Pacific Valley Bancorp : Bank 2023 Annual Report

Annual Report 2023

Independent Auditor's Report

To the Board of Directors

Pacific Valley Bancorp and Subsidiary

Salinas, California

Report on the Audit of the Consolidated Financial Statements

Opinion

We have audited the consolidated financial statements of Pacific Valley Bancorp and Subsidiary, which comprise the consolidated statements of financial condition as of December 31, 2023 and 2022, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Pacific Valley Bancorp and Subsidiary as of December 31, 2023 and 2022, and the results of their operations and their cash flows for years then ended, in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are required to be independent of Pacific Valley Bancorp and Subsidiary, and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, Pacific Valley Bancorp and Subsidiary adopted the provisions of FASB Accounting Standards Update 2016-13,Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as of January 1, 2023, using the modified retrospective approach with an adjustment at the beginning of the adoption period. Our opinion is not modified with respect to this matter.

Responsibilities of Management for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

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In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Pacific Valley Bancorp and Subsidiary's ability to continue as a going concern for one year after the date that the consolidated financial statements are available to be issued.

Auditor's Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.

In performing an audit in accordance with GAAS, we:

• Exercise professional judgment and maintain professional skepticism throughout the audit.
• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Pacific Valley Bancorp and Subsidiary's internal control. Accordingly, no such opinion is expressed.
• Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements.
• Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Pacific Valley Bancorp and Subsidiary's ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.

San Ramon, California

April 3, 2024

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Pacific Valley Bancorp

Consolidated Statements of Financial Condition

Years Ended December 31, 2023 and 2022

		2023			2022
Assets
Cash and due from banks	$	17,219,000	$	24,622,000
Federal funds sold		80,176,000			87,587,000
Total cash and cash equivalents		97,395,000			112,209,000
Time deposits in other banks		2,450,000			3,185,000
Debt securities available for sale, at fair value
(amortized cost $27,997,000 and $29,013,000,		26,946,000			27,651,000
net of allowance for credit losses of $0 and $0)
Loans, net of deferred fees and costs		452,531,000			409,322,000
Allowance for credit losses		(7,512,000)			(6,141,000)
Net loans		445,019,000			403,181,000
Federal Home Loan and other bank stocks, at cost		2,565,000			2,277,000
Premises and equipment		759,000			728,000
Bank owned life insurance		6,070,000			5,963,000
Accrued interest and other assets		4,791,000			3,836,000
Total assets	$	585,995,000	$	559,030,000
Liabilities and shareholders' equity
Deposits	$	259,712,000	$	252,802,000
Noninterest-bearing
Interest-bearing		253,374,000			239,694,000
Total deposits		513,086,000			492,496,000
Subordinated notes, net of unamortized issuance costs		16,828,000			16,775,000
Accrued interest and other liabilities		4,404,000			2,363,000
Total liabilities		534,318,000			511,634,000
Shareholders' equity		-			-
Preferred stock - 5,000,000 shares authorized, none outstanding
Common stock - no par value, 100,000,000 shares authorized,
shares issued and outstanding - 4,454,301 at December 31, 2023		37,514,000			37,345,000
and 4,464,329 at December 31, 2022
Retained earnings		14,994,000			11,127,000
Accumulated other comprehensive loss - net unrealized
loss on available-for-sale securities, net of taxes		(831,000)			(1,076,000)
of ($220,000) and ($286,000) in 2023 and 2022, respectively
Total shareholders' equity		51,677,000			47,396,000
Total liabilities and shareholders' equity	$	585,995,000	$	559,030,000

See Notes to Consolidated Financial Statements

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Pacific Valley Bancorp

Consolidated Statements of Income

Years Ended December 31, 2023 and 2022

Interest Income		2023			2022
$	21,632,000	$	19,490,000
Interest and fees on loans
Interest on federal funds sold and other		4,383,000			1,525,000
Total interest income		26,015,000			21,015,000
Interest Expense		4,524,000			741,000
Interest on savings, NOW, and money market accounts
Interest on time deposits		2,539,000			211,000
Interest on borrowings		905,000			701,000
Total interest expense		7,968,000			1,653,000
Net Interest Income		18,047,000			19,362,000
Provision for credit losses		-			592,000
Net interest income after provision for credit losses		18,047,000			18,770,000
Noninterest Income		1,108,000			1,160,000
Service charges and fees on deposit accounts
Other service charges and fees		86,000			76,000
Interchange fees		199,000			159,000
Earnings on bank owned life insurance		107,000			101,000
Total noninterest income		1,500,000			1,496,000
Noninterest Expense		7,584,000			8,047,000
Salaries and employee benefits
Occupancy and equipment expense		862,000			926,000
Other expenses		4,222,000			3,841,000
Total noninterest expense		12,668,000			12,814,000
Income before income taxes		6,879,000			7,452,000
Income taxes		2,032,000			2,245,000
Net income	$	4,847,000	$	5,207,000
Net income per share - Basic	$	1.09	$	1.18
Net income per share - Diluted	$	1.09	$	1.18

See Notes to Consolidated Financial Statements

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Pacific Valley Bancorp

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2023 and 2022

		2023			2022
Net income	$	4,847,000	$	5,207,000
Other comprehensive income
Unrealized gains (losses) on securities available for sale		345,000			(1,340,000)
		345,000			(1,340,000)
Income tax benefit
Change in net unrealized gain (loss)		100,000			(281,000)
		100,000			(281,000)
Total other comprehensive income (loss)		245,000			(1,059,000)
Total comprehensive income	$	5,092,000	$	4,148,000

See Notes to Consolidated Financial Statements

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Pacific Valley Bancorp

Consolidated Statements of Shareholders' Equity

Years Ended December 31, 2023 and 2022

	Common Stock						Accumulated
	Number of						Retained			Other
			Amount				Comprehensive			Total
	Shares					Earnings			Income (Loss)
Balance at December 31, 2021	3,991,828	$	32,705,000	$	10,303,000	$	(17,000)	$	42,991,000
Issuance of shares for cash	9,434			100,000									100,000
Issuance of stock grants	57,444
Common stock dividend distributable	405,623			4,381,000			(4,383,000)						(2,000)
Stock based compensation				159,000									159,000
Net income							5,207,000						5,207,000
Other comprehensive loss, net of taxes										(1,059,000)			(1,059,000)
Balance at December 31, 2022	4,464,329	$	37,345,000	$	11,127,000	$	(1,076,000)	$	47,396,000
Impact of adopting ASC 326 (CECL)							(980,000)						(980,000)
Forfeiture of stock grants	(10,028)
Stock based compensation				169,000									169,000
Net income							4,847,000						4,847,000
Other comprehensive income, net of taxes										245,000			245,000
Balance at December 31, 2023	4,454,301	$	37,514,000	$	14,994,000	$	(831,000)	$	51,677,000

See Notes to Consolidated Financial Statements

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Pacific Valley Bancorp

Consolidated Statements of Cash Flow

December 31, 2023 and 2022

		2023		2022
Operating Activities	$	4,847,000	$	5,207,000
Net income
Adjustments to reconcile net income to net cash
from operating activities		185,000		136,000
Depreciation and amortization
Provision for credit losses		-		592,000
Earnings on bank owned life insurance		(107,000)		(101,000)
Stock based compensation		169,000		159,000
PPP Deferred Loan Fees, net		18,000		1,771,000
Deferred income taxes		(63,000)		(160,000)
Other items		110,000		102,000
Total adjustments		312,000		2,499,000
Net Cash from Operating Activities		5,159,000		7,706,000
Investing Activities		735,000		245,000
Net change in time deposits in other banks
Net change in loans to customers		(41,856,000)		(26,339,000)
Purchase of available for sale (AFS) debt securities		(2,554,000)		(18,863,000)
Proceeds from maturities of AFS debt securities		2,000,000		-
Proceeds from payments on AFS debt securities		1,609,000		830,000
Purchase of federal home loan bank stock		(288,000)		(410,000)
Purchases of premises and equipment		(209,000)		(158,000)
Net Cash used in Investing Activities		(40,563,000)		(44,695,000)
Financing Activities		(11,899,000)		23,539,000
Net change in demand deposits and savings accounts
Net change in time deposits		32,489,000		14,808,000
Issuance of shares for cash		-		100,000
Subordinated notes, net of unamortized issuance costs		-		16,775,000
Net Cash from Financing Activities		20,590,000		55,222,000
Net Change in Cash and Cash Equivalents		(14,814,000)		18,233,000
Cash and Cash Equivalents, Beginning of Year		112,209,000		93,976,000
Cash and Cash Equivalents, End of Year	$	97,395,000	$	112,209,000
Supplemental Disclosures of Cash Flow Information
$	7,968,000	$	1,653,000
Interest paid
Taxes paid	$	2,060,000	$	2,515,000
Lease liabilities arising from obtaining right-of-use assets	$	856,000	$	1,513,000

See Notes to Consolidated Financial Statements

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Pacific Valley Bancorp

Notes to Consolidated Statements

December 31, 2023 and 2022

Note 1 - Summary of Significant Accounting Policies

Nature of Operations

On January 4, 2022, we completed the formation of Pacific Valley Bancorp ("the Company") as the bank holding company for Pacific Valley Bank ("the Bank"). Upon completion of the formation and reorganization, the Bank's shareholders became shareholders of the new holding company essentially in the same proportion as each shareholder's interest in the Bank. The financial statements presented for the years ended 2023 and 2022 represent consolidated Company results.

The Bank was created by local business leaders that were looking for a bank that truly understood the local business landscape and could provide solutions to help the local economy thrive. That is exactly what we have done since our first customer walked through the door back in September 2004. Our products and services are targeted to customers who operate small and middle-market businesses, professionals, high net worth individuals, and families residing in Monterey County, California. We serve business and individual customers from three California branch locations: Salinas, Monterey, and King City. Our mission is to "create prosperity in the community through excellence in banking." It is our goal to compete on responsive service and not solely on the basis of price.

Principles of Consolidation

The consolidated financial statements include the accounts of Pacific Valley Bancorp and its wholly owned subsidiary Pacific Valley Bank. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies we follow conform, in all material respects, to accounting principles generally accepted in the United States of America and to general practices within the financial services industry.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for credit losses.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks, deposits with other financial institutions with original maturities ninety days or less, and federal funds sold. Generally, federal funds are sold for periods of less than ninety days.

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Pacific Valley Bancorp

Notes to Consolidated Statements

December 31, 2023 and 2022

Cash and Due from Banks

Banking regulations require that banks maintain a percentage of their deposits as reserves in cash or on

deposit with the Federal Reserve Bank. As of December 31, 2023 and 2022, the required reserve percentage is zero. The Bank was in compliance with its reserve requirements as of December 31, 2023 and 2022.

The Bank maintains amounts due from banks, which may exceed federally insured limits. The Bank has not experienced any losses in such accounts.

Time Deposits in Other Banks

Time deposits in other banks generally mature within one year and are carried at cost.

Debt Securities

Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities not classified as held-to-maturity are classified as available-for-sale. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Premiums on callable debt securities are amortized to their earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days deliqinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest income.

Allowance for Credit Losses - Available-for-Sale Securities

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

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