ovly20150930_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended September 30, 2015

 

 

OR

 

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-34142

 

OAK VALLEY BANCORP

(Exact name of registrant as specified in its charter)

 

California

 

26-2326676

State or other jurisdiction of

 

I.R.S. Employer

incorporation or organization

 

Identification No.

 

125 N. Third Ave., Oakdale, CA  95361

(Address of principal executive offices)

 

(209) 848-2265

Issuer’s telephone number

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes     No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No 

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  8,078,155 shares of common stock outstanding as of November 6, 2015.

 


 

 
 

 

  

Oak Valley Bancorp

September 30, 2015

 

Table of Contents

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

 

3

 

 

 

 

Item 1.

Consolidated Financial Statements

 

3

 

 

 

 

Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014 (Unaudited)

 

4

 

 

 

 

Condensed Consolidated Statements of Income for the Three and Nine month periods Ended September 30, 2015 and September 30, 2014 (Unaudited)

 

5

 

   

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine month periods Ended September 30, 2015 and September 30, 2014 (Unaudited)

  6

 

 

 

 

Condensed Consolidated Statements of Changes of Shareholders’ Equity for the Year Ended December 31, 2014 and the Nine-month period Ended September 30, 2015 (Unaudited)

 

7

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine-month periods Ended September 30, 2015 and September 30, 2014 (Unaudited)

 

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

9

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

28

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

43

 

 

 

 

Item 4.

Controls and Procedures

 

43

 

 

 

 

PART II – OTHER INFORMATION

 

45

 

 

 

 

Item 1.

Legal Proceedings

 

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

Item 3.

Defaults Upon Senior Securities

 

45

Item 4.

Mine Safety Disclosures

 

45

Item 5.

Other Information

 

45

Item 6.

Exhibits

 

46

 

 

 

 
2

 

  

PART I – FINANCIAL STATEMENTS

 

 

Item 1. Consolidated Financial Statements (Unaudited)

 

 
3

 

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

(dollars in thousands)

 

September 30,

   

December 31,

 
   

2015

   

2014

 

ASSETS

               

Cash and due from banks

  $ 136,594     $ 132,078  

Federal funds sold

    20,020       12,210  

Cash and cash equivalents

    156,614       144,288  
                 

Securities available for sale

    129,497       121,277  

Loans, net of allowance for loan loss of $7,389 and $7,534 at September 30, 2015 and December 31, 2014, respectively

    469,616       446,492  

Bank premises and equipment, net

    13,736       14,066  

Other real estate owned

    834       884  

Interest receivable and other assets

    23,426       22,658  
                 
    $ 793,723     $ 749,665  
                 

LIABILITIES AND SHAREHOLDERS’ EQUITY

               
                 

Deposits

  $ 712,577     $ 669,581  

Interest payable and other liabilities

    3,999       5,043  

Total liabilities

    716,576       674,624  
                 

Commitments and contingencies

               
                 

Shareholders’ equity

               

Preferred stock, 10,000,000 shares authorized, no shares issued and outstanding at September 30, 2015 and December 31, 2014

    0       0  

Common stock, no par value; 50,000,000 shares authorized, 8,078,155 and 8,074,855 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively

    24,682       24,682  

Additional paid-in capital

    3,107       2,910  

Retained earnings

    48,304       45,582  

Accumulated other comprehensive income, net of tax

    1,054       1,867  

Total shareholders’ equity

    77,147       75,041  
                 
    $ 793,723     $ 749,665  

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
4

 

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

(dollars in thousands, except per share amounts)

 

THREE MONTHS ENDED
SEPTEMBER 30,

   

NINE MONTHS ENDED
SEPTEMBER 30,

 
   

2015

   

2014

   

2015

   

2014

 

INTEREST INCOME

                               

Interest and fees on loans

  $ 5,515     $ 5,555     $ 16,293     $ 16,202  

Interest on securities available for sale

    914       945       2,687       2,793  

Interest on federal funds sold

    8       6       24       30  

Interest on deposits with banks

    72       39       212       134  

Total interest income

    6,509       6,545       19,216       19,159  
                                 

INTEREST EXPENSE

                               

Deposits

    155       156       461       490  

Total interest expense

    155       156       461       490  
                                 

Net interest income

    6,354       6,389       18,755       18,669  

(Reversal of) provision for loan losses

    0       0       (125 )     (1,877 )
                                 

Net interest income after (reversal of) provision for loan losses

    6,354       6,389       18,880       20,546  
                                 

OTHER INCOME

                               

Service charges on deposits

    307       364       927       1,009  

Earnings on cash surrender value of life insurance

    108       111       322       321  

Mortgage commissions

    26       60       114       138  

Net gain on sales and calls of securities

    3       17       186       29  

Other

    521       388       1,599       1,180  

Total non-interest income

    965       940       3,148       2,677  
                                 

OTHER EXPENSES

                               

Salaries and employee benefits

    2,852       2,796       8,790       8,210  

Occupancy expenses

    743       719       2,214       2,177  

Data processing fees

    366       339       1,077       995  

Merger expenses

    155       0       155       0  

Regulatory assessments (FDIC & DBO)

    123       118       368       358  

Other operating expenses

    1,061       1,140       2,986       3,242  

Total non-interest expense

    5,300       5,112       15,590       14,982  
                                 

Net income before provision for income taxes

    2,019       2,217       6,438       8,241  
                                 

PROVISION FOR INCOME TAXES

    638       682       2,020       2,761  

NET INCOME

  $ 1,381     $ 1,535     $ 4,418     $ 5,480  
                                 

NET INCOME PER COMMON SHARE

  $ 0.17     $ 0.19     $ 0.55     $ 0.69  
                                 

NET INCOME PER DILUTED COMMON SHARE

  $ 0.17     $ 0.19     $ 0.55     $ 0.69  

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
5

 

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

   

THREE MONTHS ENDED SEPTEMBER 30,

   

NINE MONTHS ENDED SEPTEMBER 30,

 

(in thousands)

 

2015

   

2014

   

2015

   

2014

 
                                 

Net income

  $ 1,381     $ 1,535     $ 4,418     $ 5,480  

Available for sale securities:

                               

Unrealized holding gains (losses) on securities arising during the current period, net of tax effect of $290 thousand and ($492) thousand for the three and nine month periods ended September 30, 2015, respectively, and $253 thousand and $1.5 million for the comparable 2014 periods

    415       362       (704 )     2,153  

Reclassification adjustment due to net gains realized on sales and calls of securities, net of tax effect of $1 thousand and $77 thousand for the three and nine months ended September 30, 2015, respectively and $7 thousand and $12 thousand for the comparable 2014 periods

    (2 )     (10 )     (109 )     (17 )

Other comprehensive income (loss)

    413       352       (813 )     2,136  

Comprehensive income

  $ 1,794     $ 1,887     $ 3,605     $ 7,616  

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
6

 

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

 

   

YEAR ENDED DECEMBER 31, 2014 AND NINE MONTHS ENDED SEPTEMBER 30, 2015

 
                                                   

Accumulated

         
                                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Preferred Stock

   

Paid-in

   

Retained

   

Comprehensive

   

Shareholders’

 

(dollars in thousands)

 

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Earnings

   

Income (Loss)

   

Equity

 
                                                                 

Balances, January 1, 2014

    7,929,730     $ 23,758       0     $ 0     $ 2,537     $ 38,985     $ (763 )   $ 64,517  

Stock options exercised

    122,625       924                                               924  

Tax benefit on stock based compensation

                                    102                       102  

Restricted stock issued

    24,500                                                          

Restricted stock forfeited

    (2,000 )                                                        

Cash dividends declared

                                            (525 )             (525 )

Stock based compensation

                                    271                       271  

Other comprehensive income

                                                    2,630       2,630  

Net income

                                            7,122               7,122  

Balances, December 31, 2014

    8,074,855     $ 24,682       0     $ 0     $ 2,910     $ 45,582     $ 1,867     $ 75,041  
                                                                 

Restricted stock issued

    6,000                                                          

Restricted stock forfeited

    (2,700 )                                                        

Cash dividends declared

                                            (1,696 )             (1,696 )

Stock based compensation

                                    197                       197  

Other comprehensive loss

                                                    (813 )     (813 )

Net income

                                            4,418               4,418  

Balances, September 30, 2015

    8,078,155     $ 24,682       0     $ 0     $ 3,107     $ 48,304     $ 1,054     $ 77,147  

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 
7

 

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   

NINE MONTHS ENDED

SEPTEMBER 30,

 

(dollars in thousands)

 

2015

   

2014

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 4,418     $ 5,480  

Adjustments to reconcile net earnings to net cash from operating activities:

               

(Reversal of) provision for loan losses

    (125 )     (1,877 )

Decrease in deferred fees/costs, net

    (123 )     (231 )

Depreciation

    892       471  

Amortization of investment securities, net

    132       120  

Stock based compensation

    197       209  

Excess tax benefits from exercised stock options

    0       (52 )

Gain on sale of premises and equipment

    (5 )     (3 )

OREO write downs

    50       32  

Gain on sales and calls of available for sale securities

    (186 )     (29 )

Earnings on cash surrender value of life insurance

    (322 )     (321 )

Gain on BOLI death benefit

    (66 )     0  

Decrease in interest payable and other liabilities

    (1,044 )     (58 )

Decrease in interest receivable

    75       153  

(Increase) decrease in other assets

    (178 )     483  

Net cash from operating activities

    3,715       4,377  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchases of available for sale securities

    (34,506 )     (18,389 )

Proceeds from maturities, calls, and principal paydowns of securities available for sale

    24,958       15,475  

Net increase in loans

    (22,876 )     (14,579 )

Purchase of FHLB Stock

    0       (104 )

Purchase of BOLI policies

    0       (1,029 )

Proceeds from redemption of BOLI policies

    292       0  

Proceeds from sales of premises and equipment

    5       3  

Net purchases of premises and equipment

    (562 )     (401 )

Net cash used in investing activities

    (32,689 )     (19,024 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Shareholder cash dividends paid

    (1,696 )     (1,318 )

Net increase in demand deposits and savings accounts

    43,078       30,316  

Net decrease in time deposits

    (82 )     (2,771 )

Excess tax benefits from exercised stock options

    0       52  

Proceeds from sale of common stock and exercise of stock options

    0       924  

Net cash from financing activities

    41,300       27,203  
                 

NET INCREASE IN CASH AND CASH EQUIVALENTS

    12,326       12,556  
                 

CASH AND CASH EQUIVALENTS, beginning of period

    144,288       105,191  
                 

CASH AND CASH EQUIVALENTS, end of period

  $ 156,614     $ 117,747  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

               

Cash paid during the period for:

               

Interest

  $ 466     $ 512  

Income taxes

  $ 3,545     $ 2,075  
                 

NON-CASH INVESTING ACTIVITIES:

               

Change in unrealized (loss) gain on available-for-sale securities

  $ (1,382 )   $ 3,630  

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
8

 

 

OAK VALLEY BANCORP

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BASIS OF PRESENTATION

 

Oak Valley Community Bank is a California State chartered bank. The Company was incorporated under the laws of the state of California on May 31, 1990, and began operations in Oakdale on May 28, 1991. The Company operates branches in Oakdale, Sonora, Bridgeport, Bishop, Mammoth Lakes, Modesto, Manteca, Patterson, Turlock, Ripon, Stockton, Tracy and Escalon, California. The Bridgeport, Mammoth Lakes, and Bishop branches operate as a separate division, Eastern Sierra Community Bank. The Company’s primary source of revenue is providing loans to customers who are predominantly middle-market businesses.

 

On July 3, 2008 (the “Effective Date”), a bank holding company reorganization was completed whereby Oak Valley Bancorp (“Bancorp”) became the parent holding company for Oak Valley Community Bank ( the “Bank”).  On the Effective Date, a tax-free exchange was completed whereby each outstanding share of the Company was converted into one share of Bancorp and the Company became the sole wholly-owned subsidiary of the holding company.

 

The consolidated financial statements include the accounts of Bancorp and its wholly-owned bank subsidiary. All material intercompany transactions have been eliminated. In the opinion of Management, the consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations, changes in shareholders’ equity and cash flows.  All adjustments are of a normal, recurring nature.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates reflected in the Company’s consolidated financial statements include the allowance for loan losses, determination of non-accrual loans, other-than-temporary impairment of investment securities, the fair value measurements, deferred compensation plans, and the determination, recognition and measurement of impaired loans. Actual results could differ from these estimates.

 

The interim consolidated financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and nine month periods ended September 30, 2015 are not necessarily indicative of the results of a full year’s operations. Certain prior year amounts have been reclassified to conform to the current year presentation. There was no effect on net income or shareholders’ equity as a result of reclassifications. For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2014.

 

   

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

   

In January 2014, the FASB issued ASU No. 2014 – 01, Investments – Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Qualified Affordable Housing Projects. This Update provides guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments in this Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this Update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of ASU No. 2014-01 did not have a material impact on the Company's consolidated financial statements.

 

In January 2014, the FASB issued ASU No. 2014 – 04, Receivables – Troubled Debt Restructurings by Creditors. This ASU provides clarification that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of ASU No. 2014-04 did not have a material impact on the Company's consolidated financial statements.

 

 
9

 

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-14 Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40), Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. This update addresses classification of government-guaranteed mortgage loans, including those where guarantees are offered by the Federal Housing Administration (“FHA”), the U.S. Department of Housing and Urban Development (“HUD”), and the U.S. Department of Veterans Affairs (“VA”). Although current accounting guidance stipulates proper measurement and classification in situations where a creditor obtains from a debtor, assets in satisfaction of a receivable (such as through foreclosure), current guidance does not specify how to measure and classify foreclosed mortgage loans that are government-guaranteed. Under the provisions of this update, a creditor would derecognize a mortgage loan that has been foreclosed upon, and recognize a separate receivable if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The amendments within this update are effective for annual and interim periods beginning after December 15, 2014. The adoption of ASU No. 2014-14 did not have a material impact on the Company's consolidated financial statements.

 

In September, 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments (Topic 805). This ASU eliminates the requirement to restate prior period financial statements for measurement period adjustments to assets acquired and liabilities assumed in a business combination. The new guidance under this update requires the cumulative impact of measurement period adjustments be recognized in the period the adjustment is determined. This update does not change what constitutes a measurement period adjustment, nor does it change the length of the measurement period. The new standard is effective for interim annual periods beginning after December 15, 2015 and should be applied prospectively to measurement period adjustments that occur after the effective date. The Company does not expect the adoption of this update to have a material impact on the Company’s consolidated financial statements.

 

 

NOTE 3 – SECURITIES

 

The amortized cost and estimated fair values of debt securities as of September 30, 2015 are as follows:

 

(dollars in thousands)

 

Amortized Cost

   

Gross Unrealized Gains

   

Gross Unrealized Losses

   

Fair Value

 
                                 

Available-for-sale securities:

                               

U.S. agencies

  $ 32,799     $ 1,315     $ (74 )   $ 34,040  

Collateralized mortgage obligations

    3,662       39       (22 )     3,679  

Municipalities

    63,016       1,480       (693 )     63,803  

SBA pools

    823       0       (3 )     820  

Corporate debt

    10,996       47       (15 )     11,028  

Asset backed securities

    13,260       15       (163 )     13,112  

Mutual fund

    3,149       0       (134 )     3,015  
    $ 127,705     $ 2,896     $ (1,104 )   $ 129,497  

 

The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2015.

 

(dollars in thousands)

 

Less than 12 months

   

12 months or more

   

Total

 

Description of Securities

 

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

 

U.S. agencies

  $ 1,262     $ (21 )   $ 1,818     $ (53 )   $ 3,080     $ (74 )

Collateralized mortgage obligations

    0       0       1,317       (22 )     1,317       (22 )

Municipalities

    25,594       (519 )     3,189       (174 )     28,783       (693 )

SBA pools

    0       0       817       (3 )     817       (3 )

Corporate debt

    2,479       (15 )     0       0       2,479       (15 )

Asset backed securities

    4,938       (35 )     4,759       (128 )     9,697       (163 )

Mutual fund

    0       0       3,015       (134 )     3,015       (134 )

Total temporarily impaired securities

  $ 34,273     $ (590 )   $ 14,915     $ (514 )   $ 49,188     $ (1,104 )

 

 
10

 

 

At September 30, 2015, there was one U.S. agency, one collateralized mortgage obligations, five municipalities, two SBA pools, three asset backed securities and one mutual fund that comprised the total securities in an unrealized loss position for greater than 12 months and one U.S. agency, 23 municipalities, three corporate debts and two asset backed securities that make up the total securities in a loss position for less than 12 months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary. This evaluation encompasses various factors including, the nature of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings and other credit related factors such as third party guarantees and volatility of the security’s fair value. Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due primarily to interest rate changes and the Company does not intend to sell the securities and it is not likely that we will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

 

The amortized cost and estimated fair value of investment securities at September 30, 2015, by contractual maturity or call date, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(dollars in thousands)

 

Amortized

   

Fair

 
   

Cost

   

Value

 

Available-for-sale securities:

               

Due in one year or less

  $ 11,396     $ 11,788  

Due after one year through five years

    38,658       39,756  

Due after five years through ten years

    41,765       41,454  

Due after ten years

    35,886       36,499  
    $ 127,705     $ 129,497  

 

 

The amortized cost and estimated fair values of investment securities as of December 31, 2014, are as follows:

 

(dollars in thousands)

 

Amortized Cost

   

Gross Unrealized Gains

   

Gross Unrealized Losses

   

Fair Value

 
                                 

Available-for-sale securities:

                               

U.S. agencies

  $ 40,316     $ 1,760     $ (146 )   $ 41,930  

Collateralized mortgage obligations

    6,927       184       (39 )     7,072  

Municipalities

    49,396       1,713       (212 )     50,897  

SBA pools

    895       0       (3 )     892  

Corporate debt

    6,726       95       (17 )     6,804  

Asset backed securities

    10,766       50       (106 )     10,710  

Mutual fund

    3,077       0       (105 )     2,972  
    $ 118,103     $ 3,802     $ (628 )   $ 121,277  

 

 

The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2014.

 

(dollars in thousands)

 

Less than 12 months

   

12 months or more

   

Total

 

Description of Securities

 

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

 

U.S. agencies

  $ 0     $ 0     $ 8,446     $ (146 )   $ 8,446     $ (146 )

Collateralized mortgage obligations

    0       0       1,445       (39 )     1,445       (39 )

Municipalities

    3,530       (22 )     12,791       (190 )     16,321       (212 )

SBA pools

    0       0       892       (3 )     892       (3 )

Corporate debt

    1,983       (17 )     0       0       1,983       (17 )

Asset backed securities

    3,798       (79 )     971       (27 )     4,769       (106 )

Mutual fund

    0       0       2,972       (105 )     2,972       (105 )

Total temporarily impaired securities

  $ 9,311     $ (118 )   $ 27,517     $ (510 )   $ 36,828     $ (628 )

 

 
11

 

 

We recognized gross gains of $3,000 and $218,000 for the three and nine month periods ended September 30, 2015, respectively, on certain available-for-sale securities that were called or sold, which compares to $17,000 and $29,000 in the same periods of 2014. The gains in 2015 reflected in the condensed consolidated statements of income are net of a $32,000 gross realized loss related to one available-for-sale securities sold during the first quarter of 2015, compared to no sales or calls of securities resulting in losses during the first nine months of 2014.

 

Securities carried at $67,922,000 and $60,474,000 at September 30, 2015 and December 31, 2014, respectively, were pledged to secure deposits of public funds.

 

 

NOTE 4 – LOANS

 

Our customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. As of September 30, 2015, approximately 82% of the Company’s loans are commercial real estate loans which include construction loans. Approximately 10% of the Company’s loans are for general commercial uses including professional, retail, and small business. Additionally, 5% of the Company’s loans are for residential real estate and other consumer loans. The remaining 3% are agriculture loans. Loan totals were as follows:

 

(in thousands)

 

September 30, 2015

   

December 31, 2014

 

Commercial real estate:

               

Commercial real estate- construction

  $ 24,205     $ 9,181  

Commercial real estate- mortgages

    331,895       315,506  

Land

    8,535       10,620  

Farmland

    27,704       23,091  

Commercial and industrial

    48,943       54,051  

Consumer

    638       805  

Consumer residential

    22,078       25,464  

Agriculture

    13,329       15,753  

Total loans

    477,327       454,471  
                 

Less:

               

Deferred loan fees and costs, net

    (322 )     (445 )

Allowance for loan losses

    (7,389 )     (7,534 )

Net loans

  $ 469,616     $ 446,492  

 

 

Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentration of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

 

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, our management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

 

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At September 30, 2015, commercial real estate loans equal to approximately 39.5% of the outstanding principal balance of our commercial real estate loans were secured by owner-occupied properties.

 

 
12

 

 

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

 

Agricultural production, real estate and development lending is susceptible to credit risks including adverse weather conditions, pest and disease, as well as market price fluctuations and foreign competition. Agricultural loan underwriting standards are maintained by following Company policies and procedures in place to minimize risk in this lending segment. These standards consist of limiting credit to experienced farmers who have demonstrated farm management capabilities, requiring cash flow projections displaying margins sufficient for repayment from normal farm operations along with equity injected as required by policy, as well as providing adequate secondary repayment and sponsorship including satisfactory collateral support. Credit enhancement obtained through government guarantee programs may also be used to provide further support as available. 

 

The Company originates consumer loans utilizing common underwriting criteria specified in policy. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for 1-4 family, home equity lines and loans follow bank policy, which include, but are not limited to, a maximum loan-to-value percentage of 80%, a maximum housing and total debt ratio of 36% and 42%, respectively and other specified credit and documentation requirements.

 

The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures.

 

 

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Non-accrual loans, segregated by class of loans, were as follows:

 

(in thousands)

 

September 30, 2015

   

December 31, 2014

 

Commercial real estate:

               

Commercial real estate- construction

  $ 0     $ 0  

Commercial real estate- mortgages

    0       1,296  

Land

    2,918       2,995  

Farmland

    57       72  

Commercial and industrial

    1,314       337  

Consumer

    0       0  

Consumer residential

    0       0  

Agriculture

    0       0  

Total non-accrual loans

  $ 4,289     $ 4,700  

 

 
13

 

 

Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income of approximately $71,000 and $224,000 in the three and nine month periods ended September 30, 2015, as compared to $46,000 and $235,000 in the same periods of 2014.

 

The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of September 30, 2015 (in thousands):

 

September 30, 2015

 

30-59 Days Past Due

   

60-89 Days Past Due

   

Greater Than 90 Days Past Due

   

Total Past Due

   

Current

   

Total

   

Greater Than 90 Days Past Due and Still Accruing

 

Commercial real estate:

                                                       

Commercial R.E. - construction

  $ 0     $ 0     $ 0     $ 0     $ 24,205     $ 24,205     $ 0  

Commercial R.E. - mortgages

    469       0       0       469       331,426       331,895       0  

Land

    0       0       2,432       2,432       6,103       8,535       0  

Farmland

    0       0       57       57       27,647       27,704       0  

Commercial and industrial

    0       0       1,303       1,303       47,640       48,943       0  

Consumer

    0       0       0       0       638       638       0  

Consumer residential

    0       0       0       0       22,078       22,078       0  

Agriculture

    0       0       0       0       13,329       13,329       0  

Total

  $ 469     $ 0     $ 3,792     $ 4,261     $ 473,066     $ 477,327     $ 0  

 

 

 

The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of December 31, 2014 (in thousands):

 

December 31, 2014

 

30-59 Days Past Due

   

60-89 Days Past Due

   

Greater Than 90 Days Past Due

   

Total Past Due

   

Current

   

Total

   

Greater Than 90 Days Past Due and Still Accruing

 

Commercial real estate:

                                                       

Commercial R.E. - construction

  $ 0     $ 0     $ 0     $ 0     $ 9,181     $ 9,181     $ 0  

Commercial R.E. - mortgages

    35       1,296       0       1,331       314,175       315,506       0  

Land

    0       0       2,493       2,493       8,127       10,620       0  

Farmland

    0       0       72       72       23,019       23,091       0  

Commercial and industrial

    14       0       323       337       53,714       54,051       0  

Consumer

    0       0       0       0       805       805       0  

Consumer residential

    0       0       0       0       25,464       25,464       0  

Agriculture

    0       0       0       0       15,753       15,753       0  

Total

  $ 49     $ 1,296     $ 2,888     $ 4,233     $ 450,238     $ 454,471     $ 0  

 

 

 

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. There was no interest income realized on impaired loans for the three and nine months ended September 30, 2015 and 2014. Average recorded investment in impaired loans was $4.33 million and $4.42 million for the three and nine months ended September 30, 2015, as compared to $3.81 million and $4.1 million for the same periods of 2014. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

 

 
14

 

 

Impaired loans as of September 30, 2015 and December 31, 2014 are set forth in the following table.

 

 

(in thousands)

 

Unpaid Contractual Principal Balance

   

Recorded Investment With No Allowance

   

Recorded Investment With Allowance

   

Total Recorded Investment

   

Related Allowance

 

September 30, 2015

                                       

Commercial real estate:

                                       

Commercial R.E. - construction

  $ 0     $ 0     $ 0     $ 0     $ 0  

Commercial R.E. - mortgages

    0       0       0       0       0  

Land

    3,284       0       2,918       2,918       833  

Farmland

    0       57       0       57       0  

Commercial and Industrial

    1,379       326       988       1,314       70  

Consumer

    0       0       0       0       0  

Consumer residential

    0       0       0       0       0  

Agriculture

    0       0       0       0       0  

Total

  $ 4,663     $ 383     $ 3,906     $ 4,289     $ 903  

 

December 31, 2014

                                       

Commercial real estate:

                                       

Commercial R.E. - construction

  $ 0     $ 0     $ 0     $ 0     $ 0  

Commercial R.E. - mortgages

    1,301       0       1,296       1,296       125  

Land

    3,215       0       2,995       2,995       868  

Farmland

    80       72       0       72       0  

Commercial and Industrial

    359       337       0       337       0  

Consumer

    0       0       0       0       0  

Consumer residential

    0       0       0       0       0  

Agriculture

    0       0       0       0       0  

Total

  $ 4,956     $ 409     $ 4,291     $ 4,700     $ 993  

 

 

 

Average recorded investment in impaired loans is set forth in the following table.

 

 

    Average Recorded Investment for the:  
       
(in thousands)  

Three Months

Ended
September 30,

2015

   

Nine Months

Ended

September 30,

2015

   

Three Months

Ended

September 30,

2014

   

Nine Months

Ended

September 30, 

2014

 
Commercial real estate:                                
Commercial R.E. - construction   $ 0     $ 0     $ 0     $ 0  
Commercial R.E. - mortgages     0       216       0       523  
Land     2,931       2,961       3,383       3,202  
Farmland     59       64       80       85  

Commercial and Industrial

    1,335       1,182       345       293  

Consumer

    0       0       0       0  

Consumer residential

    0       0       0       0  

Agriculture

    0       0       0       0  

Total

  $ 4,325     $ 4,423     $ 3,808     $ 4,103  

  

 
15

 

 

Troubled Debt Restructurings – In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

 

At September 30, 2015, there were 5 loans that were considered to be troubled debt restructurings, all of which are considered non-accrual totaling $3,244,000. At December 31, 2014, there were 5 loans that were considered to be troubled debt restructurings, all of which are considered non-accrual totaling $3,332,000. At September 30, 2015 and December 31, 2014 there were no unfunded commitments on loans classified as a troubled debt restructures. We have allocated $833,000 and $868,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of September 30, 2015 and December 31, 2014, respectively.

 

The modification of the terms of such loans typically includes one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date; or a temporary payment modification in which the payment amount allocated towards principal was reduced. In some cases, a permanent reduction of the accrued interest on the loan is conceded. During the three months ended September 30, 2015 and 2014, no loans were modified as troubled debt restructurings. During the nine months ended September 30, 2015, two loans were modified as troubled debt restructurings by extending the maturity dates, as compared to four loans that were modified during the nine month period of 2014 by reducing the interest rates and extending the maturity dates.

 

 

The following tables presents loans by class modified as troubled debt restructurings that occurred during the nine month periods ended September 30, 2015 and 2014:

 

   

Nine Months Ended

   

Nine Months Ended

 

(dollars in thousands)

 

September 30, 2015

   

September 30, 2014

 
                                     
   

Number of Loans

   

Pre- Modification Outstanding Recorded Investment

   

Post- Modification Outstanding Recorded Investment

   

Number of Loans

   

Pre- Modification Outstanding Recorded Investment

   

Post- Modification Outstanding Recorded Investment

 
                                                 

Commercial real estate:

                                               

Commercial R.E. - construction

    0     $ 0     $ 0       0