The following discussion of financial condition as of December 31, 2022 and 2021 and results of operations for each of the years in the two-year period ended December 31, 2022 should be read in conjunction with our consolidated financial statements and related notes thereto, included in this report. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read "Special Note Regarding Forward-Looking Statements" included in this report. Introduction Our continued focus on responsible community banking fundamentals and our strong customer relationships have enabled us to increase our market presence through growth in our loan portfolio, which is primarily funded by steady core deposit growth.
As of December 31, 2022, we had approximately $1.97 billion in total assets, $0.92 billion in total gross loans, and $1.81 billion in total deposits.
We believe the following were key indicators of our performance during 2022:
? Total assets increased to $1.97 billion at the end of 2022, an increase of
0.2%, from $1.96 billion at the end of 2021.
? Total deposits increased to $1.814 billion at the end of 2022, an increase of
0.4%, from $1.807 billion at the end of 2021.
? Total net loans increased to $905 million at the end of 2022, an increase of
6.7%, from $848 million at the end of 2021.
? Net interest income increased to $60.1 million in 2022, an increase of $11.2
million or 23.0%, compared to $48.8 million in 2021, mainly as a result of
rising interest rates and growth of our loan and investment portfolios.
? Changes in total assets, deposits, loans and net interest income as described
above were impacted by PPP loans, which had outstanding balances of $2 million
and $31 million, as of December 31, 2022 and 2022, respectively.
? Reversal of loan loss provisions totaling $1,350,000 and $635,000 were
recorded in 2022 and 2021, respectively, mainly due to credit quality
improvements and the reversal of $1.1 million in 2022 of a qualitativeadjustment in the loan loss reserve corresponding to the COVID-19 pandemic
that was originally recorded during 2020.
? The ratio of total non-performing loans to total loans remained at 0.00% as of
December 31, 2022 and 2021.
? Total noninterest income increased to $5.6 million in 2022, an increase of
2.7%, from $5.4 million in 2021, which is mainly due to increases in debit
card transaction fee income. ? Total noninterest expense increased from $33.2 million in 2021 to $37.3
million in 2022, primarily due to staffing increases and general operating
costs necessary to support the growing loan and deposit portfolios.
? Provision from income taxes increased by $1.4 million to $6.8 million in 2022,
due to higher pre-tax income.
These items, as well as other factors, contributed to the increase in net income for 2022 to $22.9 million from $16.3 million in 2021, which translates into $2.79 per diluted share in 2022 as compared to $2.00 per diluted share in 2021.
Over the past several years, our network of branches and loan production offices
have expanded geographically. We currently maintain eighteen full-service
offices. We intend to continue our growth strategy in future years through the
opening of additional branches and loan production offices as our needs and
resources permit.
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Table of Contents 2023 Outlook As we begin our strategic business plan for 2023, we remained focused on relationship-based expansion throughout our market area. We plan to continue to focus on increasing our loan-to-deposit ratio to expand our net interest margin, while attempting to control expenses and credit losses. Unfavorable trends in our economy prompted the Federal Reserve Open Market Committee, or FOMC, to decrease the target federal funds rate by 0.75% and 1.50% in 2019 and 2020, respectively. The decreased market interest rates from 2019 through 2020 had a negative impact on net interest income mainly because our balance sheet is slightly asset sensitive. In 2022, that trend reversed and we recognized yield increases on our earning assets due to the FOMC rate hikes. We expect this positive impact will continue to some degree due to continued repricing of existing loans and investment securities, until FOMC decide to lower rates. Rate decreases are possible towards the end of 2023, and the potential compression of net interest income and net interest margin could occur if interest rates decline, given that our balance sheet is asset sensitive to interest rate changes primarily due to the number of variable rate loans and a high level of interest-earning cash balances. This could in turn result in further decrease on the yield of earning assets compared to the cost of deposits and other funds, which remain at historic lows and cannot reasonably be further reduced. Given our asset sensitive balance sheet, we expect our net interest income to benefit from interest rate increases, but we expect any such benefit to be proportional to the increase in rates. If we experience an increase in our yield on earnings assets, we could then determine to increase the interest rates we pay on our deposit accounts or change our promotional or other interest rates on new deposits in marketing activation programs to attempt to achieve a certain net interest margin. That said, in light of the current economic environment, if the rates increase is modest, it may not be possible to manage the interest margin in this manner, as competitive pressures may dictate that we increase deposit rates at a faster rate than the earning assets increase, thereby offsetting any gains to the net interest margin. The economies and real estate markets in our primary market areas are expected to continue to be significant determinants of the quality of our assets in future periods and, thus, our results of operations, liquidity and financial condition. For 2023, management remains focused on the above challenges and opportunities and other factors affecting the business similar to the factors driving the 2022 results as discussed in this section.
Critical Accounting Estimates
Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation and uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. We consider accounting estimates to be critical to our financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, (ii) management could have applied different assumptions during the reported period, and (iii) changes in the accounting estimate are reasonably likely to occur in the future and could have a material impact on our financial statements. Management has determined the following accounting estimates and related policies to be critical: Goodwill Impairment The Company applies a qualitative analysis of conditions in order to determine if it is more likely than not that the carrying value is impaired. In the event that the qualitative analysis suggests that the carrying value of goodwill may be impaired, the Company uses several quantitative valuation methodologies in evaluating goodwill for impairment that includes assumptions and estimates made concerning the future earnings potential of the organization, and a market-based approach that looks at values for organizations of comparable size, structure and business model. Estimates of fair value are based on a complex model using, among other things, estimated cash flows and industry pricing multiples. The Company tests its goodwill for impairment annually as of December 31 (the Measurement Date), and quarterly if a triggering event causes concern of a possible goodwill impairment charge. At each Measurement Date, the Company, in accordance with ASC 350-20-35-3, evaluates, based on the weight of evidence, the significance of all qualitative factors to determine whether it is more likely than not that the fair value of each of the reporting units is less than its carrying amount.
The assessment of qualitative factors at the most recent Measurement Date (December 31, 2022), indicated that it was not more likely than not that impairment existed; as a result, no further testing was performed.
35
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Table of Contents Allowance for Loan Losses Credit risk is inherent in the business of lending and making commercial loans. Accounting for our allowance for loan losses involves significant judgment and assumptions by management and is based on historical data and management's view of the current economic environment. At least on a quarterly basis, our management reviews the methodology and adequacy of allowance for loan losses and reports its assessment to the Board of Directors for its review and approval. The allowance for loan losses is an estimate of probable incurred losses with regard to our loans. Our loan loss provision for each period is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loans, delinquencies, management's assessment of the quality of the loans, the valuation of problem loans and the general economic conditions in our market area. We base our allowance for loan losses on an estimation of probable losses inherent in our loan portfolio. Our methodology for assessing loan loss allowances are intended to reduce the differences between estimated and actual losses and involves a detailed analysis of our loan portfolio, in three phases:
? the specific review of individual loans,
? the segmenting and review of loan pools with similar characteristics, and
? our judgmental estimate based on various subjective factors:
The first phase of our methodology involves the specific review of individual loans to identify and measure impairment. We evaluate each loan by use of a risk rating system, except for homogeneous loans, such as automobile loans and home mortgages. Specific risk rated loans are deemed impaired if all amounts, including principal and interest, will likely not be collected in accordance with the contractual terms of the related loan agreement. Impairment for commercial and real estate loans is measured either based on the present value of the loan's expected future cash flows or, if collection on the loan is collateral dependent, the estimated fair value of the collateral, less selling and holding costs. The second phase involves the segmenting of the remainder of the risk rated loan portfolio into groups or pools of loans, together with loans with similar characteristics, for evaluation. We determine the calculated loss ratio to each loan pool based on its historical net losses and benchmark it against the levels of other peer banks. In the third phase, we consider relevant internal and external factors that may affect the collectability of loan portfolio and each group of loan pool. The factors considered are, but are not limited to: ? concentration of credits,
? nature and volume of the loan portfolio,
? delinquency trends, ? non-accrual loan trends, ? problem loan trends, ? loss and recovery trends, ? quality of loan review,
? lending and management staff,
? lending policies and procedures,
? economic and business conditions, and
? other external factors.
Management estimates the probable effect of such conditions based on our
judgment, experience and known or anticipated trends. Such estimation may be
reflected as an additional allowance to each group of loans, if necessary.
Management reviews these conditions with our senior credit officers. To the
extent that any of these conditions is evidenced by a specifically identifiable
problem credit or portfolio segment as of the month-end evaluation date,
management's estimate of the effect of such condition may be reflected as a
specific allowance applicable to such credit or portfolio segment.
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Table of Contents
Central to our credit risk management and our assessment of appropriate loss allowance is our loan risk rating system. Under this system, the originating credit officer assigns borrowers an initial risk rating based on a thorough analysis of each borrower's financial capacity in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit administration personnel. Credits are monitored by line and credit administration personnel for deterioration in a borrower's financial condition which may impact the ability of the borrower to perform under the contract. Although management has allocated a portion of the allowance to specific loans, specific loan pools, and off-balance sheet credit exposures (which are reported separately as part of other liabilities), the adequacy of the allowance is considered in its entirety. It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the overall loan portfolio, however, the loan portfolio can be adversely affected if the State of California's economic conditions and the real estate market in our general market area deteriorate or weaken. Additionally, further weakness of a prolonged nature in the agricultural sector or general economy would have a negative impact on the local market. The effect of such economic events, although uncertain and unpredictable at this time, could result in an increase in the levels of nonperforming loans and additional loan losses, which could adversely affect our future growth and profitability. No assurance of the level of predicted credit losses can be given with any certainty. Income Taxes Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled using the liability method. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. We file income tax returns in the U.S. federal jurisdiction, and the State of California. With few exceptions, we are no longer subject to U.S. federal or state or local income tax examinations by tax authorities for years before 2018. Fair Value Measurements We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available for sale, derivatives, and loans held for sale, if any, are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record certain assets at fair value on a non-recurring basis, such as certain impaired loans held for investment and securities held to maturity that are other-than-temporarily impaired. These non-recurring fair value adjustments typically involve write-downs of individual assets due to application of lower-of-cost or market accounting. We have established and documented a process for determining fair value. We maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Whenever there is no readily available market data, management uses its best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures could have been materially different from those reflected in these financial statements. For detailed information on our use of fair value measurements and our related valuation methodologies, see Note 14 to the Consolidated Financial Statements in Item 8 of this report.
Recently Issued Accounting Standards
See Note 1 to the Consolidated Financial Statements in Item 8 of this report.
37
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Table of Contents Results of Operations The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on interest-bearing liabilities. The second is noninterest income, which primarily consists of deposit service charges and fees, the increase in cash surrender value of life insurance, investment advisory service fee income and mortgage commissions. The majority of the Company's noninterest expenses are operating costs that relate to providing a full range of banking services to our customers. Overview We recorded net income for the year ended December 31, 2022 of $22,902,000 or $2.79 per diluted share compared to $16,337,000 or $2.00 per diluted share for the year ended December 31, 2021. The increase in net income for the year ended December 31, 2022 was primarily due to an increase of $11,241,000 in net interest income, mainly from the positive impact of FOMC interest rate hikes and the growth of our loan and investment portfolios. Non-interest income increased by $145,000 in 2022, mainly as a result of increased service charges on deposit accounts. The provision for loan losses decreased compared to last year, mainly due to reversal of $1,100,000 in qualitative adjustments in the loan loss reserve that was originally recorded during 2020, corresponding to COVID-19 pandemic. Non-interest expense increased by $4,089,000 associated with staffing and general operating overhead increases to support the growth of our loan and deposit portfolios.
Highlights of the financial results are presented in the following table:
As of and for the years ended
December 31,
(Dollars in thousands, except per share data) 2022 2021
For the period: Net income available to common shareholders $ 22,902 $ 16,337 Net income per common share: Basic $ 2.80 $ 2.01 Diluted $ 2.79 $ 2.00 Return on average common equity 18.21 % 11.96 % Return on average assets 1.17 % 0.93 % Common stock dividend payout ratio of earnings during the period 10.75 % 14.50 % Efficiency ratio 54.29 % 59.43 % At period end: Book value per common share $ 15.33 $ 17.31 Total assets $ 1,968,346 $ 1,964,478 Total gross loans $ 915,758 $ 860,037 Total deposits $ 1,814,297 $ 1,806,966 Net loan-to-deposit ratio 49.88 % 46.92 %
Net Interest Income and Net Interest Margin
Our primary source of revenue is net interest income, which is the difference
between interest and fees derived from earning assets and interest paid on
liabilities obtained to fund those assets. Our net interest income is affected
by changes in the level and mix of interest-earning assets and interest- bearing
liabilities, referred to as volume changes. Our net interest income is also
affected by changes in the yields earned on assets and rates paid on
liabilities, referred to as rate changes. Interest rates charged on our loans
are affected principally by the demand for such loans, the supply of money
available for lending purposes and competitive factors. Those factors are, in
turn, affected by general economic conditions and other factors beyond our
control, such as federal economic policies, the general supply of money in the
economy, legislative tax policies, governmental budgetary matters, and the
actions of the Federal Reserve Board.
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Table of Contents
For a detailed analysis of interest income and interest expense, see the "Average Balance Sheets" and the "Rate/Volume Analysis" below.
Distribution, Yield and Rate Analysis of Net Income
For the Years Ended December 31,
(Dollars in 2022 2021
Thousands)
Interest Avg Interest Avg
Average Income/ Rate/ Average Income/ Rate/
Balance Expense Yield Balance Expense Yield
Assets:
Earning assets:
Gross loans (1) (2) $ 888,135 $ 38,972 4.39 % $ 944,477 $ 43,852 4.64 %
Securities -
tax-exempt (2) 278,859 10,367 3.72 % 131,799 4,602 3.49 %
Securities -
taxable 194,034 5,935 3.06 % 94,686 1,753 1.85 %
Federal funds sold 22,164 415 1.87 % 33,376 36 0.11 %
Interest-earning
deposits 495,854 7,738 1.56 % 437,515 601 0.14 %
Total
interest-earning
assets 1,879,046 63,427 3.38 % 1,641,853 50,844 3.10 %
Total noninterest
earning assets 83,576 111,944
Total Assets $ 1,962,622 $ 1,753,797
Liabilities and
Shareholders'
Equity:
Interest-bearing
liabilities:
Demand 481,515 452 0.09 % 380,185 411 0.11 %
Money market 417,896 481 0.12 % 358,037 377 0.11 %
Savings 167,582 82 0.05 % 140,999 69 0.05 %
Time deposits
$250,000 and under 23,365 58 0.25 % 21,987 61 0.28 %
Time deposits over
$250,000 17,339 46 0.27 % 17,064 53 0.31 %
Total
interest-bearing
liabilities 1,107,697 1,119 0.10 % 918,272 971 0.11 %
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits 709,150 682,705
Other liabilities 20,004 16,209
Total
noninterest-bearing
liabilities 729,154 698,914
Shareholders'
equity 125,771 136,611
Total liabilities
and shareholders'
equity $ 1,962,622 $ 1,753,797
Net interest income $ 62,308 $ 49,873
Net interest spread
(3) 3.27 % 2.99 %
Net interest margin
(4) 3.32 % 3.04 %
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(1) Loan fees have been included in the calculation of interest income.
(2) Yields on municipal securities and loans have been adjusted to their
fully-taxable equivalents (FTE), based on a federal marginal tax rate of
21.0%.
(3) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(4) Represents net interest income as a percentage of average interest-earning
assets.
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Table of Contents
Net interest income, on a fully tax equivalent basis ("FTE"), increased
$12,435,000 or 24.9% to $62,308,000 for the year ended December 31, 2022,
compared to $49,873,000 in 2021. Net interest spread and net interest margin
were 3.27% and 3.32%, respectively, for the year ended December 31, 2022,
compared to 2.99% and 3.04%, respectively, for the year ended December 31, 2021.
This upward trend is mainly due to the FOMC rate hikes that begin in March 2022,
resulting in an increase in earning asset yields, as described below.
Our earning asset yield increased 28 basis points in 2022 compared to 2021. The
FOMC increased the federal funds target rate from a range of 0% to 0.25% at the
beginning of 2022, to 4.25% to 4.50% by the end of the year. All earning asset
yields benefited from these increases, especially our interest-bearing cash
accounts that receive the full impact of those increases. These cash balances
averaged $516 million in 2022, representing over 25% of total average assets.
The Bank implemented a strategy to deploy cash funds into our investment
portfolio, which increased by $246 million on average during 2022, further
expanding our earning asset yield. The yield on loans recognized a decrease of
25 basis points for 2022 as compared to 2021, primarily due to a decrease in fee
income on PPP loans of $6,409,000. These loan fees were paid by the SBA at the
time the loans were funded and were scheduled to be deferred over the life of
the PPP loans, and thus unamortized amounts were fully recognized upon receipt
of the forgiveness payments. Growth in the core loans, which excludes PPP loans,
was $84 million, combined with the upward repricing of variable rate loans and
higher rate indexes on new loans, helped to offset the impact of the PPP fee
decrease in 2022.
The cost of funds on interest-bearing liabilities decreased to 0.10% in 2022
compared to 0.11% in 2021 as our excess liquidity and minimal competitive
pressure has allowed us to keep deposit rates at historic lows. Average
non-interest-bearing demand deposit balances increased by $26,445,000 in 2022
compared to 2021, which contributed in maintaining our low cost of funds on
total deposits.
The net interest margin expansion the Company recognized in 2022, is due to the
factors discussed above but could reverse and result in interest margin
compression if rate indexes on assets were to fall, and/or: 1) deposit interest
rates increase due to customer demand, or competitive pressure from peer banks,
2) competition in the lending market restrict significant increases in new loan
rates, and 3) deposit growth out-paces loan growth as recognized in recent
years, resulting in higher interest-bearing cash balances, which offer a lower
yields than loans and investments.
Changes in volume resulted in an increase in net interest income (on a FTE
basis) of $4,235,000 for the year of 2022 compared to the year 2021, and changes
in interest rates and the mix resulted in an increase in net interest income (on
a FTE basis) of $8,200,000 for the year 2022 versus the year 2021. Management
closely monitors both total net interest income and the net interest margin.
Market rates are in part based on the FOMC target Federal funds interest rate
(the interest rate banks charge each other for short-term borrowings). The
change in the Federal funds sold rates is the result of target rate changes
implemented by the FOMC. In 2020, the FOMC decreased the Federal funds rate by
0.50% and 1.00% on two occasions in March resulting in a range of 0.00% to 0.25%
as of December 31, 2020 and 2021. In 2022, the FOMC raised the federal funds
rate seven times by an aggregate of 4.00% for 2022. In February 2023, the FOMC
raised the the Federal funds rate by 0.25% resulting in a range of 4.50% to
4.75%. If FOMC were to cut rates in 2023 or thereafter, we expect this would
have a negative impact on our net interest income, due to repricing of
interest-bearing cash balances, existing loans and investment securities.
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Table of Contents
Rate/Volume Analysis
The following table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in average volume multiplied by old rate); and (ii) changes in rates (change in
rate multiplied by old average volume). Changes in rate/volume (change in rate
multiplied by the change in volume) have been allocated to the changes due to
volume and rate in proportion to the absolute value of the changes due to volume
and rate prior to the allocation.
Rate/Volume Analysis of Net Interest Income
For the Year Ended December 31, For the Year Ended December 31,
(Dollars in
Thousands) 2022 vs. 2021 2021 vs. 2020
Increases (Decreases) Increases (Decreases)
Due to Change In Due to Change In
Volume Rate Total Volume Rate Total
Interest income:
Net loans (1) $ (2,616 ) $ (2,264 ) $ (4,880 ) $ 598 $ 3,214 $ 3,812
Securities - tax
exempt 5,135 630 5,765 659 (135 ) 524
Securities - taxable 1,839 2,343 4,182 (260 ) (388 ) (648 )
Federal funds sold (12 ) 391 379 36 (57 ) (21 )
Interest-earning
deposits 80 7,057 7,137 1,434 (1,294 ) 140
Total interest income 4,426 8,157 12,583 2,467 1,340 3,807
Interest expense:
Interest-earning DDA $ 110 $ (69 ) $ 41 $ 146 $ (262 ) $ (116 )
Money market deposits 63 41 104 131 (156 ) (25 )
Savings deposits 13 0 13 20 0 20
Time deposits
$250,000 and under 4 (7 ) (3 ) 5 0 5
Time deposits over
$250,000 1 (8 ) (7 ) 5 (37 ) (32 )
Borrowed funds 0 0 0 (34 ) 0 (34 )
Total interest
expense 191 (43 ) 148 273 (455 ) (182 )
Change in net
interest income $ 4,235 $ 8,200 $ 12,435 $ 2,194 $ 1,795 $ 3,989--------------------------------------------------------------------------------
(1) Loan fees have been included in the calculation of interest income.
Provision for Loan Losses
Credit risk is inherent in the business of making loans. The Company establishes
an allowance for loan losses through charges to earnings, which are shown in the
consolidated statements of income as the provision for loan losses. Specifically
identifiable and quantifiable losses are promptly charged off against the
allowance. The Company maintains the allowance for loan losses at a level that
it considers to be adequate to provide for credit losses inherent in its loan
portfolio. Management determines the level of the allowance by performing a
quarterly analysis that considers concentrations of credit, past loss
experience, current economic conditions, the amount and composition of the loan
portfolio (including nonperforming and potential problem loans), estimated fair
value of underlying collateral, and other information relevant to assessing the
risk of loss inherent in the loan portfolio such as loan growth, net
charge-offs, changes in the composition of the loan portfolio, and
delinquencies. As a result of management's analysis, a range of the potential
amount of the allowance for loan losses is determined.
The Company recorded provision for loan loss reversals totaling $1,350,000 and
$635,000 during the years ended December 31, 2022 and 2021, respectively.
Included in 2022, was the reversal of approximately $1,100,000 for the
qualitative adjustment corresponding to the COVID-19 pandemic, which was
initially recorded during the second quarter of 2020 and totaled $1,620,000 at
that time. The Company did not have any nonperforming loans as of December 31,
2022 and 2021. The allowance for loan losses was $9,468,000 and $10,738,000 as
of December 31, 2022 and 2021, or 1.03% and 1.25%, respectively, of total loans.
The decrease as a percentage of total loans is due to the previously mentioned
loan loss provision reversals. The strong credit quality has resulted in net
loan recoveries of $80,000 and $76,000 in 2022 and 2021, respectively.
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Table of Contents
The Company will continue to monitor the adequacy of the allowance for loan losses and make additions to the allowance in accordance with the analysis referred to above. Because of uncertainties inherent in estimating the appropriate level of the allowance for loan losses, actual results may differ from management's estimate of credit losses and the related allowance.
Noninterest Income
The following table sets forth a summary of noninterest income for the periods
indicated:
(in thousands) For the Year Ended December 31,
2022 2021 Year-Over-Year
$ %
Amount % Amount % Change Change
Service charges on deposits $ 1,596 28.6 % $ 1,287 23.7 % $ 309 24.0 %
Debit card transaction fee
income 1,734 31.1 % 1,693 31.2 % 41 2.4 %
Earnings on cash surrender
value of life insurance 749 13.4 % 719 13.3 % 30 4.2 %
Mortgage commissions 73 1.3 % 152 2.8 % (79 ) -52.0 %
Gains on calls of
available-for-sale
securities 0 0.0 % 154 2.8 % (154 ) -100.0 %
Other income 1,419 25.6 % 1,421 26.2 % (2 ) -0.1 %
Total non-interest income $ 5,571 100.0 % $ 5,426 100.0 % $ 145 2.7 %
Average assets $ 1,962,622 $ 1,753,797
Noninterest expenses as a %
of average assets 0.3 % 0.3 %
Noninterest income was $5,571,000 for the year ended December 31, 2022, compared
to $5,426,000 for the year 2021. Service charge income increased to $1,596,000
in 2022 compared to $1,287,000 for 2021, due to an increase in overdraft fees
and the number of checking accounts. Debit card transaction fee income increased
to $1,734,000 in 2022 as compared to $1,693,000 in 2021, as a result of the
increase in the aggregate number of transaction deposit accounts and
corresponding service fee income, and a spending trend shifting to debit cards
payments in recent years. Earnings on the cash surrender value of life insurance
recognized an increase of $30,000 in 2022 compared to 2021, due to higher yields
earned on certain life insurance policies. Mortgage commissions have decreased
by $79,000 for the year 2022, as compared to 2021, as a result of the decreased
demand for home purchases and refinancing. Gains on called and sold securities
decreased from $154,000 in 2021 to $0 in 2022. In 2022, other income decreased
by $2,000. The Company continues to evaluate its deposit product offerings with
the intention of continuing to expand its offerings to the consumer and business
depositors.
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Table of Contents
Noninterest Expense
The following table sets forth a summary of noninterest expenses for the periods
indicated:
(in thousands) For the Year Ended December 31,
2022 2021 Year-Over-Year
$ %
Amount % Amount % Change Change
Salaries and employee
benefits $ 23,045 61.8 % $ 20,210 60.7 % $ 2,835 14.0 %
Occupancy expenses 4,151 11.1 % 3,972 12.0 % 179 4.5 %
Data processing fees 2,343 6.3 % 2,117 6.4 % 226 10.7 %
Regulatory assessments
(FDIC & DFPI) 927 2.5 % 649 2.0 % 278 42.8 %
Other operating expenses 6,842 18.3 % 6,271 18.9 % 571 9.1 %
Total non-interest expense $ 37,308 100.0 % $ 33,219 100.0 % $ 4,089 12.3 %
Average assets $ 1,962,622 $ 1,753,797
Noninterest expenses as a %
of average assets 1.9 % 1.9 %
Noninterest expense was $37,308,000 for the year ended December 31, 2022, an
increase of $4,089,000 or 12.3% compared to $33,219,000 for the year ended 2021.
Salaries and employee benefits increased by $2,835,000 in 2022, due to expansion
of our staff to support loan and deposit growth. Included in the salary and
benefit expense total is deferred loan cost accounting adjustments of $694,000
against salary expense in 2021, corresponding to PPP loans funded, which further
contributed to the increase in salary and benefit expense in 2022.
Occupancy expense realized an increase of $179,000 in 2022 compared to the prior year, primarily from rent, utilities and facility maintenance increases on certain branch locations.
Data processing costs increased in 2022 over 2021 by $226,000, primarily due to servicing costs on the growing number of loan and deposit accounts.
FDIC and DFPI regulatory assessments increased by $278,000 in 2022 compared to
2021, mainly due increases in our deposit balances and normal fluctuations in
the assessment rate. The initial base assessment rate for financial institutions
varies based on the overall risk profile of the institution as defined by the
FDIC and the Company's risk profile has remained at relatively stable levels in
recent years. Modest increases in the assessment rate during 2021 and 2022
related to normal business cycles but still remains relatively low. Management
recognizes that assessments could increase further depending on deposit growth
throughout the remainder of 2023, as the FDIC assessment rates are applied to
average quarterly total liabilities as the primary basis.
Other operating expenses increased by $571,000 or 9.1% in 2022, primarily as a
result of various general operating expense increases required to support our
growing business portfolios and compliance mandates, some of which included
legal expenses, software license fees and ATM processing expenses.
Management anticipates that noninterest expense should continue to increase as
we continue to grow, and management believes the Company's administration as
currently set up is scalable to handle future deposit growth. However,
management remains committed to cost-control and efficiency, and we expect to
keep these increases to a minimum relative to growth.
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Table of Contents Provision for Income Taxes We reported a provision for income taxes of $6,787,000 and $5,340,000 for the years 2022 and 2021, respectively. The effective income tax rate on income from continuing operations was 22.9% for the year ended December 31, 2022, compared to 24.6% for the year 2021. These provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income and adjusted for the effects of all permanent differences between income for tax and financial reporting purposes (such as earnings on qualified municipal securities, BOLI and certain tax-exempt loans). The disparity between the effective tax rates for 2022 as compared to 2021 is primarily due to tax credits from low-income housing projects as well as tax-free income on municipal securities and loans that comprised a larger proportion of pre-tax income in 2022 as compared to 2021. Financial Condition The Company's total assets were $1,968,346,000 at December 31, 2022 compared to $1,964,478,000 at December 31, 2021, an increase of $3,868,000 or 0.2%. Net loans increased by $57,188,000, investments increased $264,148,000, bank premises and equipment decreased $122,000, interest receivable and other assets increased $30,628,000, while cash and cash equivalents decreased $348,634,000 for the year ended December 31, 2022 as compared to December 31, 2021. Loans gross of the allowance for loan losses and deferred fees were $915,758,000 as of December 31, 2022, compared to $860,037,000 as of December 31, 2021, an increase of $55,721,000 or 6.5%. The increase was due to an increase of $90,837,000 or 13.2% in commercial real estate loans, an increase of $3,381,000 or 11.7% in consumer loans and consumer residential loans, a decrease of $11,449,000 or 35.2% in agriculture loans, and a decrease of $27,048,000 or 24.7% in commercial and industrial loans which included a decrease of $28,672,000 in PPP loans,. The PPP loans changed the composition of the loan portfolio categories, but excluding those loans, the composition remained relatively unchanged as a percentage of total loans, with commercial real estate comprising 85% and 80% of the loan portfolio at December 31, 2022 and 2021, respectively. Deposits increased $7,331,000 or 0.4% to $1,814,297,000 as of December 31, 2022 compared to $1,806,966,000 at December 31, 2021. Money Market and Savings increased by $4,725,000 and $10,763,000, respectively, while Demand and Time Deposits decreased by $7,832,000 and $325,000, respectively, as of December 31, 2022 as compared to December 31, 2021. There were no short-term borrowing or long-term debt outstanding balances at December 31, 2022 and 2021. The Company uses short-term borrowings, primarily short-term FHLB advances, to fund short-term liquidity needs, if needed, and manage net interest margin. Equity decreased $15,986,000 or 11.2% to $126,626,000 as of December 31, 2022, compared to $142,612,000 at December 31, 2021. Equity decreased due to the negative impact rising rates had on our unrealized loss on available-for-sale investment securities. Investment Activities Investments are a key source of interest income. Management of our investment portfolio is set in accordance with strategies developed and overseen by our Investment Committee. Investment balances, including cash equivalents and interest-bearing deposits in other financial institutions, are subject to change over time based on our asset/liability funding needs and interest rate risk management objectives. Our liquidity levels take into consideration anticipated future cash flows and all available sources of credits and are maintained at levels management believes are appropriate to assure future flexibility in meeting anticipated funding needs.
Cash Equivalents and Interest-bearing Deposits in other Financial Institutions
The Company holds federal funds sold, unpledged available-for-sale securities
and salable government guaranteed loans to help meet liquidity requirements and
provide temporary holdings until the funds can be otherwise deployed or
invested. As of December 31, 2022, and 2021, we had $13,830,000 and $42,935,000,
respectively, in federal funds sold.
Investment Securities
Management of our investment securities portfolio focuses on providing an
adequate level of liquidity and establishing an interest rate-sensitive
position, while earning an adequate level of investment income without taking
undue risk. Investment securities that we intend to hold until maturity are
classified as held-to-maturity securities, and all other investment securities
are classified as either available-for-sale or equity securities. Currently, all
of our investment securities are classified as available-for-sale, except for
one mutual fund classified as an equity security.
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The fair value of the equity security was $2,990,000 and $3,391,000 at December 31, 2022 and December 31, 2021, respectively. Consistent with ASU 2016-01, equity securities are carried at fair value with the changes in fair value recognized in the consolidated statement of income. Accordingly, the Company recognized unrealized losses of $475,000 and $99,000 during the years ended December 31, 2022 and 2021, respectively. Our available-for-sale investment securities holdings increased by $264,549,000 or 100.6% to $527,438,000 at December 31, 2022, compared to holdings of $262,889,000 at December 31, 2021. The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income. Total investment securities as a percentage of total assets increased to 26.9% as of December 31, 2022 compared to 13.6% at December 31, 2021. As of December 31, 2022, $242,023,000 of the investment securities were pledged to secure public deposits. As of December 31, 2022, the total unrealized loss on debt securities that were in a loss position for less than 12 continuous months was $26,374,000 with an aggregate fair value of $369,614,000. The total unrealized loss on debt securities that were in a loss position for greater than 12 continuous months was $18,306,000 with an aggregate fair value of $76,760,000.
The following table summarizes the maturity and repricing schedule of our debt investment securities, which does not include equity securities, at their amortized cost and their weighted average yields at December 31, 2022:
Debt Investment Maturities and Repricing Schedule
(Dollars in
Thousands) After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Available-for-sale: U.S. agencies $ 62,000 1.01 % $ 1,334 1.00 %
$ 2,183 4.58 % $ 28,625 3.20 % $ 94,142 1.76 % Collateralized mortgage obligations 0 0.00 % 0 0.00 %
0 0.00 % 5,094 3.75 % 5,094 3.75 %
Municipalities 21,641 4.43 % 118,701 4.04 % 216,866 3.57 % 4,435 5.07 % 361,643 3.79 %
SBA pools 0 0.00 % 615 2.69 % 1,378 5.26 % 365 5.72 % 2,358 4.66 %
Corporate debt 22,000 2.08 % 25,512 3.54 % 0 0.00 % 0 0.00 % 47,512 2.86 %
Asset backed
securities 0 0.00 % 1,121 5.04 % 17,853 6.66 % 41,339 5.65 % 60,313 5.94 %
Total debt
securities $ 105,641 1.93 % $ 147,283 3.93 % $ 238,280 3.82 % $ 79,858 4.62 % $ 571,062 3.61 %
Yields in the above table have been adjusted to a fully tax equivalent basis.
The yields are calculated using a weighted average method based on the
investment security balances as of December 31, 2022. Securities are reported at
the earliest possible call, repricing or maturity date.
Loans
Our residential loan portfolio includes no sub-prime loans, nor is it our normal
practice to underwrite loans commonly referred to as "Alt-A mortgages", the
characteristics of which are loans lacking full documentation, borrowers having
low FICO scores or collateral compositions reflecting high loan-to-value ratios.
Substantially all of our residential loans are indexed to U.S. Treasury Constant
Maturity Rates and have provisions to reset five years after their origination
dates.
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The following table summarizes our commercial real estate loan portfolio by the
geographic location in which the property is located as of December 31, 2022 and
2021:
(Dollars in Thousands) December 31, 2022 December 31, 2021
% of % of
Commercial Commercial
Commercial real estate loans by Real Estate Real Estate
geographic location (County) Amount Loans Amount Loans
Stanislaus $ 195,176 25.0 % $ 188,118 27.3 %
San Joaquin 176,797 22.7 % 154,258 22.4 %
Sacramento 82,766 10.6 % 71,418 10.4 %
Fresno 54,747 7.0 % 51,177 7.4 %
Tuolumne 32,023 4.1 % 29,317 4.3 %
Merced 29,024 3.7 % 17,293 2.5 %
Shasta 19,547 2.5 % 16,279 2.4 %
Alameda 13,307 1.7 % 11,770 1.7 %
Solano 12,217 1.6 % 7,101 1.0 %
Contra Costa 12,044 1.5 % 12,481 1.8 %
Sonoma 12,002 1.5 % 12,329 1.8 %
Yolo 11,911 1.5 % 10,034 1.5 %
Marin 11,175 1.4 % 11,371 1.6 %
Placer 9,979 1.3 % 2,242 0.3 %
San Diego 9,905 1.3 % 6,456 0.9 %
Sutter 8,537 1.1 % 4,101 0.6 %
Inyo 5,452 0.7 % 5,644 0.8 %
Mono 5,315 0.7 % 5,255 0.8 %
Other 78,041 10.1 % 72,484 10.5 %
Total $ 779,965 100.0 % $ 689,128 100.0 %
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Construction and land loans are classified as commercial real estate loans and
increased $15.0 million in 2022 as compared to 2021. The table below shows an
analysis of construction and land loans by type and location. Non-owner-occupied
land loans of $8.7 million as of December 31, 2022 included loans for lands
specified for commercial development of $6.9 million and for residential
development of $1.8 million, the majority of which are located in Stanislaus
County.
Construction and Land Loans Outstanding by Type and Geographic Location
(Dollars in Thousands) December 31, 2022 December 31, 2021
% of % of
Construction Construction
and Land and Land
Construction and land loans by type Amount Loans Amount Loans
Single family non-owner-occupied $ 1,679 3.8 % $ 1,954 6.8 %
Single family owner-occupied 275 0.6 % 1,076 3.7 %
Commercial non-owner-occupied 21,985 50.3 % 14,685 50.9 %
Commercial owner-occupied 7,318 16.7 % 8,022 27.8 %
Land non-owner-occupied 12,539 28.6 % 3,101 10.8 %
Total $ 43,796 100.0 % $ 28,838 100.0 %
% of % of
Construction Construction
Construction and land loans by and Land and Land
geographic location (County) Amount Loans Amount Loans
San Joaquin $ 11,635 26.6 % $ 4,278 14.8 %
Fresno 7,215 16.5 % 3,565 12.4 %
Shasta 4,854 11.1 % 4,742 16.4 %
Merced 4,474 10.2 % 3,990 13.8 %
Stanislaus 4,327 9.9 % 8,396 29.1 %
Sacramento 3,929 9.0 % 0 0.0 %
Placer 1,860 4.2 % 0 0.0 %
Mono 762 1.7 % 805 2.8 %
Tuolumne 618 1.4 % 198 0.7 %
Other 4,122 9.4 % 2,864 10.0 %
Total $ 43,796 100.0 % $ 28,838 100.0 %
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Loan Maturities
The following table shows the contractual maturity distribution and repricing
intervals of the outstanding loans in our portfolio, as of December 31, 2022. In
addition, the table shows the distribution of such loans between those with
variable or floating interest rates and those with fixed or predetermined
interest rates. The large majority of the variable rate loans are tied to
independent indices (such as the Wall Street Journal prime rate or a Treasury
Constant Maturity Rate). Substantially all loans with an original term of more
than five years have provisions for the fixed rates to reset, or convert to a
variable rate, after one, three or five years and are therefore classified as a
variable rate loan in the table below.
Loan Maturities and Repricing Schedule
At December 31, 2022
After 1 But After 5 But
Within Within Within 15 After
1 Year 5 Years Years 15 Years Total
Commercial real estate $ 65,509 $ 298,434 $ 415,251 $ 771 $ 779,965
Commercial & industrial 35,302 29,450 17,751 3 82,506
Consumer 158 163 20 34 375
Consumer residential 3,099 15,440 6,885 6,437 31,861
Agriculture 17,955 2,417 679 0 21,051
Unearned income (167 ) (474 ) (604 ) (10 ) (1,255 )
Total loans, net of unearned
income $ 121,856 $ 345,430 $ 439,982 $ 7,235 $ 914,503
Loans with variable
(floating) interest rates $ 102,135 $ 239,696 104,016 $ 5,953 $ 451,800
Loans with predetermined
(fixed) interest rates $ 19,721 $ 105,734 335,966 $ 1,282 $ 462,703
The majority of the properties taken as collateral are located in Northern
California. We employ strict guidelines regarding the use of collateral located
in less familiar market areas. Positive trends in Northern California real
estate values, the low loan-to-value ratios in our commercial real estate
portfolio, and the high percentage of owner-occupied properties further solidify
our credit quality position.
Nonperforming Assets
Financial institutions generally have a certain level of exposure to credit
quality risk and could potentially receive less than a full return of principal
and interest if a debtor becomes unable or unwilling to repay. Since loans are
the most significant assets of the Company and generate the largest portion of
its revenues, the Company's management of credit quality risk is focused
primarily on loan quality. Banks have generally suffered their most severe
earnings declines due to customers' inability to generate sufficient cash flow
to service their debts and/or downturns in national and regional economies which
have brought about declines in overall property values. In addition, certain
debt securities that the Company may purchase have the potential of declining in
value if the obligor's financial capacity to repay deteriorates.
Nonperforming assets consist of loans on non-accrual status, loans 90 days or
more past due and still accruing interest, loans restructured, where the terms
of repayment have been renegotiated resulting in a reduction or deferral of
interest or principal and OREO.
Loans are generally placed on non-accrual status when they become 90 days past
due, unless management believes the loan is adequately collateralized and in the
process of collection. The past due loans may or may not be adequately
collateralized, but collection efforts are continuously pursued. Loans may be
restructured by management when a borrower has experienced some changes in
financial status, causing an inability to meet the original repayment terms, and
where we believe the borrower will eventually overcome those circumstances and
repay the loan in full. OREO consists of properties acquired by foreclosure or
similar means and which management intends to offer for sale. The Company did
not have any nonperforming loans as of December 31, 2022 and 2021.
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The Company held no OREO properties as of December 31, 2022. The Company held one OREO property as of December 31, 2021, a residential land property that was acquired through foreclosure that was written down to a zero balance because the public utilities have not been obtainable, thereby rendering these land lots unmarketable at this time. Accordingly, the Company had zero non-performing assets recorded on the balance sheet as of at December 31, 2022 and 2021. Allowance for Loan Losses In anticipation of credit risk inherent in our lending business, we set aside allowances through charges to earnings. Such charges are not only made for the outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend credits or letters of credit. The charges made for the outstanding loan portfolio are credited to the allowance for loan losses, whereas charges for off-balance sheet items are credited to the reserve for off-balance sheet items, which is presented as a component of other liabilities. The provision for loan losses is discussed in the section entitled "Provision for Loan Losses" above. The balance of our allowance for loan losses is management's best estimate of the probable losses inherent in the portfolio. The ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the real estate market, changes in interest rate and economic and political environments. In 2020, the economy briefly slipped into a recession following the COVID-19 pandemic which inevitability impacted the financial condition of certain borrowers. We responded by making qualitative risk-based discretionary adjustments in connection with the COVID-19 pandemic and corresponding economic stress. In 2021, the financial stress subsided to some degree and credit quality improved allowing the Company to reverse $635,000 in loan loss provisions. In 2022, that trend continued and we reversed $1,350,000, which included the remaining COVID-19 discretionary adjustment of $1,100,000. The allowance for loan losses decreased to $9,468,000 as of December 31, 2022, as compared with $10,738,000 at December 31, 2021. The allowance for loan losses as a percentage of total loans decreased to 1.03% as of December 31, 2022, as compared to 1.25% as of December 31, 2021, mainly due the provision reversal. Based on the current conditions of the loan portfolio, management believes that the $9,468,000 allowance for loan losses at December 31, 2022 is adequate to absorb losses inherent in our loan portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result in increased losses in the portfolio. Diversification, low loan-to-values, strong credit quality and enhanced credit monitoring contribute to a reduction in the portfolio's overall risk in recent years and help to offset the various inherent credit risks. We continue to monitor the impact of the economic environment, and adjustments to the provision for loan loss will be made accordingly. During 2022, the Company recognized net loan recoveries of $80,000 as compared to $76,000 in 2021. Management reviews these conditions with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Although management has allocated a portion of the allowance to specific loan categories, the adequacy of the allowance is considered in its entirety. Our allowance for loan losses consisted of amounts allocated to three phases of our methodology for assessing loan loss allowances, as follows (see details of methodology for assessing allowance for loan losses in the section entitled "Critical Accounting Estimates"): (Dollars in Thousands) Years Ended December 31, Phase of Methodology 2022 2021 Specific review of individual loans $ 0 $ 0 Review of portfolio based on loss trends and current economic climate 4,932
4,912
Review of portfolio based on inherent risk and
other subjective factors 4,536 5,826
$ 9,468 $ 10,738
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The Components of the Allowance for Loan Losses
As stated previously in "Critical Accounting Estimates," the overall allowance
consists of a specific allowance for individually identified impaired loans, an
allowance factor for categories of credits with similar characteristics and
trends, and an allowance for changing environmental factors.
The first component, the specific allowance, results from the analysis of
identified problem credits and the evaluation of sources of repayment including
collateral, as applicable. Through management's ongoing loan grading process,
individual loans are identified that have conditions that indicate the borrower
may be unable to pay all amounts due under the contractual terms. These loans
are evaluated individually by management and specified allowances for loan
losses are established when the discounted cash flows of future payments or
collateral value of collateral-dependent loans are lower than the recorded
investment in the loan. Generally, with problem credits that are
collateral-dependent, we obtain appraisals of the collateral at least annually.
We may obtain appraisals more frequently if we believe the collateral value is
subject to market volatility, if a specific event has occurred to the collateral
(e.g. tentative map has been filed), or if we believe foreclosure is
imminent. Impaired loan balances remained at zero at December 31, 2022 and 2021,
and therefore there was no specific allowances for impaired loans, as we charge
off substantially all of our estimated losses related to specifically identified
impaired loans as the losses are identified.
The second component, the allowance factor, is an estimate of the probable
inherent losses in each loan pool stratified by major categories or loans with
similar characteristics in our loan portfolio. This analysis encompasses
segmenting and reviewing historical losses, loan grades by pool and current
general economic and business conditions. Confirmation of the quality of our
grading process is obtained by independent reviews conducted by consultants
specifically hired for this purpose and by various bank regulatory agencies.
This analysis covers our entire loan portfolio but excludes any loans that were
analyzed individually for specific allowances as discussed above. There are
limitations to any credit risk grading process. The number of loans makes it
impractical to review every loan every quarter. Therefore, it is possible that
in the future, some currently performing loans not recently graded will not be
as strong as their last grading and an insufficient portion of the allowance
will have been allocated to them. Grading and loan review often must be done
without knowing whether all relevant facts are at hand. Troubled borrowers may
deliberately or inadvertently omit important information from reports or
conversations with lending officers regarding their financial condition and the
diminished strength of repayment sources.
The total amount allocated for the second component is determined by applying
loss estimation factors based on loss history to outstanding loans. As of
December 31, 2022 and 2021, the allowance allocated by categories of credits
totaled $4.9 million.
The third component of the allowance for loan losses is an economic and
qualitative component that is intended to absorb losses caused by portfolio
trends, concentration of credit, growth, and economic trends, as stated
previously in "Critical Accounting Estimates". At December 31, 2022 and 2021,
the general valuation allowance, including the economic component, totaled $4.5
million and 5.8 million, respectively. While published economic data indicates
that the economy has been in a recovery cycle during 2021 and 2022, it is
uncertain that the recovery cycle will continue for any definite period of time.
In response to this, we have been proactive in evaluating reserve percentages
for economic and other qualitative loss factors used to determine the adequacy
of the allowance for loan losses. The increase to the third component of the
allowance for loan losses reflected such evaluation.
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The table below summarizes, for the periods indicated, loan balances at the end
of each period, the daily averages during the period, changes in the allowance
for loan losses arising from loans charged off, recoveries on loans previously
charged off, additions to the allowance and certain ratios related to the
allowance for loan losses:
Allowance for Loan Losses
December 31, December 31,
(Dollars in thousands) 2022 2021
Balances:
Average total loans outstanding during period $ 888,135 $ 944,477
Total loans outstanding at end of period $ 915,758 $ 860,037
Net loan recoveries $ 80 $ 76
(Reversal) provision for loan losses $ (1,350 ) $ (635 )
Allowance for loan losses at end of period $ 9,468$ 10,738
Ratios:
Net loan recoveries to average total loans 0.01 %
0.01 % Allowance for loan losses to total loans at end of period
1.03 %
1.25 % Net loan recoveries to allowance for loan losses at end of period
0.84 % 0.71 %
Net loan recoveries to provision for loan losses NA NA
Nonperforming loans as a percentage of total loans 0.00 % 0.00 %
Allowance for loan losses as a percentage of
nonperforming loans NA NA
The table below summarizes the allowance for loan loss balance by type of loan
balance at the end of each period (See "Loan Portfolio" above for a description
of each type of loan balance):
Allocation of the Allowance for Loan Losses
(Dollars in thousands) December 31, 2022 December 31, 2021
% of % of
Allowance Allowance
for Loan for Loan
Amount Losses Amount Losses
Applicable to:
Commercial real estate $ 8,373 88.4 % $ 9,404 87.6 %
Commercial and Industrial 612 6.5 % 711 6.6 %
Consumer 5 0.1 % 6 0.1 %
Consumer Residential 306 3.2 % 327 3.0 %
Agriculture 172 1.8 % 290 2.7 %
Total Allowance $ 9,468 100.0 % $ 10,738 100.0 %
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Other Earning Assets
For various business purposes, we make investments in earning assets other than
the interest-earning securities and loans discussed above. The primary other
earning assets held by the Company as of December 31, 2022 and 2021, includes
the cash surrender value of the BOLI policies, Federal Home Loan Bank stock and
Federal Reserve Bank stock. During 2021, we purchased 17 new life insurance
policies on certain employees for a total investment of $3.4 million. During
2018 and 2022, we committed to invest $5 million and $10.5 million,
respectively, in low-income housing tax credit funds ("LIHTC") to promote our
participation in CRA activities, which had unfunded commitments of $10,154,000
and $895,000 as of December 31, 2022 and 2021, respectively. For LIHTC
investments, we receive the return in the form of tax credits and tax deductions
over a period of approximately 15 years. In 2017, we made a $1 million
commitment as a limited partner, to a small business private equity partnership
to promote our participation in CRA activities. Returns will be received in the
form of dividends from the general partner. As of December 31, 2022, we have
remaining commitments to fund an additional $300,000 on this investment.
The balances of other earning assets as of December 31, 2022 and December 31,
2021 were as follows:
December 31, December 31,
(Dollars in Thousands) 2022 2021
BOLI $ 30,218 $ 29,469
LIHTCs $ 13,627 $ 3,739
Small business private equity partnership $ 955 $ 620
Federal Reserve Bank Stock $ 755 $ 755
Federal Home Loan Bank Stock $ 4,482 $ 4,739Deposits and Other Sources of Funds
Deposits
Total deposits at December 31, 2022 and 2021 were $1,814,297,000 and
$1,806,966,000, respectively, representing an increase of $7,331,000 or 0.4% in
2022. The average deposits for the year ended December 31, 2022 increased
$215,870,000 or 13.5% to $1,816,847,000 compared to $1,600,977,000 at
December 31, 2021. Deposit data analysis has resulted in an estimate of
$922,778,000 in uninsured deposits, representing the balance that is not covered
by FDIC insurance limits as of December 31, 2022.
Deposits are the Company's primary source of funds. Due to strategic emphasis by
management, core deposits (based on a definition provided by FDIC's Uniform Bank
Performance Report) increased by $1,756,000 or 0.1% in 2022 to $1,790,161,000 at
December 31, 2022. The percentage of core deposits to total deposits decreased
slightly to 98.7% at December 31, 2022 as compared to 99.0% at December 31,
2021. The average rate paid on time deposits in denominations of over $250,000
was 0.27% and 0.31% for the years ended December 31, 2022 and 2021,
respectively. The composition and cost of the Company's deposit base are
important components in analyzing the Company's net interest margin and balance
sheet liquidity characteristics, both of which are discussed in greater detail
in other sections herein. See "Net Interest Income and Net Interest Margin" for
further discussion.
The Company's liquidity is impacted by the volatility of deposits or other
funding instruments or, in other words, by the propensity of that money to leave
the institution for rate-related or other reasons. Deposits can be adversely
affected if economic conditions in California and the Company's market area in
particular, were to weaken. Potentially, the most volatile deposits in a
financial institution are jumbo certificates of deposit, meaning time deposits
with balances that equal or exceed $250,000, as customers with balances of that
magnitude are typically more rate-sensitive than customers with smaller
balances.
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The following tables summarize the distribution of average daily deposits and the average daily rates paid for the periods indicated:
Distribution of Average Daily Deposits
Average Deposits
2022 2021
Average Average Average Average
(Dollars in Thousands) Balance Rate Balance Rate
Demand $ 1,190,665 0.04 % $ 1,062,890 0.04 %
Money market 417,896 0.12 % 358,037 0.11 %
Savings 167,582 0.05 % 140,999 0.05 %
Time deposits $250,000 and under 23,365 0.25 % 21,987 0.28 %
Time deposits over $250,000 17,339 0.27 % 17,064 0.31 %
Total deposits $ 1,816,847 0.06 % $ 1,600,977 0.06 %
The scheduled maturities of our time deposits in denominations of more than $250,000 at December 31, 2022 are as follows:
Maturities of Time Deposits over $250,000
(Dollars in Thousands)
Three months or less $ 9,583
Over three months through six months 3,063
Over six months through twelve months 1,825
Over twelve months 1,002
Total $ 15,473
Because our client base is comprised primarily of commercial and industrial
accounts, individual account balances are generally higher than those of
consumer-oriented banks. Four of our clients carry deposit balances of more than
1% of our total deposits, none of which had a deposit balance of more than 3% of
total deposits at December 31, 2022. The Company had no brokered deposits as of
December 31, 2022 and 2021.
FHLB Borrowings
Although deposits are the primary source of funds for our lending and investment
activities and for general business purposes, we may obtain advances from the
FHLB as an alternative to retail deposit funds. We had no outstanding balances
as of December 31, 2022 and 2021. The average balance of FHLB advances
outstanding in 2022 and 2021 was $0. See "Liquidity Management" below for the
details on the FHLB borrowings program.
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Deferred Compensation Obligations
We maintain a nonqualified, unfunded deferred compensation plan for certain key management personnel. Under this plan, participating employees may defer compensation, which will entitle them to receive certain payments upon retirement, death, or disability. The plan provides for payments commencing upon retirement and reduced benefits upon early retirement, disability, or termination of employment. As of December 31, 2022 and 2021, our aggregate payment obligations under this plan totaled $11.3 million and $11.4 million, respectively.
Liquidity and Asset/Liability Management
Management seeks to ascertain optimum and stable utilization of available assets and liabilities as a vehicle to attain our overall business plans and objectives. In this regard, management focuses on measurement and control of liquidity risk, interest rate risk and market risk, capital adequacy, operation risk and credit risk. Liquidity Liquidity to meet borrowers' credit and depositors' withdrawal demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds from depositors. Additional sources of liquidity may include institutional deposits, advances from the FHLB and other short-term borrowings, such as federal funds purchased.
Since our deposit growth strategy emphasizes core deposit growth, we have avoided relying on brokered deposits as a consistent source of funds. The Company had no brokered deposits as of December 31, 2022 and 2021.
As a secondary source of liquidity, we rely on advances from the FHLB to
supplement our supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB are typically secured by a portion of our
loan portfolio and stock issued by the FHLB. The FHLB determines limitations on
the amounts of advances by assigning a percentage to each eligible loan category
that will count towards the borrowing capacity. As of December 31, 2022 and
2021, the Company had no FHLB advances outstanding and had sufficient collateral
to borrow an additional $322.4 million and $368.5 million, respectively. In
addition, the Company had lines of credit with its correspondent banks to
purchase overnight federal funds totaling $70 million at December 31, 2022 and
2021. No advances were made on these lines of credit as of December 31, 2022 and
2021.
The Company's liquidity depends primarily on dividends paid to it as the sole
shareholder of the Bank. The Bank's ability to pay dividends to the Company may
depend on whether the Bank will be in a position to pay dividends based on
regulatory requirements and the performance of the Bank.
Maintenance of adequate liquidity requires that sufficient resources be
available at all time to meet our cash flow requirements. Liquidity in a banking
institution is required primarily to provide for deposit withdrawals and the
credit needs of its customers and to take advantage of investment opportunities
as they arise. Liquidity management involves our ability to convert assets into
cash or cash equivalents without incurring significant loss, and to raise cash
or maintain funds without incurring excessive additional cost. For this purpose,
we maintain a portion of our funds in cash and cash equivalents, loans and
securities available for sale. Our liquid assets at December 31, 2022 and 2021
totaled approximately $509.5 million and $858.2 million, respectively. Our
liquidity level measured as the percentage of liquid assets to total assets was
25.9% and 43.7% as of December 31, 2022, and 2021, respectively.
We believe that our current unrestricted cash and cash equivalents, cash flows
from operations and borrowing capacity under our credit facility will be
sufficient to meet our working capital, capital expenditures, and any other
capital needs for at least the next 12 months. We are currently not aware of any
trends or demands, commitments, events or uncertainties that will result in or
that are reasonably likely to result in our liquidity increasing or decreasing
in any material way that will impact our capital needs during or beyond the next
12 months.
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The following tables summarizes short- and long-term material cash requirements
as of December 31, 2022, which we believe that we will be able to fund these
obligations through cash generated from our operations and available alternative
sources of funds (dollars in thousands):
Less than 1 More than 5
year 1-3 years 3-5 years years TotalOperating lease obligations $ 1,489 $ 2,495 $ 1,696 $ 3,654 $ 9,334 Supplemental retirement plans
100 220 502 4,591 5,413 Time deposit maturities 30,854 9,027 305 - 40,186 Total $ 32,443 $ 11,742 $ 2,503 $ 8,245 $ 54,933
Capital Resources and Capital Adequacy Requirements
In the past two years, our primary source of capital has been internally
generated operating income through retained earnings. At December 31, 2022,
total shareholders' equity decreased to $126.6 million, representing a decrease
of $16.0 million from December 31, 2021. The decrease was due to other
comprehensive loss of $36.9 million, net of income taxes, due to the negative
effect that rising treasury yields had on the unrealized market value adjustment
of our available-for-sale investment portfolio during 2022, which was offset by
net income of $22.9 million recorded to retained earnings. Also, retained
earnings was reduced by the common stock dividend payments totaling $2.5 million
during 2022. As of December 31, 2022, we had no material commitments for capital
expenditures.
We are subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
trigger regulatory actions that could have a material adverse effect on our
financial statements and operations. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, we must meet specific capital
guidelines that rely on the quantitative measures of our assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Our capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. (See "Description of Business-Regulation and Supervision-Capital
Adequacy Requirements" in this report for exact definitions and regulatory
capital requirements.)
As of December 31, 2022, we were qualified as a "well capitalized institution"
under the regulatory framework for prompt corrective action. For more
information on our capital resources and capital adequacy requirements, see Note
19 to the Consolidated Financial Statements in Item 8 of this report.
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