without call or prepayment penalties. Contractual maturities on collateralized mortgage obligations cannot be anticipated due to allowed paydowns. Mutual funds are included in the "due in one year or less" category below.
construction loans generally comes from long-term mortgages with other lending institutions obtained at completion of the project.project or from the sale of the constructed homes to individuals.
In the normal course of business, the Company is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. At September 30, 2017March 31, 2024, and December 31, 2016,2023, these financial instruments include commitments to extend credit of $107,580,000$190.3 million and $120,485,000,$183.5 million, respectively, and standby letters of credit of $2,058,000$2.2 million and $1,201,000,$2.9 million for the same period ends, respectively. These instruments involve elements of credit risk in excess of the amount recognized on the consolidated balance sheet. The contract amounts of these instruments reflect the extent of the Company’s involvement the Company has in off-balance sheet financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the counterparty to thethese financial instrument for commitments to extend credit and standby letters of creditinstruments is represented by the contractual amounts of those instruments. The Company usesapplies the same credit policies as it doesused for on-balance sheet instruments.
Standby letters of credit are generally unsecured and are issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
- When there is doubt regarding the full repayment of interest and principal.
A loan is not considered impaired if there is merely an insignificant delay or shortfall in the amounts of payments and the Company expects to collect all amounts due, including interest accrued, at the contractual interest rate for the period of the delay.
Review for impairment does not include large groups of smaller balance homogeneous loans that are collectively evaluated to estimate the allowance for loan losses. The Company’s present allowance for loan losses methodology, including migration analysis, captures required reserves for these loans in the formula allowance.
For loans determined to be impaired, the Company evaluates impairment based upon either the fair value of underlying collateral, discounted cash flows of expected payments, or observable market price.
| |
- | For loans secured by collateral including real estate and equipment, the fair value of the collateral less selling costs will determine the carrying value of the loan. The difference between the recorded investment in the loan and the fair value, less selling costs, determines the amount of impairment. The Company uses the measurement method based on fair value of collateral when the loan is collateral dependent and foreclosure is probable. For loans that are not considered collateral dependent, a discounted cash flow methodology is used. |
| |
- | The discounted cash flow method of measuring the impairment of a loan is used for impaired loans that are not considered to be collateral dependent. Under this method, the Company assesses both the amount and timing of cash flows expected from impaired loans. The estimated cash flows are discounted using the loan's effective interest rate. The difference between the amount of the loan on the Bank's books and the discounted cash flow amounts determines the amount of impairment to be provided. This method is used for most of the Company’s troubled debt restructurings or other impaired loans where some payment stream is being collected. |
| |
- | The observable market price method of measuring the impairment of a loan is only used by the Company when the sale of loans or a loan is in process. |
The method for recognizing interest income on impaired loans is dependent on whether the loan is on nonaccrual status or is a troubled debt restructure. For income recognition, the existing nonaccrual and troubled debt restructuring policies are applied to impaired loans. Generally, except for certain troubled debt restructurings which are performing under the restructure agreement, the Company does not recognize interest income received on impaired loans, but reduces the carrying amount of the loan for financial reporting purposes.
Loans other than certain homogeneous loan portfolios are reviewed on a quarterly basis for impairment. Impaired loans are written down to estimated realizable values by the establishment of specific reserves for loan utilizing the discounted cash flow method, or charge-offs for collateral-based impaired loans, or those using observable market pricing.
The following is a summary of impaired loans at September 30, 2017 (in 000's).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2017 | Unpaid Contractual Principal Balance | | Recorded Investment With No Allowance (1) | | Recorded Investment With Allowance (1) | | Total Recorded Investment | | Related Allowance | | Average Recorded Investment (2) | | Interest Recognized (2) |
Commercial and Business Loans | $ | 3,590 |
| | $ | 543 |
| | $ | 3,061 |
| | $ | 3,604 |
| | $ | 567 |
| | $ | 3,965 |
| | $ | 63 |
|
Government Program Loans | 83 |
| | 54 |
| | 29 |
| | 83 |
| | 4 |
| | 275 |
| | 36 |
|
Total Commercial and Industrial | 3,673 |
| | 597 |
| | 3,090 |
| | 3,687 |
| | 571 |
| | 4,240 |
| | 99 |
|
| | | | | | | | | | | | | |
Commercial Real Estate Loans | 1,147 |
| | — |
| | 1,151 |
| | 1,151 |
| | 221 |
| | 1,102 |
| | 10 |
|
Residential Mortgages | 2,783 |
| | 512 |
| | 2,281 |
| | 2,793 |
| | 206 |
| | 2,643 |
| | 150 |
|
Home Improvement and Home Equity Loans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Real Estate Mortgage | 3,930 |
| | 512 |
| | 3,432 |
| | 3,944 |
| | 427 |
| | 3,745 |
| | 160 |
|
| | | | | | | | | | | | | |
Real Estate Construction and Development Loans | 6,797 |
| | 6,816 |
| | — |
| | 6,816 |
| | — |
| | 6,889 |
| | 415 |
|
Agricultural Loans | 887 |
| | 1 |
| | 890 |
| | 891 |
| | 743 |
| | 1,170 |
| | 64 |
|
| | | | | | | | | | | | | |
Consumer Loans | — |
| | — |
| | — |
| | — |
| | — |
| | 322 |
| | — |
|
Overdraft Protection Lines | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Overdrafts | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Installment | — |
| | — |
| | — |
| | — |
| | — |
| | 322 |
| | — |
|
Total Impaired Loans | $ | 15,287 |
| | $ | 7,926 |
| | $ | 7,412 |
| | $ | 15,338 |
| | $ | 1,741 |
| | $ | 16,366 |
| | $ | 738 |
|
(1) The recorded investment in loans includes accrued interest receivable of $51,000.
(2) Information is based on the nine month period ended September 30, 2017.
The following is a summary of impaired loans at December 31, 2016 (in 000's).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | Unpaid Contractual Principal Balance | | Recorded Investment With No Allowance (1) | | Recorded Investment With Allowance (1) | | Total Recorded Investment | | Related Allowance | | Average Recorded Investment (2) | | Interest Recognized (2) |
Commercial and Business Loans | $ | 4,635 |
| | $ | 495 |
| | $ | 4,158 |
| | $ | 4,653 |
| | $ | 757 |
| | $ | 5,050 |
| | $ | 302 |
|
Government Program Loans | 356 |
| | 356 |
| | — |
| | 356 |
| | — |
| | 372 |
| | 20 |
|
Total Commercial and Industrial | 4,991 |
| | 851 |
| | 4,158 |
| | 5,009 |
| | 757 |
| | 5,422 |
| | 322 |
|
| | | | | | | | | | | | | |
Commercial Real Estate Loans | 1,454 |
| | — |
| | 1,456 |
| | 1,456 |
| | 450 |
| | 1,503 |
| | 89 |
|
Residential Mortgages | 2,467 |
| | 526 |
| | 1,949 |
| | 2,475 |
| | 153 |
| | 2,874 |
| | 138 |
|
Home Improvement and Home Equity Loans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Real Estate Mortgage | 3,921 |
| | 526 |
| | 3,405 |
| | 3,931 |
| | 603 |
| | 4,377 |
| | 227 |
|
| | | | | | | | | | | | | |
Real Estate Construction and Development Loans | 6,267 |
| | 6,274 |
| | — |
| | 6,274 |
| | — |
| | 8,794 |
| | 361 |
|
Agricultural Loans | — |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| | 8 |
|
| | | | | | | | | | | | | |
Consumer Loans | 965 |
| | 965 |
| | — |
| | 965 |
| | — |
| | 968 |
| | 35 |
|
Overdraft Protection Lines | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Overdrafts | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Installment | 965 |
| | 965 |
| | — |
| | 965 |
| | — |
| | 968 |
| | 35 |
|
Total Impaired Loans | $ | 16,144 |
| | $ | 8,616 |
| | $ | 7,563 |
| | $ | 16,179 |
| | $ | 1,360 |
| | $ | 19,566 |
| | $ | 953 |
|
(1) The recorded investment in loans includes accrued interest receivable of $35,000.
(2) Information is based on the twelve month period ended December 31, 2016.
In most cases, the Company uses the cash basis method of income recognition for impaired loans. In the case of certain troubled debt restructurings for which the loan is performing under the current contractual terms for a reasonable period of time, income is recognized under the accrual method.
The average recorded investment in impaired loans for the quarters ended September 30, 2017 and 2016 was $15,681,000 and $19,397,000, respectively. Interest income recognized on impaired loans for the quarters ended September 30, 2017 and 2016 was approximately $192,000 and $34,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $70,000 and $126,000 for the quarters ended September 30, 2017 and 2016, respectively.
The average recorded investment in impaired loans for the nine months ended September 30, 2017 and 2016 was $16,366,000 and $21,440,000, respectively. Interest income recognized on impaired loans for the nine months ended September 30, 2017 and 2016 was approximately $738,000 and $741,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $260,000 and $362,000 for the nine months ended September 30, 2017 and 2016, respectively.
Troubled Debt Restructurings
In certain circumstances, when the Company grants a concession to a borrower as part of a loan restructuring, the restructuring is accounted for as a troubled debt restructuring (TDR). TDRs are reported as a component of impaired loans.
A TDR is a type of restructuring in which the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower and the Bank) to the borrower that it would not otherwise consider. Although the restructuring may take different forms, the Company's objective is to maximize recovery of its investment by granting relief to the borrower.
A TDR may include, but is not limited to, one or more of the following:
- A transfer from the borrower to the Company of receivables from third parties, real estate, other assets, or an equity interest in the borrower is granted to fully or partially satisfy the loan.
- A modification of terms of a debt such as one or a combination of:
| |
◦ | The reduction (absolute or contingent) of the stated interest rate. |
| |
◦ | The extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk. |
| |
◦ | The reduction (absolute or contingent) of the face amount or maturity amount of debt as stated in the instrument or agreement. |
| |
◦ | The reduction (absolute or contingent) of accrued interest. |
For a restructured loan to return to accrual status there needs to be, among other factors, at least 6 months successful payment history. In addition, the Company performs a financial analysis of the credit to determine whether the borrower has the ability to continue to meet payments over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and cash flow analysis of the borrower. Only after determination that the borrower has the ability to perform under the terms of the loans, will the restructured credit be considered for accrual status. Although the Company does not have a policy which specifically addresses when a loan may be removed from TDR classification, as a matter of practice, loans classified as TDRs generally remain classified as such until the loan either reaches maturity or its outstanding balance is paid off.
The following tables illustrates TDR activity for the periods indicated:
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
($ in 000's) | Number of Contracts | | Pre- Modification Outstanding Recorded Investment | | Post- Modification Outstanding Recorded Investment | | Number of Contracts which Defaulted During Period | | Recorded Investment on Defaulted TDRs |
Troubled Debt Restructurings | | | | | | | | | |
Commercial and Business Loans | — |
| | $ | — |
| | $ | — |
| | — |
| | $ | — |
|
Government Program Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Commercial Real Estate Term Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Single Family Residential Loans | 1 |
| | 167 |
| | 167 |
| | — |
| | — |
|
Home Improvement and Home Equity Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Real Estate Construction and Development Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Agricultural Loans | 1 |
| | 587 |
| | 587 |
| | — |
| | — |
|
Consumer Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Overdraft Protection Lines | — |
| | — |
| | — |
| | — |
| | — |
|
Total Loans | 2 |
| | $ | 754 |
| | $ | 754 |
| | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
($ in 000's) | Number of Contracts | | Pre- Modification Outstanding Recorded Investment | | Post- Modification Outstanding Recorded Investment | | Number of Contracts which Defaulted During Period | | Recorded Investment on Defaulted TDRs |
Troubled Debt Restructurings | | | | | | | | | |
Commercial and Business Loans | 1 |
| | $ | 69 |
| | $ | 69 |
| | — |
| | $ | — |
|
Government Program Loans | 1 |
| | 178 |
| | 178 |
| | — |
| | — |
|
Commercial Real Estate Term Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Single Family Residential Loans | 2 |
| | 404 |
| | 404 |
| | — |
| | — |
|
Home Improvement and Home Equity Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Real Estate Construction and Development Loans | 1 |
| | 790 |
| | 790 |
| | — |
| | — |
|
Agricultural Loans | 2 |
| | 1,437 |
| | 1,437 |
| | — |
| | — |
|
Consumer Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Overdraft Protection Lines | — |
| | — |
| | — |
| | — |
| | — |
|
Total Loans | 7 |
| | $ | 2,878 |
| | $ | 2,878 |
| | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2016 |
($ in 000's) | Number of
Contracts | | Pre-
Modification
Outstanding
Recorded
Investment | | Post-
Modification
Outstanding
Recorded
Investment | | Number of Contracts which Defaulted During Period | | Recorded Investment on Defaulted TDRs |
Troubled Debt Restructurings | | | | | | | | | |
Commercial and Business Loans | — |
| | $ | — |
| | $ | — |
| | — |
| | $ | — |
|
Government Program Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Commercial Real Estate Term Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Single Family Residential Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Home Improvement and Home Equity Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Real Estate Construction and Development Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Agricultural Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Consumer Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Overdraft Protection Lines | — |
| | — |
| | — |
| | — |
| | — |
|
Total Loans | — |
| | $ | — |
| | $ | — |
| | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
($ in 000's) | Number of Contracts | | Pre- Modification Outstanding Recorded Investment | | Post- Modification Outstanding Recorded Investment | | Number of Contracts which Defaulted During Period | | Recorded Investment on Defaulted TDRs |
Troubled Debt Restructurings | | | | | | | | | |
Commercial and Business Loans | 4 |
| | $ | 1,021 |
| | $ | 749 |
| | — |
| | $ | — |
|
Government Program Loans | 1 |
| | 100 |
| | 100 |
| | — |
| | — |
|
Commercial Real Estate Term Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Single Family Residential Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Home Improvement and Home Equity Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Real Estate Construction and Development Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Agricultural Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Consumer Loans | — |
| | — |
| | — |
| | — |
| | — |
|
Overdraft Protection Lines | — |
| | — |
| | — |
| | — |
| | — |
|
Total Loans | 5 |
| | $ | 1,121 |
| | $ | 849 |
| | — |
| | $ | — |
|
The Company makes various types of concessions when structuring TDRs including rate reductions, payment extensions, and forbearance. At September 30, 2017, the Company had 29 restructured loans totaling $12,150,000 as compared to 28 restructured loans totaling $12,410,000 at December 31, 2016.
The following tables summarize TDR activity by loan category for the quarters ended September 30, 2017 and September 30, 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2017 | Commercial and Industrial | | Commercial Real Estate | | Residential Mortgages | | Home Improvement and Home Equity | | Real Estate Construction Development | | Agricultural | | Installment & Other | | Total |
Beginning balance | $ | 1,055 |
| | $ | 1,062 |
| | $ | 2,573 |
| | $ | — |
| | $ | 6,868 |
| | $ | 400 |
| | $ | — |
| | $ | 11,958 |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | |
Defaults | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Additions | — |
| | — |
| | 167 |
| | — |
| | — |
| | 587 |
| | — |
| | 754 |
|
|
|
| |
|
| |
|
| |
|
| | — |
| |
|
| |
|
| | |
Principal (reductions) additions | (425 | ) | | 85 |
| | (52 | ) | | — |
| | (70 | ) | | (100 | ) | | — |
| | (562 | ) |
| | | | | | | | | | | | | | | |
Ending balance | $ | 630 |
| | $ | 1,147 |
| | $ | 2,688 |
| | $ | — |
| | $ | 6,798 |
| | $ | 887 |
| | $ | — |
| | $ | 12,150 |
|
| | | | | | | | | | | | | | | |
Allowance for loan loss | $ | 15 |
| | $ | 221 |
| | $ | 206 |
| | $ | — |
| | $ | — |
| | $ | 743 |
| | $ | — |
| | $ | 1,185 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2016 | Commercial and Industrial | | Commercial Real Estate | | Residential Mortgages | | Home Improvement and Home Equity | | Real Estate Construction Development | | Agricultural | | Installment & Other | | Total |
Beginning balance | $ | 1,236 |
| | $ | 1,510 |
| | $ | 2,400 |
| | $ | — |
| | $ | 12,100 |
| | $ | 6 |
| | $ | 965 |
| | $ | 18,217 |
|
|
|
| |
|
| |
|
| |
|
| |
|
| | | |
|
| | |
Defaults | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Additions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
|
|
| |
|
| |
|
| |
|
| | — |
| | | |
|
| | |
Principal reductions | 10 |
| | (25 | ) | | (15 | ) | | — |
| | (6,991 | ) | | (5 | ) | | — |
| | (7,026 | ) |
| | | | | | | | | | | | | | | |
Ending balance | $ | 1,246 |
| | $ | 1,485 |
| | $ | 2,385 |
| | $ | — |
| | $ | 5,109 |
| | $ | 1 |
| | $ | 965 |
| | $ | 11,191 |
|
| | | | | | | | | | | | | | | |
Allowance for loan loss | $ | 38 |
| | $ | 472 |
| | $ | 163 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 673 |
|
The following tables summarize TDR activity by loan category for the nine months endedSeptember 30, 2017 and September 30, 2016 (in 000's).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2017 | Commercial and Industrial | | Commercial Real Estate | | Residential Mortgages | | Home Improvement and Home Equity | | Real Estate Construction Development | | Agricultural | | Installment & Other | | Total |
Beginning balance | $ | 1,356 |
| | $ | 1,454 |
| | $ | 2,368 |
| | $ | — |
| | $ | 6,267 |
| | $ | — |
| | $ | 965 |
| | $ | 12,410 |
|
| | | | | | | | | | | | | | | |
Defaults | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Additions | 247 |
| | — |
| | 404 |
| | — |
| | 790 |
| | 1,437 |
| | — |
| | 2,878 |
|
| | | | | | | | | | | | | | | |
Principal reductions | (973 | ) | | (307 | ) | | (84 | ) | | — |
| | (259 | ) | | (550 | ) | | (965 | ) | | (3,138 | ) |
| | | | | | | | | | | | | | | |
Ending balance | $ | 630 |
| | $ | 1,147 |
| | $ | 2,688 |
| | $ | — |
| | $ | 6,798 |
| | $ | 887 |
| | $ | — |
| | $ | 12,150 |
|
| | | | | | | | | | | | | | | |
Allowance for loan loss | $ | 15 |
| | $ | 221 |
| | $ | 206 |
| | $ | — |
| | $ | — |
| | $ | 743 |
| | $ | — |
| | $ | 1,185 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | Commercial and Industrial | | Commercial Real Estate | | Residential Mortgages | | Home Improvement and Home Equity | | Real Estate Construction Development | | Agricultural | | Installment & Other | | Total |
Beginning balance | $ | 898 |
| | $ | 1,243 |
| | $ | 3,533 |
| | $ | — |
| | $ | 12,168 |
| | $ | 16 |
| | $ | 650 |
| | $ | 18,508 |
|
| | | | | | | | | | | | | | | |
Defaults | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Additions | 849 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 849 |
|
| | | | | | | | | | | | | | | |
Principal additions (reductions) | (501 | ) | | 242 |
| | (1,148 | ) | | — |
| | (7,059 | ) | | (15 | ) | | 315 |
| | (8,166 | ) |
| | | | | | | | | | | | | | | |
Ending balance | $ | 1,246 |
| | $ | 1,485 |
| | $ | 2,385 |
| | $ | — |
| | $ | 5,109 |
| | $ | 1 |
| | $ | 965 |
| | $ | 11,191 |
|
| | | | | | | | | | | | | | | |
Allowance for loan loss | $ | 38 |
| | $ | 472 |
| | $ | 163 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 673 |
|
Credit Quality Indicators
As part of its credit monitoring program, the Company utilizes a risk rating system which quantifiesto quantify the risk the Company estimates it has assumed during the life of a loan. TheThis system rates the strength of the borrower and the facility or transaction, and is designed to provide a program for risk management and early detection of problems.
For each new credit approval, credit extension, renewal, or modification of existing credit facilities, the Company assigns risk ratings utilizing the rating scale identified in this policy. In addition, on an on-goingongoing basis, loans and credit facilities are reviewed for internal and external influences impacting the credit facility that would warrant a change in the risk rating. Each loan credit facility is to be given a risk rating that takes into account factors that materially affect credit quality.
When assigning risk ratings, the Company evaluates two risk rating approaches, risk-rating approaches; a facility rating and a borrower rating as follows:rating.
Facility Rating:
The facility rating is determined by the analysis of positive and negative factors that may indicate that the quality of a particular loan or credit arrangement requires that it be rated differently from thea different risk rating than that assigned to the borrower. The Company assesses the risk impact of these factors:
Collateral - The rating may be affected by the type and quality of the collateral, the degree of coverage, the economic life of the collateral, the liquidation value, and the Company's ability to dispose of the collateral.
Guarantees - The value of third partythird-party support arrangements varies widely. Unconditional guarantiesguarantees from persons with demonstrable ability to perform are more substantial than that of closely related persons closely-related to the borrower who offer only modest support.
Unusual Terms - Credit may be extended on terms that subject the Company to a higher level of risk than indicated in the rating of the borrower.
Borrower Rating:
The borrower rating is a measure of loss possibility based on the historical, current, and anticipated financial characteristics of the borrower in the current risk environment. To determine the rating, the Company considers at least the following factors:
- Quality of management
- Liquidity
- Leverage/capitalization
- Profit margins/earnings trend
- Adequacy of financial records
- Alternative funding sources
- Geographic risk
- Industry risk
- Cash flow risk
- Accounting practices
- Asset protection
- Extraordinary risks
The Company assigns risk ratings to loans, other than consumer loans and other homogeneous loan pools, based on the following scale. The risk ratings are used when determining borrower ratings as well as facility ratings. WhenThe Company uses the following risk rating grades:
Pass Ratings:
- Grades 1 and 2 – These grades include loans to high-quality borrowers with high credit quality and sound financial strength. Key financial ratios are generally above industry averages and the borrower has a strong earnings history or net worth. These may be secured by deposit accounts or high-grade investment securities.
- Grade 3 – This grade includes loans to borrowers with solid credit quality and minimal risk. The borrower’s balance sheet and financial ratios are generally in line with industry averages, and the borrower has historically demonstrated
the ability to manage economic adversity. Real estate and asset-based loans assigned this risk rating must have characteristics that place them well above the minimum underwriting requirements for those departments. Asset-based borrowers assigned this rating must exhibit extremely favorable leverage and cash flow characteristics and consistently demonstrate a high level of unused borrowing capacity.
- Grades 4 and 5 – These include pass-grade loans to borrowers of acceptable credit quality and risk. The borrower’s balance sheet and financial ratios may be below industry averages but above the lowest industry quartile. Leverage is above and liquidity is below industry averages. Inadequacies evident in financial performance and/or management sufficiency are offset by readily available features of support, such as adequate collateral, or good guarantors having the liquid assets and/or cash flow capacity to repay the debt. Although the borrower may have recognized a loss over three or four years, recent earnings trends, while perhaps somewhat cyclical, are improving, and cash flows are adequate to cover debt service and fixed obligations. Real estate and asset borrowers who fully comply with all underwriting standards and are performing according to projections are assigned this rating. These also include grade 5 loans which are leveraged or on management’s watch list. While still considered pass loans, the borrower’s financial condition, cash flow, or operations evidence more than average risk and short-term weaknesses. These loans warrant a higher-than-average level of monitoring, supervision, and attention from the Company, but do not reflect credit weakness trends that weaken or inadequately protect the Company’s credit position. Loans with a grade 5 rating are not normally acceptable as new credits unless they are adequately secured or carry substantial endorser/guarantors.
Special Mention Rating:
- Grade 6 – This grade includes loans that are currently protected but potentially weak. This is generally an interim classification and these loans will typically be upgraded to an acceptable rating or downgraded to a substandard rating within a reasonable time period. Weaknesses in special mention loans may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. Special mention loans are often loans with weaknesses inherent in the loan origination and loan servicing, and may have some technical deficiencies. This designation indicates a distinct probability that the classification will deteriorate to a more adverse class if the noted deficiencies are not addressed by the loan officer or loan management.
Substandard Rating:
- Grade 7 – This grade includes substandard loans that are inadequately supported by the current sound net worth and paying capacity of the borrower or the collateral pledged, if any. Substandard loans have a well-defined weakness, or weaknesses, that may impair the regular liquidation of the debt. When a loan has been downgraded to substandard, there exists a distinct possibility that the Company will sustain a loss if the deficiencies are not corrected.
Doubtful Ratings:
- Grade 8 – This grade includes doubtful loans that exhibit the same characteristics as substandard loans. Loan weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high but, due to pending factors that may work toward the strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include a proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.
- Grade 9 – This grade includes loans classified as loss which are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset even though partial recovery may be achieved in the future.
The following table presents loans by class, at amortized cost, by risk rating, and the facility ratings differ, the lowestperiod indicated as of March 31, 2024:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year - As of March 31, 2024 | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans | | |
(In thousands) | | 2024 | | 2023 | | 2022 | | 2021 | | 2020 | | Prior | | | | Total |
Commercial and business | | | | | | | | | | | | | | |
Pass | | $ | 1,793 | | | $ | 6,129 | | | $ | 4,927 | | | $ | 1,959 | | | $ | 702 | | | $ | 897 | | | $ | 39,718 | | | $ | — | | | $ | 56,125 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | 86 | | | — | | | — | | | — | | | 150 | | | — | | | 236 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 1,793 | | | $ | 6,129 | | | $ | 5,013 | | | $ | 1,959 | | | $ | 702 | | | $ | 897 | | | $ | 39,868 | | | $ | — | | | $ | 56,361 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Government program | | | | | | | | | | | | | | |
Pass | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 6 | | | $ | 65 | | | $ | — | | | $ | — | | | $ | 71 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 6 | | | $ | 65 | | | $ | — | | | $ | — | | | $ | 71 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Commercial real estate | | | | | | | | | | | | | | |
Pass | | $ | 21,760 | | | $ | 39,470 | | | $ | 81,394 | | | $ | 51,724 | | | $ | 38,809 | | | $ | 157,645 | | | $ | — | | | $ | — | | | $ | 390,802 | |
Special Mention | | — | | | — | | | — | | | — | | | 5,762 | | | — | | | — | | | — | | | 5,762 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 21,760 | | | $ | 39,470 | | | $ | 81,394 | | | $ | 51,724 | | | $ | 44,571 | | | $ | 157,645 | | | $ | — | | | $ | — | | | $ | 396,564 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Residential mortgages | | | | | | | | | | | | | | |
Not graded | | $ | — | | | $ | — | | | $ | 24,715 | | | $ | 204,689 | | | $ | 2,526 | | | $ | 8,216 | | | $ | — | | | $ | — | | | $ | 240,146 | |
Pass | | — | | | 4,189 | | | 1,925 | | | 5,052 | | | 1,579 | | | 5,063 | | | — | | | — | | | 17,808 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | — | | | $ | 4,189 | | | $ | 26,640 | | | $ | 209,741 | | | $ | 4,105 | | | $ | 13,279 | | | $ | — | | | $ | — | | | $ | 257,954 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Home improvement and home equity | | | | | | | | | | | | | | |
Not graded | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 31 | | | $ | — | | | $ | — | | | $ | 31 | |
Pass | | — | | | — | | | — | | | — | | | — | | | 3 | | | — | | | — | | | 3 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 34 | | | $ | — | | | $ | — | | | $ | 34 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Real estate construction and development | | | | | | | | | | |
Pass | | $ | — | | | $ | 28,598 | | | $ | 8,349 | | | $ | — | | | $ | 32,446 | | | $ | 3,571 | | | $ | 43,396 | | | $ | — | | | $ | 116,360 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | 3,524 | | | 8,029 | | | — | | | — | | | 11,553 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | — | | | $ | 28,598 | | | $ | 8,349 | | | $ | — | | | $ | 35,970 | | | $ | 11,600 | | | $ | 43,396 | | | $ | — | | | $ | 127,913 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year - As of March 31, 2024 | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans | | |
(In thousands) | | 2024 | | 2023 | | 2022 | | 2021 | | 2020 | | Prior | | | | Total |
Agricultural | | | | | | | | | | |
Pass | | $ | — | | | $ | 2,079 | | | $ | 4,121 | | | $ | 505 | | | $ | 2,947 | | | $ | 13,850 | | | $ | 22,075 | | | $ | — | | | $ | 45,577 | |
Special Mention | | — | | | — | | | 1,954 | | | — | | | 513 | | | 356 | | | 223 | | | — | | | 3,046 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 37 | | | 390 | | | — | | | 427 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | — | | | $ | 2,079 | | | $ | 6,075 | | | $ | 505 | | | $ | 3,460 | | | $ | 14,243 | | | $ | 22,688 | | | $ | — | | | $ | 49,050 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Installment and student loans | | | | | | | | | | |
Not graded | | $ | 55 | | | $ | 650 | | | $ | 185 | | | $ | 130 | | | $ | 65 | | | $ | 38,585 | | | $ | 458 | | | $ | — | | | $ | 40,128 | |
Pass | | — | | | 1,164 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,164 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 174 | | | — | | | — | | | 174 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 55 | | | $ | 1,814 | | | $ | 185 | | | $ | 130 | | | $ | 65 | | | $ | 38,759 | | | $ | 458 | | | $ | — | | | $ | 41,466 | |
Current period gross charge-offs | | $ | — | | | $ | 20 | | | $ | — | | | $ | — | | | $ | — | | | $ | 395 | | | $ | — | | | $ | — | | | $ | 415 | |
| | | | | | | | | | | | | | | | | | |
Total loans outstanding (risk rating): | | | | | | | | | | |
Not graded | | $ | 55 | | | $ | 650 | | | $ | 24,900 | | | $ | 204,819 | | | $ | 2,591 | | | $ | 46,832 | | | $ | 458 | | | $ | — | | | $ | 280,305 | |
Pass | | 23,553 | | | 81,629 | | | 100,716 | | | 59,240 | | | 76,489 | | | 181,094 | | | 105,189 | | | — | | | 627,910 | |
Special Mention | | — | | | — | | | 1,954 | | | — | | | 6,275 | | | 356 | | | 223 | | | — | | | 8,808 | |
Substandard | | — | | | — | | | 86 | | | — | | | 3,524 | | | 8,240 | | | 540 | | | — | | | 12,390 | |
| | | | | | | | | | | | | | | | | | |
Grand total loans | | $ | 23,608 | | | $ | 82,279 | | | $ | 127,656 | | | $ | 264,059 | | | $ | 88,879 | | | $ | 236,522 | | | $ | 106,410 | | | $ | — | | | $ | 929,413 | |
Total current period gross charge-offs | | $ | — | | | $ | 20 | | | $ | — | | | $ | — | | | $ | — | | | $ | 395 | | | $ | — | | | $ | — | | | $ | 415 | |
The following table presents loans by class, at amortized cost, by risk rating, applied is:
| |
- | Grades 1 and 2 – These grades include loans which are given to high quality borrowers with high credit quality and sound financial strength. Key financial ratios are generally above industry averages and the borrower’s strong earnings history or net worth. These may be secured by deposit accounts or high-grade investment securities.
|
| |
- | Grade 3 – This grade includes loans to borrowers with solid credit quality with minimal risk. The borrower’s balance sheet and financial ratios are generally in line with industry averages, and the borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans assigned this risk rating must have characteristics, which place them well above the minimum underwriting requirements for those departments. Asset-based borrowers assigned this rating must exhibit extremely favorable leverage and cash flow characteristics, and consistently demonstrate a high leveland period indicated as of unused borrowing capacity.
|
| |
- | Grades 4 and 5 – These include “pass” grade loans to borrowers of acceptable credit quality and risk. The borrower’s balance sheet and financial ratios may be below industry averages, but above the lowest industry quartile. Leverage is above and liquidity is below industry averages. Inadequacies evident in financial performance and/or management sufficiency are offset by readily available features of support, such as adequate collateral, or good guarantors having the liquid assets and/or cash flow capacity to repay the debt. The borrower may have recognized a loss over three or four years, however recent earnings trends, while perhaps somewhat cyclical, are improving and cash flows are adequate to cover debt service and fixed obligations. Real estate and asset-borrowers fully comply with all underwriting standards and are performing according to projections would be assigned this rating. These also include grade 5 loans which are “leveraged” or on management’s “watch list.” While still considered pass loans (loans given a grade 5), the borrower’s financial condition, cash flow or operations evidence more than average risk and short term weaknesses, these loans warrant a higher than average level of monitoring, supervision and attention from the Company, but do not reflect credit weakness trends that weaken or inadequately protect the Company’s credit position. Loans with a grade rating of 5 are not normally acceptable as new credits unless they are adequately secured or carry substantial endorser/guarantors.
|
| |
- | Grade 6 – This grade includes “special mention” loans which are loans that are currently protected but are potentially weak. This generally is an interim grade classification and should usually be upgraded to an Acceptable rating or downgraded to Substandard within a reasonable time period. Weaknesses in special mention loans may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. Special mention loans are often loans with weaknesses inherent from the loan origination, loan servicing, and perhaps some technical deficiencies. The main theme in special mention credits is the distinct probability that the classification will deteriorate to a more adverse class if the noted deficiencies are not addressed by the loan officer or loan management.
|
| |
- | Grade 7 – This grade includes “substandard” loans which are inadequately supported by the current sound net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that may impair the regular liquidation of the debt. Substandard loans exhibit a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard loans also include impaired loans.
|
| |
- | Grade 8 – This grade includes “doubtful” loans which exhibit the same characteristics as the Substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include a proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.
|
| |
- | Grade 9 – This grade includes loans classified “loss” which are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off the asset even though partial recovery may be achieved in the future.
|
The Company did not carry any loans graded as loss at September 30, 2017 or December 31, 2016.2023:
The following tables summarize the credit risk ratings for commercial, construction, and other non-consumer related loans for September 30, 2017 and December 31, 2016: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2023 | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans | | |
(In thousands) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | | | Total |
Commercial and business | | | | | | | | | | | | | | |
Pass | | $ | 5,989 | | | $ | 5,066 | | | $ | 1,594 | | | $ | 810 | | | $ | 6 | | | $ | 939 | | | $ | 38,869 | | | $ | — | | | $ | 53,273 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 5,989 | | | $ | 5,066 | | | $ | 1,594 | | | $ | 810 | | | $ | 6 | | | $ | 939 | | | $ | 38,869 | | | $ | — | | | $ | 53,273 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Government program | | | | | | | | | | | | | | |
Pass | | $ | — | | | $ | — | | | $ | — | | | $ | 8 | | | $ | — | | | $ | 66 | | | $ | — | | | $ | — | | | $ | 74 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | — | | | $ | — | | | $ | — | | | $ | 8 | | | $ | — | | | $ | 66 | | | $ | — | | | $ | — | | | $ | 74 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Commercial real estate | | | | | | | | | | | | | | |
Pass | | $ | 40,929 | | | $ | 81,823 | | | $ | 52,019 | | | $ | 39,155 | | | $ | 60,626 | | | $ | 105,285 | | | $ | 501 | | | $ | — | | | $ | 380,338 | |
Special Mention | | — | | | — | | | — | | | 5,796 | | | — | | | — | | | — | | | — | | | 5,796 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 40,929 | | | $ | 81,823 | | | $ | 52,019 | | | $ | 44,951 | | | $ | 60,626 | | | $ | 105,285 | | | $ | 501 | | | $ | — | | | $ | 386,134 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Residential mortgages | | | | | | | | | | | | | | |
Not graded | | $ | — | | | $ | 24,835 | | | $ | 206,257 | | | $ | 2,260 | | | $ | — | | | $ | 8,969 | | | $ | — | | | $ | — | | | $ | 242,321 | |
Pass | | 4,189 | | | 1,925 | | | 5,253 | | | 1,579 | | | 3,494 | | | 1,778 | | | — | | | — | | | 18,218 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 4,189 | | | $ | 26,760 | | | $ | 211,510 | | | $ | 3,839 | | | $ | 3,494 | | | $ | 10,747 | | | $ | — | | | $ | — | | | $ | 260,539 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Home improvement and home equity | | | | | | | | | | | | | | |
Not graded | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 32 | | | $ | — | | | $ | — | | | $ | 32 | |
Pass | | — | | | — | | | — | | | — | | | — | | | 4 | | | — | | | — | | | 4 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 36 | | | $ | — | | | $ | — | | | $ | 36 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial | | Commercial Real Estate | | Real Estate Construction and Development | | Agricultural | | Total |
September 30, 2017 | | | | |
(in 000's) | | | | |
Grades 1 and 2 | $ | 381 |
| | $ | 2,972 |
| | $ | — |
| | $ | 70 |
| | $ | 3,423 |
|
Grade 3 | 268 |
| | 5,600 |
| | — |
| | — |
| | 5,868 |
|
Grades 4 and 5 – pass | 40,155 |
| | 182,089 |
| | 108,506 |
| | 55,488 |
| | 386,238 |
|
Grade 6 – special mention | 2,635 |
| | 8,541 |
| | 2,609 |
| | 985 |
| | 14,770 |
|
Grade 7 – substandard | 3,512 |
| | 466 |
| | 17,768 |
| | 1,962 |
| | 23,708 |
|
Grade 8 – doubtful | — |
| | — |
| | — |
| | — |
| | — |
|
Total | $ | 46,951 |
| | $ | 199,668 |
| | $ | 128,883 |
| | $ | 58,505 |
| | $ | 434,007 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Commercial and Industrial | | Commercial Real Estate | | Real Estate Construction and Development | | Agricultural | | Total |
December 31, 2016 | | | | |
(in 000's) | | | | |
Grades 1 and 2 | $ | 340 |
| | $ | — |
| | $ | — |
| | $ | 75 |
| | $ | 415 |
|
Grade 3 | 4,823 |
| | 5,767 |
| | — |
| | — |
| | 10,590 |
|
Grades 4 and 5 – pass | 34,921 |
| | 192,699 |
| | 110,992 |
| | 56,843 |
| | 395,455 |
|
Grade 6 – special mention | 4,416 |
| | 621 |
| | 928 |
| | — |
| | 5,965 |
|
Grade 7 – substandard | 4,505 |
| | 1,126 |
| | 18,767 |
| | — |
| | 24,398 |
|
Grade 8 – doubtful | — |
| | — |
| | — |
| | — |
| | — |
|
Total | $ | 49,005 |
| | $ | 200,213 |
| | $ | 130,687 |
| | $ | 56,918 |
| | $ | 436,823 |
|
The Company follows consistent underwriting standards outlined in its loan policy for consumer and other homogeneous loans but, does not specifically assign a risk rating when these loans are originated. Consumer loans are monitored for credit risk and are considered “pass” loans until some issue or event requires that the credit be downgraded to special mention or worse.
The following tables summarize the credit risk ratings for consumer related loans and other homogeneous loans for September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Residential Mortgages | | Home Improvement and Home Equity | | Installment and Other | | Total | | Residential Mortgages | | Home Improvement and Home Equity | | Installment and Other | | Total |
(in 000's) | | | | | | | |
Not graded | $ | 74,355 |
| | $ | 486 |
| | $ | 54,750 |
| | $ | 129,591 |
| | $ | 69,955 |
| | $ | 573 |
| | $ | 41,855 |
| | $ | 112,383 |
|
Pass | 14,659 |
| | 24 |
| | 2,827 |
| | 17,510 |
| | 15,669 |
| | 26 |
| | 2,120 |
| | 17,815 |
|
Special Mention | 647 |
| | — |
| | — |
| | 647 |
| | — |
| | — |
| | — |
| | — |
|
Substandard | 623 |
| | — |
| | 6 |
| | 629 |
| | 1,764 |
| | — |
| | 9 |
| | 1,773 |
|
Doubtful | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 965 |
| | 965 |
|
Total | $ | 90,284 |
| | $ | 510 |
| | $ | 57,583 |
| | $ | 148,377 |
| | $ | 87,388 |
| | $ | 599 |
| | $ | 44,949 |
| | $ | 132,936 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2023 | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans | | |
(In thousands) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | | | Total |
Real estate construction and development | | | | | | | | | | |
Pass | | $ | 27,951 | | | $ | 9,571 | | | $ | — | | | $ | 31,308 | | | $ | — | | | $ | 3,978 | | | $ | 43,734 | | | $ | — | | | $ | 116,542 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | 3,524 | | | — | | | 7,878 | | | — | | | — | | | 11,402 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 27,951 | | | $ | 9,571 | | | $ | — | | | $ | 34,832 | | | $ | — | | | $ | 11,856 | | | $ | 43,734 | | | $ | — | | | $ | 127,944 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Agricultural | | | | | | | | | | |
Pass | | $ | 2,086 | | | $ | 4,163 | | | $ | 457 | | | $ | 2,958 | | | $ | 1,592 | | | $ | 12,574 | | | $ | 22,556 | | | $ | — | | | $ | 46,386 | |
Special Mention | | — | | | 2,105 | | | — | | | 513 | | | — | | | 356 | | | — | | | — | | | 2,974 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 45 | | | 390 | | | — | | | 435 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 2,086 | | | $ | 6,268 | | | $ | 457 | | | $ | 3,471 | | | $ | 1,592 | | | $ | 12,975 | | | $ | 22,946 | | | $ | — | | | $ | 49,795 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Installment and student loans | | | | | | | | | | |
Not graded | | $ | 708 | | | $ | 250 | | | $ | 142 | | | $ | 74 | | | $ | 483 | | | $ | 38,519 | | | $ | 472 | | | $ | — | | | $ | 40,648 | |
Pass | | 1,173 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,173 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 426 | | | — | | | — | | | 426 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 1,881 | | | $ | 250 | | | $ | 142 | | | $ | 74 | | | $ | 483 | | | $ | 38,945 | | | $ | 472 | | | $ | — | | | $ | 42,247 | |
Current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,588 | | | $ | — | | | $ | — | | | $ | 2,588 | |
| | | | | | | | | | | | | | | | | | |
Total loans outstanding (risk rating): | | | | | | | | | | |
Not graded | | 708 | | | 25,085 | | | 206,399 | | | 2,334 | | | 483 | | | 47,520 | | | 472 | | | — | | | 283,001 | |
Pass | | 82,317 | | | 102,548 | | | 59,323 | | | 75,818 | | | 65,718 | | | 124,624 | | | 105,660 | | | — | | | 616,008 | |
Special Mention | | — | | | 2,105 | | | — | | | 6,309 | | | — | | | 356 | | | — | | | — | | | 8,770 | |
Substandard | | — | | | — | | | — | | | 3,524 | | | — | | | 8,349 | | | 390 | | | — | | | 12,263 | |
| | | | | | | | | | | | | | | | | | |
Grand total loans | | $ | 83,025 | | | $ | 129,738 | | | $ | 265,722 | | | $ | 87,985 | | | $ | 66,201 | | | $ | 180,849 | | | $ | 106,522 | | | $ | — | | | $ | 920,042 | |
Total current period gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,588 | | | $ | — | | | $ | — | | | $ | 2,588 | |
Allowance for LoanCredit Losses on Loans
The Company adopted ASU 2016-13, Financial Instrument-Credit Losses (Topic 326), effective January 1, 2023. This loss measurement, which uses the current expected credit loss (CECL) cohort methodology analysis, relies on segmenting the loan portfolio into pools with similar risks, tracking the performance of the pools over time, and using the data to determine pool loss experience. Management estimates the allowance for credit loss balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Company’s historical loss experience from 2006 to 2024. The Company expects that the markets in which it operates will experience a slight decline in economic conditions and an increase in unemployment rates and levels and trends of delinquencies over the next two years. Management has adjusted the historical loss experience for these expectations.
The Company analyzes risk characteristics inherent in each loan portfolio segment as part of the quarterly review of the adequacy of the allowance for loan losses.credit losses on loans. The following summarizes some of the key risk characteristics for the ten segments of the loan portfolio (Consumer loans include three segments):portfolio:
Commercial and industrial loans – Commercial loans are subject to the effects of economic cycles and tend to exhibit increased risk as economic conditions deteriorate or if the economic downturn isdownturns are prolonged. The Company considers this segment to be one of higher risk given the size of individual loans and the balances in the overall portfolio.
Government program loans – This is a relatively a small part of the Company’s loan portfolio but has historically had a high percentage of loans that have migrated from pass to substandard given their vulnerability to economic cycles.
Commercial real estate loans – This segment is considered to have more risk in part because ofdue to the vulnerability of commercial businesses to economic cycles as well as thetheir exposure to fluctuations in real estate prices because most of these loans are secured by real estate.prices. Losses in this segment have however been historically low because most of the loans are real estate secured,estate-secured, and the bankBank maintains appropriate loan-to-value ratios.
Residential mortgages – This segment is considered to have low risk factors based on the past experience of both from the Company and peer statistics. These loanspeers. Loans in this category are secured by first deeds of trust. The losses experienced over the past sixteen quarters are isolated to approximately nine loans and are generally the result of short sales.
Home improvement and home equity loans – Because of their junior lien position, these loans have an inherently higher risk level. Because residential real estate has been severely distressed in the recent past, the anticipated risk for this loan segment has increased.
Real estate construction and development loans –This – This segment of loans is considered to have a higher risk profile due to construction issues and market value issuesfluctuations in conjunction with normal credit risks.
Agricultural loans – This segment is considered to have risks associated with weather, insects, marketing issues, commodity prices, land valuation, water availability, fertilizer costs, and marketing issues. In addition, concentrations in certain crops or certain agricultural areascrop concentration. Additionally, California may experience severe droughts, which can increase risk.significantly harm the business of customers and the credit quality of the loans to those customers. Water resources and related issues affecting customers are closely monitored. Signs of deterioration within this loan portfolio are closely monitored to manage credit quality and promote early efforts to work with borrowers to mitigate any potential losses.
Installment, and other loans (Includes consumer loans, overdrafts, and overdraft protection lines) lines – This segment is at higher risk because manymost of the loans are unsecured. Additionally, in the case of student loans, there are increased risks associated with liquidity as there is a significant time lag between funding of a student loan and eventual repayment.
The following summarizes the activity in the allowance for credit losses by loan categorycategory:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2024 |
(In thousands) | | Commercial and Industrial | | Real Estate Mortgage | | Real Estate Construction Development | | Agricultural | | Installment and Student Loans | | | | Total |
Beginning balance | | $ | 1,903 | | | $ | 2,524 | | | $ | 3,614 | | | $ | 1,250 | | | $ | 6,367 | | | | | $ | 15,658 | |
Provision (reversal) for credit losses (1) | | 78 | | | 204 | | | (606) | | | (153) | | | 559 | | | | | 82 | |
Charge-offs | | — | | | — | | | — | | | — | | | (415) | | | | | (415) | |
Recoveries | | — | | | 4 | | | — | | | — | | | 122 | | | | | 126 | |
Ending balance | | $ | 1,981 | | | $ | 2,732 | | | $ | 3,008 | | | $ | 1,097 | | | $ | 6,633 | | | | | $ | 15,451 | |
(1) There was a provision of $91for unfunded loan commitments during the quarter.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 |
(In thousands) | | Commercial and Industrial | | Real Estate Mortgage | | Real Estate Construction Development | | Agricultural | | Installment and Student Loans | | Total |
Beginning balance | | $ | 955 | | | $ | 1,363 | | | $ | 3,409 | | | $ | 525 | | | $ | 3,930 | | | $ | 10,182 | |
Impact of ASC 326 adoption | | 1,336 | | | 2,359 | | | 720 | | | 1,025 | | | 927 | | | 6,367 | |
Provision (reversal) for credit losses (1) | | (383) | | | (37) | | | (542) | | | (294) | | | 763 | | | (493) | |
Charge-offs | | — | | | — | | | — | | | — | | | (477) | | | (477) | |
Recoveries | | — | | | 20 | | | — | | | — | | | 23 | | | 43 | |
Ending balance | | $ | 1,908 | | | $ | 3,705 | | | $ | 3,587 | | | $ | 1,256 | | | $ | 5,166 | | | $ | 15,622 | |
(1) There was no provision for unfunded loan commitments during the quarter.
Collateral-Dependent Loans
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.
The following table presents the recorded investment in collateral-dependent loans by type of loan:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
(Dollars in thousands) | | Amount | | | Number of Collateral-Dependent Loans | | Amount | | | Number of Collateral-Dependent Loans |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Real estate construction and development loans | | $ | 11,543 | | | | 3 | | | $ | 11,390 | | | | 3 | |
Agricultural loans | | 390 | | | | 1 | | | 390 | | | | 1 | |
| | | | | | | | | | |
Total | | $ | 11,933 | | | | 4 | | | $ | 11,780 | | | | 4 | |
Reserve for Unfunded Commitments
The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit, and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet loan commitments in the same manner as it evaluates credit risk within the loan portfolio. There was a provision of $91,000 for unfunded loan commitments made during the quarter ended March 31, 2024, increasing the liability balance to $927,000. For the quarter ended March 31, 2023, there was no provision made for unfunded loan commitments. At March 31, 2023, the balance for unfunded loan commitments totaled $805,000. The reserve for the quarters ended September 30, 2017unfunded loan commitments is a liability on the Company’s consolidated financial statements and 2016 (in 000's).is included in other liabilities.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended | Commercial and Industrial | | Real Estate Mortgage | | Real Estate Construction Development | | Agricultural | | Installment & Other | | Unallocated | | Total |
September 30, 2017 | | | | | | |
Beginning balance | $ | 1,764 |
| | $ | 1,174 |
| | $ | 2,887 |
| | $ | 1,589 |
| | $ | 814 |
| | $ | 777 |
| | $ | 9,005 |
|
Provision (recovery of provision) for credit losses | (271 | ) | | (91 | ) | | 112 |
| | 81 |
| | (69 | ) | | 245 |
| | 7 |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | |
Charge-offs | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
Recoveries | 11 |
| | 59 |
| | — |
| | — |
| | 77 |
| | — |
| | 147 |
|
Net charge-offs | 10 |
| | 59 |
| | — |
| | — |
| | 77 |
| | — |
| | 146 |
|
| | | | | | | | | | | | | |
Ending balance | $ | 1,503 |
| | $ | 1,142 |
| | $ | 2,999 |
| | $ | 1,670 |
| | $ | 822 |
| | $ | 1,022 |
| | $ | 9,158 |
|
Period-end amount allocated to: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Loans individually evaluated for impairment | 571 |
| | 427 |
| | — |
| | 743 |
| | — |
| | — |
| | 1,741 |
|
Loans collectively evaluated for impairment | 932 |
| | 715 |
| | 2,999 |
| | 927 |
| | 822 |
| | 1,022 |
| | 7,417 |
|
Ending balance | $ | 1,503 |
| | $ | 1,142 |
| | $ | 2,999 |
| | $ | 1,670 |
| | $ | 822 |
| | $ | 1,022 |
| | $ | 9,158 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended | Commercial and Industrial | | Real Estate Mortgage | | Real Estate Construction Development | | Agricultural | | Installment & Other | | Unallocated | | Total |
September 30, 2016 | | | | | | |
Beginning balance | $ | 1,685 |
| | $ | 1,665 |
| | $ | 3,455 |
| | $ | 554 |
| | $ | 1,219 |
| | $ | 331 |
| | $ | 8,909 |
|
Provision (recovery of provision) for credit losses | (15 | ) | | (131 | ) | | 271 |
| | 74 |
| | (438 | ) | | 243 |
| | 4 |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | |
Charge-offs | (4 | ) | | (7 | ) | | — |
| | — |
| | — |
| | (4 | ) | | (15 | ) |
Recoveries | 13 |
| | 6 |
| | — |
| | — |
| | 1 |
| | — |
| | 20 |
|
Net charge-offs | 9 |
| | (1 | ) | | 0 |
| | 0 |
| | 1 |
| | (4 | ) | | 5 |
|
| | | | | | | | | | | | | |
Ending balance | $ | 1,679 |
| | $ | 1,533 |
| | $ | 3,726 |
| | $ | 628 |
| | $ | 782 |
| | $ | 570 |
| | $ | 8,918 |
|
Period-end amount allocated to: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Loans individually evaluated for impairment | 735 |
| | 635 |
| | — |
| |
| | — |
| | — |
| | 1,370 |
|
Loans collectively evaluated for impairment | 944 |
| | 898 |
| | 3,726 |
| | 628 |
| | 782 |
| | 570 |
| | 7,548 |
|
Ending balance | $ | 1,679 |
| | $ | 1,533 |
| | $ | 3,726 |
| | $ | 628 |
| | $ | 782 |
| | $ | 570 |
| | $ | 8,918 |
|
The following summarizesOccasionally, the activityCompany modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, and other-than-insignificant payment delay or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged off against the allowance for credit losses bylosses. There were no loan categorymodifications during the quarter ended March 31, 2024, or March 31, 2023.
4.Student Loans
Included in the installment loan portfolio are $37.6 million and $38.5 million in student loans at March 31, 2024, and December 31, 2023, respectively, made to medical and pharmacy school students. Upon graduation, the loan is automatically placed in a grace period of six months. This may be extended up to 48 months for graduates enrolling in internships, medical residency, or fellowship programs. As approved, the ninestudent may receive additional deferment for hardship or administrative reasons in the form of forbearance for a maximum of 36 months endedSeptember 30, 2017throughout the life of the loan. Student loans have not been originated or purchased since 2019.
As of March 31, 2024, and 2016 (in 000's).December 31, 2023, the reserve against the student loan portfolio was $6.6 million and $6.3 million, respectively. At March 31, 2024, there were $174,000 in student loans in the substandard category. At December 31, 2023, there were $426,000 in student loans included in the substandard category.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended | Commercial and Industrial | | Real Estate Mortgage | | Real Estate Construction Development | | Agricultural | | Installment & Other | | Unallocated | | Total |
September 30, 2017 | | | | | | |
Beginning balance | $ | 1,843 |
| | $ | 1,430 |
| | $ | 3,378 |
| | $ | 666 |
| | $ | 888 |
| | $ | 697 |
| | $ | 8,902 |
|
Provision (recovery of provision) for credit losses | (408 | ) | | (359 | ) | | (379 | ) | | 983 |
| | (198 | ) | | 337 |
| | (24 | ) |
| | | | | | | | | | | | | |
Charge-offs | (106 | ) | | (2 | ) | | — |
| | — |
| | — |
| | (12 | ) | | (120 | ) |
Recoveries | 174 |
| | 73 |
| | — |
| | 21 |
| | 132 |
| | — |
| | 400 |
|
Net recoveries | 68 |
| | 71 |
| | — |
| | 21 |
| | 132 |
| | (12 | ) | | 280 |
|
| | | | | | | | | | | | | |
Ending balance | $ | 1,503 |
| | $ | 1,142 |
| | $ | 2,999 |
| | $ | 1,670 |
| | $ | 822 |
| | $ | 1,022 |
| | $ | 9,158 |
|
Period-end amount allocated to: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Loans individually evaluated for impairment | 571 |
| | 427 |
| | — |
| | 743 |
| | — |
| | — |
| | 1,741 |
|
Loans collectively evaluated for impairment | 932 |
| | 715 |
| | 2,999 |
| | 927 |
| | 822 |
| | 1,022 |
| | 7,417 |
|
Ending balance | $ | 1,503 |
| | $ | 1,142 |
| | $ | 2,999 |
| | $ | 1,670 |
| | $ | 822 |
| | $ | 1,022 |
| | $ | 9,158 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended | Commercial and Industrial | | Real Estate Mortgage | | Real Estate Construction Development | | Agricultural | | Installment & Other | | Unallocated | | Total |
September 30, 2016 | | | | | | |
Beginning balance | $ | 1,652 |
| | $ | 1,449 |
| | $ | 4,629 |
| | $ | 655 |
| | $ | 1,258 |
| | $ | 70 |
| | $ | 9,713 |
|
Provision (recovery of provision) for credit losses | 822 |
| | 93 |
| | (933 | ) | | (27 | ) | | (482 | ) | | 520 |
| | (7 | ) |
| | | | | | | | | | | | | |
Charge-offs | (846 | ) | | (29 | ) | | — |
| | — |
| | — |
| | (20 | ) | | (895 | ) |
Recoveries | 51 |
| | 20 |
| | 30 |
| | — |
| | 6 |
| | — |
| | 107 |
|
Net charge-offs | (795 | ) | | (9 | ) | | 30 |
| | — |
| | 6 |
| | (20 | ) | | (788 | ) |
| | | | | | | | | | | | | |
Ending balance | $ | 1,679 |
| | $ | 1,533 |
| | $ | 3,726 |
| | $ | 628 |
| | $ | 782 |
| | $ | 570 |
| | $ | 8,918 |
|
Period-end amount allocated to: | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Loans individually evaluated for impairment | 735 |
| | 635 |
| | — |
| |
|
| | — |
| | — |
| | 1,370 |
|
Loans collectively evaluated for impairment | 944 |
| | 898 |
| | 3,726 |
| | 628 |
| | 782 |
| | 570 |
| | 7,548 |
|
Ending balance | $ | 1,679 |
| | $ | 1,533 |
| | $ | 3,726 |
| | $ | 628 |
| | $ | 782 |
| | $ | 570 |
| | $ | 8,918 |
|
The following summarizes information with respecttables summarize the credit quality indicators for outstanding student loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
(Dollars in thousands) | | Number of Loans | | Principal Amount | | Accrued Interest | | Number of Loans | | Principal Amount | | Accrued Interest |
School | | 39 | | $ | 986 | | | $ | 640 | | | 44 | | | $ | 1,242 | | | $ | 734 | |
Grace | | 10 | | | 396 | | | 227 | | | 18 | | | 473 | | | 296 | |
Repayment | | 387 | | | 17,957 | | | 264 | | | 444 | | | 20,833 | | | 289 | |
Deferment | | 250 | | | 11,279 | | | 2,348 | | | 237 | | | 10,163 | | | 2,022 | |
Forbearance | | 135 | | | 7,007 | | | 204 | | | 98 | | | 5,782 | | | 133 | |
Total | | 821 | | | $ | 37,625 | | | $ | 3,683 | | | 841 | | | $ | 38,493 | | | $ | 3,474 | |
School - The time in which the borrower is still actively in school at least half-time. No payments are expected during this stage, though the borrower may make payments during this time.
Grace - A six-month period of time granted upon graduation, or end of active-student status, during which payment is not required but interest continues to accrue. Upon completion of the six-month grace period, the loan balancesis transferred to repayment status. This status may also represent an in-school borrower activated to military duty. The borrower must return to at September 30, 2017least half-time status within six months of their active-duty end date to return to in-school status.
Repayment - The time in which the borrower is no longer attending school at least half-time, and 2016.has not received an approved grace, deferment, or forbearance. Regular payment is expected from these borrowers under an allotted payment plan.
Deferment - May be granted for up to 48 months for borrowers who have begun the repayment period on their loans but are either actively enrolled in an eligible school at least half-time or actively enrolled in an approved and verifiable medical residency, internship, or fellowship program.
Forbearance - The period of time during which the borrower may postpone making principal and interest payments due to either hardship or administrative reasons. Interest will continue to accrue on loans during periods of authorized forbearance and will be capitalized at the end of the forbearance period. If the borrower is delinquent at the time the forbearance is granted, unpaid interest and interest accrued during the delinquency will also be capitalized. Loan terms will not change as a result of forbearance and payment amounts may be increased to allow the loan to pay off in the required time frame. A forbearance that results in an insignificant delay in payment, is not considered a concessionary change in terms, provided the borrower affirms the obligation. Forbearance is not an uncommon status designation and is considered standard industry practice, consistent with the succession of students migrating from school to career. However, additional risk is associated with this designation.
Student Loan Aging
Student loans are generally charged off at the end of the quarter during which the account becomes 120 days contractually past due. Accrued but unpaid interest related to charged-off student loans is reversed and charged against interest income. For the quarter ended March 31, 2024, $28,000 in accrued interest receivable was reversed, due to charge-offs of $395,000. For the quarter ended March 31, 2023, $28,000 in accrued interest receivable was reversed, due to charge-offs of $406,000.
The following table summarizes the student loan aging for loans in repayment and forbearance as of March 31, 2024 and December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
(Dollars in thousands) | | Number of Borrowers | | Amount | | Number of Borrowers | | Amount |
Current or less than 31 days | | 207 | | $ | 23,210 | | | 221 | | $ | 25,070 | |
31 - 60 days | | 4 | | 608 | | | 6 | | 791 | |
61 - 90 days | | 6 | | 972 | | | 2 | | 328 | |
91 - 120 days | | 4 | | | 174 | | | 3 | | 426 | |
| | | | | | | | |
Total | | 221 | | $ | 24,964 | | | 232 | | $ | 26,615 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | September 30, 2016 |
| Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | Total Loans | | Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | Total Loans |
(in 000's) | | | | | |
Commercial and Business Loans | $ | 3,604 |
| | $ | 42,333 |
| | $ | 45,937 |
| | $ | 5,101 |
| | $ | 52,404 |
| | $ | 57,505 |
|
Government Program Loans | 83 |
| | 931 |
| | 1,014 |
| | 365 |
| | 1,612 |
| | 1,977 |
|
Total Commercial and Industrial | 3,687 |
| | 43,264 |
| | 46,951 |
| | 5,466 |
| | 54,016 |
| | 59,482 |
|
| | | | | | | | | | | |
Commercial Real Estate Loans | 1,151 |
| | 198,517 |
| | 199,668 |
| | 1,511 |
| | 179,983 |
| | 181,494 |
|
Residential Mortgage Loans | 2,793 |
| | 87,491 |
| | 90,284 |
| | 2,961 |
| | 98,339 |
| | 101,300 |
|
Home Improvement and Home Equity Loans | — |
| | 510 |
| | 510 |
| | — |
| | 760 |
| | 760 |
|
Total Real Estate Mortgage | 3,944 |
| | 286,518 |
| | 290,462 |
| | 4,472 |
| | 279,082 |
| | 283,554 |
|
| | | | | | | | | | | |
Real Estate Construction and Development Loans | 6,816 |
| | 122,067 |
| | 128,883 |
| | 12,131 |
| | 126,043 |
| | 138,174 |
|
| | | | | | | | | | | |
Agricultural Loans | 891 |
| | 57,614 |
| | 58,505 |
| | 6 |
| | 46,757 |
| | 46,763 |
|
| | | | | | | | | | | |
Installment and Other Loans | — |
| | 57,583 |
| | 57,583 |
| | 965 |
| | 28,271 |
| | 29,236 |
|
| | | | | | | | | | | |
Total Loans | $ | 15,338 |
| | $ | 567,046 |
| | $ | 582,384 |
| | $ | 23,040 |
| | $ | 534,169 |
| | $ | 557,209 |
|
5.Deposits
Deposits include the following:
| | (in 000's) | September 30, 2017 | | December 31, 2016 |
(In thousands) | | (In thousands) | | March 31, 2024 | | December 31, 2023 |
Noninterest-bearing deposits | $ | 315,877 |
| | $ | 262,697 |
|
Interest-bearing deposits: | |
| | |
|
NOW and money market accounts | 262,037 |
| | 235,873 |
|
NOW and money market accounts | |
NOW and money market accounts | |
Savings accounts | 81,378 |
| | 75,068 |
|
Time deposits: | |
| | |
|
Under $250,000 | |
Under $250,000 | |
Under $250,000 | 53,702 |
| | 87,419 |
|
$250,000 and over | 12,304 |
| | 15,572 |
|
Total interest-bearing deposits | 409,421 |
| | 413,932 |
|
Total deposits | $ | 725,298 |
| | $ | 676,629 |
|
| | | |
Total brokered deposits included in time deposits above | $ | 9,755 |
| | $ | 28,132 |
|
|
| |
5. | Short-term Borrowings/Other Borrowings |
6.Short-term Borrowings/Other Borrowings
The following table sets forth the Company’s credit lines, balances outstanding, and pledged collateral:
| | | | | | | | | | | | | | |
(In thousands) | | March 31, 2024 | | December 31, 2023 |
Unsecured credit lines: | | | | |
Credit limit | | $ | 90,000 | | | $ | 80,000 | |
Balance outstanding | | 28,000 | | | 2,000 | |
Federal Home Loan Bank: | | | | |
Credit limit | | 141,595 | | | 128,935 | |
Balance outstanding | | 75,000 | | | 60,000 | |
Collateral pledged | | 232,273 | | | 232,144 | |
Federal Reserve Bank: | | | | |
Credit limit | | 481,740 | | | 463,501 | |
Balance outstanding | | — | | | — | |
Collateral pledged | | 616,365 | | | 608,045 | |
| | | | |
| | | | |
At September 30, 2017,March 31, 2024, the Company had collateralizedCompany’s available lines of credit with the Federal Reserve Bank of San Francisco totaling $283,948,000, as well as Federal Home Loan Bank (FHLB) lines of credit totaling $14,400,000. At September 30, 2017, the Company had an uncollateralized line of credit with Pacific Coast Bankers Bank ("PCBB") totaling $10,000,000, a Fed Funds line of $10,000,000 with Union Bank, and a Fed Funds line of $20,000,000 with Zions First National Bank.totaled $713.3 million. All lines of credit are on an “as available” basis and can be revoked by the grantor at any time. These lines of credit have interest rates that are generally tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR. FHLB advances are collateralized bySOFR. At March 31, 2024, pledged collateral at the Company’s stockFederal Home Loan Bank consisted of $2.0 million in the FHLB,available-for-sale investment securities and certain qualifying mortgage loans. As$230.3 million in loan balances. Pledged collateral at the Federal Reserve Bank consisted of September 30, 2017, $15,327,000$4.0 million in available-for-sale investment securities at FHLBand $612.4 million in loan balances. At December 31, 2023, $230.1 million in loans and $2.1 million in available-for-sale investment securities were pledged as collateral for FHLB advances. Additionally, $410,463,000$604.0 million in securedloans and unsecured loans were pledged at September 30, 2017, as collateral for borrowing lines with the Federal Reserve Bank totaling $283,948,000. At September 30, 2017, the Company had no outstanding borrowings.
At December 31, 2016, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling $323,162,000, as well as Federal Home Loan Bank (“FHLB”) lines of credit totaling $2,037,000. At December 31, 2016, the Company had an uncollateralized line of credit with Pacific Coast Bankers Bank ("PCBB") totaling $10,000,000 and a Fed Funds line of $20,000,000 with Zions First National Bank. These lines of credit generally have interest rates tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR. FHLB advances are collateralized by the Company’s stock$4.1 million in the FHLB,available-for-sale investment securities and certain qualifying mortgage loans. As of December 31, 2016, $2,152,000 in investment securities at FHLB were pledged as collateral for FHLB advances. Additionally, $471,737,000 in secured and unsecured loans were pledgedadvances atDecember 31, 2016, as collateral for used and unused borrowing lines with the Federal Reserve Bank totaling $323,162,000. At DecemberBank.
7.Leases
The Company leases land and premises for its branch banking offices, administration facility, and ITMs. The initial terms of these leases expire at various dates through 2032. Under the provisions of most of these leases, the Company has the option to extend the leases beyond their original terms at rental rates adjusted to certain economic indices or market conditions. Lease terms may also include options for termination. Under guidance from Topic 842, the discount rate applied to the lease liability is calculated by determining the Bank’s incremental borrowing rate. Current rates for fully-secured loans with amounts and terms similar to the lease amount and term at inception are used to calculate the incremental borrowing rate. The liability is reduced at each reporting period based on the discounted present value of remaining payments. As of March 31, 2016,2024, the Company had 13 operating leases and no outstanding borrowings.financing leases.
All lines of credit are on an “as available” basis and can be revoked by the grantor at any time.
| |
6. | Supplemental Cash Flow Disclosures |
|
| | | | | | | |
| Nine months ended September 30, |
(in 000's) | 2017 | | 2016 |
Cash paid during the period for: | | | |
Interest | $ | 1,313 |
| | $ | 1,003 |
|
Income taxes | $ | 5,700 |
| | $ | 1,110 |
|
Noncash investing activities: | |
| | |
|
OREO financed | $ | — |
| | $ | 3,766 |
|
Unrealized gain on securities | $ | 355 |
| | $ | 118 |
|
Stock dividends issued | $ | 1,220 |
| | $ | 1,673 |
|
Cash dividend declared | $ | 1,182 |
| | $ | — |
|
The components of lease expense are as follows: | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
(In thousands) | | March 31, 2024 | | March 31, 2023 | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Operating lease expense | | $ | 177 | | | $ | 178 | | | | | |
Variable lease expense | | — | | | — | | | | | |
| | | | | | | | |
Total | | $ | 177 | | | $ | 178 | | | | | |
| |
7. | Dividends on Common Stock |
Supplemental information related to leases is as follows:
On March 28, 2017, the Company’s Board | | | | | | | | | | | | | | |
| | Three Months Ended |
(Dollars in thousands) | | March 31, 2024 | | March 31, 2023 |
| | | | |
| | | | |
| | | | |
| | | | |
Operating cash flows from operating leases | | $ | 182 | | | $ | 178 | |
| | | | |
| | | | |
| | | | |
Weighted-average remaining lease term in years for operating leases | | 4.29 | | 4.38 |
| | | | |
Weighted-average discount rate for operating leases | | 5.04 | % | | 5.12 | % |
Maturities of Directors declared a one-percent (1%) stock dividendlease liabilities are as follows:
| | | | | | | | |
(In thousands) | | March 31, 2024 |
2025 | | $ | 525 | |
2026 | | 333 | |
2027 | | 157 | |
2028 | | 107 | |
2029 | | 101 | |
Thereafter | | 189 | |
Total undiscounted cash flows | | 1,412 | |
Less: present value discount | | (140) | |
Present value of net future minimum lease payments | | $ | 1,272 | |
8.Supplemental Cash Flow Disclosures
| | | | | | | | | | | | | | |
| | Three Months Ended |
(In thousands) | | March 31, 2024 | | March 31, 2023 |
Cash paid during the period for: | | | | |
Interest | | $ | 3,147 | | | $ | 1,631 | |
Income taxes | | — | | | — | |
Noncash investing activities: | | | | |
| | | | |
| | | | |
Impact of ASC 326 CECL adoption | | — | | | 6,367 | |
Unrealized gain on unrecognized post-retirement costs, net of tax | | 10 | | | 21 | |
Unrealized (loss) gain on available-for-sale securities, net of tax | | (1,069) | | | 1,325 | |
Unrealized gain on junior subordinated debentures, net of tax | | 155 | | | 2,947 | |
Cash dividend declared | | 2,089 | | | 1,880 | |
9.Dividends on the Company’s outstanding common stock. Based upon the numberand Repurchase of outstanding common shares on the record date of April 7, 2017, 167,082 additional shares were issued to shareholders on April 17, 2017. Because the stock dividend was considered a “small stock dividend,” approximately $1,219,759 was transferred from retained earnings to common stock based upon the $7.38 closing price of the Company’s common stock on the declaration date of March 28, 2017. There were no fractional shares paid. Except for earnings-per-share calculations, shares issued for the stock dividend have been treated prospectively for financial reporting purposes. For purposes of earnings per share calculations, the Company’s weighted average shares outstanding and potentially dilutive shares used in the computation of earnings per share have been restated after giving retroactive effect to a 1% stock dividend to shareholders for all periods presented.Common Stock
On April 25, 2017,March 26, 2024, the Company’s Board of Directors declared a cash dividend of $0.05$0.12 per share on the Company'sCompany’s common stock. The dividend was payable on May 17, 2017,April 22, 2024, to shareholders of record as of MayApril 8, 2017.2024. Approximately $846,000$2.1 million was transferedtransferred from retained earnings to cashdividends payable as of March 31, 2024, to allow for distribution of the dividend to shareholders.
The Board of Directors also authorized theCompany has a program to repurchase of up to $3$3.0 million of theits outstanding common stock of the Company.stock. The timing of the purchases will depend on certain factors including, but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, or negotiated private transactions. For the three months ended March 31, 2024, and March 31, 2023, no shares have been repurchased.
On June 27, 2017, the Company’s Board of Directors declared a cash dividend of $0.05
10.Net Income per share on the Company's common stock. The dividend was payable on July 21, 2017, to shareholders of record as of July 7, 2017. Approximately $844,000 were transfered from retained earnings to cash to allow for distribution of the dividend to shareholders.Common Share
On September 26, 2017, the Company’s Board of Directors declared a cash dividend of $0.07 per share on the Company's common stock. The dividend is payable on October 19, 2017, to shareholders of record as of October 10, 2017. Approximately $1,182,000 were transfered from retained earnings to other liabilities to allow for distribution of the dividend to shareholders.
| |
8. | Net Income per Common Share |
The following table provides a reconciliation of the numerator and the denominator of the basic EPS computation with the numerator and the denominator of the diluted EPS computation:
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | March 31, 2024 | | March 31, 2023 | | | | | | | | |
Net income (in thousands) | | $ | 4,161 | | | $ | 6,125 | | | | | | | | | |
Weighted average shares issued | | 17,170,907 | | | 17,076,510 | | | | | | | | | |
Add: dilutive effect of stock options and unvested restricted stock | | 735 | | | 15,950 | | | | | | | | | |
Weighted average shares outstanding adjusted for potential dilution | | 17,171,642 | | | 17,092,460 | | | | | | | | | |
Basic earnings per share | | $ | 0.24 | | | $ | 0.36 | | | | | | | | | |
Diluted earnings per share | | $ | 0.24 | | | $ | 0.36 | | | | | | | | | |
Weighted average anti-dilutive shares excluded from earnings per share calculation | | 167,000 | | | 101,000 | | | | | | | | | |
11.Taxes on Income
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income (000's, except per share amounts) | $ | 2,740 |
| | $ | 2,040 |
| | $ | 7,004 |
| | $ | 5,830 |
|
| | | | | | | |
Weighted average shares issued | 16,885,615 |
| | 16,881,422 |
| | 16,885,578 |
| | 16,880,835 |
|
Add: dilutive effect of stock options | 21,652 |
| | 9,644 |
| | 18,485 |
| | 6,243 |
|
Weighted average shares outstanding adjusted for potential dilution | 16,907,267 |
| | 16,891,066 |
| | 16,904,063 |
| | 16,887,078 |
|
| | | | | | | |
Basic earnings per share | $ | 0.16 |
| | $ | 0.12 |
| | $ | 0.41 |
| | $ | 0.35 |
|
Diluted earnings per share | $ | 0.16 |
| | $ | 0.12 |
| | $ | 0.41 |
| | $ | 0.35 |
|
Anti-dilutive stock options excluded from earnings per share calculation | 30,000 |
| | 21,000 |
| | 30,000 |
| | 21,000 |
|
Prior year anti-dilutive stock options excluded from earnings per share calculation have been restated to reflect the impact of stock dividends.
The Company periodically reviews its tax positions under the accounting standards related to uncertainty in income taxes, which defines the criteria that an individual tax position would have to meet for some or all of the income tax benefit to be recognized in a taxable entity’s financial statements. Under the guidelines, an entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination. The term “more likely than not” means a likelihood of more than 50 percent. In assessing whether the more-likely-than-not criterion is met, the entity should assume that the tax position will be reviewed by the applicable taxing authority and all available information is known to the taxing authority.
The Company periodically evaluates its deferred tax assets to determine whether a valuation allowance is required based upon a determination that some or all of the deferred assets may not be ultimately realized. At September 30, 2017March 31, 2024, and December 31, 2016,2023, the Company had no recorded valuation allowance. The Company is no longer subject to examinations by taxing authorities for years before 2019 and 2018 for Federal and California jurisdictions, respectively.
The Company and its subsidiary file income tax returns in the U.S federal jurisdiction, and several states within the U.S. There are no filings in foreign jurisdictions. During 2014, the Company began the process to amend its California state tax returns for the years 2009 through 2012 to file a combined report on a unitary basis with the Company and USB Investment Trust. The amended returns for 2009, 2010, and 2011 were filed in 2014, 2015, and 2016 respectively. The amended return for 2012 was filed during 2016. During the third quarter of 2016, the IRS notified the Company it would be conducting an examination of the Company's 2014 federal return. As of September 30, 2017, the Company is unaware of any change in tax positions as a result of the IRS examination.
The Company'sCompany’s policy is to recognize any interest or penalties related to uncertain tax positions in income tax expense. Interest andThere were no interest or penalties recognized on uncertain tax positions during the periods ended September 30, 2017March 31, 2024 and 2016 were insignificant.2023.
The Company reported a provision for income taxes of $1.7 million for the quarter ended March 31, 2024, compared to $2.5 million for the comparable period of 2023. The effective tax rate was 28.94% for the quarter ended March 31, 2024, compared to 29.16% for the comparable period of 2023. | |
10. | Junior Subordinated Debt/Trust Preferred Securities |
12.Junior Subordinated Debt/Trust Preferred Securities
Effective September 30, 2009 and beginning withThe contractual principal balance of the quarterly interest payment due October 1, 2009, the Company elected to defer interest payments on the Company's $15.0 million of junior subordinatedCompany’s debentures relating to its trust preferred securities. The termssecurities is $12.0 million as of the debenturesMarch 31, 2024, and trust indentures allow for the Company to defer interest payments for up to 20 consecutive quarters without default or penalty. During the period that the interest deferrals were elected, the Company continued to record interest expense associated with the debentures. As of June 30, 2014, the Company ended the extension period, paid all accrued and unpaid interest, and is currently making quarterly interest payments.December 31, 2023. The Company may redeem the junior subordinated debentures at any time at par.
During August 2015, the Bank purchased $3.0 million of the Company's junior subordinated debentures related to the Company's trust preferred securities at a fair value discount of 40%. Subsequently, in September 2015, the Company purchased those shares from the Bank and canceled $3.0 million in par value of the junior subordinated debentures, realizing a $78,000 gain on redemption. The contractual principal balance of the Company's debentures relating to its trust preferred securities is $12.0 million as of September 30, 2017.
The fair value guidance generally permits the measurement of selected eligible financial instruments at fair value at specified election dates. Effective January 1, 2008, the Company elected the fair value optionaccounts for its junior subordinated debt issued under USB Capital Trust II.II at fair value. The Company believes the election of fair value accounting for the junior subordinated debentures better reflects the true economic value of the debt instrument on the consolidated balance sheet. TheAs of March 31, 2024, the rate paid on the junior subordinated debt issued under USB Capital Trust II is the forward 3-month LIBORSOFR rate of 5.30% plus 129 basis points and is adjusted quarterly.
At September 30, 2017March 31, 2024, the Company performed a fair value measurement analysis on its junior subordinated debt using a cash flow model approach to determine theits present value of those cash flows.value. The cash flow model approach utilizes the forward 3-month LIBORthree-month SOFR curve to estimate future quarterly interest payments due over the thirty-year life of the debt instrument. These cashCash flows were discounted at a rate which incorporates abased on current market raterates for similar-term debt instruments and adjusted for additional credit and liquidity risks
associated with the junior subordinated debt. We believe the 5.89%The 6.31% discount rate used represents what a market participant would consider under the circumstancesan investor’s yield based on current market assumptions. At September 30, 2017,March 31, 2024, the total cumulative gain recorded on the debt is $3,008,000.was $1.3 million.
| | | | | | | | | | | | | | |
(In thousands) | | March 31, 2024 | | March 31, 2023 |
Net fair value calculation loss | | $ | (139) | | | $ | (107) | |
Other comprehensive income gain (loss) | | 155 | | | (440) | |
Recognized (loss) gain on fair value | | (294) | | | 333 | |
Cumulative gain recorded | | 1,322 | | | 1,625 | |
Discount rate | | 6.31 | % | | 6.22 | % |
The net fair value calculation performed at September 30, 2017as of March 31, 2024, resulted in a net pretax loss adjustment of $688,000 ($405,000,$139,000 for the quarter ended March 31, 2024, compared to a net pretax loss adjustment of $107,000 for the quarter ended March 31, 2023.
For the quarter ended March 31, 2024, the net $139,000 fair value loss adjustment was separately presented as a $294,000 loss, ($207,000 net of tax) for the nine months endedSeptember 30, 2017, compared to a pretax gain adjustment of $48,000 ($28,000, net of tax) for the nine months endedSeptember 30, 2016. Fair value gains and losses are reflected as a component of noninterest incomerecognized on the consolidated statements of income.
The fair value calculation performed at September 30, 2017 resulted inincome, and a pretax loss adjustment of $88,000$155,000 gain, ($52,000,109,000 net of tax) forassociated with the three monthsinstrument-specific credit risk recognized in other comprehensive income. For the quarter ended September 30, 2017, compared toMarch 31, 2023, the net $107,000 fair value loss adjustment was separately presented as a pretax$333,000 gain, adjustment of $423,000 ($249,000,235,000 net of tax) for the three months ended September 30, 2016. Fair value gains and losses are reflected as a component of noninterest incomerecognized on the consolidated statements of income, and a $440,000 loss, ($300,000 net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods indicated.
| |
11. | Fair Value Measurements and Disclosure |
13.Fair Value Measurements and Disclosure
The following summary disclosures are made in accordance with the guidance provided by ASC Topic 825 “Fair Value Measurements and Disclosures (formerly Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments),” which requires the disclosure of fair value information aboutfor both on- and off-balance sheet financial instruments where it is practicable to estimate that value.
Generally accepted accountingGAAP guidance clarifies the definition of fair value, describes methods used to appropriately measure fair value in accordance with generally accepted accounting principles, and expands fair value disclosure requirements. This guidance applies whenever other accounting pronouncements require or permit fair value measurements.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2, and Level 3). levels:
•Level 1 inputs are unadjusted quoted prices in active markets (as defined) for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
•Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
•Level 3 inputs are unobservable inputs for the asset or liability and reflect the reporting entity’s own assumptions aboutregarding the assumptions that market participants would use in pricing theof an asset or liability by a market participant (including assumptions about risk).
The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized at the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 |
(In thousands) | | Carrying Amount | | Estimated Fair Value | | Quoted Prices In Active Markets for Identical Assets Level 1 | | Significant Other Observable Inputs Level 2 | | Significant Unobservable Inputs Level 3 |
Financial Assets: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Investment securities | | $ | 165,166 | | | $ | 165,166 | | | $ | — | | | $ | 165,166 | | | $ | — | |
Marketable equity securities | | 3,397 | | | 3,397 | | | 3,397 | | | — | | | — | |
Loans, net | | 913,962 | | | 867,916 | | | — | | | — | | | 867,916 | |
Financial Liabilities: | | | | | | | | | | |
Time deposits | | 72,802 | | | 72,227 | | | — | | | — | | | 72,227 | |
Short-term borrowings | | 103,000 | | | 103,000 | | | 103,000 | | | — | | | — | |
Junior subordinated debt | | 11,348 | | | 11,348 | | | — | | | — | | | 11,348 | |
| | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
September 30, 2017 |
(in 000's) | Carrying Amount | | Estimated Fair Value | | Quoted Prices In Active Markets for Identical Assets Level 1 | | Significant Other Observable Inputs Level 2 | | Significant Unobservable Inputs Level 3 |
Financial Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 159,892 |
| | $ | 159,892 |
| | $ | 159,892 |
| | $ | — |
| | $ | — |
|
Interest-bearing deposits | 654 |
| | 654 |
| | — |
| | 654 |
| | — |
|
Investment securities | 48,356 |
| | 48,356 |
| | 3,783 |
| | 44,573 |
| | — |
|
Loans | 574,443 |
| | 569,970 |
| | — |
| | — |
| | 569,970 |
|
Accrued interest receivable | 5,846 |
| | 5,846 |
| | — |
| | 5,846 |
| | — |
|
Financial Liabilities: | |
| | |
| | |
| | |
| | |
|
Deposits: | |
| | |
| | |
| | |
| | |
|
Noninterest-bearing | 315,877 |
| | 315,877 |
| | 315,877 |
| | — |
| | — |
|
NOW and money market | 262,037 |
| | 262,037 |
| | 262,037 |
| | — |
| | — |
|
Savings | 81,378 |
| | 81,378 |
| | 81,378 |
| | — |
| | — |
|
Time deposits | 66,006 |
| | 65,658 |
| | — |
| | — |
| | 65,658 |
|
Total deposits | 725,298 |
| | 724,950 |
| | 659,292 |
| | |
| | 65,658 |
|
Junior subordinated debt | 9,534 |
| | 9,534 |
| | — |
| | — |
| | 9,534 |
|
Accrued interest payable | 41 |
| | 41 |
| | — |
| | 41 |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | |
December 31, 2016 |
(in 000's) | Carrying Amount | | Estimated Fair Value | | Quoted Prices In Active Markets for Identical Assets Level 1 | | Significant Other Observable Inputs Level 2 | | Significant Unobservable Inputs Level 3 |
Financial Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 113,032 |
| | $ | 113,032 |
| | $ | 113,032 |
| | $ | — |
| | $ | — |
|
Interest-bearing deposits | 650 |
| | 650 |
| | — |
| | 650 |
| | — |
|
Investment securities | 57,491 |
| | 57,491 |
| | 3,716 |
| | 53,775 |
| | — |
|
Loans | 561,932 |
| | 557,914 |
| | — |
| | — |
| | 557,914 |
|
Accrued interest receivable | 3,895 |
| | 3,895 |
| | — |
| | 3,895 |
| | — |
|
Financial Liabilities: | |
| | |
| | |
| | |
| | |
|
Deposits: | |
| | |
| | |
| | |
| | |
|
Noninterest-bearing | 262,697 |
| | 262,697 |
| | 262,697 |
| | — |
| | — |
|
NOW and money market | 235,873 |
| | 235,873 |
| | 235,873 |
| | — |
| | — |
|
Savings | 75,068 |
| | 75,068 |
| | 75,068 |
| | — |
| | — |
|
Time deposits | 102,991 |
| | 102,743 |
| | — |
| | — |
| | 102,743 |
|
Total deposits | 676,629 |
| | 676,381 |
| | 573,638 |
| | — |
| | 102,743 |
|
Junior subordinated debt | 8,832 |
| | 8,832 |
| | — |
| | — |
| | 8,832 |
|
Accrued interest payable | 76 |
| | 76 |
| | — |
| | 76 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
(In thousands) | | Carrying Amount | | Estimated Fair Value | | Quoted Prices In Active Markets for Identical Assets Level 1 | | Significant Other Observable Inputs Level 2 | | Significant Unobservable Inputs Level 3 |
Financial Assets: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Investment securities | | $ | 181,266 | | | $ | 181,266 | | | $ | 12,438 | | | $ | 168,828 | | | $ | — | |
Marketable equity securities | | 3,354 | | | 3,354 | | | 3,354 | | | — | | | — | |
Loans, net | | 904,384 | | | 871,681 | | | — | | | — | | | 871,681 | |
Financial Liabilities: | | | | | | | | | | |
Time deposits | | 71,848 | | | 71,414 | | | — | | | — | | | 71,414 | |
Short-term borrowings | | 62,000 | | | 62,000 | | | 62,000 | | | — | | | — | |
Junior subordinated debt | | 11,213 | | | 11,213 | | | — | | | — | | | 11,213 | |
| | | | | | | | | | |
| | | | | | | | | | |
The Company performs fair value measurements on certain assets and liabilities as the result of the application of current accounting guidelines. Some fair value measurements, such as available-for-salethose on investment securities (AFS) and junior subordinated debt, are performed on a recurring basis, while others, such as impairmentevaluations of loans, other real estate owned, goodwill, and other intangibles, are performed on a nonrecurring basis.
The Company’s •Level 1 financial assets consist of money market funds and highly liquid mutual funds for which fair values are based on quoted market prices. The Company’s
•Level 2 financial assets include highly liquid debt instruments of U.S. government agencies, collateralized mortgage obligations, and debt obligations of states and political subdivisions, whose fair
values are obtained from readily-available pricing sources for the identical or similar underlying security that may or may not be actively traded. The Company’s
•Level 3 financial assets include certain instruments where the assumptions may be made by usthe Company or third parties about assumptions that market participants would use in pricing the asset or liability. From time to time, the
The Company recognizes transfers between LevelLevels 1, 2, and 3 when a change in circumstances warrants a transfer. There were no transfers in or out of Level 1 and Level 2between fair value measurementsmeasurement classifications during the threequarter ended March 31, 2024, or nine month periodsthe quarter ended September 30, 2017.March 31, 2023.
The following methods and assumptions were used in estimating the fair values of financial instruments:
Cash and Cash Equivalents - The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate their estimated fair values.
Interest-bearing Deposits – Interest bearing deposits in other banks consist of fixed-rate certificates of deposits. Accordingly,instruments measured at fair value has been estimatedon a recurring and non-recurring basis:
Investment Securities - Available-for-sale and marketable equity security values are based upon interest rates currently being offered on deposits with similar characteristics and maturities.
Investment Securities – Available for sale securities are valued based upon open-market price quotes obtained from reputable third-party brokers that actively make a market in those securities.brokers. Market pricing is based upon specific CUSIP identification for each individual
security. To the extent there are observable prices in the market, the mid-point of the bid/ask price is used to determine the fair value of individual securities. If that data is not available for the last 30 days, a Level 2-type matrix pricingLevel-2 type matrix-pricing approach, based on comparable securities in the market, is utilized. Level 2 pricing may include usingthe use of a forward spread from the last observable trade or may use a proxy bond, likesuch as a TBA mortgage, to come up with adetermine the price for the security being valued. Changes in fair market value are recorded through other accumulated comprehensive income as an unrecognized gain or loss as the securities are available for sale.
Loans - Fair values of variable rate loans, which reprice frequently and with no significant change in credit risk, are based on carrying values adjusted for credit risk. Fair values for all other loans, except impaired loans, are estimated using discounted cash flows over their remaining maturities, using interest rates at which similar loans would currently be offered to borrowers with similar credit ratings and for the same remaining maturities. The allowance for loan loss is considered to be a reasonable estimate of loan discount for credit quality concerns.fair value.
ImpairedIndividually-Evaluated Loans - Fair value measurements for collateral dependent impairedindividually-evaluated loans are performed pursuant to authoritative accounting guidance and are based upon either collateral values supported by third-party appraisals andor observed market prices. Collateral dependentCollateral-dependent loans are measured for impairment using the fair value of the collateral. Changes are recorded directlyThere were no individually-evaluated loans measured at fair value as an adjustment to current earnings.of March 31, 2024 or December 31, 2023.
Other Real Estate Owned - Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third partythird-party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. No OREO properties were measured at fair value as of March 31, 2024, or December 31, 2023.
Deposits – Fair values for transaction and savings accounts are equal to the respective amounts payable on demand (i.e., carrying amounts). Fair values of fixed-maturity certificates of deposit were estimated using the rates currently offered for deposits with similar remaining maturities.
Junior Subordinated Debt – - The fair value of the junior subordinated debt was determinedis based uponon a discounted cash flowsflow model utilizing observable market rates and credit characteristics for similar debt instruments. In its analysis, the Company useduses characteristics that market participants would generally use and consideredconsiders factors specific to (a) the liability (b)and the principal, (oror most advantageous)advantageous, market for the liability, and (c) market participants with whom the reporting entity would transact in that market.liability. Cash flows are discounted at a rate whichthat incorporates a current market rate for similar-term debt instruments, adjusted for credit and liquidity risks associated with similar junior subordinated debt and circumstances unique to the Company. The Company believes that the subjective nature of thesesthese inputs, due primarily tocredit concerns in the current economic environment, requirecapital markets, and inactivity in the trust preferred markets, limit the observability of market spreads, requiring the junior subordinated debt to be classified asat a Level 3 fair value.
Accrued Interest ReceivableThe following tables summarize the Company’s assets and Payable- The carrying value of these instruments is a reasonable estimate of fair value.
Off-Balance Sheet Instruments - Off-balance sheet instruments consist of commitments to extend credit, standby letters of credit and derivative contracts. Fair values of commitments to extend credit are estimated using the interest rate currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present
counterparties’ credit standing. There was no material difference between the contractual amount and the estimatedliabilities that were measured at fair value on a recurring basis as of commitments to extend creditMarch 31, 2024:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | March 31, 2024 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | | | |
Assets: | | | | | | | | | | | | |
AFS Securities: | | | | | | | | | | | | |
U.S. Government agencies | | $ | 5,883 | | $ | — | | | $ | 5,883 | | | $ | — | | | | | |
U.S. Government collateralized mortgage obligations | | 84,541 | | — | | | 84,541 | | | — | | | | | |
| | | | | | | | | | | | |
Municipal bonds | | 40,029 | | — | | | 40,029 | | | — | | | | | |
Tax-exempt municipal bonds | | 2,225 | | | | 2,225 | | | | | | | |
| | | | | | | | | | | | |
Corporate bond | | 32,488 | | — | | | 32,488 | | | — | | | | | |
Total AFS securities | | 165,166 | | | — | | | 165,166 | | | — | | | | | |
Marketable equity securities | | 3,397 | | | 3,397 | | | — | | | — | | | | | |
Total | | $ | 168,563 | | $ | 3,397 | | | $ | 165,166 | | | $ | — | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | |
Junior subordinated debt | | $ | 11,348 | | | $ | — | | | $ | — | | | $ | 11,348 | |
Total | | $ | 11,348 | | | $ | — | | | $ | — | | | $ | 11,348 | |
The following tables summarize the Company’s assets and liabilities that were measured at September 30, 2017 and fair value on a recurring basis as of December 31, 2016.2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | December 31, 2023 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | |
AFS Securities: | | | | | | | | |
U.S. Government agencies | | $ | 6,156 | | | $ | — | | | $ | 6,156 | | | $ | — | |
U.S. Government collateralized mortgage obligations | | 88,184 | | | — | | | 88,184 | | | — | |
| | | | | | | | |
Municipal bonds | | 40,115 | | | — | | | 40,115 | | | — | |
Tax-exempt municipal bonds | | 2,250 | | | | | 2,250 | | | |
Treasury securities | | 12,438 | | | — | | | 12,438 | | | — | |
Corporate bonds | | 32,122 | | | — | | | 32,122 | | | — | |
Total AFS securities | | 181,265 | | | — | | | 181,265 | | | — | |
Marketable equity securities | | 3,354 | | | 3,354 | | | — | | | — | |
Total | | $ | 184,619 | | | $ | 3,354 | | | $ | 181,265 | | | $ | — | |
Fair values of standby letters of credit are based on fees currently charged for similar agreements. The
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | |
Junior subordinated debt | | $ | 11,213 | | | $ | — | | | $ | — | | | $ | 11,213 | |
Total | | $ | 11,213 | | | $ | — | | | $ | — | | | $ | 11,213 | |
There were no non-recurring fair value of commitments generally approximates the fees received from the customer for issuing such commitments. These fees are not material to the Company’s consolidated balance sheets and results of operations.adjustments at March 31, 2024, or December 31, 2023.
The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at September 30, 2017March 31, 2024, and December 31, 2016:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2024 | | December 31, 2023 |
Financial Instrument | | Valuation Technique | | Unobservable Input | | Weighted Average | | Financial Instrument | | Valuation Technique | | Unobservable Input | | Weighted Average |
Junior Subordinated Debt | | Discounted cash flow | | Market credit risk-adjusted spreads | | 6.31% | | Junior Subordinated Debt | | Discounted cash flow | | Market credit risk-adjusted spreads | | 6.14% |
|
| | | | | | | | |
September 30, 2017 | | December 31, 2016 |
Financial Instrument | Valuation Technique | Unobservable Input | Weighted Average | | Financial Instrument | Valuation Technique | Unobservable Input | Weighted Average |
Junior Subordinated Debt | Discounted cash flow | Discount Rate | 5.89% | | Junior Subordinated Debt | Discounted cash flow | Discount Rate | 6.46% |
Management believes that the credit risk adjustedrisk-adjusted spread utilized in the fair value measurement of the junior subordinated debentures carried at fair value is indicative of the nonperformance risk premium a willing market participant would require under current, inactive market conditions, that is, the inactive market.conditions. Management attributes the change in fair value of the junior subordinated debentures during the period to market changes in the nonperformance expectations and pricing of this type of debt, and not as a result of changes to our entity-specific credit risk. The narrowing of the credit risk adjusted spread above the Company’s contractual spreads has primarily contributed to the negative fair value adjustments.debt. Generally, an increase in the credit risk adjustedrisk-adjusted spread and/or a decrease in the three month LIBOR swapforward three-month SOFR curve will result in a positive fair value adjustments (andadjustment and a decrease in the fair value measurement).measurement. Conversely, a decrease in the credit risk adjusted spread and/or an increase in the three month LIBOR swapforward three-month SOFR curve will result in a negative fair value adjustments (andadjustment and an increase in the fair value measurement).measurement. The decreaseincrease in discount rate between the periods ended September 30, 2017March 31, 2024, and December 31, 20162023, is primarily due to decreasesincreases in rates for similar debt instruments.
The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of September 30, 2017 (in 000’s):
|
| | | | | | | | | | | | | | | |
Description of Assets | September 30, 2017 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
AFS Securities (2): | | | | | | | |
U.S. Government agencies | $ | 20,970 |
| | $ | — |
| | $ | 20,970 |
| | $ | — |
|
U.S. Government collateralized mortgage obligations | 23,603 |
| | — |
| | 23,603 |
| | — |
|
Mutual Funds | 3,783 |
| | 3,783 |
| | — |
| | — |
|
Total AFS securities | $ | 48,356 |
| | $ | 3,783 |
| | $ | 44,573 |
| | $ | — |
|
| | | | | | | |
Total | $ | 48,356 |
| | $ | 3,783 |
| | $ | 44,573 |
| | $ | — |
|
|
| | | | | | | | | | | | | |
Description of Liabilities | September 30, 2017 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Junior subordinated debt (2) | $ | 9,534 |
| | — |
| | — |
| | $ | 9,534 |
|
Total | $ | 9,534 |
| | — |
| | — |
| | $ | 9,534 |
|
(1)Nonrecurring
(2)Recurring
The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of December 31, 2016 (in 000’s):
|
| | | | | | | | | | | | | | | |
Description of Assets | December 31, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
AFS Securities (2): | | | | | | | |
U.S. Government agencies | $ | 23,203 |
| | $ | — |
| | $ | 23,203 |
| | $ | — |
|
U.S. Government collateralized mortgage obligations | 30,572 |
| | — |
| | 30,572 |
| | — |
|
Mutual Funds | 3,716 |
| | 3,716 |
| | — |
| | — |
|
Total AFS securities | 57,491 |
| | 3,716 |
| | 53,775 |
| | $ | — |
|
Impaired Loans (1): | |
| | |
| | |
| | |
|
Commercial and industrial | 301 |
| | — |
| | — |
| | 301 |
|
Total impaired loans | $ | 301 |
| | $ | — |
| | $ | — |
| | $ | 301 |
|
| | | | | | | |
Total | $ | 57,792 |
| | $ | 3,716 |
| | $ | 53,775 |
| | $ | 301 |
|
|
| | | | | | | | | | | | | | | |
Description of Liabilities | December 31, 2016 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Junior subordinated debt (2) | $ | 8,832 |
| | $ | — |
| | $ | — |
| | $ | 8,832 |
|
Total | $ | 8,832 |
| | $ | — |
| | $ | — |
| | $ | 8,832 |
|
(1)Nonrecurring
(2)Recurring
The Company did not record a write-down on other real estate owned during the nine months endedSeptember 30, 2017 or the year ended December 31, 2016.
The following table presents quantitative information about Level 3 fair value measurements for the Company's assets measured at fair value on a non-recurring basis at December 31, 2016 (in 000's). There were no assets measured at fair value on a non-recurring basis as of September 30, 2017.
|
| | | | | | |
December 31, 2016 |
Financial Instrument | Fair Value | Valuation Technique | Unobservable Input | Range, Weighted Average |
Impaired Loans: | | | | |
Commercial and industrial | $ | 301 |
| Sales Comparison Approach | Adjustment for difference between comparable sales | 7% - 29%, 19.1% |
The following tables provideprovides a reconciliation of assets and liabilities at fair value using Level 3 significant, unobservable inputs (Level 3) on a recurring basis during the threebasis:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
(In thousands) | | March 31, 2024 | | March 31, 2023 | | | | |
Junior Subordinated Debt: | | | | | | | | |
Beginning balance | | $ | 11,213 | | | $ | 10,883 | | | | | |
Gross loss (gain) included in earnings | | 294 | | | (333) | | | | | |
Gross (gain) loss related to changes in instrument-specific credit risk | | (155) | | | 440 | | | | | |
(Decrease) increase in accrued interest | | (4) | | | $ | 27 | | | | | |
Ending balance | | $ | 11,348 | | | $ | 11,017 | | | | | |
The amount of total loss (gain) for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities held at the reporting date | | $ | 294 | | | $ | (333) | | | | | |
14.Goodwill and nine months endedSeptember 30, 2017 and 2016 (in 000’s):Intangible Assets
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 |
Reconciliation of Liabilities: | Junior Subordinated Debt | | Junior Subordinated Debt | | Junior Subordinated Debt | | Junior Subordinated Debt |
Beginning balance | $ | 9,441 |
| | $ | 7,837 |
| | $ | 8,832 |
| | $ | 8,300 |
|
Total loss (gain) included in earnings | 88 |
| | 423 |
| | 688 |
| | (48 | ) |
Other accrued interest | 5 |
| | 2 |
| | 14 |
| | 10 |
|
Ending balance | $ | 9,534 |
| | $ | 8,262 |
| | $ | 9,534 |
| | $ | 8,262 |
|
The amount of total loss (gains) for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date | $ | 88 |
| | $ | 423 |
| | $ | 688 |
| | $ | (48 | ) |
| |
12. | Goodwill and Intangible Assets |
At September 30, 2017,March 31, 2024, the Company hadheld goodwill in the amount of $4,488,000$4.5 million in connection with various business combinations and purchases. This amount was unchanged from the balance of $4,488,000$4.5 million at December 31, 2016. While goodwill is not amortized, the2023. The Company does conduct periodicconducts impairment analysis on goodwill at leastboth annually or more often as conditions require.and in the event of triggering events, if any. The Company performed itsan analysis of goodwill impairment and concluded goodwill was not impaired at September 30, 2017.
Subsequent eventsare events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the dateas of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewedDecember 31, 2023, with no triggering events occurring through the period ended March 31, 2024.
15.Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income included in shareholders’ equity are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
(In thousands) | | Net unrealized gain (loss) on available-for-sale securities | | Unfunded status of the supplemental retirement plans | | Net unrealized gain (loss) on junior subordinated debentures | | Net unrealized gain (loss) on available-for-sale securities | | Unfunded status of the supplemental retirement plans | | Net unrealized gain (loss) on junior subordinated debentures |
Beginning balance | | $ | (16,290) | | | $ | (130) | | | $ | 1,382 | | | $ | (19,066) | | | $ | (194) | | | $ | 1,765 | |
Current period comprehensive income (loss), net of tax | | (753) | | | 7 | | | 109 | | | 2,776 | | | 64 | | | (383) | |
Ending balance | | $ | (17,043) | | | $ | (123) | | | $ | 1,491 | | | $ | (16,290) | | | $ | (130) | | | $ | 1,382 | |
Accumulated other comprehensive loss | | | | | | $ | (15,675) | | | | | | | $ | (15,038) | |
16.Investment in York Monterey Properties
The Bank wholly owns the subsidiary, York Monterey Properties, Inc. (“Properties”), which is organized as a California corporation. The Bank capitalized the subsidiary through the transfer of eight unimproved lots at a historical cost of $5.3 million comprised of approximately 186.97 acres in the York Highlands subdivision of the Monterra Ranch residential development in Monterey County, California, together with cash contributions. The Bank transferred the properties to York Monterey Properties, Inc., to maintain ownership beyond the ten-year regulatory holding period applicable to a state bank. The Bank acquired five of the lots through a non-judicial foreclosure on or about May 29, 2009. In addition, the Bank purchased three of the lots from another bank. The Bank has continuously held the Properties from the date of foreclosure and acquisition until the time of transfer. At the time of transfer, the Properties had reached the end of the ten-year regulatory holding period limit.
At both March 31, 2024 and December 31, 2023, the Bank’s investment in York Monterey Properties, Inc., totaled $5.0 million. York Monterey Properties, Inc., is included within the consolidated financial statements wereof the Company, with $4.6 of the total investment recognized within the balance of other real estate owned on the consolidated balance sheets.
17.Commitments and Contingent Liabilities
Financial Instruments with Off-Balance Sheet Risk: The Company is party to financial instruments with off-balance sheet risks which arise in the normal course of business. These instruments, which may contain elements of credit risk, interest rate risk, and liquidity risk, include commitments to extend credit and standby letters of credit. The credit risks associated with these instruments are essentially the same as those involved in extending credit to customers and are represented by the contractual amount indicated in the table below:
| | | | | | | | | | | | | | |
(In thousands) | | March 31, 2024 | | December 31, 2023 |
Commitments to extend credit | | $ | 190,319 | | | $ | 183,537 | |
Standby letters of credit | | $ | 2,170 | | | $ | 2,940 | |
Commitments to extend credit are agreements to lend to a customer, as long as conditions established in the contract have not been violated. These commitments are floating-rate instruments based on the current prime rate, and, in most cases, have fixed expiration dates. The Company evaluates each customer’s creditworthiness on a case-by-case basis, and the amount of collateral obtained is based on management’s credit evaluation. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate, and income-producing properties. As many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent the future cash requirements of the Company.
Standby letters of credit are generally unsecured and are issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company’s letters of credit are short-term guarantees and generally have identified no subsequent events requiring disclosure.terms from one month to three years. At March 31, 2024, the maximum potential amount of future undiscounted payments the Company could be required to make under outstanding standby letters of credit totaled $2.2 million.
The remaining unfunded commitments for the investment in limited partnership as of March 31, 2024, and December 31, 2023, totaled $600,000 and $800,000, respectively.
In the ordinary course of business, the Company may become involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material to the financial position of the Company.
Item 2 - Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Certain matters discussed, or incorporated by reference in this Quarterly Report of Form 10-Q, are contain forward-looking statements about the Company that are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995 and are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, but are not limited to, those described in Management’s Discussion and Analysis of Financial Condition and Results of Operations.projected. Such risks and uncertainties include, but are not limited to, the following factors: i) competitive
•Adverse developments with respect to U.S. or global economic conditions and other uncertainties, including the impact of supply chain disruptions, inflationary pressures, and labor shortages;
•The impact of natural disasters, earthquakes, wildfires, terrorist attacks, threats of war or actual war, including current military actions involving the Russian Federation and Ukraine and the conflict in the banking industryMiddle East, and changeshealth epidemics;
•Changes in general economic and financial market conditions either nationally or locally;
•Fiscal policies of the regulatory environment; ii) exposure to changes in theU.S. government including interest rate environmentpolicies of the Board of Governors of the Federal Reserve System and the resulting impact on the Company’s interest rateinterest-rate sensitive assets and liabilities; iii) decline
•Government policies that could lead to a tightening of credit and a requirement that the Company raise additional capital;
•Increased competition in the healthCompany’s markets, impacting the ability to execute its business plans;
•Loss of, or inability to attract, key personnel;
•Unanticipated deterioration in our loan portfolio, credit losses, and the sufficiency of our allowance for credit losses;
•The ability to grow our loan portfolio due to constraints on concentrations of credit;
•Drought, earthquakes, floods, wildfires, or other natural disasters impacting the local economy nationally and/or regionally which could reduce the demand for loans or reduce the valuecondition of real estate collateral securing mostcollateral;
•The impact of technological changes and the ability to develop and maintain secure and reliable electronic systems including failures in or breaches of the Company’s loans; iv) creditoperational and/or security systems or infrastructure;
•The failure to maintain effective controls over our financial reporting;
•The quality deterioration that could cause an increaseand quantity of our deposits and our ability to attract and retain deposits and other sources of funding and liquidity;
•Adverse developments in the provision for loan losses; v) financial services industry generally such as the recent bank failures and any related impact on depositor behavior or investor sentiment;
•The possibility that our recorded goodwill could become impaired which may have an adverse impact on our earnings and capital;
•Asset/Liabilityliability matching risksrisks; and liquidity risks; volatility and devaluation
•Changes in the securities markets, vi) expected cost savings from recent acquisitions are not realized, vii) potential impairment of goodwill and other intangible assets, and viii) technology implementation problems and information security breaches. Therefore, theaccounting policies or procedures.
The information set forth thereinherein should be carefully considered when evaluating the business prospects of the Company. For additional information concerning risks and uncertainties related to the Company and its operations, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2023.
The Company
United Security Bancshares, (the “Company” or “Holding Company") is a California corporation, incorporated during March of 2001 and is registered with the Board of Governors of the Federal Reserve System as a bank holding company registered under the Bank Holding Company Act (BHCA) with corporate headquarters located in Fresno, California. The principal business of 1956,United Security Bancshares is to serve as amended.the holding company for its wholly-owned subsidiary, United Security Bank. References to the “Bank” refer to United Security Bank (the “Bank”) is atogether with its wholly-owned bank subsidiary, of the Company and was formed in 1987.York Monterey Properties, Inc. References to the Company are references“Company” refer to United Security Bancshares (including the Bank).together with its subsidiaries on a consolidated basis. References to the Bank are“Holding Company” refer to United Security Bank, while references to the Holding Company are toBancshares, the parent only, United Security Bancshares.company, on a stand-alone basis. The CompanyBank currently has elevenmaintains 12 banking branches, which provide financialbanking services in Fresno, Madera, Kern, and Santa Clara counties, in the state of California. In addition to full-service branches, the Bank has several stand-alone interactive teller machines (ITMs) within its geographic footprint.
Executive Summary
During 2024, the Company has worked closely with long-term, core customers to provide deposit and lending solutions that meet their business and individual needs. The Company has also focused on maintaining adequate liquidity, managing credit risk, and responsibly managing growth on the balance sheet.
First Quarter 2024 Highlights (as of, or for, the quarter ended March 31, 2024, except where noted):
▪Net interest margin decreased to 4.35% for the quarter ended March 31, 2024, compared to 4.51% for the quarter ended March 31, 2023.
▪Annualized average cost of funds, including short-term borrowings, was 1.73% for the quarter ended March 31, 2024, compared to 0.83% for the quarter ended March 31, 2023.
▪Net income for the quarter decreased 32.07% to $4.2 million for the quarter ended March 31, 2024, compared to the $6.1 million reported for the quarter ended March 31, 2023.
▪Interest and fees on loans increased 3.70% to $13.5 million, as a result of increases in interest rates, compared to $13.0 million for the first quarter of 2023.
▪The total fair value of the junior subordinated debentures (TRUPs) changed by $139,000 during the quarter ended March 31, 2024. A loss of $294,000 was recorded through the income statement and a gain of $155,000 was recorded through accumulated other comprehensive income.
▪The Company recorded a provision for credit losses of $173,000 for the quarter ended March 31, 2024, compared to a reversal of provision of $493,000 for the quarter ended March 31, 2023.
▪Net interest income before the provision for credit losses decreased 9.51% to $11.7 million for the quarter ended March 31, 2024, compared to $12.9 million for the quarter ended March 31, 2023.
▪Annualized return on average assets (ROAA) decreased to 1.40% for the quarter ended March 31, 2024, compared to 1.95% for the quarter ended March 31, 2023.
▪Annualized return on average equity (ROAE) decreased to 13.51% for the quarter ended March 31, 2024, compared to 22.05% for the quarter ended March 31, 2023.
▪The Company had remaining available secured lines of credit of $548.3 million, available unsecured lines of credit of $62.0 million, unpledged investment securities of $81.6 million, and cash and cash equivalents of $43.0 million as of March 31, 2024. Short-term borrowings totaled $103.0 million at March 31, 2024, compared to $62.0 million at December 31, 2023.
▪Total loans, net of unearned fees, increased 1.02% to $929.4 million, compared to $920.0 million at December 31, 2023.
▪Total investments decreased 8.70%, to $168.6 million, compared to $184.6 million at December 31, 2023.
▪Total deposits decreased 4.83% to $955.9 million, compared to $1.0 billion at December 31, 2023.
▪Net charge-offs totaled $289,000, compared to net charge-offs of $434,000 for the quarter ended March 31, 2023.
▪The allowance for credit losses as a percentage of gross loans decreased to 1.66%, compared to 1.70% at December 31, 2023.
▪Book value per share increased to $7.17, compared to $7.14 at December 31, 2023.
▪Capital position remains well-capitalized with a 12.47% Tier 1 Leverage Ratio compared to 11.82% as of December 31, 2023.
Trends Affecting Results of Operations and Financial Position
The Company’s overall operations are impacted by a number of factors including not only interest rates and margin spreads, which impact the results of operations, but also the composition of the Company’s consolidated balance sheet. One of the primary strategic goals of the Company is to maintain a mix of assets that will generate a reasonable rate of return without undue risk and to finance those assets with a low-cost and stable source of funds. Liquidity and capital resources must also be considered in the planning process to mitigate risk and allow for growth.
Since the Bank primarily conducts banking operations in California’s Central Valley, its operations and cash flows are subject to changes in the economic condition of the Central Valley. Our businessBusiness results are dependent in large part upon the business activity, population, income levels, deposits, and real estate activity in the Central Valley, and declines in economic conditions can have adverse materialmaterially-adverse effects uponon the Bank. In addition,Due to the Central Valley remains largely dependentValley’s economic dependence on agriculture. Aagriculture, a downturn in agriculture and agricultural relatedagricultural-related business could indirectly and adversely affect the Company as many borrowers and customers are involved in, or are impacted to some extent impacted by, the agricultural industry. The agricultural industry has been affected by declines in prices and changes in yields of various crops and other agricultural commodities. Weaker prices could reduce the cash flows generated by farms and the value of agricultural land in our local markets and thereby increase the risk of default by our borrowers or reduce the foreclosure value of agricultural land and equipment that serve as collateral of our loans. Moreover, weaker prices might threaten farming operations in the Central Valley, reducing market demand for agricultural lending. In particular, farm income has seen recent declines, and in line with the downturn in farm income, farmland prices are coming under pressure. While a great numbermost of our borrowers are not directly involved in agriculture, they would likely be impacted by difficultiesdownturns in the agricultural industry sinceas many jobs in our market areas are ancillary to the regular production, processing, marketing, and sale of agricultural commodities. WhileDespite the prolonged drought has been alleviated during the past year due to significant amounts of precipitation,unusually wet winter experienced recently, the state of California recentlyhas experienced severe droughts in the worst droughtpast which have resulted in recorded history. It is not possiblewater-allocation reductions for farmers in the Central Valley.
Due to quantifythese uncertain water issues, the drought's impact on businesses and consumers located in the Company'sCompany’s market areas oris not possible to predict adverse economic impacts relatedor quantify. In response to future droughts.drought conditions, the California state legislature passed the Sustainable Groundwater Management Act in 2014 with the goal of ensuring better local and regional management of groundwater use and sustainable groundwater management in California by 2042. Development, preparation, and implementation of the Groundwater Sustainability Plan began in 2020. The effects of this plan have yet to be determined.
The residential real estate markets inCompany’s earnings are impacted by the five county region from Mercedmonetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank (FRB) has a significant impact on the operating results of depository institutions through its power to Kern has strengthened since 2013 and that trend has continued through 2017.implement national monetary policy, among other things, to curb inflation or combat a recession. The severe declines in residential construction and home prices that began in 2008 have ended and home prices are now rising on a year-over-year basis. The sustained period of double-digit price declines from 2008–2011 adversely impacted the Company’s operations and increasedFRB affects the levels of nonperforming assets, increased expenses relatedbank loans, investments. and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to foreclosed properties,member banks, and decreased profit margins. Asits influence over reserve requirements to which member banks may be subject. While the Company continues its business development and expansion efforts throughout its market areas, itFederal Open Market Committee (FOMC) has indicated that interest rates will also maintain its commitment tolikely decrease during 2024, there were no rate decreases during the reductionfirst quarter of nonperforming assets and provision of options for borrowers experiencing difficulties. Those options include combinations of2024. It is unknown what effects increases or decreases in the inflation rate and term concessions, as well as forbearance agreementsthe recent banking turmoil, in conjunction with borrowers.continued international instability, will have on FRB monetary policies.
The Company continues to emphasize relationship banking and core deposit growth, and has focused greater attention on its market area of Fresno, Madera, and Kern Counties, as well as Campbell, in Santa Clara County. The San Joaquin Valley and
other California markets are exhibiting stronger demand for construction lending and commercial lending from small and medium size businesses, as commercial and residential real estate markets have shown improvements.
The Company continually evaluates its strategic business plan as economic and market factors change in its market area. BalanceManaging the balance sheet, management, enhancing revenue sources, attracting and retaining deposit customers, and maintaining market share will continue to be of primary importance during 2017 and beyond. The previous pressure on net margins as interest rates hit historical lows may now be ending as interest rates are anticipated to rise slowly. As a result, market rates of interest and asset quality will continue to be important factors in the Company’s ongoing strategic planning process.importance.
Results of Operations
On a year-to-date basis, the Company reported net income of $7,004,000$4.2 million, or $0.41$0.24 per share ($0.41($0.24 diluted), for the nine monthsquarter ended September 30, 2017, asMarch 31, 2024, compared to $5,830,000$6.1 million, or $0.35$0.36 per share ($0.350.36 diluted), for the same period in 2016.2023. The Company’s annualized return on average assets was 1.17%1.40% for the nine monthsquarter ended September 30, 2017, asMarch 31, 2024, compared to 1.04%1.95% for the nine monthsquarter ended September 30, 2016.March 31, 2023. The Company’s annualized return on average equity was 9.42%13.51% for the nine monthsquarter ended September 30, 2017, asMarch 31, 2024, compared to 8.38%22.05% for the nine monthsquarter ended September 30, 2016.March 31, 2023. The decrease in the return on average assets is primarily attributable to increases in deposit and short-term borrowing costs and decreases in average assets. The decrease in the return on average equity is primarily due to a decrease in net income and an increase in average equity.
Net Interest Income
The following tables presenttable presents condensed average balance sheet information, together with interest income and yields earned on average interest earninginterest-earning assets and interest expense and rates paid on average interest-bearing liabilities for the three and nine month periods ended September 30, 2017March 31, 2024 and 2016.2023.
Distribution of Average Assets, Liabilities and Shareholders’ Equity:Equity:
Interest rates and Interest Differentials
Three Months Ended September 30, 2017March 31, 2024 and 20162023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | March 31, 2023 |
(Dollars in thousands) | | Average Balance | | Interest | | Yield/Rate (2) | | Average Balance | | Interest | | Yield/Rate (2) |
Assets: | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | |
Loans (1) (2) | | $ | 904,392 | | | $ | 13,481 | | | 6.00 | % | | $ | 947,453 | | | $ | 13,000 | | | 5.56 | % |
Securities: | | | | | | | | | | | | |
Taxable securities | | 175,051 | | | 1,341 | | | 3.08 | % | | 209,231 | | | 1,488 | | | 2.88 | % |
Tax-exempt securities (3) | | 2,225 | | | 13 | | | 2.35 | % | | 2,292 | | | 13 | | | 2.30 | % |
Total investment securities (4) | | 177,276 | | | | | | | 211,523 | | | | | |
Interest-bearing deposits in FRB | | 3,218 | | | 44 | | | 5.50 | % | | 5,493 | | | 58 | | | 4.28 | % |
Total interest-earning assets | | 1,084,886 | | | $ | 14,879 | | | 5.52 | % | | 1,164,469 | | | $ | 14,559 | | | 5.07 | % |
Allowance for credit losses | | (15,671) | | | | | | | (16,323) | | | | | |
Noninterest-earning assets: | | | | | | | | | | | | |
Cash and due from banks | | 31,564 | | | | | | | 36,008 | | | | | |
Nonaccrual loans | | 12,083 | | | | | | | 13,195 | | | | | |
Premises and equipment, net | | 9,021 | | | | | | | 9,685 | | | | | |
Accrued interest receivable | | 7,076 | | | | | | | 7,696 | | | | | |
Other real estate owned | | 4,582 | | | | | | | 4,582 | | | | | |
Other assets | | 59,767 | | | | | | | 61,169 | | | | | |
Total average assets | | $ | 1,193,308 | | | | | | | $ | 1,280,481 | | | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | |
NOW accounts | | $ | 135,114 | | | $ | 170 | | | 0.51 | % | | $ | 142,222 | | | $ | 40 | | | 0.11 | % |
Money market accounts | | 241,194 | | | 1,022 | | | 1.70 | % | | 363,717 | | | 1,071 | | | 1.19 | % |
Savings accounts | | 119,963 | | | 33 | | | 0.11 | % | | 124,840 | | | 33 | | | 0.11 | % |
Time deposits | | 104,765 | | | 498 | | | 1.91 | % | | 58,927 | | | 199 | | | 1.37 | % |
Other borrowings | | 85,436 | | | 1,233 | | | 5.80 | % | | 7,492 | | | 90 | | | 4.87 | % |
Junior subordinated debentures | | 12,464 | | | 209 | | | 6.74 | % | | 12,464 | | | 181 | | | 5.89 | % |
Total interest-bearing liabilities | | 698,936 | | | $ | 3,165 | | | 1.82 | % | | 709,662 | | | $ | 1,614 | | | 0.92 | % |
Noninterest-bearing liabilities: | | | | | | | | | | | | |
Noninterest-bearing checking | | 361,671 | | | | | | | 445,502 | | | | | |
Other liabilities | | 8,773 | | | | | | | 12,351 | | | | | |
Total liabilities | | 1,069,380 | | | | | | | 1,167,515 | | | | | |
Total shareholders’ equity | | 123,928 | | | | | | | 112,966 | | | | | |
Total average liabilities and shareholders’ equity | | $ | 1,193,308 | | | | | | | $ | 1,280,481 | | | | | |
Interest income as a percentage of average earning assets | | | | | | 5.52 | % | | | | | | 5.07 | % |
Interest expense as a percentage of average earning assets | | | | | | 1.17 | % | | | | | | 0.56 | % |
Net interest margin | | | | | | 4.35 | % | | | | | | 4.51 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | | | | | 2016 | | |
(dollars in thousands) | Average Balance | | Interest | | Yield/Rate (2) | | Average Balance | | Interest | | Yield/Rate (2) |
| | | | | |
Assets: | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | |
Loans and leases (1) | $ | 574,484 |
| | $ | 7,978 |
| | 5.51 | % | | $ | 574,885 |
| | $ | 7,435 |
| | 5.15 | % |
Investment Securities – taxable (3) | 51,811 |
| | 238 |
| | 1.82 | % | | 56,887 |
| | 244 |
| | 1.71 | % |
Interest-bearing deposits in other banks | 654 |
| | 1 |
| | 0.61 | % | | 1,533 |
| | 2 |
| | 0.52 | % |
Interest-bearing deposits in FRB | 117,803 |
| | 375 |
| | 1.26 | % | | 56,264 |
| | 72 |
| | 0.51 | % |
Total interest-earning assets | 744,752 |
| | $ | 8,592 |
| | 4.58 | % | | 689,569 |
| | $ | 7,753 |
| | 4.47 | % |
Allowance for credit losses | (9,104 | ) | | |
| | |
| | (8,913 | ) | | |
| | |
|
Noninterest-earning assets: | | | |
| | |
| | |
| | |
| | |
|
Cash and due from banks | 22,375 |
| | |
| | |
| | 21,857 |
| | |
| | |
|
Premises and equipment, net | 10,623 |
| | |
| | |
| | 10,321 |
| | |
| | |
|
Accrued interest receivable | 4,878 |
| | |
| | |
| | 2,791 |
| | |
| | |
|
Other real estate owned | 5,745 |
| | |
| | |
| | 7,407 |
| | |
| | |
|
Other assets | 37,355 |
| | |
| | |
| | 36,734 |
| | |
| | |
|
Total average assets | $ | 816,624 |
| | |
| | |
| | $ | 759,766 |
| | |
| | |
|
Liabilities and Shareholders' Equity: | |
| | |
| | |
| | |
| | |
| | |
|
Interest-bearing liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
NOW accounts | $ | 87,435 |
| | $ | 30 |
| | 0.14 | % | | $ | 86,074 |
| | $ | 30 |
| | 0.14 | % |
Money market accounts | 156,050 |
| | 187 |
| | 0.48 | % | | 148,411 |
| | 142 |
| | 0.38 | % |
Savings accounts | 81,027 |
| | 47 |
| | 0.23 | % | | 67,652 |
| | 34 |
| | 0.20 | % |
Time deposits | 66,841 |
| | 91 |
| | 0.54 | % | | 70,772 |
| | 83 |
| | 0.47 | % |
Junior subordinated debentures | 9,399 |
| | 80 |
| | 3.38 | % | | 7,805 |
| | 60 |
| | 3.06 | % |
Total interest-bearing liabilities | 400,752 |
| | $ | 435 |
| | 0.43 | % | | 380,714 |
| | $ | 349 |
| | 0.36 | % |
Noninterest-bearing liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
Noninterest-bearing checking | 308,480 |
| | |
| | |
| | 275,878 |
| | |
| | |
|
Accrued interest payable | 92 |
| | |
| | |
| | 73 |
| | |
| | |
|
Other liabilities | 6,298 |
| | |
| | |
| | 8,194 |
| | |
| | |
|
Total Liabilities | 715,622 |
| | |
| | |
| | 664,859 |
| | |
| | |
|
| | | | | | | | | | | |
Total shareholders' equity | 101,002 |
| | |
| | |
| | 94,907 |
| | |
| | |
|
Total average liabilities and shareholders' equity | $ | 816,624 |
| | |
| | |
| | $ | 759,766 |
| | |
| | |
|
Interest income as a percentage of average earning assets | |
| | |
| | 4.58 | % | | |
| | |
| | 4.47 | % |
Interest expense as a percentage of average earning assets | |
| | |
| | 0.23 | % | | |
| | |
| | 0.20 | % |
Net interest margin | |
| | |
| | 4.35 | % | | |
| | |
| | 4.27 | % |
| |
(1) | (1)Loan amounts include nonaccrual loans, but the related interest income has been included only if collected for the period prior to the loan being placed on a nonaccrual basis. Loan interest income includes loan costs of approximately $68,000 for the quarter ended September 30, 2017 and loan costs of $133,000 for the quarter ended September 30, 2016. |
| |
(2) | Interest income/expense is divided by actual number of days in the period times 365 days in the yield calculation |
| |
(3) | Yields on investments securities are calculated based on average amortized cost balances rather than fair value, as changes in fair value are reflected as a component of shareholders' equity. |
For the quarter ended September 30, 2017, total interest income increased $839,000 or 10.82%, as comparedincludes loan fee costs of approximately $199,000 for the three months ended March 31, 2024, and loan fee income of $26,000 for the three months ended March 31, 2023.
(2)Interest income/expense is divided by actual number of days in the period times 365 days in the yield calculation.
(3)Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to the quarter ended September 30, 2016. Comparing those two periods, average interest earning assets increased $55,183,000, with a $61,539,000 increaseincome earned on balances held at the Federal Reserve Bank, partially offset by a $5,076,000 decrease inmunicipal bonds totaling $4,000 for both periods.
(4)Yields on investment securities, and a $401,000 decreaseaside from marketable equity securities, are calculated based on average amortized cost balances rather than fair value, as changes in loans and leases. The average yield on total interest-earning assets increased 11 basis points. Loan yields increased 36 basis points primarilyfair value are reflected as a resultcomponent of loan growth in the higher-yielding student loan portfolio, and increases on rates throughout the loan portfolio reflecting the increase in the prime rate. Yields on interest bearing deposits at the Federal Reserve Bank and other banks increased for the quarter ended September 30, 2017 as a result of the two 0.25% interest rate increases during 2017. For the quarter ended September 30, 2017, total interest expense increased $86,000 or 24.64% as compared to the quarter ended September 30, 2016, as a result of a $20,038,000 increase in interest-bearing liabilities. The average rate paid on interest-bearing liabilities was 0.43% for the quarter ended September 30, 2017 and 0.36% for the quarter ended September 30, 2016.shareholders’ equity.
Interest rates and Interest Differentials
Nine months ended September 30, 2017 and 2016
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | | | | | 2016 | | |
(dollars in 000's) | Average Balance | | Interest | | Yield/Rate (2) | | Average Balance | | Interest | | Yield/Rate (2) |
| | | | | |
Assets: | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | |
Loans and leases (1) | $ | 565,068 |
| | $ | 22,782 |
| | 5.39 | % | | $ | 532,133 |
| | $ | 20,722 |
| | 5.20 | % |
Investment Securities – taxable (3) | 54,284 |
| | 691 |
| | 1.70 | % | | 46,384 |
| | 618 |
| | 1.78 | % |
Interest-bearing deposits in other banks | 652 |
| | 4 |
| | 0.82 | % | | 1,531 |
| | 6 |
| | 0.52 | % |
Interest-bearing deposits in FRB | 107,921 |
| | 858 |
| | 1.06 | % | | 93,305 |
| | 348 |
| | 0.50 | % |
Total interest-earning assets | 727,925 |
| | $ | 24,335 |
| | 4.47 | % | | 673,353 |
|
| $ | 21,694 |
| | 4.30 | % |
Allowance for credit losses | (9,017 | ) | | |
| | |
| | (9,439 | ) | | |
| | |
|
Noninterest-earning assets: | |
| | |
| | |
| | |
| | |
| | |
|
Cash and due from banks | 21,393 |
| | |
| | |
| | 22,126 |
| | |
| | |
|
Premises and equipment, net | 10,708 |
| | |
| | |
| | 10,550 |
| | |
| | |
|
Accrued interest receivable | 4,248 |
| | |
| | |
| | 2,350 |
| | |
| | |
|
Other real estate owned | 6,083 |
| | |
| | |
| | 9,797 |
| | |
| | |
|
Other assets | 36,731 |
| | |
| | |
| | 36,552 |
| | |
| | |
|
Total average assets | $ | 798,071 |
| | |
| | |
| | $ | 745,289 |
| | |
| | |
|
Liabilities and Shareholders' Equity: | |
| | |
| | |
| | |
| | |
| | |
|
Interest-bearing liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
NOW accounts | $ | 87,598 |
| | $ | 87 |
| | 0.13 | % | | $ | 84,610 |
| | $ | 81 |
| | 0.13 | % |
Money market accounts | 152,257 |
| | 506 |
| | 0.44 | % | | 146,801 |
| | 419 |
| | 0.38 | % |
Savings accounts | 78,247 |
| | 136 |
| | 0.23 | % | | 66,117 |
| | 103 |
| | 0.21 | % |
Time deposits | 80,861 |
| | 326 |
| | 0.54 | % | | 70,936 |
| | 234 |
| | 0.44 | % |
Junior subordinated debentures | 9,114 |
| | 223 |
| | 3.27 | % | | 7,995 |
| | 176 |
| | 2.94 | % |
Total interest-bearing liabilities | 408,077 |
|
| $ | 1,278 |
| | 0.42 | % | | 376,459 |
|
| $ | 1,013 |
| | 0.36 | % |
Noninterest-bearing liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
Noninterest-bearing checking | 283,783 |
| | |
| | |
| | 268,820 |
| | |
| | |
|
Accrued interest payable | 104 |
| | |
| | |
| | 73 |
| | |
| | |
|
Other liabilities | 6,714 |
| | |
| | |
| | 7,218 |
| | |
| | |
|
Total Liabilities | 698,678 |
| | |
| | |
| | 652,570 |
| | |
| | |
|
| | | | | | | | | | | |
Total shareholders' equity | 99,393 |
| | |
| | |
| | 92,719 |
| | |
| | |
|
Total average liabilities and shareholders' equity | $ | 798,071 |
| | |
| | |
| | $ | 745,289 |
| | |
| | |
|
Interest income as a percentage of average earning assets | |
| | |
| | 4.47 | % | | |
| | |
| | 4.30 | % |
Interest expense as a percentage of average earning assets | |
| | |
| | 0.23 | % | | |
| | |
| | 0.20 | % |
Net interest margin | |
| | |
| | 4.24 | % | | |
| | |
| | 4.10 | % |
| |
(1) | Loan amounts include nonaccrual loans, but the related interest income has been included only if collected for the period prior to the loan being placed on a nonaccrual basis. Loan interest income includes loan costs of approximately $336,000 and $169,000 for the nine months ended September 30, 2017 and 2016, respectively. |
| |
(2) | Interest income/expense is divided by actual number of days in the period times 365 days in the yield calculation |
| |
(3) | Yields on investments securities are calculated based on average amortized cost balances rather than fair value, as changes in fair value are reflected as a component of shareholders' equity. |
The prime rate was raisedincreased from 8.00% at March 31, 2023, to 4.00% in8.50% at March 2017,31, 2024. Future increases or decreases will affect both interest income and raised to 4.25% in June 2017. These increases affect rates for loansexpense and customer deposits, both of which have increased and are likely to increase further as the prime rate continues to rise.resultant net interest margin.
Both the Company's net interest income and net interest margin are affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as "volumevolume change." Both are also affected by changes in yields on interest-earning assets and rates paid on interest-bearing liabilities, referred to as "raterate change." The following table sets forth the changes in interest income and interest expense for each major category of interest-earning assetassets and interest-bearing liability,liabilities, and the amount of change attributable to volume and rate changes for the periods indicated.
Table 2. Rate and Volume Analysis:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2024, compared to March 31, 2023 |
(In thousands) | | Rate | | Volume | | Total |
Increase (decrease) in interest income: | | | | | | |
Loans | | $ | 1,047 | | | $ | (566) | | | $ | 481 | |
Investment securities available for sale | | 100 | | | (247) | | | (147) | |
Interest-bearing deposits in FRB | | 21 | | | (35) | | | (14) | |
Total interest income | | 1,168 | | | (848) | | | 320 | |
Increase (decrease) in interest expense: | | | | | | |
Interest-bearing demand accounts | | 409 | | | (327) | | | 82 | |
Savings and money market accounts | | 1 | | | (1) | | | — | |
Time deposits | | 101 | | | 198 | | | 299 | |
Other borrowings | | 106 | | | 1,036 | | | 1,142 | |
Junior subordinated debentures | | 28 | | | — | | | 28 | |
Total interest expense | | 645 | | | 906 | | | 1,551 | |
Increase (decrease) in net interest income | | $ | 523 | | | $ | (1,754) | | | $ | (1,231) | |
|
| | | | | | | | | | | |
| Increase (decrease) in the nine months ended September 30, 2017 compared to September 30, 2016 |
(in 000's) | Total | | Rate | | Volume |
Increase (decrease) in interest income: | | | | | |
Loans and leases | $ | 2,060 |
| | $ | 832 |
| | $ | 1,228 |
|
Investment securities available for sale | 73 |
| | (25 | ) | | 98 |
|
Interest-bearing deposits in other banks | (2 | ) | | 4 |
| | (6 | ) |
Interest-bearing deposits in FRB | 510 |
| | 386 |
| | 124 |
|
Total interest income | 2,641 |
| | 1,197 |
| | 1,444 |
|
Increase (decrease) in interest expense: | |
| | |
| | |
|
Interest-bearing demand accounts | 93 |
| | 75 |
| | 18 |
|
Savings and money market accounts | 33 |
| | 13 |
| | 20 |
|
Time deposits | 92 |
| | 57 |
| | 35 |
|
Subordinated debentures | 47 |
| | 22 |
| | 25 |
|
Total interest expense | 265 |
| | 167 |
| | 98 |
|
Increase in net interest income | $ | 2,376 |
| | $ | 1,030 |
| | $ | 1,346 |
|
For the ninethree months ended September 30, 2017,March 31, 2024, total interest income increased approximately $2,641,000,$320,000, or 12.17%2.2%, as compared to the ninethree months ended September 30, 2016. Earning asset volumes for loans and leases increased $32,935,000 on average. Overnight investmentsMarch 31, 2023. In comparing the two periods, average interest-earning assets decreased $79.6 million, with the FRB increased $14,616,000 and available for salea decrease of $43.1 million in average loan balances, a decrease of $34.2 million in average investment securities balances, and a decrease of $2.3 million in average balances held at the Federal Reserve Bank. The decrease in average loan balances is attributed primarily to decreases in the real estate construction and development portfolio, the residential mortgage portfolio, and the agriculture portfolio, partially offset by an increase in the commercial and industrial portfolio. Loan yields increased $7,900,000 between the two periods.44 basis points and investment securities yields increased 20 basis points. The average yield on loanstotal interest-earning assets increased 1945 basis points betweenpoints. The increase in yields is a result of the two periods, and the average yield onincreases in loan yields, increases in investment securities decreased approximately 8 basis points during the nine months ended September 30, 2017 as comparedyields, and increases in yields on overnight deposits related to the same period of 2016. increase in the Fed Funds rate.
The overall average yield on the loan portfolio increased to 5.39%6.00% for the nine monthsquarter ended September 30, 2017,March 31, 2024, as compared to 5.20%5.56% for the nine monthsquarter ended September 30, 2016. The Company has successfully sought to mitigate the low-interest rate environment with loan floors included in new and renewed loans when practical.March 31, 2023. At September 30, 2017, 53.0%March 31, 2024, 30.8% of the Company'sCompany’s loan portfolio consisted of floating rate instruments, as compared to 52.1%31.7% of the portfolio at December 31, 2016,2023, with the majority of those tied to the prime rate. Approximately 25.3%57.1%, or $78,201,000,$163.4 million, of the floating ratefloating-rate loans had rate floors at September 30, 2017, making them effectively fixed-rate loansMarch 31, 2024.
The Company’s net interest margin decreased to 4.35% for certainthe quarter ended March 31, 2024, compared to 4.51% for the quarter ended March 31, 2023. The net interest margin decreased primarily as a result of increases in interestdeposit and short-term borrowing costs, offset by increases in yields on interest-earning assets. The yield on average interest-earning assets increased from 5.07% to 5.52%. Yields on average interest-bearing liabilities increased from 0.92% to 1.82%.
While deposit rates and fixed-rate loans for all decreases in interest rates. None of the loans with floors have floor spreads of 100 basis points or more.
Although market rates of interest are at historically low levels,increased, the Company’s disciplined deposit pricing efforts have helped keep the Company'sCompany’s cost of funds relatively low. The Company’s net interest margin increased to 4.24% for the nine months ended September 30, 2017, when compared to 4.10% for the nine months ended September 30, 2016. The net interest margin increased due to increases in the loan portfolio yield and increases in the yield on overnight investments held at correspondent banks. As interest rates paid on deposits have alsointerest-bearing liabilities increased the Company’s average cost of funds rose to 0.42%1.82% for the nine monthsquarter ended September 30, 2017,March 31, 2024, compared to 0.92% for the quarter ended March 31, 2023. For the quarter ended March 31, 2024, total interest expense increased approximately $1.6 million, or 96.1%, as compared to 0.36% for the nine monthsquarter ended September 30, 2016. TheMarch 31, 2023. Between those two periods, average interest-bearing liabilities decreased by $10.7 million due to decreases in NOW and money market accounts and
savings accounts, partially offset by increases in time deposits and short-term borrowings. While the Company utilizesmay utilize brokered deposits as an additional source of funding. Currently,funding, the Company holds CDARs reciprocal deposits, which are preferred by some depositors. These comprise $9,755,000 of the balance of certificates ofheld no brokered deposits at September 30, 2017. For the nine months ended September 30, 2017, total interest expense increased approximately $265,000,March 31, 2024, or 26.16%, as compared to the nine months ended September 30, 2016. Between those two periods, average interest-bearing liabilities increased by $31,618,000 due to increases across all categories of customer deposits.December 31, 2023.
Net interest income has increased between the nine months ended September 30, 2017Interest-Earning Assets and 2016, totaling $23,057,000 for the nine months ended September 30, 2017 as compared to $20,681,000 for the nine months ended September 30, 2016. The increase in net interest income between 2016 and 2017 was primarily the result of reinvestment of low yielding overnight investments into the loan and investment portfolios and growth in total interest-earning assets.Liabilities:
The following table summarizes the year-to-date (YTD) averages of the components of interest-earning assets as a percentage of total interest-earning assets and the components of interest-bearing liabilities as a percentage of total interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | |
| | YTD Averages |
| | March 31, 2024 | | December 31, 2023 | | March 31, 2023 |
Loans | | 83.53% | | 82.11% | | 81.36% |
Investment securities available for sale | | 16.17% | | 17.36% | | 18.16% |
Interest-bearing deposits in FRB | | 0.30% | | 0.53% | | 0.48% |
Total interest-earning assets | | 100.00% | | 100.00% | | 100.00% |
NOW accounts | | 19.33% | | 18.90% | | 20.09% |
Money market accounts | | 34.51% | | 42.98% | | 51.37% |
Savings accounts | | 17.16% | | 16.46% | | 17.63% |
Time deposits | | 14.99% | | 11.46% | | 8.32% |
Other borrowings | | 12.22% | | 8.71% | | 1.06% |
Junior subordinated debentures | | 1.79% | | 1.49% | | 1.53% |
Total interest-bearing liabilities | | 100.00% | | 100.00% | | 100.00% |
|
| | | | | |
| YTD Average 9/30/2017 | | YTD Average 12/31/16 | | YTD Average 9/30/2016 |
Loans | 77.63% | | 79.26% | | 79.02% |
Investment securities available for sale | 7.46% | | 7.27% | | 6.89% |
Interest-bearing deposits in other banks | 0.09% | | 0.22% | | 0.23% |
Interest-bearing deposits in FRB | 14.82% | | 13.25% | | 13.86% |
Total interest-earning assets | 100.00% | | 100.00% | | 100.00% |
| | | | | |
NOW accounts | 21.47% | | 22.25% | | 22.48% |
Money market accounts | 37.31% | | 38.82% | | 39.00% |
Savings accounts | 19.17% | | 17.62% | | 17.56% |
Time deposits | 19.82% | | 19.21% | | 18.84% |
Subordinated debentures | 2.23% | | 2.10% | | 2.12% |
Total interest-bearing liabilities | 100.00% | | 100.00% | | 100.00% |
Noninterest Income
Table 3. Changes in Noninterest IncomeIncome:
The following tables setsset forth the amount and percentage changes in the categories presented for the three and nine month periods ended September 30, 2017March 31, 2024 and 2016:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
(In thousands) | | March 31, 2024 | | March 31, 2023 | | $ Change | | % Change |
Customer service fees | | $ | 706 | | | $ | 734 | | | $ | (28) | | | (3.8) | % |
Increase in cash surrender value of bank-owned life insurance | | 137 | | | 132 | | | 5 | | | 3.8 | % |
Gain on fair value of marketable equity securities | | 43 | | | 43 | | | — | | | — | % |
| | | | | | | | |
(Loss) gain on fair value of junior subordinated debentures | | (294) | | | 333 | | | (627) | | | 188.3 | % |
Gain on sale of assets | | 11 | | | — | | | 11 | | | (100.0) | % |
| | | | | | | | |
Other | | 450 | | | 206 | | | 244 | | | 118.4 | % |
Total noninterest income | | $ | 1,053 | | | $ | 1,448 | | | $ | (395) | | | (27.3) | % |
|
| | | | | | | | | | | | | | |
(in 000's) | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | | Amount of Change | | Percent Change |
Customer service fees | $ | 959 |
| | $ | 924 |
| | $ | 35 |
| | 3.79 | % |
Increase in cash surrender value of BOLI/COLI | 134 |
| | 131 |
| | 3 |
| | 2.29 | % |
(Loss) gain on fair value of financial liability | (88 | ) | | (423 | ) | | 335 |
| | (79.20 | )% |
Gain on sale of other investment | 3 |
| | — |
| | 3 |
| | 100.00 | % |
Other | 168 |
| | 154 |
| | 14 |
| | 9.09 | % |
Total noninterest income | $ | 1,176 |
| | $ | 786 |
| | $ | 390 |
| | 49.62 | % |
Noninterest income for the quarter ended September 30, 2017 increased $390,000March 31, 2024, decreased $395,000 to $1,176,000,$1,053,000 compared to the quarter ended September 30, 2016.March 31, 2023. The increase is mostly attributed to a decreasechange in the loss on the fair value of financial liability of $335,000junior subordinated debentures caused a $294,000 loss for the quarter ended September 30, 2017. The fluctuation in fair value of financial liability was caused by changes in the LIBOR yield curve.
|
| | | | | | | | | | | | | | |
(in 000's) | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 | | Amount of Change | | Percent Change |
Customer service fees | $ | 2,897 |
| | $ | 2,867 |
| | $ | 30 |
| | 1.05 | % |
Increase in cash surrender value of BOLI/COLI | 400 |
| | 394 |
| | 6 |
| | 1.52 | % |
(Loss) gain on fair value of financial liability | (688 | ) | | 48 |
| | (736 | ) | | (1,533.33 | )% |
Gain on sale of other investment | 3 |
| | — |
| | 3 |
| | 100.00 | % |
Other | 539 |
| | 464 |
| | 75 |
| | 16.16 | % |
Total noninterest income | $ | 3,151 |
| | $ | 3,773 |
| | $ | (622 | ) | | (16.49 | )% |
Noninterest income for the nine months endedSeptember 30, 2017decreased $622,000, or 16.49%, when compared to the same period of 2016. Customer service fees, the primary component of noninterest income, increased $30,000, or 1.05%, between the two periods presented. The decrease in noninterest income of $622,000 between the two periods is primarily the result of a $688,000 loss recorded on the fair value of a financial liability for the nine months ended September 30, 2017 asMarch 31, 2024, compared to a $48,000$333,000 gain on the fair value of a financial liability recorded for the same periodquarter ended March 31, 2023, resulting in 2016.a difference of $627,000. The change in the fair value of financial liabilityjunior subordinated debentures was primarily caused by fluctuations in the LIBORSOFR yield curve. Customer service fees decreased $28,000 between the two quarters primarily due to decreases in ATM fees and cash advance fees. Other noninterest income increased due to increases in miscellaneous income.
The costTable of the Company’s subordinated debentures issued by USB Capital Trust II has remained low as market rates have remained low during the first nine months of 2017. With pricing at 3-month-LIBOR plus 129 basis points, the effective cost of the subordinated debt was 2.85% at September 30, 2017, as compared to 2.15% at September 30, 2016. Pursuant to fair value accounting guidance, the Company has recorded $688,000 in pretax fair value loss on its junior subordinated debt during the nine months ended September 30, 2017, bringing the total cumulative gain recorded on the debt to $3,008,000 at September 30, 2017.Contents
Noninterest Expense
Changes in Noninterest Expense:
The following table setstables set forth the amount and percentage changes in the categories presented for the three and nine month periods ended September 30, 2017March 31, 2024 and 2016:2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
(In thousands) | | March 31, 2024 | | March 31, 2023 | | $ Change | | % Change |
Salaries and employee benefits | | $ | 3,498 | | | $ | 3,260 | | | $ | 238 | | | 7.3 | % |
Occupancy expense | | 858 | | | 963 | | | (105) | | | (10.9) | % |
Data processing | | 111 | | | 174 | | | (63) | | | (36.2) | % |
Professional fees | | 1,225 | | | 882 | | | 343 | | | 38.9 | % |
Regulatory assessments | | 173 | | | 192 | | | (19) | | | (9.9) | % |
Director fees | | 128 | | | 109 | | | 19 | | | 17.4 | % |
Correspondent bank service charges | | 12 | | | 19 | | | (7) | | | (36.8) | % |
Net cost of operation of OREO | | (12) | | | 37 | | | (49) | | | (132.4) | % |
Other | | 745 | | | 604 | | | 141 | | | 23.3 | % |
Total expense | | $ | 6,738 | | | $ | 6,240 | | | $ | 498 | | | 8.0 | % |
Table 4. Changes in Noninterest Expense
|
| | | | | | | | | | | | | | |
(in 000's) | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | | Amount of Change | | Percent Change |
Salaries and employee benefits | $ | 2,578 |
| | $ | 2,533 |
| | $ | 45 |
| | 1.78 | % |
Occupancy expense | 1,087 |
| | 1,097 |
| | (10 | ) | | (0.91 | )% |
Data processing | 29 |
| | 23 |
| | 6 |
| | 26.09 | % |
Professional fees | 312 |
| | 327 |
| | (15 | ) | | (4.59 | )% |
FDIC/DFI insurance assessments | 43 |
| | 131 |
| | (88 | ) | | (67.18 | )% |
Director fees | 72 |
| | 75 |
| | (3 | ) | | (4.00 | )% |
Loss on California tax credit partnership | (1 | ) | | 49 |
| | (50 | ) | | (102.04 | )% |
Net cost on operation of OREO | 21 |
| | 39 |
| | (18 | ) | | (46.15 | )% |
Other | 605 |
| | 590 |
| | 15 |
| | 2.54 | % |
Total expense | $ | 4,746 |
| | $ | 4,864 |
| | $ | (118 | ) | | (2.43 | )% |
Noninterest expense for the quarter ended September 30, 2017 decreased $118,000March 31, 2024, increased $498,000 to $4,746,000,$6.7 million, compared to the quarter ended September 30, 2016.March 31, 2023. The decreaseincrease was primarily attributed to lower OREO expenses, a decrease in the loss of a tax credit partnership, and a reduction in regulatory assessment expense. The FDIC assessment rate for the Company was reduced effective third quarter 2017. OREO expenses decreased $18,000 during the quarter ended September 30, 2017 as a result of partial sales on OREO properties in 2016 and 2017.
|
| | | | | | | | | | | | | | |
(in 000's) | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 | | Amount of Change | | Percent Change |
Salaries and employee benefits | $ | 8,149 |
| | $ | 7,592 |
| | $ | 557 |
| | 7.34 | % |
Occupancy expense | 3,144 |
| | 3,212 |
| | (68 | ) | | (2.12 | )% |
Data processing | 81 |
| | 108 |
| | (27 | ) | | (25.00 | )% |
Professional fees | 912 |
| | 1,116 |
| | (204 | ) | | (18.28 | )% |
FDIC/DFI insurance assessments | 313 |
| | 632 |
| | (319 | ) | | (50.47 | )% |
Director fees | 215 |
| | 218 |
| | (3 | ) | | (1.38 | )% |
Loss on California tax credit partnership | 118 |
| | 122 |
| | (4 | ) | | (3.28 | )% |
Net (gain) cost on operation of OREO | (257 | ) | | 216 |
| | (473 | ) | | (218.98 | )% |
Other | 1,868 |
| | 1,772 |
| | 96 |
| | 5.42 | % |
Total expense | $ | 14,543 |
| | $ | 14,988 |
| | $ | (445 | ) | | (2.97 | )% |
Noninterest expense decreased approximately $445,000 or 2.97% between the nine months ended September 30, 2016 and September 30, 2017. The decrease experienced during the nine months ended September 30, 2017, was primarily the result of decreases of $473,000 in net cost of OREO, $319,000 in regulatory assessments, $204,000increases in professional fees and $68,000salaries and employee benefits, and was partially offset by decreases in occupancy expense, partially offset by an increasedata processing, net cost of $557,000operation of OREO, and regulatory assessments. Professional fees increased primarily due to increases in employee salary and benefit expenses.service contract expenses related to information technology services. The increase in salaries and employee salary and benefit expenses is drivenbenefits was caused by increases in salary expenses, group insurance expense, and higher employee incentives, compared to the nine months ended September 30, 2016.accruals for bonuses.
Income Taxes
The Company’s income tax expense is impacted to some degree by permanent taxable differences between income reported for book purposes and income reported for tax purposes, as well as certain tax credits which are not reflected in the Company’s pretax income or loss shown in the statements of operations and comprehensive income. As pretax income or loss amounts become smaller, the impact of these differences becomebecomes more significant and are reflected as variances in the Company’s effective tax rate for the periods presented. In general, the permanent differences and tax credits affecting tax expense have a positive impact and tend to reduce the effective tax rates shown in the Company’s statements of income and comprehensive income.
The Company reviews its current tax positions at least quarterly based on the accounting standards related to uncertainty in income taxes which includestaxes. These standards identify the criteria that an individual tax position criteria that would have to meet for some or all of thebe met to recognize an income tax benefit to be recognized inon a taxable entity’s financial statements. Under the income tax guidelines, an entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination. The term “more likely than not” means a likelihood of more than 50 percent. In assessing whether the more-likely-than-notmore likely than not criterion is met, the entity should assume that the tax position will be reviewed by the applicable taxing authority.
The Company has reviewed all of its tax positions as of September 30, 2017,March 31, 2024, and has determined that there are no material additional amounts to be recorded under the current income tax accounting guidelines.
The Company’s effective tax rate for the three months ended March 31, 2024, was 28.94% compared to 29.16% for the three months ended March 31, 2023.
Financial Condition
The following table illustrates the changes in balances as of and for the periods ended:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | March 31, 2024 | | December 31, 2023 | | | | March 31, 2023 | | Year-to-Date $ Change | | Prior Period $ Change | | |
Due from Federal Reserve Bank (FRB) | | $ | 1,858 | | | $ | 207 | | | | | $ | 3,204 | | | $ | 1,651 | | | $ | (1,346) | | | |
Net loans | | 913,962 | | | 904,384 | | | | | 927,105 | | | 9,578 | | | (13,143) | | | |
Investment securities | | 168,563 | | | 184,620 | | | | | 208,914 | | | (16,057) | | | (40,351) | | | |
Total assets | | 1,206,404 | | | 1,211,045 | | | | | 1,261,194 | | | (4,641) | | | (54,790) | | | |
Total deposits | | 955,934 | | | 1,004,477 | | | | | 1,111,132 | | | (48,543) | | | (155,198) | | | |
Total liabilities | | 1,082,220 | | | 1,088,503 | | | | | 1,148,286 | | | (6,283) | | | (66,066) | | | |
Average interest-earning assets | | 1,084,886 | | | 1,150,280 | | | | | 1,164,469 | | | (65,394) | | | (79,583) | | | |
Average interest-bearing liabilities | | 698,936 | | | 725,075 | | | | | 709,662 | | | (26,139) | | | (10,726) | | | |
Total assets increased $55,535,000, or 7.05%, to a balance of $843,507,000 at September 30, 2017, from the balance of $787,972,000 at decreased 0.4% between March 31, 2024, and December 31, 2016,2023, and increased $61,915,000, or 7.92%, from the balance of $781,592,000 at September 30, 2016.4.3% between March 31, 2024, and March 31, 2023. Total deposits of $725,298,000 at September 30, 2017decreased 4.8% and 14.0%, increased $48,669,000, or 7.19%, fromrespectively, during the balance reported at same periods. Net loans increased 1.1% between March 31, 2024, and December 31, 2016,2023, and increased $54,012,000, or 8.05%, from the balance of $671,286,000 reported at September 30, 2016. Cashdecreased 1.4% between March 31, 2024, and cash equivalents increased $46,860,000, or 41.46%March 31, 2024. Investment securities decreased 8.7%, between March 31, 2024, and December 31, 20162023, and September 30, 2017; net19.6% between March 31, 2024, and March 31, 2023. Net loans increased $12,511,000, or 2.23%,decreased on a year-over-year basis due to a balance of $574,443,000;loan payoffs and investment securities decreased $9,135,000, or 15.89%,paydowns. Net loans increased during the first nine monthsquarter ended March 31, 2024, due to organic loan growth. Investment securities decreased on a year-over-year and quarter-to-date basis due to repayments of 2017.principal and maturities. Deposits decreased on a year-over-year basis due to decreases in non-interest-bearing deposits and NOW and money market accounts and decreased year-to-date due to decreases in non-interest bearing deposits and savings accounts, partially offset by increases in time deposits and NOW and money market accounts. The balances in overnight interest-bearing deposits in the Federal Reserve Bank and federal funds sold decreased on a year-over-year basis due to decreases in deposit balances. Short-term borrowings totaled $103.0 million at March 31, 2024, and $13.2 million March 31, 2023.
Earning assets averaged approximately $727,925,000$1.08 billion during the nine monthsquarter endedSeptember 30, 2017, as March 31, 2024, compared to $673,353,000$1.16 billion for the same period in 2016.2023. Average interest-bearing liabilities increaseddecreased to $408,077,000$698.9 million for the nine monthsquarter endedSeptember 30, 2017, March 31, 2024, from $376,459,000 reported$709.7 million for the comparative period of 2016.2023.
Loans and Leases
The Company'sCompany’s primary business is that of acquiring deposits and making loans, with the loan portfolio representing the largest and most important component of earning assets. Loans totaled $582,384,000$929.4 million at September 30, 2017,March 31, 2024, an increase of $12,625,000,$9.4 million, or 2.22%1.0%, when compared to the balance of $569,759,000$920.0 million at December 31, 2016,2023, and an increasea decrease of $22,785,000,$13.3 million, or 4.07%1.4%, when compared to the balance of $559,599,000$942.7 million reported at September 30, 2016.March 31, 2023. Loans on average increased $32,935,000,decreased $44.2 million, or 6.19%4.7%, between the nine monthsquarter endedSeptember 30, 2016 March 31, 2023 and September 30, 2017,March 31, 2024, with loans, excluding nonaccrual loans, averaging $565,068,000$904.4 million for the nine monthsquarter endedSeptember 30, 2017, March 31, 2024, as compared to $532,133,000$960.6 million for the same period of 2016.in 2023.
Total loans increased $12,625,000 between December 31, 2016 and September 30, 2017, and increased $22,785,000 between September 30, 2016 and September 30, 2017. During the nine months ended September 30, 2017, the Company experienced increases in real estate, agriculture, and consumer loans compared to the same period ended September 30, 2016. Commercial and industrial loans decreased $2,054,000 between December 31, 2016 and September 30, 2017 and decreased $762,000 between September 30, 2016 and September 30, 2017. Installment and other loans increased $12,634,000 during the same period due to growth in the student loan portfolio. Included in installment loans are $51,185,000 in student loans made to medical and pharmacy school students. Repayment on student loans is deferred until 6 months after graduation. Accrued interest on loans that have not entered repayment status totaled $3,769,000 at September 30, 2017. The outstanding balance of student loans that have not entered repayment status totaled $47,759,000 at September 30, 2017. Real estate mortgage loans increased $2,262,000, or 0.78%, between December 31, 2016 and September 30, 2017, and increased $450,000 between September 30, 2016 and September 30, 2017. Agricultural loans increased $1,587,000, or 2.79%, between December 31, 2016
and September 30, 2017 and increased $5,236,000 between September 30, 2016 and September 30, 2017. Commercial real estate loans (a component of real estate mortgage loans) continue to represent a significant portion of the total loan portfolio. Commercial real estate loans amounted to 34.28%, 35.14%, and 35.30%, of the total loan portfolio at September 30, 2017, December 31, 2016, and September 30, 2016, respectively. Residential mortgage loans are not generally originated by the Company, but some residential mortgage loans have been made over the past several years to facilitate take-out loans for construction borrowers when they were not able to obtain permanent financing elsewhere. These loans are generally 30-year amortizing loans with maturities of between three and five years. Residential mortgages totaled $90,284,000, or 15.50%, of the portfolio at September 30, 2017, $87,388,000, or 15.34% of the portfolio at December 31, 2016, and $91,852,000 or 16.41% of the portfolio at September 30, 2016. The Company held no loan participation purchases at September 30, 2016, December 31, 2016 or September 30, 2017. Loan participations sold decreased from $7,632,000, or 1.36%, of the portfolio at September 30, 2016, to $7,548,000, or 1.3% of the portfolio, at December 31, 2016, and increased to $9,069,000, or 1.6% of the portfolio, at September 30, 2017.
The following table sets forth the amounts of loans outstanding by category at September 30, 2017andDecember 31, 2016, the category percentages for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 | | March 31, 2023 |
(In thousands) | | Amount | | % of Loans | | Amount | | % of Loans | | Amount | | % of Loans |
Commercial and industrial | | $ | 56,432 | | | 6.1 | % | | $ | 53,347 | | | 5.8 | % | | $ | 50,511 | | | 5.4 | % |
Real estate – mortgage | | 654,552 | | | 70.4 | % | | 646,709 | | | 70.3 | % | | 665,706 | | | 70.6 | % |
Real estate construction and development | | 127,913 | | | 13.8 | % | | 127,944 | | | 13.9 | % | | 137,257 | | | 14.6 | % |
Agricultural | | 49,050 | | | 5.3 | % | | 49,795 | | | 5.4 | % | | 45,513 | | | 4.8 | % |
Installment and student loans | | 41,466 | | | 4.4 | % | | 42,247 | | | 4.6 | % | | 43,740 | | | 4.6 | % |
Total gross loans | | $ | 929,413 | | | 100.00 | % | | $ | 920,042 | | | 100.00 | % | | $ | 942,727 | | | 100.00 | % |
Loan volume continues to be highest in what has historically been the Bank’s primary lending emphasis: real estate mortgage and real estate construction and development lending. Total loans increased $9.4 million during the first three months of 2024. There were increases of $7.8 million, or 1.2%, in real estate mortgage loans and a decrease of $745,000, or 1.5%, in agricultural
loans. Real estate construction and development loans decreased $31,000, or 0.02%, commercial and industrial loans increased $3.1 million, or 5.8%, and installment loans decreased by $781,000, or 1.8%.
The real estate mortgage loan portfolio, totaling $654.6 million at March 31, 2024, consists of commercial real estate, residential mortgages, and home equity loans. Commercial real estate loans have remained a significant percentage of total loans over the past year, amounting to 42.7%, 42.0%, and 42.0% of the total loan portfolio at March 31, 2024, December 31, 2023, and March 31, 2023, respectively. Commercial real estate balances increased to $396.6 million at March 31, 2024, from $386.1 million at December 31, 2023. Commercial real estate loans are generally a mix of short- to medium-term, fixed- and floating-rate instruments and are mainly secured by commercial income and multi-family residential properties.
Residential mortgage loans are generally 30-year amortizing loans with an average life of nine to 11 years. These loans totaled $258.0 million, or 27.8%, of the portfolio at March 31, 2024, $260.5 million, or 28.3%, of the portfolio at December 31, 2023, and $270.0 million, or 28.6%, of the portfolio at March 31, 2023. Included in the residential mortgage portfolio are purchased home-mortgage loan pools with aggregate balances of $230.6 million, comprising 92.9% of the total residential mortgage portfolio at March 31, 2024. These loans were purchased in whole-loan form, in several pools, during 2021 and 2022. Dovenmuehle Mortgage, Inc., (DMI) is the third-party sub-servicer for the Company’s purchased residential mortgage portfolio. DMI’s services include administration, Company-approved modification, escrow management, monitoring, and collection. DMI is paid a monthly servicing fee based primarily upon the number of loans being serviced which, at March 31, 2024, totaled 254.
Real estate construction and development loans, representing 13.8%, 13.9%, and 14.6% of total loans at March 31, 2024, December 31, 2023, and March 31, 2023, respectively, consisted of loans for residential and commercial construction projects, as well as land acquisition and development, and land held for future development. Loans in this category are secured by real estate, including improved and unimproved land, as well as single-family residential, multi-family residential, and commercial properties in various stages of completion. All real estate loans have established equity requirements. Repayment on construction loans generally comes from long-term mortgages with other lending institutions obtained at the completion of the project or from the sale of the constructed homes to individuals.
Commercial and industrial loans increased $3.1 million between December 31, 2023, and March 31, 2024, and increased $5.9 million between March 31, 2023, and March 31, 2024. Agricultural loans decreased $745,000 between December 31, 2023, and March 31, 2024, and increased $3.5 million between March 31, 2023, and March 31, 2024. Installment loans decreased $781,000 between December 31, 2023, and March 31, 2024, and decreased $2.3 million between March 31, 2023, and March 31, 2024, primarily due to decreases in student loan balances.
Included in installment loans are $37.6 million in unsecured student loans made to medical and pharmacy school students in the US and Caribbean, all of which are exclusively US citizens. Student loans decreased $3.8 million between the quarter ended March 31, 2024 and 2023, due to paydowns, consolidations with other lenders, and charge-offs. The outstanding balance of loans for students who are in school or in a grace period and have not entered repayment status totaled $1.4 million at March 31, 2024. At March 31, 2024, there were 772 loans within repayment, deferment, and forbearance which represented $18.0 million, $11.3 million, and $7.0 million in outstanding balances, respectively. Student loans have not been originated or purchased since 2019.
Repayment of the unsecured student loans is premised on the medical and pharmacy students graduating and becoming high-income earners. Under program guidelines, repayment terms can vary per borrower; however, repayment occurs on average within 10 to 20 years. Additional repayment capacity is provided by non-student, co-borrowers for roughly one-third of the portfolio. The average student loan balance per borrower as of those dates,March 31, 2024, was approximately $108,000. Loan interest rates are variable and currently range from 6.00% to 13.250%.
ZuntaFi is the net change betweenthird-party servicer for the two periods presented.student loan portfolio. ZuntaFi’s services include application administration, processing, approval, documenting, funding, collection, and borrower file custodial responsibilities. Except in cases where applicants/loans do not meet program requirements or extreme delinquency, ZuntaFi is responsible for complete program management. ZuntaFi is paid a monthly servicing fee based on the outstanding principal balance.
The Company classifies student loans delinquent more than 90 days as substandard. As of March 31, 2024, and December 31, 2023, reserves against the student loan portfolio totaled $6.6 million and $6.3 million, respectively. For the quarter ended March 31, 2024, $28,000 in accrued interest receivable was reversed, due to charge-offs of $395,000. For the quarter ended March 31, 2023, $28,000 in accrued interest receivable was reversed, due to charge-offs of $406,000.
|
| | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 | | | | |
(in 000's) | Dollar Amount | | % of Loans | | Dollar Amount | | % of Loans | | Net Change | | % Change |
Commercial and industrial | $ | 46,951 |
| | 8.1 | % | | $ | 49,005 |
| | 8.6 | % | | $ | (2,054 | ) | | (4.19 | )% |
Real estate – mortgage | 290,462 |
| | 49.9 | % | | 288,200 |
| | 50.6 | % | | 2,262 |
| | 0.78 | % |
RE construction & development | 128,883 |
| | 22.1 | % | | 130,687 |
| | 22.9 | % | | (1,804 | ) | | -1.38 | % |
Agricultural | 58,505 |
| | 10.0 | % | | 56,918 |
| | 10.0 | % | | 1,587 |
| | 2.79 | % |
Installment/other | 57,583 |
| | 9.9 | % | | 44,949 |
| | 7.9 | % | | 12,634 |
| | 28.11 | % |
Total Gross Loans | $ | 582,384 |
| | 100.0 | % | | $ | 569,759 |
| | 100.0 | % | | $ | 12,625 |
| | 2.22 | % |
The following table sets forth the Bank’s student loan portfolio with activity from December 31, 2023, to March 31, 2024: | | | | | | | | |
(In thousands) | | Balance |
Balance at December 31, 2023 | | $ | 38,493 | |
Capitalized interest | | 561 | |
Loan consolidations/payoffs | | (282) | |
Payments received | | (752) | |
Loans charged-off | | (395) | |
Balance at March 31, 2024 | | $ | 37,625 | |
Loan participations purchased increased to $15.0 million, or 1.6% of the portfolio, at March 31, 2024, increased from $9.2 million, or 1.0%, of the portfolio at December 31, 2023, and increased from $9.3 million, or 1.0%, of the portfolio at March 31, 2023. Loan participations sold decreased from $9.3 million, or 1.0%, of the portfolio at March 31, 2023, to $4.2 million, or 0.5%, of the portfolio, at December 31, 2023, and increased to $4.2 million, or 0.5%, of the portfolio, at March 31, 2024.
Deposits
Total depositsDeposit balances totaled $725,298,000$955.9 million at September 30, 2017,March 31, 2024, representing an increasea decrease of $48,669,000,$48.5 million, or 7.19%4.8%, from the balance of $676,629,000$1.00 billion reported at December 31, 2016,2023, and an increasea decrease of $54,012,000,$155.2 million, or 8.05%14.0%, from the balance of $671,286,000 reported$1.11 billion at September 30, 2016.March 31, 2023.
The following table sets forth the amounts of deposits outstanding by category at September 30, 2017March 31, 2024 and December 31, 2016,2023, and the net change between the two periods presented.presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | March 31, 2024 | | December 31, 2023 | | $ Change |
Noninterest-bearing deposits | | $ | 353,151 | | | 36.94 | % | | $ | 403,225 | | | 40.14 | % | | $ | (50,074) | |
Interest-bearing deposits: | | | | | | | | | | |
NOW and money market accounts | | 410,936 | | | 42.99 | % | | 406,857 | | | 40.50 | % | | 4,079 | |
Savings accounts | | 119,045 | | | 12.45 | % | | 122,547 | | | 12.20 | % | | (3,502) | |
Time deposits: | | | | | | | | | | |
Under $250,000 | | 45,260 | | | 4.74 | % | | 48,098 | | | 4.80 | % | | (2,838) | |
$250,000 and over | | 27,542 | | | 2.88 | % | | 23,750 | | | 2.36 | % | | 3,792 | |
Total interest-bearing deposits | | 602,783 | | | 63.06 | % | | 601,252 | | | 59.86 | % | | 1,531 | |
Total deposits | | $ | 955,934 | | | 100.00 | % | | $ | 1,004,477 | | | 100.00 | % | | $ | (48,543) | |
The following tables set forth estimated deposit balances exceeding the FDIC insurance limits as of:
| | | | | | | | | | | | | | | | |
(In thousands) | | March 31, 2024 | | December 31, 2022 | | |
Uninsured deposits (1) | | $ | 493,910 | | | $ | 523,971 | | | |
(1) Represents the amount over the insurance limit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 |
(In thousands) | | Three months or less | | Over three months through six months | | Over six months through twelve months | | Over twelve months | | Total |
Uninsured time deposits (1) | | $ | 1,653 | | | $ | 1,125 | | | $ | 1,536 | | | $ | 10,010 | | | $ | 14,324 | |
(1) Represents the amount over the insurance limit
|
| | | | | | | | | | | | | | |
(in 000's) | September 30, 2017 | | December 31, 2016 | | Net Change | | Percentage Change |
Noninterest bearing deposits | $ | 315,877 |
| | $ | 262,697 |
| | $ | 53,180 |
| | 20.24 | % |
Interest bearing deposits: | |
| | |
| | |
| | |
|
NOW and money market accounts | 262,037 |
| | 235,873 |
| | 26,164 |
| | 11.09 | % |
Savings accounts | 81,378 |
| | 75,068 |
| | 6,310 |
| | 8.41 | % |
Time deposits: | |
| | |
| | |
| | |
|
Under $250,000 | 53,702 |
| | 87,419 |
| | (33,717 | ) | | -38.57 | % |
$250,000 and over | 12,304 |
| | 15,572 |
| | (3,268 | ) | | -20.99 | % |
Total interest bearing deposits | 409,421 |
| | 413,932 |
| | (4,511 | ) | | -1.09 | % |
Total deposits | $ | 725,298 |
| | $ | 676,629 |
| | $ | 48,669 |
| | 7.19 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2023 |
(In thousands) | | Three months or less | | Over three months through six months | | Over six months through twelve months | | Over twelve months | | Total |
Uninsured time deposits (1) | | $ | 1,379 | | | $ | 1,186 | | | $ | 1,891 | | | $ | 6,792 | | | $ | 11,248 | |
(1) Represents the amount over the insurance limit
The Company's deposit base consists of two major components represented by noninterest bearing (demand) deposits and interest bearing deposits, totaling $315,877,000 and $409,421,000 at September 30, 2017, respectively. Interest bearing
deposits consist of time certificates, NOW and money market accounts, and savings deposits. Total interest bearing deposits decreased $4,511,000, or 1.09%, between December 31, 2016 and September 30, 2017, and noninterest bearing deposits increased $53,180,000, or 20.24%, between the same two periods presented. Included in the decrease of $4,511,000 in interest bearing deposits during the nine months endedSeptember 30, 2017, are decreases of $36,985,000 in time deposits and $26,164,000 in NOW and money market accounts, offset by increases of $6,310,000 in savings accounts and $26,164,000 in NOW and money market accounts. The decrease in time deposits is attributed to the maturities of $17,285,000 in brokered deposits and $18,413,000 in out-of-market time deposits.
Core deposits, as defined by the Company as consisting of all deposits other than time deposits of more than $250,000 and brokered deposits, continue to provide the foundation forof the Company'sCompany’s principal sources of funding and liquidity. These core deposits amounted to 96.96%97.1% and 90.82% of the total deposit portfolio at September 30, 2017 and December 31, 2016, respectively. Brokered deposits totaled $9,755,000 at September 30, 2017, as compared to $28,132,000 at December 31, 2016, and $12,146,000 at September 30, 2016. Brokered deposits were 1.34% and 4.16%97.6% of total deposits at September 30, 2017March 31, 2024, and December 31, 2016,2023, respectively. The Company held no brokered deposits at March 31, 2024, or December 31, 2023.
On a year-to-date average basis, the Company experienced an increasea decrease of $45,462,000,$172.5 million, or 7.13%15.2%, in total deposits between the nine monthsquarter endedSeptember 30, 2017 March 31, 2024 and September 30, 2016.the quarter ended March 31, 2023. Between these two periods, average interest bearinginterest-bearing deposits increased $30,499,000,decreased $88.7 million, or 8.28%12.9%, and total noninterest-bearing deposits increased $14,963,000,decreased $83.8 million, or 5.57%, on a year-to-date average basis.18.8%.
Short-Term Borrowings
At September 30, 2017,March 31, 2024, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling $283,948,000,$481.7 million, as well as Federal Home Loan Bank (FHLB) lines of credit totaling $14,400,000.$141.6 million. At September 30, 2017,March 31, 2024, the Company had uncollateralized lines of credit with both Pacific Coast Bankers Bank ("PCBB")(PCBB), UnionZions Bank, and Zion'sUS Bank totaling $10,000,000, $10,000,000,$50 million, $20 million, and $20,000,000,$20 million, respectively. These lines of credit generally have interest rates tied to either the Federal Funds rate or short-term U.S. Treasury rates, or LIBOR.rates. All lines of credit are on an “as available” basis and can be revoked by the grantor at any time. At September 30, 2017 and September 30, 2016, theThe Company had no outstanding borrowings.borrowings of $103.0 million and $13.2 million at March 31, 2024, and March 31, 2023, respectively. The Company had collateralized FRB lines of credit of $323,162,000,$463.5 million, collateralized FHLB lines of credit totaling $2,037,000,$128.9 million, and uncollateralized lines of credit of $10,000,000$50 million with PCBB, $10,000,000$20 million with UnionZion’s Bank, and $20,000,000$10 million with ZionsUS Bank at December 31, 2016.2023.
Asset Quality and Allowance for Credit Losses
Lending money is the Company'sCompany’s principal business activity, and ensuring appropriate evaluation, diversification, and control of credit risks is a primary management responsibility. Losses are implicit in lending activities and the amount of such losses will vary, depending on the risk characteristics of the loan portfolio as affected by local economic conditions and the financial experience of borrowers.
The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), effective January 1, 2023, and utilizes a current expected credit loss (CECL) methodology which relies on segmenting the loan portfolio into pools with similar risks, tracking the performance of the pools over time, and using the data to determine pool loss experience. The allowance for credit losses on most loans is maintained atmeasured on a collective (pool) basis for loans with similar characteristics. The Company estimates the appropriate level deemed appropriateof allowance for credit losses for collateral-dependent loans by managementevaluating them separately. The Company also uses the CECL model to provide for known and inherent risks in existing loans and commitments to extend credit. The adequacy ofcalculate the allowance for credit losses is based upon management's continuing assessment of various factors affecting the collectability of loans and commitments to extend credit; including current economic conditions, paston off-balance sheet credit experience, collateral, and concentrationsexposures, such as undrawn amounts on lines of credit. There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio. The conclusion that a loan may become uncollectible, either in part or in whole is subjective and contingent upon economic, environmental, and other conditions which cannot be predicted with certainty. When determining the adequacy ofWhile the allowance for credit losses on loans is reported as a contra-asset for loans, the Company follows, in accordance with GAAP, the guidelines set forth in the Revised Interagency Policy Statementallowance for credit losses on the Allowance for Loan and Lease Losses (“Statement”) issued by banking regulators in December 2006. off-balance sheet credit exposure is reported as a liability.
The Statement is a revision of the previous guidance released in July 2001, and outlines characteristics that should be used in segmentation of the loan portfolio for purposes of the analysis including risk classification, past due status, type of loan, industry or collateral. It also outlines factors to consider when adjusting the loss factors for variouseight (8) segments of the loan portfolio and updates previous guidance that describesare as follows (subtotals are provided as needed to allow the responsibilities ofreader to reconcile the board of directors, management, and bank examiners regarding the allowance for credit losses. Securities and Exchange Commission Staff Accounting Bulletin No. 102 was released during July 2001, and represents the SEC staff’s view relatingamounts to methodologies and supporting documentation for the Allowance for Loan and Lease Losses that should be observed by all public companies in complying with the federal securities laws and the Commission’s interpretations. It is also generally consistent with the guidance published by the banking regulators.
The allowance for loan losses includes an asset-specific component, as well as a general or formula-based component. The Company segments the loan and lease portfolio into eleven (11) segments, primarily by loan class and type, that have homogeneity and commonality of purpose and terms for analysis under the formula-based component of the allowance. Those loans which are determined to be impaired under current accounting guidelines are not subject to the formula-based reserve analysis, and evaluated individually for specific impairment under the asset-specific component of the allowance.
The Company’s methodology for assessing the adequacy of the allowance for credit losses consists of several key elements, which include:
- the formula allowance
- specific allowances for problem graded loans identified as impaired
- and the unallocated allowance
The formula allowance is calculated by applying loss factors to outstanding loans and certain unfunded loan commitments. Loss factors are based on the Company’s historical loss experience and on the internal risk grade of those loans and, may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. Factors that may affect collectability of the loan portfolio include:
Levels of, and trends in delinquencies and nonaccrual loans;
Trends in volumes and term of loans;
Effects of any changes in lending policies and procedures including those for underwriting, collection, charge-off, and recovery;
Experience, ability, and depth of lending management and staff;
National and local economic trends and conditions and;
Concentrations of credit that might affect loss experience across one or more components of the portfolio, including high-balance loan concentrations and participations.
Management determines the loss factors for problem graded loans (substandard, doubtful, and loss), special mention loans, and pass graded loans, based on a loss migration model. The migration analysis incorporates loan losses over the previous quarters as determined by management (time horizons adjusted as business cycles or environment changes) and loss factors are adjusted to recognize and quantify the loss exposure from changes in market conditions and trends in the Company’s loan portfolio. For purposes of this analysis, loans are grouped by internal risk classifications and categorized as pass, special mention, substandard, doubtful, or loss. Certain loans are homogeneous in nature and are therefore pooled by risk grade. These homogeneous loans include consumer installment and home equity loans. Special mention loans are currently performing but are potentially weak, as the borrower has begun to exhibit deteriorating trends which, if not corrected, could jeopardize repayment of the loan and result in further downgrades. Substandard loans have well-defined weaknesses which, if not corrected, could jeopardize the full satisfaction of the debt. A loan classified as doubtful has critical weaknesses that make full collection of the obligation improbable. Classified loans, as defined by the Company, include impaired loans and loans categorized as substandard, doubtful, and loss which are not considered impaired. At September 30, 2017, impaired and classified loans totaled $28,214,000, or 5.2%, of gross loans as compared to $29,838,000, or 5.2%, of gross loans at December 31, 2016.
Loan participations are reviewed for allowance adequacy under the same guidelines as other loans in the Company’s portfolio, with an additional participation factor added, if required, for specific risks associated with participations. In general, participations are subject to certain thresholds set by the Company, and are reviewed for geographic location as well as the well-being of the underlying agent bank.
Specific allowances are established based on management’s periodic evaluation of loss exposure inherent in impaired loans. For impaired loans, specific allowances are determined based on the net realizable value of the underlying collateral, the net present value of the anticipated cash flows, or the market value of the underlying assets. Formula allowances for classified loans, excluding impaired loans, are determined on the basis of additional risks involved with individual loans that may be in excess of risk factors associated with the loan portfolio as a whole. The specific allowance is different from the formula allowance in that the specific allowance is determined on a loan-by-loan basis based on risk factors directly related to a particular loan, as opposed to the formula allowance which is determined for a pool of loans with similar risk characteristics, based on past historical trends and other risk factors which may be relevant on an ongoing basis.
The unallocated portion of the allowance is based upon management’s evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to,
general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions.
The following table summarizes the specific allowance, formula allowance, and unallocated allowance at September 30, 2017 and December 31, 2016, as well as classified loans at those period-ends.
|
| | | | | | | |
(in 000's) | September 30, 2017 | | December 31, 2016 |
Specific allowance – impaired loans | $ | 1,741 |
| | $ | 1,360 |
|
Formula allowance – classified loans not impaired | 1,286 |
| | 1,226 |
|
Formula allowance – special mention loans | 385 |
| | 248 |
|
Total allowance for special mention and classified loans | 3,412 |
| | 2,834 |
|
| | | |
Formula allowance for pass loans | 4,724 |
| | 5,371 |
|
Unallocated allowance | 1,022 |
| | 697 |
|
Total allowance for loan losses | $ | 9,158 |
| | $ | 8,902 |
|
| | | |
Impaired loans | 15,338 |
| | 16,179 |
|
Classified loans not considered impaired | 12,876 |
| | 13,659 |
|
Total classified loans / impaired loans | $ | 28,214 |
| | $ | 29,838 |
|
Special mention loans not considered impaired | $ | 13,990 |
| | $ | 5,515 |
|
While impaired loans decreased $841,000 between December 31, 2016 and September 30, 2017, the specific allowance related to impaired loans increased $381,000 between December 31, 2016 and September 30, 2017 due to the addition of a new highly reserved impaired Ag loan in the period. The decrease in impaired loans is primarily due to a decrease in troubled debt restructures. The formula allowance related to classified and special mention unimpaired loans increased by $197,000 between December 31, 2016 and September 30, 2017. The unallocated allowance increased from $697,000 at December 31, 2016 to $1,022,000 at September 30, 2017. The increase in unallocated allowance is the result of declining historical loss factors. Although there has been a reduction in required loss reserves as economic conditions have improved, the Company has a concentration in loans to finance CRE, construction and land development activities not secured by real estate. These loans have inherently higher risk characteristics and management believes maintaining additional, unallocated reserves to address the inherent losses in these loans is reasonable and appropriate. The level of “pass” loans increased approximately $5,972,000 between December 31, 2016 and September 30, 2017. The related formula allowance decreased $647,000 during the same period. The formula allowance for “pass loans” is derived from the loan loss factors under migration analysis.
The Company’s methodology includes features that are intended to reduce the difference between estimated and actual losses. The specific allowance portion of the analysis is designed to be self-correcting by taking into account the current loan loss experience based on that portion of the portfolio. By analyzing the estimated losses inherent in the loan portfolio on a quarterly basis, management is able to adjust specific and inherent loss estimates using the most recent information available. In performing the periodic migration analysis, management believes that historical loss factors used in the computation of the formula allowance need to be adjusted to reflect current changes in market conditions and trends in the Company’s loan portfolio. There are a number of other factors which are reviewed when determining adjustments in the historical loss factors. Those factors include 1) trends in delinquent and nonaccrual loans, 2) trends in loan volume and terms, 3) effects of changes in lending policies, 4) concentrations of credit, 5) competition, 6) national and local economic trends and conditions, 7) experience of lending staff, 8) loan review and Board of Directors oversight, 9) high balance loan concentrations, and 10) other business conditions.
The general reserve requirements (ASC 450-70) decreased with the continued strengthening of local, state, and national economies and their impact on our local lending base, which has resulted in a lower qualitative component for the general reserve calculation. These positive factors were partially offset by the Company including OREO financial results in loss history and extending the look back period used to capture the loss history for the quantitative portion of the ALLL. In the third quarter of 2013, the look back period was changed from 4 years to stake-in-the-ground (December 31, 2005), in an effort to include higher losses experienced during the credit crisis. Changes in the mix of historical losses in the look back period resulted in a reallocation of the general reserve component of the allowance amount within the various loan segments as compared to September 30, 2017, as loss experience by segment has fluctuated over time. The stake-in-the-ground
methodology requires the Company to use December 31, 2005, as the starting point of the look back period to capture loss history. Time horizons are subject to Management's assessment of the current period, taking into consideration changes in business cycles and environment changes.
Management and the Company’s lending officers evaluate the loss exposure of classified and impaired loans on a weekly/monthly basis. The Company’s Loan Committee meets weekly and serves as a forum to discuss specific problem assets that pose significant concerns to the Company, and to keep the Board of Directors informed through committee minutes. All special mention and classified loans are reported quarterly on Problem Asset Reports and Impaired Loan Reports and are reviewed by senior management. Migration analysis and impaired loan analysis are performed on a quarterly basis and adjustments are made to the allowance as deemed necessary. The Board of Directors is kept abreast of any changes or trends in problem assets on a monthly basis, or more often if required.
The specific allowance for impaired loans is measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The amount of impaired loans is not directly comparable to the amount of nonperforming loans disclosed laterelsewhere in this section. The primary differences between impaired loansreport):
| | | | | | | | | | | | | | | | | |
Loan Segments for Allowance for Credit Loss Analysis | | March 31, 2024 | | December 31, 2023 | | | |
(In thousands) | | | | | |
Commercial and business loans | | $ | 56,361 | | | $ | 53,273 | | | | |
Government program loans | | 71 | | | 74 | | | | |
Total commercial and industrial | | 56,432 | | | 53,347 | | | | |
Real estate – mortgage: | | | | | | | |
Commercial real estate | | 396,564 | | | 386,134 | | | | |
Residential mortgages | | 257,954 | | | 260,539 | | | | |
Home improvement and home equity loans | | 34 | | | 36 | | | | |
Total real estate mortgage | | 654,552 | | | 646,709 | | | | |
Real estate construction and development | | 127,913 | | | 127,944 | | | | |
Agricultural | | 49,050 | | | 49,795 | | | | |
Installment and student loans | | 41,466 | | | 42,247 | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total loans | | $ | 929,413 | | | $ | 920,042 | | | | |
Individually-Evaluated Loans and nonperforming loans are: i) all loan categories are considered in determining nonperforming loans while impaired loan recognition is limited to commercial and industrial loans, commercial and residential real estate loans, construction loans, and agricultural loans, and ii) impaired loan recognition considers not only loans 90 days or more past due, restructured loans and nonaccrual loans but may also include problem loans other than delinquent loans.Specific Reserves:
The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include nonaccrual loans, troubled debt restructures, and performing loans in which full payment of principal or interest is not expected. Management bases the measurement of these impaired loans either on the fair value of the loan's collateral or the expected cash flows on the loans discounted at the loan's stated interest rates. Cash receipts on impaired loans not performing to contractual terms and that are on nonaccrual status are used to reduce principal balances. Impairment losses are included in the allowance for credit losses through a charge to the provision, if applicable.
In most cases, the Company uses the cash basis method of income recognition for impaired loans. In the case of certain troubled debt restructuring, for which the loan has been performing for a prescribed period of time under the current contractual terms, income is recognized under the accrual method. At September 30, 2017, included in impaired loans, were troubled debt restructures totaling $12,150,000. Nonaccrual loans, totaling $5,124,000, were included in that balance. The remaining troubled debt restructures, totaling $7,026,000, were current with regards to payments, and were performing according to their modified contractual terms.
Commercial and industrial loans and real estate mortgage loans, respectively, comprised approximately 24.04% and 25.71% of total impaired loan balances at September 30, 2017. Of the $3,687,000 in commercial and industrial impaired loans reported at September 30, 2017, two loans, with a total recorded investment of $286,000, were secured by real estate. Specific collateral related to impaired loans is reviewed for current appraisal information, economic trends within geographic markets, loan-to-value ratios, and other factors that may impact the value of the loan collateral. Adjustments are made to collateral values as needed for these factors. Of total impaired loans at September 30, 2017, approximately $11,046,000, or 72.0%, are secured by real estate. The majority of impaired real estate construction and development loans are for the purpose of residential construction, residential and commercial acquisition and development, and land development. Residential construction loans are made for the purpose of building residential 1-4 single family homes. Residential and commercial acquisition and development loans are made for the purpose of purchasing land, developing that land if required, and developing real estate or commercial construction projects on those properties. Land development loans are made for the purpose of converting raw land into construction-ready building sites. The following table summarizes the components of impairedindividually-evaluated loans and their related specific reserves:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
(In thousands) | | Individually-Evaluated Loan Balances | | Specific Reserve | | Individually-Evaluated Loan Balances | | Specific Reserve |
| | | | | | | | |
| | | | | | | | |
Real estate construction and development | | $ | 11,540 | | | $ | — | | | $ | 11,390 | | | $ | — | |
Agricultural | | 427 | | | 5 | | | 451 | | | 14 | |
| | | | | | | | |
Total individually-evaluated loans | | $ | 11,967 | | | $ | 5 | | | $ | 11,841 | | | $ | 14 | |
Individually-evaluated loans increased $126,000 to $12.0 million at March 31, 2024, compared to $11.8 million at December 31, 2023. Included in the balance of specific reserves at September 30, 2017 and DecemberMarch 31, 2016.
|
| | | | | | | | | | | | | | | |
| Impaired Loan Balance | | Reserve | | Impaired Loan Balance | | Reserve |
(in 000’s) | September 30, 2017 | | September 30, 2017 | | December 31, 2016 | | December 31, 2016 |
Commercial and industrial | $ | 3,687 |
| | $ | 571 |
| | $ | 5,009 |
| | $ | 757 |
|
Real estate – mortgage | 3,944 |
| | 427 |
| | 3,931 |
| | 603 |
|
RE construction & development | 6,816 |
| | — |
| | 6,274 |
| | — |
|
Agricultural | 891 |
| | 743 |
| | — |
| | — |
|
Installment/other | — |
| | — |
| | 965 |
| | — |
|
Total Impaired Loans | $ | 15,338 |
| | $ | 1,741 |
| | $ | 16,179 |
| | $ | 1,360 |
|
Included in impaired loans are loans modified in troubled debt restructurings (TDRs), where concessions have been granted2024, is $5,000 allocated to borrowers experiencing financial difficulties in an attempt to maximize collection. The Company makes various types of concessions when structuring TDRs including rate reductions, payment extensions, and forbearance. At September 30, 2017, approximately $3,835,000 of the total $12,150,000 in TDRs was comprised of real estate mortgages. An additional $6,798,000 was related to real estate construction and development loans.one agricultural loan. There were no reserve amountsreserves for real estate construction and development impaired loans and impaired installment loans at March 31, 2024, and December 31, 2016 and September 30, 2017,2023, due to the Company securing collateral on those loans.
Total troubled debt restructurings decreased 2.10% between September 30, 2017 and December 31, 2016. Nonaccrual TDRs decreased by 29.46% while accruing TDRs increased by 36.53% over the same period. Total residential mortgages and real estate construction TDRs increased slightly to 5.39%. Many of these credits are related to real estate projects that slowed significantly or stalled during the recession, leading the Company to pursue restructuringvalue of the qualified credits allowing the real estate market time to recover and developers opportunity to finish projects at a slower pace. Concessions granted in these circumstances include lengthened maturities and/or rate reductions that enabledcollateral securing those loans.
Collateral-Dependent Loans:
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to finishbe provided substantially through the projects and may be entirely successful. In large part, current successes are related to a recovering real estate market.operation or sale of the collateral.
The following table presents the recorded investment in collateral-dependent loans by type of loan:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
(Dollars in thousands) | | Amount | | | Number of Collateral-Dependent Loans | | Amount | | | Number of Collateral-Dependent Loans |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Real estate construction and development loans | | $ | 11,543 | | | | 3 | | | $ | 11,390 | | | | 3 | |
Agricultural loans | | 390 | | | | 1 | | | 390 | | | | 1 | |
| | | | | | | | | | |
Total | | $ | 11,933 | | | | 4 | | | $ | 11,780 | | | | 4 | |
Credit Quality Indicators for Outstanding Student Loans:
The following table summarizes TDRs by type, classified separatelythe credit quality indicators for outstanding student loans as nonaccrual or accrual, whichof:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 |
(Dollars in thousands) | | Number of Loans | | Amount | | Accrued Interest | | Number of Loans | | Amount | | Accrued Interest |
School | | 39 | | | $ | 986 | | | $ | 640 | | | 44 | | | $ | 1,242 | | | $ | 734 | |
Grace | | 10 | | | 396 | | | 227 | | | 18 | | | 473 | | | 296 | |
Repayment | | 387 | | | 17,957 | | | 264 | | | 444 | | | 20,833 | | | 289 | |
Deferment | | 250 | | | 11,279 | | | 2,348 | | | 237 | | | 10,163 | | | 2,022 | |
Forbearance | | 135 | | | 7,007 | | | 204 | | | 98 | | | 5,782 | | | 133 | |
Total | | 821 | | | $ | 37,625 | | | $ | 3,683 | | | 841 | | | $ | 38,493 | | | $ | 3,474 | |
Included in installment loans are included$37.6 million and $38.5 million in impairedstudent loans at September 30, 2017March 31, 2024, and December 31, 2016.2023, respectively, made to medical and pharmacy school students. As of March 31, 2024, and December 31, 2023, the reserve against the student loan portfolio totaled $6.6 million and $6.3 million, respectively. Loan interest rates on the student loan portfolio are variable and range from 6.00% to 13.25 % at March 31, 2024, and December 31, 2023.
|
| | | | | | | | | | | |
| Total TDRs | | Nonaccrual TDRs | | Accruing TDRs |
(in 000's) | September 30, 2017 | | September 30, 2017 | | September 30, 2017 |
Commercial and industrial | $ | 630 |
| | $ | 250 |
| | $ | 381 |
|
Real estate - mortgage: | |
| | |
| | |
|
Commercial real estate | 1,147 |
| | 466 |
| | 681 |
|
Residential mortgages | 2,688 |
| | — |
| | 2,688 |
|
Total real estate mortgage | 3,835 |
| | 466 |
| | 3,369 |
|
RE construction & development | 6,798 |
| | 4,408 |
| | 2,389 |
|
Agricultural | 887 |
| | — |
| | 887 |
|
Total Troubled Debt Restructurings | $ | 12,150 |
| | $ | 5,124 |
| | $ | 7,026 |
|
Nonperforming Assets:
The following table summarizes the components of nonperforming assets as of March 31, 2024, and December 31, 2023, and the percentage of nonperforming assets to total gross loans, total assets, and the percentage of nonperforming assets to allowance for loan losses: |
| | | | | | | | | | | |
| Total TDRs | | Nonaccrual TDRs | | Accruing TDRs |
(in 000's) | December 31, 2016 | | December 31, 2016 | | December 31, 2016 |
Commercial and industrial | $ | 1,356 |
| | $ | 565 |
| | $ | 791 |
|
Real estate - mortgage: | |
| | |
| | |
|
Commercial real estate | 1,454 |
| | 1,126 |
| | 328 |
|
Residential mortgages | 2,368 |
| | — |
| | 2,368 |
|
Total real estate mortgage | 3,822 |
| | 1,126 |
| | 2,696 |
|
RE construction & development | 6,267 |
| | 4,608 |
| | 1,659 |
|
Installment/other | 965 |
| | 965 |
| | — |
|
Total Troubled Debt Restructurings | $ | 12,410 |
| | $ | 7,264 |
| | $ | 5,146 |
|
| | | | | | | | | | | | | | |
(In thousands) | | March 31, 2024 | | December 31, 2023 |
Nonaccrual loans | | $ | 11,590 | | | $ | 11,448 | |
Loans past due 90 days or more, still accruing | | 174 | | | 426 | |
Total nonperforming loans | | 11,764 | | | 11,874 | |
Other real estate owned | | 4,582 | | | 4,582 | |
Total nonperforming assets | | $ | 16,346 | | | $ | 16,456 | |
Nonperforming loans to total gross loans | | 1.26 | % | | 1.29 | % |
Nonperforming assets to total assets | | 1.35 | % | | 1.36 | % |
Allowance for credit losses to nonperforming loans | | 131.34 | % | | 131.87 | % |
OfNonperforming assets, which are primarily related to the $12,150,000 in total TDRs at September 30, 2017, $5,124,000 were on nonaccrual status at period-end. Of the $12,410,000 in total TDRsreal estate loan and other-real-estate-owned portfolio, decreased $110,000 from $16.5 million at December 31, 2016, $7,264,000 were on nonaccrual status2023, to $16.3 million at period-end. As of September 30, 2017,March 31, 2024. Nonaccrual loan balances increased to $11.6 million between the Company has no commercial real estate (CRE) workouts whereby an existing loan was restructured into multiple new loans (i.e., A Note/B Note structure).
For a restructured loan to return to accrual status there needs to be at least 6 months successful payment history. In addition, the Company’s Credit Administration performs a financial analysis of the credit to determine whether the borrower has the ability to continue to perform successfully over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and a cash flow analysis of the borrower. Only after determining that the borrower has the ability to perform under the terms of the loans will the restructured credit be considered for accrual status.
Table 7. Nonperforming Assets
|
| | | | | | | |
(in 000's) | September 30, 2017 | | December 31, 2016 |
Nonaccrual Loans (1) | $ | 5,145 |
| | $ | 7,264 |
|
Restructured Loans | 7,026 |
| | 5,146 |
|
Loans past due 90 days or more, still accruing | — |
| | — |
|
Total nonperforming loans | 12,171 |
| | 12,410 |
|
Other real estate owned | 5,745 |
| | 6,471 |
|
Total nonperforming assets | $ | 17,916 |
| | $ | 18,881 |
|
| | | |
Nonperforming loans to total gross loans | 2.09 | % | | 2.18 | % |
Nonperforming assets to total assets | 2.12 | % | | 2.40 | % |
Allowance for loan losses to nonperforming loans | 75.24 | % | | 71.73 | % |
| |
(1) | Included in nonaccrual loans at September 30, 2017 and December 31, 2016 are restructured loans totaling $5,124,000 and $7,264,000, respectively. |
Non-performing loans decreased $239,000 between December 31, 2016 and September 30, 2017. Nonaccrual loans decreased $2,119,000 between December 31, 2016 and September 30, 2017, with real estate mortgage and real estate construction loans comprising approximately 94.73% of totaltwo periods. All nonaccrual loans at September 30, 2017. The reductionare well-collateralized and in nonaccrual loans is primarily attributed to a payoffthe process of a $965,000 loan and the migration of a $589,000 loan to accrual. collection.
The following table summarizes the nonaccrual totals by loan category for the periods shown. The ratio of the allowance for loan losses to nonperforming loans increased from 71.73% at December 31, 2016 to 75.24% at September 30, 2017.shown:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | March 31, 2024 | | December 31, 2023 | | $ Change |
Nonaccrual Loans: | | | | | | |
| | | | | | |
| | | | | | |
Real estate construction and development | | $ | 11,553 | | | $ | 11,403 | | | $ | 150 | |
Agricultural | | 37 | | | 45 | | | (8) | |
| | | | | | |
Total nonaccrual loans | | $ | 11,590 | | | $ | 11,448 | | | $ | 142 | |
|
| | | | | | | | | | | |
(in 000's) | Balance | | Balance | | Change from |
Nonaccrual Loans: | September 30, 2017 | | December 31, 2016 | | December 31, 2016 |
Commercial and industrial | $ | 271 |
| | $ | 565 |
| | $ | (294 | ) |
Real estate - mortgage | 466 |
| | 1,126 |
| | (660 | ) |
RE construction & development | 4,408 |
| | 4,608 |
| | (200 | ) |
Installment/other | — |
| | 965 |
| | (965 | ) |
Total Nonaccrual Loans | $ | 5,145 |
| | $ | 7,264 |
| | $ | (2,119 | ) |
Loans past due more than 30 days receive increased management attention and are monitored for increased risk. The Company continues to move past duepast-due loans to nonaccrual status in an ongoing effort to recognize and address loan problems as early and most effectively as possible. As impairedindividually-evaluated loans, nonaccrual, and restructuredmodified loans are reviewed for specific reserve allocations, the allowance for credit losses is adjusted accordingly.
Except for the nonaccrual and individually-evaluated loans, included in the above table, or those included in the impaired loan totals, there were no loans at September 30, 2017March 31, 2024, where the known credit problems of a borrower caused the Company to have serious doubts as to the ability of such borrower to comply with the present loan repayment terms and which would result in such loan being included as a nonaccrual, past due, or restructured loanterms.
Nonaccrual loans, totaling $11.6 million at some future date.
Nonperforming assets, which are primarily related to the real estate loan and other real estate owned portfolio, decreased$965,000March 31, 2024, increased $142,000 from a balance of $18,881,000$11.4 million at December 31, 2016 to a balance2023, with real estate mortgage and real estate construction loans comprising 99.7% of $17,916,000total nonaccrual loans at September 30, 2017, but remained relatively high compared to peers during the nine months ended September 30, 2017. Nonaccrual loans, totaling $5,145,000 at September 30, 2017, decreased $2,119,000 from the balance of $7,264,000 reported at DecemberMarch 31, 2016.2024. In determining the adequacy of the underlying collateral related to these loans, management monitors trends within specific geographical areas, loan-to-value ratios, appraisals, and other credit-related issues. At both March 31, 2024, and December 31, 2023, nonaccrual loans represented 1.24% of total loans. The loan allowance for credit issues related toloss represented 133.31% and 136.77% of nonaccrual loans for the specific loans. Impaired loans decreased $841,000 during the nine months ended September 30, 2017 to a balance of $15,338,000 at September 30, 2017. same periods.
Other real estate owned through foreclosure decreased to $5,745,000remained at $4.6 million for the periodperiods ended September 30, 2017 from the $6,471,000 balance recorded atMarch 31, 2024, and December 31, 2016.2023. Nonperforming assets as a percentage of total assets decreased from 2.40%1.36% at December 31, 20162023, to 2.12%1.35% at September 30, 2017.March 31, 2024.
The following table summarizes various nonperforming components of the loan portfolio, the related allowance for credit losses and provision for credit losses for the periods shown.
|
| | | | | | | | | | | |
(in 000's) | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
Recovery of provision for credit losses year-to-date | $ | (24 | ) | | $ | (21 | ) | | $ | (7 | ) |
Allowance as % of nonperforming loans | 75.24 | % | | 71.73 | % | | 77.06 | % |
| | | | | |
Nonperforming loans as % total loans | 2.09 | % | | 2.18 | % | | 2.07 | % |
Restructured loans as % total loans | 2.09 | % | | 2.18 | % | | 2.00 | % |
Management continues to monitor economic conditions in the real estate market for signs of further deterioration or improvement which may impact the level of the allowance for loancredit losses required to cover identified and potential losses in the loan portfolio. Greater focusFocus has been placed on monitoring and reducing the level of problem assets, while working with borrowers to find more options, including loan restructures, to work through these difficult economic times. Restructured loan balances are comprised of 29 loans totaling $12,150,000 at September 30, 2017, compared to 28 loans totaling $12,410,000 at December 31, 2016.assets.
The following table summarizes special mention loans by type at September 30, 2017 and December 31, 2016.as of:
|
| | | | | | | |
(in thousands) | September 30, 2017 | | December 31, 2016 |
Commercial and industrial | $ | 2,635 |
| | $ | 4,416 |
|
Real estate - mortgage: | |
| | |
|
Commercial real estate | 8,541 |
| | 621 |
|
Residential mortgages | 647 |
| | — |
|
Total real estate mortgage | 9,188 |
| | 621 |
|
RE construction & development | 2,609 |
| | 928 |
|
Agricultural | 985 |
| | — |
|
Total Special Mention Loans | $ | 15,417 |
| | $ | 5,965 |
|
| | | | | | | | | | | | | | |
(In thousands) | | March 31, 2024 | | December 31, 2023 |
| | | | |
| | | | |
Commercial real estate mortgage | | 5,762 | | | 5,796 | |
| | | | |
| | | | |
| | | | |
| | | | |
Agricultural | | 3,046 | | | 2,974 | |
| | | | |
Total special mention loans | | $ | 8,808 | | | $ | 8,770 | |
The Company focusesremains focused on competition and other economic conditions within its market area and other geographical areas in which it does business, which may ultimately affect the risk assessment of the portfolio. The Company continues to experience increased competition from major banks, local independents, and non-bank institutions, which creates pressure on loan pricing. Low interest rates and a weak economy continue to dominate, even as real estate prices show signs of stabilization and interest rates have begun to rise. The Company continues to place increasedIncreased emphasis has been placed on reducing both the level of nonperforming assets and the level ofpotential losses on the disposition of thesethose assets. It is in the best interest of both the Company and the borrowers to seek alternative options to foreclosure in an effort to reduce the impacts on the real estate market. As part of this strategy, the Company has increased its level of troubled debt restructurings,enters into loan modifications when it makes economic sense. While business and consumer spending show improvement in recent quarters, current GDP remains anemic. It is difficult to forecast what impact Federal Reserve actions to hold rates low will have on the economy. Local unemployment rates in the San Joaquin Valley have improved, but remain elevated compared with other regions and historically are higher as a result of the area's agricultural dynamics. The Company believes that the Central San Joaquin Valley will continue to grow and diversify as property and housing costs remain low relative to other areas of the state.improves collection prospects. Management recognizes the increased risk of loss due to the
Company's Company’s exposure to local and worldwide economic conditions, as well as potentially volatile real estate markets, and takes these factors into consideration when analyzing the adequacy of the allowance for credit losses.
The following table provides a summary of the Company'sCompany’s allowance for possibleloan credit losses, loan loss provisions, made to that allowance, and charge-off and recovery activity affecting the allowance for credit losses for the nine monthsquarter ended September 30, 2017March 31, 2024, and September 30, 2016.March 31, 2023.
Table 8. Allowance for Credit Losses - Summary of ActivityActivity:
| | | | | | | | | | | | | | |
(In thousands) | | March 31, 2024 | | March 31, 2023 |
Total loans outstanding at end of period before deducting allowances for credit losses | | $ | 929,413 | | | $ | 942,727 | |
Average loans outstanding during period | | 916,475 | | | 960,648 | |
| | | | |
Balance of allowance at beginning of period | | $ | 15,658 | | | $ | 16,549 | |
Loans charged-off: | | | | |
| | | | |
| | | | |
| | | | |
Installment and student loans | | (415) | | | (477) | |
| | | | |
Recoveries of loans previously charged off: | | | | |
Real estate | | 4 | | | 20 | |
| | | | |
Installment and student loans | | 122 | | | 23 | |
Total loan recoveries | | 126 | | | 43 | |
Net loans charged-off | | (289) | | | (434) | |
Provision (reversal of provision) (1) | | 82 | | | (493) | |
Balance of allowance for credit losses at end of period | | $ | 15,451 | | | $ | 15,622 | |
| | | | |
Net loan charged-off to total average loans (annualized) | | 0.13 | % | | 0.18 | % |
Net loan charged-off to loans at end of period (annualized) | | 0.03 | % | | 0.18 | % |
Allowance for credit losses to total loans at end of period | | 1.66 | % | | 1.65 | % |
Net loan charged-off to allowance for credit losses (annualized) | | 7.48 | % | | 11.11 | % |
Provision (reversal of provision) for credit losses to net charged-off (annualized) | | 113.49 | % | | (227.19) | % |
|
| | | | | | | |
(in 000's) | September 30, 2017 | | September 30, 2016 |
Total loans outstanding at end of period before deducting allowances for credit losses | $ | 583,601 |
| | $ | 560,651 |
|
Average loans outstanding during period | 565,068 |
| | 532,133 |
|
| | | |
Balance of allowance at beginning of period | 8,902 |
| | 9,713 |
|
Loans charged off: | |
| | |
|
Real estate | (2 | ) | | (29 | ) |
Commercial and industrial | (106 | ) | | (846 | ) |
Installment and other | (12 | ) | | (20 | ) |
Total loans charged off | (120 | ) | | (895 | ) |
Recoveries of loans previously charged off: | |
| | |
|
Real estate | 73 |
| | 50 |
|
Commercial and industrial | 195 |
| | 51 |
|
Installment and other | 132 |
| | 6 |
|
Total loan recoveries | 400 |
| | 107 |
|
Net loans recovered (charged off) | 280 |
| | (788 | ) |
| | | |
Recovery of provision charged to operating expense | (24 | ) | | (7 | ) |
Balance of allowance for credit losses at end of period | $ | 9,158 |
| | $ | 8,918 |
|
| | | |
Net loan (recoveries) charge offs to total average loans (annualized) | (0.07 | )% | | 0.20 | % |
Net loan (recoveries) charge offs to loans at end of period (annualized) | (0.10 | )% | | 0.19 | % |
Allowance for credit losses to total loans at end of period | 1.57 | % | | 1.59 | % |
Net loan (recoveries) charge offs to allowance for credit losses (annualized) | (6.11 | )% | | 35.34 | % |
Provision for credit losses to net (charge offs) recoveries (annualized) | (11.43 | )% | | 1.18 | % |
(1) There was a provision of $91for unfunded loan commitments made during the quarter ended March 31, 2024. There was no provision for unfunded loan commitments made during the quarter ended March 31, 2023.
Provisions for credit losses are determined based on the basis of management'smanagement’s periodic credit review of the loan portfolio, consideration of past loan loss experience, expected losses within the portfolio, current and future economic conditions, and other pertinent factors. Management believes its estimate of the allowance for credit losses adequately covers estimated losses inherent in the loan portfolio and, based on the condition of the loan portfolio, management believes the allowance is sufficient to cover risk elements in the loan portfolio. For the nine monthsquarter ended September 30, 2017, the recovery ofMarch 31, 2024, a $82,000 provision forwas recorded to the allowance for credit losses was $24,000 as compared to a recovery$493,000 reversal of provision of $7,000 for the nine monthsquarter ended September 30, 2016.March 31, 2023.
The following provides a summary of the Company’s net charge-offs as a percentage of average loan balances (including nonaccrual loans) in each category for the quarters indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | March 31, 2023 | | | | | | |
(In thousands) | | Net Charge-offs (Recoveries) | | Average Loan Balance | | Percentage | | Net Charge-offs (Recoveries) | | Average Loan Balance | | Percentage | | | | | | |
Commercial and industrial | | $ | — | | | $ | 56,474 | | | — | % | | $ | — | | | $ | 49,628 | | | — | % | | | | | | |
Real estate mortgages | | (4) | | | 643,625 | | | <0.01% | | (20) | | | 667,376 | | | <0.01% | | | | | | |
RE construction and development | | — | | | 126,556 | | | — | % | | — | | | 148,340 | | | — | % | | | | | | |
Agricultural | | — | | | 47,691 | | | — | % | | — | | | 50,332 | | | — | % | | | | | | |
Installment and student loans | | 293 | | | 42,129 | | | 0.70 | % | | 454 | | | 44,972 | | | 1.01 | % | | | | | | |
Total | | $ | 289 | | | $ | 916,475 | | | 0.03 | % | | $ | 434 | | | $ | 960,648 | | | 0.05 | % | | | | | | |
Net recoveriescharge-offs during the nine monthsquarter ended September 30, 2017March 31, 2024, totaled $280,000$289,000 as compared to net charge-offs of $788,000$434,000 for the nine monthsquarter ended September 30, 2016.March 31, 2023. The Company charged-off or had partial charge-offs on 37 loans during the nine monthsquarter ended September 30, 2017, asMarch 31, 2024, compared to 1112 loans during the same period ended September 30, 2016, and 13 loans during the year ended DecemberMarch 31, 2016.2023. The annualized percentage of net recoveriescharge-offs to
average loans were 0.07%was 0.13% for the nine monthsquarter ended September 30, 2017 and 0.15%March 31, 2024, 0.25% for the year ended December 31, 2016, as compared to net charge-offs of 0.20%2023, and 0.18% for the nine monthsquarter ended September 30, 2016.March 31, 2023. The Company'sCompany’s loans, net loans increasedof unearned fees, decreased from $560,651,000$942.7 million at September 30, 2016March 31, 2023, to $583,601,000$929.4 million at September 30, 2017.March 31, 2024.
The allowance for credit losses at September 30, 2017March 31, 2024, was 1.57%1.66% of outstanding loan balances, at September 30, 2017, as compared to 1.56%1.70% at December 31, 2016,2023, and 1.59%1.65% at September 30, 2016. The increase in the allowance as a percentage of outstanding loan balances between DecemberMarch 31, 20162023. At March 31, 2024, and September 30, 2017 is primarily attributed to increases in specific reserves due to newly impaired loans.
At September 30, 2017 and September 30, 2016, $370,000 and $316,000, respectively, of the formula allowance is allocated toMarch 31, 2023, unfunded loan commitmentscommitment reserves of $927,000 and is, therefore,$805,000 respectively, were reported separately in other liabilities on the consolidated balance sheet. liabilities.
Management believes that the 1.57%loan allowance for credit loss allowancelosses, totaling 1.66% of the loan portfolio at September 30, 2017March 31, 2024, is adequate to absorb both known and inherent risks in the loan portfolio. No assurance can be given, however, regarding future economic conditions, or other circumstances, which may adversely affect the Company'sCompany’s service areas and result in future losses toin the loan portfolio not captured by the current allowance for credit losses. Management is not currently aware of any conditions that may adversely affect the levels of losses incurred in the Company’s loan portfolio.
Asset/Liability Management – Liquidity and Cash FlowCapital Resources
The primary function ofCompany’s asset/liability management, isliquidity strategy, and capital planning are guided by policies formulated and monitored by the Asset and Liability Management Committee (ALCO) and Management, to provide adequate liquidity and maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities.
Liquidity
Liquidity management may be described as the ability to maintain sufficient cash flows to fulfill both on- and off-balance sheet financial obligations, including loan funding commitments and customer deposit withdrawals, without straining the Company’s equity structure. To maintain an adequate liquidity position, the Company relies on, in addition to cash and cash equivalents, cash inflows from deposits and short-term borrowings, repayments of principal on loans and investments, and interest income received. The Company'sCompany’s principal cash outflows are for loan origination,originations, purchases of investment securities, depositor withdrawals, and payment of operating expenses.
The Company continues to emphasize liability management as part of its overall asset/liability strategy. Through the discretionary acquisition of short term borrowings, the Company has, when needed, been able to provide liquidity to fund asset growth while, at the same time, better utilizing its capital resources, and better controlling interest rate risk. This does not preclude the Company from selling assets such as investment securities to fund liquidity needs but, with favorable borrowing rates, the Company has maintained a positive yield spread between borrowed liabilities and the assets which those liabilities fund. If, at some time, rate spreads become unfavorable, the Company has the ability to utilize an asset management approach and, either control asset growth or fund further growth with maturities or sales of investment securities. At September 30, 2017, the Company had no borrowings, as its deposit base currently provides funding sufficient to support its asset values.
The Company'sCompany’s liquid asset base, which generally consists of cash and due from banks, federal funds sold, securities purchased under agreements to resell (“reverse repos”) and investment securities, is maintained at a levellevels deemed sufficient to provide the cash outlay necessary to fund loan growth, as well as any customerunfunded loan commitments, and deposit runoff that may occur. Additional liquidity requirements may be funded with overnight or term borrowing arrangements with various correspondent banks, FHLB and the Federal Reserve Bank. Withinrunoff. Included in this framework is the objective of maximizing the yield on earning assets. This is generally achieved by maintaining a high percentage of earning assets in loans and investment securities, which historically have representedtypically provide higher yields than cash balances.
The following table sets forth asset balances as of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 | | | | | | | | | |
(Dollars in thousands) | | Balance | | % Total Assets | | Balance | | % Total Assets | | | | | | | | | |
Cash and cash equivalents | | $ | 43,004 | | | 3.6 | % | | $ | 40,784 | | | 3.4 | % | | | | | | | | | |
Loans, net of unearned income | | 929,413 | | | 77.0 | % | | 920,042 | | | 76.0 | % | | | | | | | | | |
Unpledged investment securities | | 81,610 | | | 6.8 | % | | 98,394 | | | 8.1 | % | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
At March 31, 2024, the Company's highest yielding asset. At September 30, 2017, the loan portfolio totaled 69.19% of total assets and the loan to depositloan-to-deposit ratio was 79.20%97.2%, compared to 72.44% and 83.05%, respectively,a loan-to-deposit ratio of 91.6% at December 31, 2016. Liquid assets2023.
Liabilities used to fund liquidity sources include core and non-core deposits as well as short-term borrowing capabilities. Core deposits, which comprised approximately 97.1% of total deposits at September 30, 2017, included cashMarch 31, 2024, provide a significant and cash equivalents totaling $159,892,000 as compared to $113,032,000 at December 31, 2016. Other sources of liquidity include collateralized lines ofstable funding source for the Company. The bank held $75.0 million in borrowings from a secured credit fromline with the Federal Home Loan Bank and $28.0 million in borrowings from an unsecured credit line with PCBB for a total of $103.0 million in short-term borrowings at March 31, 2024. Unused lines of credit with the Federal Reserve Bank and FHLB, totaling $298,348,000$610.3 million, were collateralized by investment securities and uncollateralizedcertain qualifying loans in the Company’s portfolio. The carrying value of loans pledged on these borrowing lines of credit from Pacific Coast Banker's Bank (PCBB) of $10,000,000, Union Bank of $10,000,000, and Zion's Bank of $20,000,000totaled $842.7 million at September 30, 2017.
The liquidity of the parent company, United Security Bancshares, is primarily dependentMarch 31, 2024. For further detail on the
paymentCompany’s borrowing arrangements, see “Note 6 - Short-term Borrowings/Other Borrowings” in the notes to the consolidated financial statements.
Cash Flow
The period-end balances of cash and cash equivalents for the periods shown are as follows (from Consolidated Statements of Cash Flows – in 000’s)Flows):
| | | | | | | | |
(In thousands) | | Balance |
December 31, 2022 | | $ | 38,595 | |
March 31, 2023 | | 45,153 | |
December 31, 2023 | | 40,784 | |
March 31, 2024 | | 43,004 | |
|
| | | |
(in 000's) | Balance |
December 31, 2015 | $ | 125,751 |
|
September 30, 2016 | $ | 111,747 |
|
December 31, 2016 | $ | 113,032 |
|
September 30, 2017 | $ | 159,892 |
|
Cash and cash equivalents increased $46,860,000 during the nine months ended September 30, 2017, compared to a decrease of $14,004,000 during the nine months ended September 30, 2016.
The Company had a net cash inflow from operating activities of $4,660,000 for the nine months ended September 30, 2017 and a cash inflow from operations totaling $6,025,000 for the period ended September 30, 2016. The Company experienced net cash outflows from investing activities of $4,787,000 related to a $12,346,000 increase in loan balances, partially offset by principal payments on available-for-sale securities of $6,091,000 and proceeds from the sale of OREO of $1,062,000 during the nine months ended September 30, 2017. For the nine months ended September 30, 2016, the Company experienced net cash outflows from investing activities of $69,516,000 due an increase of $41,303,000 in loan balances and purchases of $34,987,000 in available-for-sale securities.
During the nine months ended September 30, 2017, the Company experienced net cash inflows from financing activities totaling $46,987,000, primarily as the result of increases of $85,653,000 in demand deposits and savings accounts, offset by decreases of $36,984,000 in time deposits and purchased brokered deposits. For the nine months endedSeptember 30, 2016, the Company experienced net cash inflows of $49,487,000 from financing activities due to increases in demand deposit accounts, time deposits, and savings accounts.
The Company has the ability to increase or decrease loan growth, increase or decrease deposits and borrowings, or a combination of both to manage balance sheet liquidity.
Regulatory Matters
Termination of Regulatory Agreements
Effective April 12, 2017, the Federal Reserve Bank of San Francisco (the “Reserve Bank”) terminated the informal supervisory agreement with the Company (the “Agreement”) that required, among other things, that the Company obtain prior regulatory approval to accept dividends from the Bank, to pay dividends to its shareholders, or to pay interest on the Company’s junior subordinated debt. The Agreement had replaced a previous formal supervisory agreement with the Reserve Bank effective November 19, 2014.
Effective October 19, 2016, the California Department of Business Oversight (the “DBO”) terminated the informal memorandum of understanding (“MOU”) the Bank had entered into on September 24, 2013, replacing a previous formal order. The MOU required the Bank to maintain a ratio of tangible shareholder’s equity to total tangible assets equal to or greater than 9.0% and also required the DBO’s approval for the Bank to pay a dividend to the Company.
Capital Adequacy
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements adopted by the Board of Governors of the Federal Reserve System (the “Board of Governors”). Failure to meet minimum capital requirements can initiate certain mandates and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework, for prompt corrective action, the consolidated Company and the Bank must meet specific capital guidelines that involveinclude quantitative measures of their assets, liabilities, and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amountsCapital levels and classificationclassifications are also subject to qualitative judgments by the regulators aboutregarding components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by the capital adequacy guidelines require insured institutions to maintain a minimum leverage ratio of Tier 1 capital (the sum of common stockholders' equity, noncumulative perpetual preferred stock and minority interests in consolidated subsidiaries, minus intangible assets, identified losses and investments in certain subsidiaries, plus unrealized losses or minus unrealized gains on available for sale securities) to total assets. Institutions which have received the
highest composite regulatory rating and which are not experiencing or anticipating significant growth are required to maintain a minimum leverage capital ratio of 3% of Tier 1 capital to total assets. All other institutions are required to maintain a minimum leverage capital ratio of at least 100 to 200 basis points above the 3% minimum requirement.
The Company has adopted aCompany’s capital plan that includes guidelines and trigger points designed to ensure sufficient capital is maintained at both the Bank and the Company and that capitallevels. Capital ratios are maintained at a level deemed appropriate under regulatory guidelines given the Bank’s level of classified assets, concentrations of credit, ALLL,allowance for credit losses, current and projected growth, and projected retained earnings. The capital plan also contains contingency strategies to obtain additional capital as required to fulfill future capital requirements for both the Bank, as a separate legal entity, and the Company, on a consolidated basis. The capital plan requires the Bank to maintain a ratio of tangible shareholder’s equity to total tangible assetsTier 1 Leverage Ratio equal to or greater than 9.0%9%. The Bank’s ratio of tangible shareholders’ equity to total tangible assetsTier 1 Capital Ratio was 12.5%12.50% and 12.7%10.88% at September 30, 2017March 31, 2024 and 2016,2023, respectively.
The following table sets forth the Company’s and the Bank'sBank’s actual capital positions at September 30, 2017, as well asMarch 31, 2024 and December 31, 2023:
Capital Ratios:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 | | December 31, 2023 | | Minimum Requirement to be Well Capitalized | | Minimum requirement for Community Bank Leverage Ratio (1) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Tier 1 capital to adjusted average assets (Leverage Ratio) | | | | | | | | |
Company | | 12.47% | | 11.82% | | 5.00% | | 9.00% |
Bank | | 12.50% | | 11.83% | | 5.00% | | 9.00% |
(1) If the Bank’s Leverage Ratio exceeds the minimum capital requirements and requirementsratio under the Community Bank Leverage Ratio Framework (CBLR), it is deemed to be well capitalized“well capitalized” under prompt corrective action provisions (Bank required only) underall other regulatory capital requirements. If the regulatory guidelines discussed above:
Table 9. Capital Ratios
|
| | | | | | | |
| Ratio at September 30, 2017 | | Ratio at December 31, 2016 | | Minimum for Capital Adequacy | | Minimum requirement for "Well Capitalized" Institution |
Total capital to risk weighted assets | | | | | | | |
Company | 17.97% | | 17.26% | | 8.00% | | N/A |
Bank | 17.85% | | 17.19% | | 8.00% | | 10.00% |
Tier 1 capital to risk-weighted assets | | | | | | | |
Company | 16.72% | | 16.01% | | 6.00% | | N/A |
Bank | 16.60% | | 15.94% | | 6.00% | | 8.00% |
Common equity tier 1 capital to risk-weighted assets | | | | | | | |
Company | 15.29% | | 14.68% | | 4.50% | | N/A |
Bank | 16.60% | | 15.94% | | 4.50% | | 6.50% |
Tier 1 capital to adjusted average assets (leverage) | | | | | | | |
Company | 12.96% | | 12.97% | | 4.00% | | N/A |
Bank | 12.95% | | 12.99% | | 4.00% | | 5.00% |
The Federal Reserve and the Federal Deposit Insurance Corporation approved final capital rules in July 2013, that substantially amend the existing capital rules for banks. These new rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (commonly referred to as “Basel III”) as well as requirements encompassed by the Dodd-Frank Act.
The final rules set a new common equity tier 1 requirement and higher minimum tier 1 requirements for all banking organizations. The final rules also require a Common Equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. The capital buffer requirement will be phased in over three years beginning in 2016, and will effectively raiseBank’s leverage ratio falls below the minimum required, Common Equity Tier 1 RBC Ratioit would no longer be eligible to 7.0%,elect the Tier 1 RBC Ratio to 8.5%, anduse of the Total RBC Ratio to 10.5% on a fully phased-in basis. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases, and on the payment of discretionary bonuses to executive management. The rules revise the prompt corrective action framework to incorporate the new regulatory capital minimums. They also enhance risk sensitivity and address weaknesses identified over recent years with the measure of risk-weighted assets.CBLR framework.
As of September 30, 2017,March 31, 2024, the Company and the Bank meet all capital adequacy requirements to which they are subject. Management believes that, under the current regulations, both the Company and the Bank will continue to meet their minimum capital requirements infor the foreseeable future.
Dividends
Dividends paid to shareholders by the Holding Company are subject to restrictions set forth inunder the California General Corporation Law. As applicable to the Holding Company, the California General Corporation Law provides that the Holding Company may make a distribution to its shareholders if either retainedearnings immediately prior to the dividend payout are at least equal to the amount of the proposed distribution or, if immediately afterproceeding the distribution, the value of the Holding Company’s assets would equal or exceed the sum of its total liabilities. The primary source of funds with whichfor dividends will be paid to shareholders will come fromis cash dividends received by the Holding Company from the Bank.
On April 25, 2017, the Board of Directors announced the authorization of the repurchase of up to $3,000,000$3.0 million of the outstanding stock of the Holding Company. This amount represents 3%2.4% of total shareholders'shareholders’ equity of $101,108,000$124.2 million at September 30, 2017.March 31, 2024. The timing of the purchases will depend on certain factors including, but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, or negotiated private transactions. During the three monthsquarter ended September 30, 2017,March 31, 2024, the Company did not repurchase any of the shares available.
During the nine month periodquarter ended September 30, 2017,March 31, 2024, the Bank paid $3,109,000$2.1 million in cash dividends to the Holding Company which funded the Holding Company’s operating costs, and payments of interest on its junior subordinated debt, alland dividend payments to shareholders.
On March 26, 2024, the Company’s Board of which were approved byDirectors declared a cash dividend of $0.12 per share on the Reserve Bank andCompany’s common stock. The dividend was payable on April 22, 2024, to shareholders of record as of April 8, 2024. Approximately $2.1 million was transferred from retained earnings to dividends payable to allow for the DBO, as applicable.distribution of the dividend to shareholders.
The Bank, as a state-chartered bank, is subject to dividend restrictions set forth in the California Financial Code, as administered by the Commissioner of the DBO (“Commissioner”Department of Financial Protection and Innovation (the “Commissioner”). As applicable to the Bank, the Financial Code provides that the Bank may not pay cash dividends in an amount whichthat exceeds the lesser of the retained earnings of the Bank or the Bank’s net income for the last three fiscal years (lessless the amount of distributions to the Holding Company during that period of time).time. If the above test is not met, cash dividends may only be paid with the prior approval of the Commissioner, in an amount not exceeding the Bank’s net income for its last fiscal year or the amount of its net income for the current fiscal year. Such restrictions do not apply to stock dividends, which generally require neither the satisfaction of any tests nor the approval of the Commissioner. Notwithstanding the foregoing, if the Commissioner finds that the shareholder'sshareholders’ equity of the Bank is not adequate or that the declaration of a dividend would be unsafe or unsound, the Commissioner may order the Bank not to pay any dividend. The Federal Reserve Bank may also limit dividends paid by the Bank.
Reserve Balances
The BankItem 3 - Quantitative and Qualitative Disclosures about Market Risk
This item is requirednot applicable to maintain average reserve balances with the Federal Reserve Bank. During 2005, the Company implemented a deposit reclassification program, which allows the Company to reclassify a portion of transaction accounts to non-transaction accounts for reserve purposes. The deposit reclassification program is provided by a third-party vendor, and has been approved by the Federal Reserve Bank. At September 30, 2017, the Bank was not subject to a reserve requirement.smaller reporting companies.
Item 4.Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow for timely decisions regarding required disclosure.disclosures. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designedwell-designed and operated,executed, can provide only reasonable assurance of achieving thethat desired control objectives and our managementwill be achieved. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of September 30, 2017, the end of the period covered by this report,March 31, 2024, an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures was carried out.out under the supervision and participation of management, including the Chief Executive Officer and the Chief Financial Officer. Based on the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at thea reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have not been anywere no changes inmade to the Company'sCompany’s internal control over financial reporting that occurred during the quarter ended September 30, 2017,March 31, 2024, that have materially affected, or arewere reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and fraud. A control procedure, no matter how well conceived and operated,executed, can provide only reasonable, not absolute, assurance that the objectives of the control procedure arewill be met. Because of thethese inherent limitations in all control
procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because ofdue to simple errorerrors or mistake.mistakes. Additionally, controls can be circumvented by the individual acts of some persons,a person, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; overconditions. Over time, controls may become inadequate because ofdue to changes in conditions or deterioration in the degreedegrees of compliance with the policies and/or procedures may deteriorate.procedures. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and may not be detected.
PART II. Other Information
Item 1.Legal Proceedings
Not applicableThe Company is involved in various legal proceedings in the normal course of business. In the opinion of Management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial condition or results of operations.
Item 1A.Risk Factors
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None during the quarter ended September 30, 2017.March 31, 2024.
Item 3.Defaults Upon Senior Securities
Not applicable
Item 4.Mine Safety Disclosures
Not applicable
Item 5.Other Information
Not applicable
Item 6.Exhibits:
| | | | | |
11 | |
11 | Computation of Earnings per Share* |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
* Data required by Accounting Standards Codification (ASC) 260, Earnings per Share, is provided in Note 810 to the consolidated financial statements in this report.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | | |
| | United Security Bancshares |
| | | |
Date: | November 2, 2017May 9, 2024 | /S/ Dennis R. Woods |
| | | Dennis R. Woods |
| | | President and |
| | Chief Executive Officer |
| | | |
| | | /S/ Bhavneet GillDavid A. Kinross |
| | | Bhavneet GillDavid A. Kinross |
| | | Senior Vice President and Chief Financial Officer |