560 8.62% 141,258 $11,353 8.04%
======= =======
Less allowance for credit losses (2,495) (2,539)
Non-accrual loans 1,819 4,260
Cash and due from banks 11,804 10,476
Premises and equipment 1,656 1,691
Other assets 9,212 10,780
----- ------
Total average assets $179,240 $165,926
======== ========
1998
-----------------------------------
Interest Average
Average Income/ Rates
(Dollars in Thousands) BALANCE EXPENSE EARNED
------- ------- ------
ASSETS:
Interest-earning deposits in other
banks $227 $11 4.85%
Investment securities:
Taxable 37,373 2,242 6.00%
Non-taxable (1) 7,377 457 6.19%
----- ---
Total investment securities 44,750 2,699 6.01%
Federal funds sold 10,050 530 5.27%
Loans (2)(3) 81,364 8,672 10.93%
------ -----
Total interest-earning assets (1) 136,391 $11,912
=======
Less allowance for credit losses (2,430)
Non-accrual loans 2,119
Cash and due from banks 9,517
Premises and equipment 1,927
Other assets 14,206
------
Total average assets $161,730
========
-6-
2000 1999
----------------------------------- -------------------------------------
Interest Average Interest Average
Average Income/ Rates Average Income/ Rates
(Dollars in Thousands) Balance Expense Earned Balance Expense Earned
------- ------- ------ ------- ------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Savings and negotiable orders $70,302 $1,457 2.07% $65,085 $1,125 1.73%
of withdrawal
Time certificates of deposit,
under $100,000 36,240 1,931 5.33% 35,552 1,621 4.55%
Time certificates of deposit,
$100,000 and over 13,161 732 5.56% 12,006 551 4.59%
Other borrowed funds 2,099 126 6.00% 782 48 6.14%
Federal funds purchased 18 1 5.56% 19 -0- 5.00%
-- - -- ---
Total interest-bearing
Liabilities 121,820 $4,247 3.49% 113,444 $3,344 2.95%
====== ======
Non-interest bearing demand 39,081 35,212
Other liabilities 1,664 1,576
Shareholders' equity 16,675 15,694
------ ------
Total liabilities and
Shareholders' equity $179,240 $165,926
======== ========
Interest income and average rate
earned on earning assets (1) $13,560 8.62% $11,353 8.04%
Interest expense and average interest
cost related to interest-bearing
liabilities 4,247 3.49% 3,344 2.95%
----- -----
Net interest income and margin (4) $9,313 5.92% $8,009 5.67%
====== ======
1998
-----------------------------------
Interest Average
Average Income/ Rates
(Dollars in Thousands) BALANCE EXPENSE EARNED
------- ------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Savings and negotiable orders $58,218 $1,162 2.00%
of withdrawal
Time certificates of deposit,
under $100,000 38,110 1,999 5.25%
Time certificates of deposit,
$100,000 and over 15,421 816 5.29%
Other borrowed funds 1,037 73 7.04%
Federal funds purchased 117 6 5.13%
--- -
Total interest-bearing
Liabilities 112,903 $4,056 3.59%
======
Non-interest bearing demand 31,548
Other liabilities 2,094
Shareholders' equity 15,185
------
Total liabilities and
Shareholders' equity $161,730
========
Interest income and average rate
earned on earning assets (1)
Interest expense and average interest
cost related to interest-bearing
liabilities 4,056 3.59%
-----
Net interest income and margin (4) $7,856 5.75%
======
-7-
(1) Not computed on a tax equivalent basis.
(2) Loan interest income includes loan fees of $391 in 2000; $324 in 1999;
and $397 in 1998.
(3) Average loans do not include non-accrual loans.
(4) Net interest margin is computed by dividing net interest income by
total average interest-earning assets.
-8-
TABLE B
VOLUME AND RATE ANALYSIS
The following table sets forth, for the years indicated, a summary of
the changes in interest earned and interest paid resulting from changes in asset
and liability volumes and changes in rates. The change in interest due to both
volume and rate has been allocated to change due to volume and rate in
proportion to the relationship of absolute dollar amounts of change in each.
Year Ended December 31
2000 Compared to 1999 1999 Compared to 1998
--------------------- ---------------------
(In Thousands) Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Increase (decrease) due to changes
in:
Interest income: $ 5 $ 5 $ 10 $ (2) $ 6 $ 4
Interest-earning
deposits in other banks
Investment securities:
Taxable 101 580 681 794 (211) 583
Non-taxable (1) 29 (10) 19 36 (27) 9
-- ---- -- -- ---- -
Total investment
Securities 130 570 700 830 (238) 592
Federal funds sold 153 122 275 (160) (43) (203)
Loans 899 323 1,222 (633) (319) (952)
--- --- ----- ----- ----- -----
Total earning assets(1) 1,187 1,020 2,207 35 (594) (559)
Interest expense:
Deposits:
Savings and negotiable 95 234 329 $ 143 $(180) $(37)
Orders of withdrawal
Certificates of deposit 32 280 312 (128) (251) (379)
Under $100,000
Certificates of deposit 57 124 181 (166) (99) (265)
-- --- --- ----- ---- -----
$100,000 and over
Total deposits 184 638 822 (151) (530) (681)
Federal funds purchased 0 1 1 (3) (3) (6)
Other borrowed funds 80 0 80 (16) (9) (25)
-- - -- ---- --- -----
Total interest bearing
Liabilities 264 639 903 (170) (542) (712)
--- --- --- ----- ----- -----
Net interest income (1) $ 923 $ 381 $1,304 $ 205 $ (52) $153
===== ===== ====== ===== ====== ====
(1) Not computed on a tax equivalent basis.
-9-
TABLE C
INVESTMENT PORTFOLIO
The book value of investment securities at December 31, 2000, 1999 and
1998 is set forth in the following table. At December 31, 2000, the Bank held no
investment securities from any issuer which totaled over 10% of the Company's
shareholders' equity.
AVAILABLE FOR SALE BOOK VALUE AT DECEMBER 31
- ------------------ -------------------------
2000 1999 1998
---- ---- ----
U.S. Treasury securities and obligations
of other U.S. government agencies
and corporations $15,283,000 $ 6,008,000 $ 18,242,000
Mortgage-backed securities 39,941,000 37,211,000 36,387,000
Obligations of states and political subdivisions 13,039,000 9,771,000 1,493,000
Federal Home Loan Mortgage Corporation stock 1,022,000 1,012,000 500,000
Federal Home Loan Bank stock 135,000 496,000 -0-
Corporate bonds 961,000 -0- -0-
Other securities 2,761,000 312,000 -0-
--------- ------- ---
Total Available-for-Sale Securities $73,142,000 $54,810,000 $56,622,000
=========== =========== ===========
Held to Maturity
Obligations of states and political subdivisions $7,228,000
==========
-10-
TABLE C (CONTINUED)
INVESTMENT PORTFOLIO
The book value, maturities and weighted average yield of investment
securities at December 31, 2000 are summarized in the following table.
MATURING
--------
AFTER ONE THROUGH AFTER FIVE THROUGH
IN ONE YEAR OR LESS FIVE YEARS TEN YEARS AFTER TEN YEARS TOTAL
------------------- ----------------- ------------------- --------------- -----
AVAILABLE FOR SALE AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- ------------------ ------ ----- ------ ----- ------ ----- ------ ----- ------ -------
U.S. Treasury
Securities $1,007,000 6.50% $ -0- $ -0- $ -0- $1,007,000 6.50%
Obligations of
other U.S.
Government
agencies
corporations 2,493,000 5.89% 7,883,000 6.12% 1,996,000 5.68% 1,904,000 5.88% 14,276,000 5.99%
Mortgage-backed
Securities -0- 2,984,000 7.46% 11,449,000 6.78% 25,508,000 7.79% 39,941,000 7.48%
Obligations of
states & political
subdivisions 455,000 5.69% 3,000,000 6.6% 5,307,000 5.52% 4,277,000 5.57% 13,039,000 5.79%
Corporate Bonds
-0- -0- 961,000 6.70% -0- 961,000 6.70%
Other securities -0- 3,918,000 5.30% -0- -0- 3,918,000 5.30%
--- --------- --- --- ---------
Total Available
for Sale
$ 3,955,000 6.03% $17,785,000 6.44% $19,713,000 6.31% $31,689,000 7.38% $73,142,000 6.80%
=========== =========== =========== =========== ===========
(1) Not computed on a tax equivalent basis.
-11-
TABLE D
LOAN PORTFOLIO
The composition of the loan portfolio at December 31, 2000, 1999, 1998,
1997 and 1996 is summarized in the table below.
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Commercial and industrial $36,614,000 $38,374,000 $35,801,000 $37,533,000 $35,996,000
Real estate
Construction 12,829,000 8,253,000 5,712,000 11,494,000 17,221,000
Other 33,534,000 25,544,000 25,071,000 30,915,000 25,702,000
Loans to finance agricultural
production or other loans
to farmers 941,000 610,000 1,467,000 2,177,000 2,303,000
Installment loans to individuals
for household, family and
other personal expenditures 7,371,000 5,918,000 6,031,000 8,042,000 8,302,000
Leases 4,612,000 2,260,000 194,000 487,000 -0-
Other 385,000 545,000 767,000 1,392,000 1,919,000
------- ------- ------- --------- ---------
Subtotal 96,286,000 81,504,000 72,043,000 92,040,000 91,443,000
Unearned income (266,000) (251,000) (401,000) (489,000) (645,000)
--------- --------- --------- --------- ---------
Subtotal 96,020,000 81,253,000 74,642,000 91.551,000 90,798,000
Allowance for credit losses (2,047,000) (2,236,000) (2,949,000) (2,600,000) 1,599,000
----------- ----------- ----------- ----------- ---------
Total (1) $93,973,000 $79,017,000 $71,693,000 $88,951,000 $89,199,000
=========== =========== =========== =========== ===========
(1) Includes non-accrual loans of:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
$205,000 $3,617,000 $4,033,000 $1,266,000 $856,000
-12-
TABLE E
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The following table presents information concerning loan maturities and
sensitivity to changes in interest rates of the indicated categories of the
Company's loan portfolio, as well as loans in those categories maturing after
one year that have fixed or floating interest rates at December 31, 2000.
After One
Maturity Distribution of Loans(1): One Year Through After Five
or Less Five Years Years Total
------- ---------- ----- -----
Real estate construction $11,864,000 $ 965,000 $ -0- $12,829,000
Other real estate 24,034,000 6,556,000 2,944,000 33,534,000
Commercial and industrial 29,594,000 11,044,000 1,708,000 42,346,000
Installment 3,671,000 2,138,000 1,562,000 7,371,000
--------- --------- --------- ---------
$69,163,000 $20,703,000 $ 6,214,000 $96,080,000
=========== =========== =========== ===========
Sensitivity to Changes in Interest
Rates:
Loans with Fixed Interest Rates
$ 8,824,000 $ 5,691,000
Loans with Floating Interest Rates
7,235,000 28,230,000
----------- -----------
Total $16,059,000 $33,921,000
=========== ===========
- ----------------------
(1) Does not include non-accrual loans of $205,000.
TABLE F
COMPOSITION OF NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
A summary of non-accrual, restructured and past due loans at December
31, 2000, 1999, 1998, 1997 and 1996 is set forth below:
(In Thousands) DECEMBER 31
-----------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Non-accrual $205 $3,617 $4,033 $1,266 $ 856
Accruing loans past due 90 days or more
more -0- -0- -0- 42 1,002
-0-
Restructured loans -0- 145 242 272 271
---- --- --- --- ---
$205 $3,762 $4,275 $1,580 $2,129
==== ====== ====== ====== ======
-13-
The Company's consolidated financial statements are prepared on the
accrual basis of accounting, including the recognition of interest income on
loans. Interest income from non-accrual loans is not accrued, but rather is
recorded only if collection of principal in full is not in doubt and when and if
received.
Loans are placed on non-accrual status and any accrued but unpaid
interest income is reversed and charged against income when the payment of
interest or principal is ninety days or more past due. Loans in the non-accrual
category are treated as non-accrual loans even though the Company may ultimately
recover all or a portion of the interest due. These loans return to accrual
status when the loan becomes contractually current and future collectibility of
amounts due is reasonably assured. Non-accrual loans at year end 2000
constituted approximately 0.2% of total loans compared to 4.5% at year end 1999
and 5.4% at year end 1998. One commercial borrowing relationship represented
100% of the total non-accrual balance at December 31, 2000. Two commercial real
estate borrowing relationships represented 90.4% of the total non-accrual
balance at December 31, 1999. During most of 1999, management's emphasis was on
improving loan quality. In the first quarter of 2000, the senior credit officer
position was restructured to two positions; a chief credit officer responsible
for credit quality, and a manager of commercial and business banking responsible
for business development and customer retention. The reduction in non-accrual
loans and growth in the Company's loan portfolio reflects the success of this
management restructuring.
Interest income on non-accrual loans that would have been recognized in
the year ended December 31, 2000 if the loans had been current in accordance
with their original terms totaled $14,000. No income was recognized on these
loans for the year ended December 31, 2000.
At December 31, 2000 the Company had no restructured loans, in 1999,
1998, 1997 and 1996 the Company had one (1) restructured loan in the principal
amount of $145,000, $242,000, $272,000, and $271,000 respectively. There are no
loans, which were current at December 31, 2000, where serious doubt exists as to
the ability of the borrower to comply with the present loan repayment terms. See
Note 1 of the Notes to Consolidated Financial Statements of the Company included
under Item 7 - Financial Statements for information concerning the Company's
recorded investment in loans for which an impairment has been recognized.
Impaired loans are identified from internal credit review reports, past due
reports, overdraft listings, and regulatory reports of examination. Borrowers
experiencing problems such as operating losses, marginal working capital,
inadequate cash flow or business interruptions which jeopardize collection of
the loan are also reviewed for possible impairment classification.
When a loan is classified as impaired, the net fair value (i.e., the
measure of the impaired loan) is computed based on the present value of expected
future cash flows discounted at the loan's effective interest rate.
Alternatively, if the loan is collateral dependent, impairment is measured based
on the fair value or market price of the collateral. If the net fair value of
the impaired loan is less than the recorded investment in the loan, then the
resulting impairment amount is recognized through the use of a valuation
allowance with a corresponding charge to the provision for credit losses. 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.
-14-
TABLE G
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes loan loss experience as of and for the
years ended December 31, 2000, 1999, 1998, 1997 and 1996.
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Loans outstanding at December 31, $96,285,000 $81,504,000 $75,043,000 $92,040,000 $91,443,000
=========== =========== =========== =========== ===========
Average loans outstanding during period $85,968,000 $77,234,000 $83,483,000 $97,038,000 $84,018,000
=========== =========== =========== =========== ===========
Allowance for credit losses:
Balance at beginning of year $ 2,236,000 $2,949,000 $2,600,000 $1,599,000 $1,278,000
Deduct loans charged-off:
Commercial and industrial (146,000) (1,561,000) (1,217,000) (723,000) (70,000)
Real estate - construction -0- -0- (73,000) (28,000)
-0-
Real estate - other (869,000) (152,000) (407,000) -0-
-0-
Loans to finance agricultural and
other loans to farmers -0- (845,000) -0- -0- -0-
Loans to individuals for household,
family and other personal
expenditures (128,000) (103,000) (254,000) (214,000) (150,000)
Other -0- (24,000) -0- -0- -0-
--- -------- --- --- ---
Total loans charged-off (1,143,000) (2,533,000) (1,623,000) (1,417,000) (248,000)
----------- ----------- ----------- ----------- ---------
Add recoveries of loans charged off:
Commercial and industrial 271,000 426,000 85,000 18,000 9,000
Real estate - construction -0- -0- -0- -0- 3,000
Real estate - other -0- 53,000 106,000 19,000 -0-
Loans to finance agricultural and
other loans to farmers 591,000 21,000 -0- -0- -0-
Loans to individuals for household,
family and other personal expenditures 41,000 50,000 59,000 35,000 16,000
------ ------ ------ ------ ------
Total recoveries 903,000 550,000 250,000 72,000 28,000
------- ------- ------- ------ ------
Net charge-offs (240,000) (1,983,000) (1,373,000) (1,345,000) (220,000)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Add: Provision charged to operating expense 50,000 1,270,000 1,722,000 2,346,000 541,000
------ --------- --------- --------- -------
Balance at end of year $2,047,000 $2,236,000 $2,949,000 $2,600,000 $1,599,000
========== ========== ========== ========== ==========
Allowance for credit losses as a percentage
of outstanding loan balance 2.13% 2.74% 3.93% 2.82% 1.75%
===== ===== ===== ===== =====
Net charge-offs to average loans outstanding 0.28% 2.57% 1.64% 1.39% 0.26%
===== ===== ===== ===== =====
-15-
Managing credits identified through the risk evaluation methodology
includes developing a business strategy with the customer to mitigate Company
losses. Management continues to monitor these credits with a view to identifying
as early as possible when, and to what extent, additional provisions may be
necessary.
The allowance for credit losses is reviewed at least quarterly by the
Directors' Audit Committee and by the Board of Directors. Reserves are allocated
to loan portfolio segments using percentages which are based on both historical
risk elements such as delinquencies and losses and predictive risk elements such
as economic, competitive and environmental factors. The Company has adopted the
specific reserve approach to allocate reserves to each adversely graded asset,
as well as to each impaired asset for the purpose of estimating potential loss
exposure. Although the allowance for credit losses is allocated to various
portfolio segments, it is general in nature and available for the loan portfolio
in its entirety. Additions may be required based on the results of a contractual
independent loan portfolio examination, a regulatory agency examination, or the
Company's own internal review process. Additions are also required when, in
management's judgment, the reserve does not properly reflect the potential loss
exposure. The 2000 provision for credit losses of $50,000 reflects management's
evaluation of deterioration primarily in one commercial borrowing relationship.
In 1999, the provision for credit losses of $1,270,000 reflected the
deterioration of four borrowing relationships. The $1,722,000 provision, in
1998, was partially the result of adverse economic conditions within the Bank's
market area, particularly related to real estate and agriculture as well as a
$113,000 specific allowance for potential Year 2000 related credit problems. In
1996 and 1997, the Bank substantially revised processes to measure and monitor
risk in the loan portfolio. The adoption of these revisions resulted in a
material increase in the Bank's assessment of risk within its loan portfolio,
which caused the Bank to increase its allowance for credit losses accordingly
-16-
Using the criteria on the previous page, the allocation of the
allowance for credit losses is set forth below:
2000 1999 1998
---- ---- ----
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
Commercial and $877,000 42.8% $1,060,000 47.1% $1,187,000 42.1%
999industrial
Real estate construction 272,000 13.3% 75,000 10.1% 51,000 6.3%
Real estate - other 712,000 34.8% 845,000 31.3% 507,000 37.1%
Loans to finance
agricultural and other
loans to farmers 20,000 1.0% 5,000 .8% 630,000 3.7%
Loans to individuals for
household, family and
other personal
expenditures and
other loans 158,000 7.7% 146,000 7.3% 198,000 10.2%
Lease contracts -- -- 23,000 2.8% 3,000 0.6%
Year 2000 for all loan
types -- -- 81,000 N/A 113,000 N/A
Other 8,000 0.4% 1,000 .6% -- N/A
Unallocated -- -- -- N/A 260,000 N/A
-------
$2,047,000 $2,236,000 $2,949,000
========== ========== ==========
1997 1996
---- ----
Percent of Percent of
Loans in Each Loans in Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
Commercial and $965,000 42.3% $884,000 39.4%
999industrial
Real estate construction 567,000 12.5% 170,000 18.8%
Real estate - other 610,000 33.6% 358,000 28.1%
Loans to finance
agricultural and other
loans to farmers 51,000 2.4% -0- 2.5%
Loans to individuals for
household, family and
other personal
expenditures and
other loans 191,000 8.7% 176,000 11.2%
Lease contracts 3,000 0.5% -0- -0-
Year 2000 for all loan
types -- N/A -- N/A
Other -- N/A -- N/A
Unallocated 213,000 N/A 11,000 N/A
------- ------
$2,600,000 $1,599,000
========== ==========
Loans are charged to the allowance for credit losses when the loans are
deemed uncollectible. It is the policy of management to make additions to the
allowance so that it remains adequate to cover all potential loan charge-offs
that exist in the portfolio at that time.
-17-
TABLE H
DEPOSITS
The Company has no known foreign deposits. The following table sets
forth the average amount of and the average rate paid on certain deposit
categories which were in excess of 10% of average total deposits for the years
ended December 31, 2000, 1999 and 1998.
(DOLLARS IN THOUSANDS)
----------------------
2000 1999 1998
---- ---- ----
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
Savings and negotiable orders of withdrawal $70,302 2.07% $65,085 1.73% $64,563 2.00%
Time certificates of deposit, under $100,000 36,240 5.33% 35,552 4.55% 34,035 5.25%
Time certificates of deposit, over $100,000 13,161 5.56% 12,006 4.59% 17,657 5.29%
Non-interest bearing demand 39,081 N/A 35,212 N/A 35,751 N/A
------ ------ ------
Total deposits $158,784 $147,855 $152,006
======== ======== ========
TABLE I
TIME DEPOSITS
The following table sets forth the maturity of time certificates of
deposit and other time deposits of $100,000 or more at December 31, 2000.
(IN THOUSANDS)
Three months or less $ 8,856
Over 3 months through 6 months 3,645
Over 6 through 12 months 6,367
Over 12 months 667
---
$19,535
=======
TABLE J
FINANCIAL RATIOS
The following table sets forth certain financial ratios for the years
ended December 31, 2000, 1999 and 1998.
2000 1999 1998
---- ---- ----
Net Income:
To average assets 0.98% 0.43% (0.24%)
To average shareholders' equity 10.48% 4.63% (2.58%)
Dividends declared per share to net
income per share 7.52% N/A N/A
Average shareholders' equity to average
assets 9.30% 9.46% 9.39%
-18-
SUPERVISION AND REGULATION
GENERAL
The banking and financial services businesses in which the Company
engages are highly regulated. Such regulation is intended, among other things,
to protect depositors whose deposits are insured by the FDIC and the banking
system as a whole. The monetary and fiscal policies of the federal government
and the policies of regulatory agencies, particularly the Board of Governors,
also influence the commercial banking business. The Board of Governors
implements national monetary policies (with objectives such as curbing inflation
and combating recession) by its open-market operations in United States
Government securities, by adjusting the required level of reserves for financial
intermediaries subject to its reserve requirements and by varying the discount
rates applicable to borrowings by depository institutions. The actions of the
Board of Governors in these areas influence the growth of bank loans,
investments and deposits and also affect interest rates charged on loans and
paid on deposits. Indirectly such actions may also impact the ability of
non-bank financial institutions to compete with the Bank. The nature and impact
of any future changes in monetary policies cannot be predicted.
The laws, regulations, and policies affecting financial services
businesses are continuously under review by Congress and state legislatures, and
federal and state regulatory agencies. From time to time, legislation is enacted
which has the effect of increasing the cost of doing business, limiting or
expanding permissible activities or affecting the competitive balance between
banks and other financial intermediaries. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies and other financial intermediaries are frequently made in Congress, in
the California legislature and before various bank regulatory and other
professional agencies. Changes in the laws, regulations or policies that impact
the Company cannot necessarily be predicted, but they may have a material effect
on the business and earnings of the Company.
BANK HOLDING COMPANY REGULATION
The Company, as a bank holding company, is subject to regulation under
the BHC Act, and is subject to the supervision and examination of the Board of
Governors. Pursuant to the BHC Act, the Company is required to obtain the prior
approval of the Board of Governors before it may acquire all or substantially
all of the assets of any bank, or ownership or control of voting shares of any
bank if, after giving effect to such acquisition, the Company would own or
control, directly or indirectly, more than 5 percent of such bank.
Under the BHC Act, the Company may not engage in any business other
than managing or controlling banks or furnishing services to its subsidiaries
that the Board of Governors deems to be so closely related to banking as to be a
proper incident thereto. The Company is also prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5 percent of the voting shares of any company unless the company is engaged in
banking activities or the Board of Governors determines that the activity is so
closely related to banking to be a proper incident to banking. The Board of
Governors' approval must be obtained before the shares of any such company can
be acquired and, in certain cases, before any approved company can open new
offices.
The BHC Act and regulations of the Board of Governors also impose
certain constraints on the redemption or purchase by a bank holding company of
its own shares of stock.
The Company's earnings and activities are affected by legislation, by
actions of its regulators, and by local legislative and administrative bodies
and decisions of courts in the jurisdiction in which the Company and the Bank
conduct business. For example, these include limitations on the ability of the
Bank to pay dividends to the Company and the ability of the Company to pay
dividends to the shareholders of the Company. It is the policy of the Board of
Governors that bank holding companies should pay cash dividends on common stock
only out of income available over the past year and only if prospective earnings
retention is consistent with the organization's expected future needs and
financial condition. The policy provides that bank holding companies should not
maintain a level of cash dividends that undermines the bank holding company's
ability to serve as a source of strength to its banking subsidiaries. Various
federal and state statutory provisions limit the amount of dividends that
subsidiary banks can pay to their holding companies without regulatory approval.
In addition to these explicit limitations, the federal regulatory agencies are
authorized to prohibit a banking subsidiary or bank holding company from
engaging in an unsafe or unsound banking practice. Depending upon the
circumstances, the agencies could take the position that paying a dividend would
constitute an unsafe or unsound banking practice.
In addition, banking subsidiaries of bank holding companies are subject
to certain restrictions imposed by federal law in dealings with their holding
companies and other affiliates. Subject to certain exceptions set forth in the
Federal Reserve Act, a bank can make a loan or extend credit to an affiliate,
purchase or invest in the securities of an affiliate, purchase assets from an
affiliate, accept securities of an
-19-
affiliate as collateral security for a loan or extension of credit to any person
or company, issue a guarantee, or accept letters of credit on behalf of an
affiliate only if the aggregate amount of the above transactions of such
subsidiary does not exceed 10 percent of such subsidiary's capital stock and
surplus on a per affiliate basis or 20 percent of such subsidiary's capital
stock and surplus on an aggregate affiliate basis. Such transactions must be on
terms and conditions that are consistent with safe and sound banking practices.
A bank and its subsidiaries generally may not purchase a "low-quality asset," as
that term is defined in the Federal Reserve Act, from an affiliate. Such
restrictions also prevent a holding company and its other affiliates from
borrowing from a banking subsidiary of the holding company unless the loans are
secured by collateral.
A holding company and its banking subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of property or provision of services. For example, with
certain exceptions a bank may not condition an extension of credit on a customer
obtaining other services provided by it, a holding company or any of its other
bank affiliates, or on a promise by the customer not to obtain other services
from a competitor.
The Board of Governors has cease and desist powers over parent bank
holding companies and non-banking subsidiaries where action of a parent bank
holding company or its non-financial institution subsidiaries represent an
unsafe or unsound practice or violation of law. The Board of Governors has the
authority to regulate debt obligations (other than commercial paper) issued by
bank holding companies by imposing interest ceilings and reserve requirements on
such debt obligations.
The Company is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by the California Department of
Financial Institutions (the "DFI").
Further, the Company is required by the Board of Governors to maintain
certain capital levels. See "Capital Standards."
REGULATION OF THE BANK
Banks are extensively regulated under both federal and state law. The
Bank, as a California state-chartered bank, is subject to primary supervision,
regulation and periodic examination by the DFI and the FDIC. The Bank is not a
member of the Federal Reserve System, but is nevertheless subject to certain
regulations of the Board of Governors.
If, as a result of an examination of a bank, the FDIC should determine
that the financial condition, capital resources, asset quality, earnings
prospects, management, liquidity, or other aspects of the bank's operations are
unsatisfactory or that the bank or its management is violating or has violated
any law or regulation, various remedies are available to the FDIC. Such remedies
include the power to enjoin "unsafe or unsound" practices, to require
affirmative action to correct any conditions resulting from any violation or
practice, to issue an administrative order that can be judicially enforced, to
direct an increase in capital, to restrict the growth of the bank, to assess
civil monetary penalties, to remove officers and directors, and ultimately to
terminate the bank's deposit insurance, which for a California chartered bank
would result in a revocation of the bank's charter. The DFI has many of the same
remedial powers.
The Bank is a member of the FDIC, which currently insures deposits of
each member bank to a maximum of $100,000 per depositor. For this protection,
the Bank, as is the case with all insured banks, pays a semi-annual statutory
assessment and is subject to the rules and regulations of the FDIC.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including standards for safety and soundness, reserves against
deposits, interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, fair lending
requirements, Community Reinvestment Act activities, and loans to affiliates.
-20-
PAYMENT OF DIVIDENDS
THE COMPANY
The shareholders of the Company are entitled to receive dividends when
and as declared by its Board of Directors, out of funds legally available,
subject to the dividends preference, if any, on preferred shares that may be
outstanding and also subject to the restrictions of the California Corporations
Code. At December 31, 2000, the Company had no outstanding shares of preferred
stock.
The principal sources of cash revenue to the Company will be dividends
received from the Bank. The Bank's ability to make dividend payments to the
Company is subject to state and federal regulatory restrictions.
THE BANK
Dividends payable by the Bank to the Company are restricted under
California law to the lesser of the Bank's retained earnings, or the Bank's net
income for the latest three fiscal years, less dividends declared during that
period, or, with the approval of the DFI, to the greater of the retained
earnings of the Bank, the net income of the Bank for its last fiscal year or the
net income of the Bank for its current fiscal year.
In addition to the regulations concerning minimum uniform capital
adequacy requirements described below, the FDIC has established guidelines
regarding the maintenance of an adequate allowance for credit losses. Therefore,
the future payment of cash dividends by the Bank will generally depend, in
addition to regulatory constraints, upon the Bank's earnings during any fiscal
period, the assessment of the Board of Directors of the capital requirements of
the Bank and other factors including the maintenance of an adequate allowance
for credit loan losses.
CAPITAL STANDARDS
The Board of Governors, the FDIC and other federal banking agencies
have risk based capital adequacy guidelines intended to provide a measure of
capital adequacy 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 reported as off-balance-sheet items. Under these guidelines, 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. government
securities, to 100% for assets with relatively higher credit risk, such as
business loans.
A banking organization's risk based capital ratios are obtained by
dividing its qualifying capital by its total risk-adjusted assets and
off-balance-sheet items. The regulators measure risk-adjusted assets and
off-balance-sheet items against both total qualifying capital (the sum of Tier 1
capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1
capital consists of common stock, retained earnings, noncumulative perpetual
preferred stock and minority interests in certain subsidiaries, less most other
intangible assets. Tier 2 capital may consist of a limited amount of the
allowance for possible loan and lease losses and certain other instruments with
some characteristics of equity. The inclusion of elements of Tier 2 capital are
subject to certain other requirements and limitations of the federal banking
agencies. Since December 31, 1992, the federal banking agencies have required a
minimum ratio of qualifying total capital to risk-adjusted assets and
off-balance-sheet items of 8%, and a minimum ratio of Tier 1 capital to
risk-adjusted assets and off-balance-sheet items of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. It is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating by the regulators since a strong capital
position is a significant part of the regulators' rating. For all banking
organizations not rated in the highest category, the minimum leverage ratio is
at least 100 to 200 basis points above the 3% minimum. Thus, the effective
minimum leverage ratio, for all practical purposes, is at least 4% or 5%. In
addition to these uniform risk-based capital guidelines and leverage ratios that
apply across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
-21-
In certain circumstances, the FDIC may determine that the capital
ratios for an FDIC-insured bank must be maintained at levels which are higher
than the minimum levels required by the guidelines or the regulations. A bank
that does not achieve and maintain the required capital levels may be issued a
capital directive by the FDIC to ensure the maintenance of required capital
levels.
As discussed above, the Company and the Bank are required to maintain
certain levels of capital. The regulatory capital guidelines as well as the
actual capitalization for the Bank and the Company on a consolidated basis as of
December 31, 2000 follow:
REQUIREMENT ACTUAL
--------------------------------------- ----------------------------
ADEQUATELY WELL
CAPITALIZED CAPITALIZED BANK COMPANY
------------------- ------------------- ------------ ---------------
TOTAL RISK-BASED
CAPITAL RATIO 8.0% 10.0% 16.1% 16.2%
TIER 1 RISK-BASED
CAPITAL RATIO 4.0% 6.0% 14.8% 14.8%
TIER 1 LEVERAGE
CAPITAL RATIO 3.0% 4.0% - 5.0% 9.1% 9.1%
RECENT LEGISLATION
FINANCIAL SERVICES MODERNIZATION LEGISLATION
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks and other financial institutions are
frequently made in Congress, in the California legislature and by various bank
regulatory agencies. On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act. This legislation eliminates many of the barriers that
have separated the insurance, securities and banking industries since the Great
Depression. The federal banking agencies (the Board of Governors, FDIC and the
Office of the Comptroller of the Currency) among others, continue to draft
regulations to implement the Gramm-Leach-Bliley Act. The likelihood of any major
change from regulations that have not yet been issued, and the impact such
change may have on the Company and the Bank is impossible to predict. The
Gramm-Leach-Bliley Act is the result of a decade of debate in the Congress
regarding a fundamental reformation of the nation's financial system. The law is
subdivided into seven titles, by functional area.
The major provisions of the Gramm-Leach-Bliley Act are:
FINANCIAL HOLDING COMPANIES. Title I establishes a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the BHC Act framework to permit a holding company system to engage in
a full range of financial activities through qualification as a new entity known
as a financial holding company. A bank holding company that qualifies as a
financial holding company can expand into a wide variety of services that are
financial in nature, provided that its subsidiary depository institutions are
well-managed, well-capitalized and have received at least a "satisfactory"
rating on their last CRA examination. Services that have been deemed to be
financial in nature include securities underwriting, dealing and market making,
sponsoring mutual funds and investment companies, insurance underwriting and
agency activities and merchant banking.
SECURITIES ACTIVITIES. Title II narrows the exemptions from the
securities laws previously enjoyed by banks, requires the Board of Governors and
the SEC to work together to draft rules governing certain securities activities
of banks and creates a new, voluntary investment bank holding company.
INSURANCE ACTIVITIES. Title III restates the proposition that the
states are the functional regulators for all insurance activities, including the
insurance activities of federally-chartered banks, and bars the states from
prohibiting insurance activities by depository institutions. The law encourages
the states to develop uniform or reciprocal rules for the licensing of insurance
agents.
-22-
PRIVACY. Under Title V, federal banking regulators are required to
adopt rules that will limit the ability of banks and other financial
institutions to disclose non-public information about consumers to nonaffiliated
third parties. These limitations will require disclosure of privacy policies to
consumers and, in some circumstances, will allow consumers to prevent disclosure
of certain personal information to a nonaffiliated third party. Federal banking
regulators issued final rules on May 10, 2000 to implement the privacy
provisions of Title V. Under the rules, financial institutions must provide:
o initial notices to customers about their privacy policies, describing
the conditions under which they may disclose nonpublic personal
information to nonaffiliated third parties and affiliates;
o annual notices of their privacy policies to current customers; and
o a reasonable method for customers to "opt out" of disclosures to
nonaffiliated third parties.
The rules were effective November 13, 2000, but compliance is optional
until July 1, 2001. These privacy provisions will affect how consumer
information is transmitted through diversified financial companies and conveyed
to outside vendors. It is not possible at this time to assess the impact of the
privacy provisions on the Company's financial condition or results of
operations.
SAFEGUARDING CONFIDENTIAL Customer INFORMATION. Under Title V, federal
banking regulators are required to adopt rules requiring financial institutions
to implement a program to protect confidential customer information. In January
2000, the federal banking agencies adopted guidelines requiring financial
institutions to establish an information security program to:
o identify and assess the risks that may threaten customer information;
o develop a written plan containing policies and procedures to manage and
control these risks;
o implement and test the plan; and
o adjust the plan on a continuing basis to account for changes in
technology, the sensitivity of customer information and internal or
external threats to information security.
Each institution may implement a security program appropriate to its
size and complexity and the nature and scope of its operations. The guidelines
are effective July 1, 2001.
COMMUNITY REINVESTMENT ACT SUNSHINE REQUIREMENTS. In February 2001, the
federal banking agencies adopted final regulations implementing Section 711 of
Title VII, the CRA Sunshine Requirements. The regulations require
nongovernmental entities or persons and insured depository institutions and
affiliates that are parties to written agreements made in connection with the
fulfillment of the institution's CRA obligations to make available to the public
and the federal banking agencies a copy of each agreement. The regulations
impose annual reporting requirements concerning the disbursement, receipt and
use of funds or other resources under these agreements. The effective date of
the regulations is April 1, 2001. Neither the Company nor the Bank is a party to
any agreement that would be subject of reporting pursuant to the CRA Sunshine
Requirements.
The Company continues to evaluate the strategic opportunities presented
by the broad powers granted to bank holding companies that elect to be treated
as financial holding companies. In the event that the Company determines that
access to the broader powers of a financial holding company is in the best
interests of the Company, its shareholders and the Bank, the Company will file
the appropriate election with the Board of Governors.
The Company and the Bank intend to comply with all provisions of the
Gramm-Leach-Bliley Act and all implementing regulations as they become
effective, and the Bank intends to develop appropriate policies and procedures
to meet their responsibilities in connection with the privacy provisions of
Title V of that Act.
CONSUMER PROTECTION LAWS AND REGULATIONS
The bank regulatory agencies are focusing greater attention on
compliance with consumer protection laws and their implementing regulations.
Examination and enforcement have become more intense in nature, and insured
institutions have been advised to monitor carefully compliance with such laws
and regulations. The Bank is subject to
-23-
many federal consumer protection statutes and regulations, some of which are
discussed below.
The Community Reinvestment Act ("CRA") is intended to encourage insured
depository institutions, while operating safely and soundly, to help meet the
credit needs of their communities. The CRA specifically directs the federal
regulatory agencies, in examining insured depository institutions, to assess a
bank's record of helping meet the credit needs of its entire community,
including low- and moderate-income neighborhoods, consistent with safe and sound
banking practices. 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, mergers or
acquisitions, or holding company formations. The agencies use the CRA assessment
factors in order to provide a rating to the financial institution. The ratings
range from a high of "outstanding" to a low of "substantial noncompliance." The
Bank has not been examined for CRA compliance by its primary regulator within
the past 12 months.
The Equal Credit Opportunity Act ("ECOA") generally prohibits
discrimination in any credit transaction, whether for consumer or business
purposes, on the basis of race, color, religion, national origin, sex, marital
status, age (except in limited circumstances), receipt of income from public
assistance programs, or good faith exercise of any rights under the Consumer
Credit Protection Act. The Truth in Lending Act ("TILA") is designed to ensure
that credit terms are disclosed in a meaningful way so that consumers may
compare credit terms more readily and knowledgeably. As a result of the TILA,
all creditors must use the same credit terminology to express rates and
payments, including the annual percentage rate, the finance charge, the amount
financed, the total of payments and the payment schedule, among other things.
The Fair Housing Act ("FH Act") regulates many practices, including
making it unlawful for any lender to discriminate in its housing-related lending
activities against any person because of race, color, religion, national origin,
sex, handicap or familial status. A number of lending practices have been found
by the courts to be, or may be considered, illegal under the FH Act, including
some that are not specifically mentioned in the FH Act itself. The Home Mortgage
Disclosure Act ("HMDA") grew out of public concern over credit shortages in
certain urban neighborhoods and provides public information that will help show
whether financial institutions are serving the housing credit needs of the
neighborhoods and communities in which they are located. The HMDA also includes
a "fair lending" aspect that requires the collection and disclosure of data
about applicant and borrower characteristics as a way of identifying possible
discriminatory lending patterns and enforcing anti-discrimination statutes.
Finally, the Real Estate Settlement Procedures Act ("RESPA") requires
lenders to provide borrowers with disclosures regarding the nature and cost of
real estate settlements. Also, RESPA prohibits certain abusive practices, such
as kickbacks, and places limitations on the amount of escrow accounts.
Penalties under the above laws may include fines, reimbursements and
other penalties. Due to heightened regulatory concern related to compliance with
the CRA, TILA, FH Act, ECOA, HMDA and RESPA generally, the Bank may incur
additional compliance costs or be required to expend additional funds for
investments in its local community.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which was subsequently amended by SFAS 137
to delay the effective date. In June 2000, SFAS 133 was amended by SFAS 138
which addressed certain issues causing difficulties in implementing the original
pronouncement. The Bank adopted SFAS 133 on April 1, 1999. Upon adoption, all
investment securities previously classified as held-to-maturity were transferred
to the available-for-sale classification. See Note 2 of the Consolidated
Financial Statements of the Company at page 56 for information regarding the
Company's transfer of held-to-maturity securities. No derivative instruments
were held and, accordingly, there was no transition adjustment.
In September 2000, the Financial Accounting Standards Board issued SFAS
140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES, to replace SFAS 125, which was issued in June
1996. The original statement addressed issues related to transfers of financial
assets in which the transferor has some continuing involvement with the
transferred assets or with the transferee. SFAS 140 resolves implementation
issues which arose as a result of SFAS 125, but carries forward most of the
provisions of the original statement. SFAS 140 is effective for transfers
occurring after March 31, 2001 and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Management does not believe the adoption of this statement will have a
significant impact on its financial statements.
-24-
The Financial Accounting Standards Board has proposed the elimination
of "pooling of interests" accounting. While final rules have not been adopted,
the result of such a change would be to account for all mergers as "purchase"
transactions, resulting in the recognition of goodwill in any merger where the
purchase price exceeds the fair value of the assets acquired less liabilities
assumed. Subsequently, goodwill will be periodically reviewed for impairment and
written down in periods where the recorded value is determined to be in excess
of fair value. The expense related to the write down of goodwill will reduce
future reported income of the merged companies. Additionally, in the case of
bank mergers, the banking regulators have not yet determined the regulatory
capital treatment of goodwill recognized in purchase accounting transactions.
Some investment bankers have expressed the view that the elimination of "pooling
of interest" accounting will result in lower merger premiums for sellers and
fewer merger transactions.
OTHER
Other legislation which has been or may be proposed to the United
States Congress and the California Legislature and regulations which may be
proposed by the Board of Governors, FDIC and the DFI may affect the business of
the Company and the Bank. It cannot be predicted whether any pending or proposed
legislation or regulations will be adopted or the effect such legislation or
regulations may have upon the business of the Company and the Bank.
OTHER INFORMATION CONCERNING THE COMPANY
The Company holds no material patents, trademarks, licenses, franchises
or concessions.
No expenditures were made by the Company during its last two fiscal
years on material research activities relating to the development of services or
the improvement of existing services. Based upon present business activities,
compliance with Federal, State and local provisions regulating discharge of
materials into the environment will have no material effects upon the capital
expenditures, earnings and competitive position of the Company.
The business of the Company is not seasonal. The Company intends to
continue with the same basic commercial banking activities that have
characterized the Bank's operations since its inception.
AVAILABLE INFORMATION
The Company is subject to certain of the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Therefore
the Company files reports and other information with the Securities and Exchange
Commission (the "Commission"). These reports and other information may be
inspected and copied at the public reference facilities of the Commission
located at 450 Fifth Street, N. W., Washington, D. C. 20549, at the Commission's
regional offices at 7 World Trade Center, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661, at prescribed rates.
Information regarding the Commission can be obtained by calling 1-800-SEC-0330.
Such reports and other information may also be accessed electronically at the
Commission's home page on the Internet at http://www.sec.gov.
-25-
ITEM 2 - DESCRIPTION OF PROPERTY.
OWNED LEASED TOTAL
FULL SERVICE BRANCHES
Headquarters and Main Deposit Branch
600 Pollasky Avenue, Clovis, CA 1 1
Shaver Lake Branch, Shaver Lake, CA 1 1
Foothill Branch, Prather, CA 1 1
River park Branch, Northeast Fresno, CA 1 1
Fig Garden Branch, Northwest Fresno, CA 1 1
Supermarket Branch, Clovis, CA 1 1
OTHER FACILITIES:
Cashier, Human Resources, Information Services Department 1 1
536 Woodworth, Clovis, CA
Credit Administration, Real Estate Department and
SBA Department
795 Pollasky Avenue, Clovis, CA 1 1
Training Facility
630 Pollasky Avenue, Clovis, CA 1 1
Total 3 6 9
Title to the properties described as owned in the above table is held
by the Bank with no liens or encumbrances. All of the property described as
leased is leased directly from independent parties. Management considers the
terms and conditions of each of the existing leases to be in the aggregate
favorable to the Company.
None of the net book values of the properties listed above represent
more than 10% of total assets of the Company.
-26-
ITEM 3 - LEGAL PROCEEDINGS.
Neither the Company nor the Bank is a party to, nor are any of their
properties the subject of, any material pending legal proceedings other than
ordinary, routine litigation incidental to the Company's and the Bank's
businesses, nor are any of such proceedings known to be contemplated by
government authority. No director, officer, affiliate, more than 5% shareholder
of the Company or the Bank or any associate of these persons is a party adverse
to the Company or the Bank or has a material interest adverse to the Company or
the Bank in any material legal proceeding.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is not listed on any exchange nor is it
listed with NASDAQ. Trading of the Company's common stock has been limited in
volume with transactions coordinated between buyer and seller utilizing brokers
to accommodate activity. Bid and ask prices for the Company's common stock are
quoted weekly in the "Fresno Bee" and the "pink sheet" (National Daily Quotation
Service). They can also be found on the Internet under the symbol CVCY. As of
March 15, 2001 the Company had 411 shareholders of record. The following table
summarizes bid quotations for the Company's common stock. The prices indicated
may not necessarily represent actual transactions. Bid information has been
obtained from Sutro & Co., which makes a market in the Company's common stock.
BID QUOTATIONS OF THE COMPANY'S
COMMON STOCK
------------------------------------
QUARTER ENDED LOW BID HIGH BID
March 31, 1999 $21.50 $23.00
June 30, 1999 20.00 21.00
September 30, 1999 16.00 17.50
December 31, 1999 15.00 16.00
March 31, 2000 13.50 13.50
June 30, 2000 13.63 14.50
September 30, 2000 13.88 14.50
December 31, 2000 13.88 14.75
The Company paid a $0.10 cash dividend in 2000 and a 10% stock dividend
in 1999.
-27-
Inquiries on Central Valley Community Bancorp stock can be made by
calling Troy Norlander with Sutro & Co. at (800) 288-2811, Jeffrey Mayer with
Hagerty Stewart at (888) 833-2777, or Joey Warmenhoven with Wedbush Morgan
Securities at (800) 234-0480.
In connection with the statutory merger transaction by which the
Company became the sole shareholder of the Bank, the Company issued 1,303,459
shares of its no par value common stock on November 15, 2000 to the former
shareholders of the Bank. No underwriters were involved in the transaction. The
Company relied on the exemption afforded by Section 3(a)(12) of the Securities
Act of 1933, as amended, which provides an exemption for any equity security
issued in connection with the acquisition by a holding company of a bank under
section 3(a) of the BHC Act, subject to certain conditions, which conditions
were satisfied by the Company.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's discussion and analysis should be read in conjunction with the
Company's audited Consolidated Financial Statements, including the Notes
thereto, at pages 38 through 77 herein.
ALL STATEMENTS CONTAINED HEREIN THAT ARE NOT HISTORICAL FACTS, SUCH AS
STATEMENTS REGARDING THE COMPANY'S CURRENT BUSINESS STRATEGY AND THE COMPANY'S
PLANS FOR FUTURE DEVELOPMENT AND OPERATIONS, ARE BASED UPON CURRENT
EXPECTATIONS. THESE STATEMENTS ARE FORWARD-LOOKING IN NATURE AND INVOLVE A
NUMBER OF RISKS AND UNCERTAINTIES. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE
NOT LIMITED TO, THOSE DESCRIBED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND INCLUDE, AMONG OTHER THINGS,
(1) SIGNIFICANT INCREASES IN COMPETITIVE PRESSURE IN THE BANKING INDUSTRY; (2)
CHANGES IN THE INTEREST RATE ENVIRONMENT RESULTING IN REDUCED MARGINS; (3)
GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY, ARE LESS FAVORABLE
THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS, A DETERIORATION IN CREDIT
QUALITY; (4) CHANGES IN THE REGULATORY ENVIRONMENT; (5) FLUCTUATIONS IN THE REAL
ESTATE MARKET; (6) CHANGES IN BUSINESS CONDITIONS AND INFLATION; AND (7) CHANGES
IN SECURITIES MARKETS. THEREFORE, THE INFORMATION SET FORTH IN SUCH
FORWARD-LOOKING STATEMENTS SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING THE
BUSINESS PROSPECTS OF THE COMPANY.
OVERVIEW:
Central Valley Community Bancorp (OTC: CVCY) (the "Company") reported
higher earnings in 2000 than in any of the past five years. The Company had net
income of $1,748,000 for the 2000 fiscal year compared to $718,000 for the 1999
fiscal year. The primary contributors to net income during 2000 were a
$1,304,000 increase in net interest income, a $532,000 increase in non-interest
income, and a $1,220,000 decrease in the provision for credit losses, all of
which were partially offset by a $1,303,000 increase in non-interest expense and
a $696,000 increase in tax expense.
Average earning assets for 2000 were $157,244,000 compared to
$141,258,000 for 1999. Major contributors to the increase in average earning
assets were the $10,929,000 increase in average deposits and the $2,441,000
decrease in average non-accrual loans which provided the liquidity for the
$8,734,000 increase in average loans and the $4,811,000 increase in total
average investments.
The Company's net interest margin increased 25 basis points to 5.92%
for 2000 compared to 5.67% for 1999. The increase can be attributed to higher
yields on loans and investment securities, which were partially offset by higher
rates on interest bearing deposits. Total average loans (excluding non-accrual
loans) yielded 10.63% during 2000 compared to 10.58% for 1999. Average
investments (including interest bearing deposits with other banks and Federal
funds sold) yielded 6.32% during 2000 compared to 5.32% in 1999.
The Company's emphasis in 2000 was to increase loan and deposit volumes
without compromising the improvement in loan quality achieved in 1999, and the
Company was successful in both areas. In addition to increasing earnings from
earning assets, the Company also undertook several substantial projects during
2000. Two new branches were opened and two supermarket branches that had not met
expectations were closed, with the costs associated with these projects
reflected in occupancy expense. The Company anticipates another branch closing
in the first half of 2001. An extensive remodeling of the Company's Clovis Main
Branch was also completed in 2000, enhancing the physical location and providing
more efficient use of its space. The Company made a substantial
28
investment in technology in 2000 to provide more convenient and efficient
banking to its customers, and to enable it to expand its products and services.
An entire new telephone system was installed in the main branch, administration
office, and real estate office. During 2000, the Company also updated its web
site and began offering Internet banking, Internet cash management and bill
payment. During the fourth quarter of 2000, the Company began the testing of
image statement preparation with plans to offer this service to customers in the
first quarter of 2001.
The Company was also successful in the final disposition of the assets
of Clovest, the real estate development subsidiary of the Bank. As discussed
under "Discontinued Operations", Note 6 in the "Notes to Consolidated Financial
Statements", page 57 in July 1998, the Company announced its decision to
discontinue operations of Clovest. The Company had no remaining investment in
real estate at December 31, 2000 compared to $502,000 at December 31, 1999.
Several major management changes occurred during the periods under
review. In the first half of 2000, the responsibilities and duties of the former
senior credit officer position were restructured to reflect the Company's
strategic plan. The position of Chief Credit Officer was created to ensure
continued credit quality, accurate loan grading, and to focus on streamlining
loan processing and documentation. The position of Manager, Commercial and
Business Banking was created to focus on business development and customer
retention. In the first half of 1999, the position of Manager, Retail and
Consumer Banking was created with job responsibilities which include focusing
the Company on customer retention and a needs-based sales environment.
The many mergers and acquisitions which occurred in 1999 resulted in
numerous opportunities to bring new business and experienced personnel to the
Company. One of the first responsibilities of the new Manager, Commercial and
Business Banking was to establish a branch office in the Northeast section of
Fresno in the first quarter of 2000, and to focus on opportunities in that area.
Additionally, a new branch in an established upscale shopping center in
Northwest Fresno was opened in the second quarter of 2000. Both facilities have
provided the Company with opportunities to expand its loan and deposit base;
however, based on past experience, management expected that these new offices
would initially have a negative impact on earnings until the volume of business
grew to cover fixed overhead expenses.
The Company's market focus for loans continues to concentrate on small
to medium commercial business. These loans offer diversification as to
industries and types of business, thus limiting material exposure in any
industry concentrations. The Company offers both fixed and floating interest
rate loans and obtains collateral in the form of real estate, deposit accounts,
and accounts receivable, but looks to business cash flow as its primary source
of repayment. No one borrower had aggregate credit commitments exceeding 5.39%
of the loan portfolio at December 31, 2000.
As of December 31, 2000, in management's judgment, a concentration of
loans existed in commercial loans and real estate-related loans. At that date,
commercial and real estate-related loans represented 42.8% and 48.2% of total
loans, respectively. These same concentrations existed as of December 31, 1999
with commercial and real estate-related loans representing 49.9% and 41.5% of
total loans, respectively.
Although management believes the loans within these concentrations have
no more than the normal risk of collectibility, a substantial decline in the
performance of the economy in general or a decline in real estate values in the
Company's primary market area, in particular, could have an adverse impact on
collectibility, increase the level of real estate-related nonperforming loans,
or have other adverse effects which alone or in the aggregate could have a
material adverse effect on the financial condition of the Company.
Average assets during 2000 were $179,240,000 compared to $165,926,000
for 1999, an increase of $13,314,000, or 8.0%. Return on average assets (ROA)
and return on average equity (ROE) for the periods under review are reflected in
the following table.
- ----------------------------------- --------------------- ---------------------
For the Year Ended For the Year Ended
December 31, 2000 December 31, 1999
- ----------------------------------- --------------------- ---------------------
ROA 0.98% 0.43%
- ----------------------------------- --------------------- ---------------------
ROE 10.48% 4.63%
- ----------------------------------- --------------------- ---------------------
29
RESULTS OF OPERATIONS
Net income for 2000 was $1,748,000 compared to $718,000 in 1999, a
$1,030,000 increase. The increase in net income in 2000 resulted from an
increase in net interest income, non-interest income, and a decrease in the
credit loss provision, which were partially offset by an increase in
non-interest expense.
Net interest income is the Company's primary source of revenue. Net
interest income is the difference between the interest income received on
interest-earning assets and the interest expense paid on interest-bearing
liabilities. Net interest income is primarily affected by two factors, the
volume and mix of interest-earning assets and interest-bearing liabilities and
the interest rates earned on those assets and paid on the liabilities.
Interest income from loans and fees increased 15.8%, or $1,222,000, for
2000 as average total loan volumes (including non-accrual loans) increased
11.3%, or $8,734,000, for 2000 to $85,968,000 compared to $77,234,000 for 1999.
Loan demand in the Central Valley has become highly competitive in both rates
and fees with major banks as well as other community banks vying for loan
demand. The Company's loan to deposit ratio at December 31, 2000 was 53.1%
compared to 54.5% at December 31, 1999. While the loan portfolio increased
18.2%, total deposits also increased 23.0%, which lessened the impact of loan
growth on the loan to deposit ratio.
The Company concentrates its lending activities mainly in small to
medium business related lending, both commercial and real estate, but offers
consumer and agricultural lending as well. The increase in average loan volume
can also be attributed to the Company's efforts in 1999 to refine the lending
process and improve the quality of the loan portfolio, which allowed the focus
in 2000 to be on business development and customer retention.
Significant progress was achieved in the area of Small Business
Administration (SBA) lending in 2000 with average SBA loan volumes increasing to
$7,250,000 for 2000 compared to $2,987,000 for 1999, a 142.7% increase. The
Company has been active in the SBA market since its inception and in 1998
established a distinct SBA Lending Department. The Company received its
Preferred Lender Program status and SBA Express status from SBA during the first
half of 2000. Both programs have enhanced the Company's ability to service the
needs of the SBA borrower promptly. The Company also received notification from
the Fresno Certified Development Corporation (FCDC) in September 2000 that the
Company was the number one producer of SBA 504 loans in the Fresno area. The
FCDC serves Fresno, Madera, and Kings Counties. SBA 504 loans are economic
development commercial real estate loans. During the construction phase the
Company retains 100% of the repayment risk of the loan; however, upon completion
of construction, the SBA pays the loan down to a 50% loan to value level. These
loans provide funding for businesses that would generally not qualify under
conventional lending standards and the Company's loan policies.
A significant portion of the Company's loan portfolio utilizes prime
rate as a reference point in pricing its loans. The West Coast prime rate
averaged 9.20% in 2000 and 8.00% in 1999 which can be compared to the average
effective yields on the Company's loans (excluding non-accrual loans) of 10.63%
in 2000, and 10.58% in 1999. As stated above, the competitive market in the
Company's market area heavily influences the ability to set rates and fees for
loans.
Average non-accrual loans for 2000 were $1,819,000 compared to
$4,260,000 for 1999. At December 31, 2000, the Company had $205,000 in
non-accrual loans compared to $3,618,000 at December 31, 1999. One commercial
credit represented a significant portion of the non-accrual loans in 2000
compared to two real estate commercial borrowing relationships which represented
90.4% of the total non-accrual loans at December 31, 1999. The ratio of
non-accrual loans to total loans improved significantly, declining to 0.2% at
December 31, 2000 compared to 4.5% at December 31, 1999.
The designation of a loan as non-accrual for financial reporting
purposes does not relieve the borrower of its obligation to pay interest.
Accordingly, the Company may ultimately recover all or a portion of the interest
due on these non-accrual loans. A non-accrual loan returns to accrual status
when the loan becomes contractually current and future collectibility of amounts
due is reasonably assured.
The investment policy of the Company is established by the Board of
Directors and implemented by the Bank Board's Asset/Liability Committee. It is
designed primarily to provide and maintain liquidity, to enable the Company to
meet its pledging requirements for public money and borrowing arrangements, to
generate a favorable return on investments without incurring undue interest rate
and credit risk, and to complement the Company's lending activities.
30
Investments typically have yields lower than loans. Interest income
from investment securities, Federal funds sold, and interest-bearing deposits in
other banks increased 27.1% in 2000 compared to 1999. Average investment
securities and interest-bearing deposits in other banks increased 3.4% or
$2,112,000 to $63,604,000 for 2000 compared to $61,492,000 for 1999. Average
Federal funds sold also increased $2,699,000 in the periods under review. The
increase in the volume of the investment portfolio represents the difference
between the $10,929,000 increase in average deposit volume, the $8,734,000
increase in average loan volume, and the $2,441,000 decrease in average
non-accrual loans. The reduction in non-accrual loans enabled the Company to
invest the funds in performing loans or other investments. The effective yield
on the investment portfolio and other interest bearing deposits for 2000 was
6.31% compared to 5.38% in 1999. The effective yield on Federal funds sold
averaged 6.34% in 2000 compared to 4.81% in 1999. This increase in yield
reflects the increase in the Federal funds rate from a low of 4.75% in 1999 to
6.50% at the end of 2000.
In an effort to increase yields without accepting unreasonable risk, a
significant portion of the new investment purchases has been in high quality
mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs).
These securities typically provide a higher yield than U.S. Treasuries,
government agencies, and municipal investments. The Company held $39,941,000 or
54.5% of the total investment portfolio in MBS and CMOs with an average weighted
yield of 7.48% at December 31, 2000 compared to $37,138,000, or 68.1%, of the
total investment portfolio with an average weighted yield of 7.50% at December
31, 1999. In comparison, the Company held $14,276,000 in agency securities with
an average weighted yield of 5.99% at December 31, 2000 compared to $4,990,000
in agency securities with an average weighted yield of 5.60% at December 31,
1999.
Management's review of investments before purchase includes an analysis
of how the security will perform under several interest rate scenarios to
evaluate whether investments are consistent with the Company's investment
policy. The policy addresses issues of average life, duration, prohibited
investments, and prohibited practices. The Company recognizes the interest rate
risks and prepayment risks associated with MBS and CMOs. In a declining rate
environment, prepayments from MBS and CMOs would be expected to increase and the
expected life of the investment would be expected to shorten. Conversely, if
interest rates increase, prepayments would be expected to decline and the
average life of the MBS and CMOs would be expected to extend. The Company has
purchased certain of these investments which are meant to perform well in an
increasing rate environment and others that are meant to perform well in a
declining rate environment, with the ultimate goal of a balanced portfolio. At
December 31, 2000, the Company's market risk was moderately higher in an
increasing rate environment versus a declining rate environment. With an
immediate rate increase of 200 basis points, the estimated decrease in the
market value of the Company's investment portfolio would be $5,187,000.
Conversely, with an immediate rate decrease of 200 basis points, the estimated
increase in the market value of the Company's investment portfolio would be
$4,189,000. While an immediate shock of 200 basis points is highly unlikely, the
Company uses those increments to measure its interest rate risk in accordance
with regulatory requirements.
The Company offers a variety of deposit accounts having a range of
interest rates and terms. The Company's deposits consist of savings, demand
deposits, and certificate of deposit accounts. The flow of deposits is
influenced significantly by general economic conditions, changes in the money
market and prevailing interest rates and competition. The Company's deposits are
obtained primarily from the geographic area in which its offices are located.
The Company relies primarily on customer service and long-standing relationships
with customers to attract and retain these deposits. The Company does not use
brokered deposits, and based on historical experience, management believes it
will continue to retain a large portion of its time deposit accounts at
maturity.
Interest expense in 2000 was $4,247,000 compared to $3,344,000 in 1999.
This $903,000, or 27.0%, increase can be attributed to higher interest rates and
an increased volume of interest-bearing deposits in 2000 compared to 1999.
Average interest-bearing deposits for 2000 were $119,703,000 compared to
$112,643,000 for 1999, a 6.3%, or $7,060,000 increase. Total average deposits
increased 7.4% in the periods under review. Significant contributors to the
deposit volume increase were the two new branches the Company opened in 2000, as
mentioned above.
Other interest expense increased $79,000 in the periods under review
mainly due to borrowings from the Federal Home Loan Bank ("FHLB"). During the
first quarter of 2000 the Company anticipated a need for liquidity and borrowed
$5,000,000 from the FHLB. The advances, which had an average rate of 6.13%, had
maturities that were staggered throughout the second and third quarters of 2000.
All advances were paid in full by August 2000 and the Company had no outstanding
balances at December 31, 2000.
Net interest income before provision for credit losses at December 31,
2000 was $9,313,000 compared to $8,009,000 at December 31, 1999, an increase of
$1,304,000, or 16.3%. The increase in net interest income can be mainly
attributed to the increase in interest income.
31
The Company provides for possible credit losses by a charge to
operating income based upon the composition of the loan portfolio, past levels
of delinquencies, losses and non-performing assets, economic and environmental
conditions and other factors which, in management's judgment, deserve
recognition in estimating loan losses. Loans are charged off when they are
considered uncollectible or of such little value that continuance as an active
earning asset is not warranted.
The establishment of an adequate credit allowance is based on both an
accurate risk rating system and loan portfolio management tools. Management has
established initial responsibility for the accuracy of credit risk grades with
the individual credit officer. The grading is then submitted to the Chief Credit
Officer (CCO) who reviews the grades for accuracy. The risk grading and reserve
allocation is analyzed periodically by a third party credit reviewer and by
various regulatory agencies.
The CCO sets the specific reserve for all adversely risk-graded
credits monthly. This process includes the utilization of loan delinquency
reports, classified asset reports, and portfolio concentration reports to assist
in accurately assessing credit risk and establishing appropriate reserves.
Reserves are also allocated to all credits that are not adversely graded. Use of
historical loss experience within the portfolio along with peer bank loss
experience determines the level of reserves held.
The allowance for credit losses is reviewed at least quarterly by the
Board's Audit Committee and by the Board of Directors. Reserves are allocated to
loan portfolio segments using percentages which are based on both historical
risk elements such as delinquencies and losses and predictive risk elements such
as economic, competitive and environmental factors. The Company has adopted the
specific reserve approach to allocate reserves to each adversely graded asset,
as well as to each impaired asset for the purpose of estimating potential loss
exposure. Although the allowance for credit losses is allocated to various
portfolio segments, it is general in nature and available for the loan portfolio
in its entirety. Additions may be required based on the results of independent
loan portfolio examinations, regulatory agency examinations, or the Company's
own internal review process. Additions are also required when, in management's
judgment, the reserve does not properly reflect the portfolio's potential loss
exposure.
Managing credits identified through the risk evaluation methodology
includes developing a business strategy with the customer to mitigate the
Company's potential losses. Management continues to monitor these credits with a
view to identifying as early as possible when, and to what extent, additional
provisions may be necessary. The provision for credit losses was $50,000 in 2000
compared to $1,270,000 in 1999. As stated above, the Company held $3,618,000 in
non-accrual loans at December 31, 1999 which was reflected in the 1999 provision
for credit losses
The ratio of net credit losses to average total loans outstanding was
0.28% in 2000 compared to 2.57% in 1999. Net charge-offs for 2000 were $240,000
compared to $1,983,000 for 1999. The charge-offs in 2000 of $1,143,000 primarily
related to two major commercial loans and were partially offset by recoveries of
$903,000 mainly from a previously charged-off agricultural relationship. In
1999, charge-offs of $2,533,000 occurred of which $2,406,000 were primarily
related to four commercial credit relationships. Offsetting these 1999
charge-offs were $550,000 in recoveries. The Company had no restructured loans
or accruing loans past due 90 days or more at December 31, 2000. For information
regarding impaired loans, refer to Notes 1 and 3, in the "Notes to Consolidated
Financial Statements" at pages 47 and 53.
The allowance for credit losses was $2,047,000, or 2.13% of total
loans, at December 31, 2000 compared to $2,236,000, or 2.74% of total loans, at
December 31, 1999. Based on information currently available, management believes
that the allowance for credit losses is adequate to absorb potential risks in
the portfolio. However, no assurance can be given that the Company may not
sustain charge-offs which are in excess of the allowance in any given period.
Net interest income after the provision for credit losses increased
$2,524,000, or 37.5%, in 2000 to $9,263,000 from $6,739,000 in 1999.
Non-interest income increased $531,000, or 17.7%, to $3,528,000 in 2000
from $2,997,000 in 1999. Non-interest income includes fees, charges and other
income, as well as any gain or loss on securities transactions. Increases in
2000 reflect increases in service charges, rentals from equipment leased to
others, and other non-interest income, which were partially offset by decreases
in loan placement fees.
Service charge income increased $85,000, or 8.4%, in 2000 compared to
1999. Deposit account growth reflected in the increase in average deposit
volumes contributed to the increase.
32
Rentals from equipment leased to others increased $271,000, or 21.3%,
in the periods under review. Offsetting this increase in income is the related
increase in depreciation on equipment leased to others reflected in non-interest
expenses. Average equipment leased to others increased $418,000, or 15.5%, to
$3,113,000 for 2000 from $2,695,000 for 1999. See Note 4, in the "Notes to
Consolidated Financial Statements", page 54 for details.
The Company earns loan placement fees from the brokerage of
single-family residential mortgage loans. Loan placement fees decreased $65,000,
or 30.2%, to $150,000 for 2000 compared to $215,000 for 1999. Increased interest
rates during the fourth quarter may have affected purchases and refinancing in
the single-family residential market. In addition, opportunities for refinancing
were more difficult in 2000 for new homeowners as the rate environment for the
past year was relatively low. Average 30 year mortgage rates in December 2000
were in the 6.75% range compared to approximately 7.90% in December 1999. If
this interest rate decline continues in 2001, refinance and purchase
opportunities may be created.
No losses on sales of investment securities were taken in 2000 compared
to losses of $48,000 for 1999. The majority of the loss in 1999 reflected the
replacement of lower yielding investments with higher yielding investments which
resulted in an immediate loss at the time of sale.
Other non-interest income increased $194,000, or 35.7%, to $737,000
in 2000 compared to $543,000 in 1999. The majority of the increase was the
result of new fees and charges implemented in late 1999 and on which income
was realized in 2000. The increase is also partially due to increases in the
cash surrender value of life insurance policies held in connection with the
Company's deferred compensation and salary continuation plans. Refer to
"Employee Benefits", Note 15 in the "Notes to the Consolidated Financial
Statements", page 70.
Non-interest expense for 2000 increased by $1,303,000, or 14.8%
compared to 1999. The major components of the increase were salaries,
depreciation on equipment leased to others and occupancy expenses, partially
offset by a decrease in other non-interest expense.
Salary expense increased $847,000, or 22.0%, in 2000 to $4,700,000
compared to $3,853,000 in 1999. The increase can be mainly attributed to the
increases in expenses related to additional personnel, and incentive and profit
sharing expenses in 2000. The Company had ninety-nine (99) full-time equivalent
employees at December 31, 2000 compared to ninety-two (92) at December 31, 1999,
a 7.6% increase. Incentives and profit sharing expenses for 2000 were $470,000
compared to $225,000 in 1999. As discussed above, the many mergers and
acquisitions of the past few years and the needs associated with staffing the
new branches have offered the Company numerous opportunities to obtain
experienced and knowledgeable business bankers within the community. Although
these additional people increase the Company's salary expenses, in the long term
these additions are in line with the Company's overall strategic plan for growth
and development and should have a positive impact on profitability.
Occupancy and equipment expense increased $201,000, or 31.4% in the
periods under review. As stated above, this increase reflects the fact that the
Company opened two new branches, closed two supermarket branches, and remodeled
the Clovis branch in 2000. Additional costs are also associated with the
addition of Internet banking and the new telephone system.
Depreciation and the provision for losses on equipment leased to
others increased $364,000, or 33.7%, in 2000, which was partially offset by an
increase in rental income from equipment leased to others included in
non-interest income. Due to the increased volume of leases, the Company elected
to increase the allowance for residual losses from equipment leased to others by
$65,000 in 2000 which accounts for a portion of the increased expense. No
provisions were added in 1999.
Other expense decreased $107,000, or 3.3%, to $3,130,000 in 2000 from
$3,237,000 in 1999. Major components of the decrease were advertising expenses,
provision for other real estate losses and related expenses, regulatory
assessments, and consulting fees. The reduction of other real estate owned
accounts for the decrease in the provision for other real estate losses while
the Company's positive regulatory compliance status contributed to the decrease
in regulatory assessments and consulting fees. Offsetting these decreases were
increases to data processing, legal, and audit and accounting fees. The increase
in audit and accounting fees can be attributed to contracted services for the
facilitation of strategic planning meetings and additional required examinations
related to the Company's Information Systems and interest rate risk areas. Refer
to Note 14, in the "Notes to Consolidated Financial Statements" at page 69 for
detail.
The Company's efficiency ratio is calculated by dividing non-interest
expense by the sum of net interest income and non-interest income. The ratio at
December 31, 2000 was 78.76% compared to 80.06% at December 31, 1999.
33
This means that for every dollar of income generated, the cost of that income
was 79 cents for the year ended December 31, 2000 and 80 cents for the year
ended December 31, 1999. The lower the ratio the more efficient the Company's
operations. While reducing operating expenses can lower the ratio, the Company's
low loan to deposit ratio, which reduces net interest income, also significantly
affects this ratio.
Income tax expense was $904,000 for 2000 compared to $208,000 for 1999.
Income from continuing operations after income taxes was $1,773,000 for 2000
compared to $717,000 for 1999.
Loss from discontinued operations net of income taxes in 2000 was
$25,000 compared to income in 1999 of $1,000. Clovest has been successful in the
dissolution of the majority of its partnerships and LLCs. See "Discontinued
Operations", Note 6, in the "Notes to Consolidated Financial Statements", at
page 56.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest rate risk
inherent in its loan and deposit functions. Management actively monitors and
manages this interest rate risk exposure.
Fluctuations in market interest rates expose the Company to potential
gains and losses. The primary objective of asset/liability management is to
manage the balance between rate sensitive assets and rate sensitive liabilities
being repriced in any given period in order to maximize net interest income
during periods of fluctuating interest rates.
Rate sensitive assets are those which contain a provision to adjust the
interest rate periodically (for example, a loan in which prime rate determines
the basis of the rate charged on outstanding balances). Those assets include
certain commercial, real estate mortgage and construction loans and certain
investment securities, Federal funds sold and time deposits in other financial
institutions. Rate sensitive liabilities are those which provide for periodic
changes in interest rate and include interest bearing transaction accounts,
money market accounts and time certificates of deposit. Analysis has shown that
because of time and volume influences, the repricing of assets and liabilities
is not tied directly to the timing of changes in market interest rates. If
repricing assets exceed repricing liabilities in a time period, the Company
would be considered "asset sensitive" and have a "positive gap". Conversely, if
repricing liabilities exceed repricing assets in a time period, the Company
would be considered "liability sensitive" and have a "negative gap."
Managing interest rate risk is important to the Company as its net
interest margin can be affected by the repricing of assets and liabilities.
Management uses several different tools to monitor its interest rate risk,
including gap analysis. Additionally, the Company utilizes an asset/liability
model program which provides a detailed quarterly analysis of the Company's
financial reports, to include a ratio analysis of liquidity, equity, strategic
free capital, volatile liability coverage, and maturity of the investment
portfolio. In addition, a trend analysis is generated which provides a
projection of the Company's asset and liability sensitivity position over a
one-year period. Exposure to interest rate changes is calculated within the
program to ascertain interest rate risk in actual dollar exposure resulting from
incremental changes in market interest rates. The incremental changes are
generally referred to as "shocks". These "shocks" measure the effect of sudden
and significant rate changes on the Company's net interest income. Assets may
not reprice in the same way as liabilities and adjustments are made to the model
reflect these differences. For example, the time between when the Company
changes its rate on deposits may lag behind the time the Company changes the
rate it charges on loans. Additionally, the interest rate change may not be in
the same proportion for assets and liabilities. Interest rates on deposits may
not decrease in the same proportion as a decrease in interest rates charged on
loans. Conversely, interest rates on deposits may not be increased in the same
proportion as rates charged on loans.
The following table sets forth the distribution of repricing
opportunities of interest-earning assets and interest-bearing liabilities, the
interest rate sensitivity "gap" (i.e. interest rate sensitive assets less
interest rate sensitive liabilities), the cumulative interest rate sensitivity
gap and the cumulative gap as a percentage of total interest-earning assets as
of December 31, 2000. The table also sets forth the time periods during which
interest-earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. The interest rate
relationships between the repriceable assets and repriceable liabilities are not
necessarily constant. The table should, therefore, be used only as a guide as to
the possible affect changes in interest rates might have on the net interest
margin of the Company.
Additionally, the table reflects the actual maturities of MBS and CMO
securities, which are inconsistent with the average life of the securities due
to prepayments and normal paydowns. The inherent weakness in gap analysis is
that it does not consider the cash flow generated by MBS and CMO security
investments throughout the holding of the security and assumes that the total
amount of the security will mature at the stated maturity date. As stated
previously, MBS and CMOs totaled $39,941,000 at December 31, 2000, with a market
value of $40,493,000. The average life table below reflects the expected average
life of the MBS and CMO portfolio based on current paydown levels.
34
(In thousands) More Than Three
As of December 31, 2000 Months But More Than
Next Day to Less Than One Year But
Three Twelve Less Than After Five
Months Months Five Years Years Totals
====================================================================================================================================
Assets:
Federal funds sold $ 4,528 $ -0- $ -0- $ -0- $ 4,528
Taxable investment securities 2,874 3,500 15,808 41,534 63,716
Non-taxable investment securities 300 155 165 8,906 9,526
Loans 63,692 5,675 20,705 6,213 96,285
-------------- ----------------- -------------- --------- ---------
TOTAL INTEREST-EARNING ASSETS 71,394 9,330 36,678 56,653 174,055
Liabilities:
NOW, MDA, savings 80,776 -0- -0- -0- 80,776
Time certificates of deposit 25,651 25,844 2,492 -0- 53,987
Total interest-bearing deposits 106,427 25,844 2,492 -0- 134,763
Other borrowings 0 36 -0- -0- 36
-------------- ----------------- -------------- --------- ---------
TOTAL INTEREST-BEARING
LIABILITIES 106,427 25,880 2,492 -0- 134,799
-------------- ----------------- -------------- --------- ---------
Net (interest-bearing liabilities)
interest-earning assets $ (35,033) $ (16,550) $ 34,186 $ 56,654 $ 39,256
============== ================= ============== ========= =========
Cumulative net (interest-bearing liabilities)
interest-earning assets ("GAP") $ (35,033) $ (51,583) $ (17,397) $ 39,256
============== ================= ============== =========
Cumulative ("GAP") as a percentage of
total interest-earning assets (20.13%) (29.64%) (10.00%) 22.55%
============== ================= ============== =========
SCHEDULE OF AVERAGE LIFE OF MSB AND CMOS AT DECEMBER 31, 2000. *
- ------------------------------------------------------------------------------------------------------------
More Than Three
Months But More Than
Next Day Less Than One Year But
(In thousands) to Three Twelve Less Than After Five Total MBS and
Months Months Five Years Years CMOs
------------ ---------------- ------------- ---------- -------------
*Stated at Book Value $ -0- $ 1,034 $ 26,865 $ 12,042 $ 39,941
------------ --------------- ------------- ---------- -------------
- --------------------------------------------------------------------------------
The table indicates that the Company is liability sensitive in the next day
through less than 5 years period and becomes asset sensitive in the more than
five years period.
35
The following table sets forth the distribution of the expected
maturities of interest-earning assets and interest-bearing liabilities as of
December 31, 2000 as well as the fair value of these instruments. Expected
maturities are based on contractual agreements. Savings accounts and
interest-bearing transaction accounts, which have no stated maturity, are
included in the 2001 maturity category.
(In thousands) 2001 2002 2003 2004 2005 Thereafter Total Fair Value
--------- -------- -------- -------- -------- ------------ ---------- ------------
Federal funds sold $ 4,528 $ 4,528 $ 4,528
Weighted average rate 6.34% 6.34%
Investment securities (1) 6,829 $ 2,973 $ 3,834 $ 2,838 $ 5,367 $ 51,401 73,242 74,561
Weighted average rate 5.76% 6.07% 6.31% 6.50% 6.64% 6.97% 6.80%
Fixed rate loans 5,536 1,278 3,043 3,159 2,475 14,072 29,563 29,451
Weighted average rate 10.38% 10.77% 9.53% 9.41% 10.00% 8.84% 9.45%
Variable rate loans (2) 31,258 1,909 1,067 676 3,582 28,230 66,722 66,722
Weighted average rate 10.66% 10.58% 11.83% 11.31% 10.16% 9.88% 10.32%
-------- -------- -------- -------- ------- ----------- --------- -----------
Total interest-bearing
Assets $ 48,151 $ 6,160 $ 7,944 $ 6,673 $11,424 $ 93,703 $ 174,055 $ 175,262
======== ======== ======== ======== ======= =========== ========= ===========
Savings deposits (3) $ 80,776 $ 80,776 $ 80,776
Weighted average rate 1.80% 1.80%
Time deposits 49,387 $ 4,189 $ 411 53,987 54,014
Weighted average rate 5.67% 5.67% 6.01% 5.68%
Notes Payable 36 36 36
Weighted average rate 5.65% 5.65%
-------- -------- -------- -------- ------- ----------- --------- -----------
Total interest-bearing $130,199 $ 4,189 $ 411 $ 134,799 $ 134,826
Liabilities ======== ======== ====== ========= ===========
(1) Interest rates on tax-exempt obligations have not been adjusted to reflect
the related tax benefit in calculating the weighted average yield.
(2) Of the total variable rate loans, 84.7% reprices in one year or less.
(3) Savings deposits include interest-bearing transaction accounts.
36
TERMINATION OF REGULATORY ORDERS
During 1998, the Bank was subject to regulatory orders issued by the
FDIC and DFI that addressed certain matters that arose out of a joint
examination of the Bank. The orders were terminated during the first quarter of
1999 after less than one year and were replaced by a Board Resolution adopted by
the Board of Directors. The Board Resolution was rescinded February 16, 2000.
LIQUIDITY MANAGEMENT
The object of liquidity management is to maintain cashflow adequate to
fund the Company's operations and to meet obligations and other commitments on a
timely and cost effective basis. In assessing liquidity, historical information
such as seasonal demand, local economic cycles, and the economy in general are
considered, along with current ratios, management goals, and unique
characteristics of the Company. Management accomplishes this objective through
the selection of asset and liability maturity mixes that it believes will meet
the Company's needs.
Liquidity is provided by the Company's core deposit base, shareholders'
equity, and reductions in assets which can be immediately converted to cash at
minimal cost. Liquid assets, which consist of cash, deposits in other financial
institutions, Federal funds sold and available for sale investment securities,
averaged $69,591,000 for 2000, or 38.8% of average assets compared to
$61,465,000 for 1999, or 37.0% of average assets. The ratio of average liquid
assets to average demand deposits was 178.1% for 2000 compared to 174.6% for
1999. Changes in loan and deposit volumes also affected the Company's liquidity
ratios. The Company's loan to deposit ratio at December 31, 2000 was 53.2%
compared to 54.5% at December 31, 1999.
The Company adopted SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, early and used the opportunity to re-classify its held to
maturity investment portfolio into available for sale. On April 1, 1999, the
Company transferred all held to maturity securities to its available for sale
classification. For information regarding the transfer of held to maturity
securities, refer to Notes 1 and 2 in the "Notes to Consolidated Financial
Statements", pages 51 and 56.
Unpledged investment securities may also provide liquidity. At December
31, 2000, $57,675,000 in unpledged securities were available as collateral for
borrowing. Additionally, maturing loans provide liquidity. At December 31, 2000,
approximately $8,000,000 in loans was scheduled to mature within the next ninety
days.
The Bank had unsecured lines of credit with its correspondent banks
which, in the aggregate, amounted to $2,900,000 and $4,900,000 at December 31,
2000 and 1999, respectively, at interest rates which vary with market
conditions. The Bank also had a line of credit with the Federal Reserve Bank of
San Francisco at December 31, 2000 and 1999 which bears interest at the
prevailing discount rate collateralized by investment securities with amortized
costs totaling $4,520,000 and $10,305,000 and market values totaling $4,535,000
and $10,043,000, respectively. In addition, the Bank had a credit line with the
Federal Home Loan Bank at December 31, 2000 which bears interest at the
prevailing interest rate collateralized by investment securities with amortized
costs totaling $5,788,000 and market values totaling $5,773,000. The amount of
the credit line varies according to the Bank's investment and loan portfolio
make-up. At December 31, 2000, and 1999, the Bank had no outstanding balances on
these credit lines.
CERTAIN MATTERS DISCUSSED OR INCORPORATED BY REFERENCE IN THIS ANNUAL
REPORT ON FORM 10-KSB ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARDED-LOOKING STATEMENTS. SUCH RISKS AND
UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DESCRIBED IN MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
THEREFORE, THE INFORMATION SET FORTH THEREIN SHOULD BE CAREFULLY CONSIDERED WHEN
EVALUATING THE BUSINESS PROSPECTS OF THE COMPANY AND THE BANK.
37
ITEM 7 - FINANCIAL STATEMENTS.
- ------------------------------------------------------------------------------- --------
Contents Page No.
- ------------------------------------------------------------------------------- --------
INDEPENDENT AUDITOR'S REPORT 39
- ------------------------------------------------------------------------------- --------
CONSOLIDATED BALANCE SHEET 40
- ------------------------------------------------------------------------------- --------
CONSOLIDATED STATEMENT OF OPERATIONS 41-42
- ------------------------------------------------------------------------------- --------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY 43-44
- ------------------------------------------------------------------------------- --------
CONSOLIDATED STATEMENT OF CASH FLOWS 45-46
- ------------------------------------------------------------------------------- --------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 47-77
- ------------------------------------------------------------------------------- --------
38
INEPENDENT AUDITOR'S REPORT
The Shareholders
and Board of Directors
Central Valley Community Bancorp
and Subsidiary
We have audited the accompanying consolidated balance sheet of Central
Valley Community Bancorp and subsidiary as of December 31, 2000 and 1999 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
2000. 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 generally accepted auditing
standards. 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 consolidated 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
Central Valley Community Bancorp and subsidiary as of December 31, 2000 and 1999
and the consolidated results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2000, in conformity
with generally accepted accounting principles.
Perry-Smith LLP
January 19, 2001,
except for Note 20, as to which
the date is February 21, 2001
39
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000 AND 1999
2000 1999
--------------- ----------------
ASSETS
Cash and due from banks $ 18,548,547 $ 14,087,796
Federal funds sold 4,528,000 8,921,000
Available-for-sale investment securities (Note 2) 74,561,327 54,170,377
Loans, less allowance for credit losses of $2,046,576 in
2000 and $2,236,342 in 1999 (Notes 3, 13 and 16) 93,972,692 79,017,405
Equipment leased to others, net (Note 4) 2,625,994 2,437,118
Bank premises and equipment, net (Notes 5 and 13) 1,879,335 1,507,638
Investments in real estate, net of a valuation allowance of
$35,930 in 2000 and $938,757 in 1999 (Note 6) 502,321
Accrued interest receivable and other assets
(Notes 7, 8, 11 and 15) 6,051,036 6,359,300
--------------- ----------------
$ 202,166,931 $ 167,002,955
=============== ================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 46,189,297 $ 34,965,565
Interest bearing (Note 9) 134,762,966 114,181,818
--------------- ----------------
Total deposits 180,952,263 149,147,383
Notes payable (Notes 4 and 10) 35,913 250,366
Accrued interest payable and other liabilities (Note 15) 2,508,078 1,789,694
--------------- ----------------
Total liabilities 183,496,254 151,187,443
--------------- ----------------
Commitments and contingencies (Note 12)
Shareholders' equity (Note 13):
Preferred stock, no par value; 10,000,000 shares
authorized, no shares issued or outstanding - -
Common stock, no par value; 20,000,000 and 2,812,500
shares authorized in 2000 and 1999, respectively,
1,303,459 shares issued and outstanding in 2000 and
1999 6,465,236 6,465,236
Retained earnings 11,354,441 9,737,276
Accumulated other comprehensive income (loss)
(Notes 2 and 17) 851,000 (387,000)
--------------- ----------------
Total shareholders' equity 18,670,677 15,815,512
--------------- ----------------
Total liabilities and shareholders' equity $ 202,166,931 $ 167,002,955
=============== ================
The accompanying notes are an integral
part of these financial statements.
40
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ ------------
Interest income:
Interest and fees on loans $ 8,942,082 $ 7,719,899 $ 8,671,527
Interest on Federal funds sold 601,695 327,409 530,348
Interest and dividends on investment
securities:
Taxable 3,530,964 2,839,828 2,253,138
Exempt from Federal income
taxes 485,161 466,222 457,113
------------ ------------ ------------
Total interest income 13,559,902 11,353,358 11,912,126
------------ ------------ ------------
Interest expense:
Interest on deposits (Note 9) 4,119,858 3,296,176 3,976,883
Other (Note 10) 127,218 48,217 79,556
------------ ------------ ------------
Total interest expense 4,247,076 3,344,393 4,056,439
------------ ------------ ------------
Net interest income before
provision for credit losses 9,312,826 8,008,965 7,855,687
Provision for credit losses (Note 3) 50,000 1,270,000 1,721,566
------------ ------------ ------------
Net interest income after
provision for credit losses 9,262,826 6,738,965 6,134,121
------------ ------------ ------------
Non-interest income:
Service charges 1,097,419 1,012,076 932,936
Rentals from equipment leased
to others (Note 4) 1,544,488 1,273,629 1,057,349
Loan placement fees 149,600 215,306 259,578
Net realized losses on sales of
investment securities (Note 2) (47,629)
Other income 736,768 543,269 426,991
------------ ------------ ------------
Total non-interest income 3,528,275 2,996,651 2,676,854
------------ ------------ ------------
(Continued)
41
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ ------------
Non-interest expenses:
Salaries and employee benefits
(Notes 3 and 15) $ 4,699,781 $ 3,853,412 $ 3,727,856
Occupancy and equipment (Notes 5
and 12) 841,140 640,091 621,002
Depreciation and provision for losses
on equipment leased to others (Note 4) 1,443,797 1,080,410 914,620
Other expenses (Note 14) 3,129,541 3,237,204 3,486,749
------------ ------------ ------------
Total non-interest expenses 10,114,259 8,811,117 8,750,227
------------ ------------ ------------
Income from continuing oper-
ations before income taxes 2,676,842 924,499 60,748
Income tax expense (benefit) (Note 11) 904,100 207,700 (149,000)
------------ ------------ ------------
Net income from continuing
operations 1,772,742 716,799 209,748
------------ ------------ ------------
Discontinued operations (Note 6):
(Loss) gain from operations of Clovest
less applicable income tax (benefit)
expense of $(16,800), $800 and
$(422,000) for the years ended
December 31, 2000 1999 and 1998,
respectively (25,231) 1,194 (601,967)
------------ ------------ ------------
Net income (loss) $ 1,747,511 $ 717,993 $ (392,219)
============ ============ ============
Basic earnings per share from
continuing operations (Note 13) $ 1.36 $ .56 $ .17
============ ============ ============
Diluted earnings per share from
continuing operations (Note 13) $ 1.35 $ .55 $ .16
============ ============ ============
Basic earnings (loss) per share (Note 13) $ 1.34 $ .56 $ (.31)
============ ============ ============
Diluted earnings (loss) per share (Note 13) $ 1.33 $ .55 $ (.30)
============ ============ ============
The accompanying notes are an integralpart of these
financial statements.
42
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ACCUMULATED
COMMON STOCK OTHER
--------------------------- RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME (LOSS)
--------- ------------ -------------- -------------
Balance, January 1, 1998 1,113,150 $ 3,246,548 $ 11,759,456 $ 189,600
Comprehensive loss (Note 17):
Net loss (392,219)
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale investment
securities (296,100)
Total comprehensive loss
Stock options exercised and related tax benefit 55,917 667,250
--------- ------------ -------------- -------------
Balance, December 31, 1998 1,169,067 3,913,798 11,367,237 (106,500)
Comprehensive income (Note 17):
Net income 717,993
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale investment
securities (280,500)
Total comprehensive income
Common stock dividend - 10% 117,217 2,344,340 (2,344,340)
Common stock dividend - fractional shares (3,614)
Stock options exercised and related tax benefit 17,175 207,098
--------- ------------ -------------- -------------
Balance, December 31, 1999 1,303,459 6,465,236 9,737,276 (387,000)
--------- ------------ -------------- -------------
SHAREHOLDERS' COMPREHENSIVE
EQUITY (LOSS) INCOME
------------ ---------------
Balance, January 1, 1998 $ 15,195,604
Comprehensive loss (Note 17):
Net loss (392,219) $ (392,219)
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale investment
securities (296,100) (296,100)
---------------
Total comprehensive loss $ (688,319)
===============
Stock options exercised and related tax benefit 667,250
------------
Balance, December 31, 1998 15,174,535
Comprehensive income (Note 17):
Net income 717,993 $ 717,993
Other comprehensive loss, net of tax:
Unrealized losses on available-for-sale investment
securities (280,500) (280,500)
---------------
Total comprehensive income $ 437,493
===============
Common stock dividend - 10%
Common stock dividend - fractional shares (3,614)
Stock options exercised and related tax benefit 207,098
------------
Balance, December 31, 1999 15,815,512
------------
(Continued)
43
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ACCUMULATED
COMMON STOCK OTHER
--------------------------- RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME (LOSS)
--------- ------------ -------------- -------------
Balance, December 31, 1999 1,303,459 $ 6,465,236 $ 9,737,276 $ (387,000)
Comprehensive income (Note 17):
Net income 1,747,511
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale investment
securities (Note 2) 1,238,000
Total comprehensive income
Cash dividend - $.10 per share (130,346)
--------- ------------ -------------- -------------
Balance, December 31, 2000 1,303,459 $ 6,465,236 $ 11,354,441 $ 851,000
========= ============ ============== =============
SHAREHOLDERS' COMPREHENSIVE
EQUITY (LOSS) INCOME
------------ ---------------
Balance, December 31, 1999 $ 15,815,512
Comprehensive income (Note 17):
Net income 1,747,511 $ 1,747,511
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale investment
securities (Note 2) 1,238,000 1,238,000
---------------
Total comprehensive income $ 2,985,511
===============
Cash dividend - $.10 per share (130,346)
------------
Balance, December 31, 2000 $ 18,670,677
============
1999
------------
Disclosure of reclassification amount, net of taxes:
Unrealized holding losses arising during the year $ 309,077
Less reclassification adjustment for net losses included in net income 28,577
------------
Net unrealized losses on available-for-sale investment securities $ 280,500
============
The accompanying notes are an integral part of these financial statements.
44
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 1,747,511 $ 717,993 $ (392,219)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities from
continuing operations:
Net loss (income) from discontinued operations 25,231 (1,194) 601,967
Provision for credit losses 50,000 1,270,000 1,721,566
Allowance for residual losses on equipment
leased to others 64,800
Provision for losses on other real estate 39,126 217,000
Gain on sale of equipment leased to others (43,165) (22,869)
Net increase (decrease) in deferred loan fees 15,017 (149,983) (88,393)
Depreciation, accretion and amortization, net 1,972,105 2,231,647 1,808,431
Net realized losses on sales of available-for-sale
investment securities 47,629
(Gain) loss on sale of equipment (60,458) (12,309) 4,413
Gain on sale of other real estate (36,197) (86,473) (102,483)
Increase in cash surrender value of life insurance (113,567) (71,616) (71,864)
Reduction in carrying value of bank premises
and equipment 67,111 161,612 175,500
Net decrease (increase) in accrued interest
receivable and other assets 196,092 (305,064) 1,141,368
Net increase (decrease) in accrued interest
payable and other liabilities 718,384 (125,241) 82,270
Deferred income tax expense (benefit) 876,000 645,000 (1,095,000)
----------- ----------- -----------
Net cash provided by operating activities of
continuing operations 5,522,029 4,311,962 3,979,687
----------- ----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale investment securities (28,266,554) (28,359,004) (39,509,404)
Proceeds from sales of available-for-sale investment
securities 11,773,416
Proceeds from principal repayments of available-for-
sale investment securities 6,447,423 12,706,547 7,706,916
Proceeds from called and matured available-for-sale
investment securities 3,225,690 12,041,812
Proceeds from matured held-to-maturity investment
securities 155,000
Net (increase) decrease in loans (15,001,104) (8,794,798) 14,918,119
Purchases of premises and equipment (789,575) (260,380) (196,252)
Proceeds from sale of equipment 61,385 6,000
Proceeds from sale of other real estate 65,145 1,062,611 899,752
Purchase of equipment leased to others (1,632,673) (1,818,117) (866,522)
Proceeds from sale of equipment leased to others 852,932 176,132
Deposits on single premium cash surrender value
life insurance policies (1,523,500)
----------- ----------- -----------
Net cash used in investing activities of
continuing operations (37,413,763) (782,981) (16,716,259)
----------- ----------- -----------
(Continued)
45
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand, interest-bearing and
savings deposits $ 22,848,882 $ 3,802,731 $ 11,717,800
Net increase (decrease) in time deposits 8,955,998 (6,661,675) (2,567,275)
Payments on notes payable for equipment leased to
others (214,453) (761,949) (468,991)
Cash paid for dividends (130,346)
Cash paid for fractional shares (3,614)
Proceeds from exercise of stock options 143,093 206,232
------------ ------------ ------------
Net cash provided by (used in) financing activities
of continuing operations 31,460,081 (3,481,414) 8,887,766
------------ ------------ ------------
Cash provided by discontinued operations 499,404 1,720,114 3,322,219
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 67,751 1,767,681 (526,587)
Cash and cash equivalents at beginning of year 23,008,796 21,241,115 21,767,702
------------ ------------ ------------
Cash and cash equivalents at end of year $ 23,076,547 $ 23,008,796 $ 21,241,115
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the year for:
Interest expense $ 4,135,971 $ 3,411,303 $ 4,106,864
Income taxes $ (308,706) $ (448,261) $ 436,895
Non-cash investing activities:
Real estate acquired through foreclosure, net of
valuation allowances $ 490,205 $ 706,049
Receivable recorded from Small Business
Administration in connection with foreclosed
property $ 139,606
Net change in unrealized gain (loss) on available-
for-sale investment securities $ 2,059,000 $ (470,900) $ (470,100)
Transfer of held-to-maturity investment securities
to available-for-sale investment securities $ 7,228,017
Non-cash financing activities:
Purchase of equipment leased to others through
issuance of notes payable $ 132,363 $ 767,360
The accompanying notes are an integral
part of these financial statements.
46
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Central Valley Community Bancorp (the "Company") was incorporated on
February 7, 2000 and subsequently obtained approval from the Board of
Governors of the Federal Reserve System to be a bank holding company in
connection with its acquisition of Clovis Community Bank (the "Bank").
The Company became the sole shareholder of the Bank on November 15,
2000 in a statutory merger, pursuant to which each outstanding share of
the Bank's common stock was exchanged for one share of common stock of
the Company.
The Bank operates six branches in Clovis, north Fresno, and northeast
Fresno County, California. The Bank"s primary source of revenue is
providing loans to customers who are predominately small and
middle-market businesses and individuals. In addition, the Bank engaged
in real estate development activities through its subsidiary, Clovest
Corporation ("Clovest"). However, as discussed in Note 6, the Clovest
Board of Directors adopted a plan to discontinue the operations of
Clovest on July 15, 1998.
The accounting and reporting policies of Central Valley Community
Bancorp and subsidiary conform with generally accepted accounting
principles and prevailing practices within the banking industry.
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 2000.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and the consolidated accounts of its wholly-owned subsidiary,
the Bank. In addition, the accounts of the Bank"s wholly owned
subsidiaries, Clovest and Clovis Securities (an inactive company), are
included in the consolidated financial statements. The operating
results of Clovest are reflected as discontinued operations for all
periods presented.
CASH EQUIVALENTS
For the purpose of the statement of cash flows, cash and due from banks
and Federal funds sold are considered to be cash equivalents.
Generally, Federal funds are sold for one-day periods.
INVESTMENT SECURITIES
Investments are classified into the following categories:
X 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 income (loss) within
shareholders' equity.
X Held-to-maturity securities, which management has the
positive intent and ability to hold to maturity,
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.
47
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENT SECURITIES (Continued)
The Bank adopted Statement of Financial Accounting Standards No. 133
(SFAS 133), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, on April 1, 1999. Upon adoption, SFAS 133 allows the
transfer of held-to-maturity investment securities into the
available-for-sale category without calling into question an entity"s
intent to hold other debt securities to maturity in the future. No
derivative instruments were held and, accordingly, there is no
transition adjustment reported in these financial statements. However,
all held-to-maturity investment securities were transferred to the
available-for-sale category and the unrealized holding gain at the date
of transfer was included in accumulated other comprehensive income.
Gains or losses on the sale of investment securities are computed on
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. In
addition, unrealized losses that are other than temporary are
recognized in earnings for all investments.
LOANS
Loans are stated at principal balances outstanding. Interest is accrued
daily based upon outstanding loan balances. However, when, in the
opinion of management, loans are considered impaired and the future
collectibility of interest and principal is in serious doubt, a loan is
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.
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. A loan is
considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect all amounts due
(including both principal and interest) in accordance with the
contractual terms of the loan agreement.
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.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained to provide for losses
related to impaired loans and other losses that can be expected to
occur in the normal course of business. The determination of the
allowance 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 Bank's service area.
Loans determined to be impaired or classified are individually
evaluated by management for specific risk of loss. In addition, a
reserve factor is assigned to currently performing loans based on the
Bank"s historical experience. Management also computes specific and
expected loss reserves for loan commitments. These estimates are
particularly susceptible to changes in the economic environment and
market conditions.
48
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ALLOWANCE FOR CREDIT LOSSES (Continued)
The Bank"s Audit Committee reviews the adequacy of the allowance for
credit losses quarterly, to include consideration of the relative risks
in the portfolio and current economic conditions. The allowance is
adjusted based on that review if, in the judgment of the Audit
Committee and management, changes are warranted.
This allowance is established through a provision for credit losses
which is charged to expense. Additions to the allowance are expected to
maintain the adequacy of the total allowance after credit losses and
loan growth. The allowance for credit losses at December 31, 2000 and
1999, respectively, reflects management"s estimate of losses in the
portfolio.
EQUIPMENT LEASED TO OTHERS
The Bank enters into leasing arrangements through certain leasing
brokers to lease computer equipment to various entities. Computer
equipment leased to others under operating leases is depreciated on a
straight-line basis over the lease term to an estimated residual value.
Related rental income is recorded when earned.
The Bank maintains an allowance for residual losses based upon
management"s assessment of various factors affecting residual values.
Management considers the allowance for residual losses adequate to
cover any potential losses in the lease portfolio.
OTHER REAL ESTATE
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess
of the Bank's recorded investment in the loan balance and accrued
interest income over the estimated fair market value of the property is
charged against the allowance for credit losses. A valuation allowance
for losses on other real estate is maintained to provide for temporary
declines in value. The allowance is established through a provision for
losses on other real estate and is included in other expenses.
Subsequent gains or losses on sales or writedowns resulting from
permanent impairments are recorded in other income or expense as
incurred.
BANK PREMISES AND EQUIPMENT
Bank 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 Bank premises are
estimated to be between twenty and forty years. The useful lives of
improvements to Bank premises, furniture, fixtures and equipment are
estimated to be three to ten years. Leasehold improvements are
amortized over the life of the asset or the term of the related lease,
whichever is shorter. 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 Bank 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. Based upon these evaluations,
the Bank recorded an adjustment to the carrying value of certain
long-lived assets in 2000 and 1999 (Note 5).
49
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
REAL ESTATE INVESTMENTS
Real estate held for investment is held in the Bank's subsidiary,
Clovest, and is recorded at the lower of cost or net realizable value
through the use of a valuation allowance. The allowance is established
through a provision for losses on real estate investments which is
included in losses from discontinued operations. Interest and other
carrying charges related to property held for development are
capitalized during the construction period. Capitalization of interest
ceases when the qualifying asset is substantially complete and ready
for sale or when activities related to development are completed.
Revenue recognition on the disposition of real estate is dependent upon
the transaction meeting certain criteria relating to the nature of the
property sold and the terms of the sale. Under certain circumstances,
revenue recognition may be deferred until these criteria are met.
INCOME TAXES
The Company files its income taxes on a consolidated basis with its
subsidiary. The allocation of income tax expense (benefit) represents
each entity"s proportionate share of the consolidated provision for
income taxes.
Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the reported amounts of
assets and liabilities and their tax basis. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. On the balance sheet, net deferred tax
assets are included in accrued interest receivable and other assets.
STOCK-BASED COMPENSATION
Stock options are accounted for under the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price
of the Company"s stock at the date of grant over the exercise price.
However, if the fair value of stock-based compensation computed under a
fair value based method, as prescribed in Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
is material to the financial statements, pro forma net income and
earnings per share are disclosed as if the fair value method had been
applied.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (EPS), which excludes dilution, is
computed by dividing income (loss) available to common shareholders by
the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock
options, result in the issuance of common stock which shares in the
earnings of the Company. All data with respect to computing earnings
per share is retroactively adjusted to reflect stock dividends and the
treasury stock method is applied to determine the dilutive effect of
stock options in computing diluted EPS.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
50
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
TERMINATION OF REGULATORY ORDERS
On February 10 and March 10, 1999, the Bank was notified by the Federal
Deposit Insurance Corporation and California Department of Financial
Institutions, respectively, that regulatory orders to address certain
concerns arising out of a 1997 joint examination had been terminated.
IMPACT OF NEW FINANCIAL ACCOUNTING STANDARD
In September 2000, the Financial Accounting Standards Board issued SFAS
140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES, to replace SFAS 125 which was issued in
June 1996. The original statement addressed issues related to transfers
of financial assets in which the transferor has some continuing
involvement with the transferred assets or with the transferee. SFAS
140 resolves implementation issues which arose as a result of SFAS 125,
but carries forward most of the provisions of the original statement.
SFAS 140 is effective for transfers occurring after March 31, 2001 and
for disclosures relating to securitization transactions and collateral
for fiscal years ending after December 15, 2000. Management does not
believe the adoption of this statement will have a significant impact
on its financial statements.
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
at December 31, 2000 and 1999 consisted of the following:
AVAILABLE-FOR-SALE:
2000
- ------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ------------------------------------------------------ ------------------ ------------------ ------------------
U.S. Treasury
securities $ 1,007,409 $ (2,400) $ 1,005,009
U.S. Government
agencies 14,275,957 $ 363,000 (26,700) 14,612,257
Obligations of states
and political sub-
divisions 13,038,860 530,900 (800) 13,568,960
U.S. Government
agencies collateral-
ized by mortgage
obligations 39,941,261 612,000 (60,200) 40,493,061
Federal Home Loan
Mortgage Corpora-
tion non-cumulative
preferred stock 1,022,251 (22,300) 999,951
Corporate bonds 960,518 12,972 973,490
Federal Home Loan
Bank stock 134,800 134,800
Other securities 2,761,271 12,528 2,773,799
-------------- -------------- ------------- --------------
$ 73,142,327 $ 1,531,400 $ (112,400) $ 74,561,327
============= ============== ============= ==============
51
2. INVESTMENT SECURITIES (Continued)
AVAILABLE-FOR-SALE: (Continued)
1999
- ------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ------------------------------------------------------ ------------------ ------------------ ------------------
U.S. Treasury
securities $ 1,018,614 $ (14,500) $ 1,004,114
U.S. Government
agencies 4,989,841 (117,300) 4,872,541
Obligations of states
and political sub-
divisions 9,771,247 $ 159,200 (144,500) 9,785,947
U.S. Government
agencies collateral-
ized by mortgage
obligations 37,211,067 85,500 (596,200) 36,700,367
Federal Home Loan
Mortgage Corpora-
tion non-cumulative
preferred stock 1,012,189 (12,200) 999,989
Federal Home Loan
Bank stock 495,800 495,800
Other securities 311,619 311,619
------------- ------------------ ------------------ ---------------
$ 54,810,377 $ 244,700 $ (884,700) $ 54,170,377
============= ================== ================== ===============
Net unrealized gains (losses) on available-for-sale investment
securities totaling $1,419,000 and $(640,000) are recorded net of
$568,000 and $(253,000) in tax expense (benefit) as accumulated other
comprehensive income (loss) within shareholders" equity at December 31,
2000 and 1999, respectively.
Proceeds and gross realized gains and losses from the sale of
available-for-sale investment securities totaled $11,773,416, $31,285
and $78,914, respectively, for the year ended December 31, 1999. There
were no sales of available-for-sale investment securities for the years
ended December 31, 2000 and 1998.
On April 1, 1999, all held-to-maturity investment securities were
transferred to the available-for-sale category in accordance with the
provisions of SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES, issued by the Financial Accounting Standards Board.
The amortized cost and market value of the transferred securities on
the date of transfer were $7,064,000 and $7,535,000, respectively.
Accordingly, unrealized gains of $471,000 were recorded, net of
$174,000 in tax liabilities, as accumulated other comprehensive income
within shareholders" equity. There were no transfers of
held-to-maturity investment securities during 2000 or 1998.
52
2. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities
at December 31, 2000 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because the issuers
of the securities may have the right to call or prepay obligations with
or without call or prepayment penalties.
AVAILABLE-FOR-SALE
--------------------------------------
Estimated
Amortized Market
Cost Value
------------------ ------------------
Within one year $ 3,955,041 $ 3,966,200
After one year through five years 10,883,233 11,117,546
After five years through ten years 8,263,559 8,537,763
After ten years 6,180,911 6,538,207
--------------- ----------------
29,282,744 30,159,716
Investment securities not due at a single maturity date:
U.S. Government guaranteed mortgage-
related securities 39,941,261 40,493,061
Federal Home Loan Mortgage Corporation
non-cumulative preferred stock 1,022,251 999,951
Federal Home Loan Bank stock 134,800 134,800
Other securities 2,761,271 2,773,799
-------------- ----------------
$ 73,142,327 $ 74,561,327
=============== ================
Investment securities with amortized costs totaling $15,307,967 and
$16,445,084 and market values totaling $15,466,698 and $16,279,426 were
pledged to secure public deposits, other contractual obligations and
short-term borrowing arrangements at December 31, 2000 and 1999,
respectively.
3. LOANS
Outstanding loans are summarized as follows:
DECEMBER 31,
--------------------------------------
2000 1999
------------------ ------------------
Commercial $ 41,225,576 $ 40,634,532
Real estate 33,534,129 25,543,743
Real estate - construction 12,828,991 8,253,535
Agricultural 940,431 609,613
Installment 7,371,118 5,917,822
Other 384,729 545,191
------------------ ------------------
96,284,974 81,504,436
Deferred loan fees, net (265,706) (250,689)
Allowance for credit losses (2,046,576) (2,236,342)
------------------ ------------------
$ 93,972,692 $ 79,017,405
================== ==================
53
3. LOANS (Continued)
At December 31, 2000 and 1999, loans originated under Small Business
Administration (SBA) programs totaling $9,437,533 and $4,823,198,
respectively, were included in the real estate and commercial
categories.
Changes in the allowance for credit losses were as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Balance, beginning of year $ 2,236,342 $ 2,949,171 $ 2,600,015
Provision charged to operations 50,000 1,270,000 1,721,566
Losses charged to the allowance (1,142,860) (2,532,540) (1,622,705)
Recoveries 903,094 549,711 250,295
-------------- -------------- --------------
Balance, end of year $ 2,046,576 $ 2,236,342 $ 2,949,171
============== ============== ==============
The recorded investment in loans that were considered to be impaired
totaled $262,543 and $3,274,953 at December 31, 2000 and 1999,
respectively. The related allowance for credit losses on these impaired
loans at December 31, 2000 and 1999 was $62,000 and $614,000,
respectively. The average recorded investment in impaired loans during
2000, 1999 and 1998 was $1,687,000, $4,212,000 and $2,035,000,
respectively. Interest income on impaired loans is recognized on a cash
basis and totaled $18,744, $229,000 and $83,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
At December 31, 2000 and 1999, nonaccrual loans totaled $204,854 and
$3,617,536, respectively. Interest foregone on nonaccrual loans totaled
$14,193, $126,021 and $196,226 for the years ended December 31, 2000,
1999 and 1998, respectively.
Salaries and employee benefits totaling $63,669, $58,069 and $74,126
have been deferred as loan origination costs for the years ended
December 31, 2000, 1999 and 1998, respectively.
4. EQUIPMENT LEASED TO OTHERS
The Bank is a lessor of computer equipment under operating leases.
Included in notes payable are obligations to other financial
institutions of $35,913 and $250,366 at December 31, 2000 and 1999,
respectively, which were used to partially finance purchases of
equipment leased to others (see Note 10).
Equipment leased to others consisted of the following:
DECEMBER 31,
----------------------------------
2000 1999
-------------- --------------
Computer equipment $ 5,530,070 $ 3,897,397
Accumulated depreciation (2,800,427) (1,421,430)
Allowance for residual losses (103,649) (38,849)
-------------- --------------
$ 2,625,994 $ 2,437,118
============== ==============
54
4. EQUIPMENT LEASED TO OTHERS (Continued)
Changes in the allowance for residual losses were as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Balance, beginning of year $ 38,849 $ 38,849 $ 38,849
Provision charged to operations 64,800
-------- -------- --------
Balance, end of year $103,649 $ 38,849 $ 38,849
======== ======== ========
Depreciation expense totaled $1,378,997, $1,080,410 and $914,620 for
the years ended December 31, 2000, 1999 and 1998, respectively.
Minimum future rental income on noncancelable operating leases are as
follows:
Year Ending
December 31,
----------------------
2001 $ 1,242,067
2002 610,297
2003 84,735
---------------
$ 1,937,099
===============
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
December 31,
--------------------------
2000 1999
----------- -----------
Land $ 250,000 $ 250,000
Buildings and improvements 1,165,999 933,941
Furniture, fixtures and equipment 2,240,846 1,915,536
Leasehold improvements 523,068 516,043
----------- -----------
4,179,913 3,615,520
Less accumulated depreciation
and amortization (2,300,578) (2,107,882)
----------- -----------
$ 1,879,335 $ 1,507,638
=========== ===========
Depreciation and amortization included in occupancy and equipment
expense totaled $397,320, $333,474 and $343,909 for the years ended
December 31, 2000, 1999 and 1998, respectively.
In December 2000, 1999 and 1998, management determined that the
carrying amounts of certain leasehold improvements were not fully
recoverable. To reflect these impairments, the Bank reduced the related
carrying values to $0, $7,637 and $8,000, respectively, through charges
to other expenses totaling $67,111, $161,612 and $175,500,
respectively.
55
6. DISCONTINUED OPERATIONS
On January 23, 1996, the FDIC issued an order approving the Bank's
application to continue to engage in real estate development, through Clovest,
subject to certain conditions relating to the maintenance of capital (see Note
13) and the reduction in the level of real estate investment to less than 30% of
Tier 1 capital by January 2001. Management believes that Clovest is in
substantial compliance with the outlined conditions at December 31, 2000.
On July 15, 1998 (the measurement date), the Board of Directors approved
the discontinuation of Clovest's operations. At the measurement date, management
estimated the net realizable value of each asset and established a plan of
disposition. The plan of disposition calls for the expedient but judicious sale
of assets. Management anticipates no further significant losses will be incurred
in connection with the disposition of the remaining assets in Clovest.
Summarized below is condensed consolidated financial information for
Clovest included as discontinued operations in the consolidated financial
statements before elimination of intercompany accounts:
CONDENSED BALANCE SHEET:
2000 1999
----------- -----------
Assets:
Cash and cash equivalents $ 103,028 $ 113,831
Real estate held for sale, net of valuation
allowance of $35,930 in 2000 and
$938,757 in 1999 502,321
Other assets 186,097 87,806
----------- -----------
Total assets $ 289,125 $ 703,958
=========== ===========
Liabilities and shareholder's deficit:
Liabilities:
Advances from the Bank, net of allocated tax
benefit of $618,883 in 2000 and $602,083
in 1999 $ 406,674 $ 922,877
Other liabilities 236,647 112,992
----------- -----------
Total liabilities 643,321 1,035,869
Minority interest, net of allowance for uncollect-
ible amounts of $396,396 in 2000 and 1999 (21,987) (24,934)
Shareholder's deficit (332,209) (306,977)
----------- -----------
Total liabilities and shareholder's deficit $ 289,125 $ 703,958
=========== ===========
56
6. DISCONTINUED OPERATIONS (Continued)
CONDENSED STATEMENT OF OPERATIONS:
2000 1999 1998
----------- ----------- -----------
(Loss) income from operations of real
estate investments $ (19,398) $ 201,030 $ (397,628)
Interest income 17,398 209,063
Provisions to reduce carrying value of
minority interests and real estate under
development, net of recoveries (51,512) (598,572)
Interest paid to Bank (190,424) (386,507)
Other expenses, net (24,685) (202,883) (435,546)
----------- ----------- -----------
(44,083) (226,391) (1,609,190)
Minority interest in loss from investments
in real estate 2,052 37,961 198,715
----------- ----------- -----------
Loss before income tax benefit $ (42,031) $ (188,430) $(1,410,475)
=========== =========== ===========
Clovest sold its interests in a single family development of twenty-seven
contiguous five acre parcels and in a senior citizens' apartment building in
2000 and 1999, respectively. Operating losses from the measurement date to
December 31, 2000 and 1999 totaled approximately $830,000 and $788,000,
respectively. Asset dispositions subsequent to the measurement date totaled
$8,842,000 and $7,412,000 at December 31, 2000 and 1999, respectively. At
December 31, 2000, Clovest has no commitments to fund further development of any
projects.
7. OTHER REAL ESTATE
Other real estate, net of the related valuation allowance, totaled $48,148
at December 31, 1999 and is included on the balance sheet in accrued interest
receivable and other assets.
Changes in the valuation allowance for other real estate were as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Balance, beginning of year $ 36,305 $ 593,668 $ 479,151
Provision charged to operations 39,126 217,000
Losses charged to the allowance (36,305) (596,489) (102,483)
--------- --------- ---------
Balance, end of year $ -- $ 36,305 $ 593,668
========= ========= =========
57
8. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable and other assets consisted of the following:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Accrued interest receivable $1,207,948 $ 841,158
Receivable from minority interests in real estate
investments (Note 6) 21,987 24,934
Net deferred tax assets (Note 11) 887,000 2,584,000
Cash surrender value of life insurance (Note 15) 3,219,205 1,582,138
Prepaid expenses 167,011 108,623
Taxes receivable 537,772
Other 547,885 680,675
---------- ----------
$6,051,036 $6,359,300
========== ==========
9. DEPOSITS
Interest-bearing deposits consisted of the following:
DECEMBER 31,
---------------------------
2000 1999
------------ ------------
Savings $ 10,495,266 $ 12,586,038
Money market 41,478,212 24,411,789
NOW accounts 28,802,981 32,153,482
Time, $100,000 or more 19,534,797 13,182,399
Time, under $100,000 34,451,710 31,848,110
------------ ------------
$134,762,966 $114,181,818
============ ============
Aggregate annual maturities of time deposits are as follows:
Year Ending
December 31,
------------
2001 $ 49,387,227
2002 4,188,190
2003 411,090
--------------
$ 53,986,507
==============
58
9. DEPOSITS (Continued)
Interest expense recognized on interest-bearing deposits consisted of the
following:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Savings $ 233,720 $ 266,603 $ 286,127
Money market 1,024,492 647,800 582,930
NOW accounts 198,431 211,071 292,600
Time, $100,000 or more 731,912 551,293 816,149
Time, under $100,000 1,931,303 1,619,409 1,999,077
---------- ---------- ----------
$4,119,858 $3,296,176 $3,976,883
========== ========== ==========
10. NOTES PAYABLE AND SHORT-TERM BORROWING ARRANGEMENTS
NOTES PAYABLE
Notes payable consisted of the following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
Notes payable in connection with equipment leases:
Note payable to a financial institution secured by
computer equipment, interest at 5.65% fixed, due
in installments through April 2001 $ 35,913 $ 94,849
Note payable to a financial institution secured by
computer equipment, interest at 6.88% fixed, paid
in August 2000 155,517
-------- --------
$ 35,913 $250,366
======== ========
SHORT-TERM BORROWING ARRANGEMENTS
The Bank had unsecured lines of credit with its correspondent banks which,
in the aggregate, amounted to $2,900,000 and $4,900,000 at December 31, 2000 and
1999, respectively, at interest rates which vary with market conditions. The
Bank also had a line of credit with the Federal Reserve Bank of San Francisco at
December 31, 2000 and 1999 which bears interest at the prevailing discount rate
collateralized by investment securities with amortized costs totaling $4,520,000
and $10,305,000 and market values totaling $4,535,000 and $10,043,000,
respectively. In addition, the Bank had a credit line with the Federal Home Loan
Bank at December 31, 2000 which bears interest at the prevailing interest rate
collateralized by investment securities with amortized costs totaling $5,788,000
and market values totaling $5,773,000. The credit limit varies according to the
amount and composition of the Bank's investment and loan portfolios. At December
31, 2000 and 1999, the Bank had no outstanding borrowings under these lines of
credit.
11. INCOME TAXES
The expense (benefit) for income taxes for continuing operations for the
years ended December 31, 2000, 1999 and 1998 consisted of the following:
FEDERAL STATE TOTAL
--------- --------- ---------
2000
Current $ 20,100 $ 8,000 $ 28,100
Deferred 508,000 368,000 876,000
--------- --------- ---------
Income tax expense $ 528,100 $ 376,000 $ 904,100
========= ========= =========
1999
Current $(422,100) $ (15,200) $(437,300)
Deferred 579,000 66,000 645,000
--------- --------- ---------
Income tax expense $ 156,900 $ 50,800 $ 207,700
========= ========= =========
1998
Current $ 267,000 $ 22,000 $ 289,000
Deferred (368,000) (70,000) (438,000)
--------- --------- ---------
Income tax benefit $(101,000) $ (48,000) $(149,000)
========= ========= =========
Deferred tax assets (liabilities) consisted of the following:
DECEMBER 31,
--------------------------
2000 1999
----------- -----------
Deferred tax assets:
Allowance for credit losses $ 492,000 $ 687,000
Net operating loss 378,000 823,000
Other reserves 206,000 632,000
Other accruals 52,000 117,000
Deferred compensation 438,000 388,000
Unrealized loss on available-for-sale
investment securities 253,000
----------- -----------
Total deferred tax assets 1,566,000 2,900,000
----------- -----------
Deferred tax liabilities:
Bank premises and equipment (18,000) (93,000)
Future liability of State deferred tax asset (93,000) (214,000)
Consolidated partnership and LLC book
and tax differences (9,000)
Unrealized gain on available-for-sale
investment securities (568,000)
----------- -----------
Total deferred tax liabilities (679,000) (316,000)
----------- -----------
Net deferred tax assets $ 887,000 $ 2,584,000
=========== ===========
60
11. INCOME TAXES (Continued)
At December 31, 2000, the Company had Federal and State net operating loss
(NOLs) carryforwards totaling $1,064,000 and $148,000. The NOLs expire in 2019
and 2004, respectively.
The expense (benefit) for income taxes for continuing operations differs
from amounts computed by applying the statutory Federal income tax rates to
operating income from continuing operations before income taxes. The significant
items comprising these differences for the years ended December 31, 2000, 1999
and 1998 consisted of the following:
2000 1999 1998
------ ------ --------
Federal income tax expense, at
statutory rate 34.0 % 34.0 % 34.0 %
State franchise tax expense (benefit),
net of Federal tax effect 6.8 % 2.5 % (63.4)%
Tax exempt income (6.5)% (15.9)% (220.1)%
Other (.5) 1.9 % 4.2 %
------ ------ --------
Total income tax expense
(benefit) for continuing
operations 33.8 % 22.5 % (245.3)%
====== ====== ========
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Bank leases certain of its branch facilities and administrative offices
under noncancelable operating leases. Rental expense included in occupancy and
equipment and other expense totaled $189,217, $161,653 and $174,783 for the
years ended December 31, 2000, 1999 and 1998, respectively.
Future minimum lease payments on noncancelable operating leases are as
follows:
Year Ending
December 31,
------------
2001 $ 190,229
2002 149,965
2003 112,401
2004 112,401
2005 82,056
Thereafter 189,974
----------
$ 837,026
==========
The Bank has options to renew its Shaver Lake office lease for two
five-year terms after the initial lease ends May 31, 2002 and its Fig Garden
office lease for one five-year term after the initial lease ends January 31,
2005. Additionally, the Bank has an option to renew its real estate office lease
for two five-year terms after the initial lease ends August 29, 2005.
61
12. COMMITMENTS AND CONTINGENCIES (Continued)
FEDERAL RESERVE REQUIREMENTS
Banks are required to maintain reserves with the Federal Reserve Bank equal
to a percentage of their reservable deposits. The average amount of such reserve
balances required at December 31, 2000 and 1999 was $1,431,000 and $25,000,
respectively.
CORRESPONDENT BANKING AGREEMENTS
The Bank maintains funds on deposit with other federally insured financial
institutions under correspondent banking agreements. Uninsured deposits totaled
$864,500 at December 31, 2000.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank 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 and to reduce its own exposure to fluctuations in interest rates.
These financial instruments consist of commitments to extend credit and letters
of credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and letters of credit as it does for
loans included on the balance sheet.
The following financial instruments represent off-balance-sheet credit
risk:
December 31,
-------------------------
2000 1999
----------- -----------
Commitments to extend $53,842,720 $41,929,933
Letters of credit $ 595,500 $ 592,000
Commitments to extend credit consist primarily of unfunded single-family
residential and commercial real estate construction loans and commercial
revolving lines of credit. Construction loans are established under standard
underwriting guidelines and policies and are secured by deeds of trust, with
disbursements made over the course of construction. Commercial revolving lines
of credit have a high degree of industry diversification. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Standby letters of credit are generally secured and are
issued by the Bank to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
At December 31, 2000, commercial loan commitments represent approximately
54% of total commitments and are generally secured. Real estate loan commitments
represent 33% of total commitments and are generally secured by property with a
loan-to-value ratio not to exceed 80%. Consumer loan commitments represent the
remaining 13% of total commitments and are generally unsecured. In addition, the
majority of the Bank's loan commitments have variable interest rates.
62
12. COMMITMENTS AND CONTINGENCIES (Continued)
CONCENTRATIONS OF CREDIT RISK
As of December 31, 2000, in management's judgment, a concentration of loans
existed in commercial loans and real estate-related loans. At that date,
approximately 91.0% of the Company's loans were commercial loans and real
estate-related, representing 42.8% and 48.2% of total loans, respectively.
As of December 31, 1999, in management's judgment, a concentration of loans
existed in commercial loans and real estate-related loans. At that date,
approximately 91.4% of the Company's loans were commercial loans and real
estate-related, representing 49.9% and 41.5% of total loans, respectively.
Although management believes the loans within these concentrations have no
more than the normal risk of collectibility, a substantial decline in the
performance of the economy in general or a decline in real estate values in the
Company's primary market area, in particular, could have an adverse impact on
collectibility, increase the level of real estate-related nonperforming loans,
or have other adverse effects which alone or in the aggregate could have a
material adverse effect on the financial condition of the Company.
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.
13. SHAREHOLDERS' EQUITY
REGULATORY CAPITAL
The Company and the Bank are subject to certain regulatory requirements
administered by the Board of Governors or the Federal Reserve System and the
Federal Deposit 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 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 the
Bank's assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Company's and the Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average
assets. Each of these components is defined in the regulations. The consolidated
average assets and risk-weighted assets of the Company and the average assets
and risk-weighted assets of the Bank are not materially different at December
31, 2000. Management believes that the Company and the Bank meet all their
capital adequacy requirements as of December 31, 2000.
63
13. SHAREHOLDERS' EQUITY (Continued)
REGULATORY CAPITAL (Continued)
------------------
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.
2000 1999
------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO
----------- ----- ----------- -----
TIER 1 LEVERAGE RATIO
Central Valley Community Bancorp and Subsidiary $17,784,000 9.1% Not Applicable
Clovis Community Bank $17,709,000 9.1% $14,413,000 8.8%
Minimum requirement for "Well-Capitalized" institution $ 9,739,000 5.0% $ 8,192,000 5.0%
Minimum regulatory requirement $ 7,792,000 4.0% $ 6,554,000 4.0%
TIER 1 RISK-BASED CAPITAL RATIO
Central Valley Community Bancorp and Subsidiary $17,784,000 14.8% Not Applicable
Clovis Community Bank $17,709,000 14.8% $14,413,000 14.2%
Minimum requirement for "Well-Capitalized" institution $ 7,160,000 6.0% $ 6,078,000 6.0%
Minimum regulatory requirement $ 4,773,000 4.0% $ 4,052,000 4.0%
TOTAL RISK-BASED CAPITAL RATIO
Central Valley Community Bancorp and Subsidiary $19,282,000 16.2%
Clovis Community Bank $19,207,000 16.1% $15,690,000 15.5%
Minimum requirement for "Well-Capitalized" institution $11,933,000 10.0% $10,130,000 10.0%
Minimum regulatory requirement $ 9,546,000 8.0% $ 8,104,000 8.0%
As discussed in Note 6, one of the conditions to continue real estate
activities specified that the Bank's capital level after the deduction of all
real estate investments (as defined in the FDIC"s approval of the Bank's
application to continue to engage in real estate development activities) must
equal or exceed the levels required for a well-capitalized institution. As of
December 31, 2000 and 1999, the Bank exceeded the levels required for a
well-capitalized institution after deduction of all its real estate investments.
The Bank's ratios under this additional requirement are shown below.
2000 1999
------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO
----------- ----- ----------- -----
TIER 1 LEVERAGE RATIO
Clovis Community Bank $ 17,634,000 9.1% $ 13,797,000 8.5%
Minimum requirement for "Well-Capitalized" institution $ 9,736,000 5.0% $ 8,161,000 5.0%
TIER 1 RISK-BASED CAPITAL RATIO
Clovis Community Bank $ 17,634,000 14.8% $ 13,797,000 13.7%
Minimum requirement for "Well-Capitalized" institution $ 7,155,000 6.0% $ 6,041,000 6.0%
64
13. SHAREHOLDERS' EQUITY (Continued)
REGULATORY CAPITAL (Continued)
2000 1999
------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO
----------- ----- ----------- -----
TOTAL RISK-BASED CAPITAL RATIO
Clovis Community Bank $ 19,132,000 16.0% $ 15,074,000 15.0%
Minimum requirement for "Well-Capitalized" institution $ 11,925,000 10.0% $ 10,071,000 10.0%
DIVIDENDS
On July 19, 2000, the Board of Directors declared a $.10 cash dividend to
shareholders of record at the close of business on August 1, 2000, paid on or
about August 15, 2000. In addition, all per share data has been restated to
reflect the 10% stock dividend declared May 19, 1999 to shareholders of record
on June 15, 1999, effective July 15, 1999. No dividends were paid during 1998.
The Company's primary source of income with which to pay dividends is
dividends from the Bank. 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, 2000, retained earnings of $1,863,669 were free of such
restrictions.
65
13. SHAREHOLDERS' EQUITY (Continued)
EARNINGS (LOSS) PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings (loss) per share computations is as follows:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
Basic Earnings (Loss) Per Share:
Income from continuing operations $ 1,772,742 $ 716,799 $ 209,748
(Loss) income from discontinued
operations (25,231) 1,194 (601,967)
----------- ----------- -----------
Net income (loss) available to common
shareholders $ 1,747,511 $ 717,993 $ (392,219)
=========== =========== ===========
Weighted average shares outstanding 1,303,459 1,292,345 1,248,425
=========== =========== ===========
Basic earnings (loss) per share:
Continuing operations $ 1.36 $ .56 $ .17
Discontinued operations (.02) (.48)
----------- ----------- -----------
Net income (loss) $ 1.34 $ .56 $ (.31)
=========== =========== ===========
Diluted Earnings (Loss) Per Share:
Income from continuing operations $ 1,772,742 $ 716,799 $ 209,748
(Loss) income from discontinued
operations (25,231) 1,194 (601,967)
----------- ----------- -----------
Net income (loss) available to common
shareholders $ 1,747,511 $ 717,993 $ (392,219)
=========== =========== ===========
Weighted average shares outstanding 1,303,459 1,292,345 1,248,425
Effect of dilutive stock options 8,714 15,365 65,929
----------- ----------- -----------
Weighted average shares of common
stock and common stock equivalents 1,312,173 1,307,710 1,314,354
=========== =========== ===========
Diluted earnings (loss) per share:
Continuing operations $ 1.35 $ .55 $ .16
Discontinued operations (.02) (.46)
----------- -----------
Net income (loss) $ 1.33 $ .55 $ (.30)
=========== =========== ===========
66
13. SHAREHOLDERS' EQUITY (Continued)
STOCK OPTIONS
During 1980 and 1992, the Bank established Stock Option Plans for which
shares are reserved for issuance to employees and directors under incentive and
nonstatutory agreements. The Company assumed all obligations under these plans
as of November 15, 2000 and options to purchase shares of the Company's common
stock were substituted for options to purchase shares of common stock of the
Bank. 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 option
price must be paid in full at the time it is exercised. The options under the
plans expire on dates 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. Outstanding options under the
1980 and 1992 plan are exercisable until their expiration; however, no new
options will be granted under these plans.
On November 15, 2000, the Company adopted, and subsequently amended on
December 20, 2000, the Central Valley Community Bancorp 2000 Stock Option Plan
for which 388,087 shares are reserved for issuance to employees and directors
under incentive and nonstatutory agreements. Exercise of options to be granted
under the Plan is subject to approval by the Company's shareholders at the 2001
annual shareholders meeting. Accordingly, no options have been granted under
this plan.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
Accordingly, no compensation expense has been recognized under the above stock
option plans. There were 85,100 options granted during 2000, 30,000 options
granted during 1999 and 65,175 options granted during 1998. Had compensation
cost been determined based on the fair value at grant date for awards in 2000,
1999 and 1998 consistent with the provisions of SFAS No. 123, the Company's
consolidated net earnings (loss) and earnings (loss) per share for the years
ended December 31, 2000, 1999 and 1998 would have been adjusted to the pro forma
amounts indicated below. Pro forma adjustments to the Company's consolidated net
earnings (loss) and earnings (loss) per share are disclosed during the years in
which the options become vested. However, the cancellation of options in 2000,
which were expected to vest in 1999 and 1998, resulted in an adjustment to
current year pro forma income for the pro forma compensation expense previously
recognized.
2000 1999 1998
---------- ---------- ----------
Net earnings from continuing operations -
as reported $1,772,742 $ 716,799 $ 209,748
Net earnings from continuing operations -
pro forma $1,846,746 $ 647,372 $ 186,837
Basic earnings per share from continuing
operations - as reported $ 1.36 $ .56 $ .17
Basic earnings per share from continuing
operations - pro forma $ 1.42 $ .50 $ .16
Diluted earnings per share from continuing
operations - as reported $ 1.35 $ .55 $ .16
Diluted earnings per share from continuing
operations - pro forma $ 1.41 $ .49 $ .16
Net income (loss) - as reported $1,747,511 $ 717,993 $ (392,219)
Net income (loss) - pro forma $1,821,515 $ 648,564 $ (415,130)
Basic earnings (loss) per share - as reported $ 1.34 $ .56 $ (.31)
Basic earnings (loss) per share - pro forma $ 1.40 $ .50 $ (.37)
Diluted earnings (loss) per share - as reported $ 1.33 $ .55 $ (.30)
Diluted earnings (loss) per share - pro forma $ 1.39 $ .49 $ (.35)
67
13. SHAREHOLDERS' EQUITY (Continued)
STOCK OPTIONS (Continued)
The fair value of each option is estimated on the date of grant using an
option-pricing model with the following assumptions:
2000 1999 1998
--------------- --------------- ---------------
Dividend yield .7% N/A N/A
Expected volatility 54.51 to 72.28% 55.23 to 65.85% 23.82 to 34.21%
Risk-free interest rate 5.85 to 6.75% 5.50 to 6.00% 5.70%
Expected option life 10 years 10 years 5 to 10 years
A summary of the combined activity of the plans, adjusted to give effect to
stock dividends, follows:
2000 1999 1998
------------------- ----------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ ------ ------ ------
Options outstanding,
beginning of year 125,300 $ 17.70 128,422 $16.31 124,755 $ 7.06
Options granted 85,100 $ 13.69 30,000 $18.38 65,175 $21.79
Options exercised (17,666) $ 7.94 (61,508) $ 3.35
Options canceled (85,175) $ 20.52 (15,456) $18.39
------- -------- -------
Options outstanding,
end of year 125,225 $ 13.06 125,300 $17.70 128,422 $16.31
======= ======== =======
Options exercisable,
end of year 43,500 $ 11.67 59,965 $14.51 71,277 $11.96
======= ======== =======
Weighted average fair
value of options
granted during the
year $ 6.93 $ 7.85 $ 8.10
68
13. SHAREHOLDERS' EQUITY (Continued)
STOCK OPTIONS (Continued)
A summary of options outstanding at December 31, 2000 follows:
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 2000 Life 2000
- ------------------------ --------------- --------------- ----------------
$ 7.27 to $ 10.00 24,329 1.5 years 24,329
$ 13.00 to $ 13.81 63,750 10 years 3,125
$ 14.25 to $ 16.36 35,296 8 years 14,196
$ 19.00 to $ 21.82 1,850 1 year 1,850
----------- -------------
125,225 43,500
========== =============
14. OTHER EXPENSES
Other expenses consisted of the following:
Year Ended December 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Legal fees $ 238,278 $ 201,560 $ 376,153
Data processing 718,529 695,119 745,443
Advertising 356,998 373,249 382,060
Provision for other real estate losses
and related expenses 6,704 56,178 267,694
Regulatory assessments 74,621 200,405 202,563
Audit and accounting fees 267,784 163,300 212,428
Other expenses 1,466,627 1,547,393 1,300,408
---------- ---------- ----------
$3,129,541 $3,237,204 $3,486,749
========== ========== ==========
15. EMPLOYEE BENEFITS
401(K) PROFIT SHARING PLAN
The Bank has established a 401(k) plan covering substantially all employees
who have completed a six-month period in which they are credited with at least
1,000 hours of service. Participants are eligible to receive employer
contributions after completion of two years of service. Bank contributions are
determined at the discretion of the Board of Directors. Participants are
automatically vested 100% in all employer contributions. The Bank contributed
$120,000 and $60,000 to the plan in 2000 and 1999, respectively. There were no
Bank contributions to the plan in 1998.
69
15. EMPLOYEE BENEFITS (Continued)
DEFERRED COMPENSATION PLAN
The Bank has a nonqualified Deferred Compensation Plan which provides
directors and a former key executive with an unfunded, deferred compensation
program. Under the plan, eligible participants may elect to defer some or all of
their current compensation. Deferred amounts earn interest at an annual rate
determined by the Board of Directors (9.5% at December 31, 2000). At December
31, 2000 and 1999, the total net deferrals included in other liabilities were
$906,752 and $863,467, respectively.
In connection with the implementation of the above plan, single premium
universal life insurance policies on the life of each participant were purchased
by the Bank, which is beneficiary and owner of the policies. The cash surrender
value of the policies totaled $1,656,290 and $1,582,138 at December 31, 2000 and
1999, respectively, and is included in accrued interest receivable and other
assets on the balance sheet. The current annual tax-free interest rates on these
policies is 5.61%.
SALARY CONTINUATION PLANS
The Board of Directors has approved salary continuation plans for certain
key executives. Under these plans, the Bank is obligated to provide the
executives with annual benefits for fifteen years after retirement. These
benefits are substantially equivalent to those available under split-dollar life
insurance policies purchased by the Bank on the life of the executives. In
addition, the estimated present value of these future benefits are accrued from
the effective date of the plans until the executives' expected retirement date.
The expense recognized under these plans for the year ended December 31, 2000
totaled $70,794.
In connection with these plans, the Bank purchased single premium life
insurance policies with cash surrender values totaling $1,562,914 at December
31, 2000 which are included on the balance sheet in accrued interest receivable
and other assets. Income recognized on these policies totaled $39,414 for the
year ended December 31, 2000.
16. LOANS TO RELATED PARTIES
During the normal course of business, the Bank enters into loans with
related parties, including executive officers and directors. These loans are
made 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:
Balance, January 1, 2000 $ 310,000
Disbursements 643,000
Amounts repaid (375,000)
-------------
Balance, December 31, 2000 $ 578,000
=============
Undisbursed commitments to related parties,
December 31, 2000 $ 1,759,000
==============
17. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) 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 (loss).
Unrealized gains and losses on the Company's available-for-sale investment
securities are included in other comprehensive income (loss). Total
comprehensive income (loss) and the components of accumulated other
comprehensive income (loss) are presented in the Statement of Changes in
Shareholders' Equity.
70
17. COMPREHENSIVE INCOME (LOSS) (Continued)
At December 31, 2000, 1999 and 1998, the Company held securities classified
as available-for-sale which had unrealized gains or losses as follows:
Tax
Before (Expense) After
Tax Benefit Tax
----------- ----------- -----------
FOR THE YEAR ENDED DECEMBER 31, 2000
Other comprehensive income:
Unrealized holding gains $ 2,059,000 $ (821,000) $ 1,238,000
=========== =========== ===========
FOR THE YEAR ENDED DECEMBER 31, 1999
Other comprehensive loss:
Unrealized holding losses $ (518,529) $ 209,452 $ (309,077)
Less reclassification adjustment for net
losses included in net income (47,629) 19,052 (28,577)
----------- ----------- -----------
Total other comprehensive loss $ (470,900) $ 190,400 $ (280,500)
=========== =========== ===========
FOR THE YEAR ENDED DECEMBER 31, 1998
Other comprehensive loss:
Unrealized holding losses $ (470,100) $ 174,000 $ (296,100)
=========== =========== ===========
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosures include estimated fair values 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, 2000 and 1999:
CASH AND CASH EQUIVALENTS: For cash and cash equivalents, the carrying
amount is estimated to be fair value.
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.
71
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
LOANS: For variable-rate loans that reprice frequently with no significant
change in credit risk, fair values are based on carrying values. Fair values for
other loans are estimated using discounted cash flow analyses, using interest
rates being offered at each reporting date for loans with similar terms to
borrowers of comparable creditworthiness. The carrying amount of accrued
interest receivable approximates its fair value.
CASH SURRENDER VALUE OF LIFE INSURANCE POLICIES: The fair value of life
insurance policies are based on cash surrender values at each reporting date as
provided by the insurers.
NOTES PAYABLE: The fair values of fixed-rate notes payable are estimated by
discounting their future cash flows using rates at each reporting date for
similar instruments. The carrying amount of variable rate notes payable
approximates their fair value.
DEPOSITS: The fair values for demand deposits are, by definition, equal to
the amount payable on demand at the 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 being 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.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT: Commitments to extend
credit are primarily for adjustable rate loans. For these commitments, there are
no differences between the committed amounts and their fair values. Commitments
to fund fixed rate loans and letters of credit are at rates which approximate
fair value at each reporting date.
December 31, 2000 December 31, 1999
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and due from banks $ 18,548,547 $ 18,548,547 $ 14,087,796 $ 14,087,796
Federal funds sold 4,528,000 4,528,000 8,921,000 8,921,000
Investment securities 74,561,327 74,561,327 54,170,377 54,170,377
Loans 93,972,692 93,860,000 79,017,405 77,574,000
Cash surrender value life
insurance policies 3,219,205 3,219,205 1,582,138 1,582,138
Accrued interest receivable 1,207,948 1,207,948 841,158 841,158
------------ ------------ ------------ ------------
$196,037,719 $195,925,027 $158,619,874 $157,176,469
============ ============ ============ ============
Financial liabilities:
Deposits $180,952,263 $180,979,000 $149,147,383 $149,022,000
Notes payable 35,913 35,913 250,366 241,000
Accrued interest payable 378,252 378,252 267,147 267,147
------------ ------------ ------------ ------------
$181,366,428 $181,393,165 $149,664,896 $149,530,147
============ ============ ============ ============
Off-balance-sheet financial
instruments:
Commitments to extend credit $ 53,842,720 $ 53,842,720 $ 41,929,933 $ 41,929,933
Standby letters of credit 595,500 595,500 592,000 592,000
------------ ------------ ------------ ------------
$ 54,438,220 $ 54,438,220 $ 42,521,933 $ 42,521,933
============ ============ ============ ============
72
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
DECEMBER 31, 2000
ASSETS
Cash and due from banks $ 36,999
Investment in subsidiary 18,595,020
Other assets 38,758
-----------
$18,670,777
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Other liabilities $ 100
-----------
Total liabilities 100
-----------
Shareholders' equity
Common stock 6,465,236
Retained earnings 11,354,441
Accumulated other comprehensive income 851,000
-----------
Total shareholders' equity 18,670,677
-----------
$18,670,777
===========
73
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF INCOME
FOR THE PERIOD FROM NOVEMBER 15, 2000 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 2000
Income:
Dividends declared by subsidiary -
eliminated in consolidation $125,000
--------
Expenses:
Professional fees 71,170
Other expenses 10,973
--------
Total expenses 82,143
--------
Income before equity in undistributed
income of subsidiary 42,857
Equity in undistributed income of subsidiary 531
--------
Income before income taxes 43,388
Income tax benefit 32,800
--------
Net income $ 76,188
========
74
CENTRAL VALLEY COMMUNITY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM NOVEMBER 15, 2000 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 2000
ACCUMULATED
COMMON STOCK OTHER
------------------------- RETAINED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME EQUITY INCOME
----------- ----------- ----------- ----------- ----------- -----------
Stock issued to effect merger with the Bank 1,303,459 $ 6,465,236 $11,278,253 $ 131,000 $17,874,489
Comprehensive income:
Net income 76,188 76,188 $ 76,188
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale
investment securities 720,000 720,000 720,000
-----------
Total comprehensive income $ 796,188
===========
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 1,303,459 $ 6,465,236 $11,354,441 $ 851,000 $18,670,677
=========== =========== =========== =========== ===========
75
19. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM NOVEMBER 15, 2000 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 2000
Cash flows from operating activities:
Net income $ 76,188
Adjustments to reconcile net income to net cash
provided by in operating activities:
Undistributed net income of subsidiary (531)
Increase in other assets (38,758)
Increase in other liabilities 100
------------
Net cash provided by operating activities 36,999
------------
Increase in cash and cash equivalents 36,999
Cash and cash equivalents at beginning of period
------------
Cash and cash equivalents at end of year $ 36,999
============
Non-cash investing activities:
Net change in unrealized gains on available-for-
sale investment securities $ 720,000
Issuance of common stock in exchange for the common
stock of the Bank $ 17,874,165
76
20. SUBSEQUENT EVENTS
In January 2001, the Company received an insurance settlement. The terms
and conditions related to this settlement are confidential.
In February 2001, the Company announced its intent to purchase up to
$500,000, or approximately 3% of its common stock through a stock repurchase
plan that will become effective on March 1, 2001.
77
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
For information concerning directors and executive officers of the Company,
see "ELECTION OF DIRECTORS OF THE COMPANY" in the definitive Proxy Statement for
the Company's 2001 Annual Meeting of Shareholders to be filed pursuant to
Regulation 14A (the "Proxy Statement"), which section of the Proxy Statement is
incorporated herein by reference.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the FDIC. Officers, directors and greater than 10% shareholders
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file. To the best knowledge of the Company, the only
greater than ten-percent holder of the Company's common Stock is Mr. Louis
McMurray and his related interests.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 4 and 5
were required for those persons, the Company believes that for the 2000 fiscal
year, the officers and directors of the Company complied with all applicable
filing requirements, except that Shirley Wilburn filed her Form 5 late. That
filing reported a single transaction: one option grant.
ITEM 10 - EXECUTIVE COMPENSATION.
For information concerning executive compensation, see "EXECUTIVE
COMPENSATION" in the Proxy Statement, which section of the Proxy Statement is
incorporated herein by reference.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
For information concerning security ownership of certain beneficial owners
and management, see "PRINCIPAL SHAREHOLDERS" and "ELECTION OF DIRECTORS OF THE
COMPANY" in the Proxy Statement, which sections of the Proxy Statement are
incorporated herein by reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For information concerning certain relationships and related transactions,
see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "INDEBTEDNESS OF
MANAGEMENT" in the Proxy Statement, which sections of the Proxy Statement are
incorporated herein by reference.
78
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) REPORTS ON FORM 8-K
On November 16, 2000, the Company filed a Current Report on Form 8-K under
Item 5 reporting the merger of Clovis Merger Co., a wholly-owned subsidiary of
the Company, with and into Clovis Community Bank (the "Bank"), effective as of
November 15, 2000, and pursuant to which the shareholders of the Bank became
shareholders of the Company. The Current Report included as an exhibit the Plan
of Reorganization and Merger Agreement pursuant to which Clovis Merger Co. was
merged into the Bank. No financial statements were required or included.
(b) EXHIBITS(C)
See Index to Exhibits at pages 87 through 89 of this Form 10-KSB.
79
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CENTRAL VALLEY COMMUNITY BANCORP
Date: March 27, 2001 By: /s/ Daniel J. Doyle
------------------------------
Daniel J. Doyle
President and Chief Executive Officer
(principal executive officer)
80
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.
/s/ Daniel J. Doyle Date: March 27, 2001
- ------------------------------------------
Daniel J. Doyle,
President and Chief Executive
Officer and Director (principal
executive officer)
/s/ Gayle Graham Date: March 27, 2001
- ------------------------------------------
Gayle Graham,
Senior Vice President and Chief Financial Officer
(principal accounting officer
and principal financial officer)
Daniel N. Cunningham * Date: March 21, 2001
- ------------------------------------------
Daniel N. Cunningham,
Chairman of the Board and
Director
David E. Cook * Date: March 21, 2001
- ------------------------------------------
David E. Cook, Secretary and Director
Sidney B. Cox * Date: March 21, 2001
- ------------------------------------------
Sidney B. Cox, Director
Steven D. Mcdonald * Date: March 21, 2001
- ------------------------------------------
Steven D. McDonald, Director
Louis Mcmurray * Date: March 21, 2001
- ------------------------------------------
Louis McMurray, Director
Wanda L. Rogers * Date: March 21, 2001
- ------------------------------------------
Wanda L. Rogers, Director
- ------------------------------------------ Date: March __, 2001
William S. Smittcamp, Director
Joseph B. Weirick * Date: March 21, 2001
- ------------------------------------------
Joseph B. Weirick, Director
* By /s/ Daniel J. Doyle Date: March 27, 2001
------------------------------------
Daniel J. Doyle, as ATTORNEY-IN-FACT
81
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------ -------
3.1.1 Articles of Incorporation of the Company.
3.1.2 Certificate of Amendment of Articles of Incorporation, dated July
6, 2000.
3.2 Bylaws of the Company as amended to date.
4 N/A
9 N/A
10.1 Central Valley Community Bancorp 2000 Stock Option Plan. (1)
10.2 Central Valley Community Bancorp Incentive Stock Option
Agreement.
10.3 Central Valley Community Bancorp Non-Statutory Stock Option
Agreement.
10.4 Clovis Community Bank 1992 Stock Option Plan. (2)
10.5 Clovis Community Bank Incentive Stock Option Agreement.
10.6 Clovis Community Bank Non-Statutory Stock Option Agreement.
10.7 Clovis Community Bank Amended and Restated Salary Deferral Plan,
effective January 1, 1997.
10.8 Amendment Number One to the Clovis Community Bank Amended and
Restated Salary Deferral Plan, effective January 1, 1997.
10.9 Amendment Number Two to the Clovis Community Bank Amended and
Restated Salary Deferral Plan, effective January 1, 1997.
10.10 Deferred Fee Agreement by and between Clovest Corporation and
Daniel N. Cunningham.
10.11 Deferred Fee Agreement by and between Clovest Corporation and
Steven McDonald.
10.12 Deferred Fee Agreement by and between Clovest Corporation and
Louis McMurray.
10.13 Deferred Fee Agreement by and between Clovest Corporation and
Wanda Lee Rogers.
10.14 Deferred Fee Agreement by and between Clovest Corporation and
William S. Smittcamp.
10.15 Clovis Community Bank 1999 Senior Management Incentive Plan.
10.16 Employment Agreement by and between Clovis Community Bank and
Daniel J. Doyle dated May 11, 1998.
10.17 Retirement Agreement between Clovis Community Bank and Donald H.
Bruegman dated May 28, 1998.
82
10.18 [reserved]
10.19 Salary Continuation Agreement by and between Clovis Community
Bank and Daniel J. Doyle, dated June 7, 2000.
10.20 Salary Continuation Agreement by and between Clovis Community
Bank and Gayle Graham, dated June 7, 2000.
10.21 Salary Continuation Agreement by and between Clovis Community
Bank and Gary Quisenberry, dated June 7, 2000.
10.22 Salary Continuation Agreement by and between Clovis Community
Bank and Tom Sommer, dated June 7, 2000.
10.23 Clovis Community Bank Amended and Restated Deferred Fee Agreement
for Daniel N. Cunningham
10.24 Clovis Community Bank Amended and Restated Deferred Fee Agreement
for Steven McDonald
10.25 Clovis Community Bank Amended and Restated Deferred Fee Agreement
for Louis McMurray
10.26 Clovis Community Bank Amended and Restated Deferred Fee Agreement
for Wanda Lee Rogers
10.27 Clovis Community Bank Amended and Restated Deferred Fee Agreement
for William S. Smittcamp
10.28 Life Insurance Endorsement Method Split Dollar Plan Agreement by
and between Clovis Community Bank and Daniel J. Doyle, dated June
21, 2000.
10.29 Life Insurance Endorsement Method Split Dollar Plan Agreement by
and between Clovis Community Bank and Dorothy Graham, dated June
21, 2000.
10.30 Life Insurance Endorsement Method Split Dollar Plan Agreement by
and between Clovis Community Bank and Gary Quisenberry, dated
June 21, 2000.
10.31 Life Insurance Endorsement Method Split Dollar Plan Agreement by
and between Clovis Community Bank and Tom Sommer, dated June 21,
2000.
11. N/A
12. N/A
13. N/A
16 N/A
18 N/A
83
21 Subsidiaries.
22 N/A
23 Consent of Perry-Smith LLP.
24 N/A.
- ----------
(1) Attached as Exhibit 99.1 to Registration Rtatement No. 333-52384 on Form
S-8 filed by the Registrant (the "2000 Plan S-8 Registration Statement")
and incorporated herein by reference.
(2) Attached as Exhibit 99.1 to Registration Statement No. 333-50276 on Form
S-8 filed by the Registrant (the "1992 Plan S-8 Registration Statement")
and incorporated herein by reference.
84