SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,SEPTEMBER 30, 2023 |
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . |
Commission file number: 000-32897
UNITED SECURITY BANCSHARES
(Exact name of registrant as specified in its charter)
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CALIFORNIA | | 91-2112732 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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2126 Inyo Street, Fresno, California | | 93721 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code (559) 248-4943490-6261
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, no par value | | UBFO | | Nasdaq |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☒ |
Smaller reporting company ☒ | | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, no par value
(Title of Class)
Shares outstanding as of April 30,October 31, 2023: 17,094,29817,136,095
TABLE OF CONTENTS
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PART I. Financial Information | |
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| | Condensed Consolidated Statements of Changes in Shareholders’ Equity | |
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PART II. Other Information | |
| Item 1. | | |
| Item 2. | | |
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| Item 6. | | |
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PART I. Financial Information
Item 1 - Financial Statements (Unaudited)
United Security Bancshares and Subsidiaries
Condensed Consolidated Balance Sheets – (unaudited)
March 31, 2023 and December 31, 2022
| (in thousands except shares) | | March 31, 2023 | | December 31, 2022 | |
(In thousands except shares) | | (In thousands except shares) | | September 30, 2023 | | December 31, 2022 |
Assets | Assets | | | | | Assets | | | | |
Cash and noninterest-bearing deposits in other banks | Cash and noninterest-bearing deposits in other banks | | $ | 41,949 | | | $ | 31,650 | | Cash and noninterest-bearing deposits in other banks | | $ | 34,329 | | | $ | 31,650 | |
Due from Federal Reserve Bank (“FRB”) | | 3,204 | | | 6,945 | | |
Due from Federal Reserve Bank (FRB) | | Due from Federal Reserve Bank (FRB) | | 968 | | | 6,945 | |
Cash and cash equivalents | Cash and cash equivalents | | 45,153 | | | 38,595 | | Cash and cash equivalents | | 35,297 | | | 38,595 | |
| Investment securities (at fair value) | Investment securities (at fair value) | | Investment securities (at fair value) | |
Available-for-sale (“AFS”) securities | | 205,556 | | | 207,545 | | |
Available-for-sale (AFS) securities, at fair value, net of allowance for credit losses of $0 (amortized cost of $214,645 and $234,610) | | Available-for-sale (AFS) securities, at fair value, net of allowance for credit losses of $0 (amortized cost of $214,645 and $234,610) | | 184,641 | | | 207,545 | |
Marketable equity securities | Marketable equity securities | | 3,358 | | | 3,315 | | Marketable equity securities | | 3,216 | | | 3,315 | |
Total investment securities | Total investment securities | | 208,914 | | | 210,860 | | Total investment securities | | 187,857 | | | 210,860 | |
Loans | Loans | | 944,191 | | | 981,772 | | Loans | | 973,923 | | | 981,772 | |
Unearned fees and unamortized loan origination costs - net | Unearned fees and unamortized loan origination costs - net | | (1,464) | | | (1,594) | | Unearned fees and unamortized loan origination costs - net | | (1,052) | | | (1,594) | |
Allowance for credit losses | Allowance for credit losses | | (15,622) | | | (10,182) | | Allowance for credit losses | | (15,649) | | | (10,182) | |
Net loans | Net loans | | 927,105 | | | 969,996 | | Net loans | | 957,222 | | | 969,996 | |
Premises and equipment - net | Premises and equipment - net | | 9,486 | | | 9,770 | | Premises and equipment - net | | 9,197 | | | 9,770 | |
Accrued interest receivable | Accrued interest receivable | | 7,829 | | | 8,489 | | Accrued interest receivable | | 8,095 | | | 8,489 | |
Other real estate owned | Other real estate owned | | 4,582 | | | 4,582 | | Other real estate owned | | 4,582 | | | 4,582 | |
Goodwill | Goodwill | | 4,488 | | | 4,488 | | Goodwill | | 4,488 | | | 4,488 | |
Deferred tax assets - net | Deferred tax assets - net | | 14,422 | | | 12,825 | | Deferred tax assets - net | | 15,646 | | | 12,825 | |
Cash surrender value of life insurance | | 23,025 | | | 22,893 | | |
Cash surrender value of life insurance, net | | Cash surrender value of life insurance, net | | 23,299 | | | 22,893 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | | 1,808 | | | 1,984 | | Operating lease right-of-use assets | | 1,497 | | | 1,984 | |
Other assets | Other assets | | 14,382 | | | 14,711 | | Other assets | | 25,912 | | | 14,711 | |
Total assets | Total assets | | $ | 1,261,194 | | | $ | 1,299,193 | | Total assets | | $ | 1,273,092 | | | $ | 1,299,193 | |
| Liabilities & Shareholders’ Equity | Liabilities & Shareholders’ Equity | | | | | Liabilities & Shareholders’ Equity | | | | |
Liabilities | Liabilities | | | | | Liabilities | | | | |
Deposits | Deposits | | | | | Deposits | | | | |
Non-interest-bearing | Non-interest-bearing | | $ | 394,745 | | | $ | 481,629 | | Non-interest-bearing | | $ | 386,258 | | | $ | 481,629 | |
Interest-bearing | Interest-bearing | | 716,387 | | | 683,855 | | Interest-bearing | | 601,373 | | | 683,855 | |
Total deposits | Total deposits | | 1,111,132 | | | 1,165,484 | | Total deposits | | 987,631 | | | 1,165,484 | |
Federal funds purchased and securities sold under agreements to resell | | 13,200 | | | — | | |
Short-term borrowings | | Short-term borrowings | | 142,000 | | | — | |
Operating lease liabilities | Operating lease liabilities | | 1,915 | | | 2,093 | | Operating lease liabilities | | 1,599 | | | 2,093 | |
Other liabilities | Other liabilities | | 11,022 | | | 8,270 | | Other liabilities | | 15,868 | | | 8,270 | |
Junior subordinated debentures (at fair value) | Junior subordinated debentures (at fair value) | | 11,017 | | | 10,883 | | Junior subordinated debentures (at fair value) | | 10,966 | | | 10,883 | |
Total liabilities | Total liabilities | | 1,148,286 | | | 1,186,730 | | Total liabilities | | 1,158,064 | | | 1,186,730 | |
Commitments and contingencies (Note 17) | | Commitments and contingencies (Note 17) | |
Shareholders’ Equity | Shareholders’ Equity | | | | | Shareholders’ Equity | | | | |
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,094,298 at March 31, 2023 and 17,067,253 at December 31, 2022 | | 60,269 | | | 60,030 | | |
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,135,595 at September 30, 2023 and 17,067,253 at December 31, 2022 | | Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,135,595 at September 30, 2023 and 17,067,253 at December 31, 2022 | | 60,524 | | | 60,030 | |
Retained earnings | Retained earnings | | 69,495 | | | 69,928 | | Retained earnings | | 73,654 | | | 69,928 | |
Accumulated other comprehensive loss, net of tax | Accumulated other comprehensive loss, net of tax | | (16,856) | | | (17,495) | | Accumulated other comprehensive loss, net of tax | | (19,150) | | | (17,495) | |
Total shareholders’ equity | Total shareholders’ equity | | 112,908 | | | 112,463 | | Total shareholders’ equity | | 115,028 | | | 112,463 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | | $ | 1,261,194 | | | $ | 1,299,193 | | Total liabilities and shareholders’ equity | | $ | 1,273,092 | | | $ | 1,299,193 | |
United Security Bancshares and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
| | | | | Three Months Ended March 31, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands except shares and EPS) | | | 2023 | | 2022 | |
(In thousands, except shares and EPS) | | (In thousands, except shares and EPS) | | 2023 | | 2022 | | 2023 | | 2022 |
Interest Income: | Interest Income: | | | | | | Interest Income: | | | | | | | | |
Interest and fees on loans | Interest and fees on loans | | | $ | 13,000 | | | $ | 9,119 | | Interest and fees on loans | | $ | 13,763 | | | $ | 11,514 | | | $ | 40,292 | | | $ | 30,363 | |
Interest on investment securities | Interest on investment securities | | | 1,501 | | | 790 | | Interest on investment securities | | 1,491 | | | 1,322 | | | 4,492 | | | 3,117 | |
Interest on deposits in FRB | Interest on deposits in FRB | | | 58 | | | 82 | | Interest on deposits in FRB | | 74 | | | 683 | | | 187 | | | 1,023 | |
| Total interest income | Total interest income | | | 14,559 | | | 9,991 | | Total interest income | | 15,328 | | | 13,519 | | | 44,971 | | | 34,503 | |
Interest Expense: | Interest Expense: | | | | | | Interest Expense: | | | | |
Interest on deposits | Interest on deposits | | | 1,343 | | | 508 | | Interest on deposits | | 1,841 | | | 679 | | | 5,128 | | | 1,702 | |
Interest on other borrowed funds | Interest on other borrowed funds | | | 271 | | | 45 | | Interest on other borrowed funds | | 1,566 | | | 110 | | | 2,475 | | | 224 | |
Total interest expense | Total interest expense | | | 1,614 | | | 553 | | Total interest expense | | 3,407 | | | 789 | | | 7,603 | | | 1,926 | |
Net Interest Income | Net Interest Income | | | 12,945 | | | 9,438 | | Net Interest Income | | 11,921 | | | 12,730 | | | 37,368 | | | 32,577 | |
(Reversal) Provision for Credit Losses | | | (493) | | | 5 | | |
Net Interest Income after (Reversal) Provision for Credit Losses | | | 13,438 | | | 9,433 | | |
Provision for Credit Losses | | Provision for Credit Losses | | — | | | 607 | | | 587 | | | 1,217 | |
Net Interest Income after Provision for Credit Losses | | Net Interest Income after Provision for Credit Losses | | 11,921 | | | 12,123 | | | 36,781 | | | 31,360 | |
Noninterest Income: | Noninterest Income: | | | | | | Noninterest Income: | | | | |
Customer service fees | Customer service fees | | | 734 | | | 654 | | Customer service fees | | 686 | | | 899 | | | 2,187 | | | 2,328 | |
Increase in cash surrender value of bank-owned life insurance | Increase in cash surrender value of bank-owned life insurance | | | 132 | | | 139 | | Increase in cash surrender value of bank-owned life insurance | | 102 | | | 89 | | | 406 | | | 343 | |
Unrealized gain (loss) on fair value of marketable equity securities | | | 43 | | | (182) | | |
Unrealized loss on fair value of marketable equity securities | | Unrealized loss on fair value of marketable equity securities | | (92) | | | (149) | | | (99) | | | (458) | |
| Gain (Loss) on fair value of junior subordinated debentures | | | 333 | | | (999) | | |
Loss on fair value of junior subordinated debentures | | Loss on fair value of junior subordinated debentures | | (811) | | | (600) | | | (553) | | | (2,469) | |
Gain on sale of investment securities | Gain on sale of investment securities | | | — | | | 30 | | Gain on sale of investment securities | | — | | | — | | | — | | | 30 | |
| Other | Other | | | 206 | | | 152 | | Other | | 229 | | | 153 | | | 633 | | | 1,015 | |
Total noninterest income (loss) | | | 1,448 | | | (206) | | |
Total noninterest income | | Total noninterest income | | 114 | | | 392 | | | 2,574 | | | 789 | |
Noninterest Expense: | Noninterest Expense: | | | Noninterest Expense: | |
Salaries and employee benefits | Salaries and employee benefits | | | 3,260 | | | 3,049 | | Salaries and employee benefits | | 3,376 | | | 2,965 | | | 9,937 | | | 8,791 | |
Occupancy expense | Occupancy expense | | | 963 | | | 780 | | Occupancy expense | | 984 | | | 923 | | | 2,804 | | | 2,551 | |
Data processing | Data processing | | | 174 | | | 115 | | Data processing | | 204 | | | 215 | | | 583 | | | 475 | |
Professional fees | Professional fees | | | 882 | | | 949 | | Professional fees | | 1,177 | | | 1,089 | | | 2,969 | | | 2,957 | |
Regulatory assessments | Regulatory assessments | | | 192 | | | 231 | | Regulatory assessments | | 169 | | | 212 | | | 554 | | | 630 | |
Director fees | Director fees | | | 109 | | | 118 | | Director fees | | 106 | | | 110 | | | 321 | | | 345 | |
Correspondent bank service charges | Correspondent bank service charges | | | 19 | | | 25 | | Correspondent bank service charges | | 20 | | | 23 | | | 57 | | | 74 | |
| Net cost of operation of OREO | Net cost of operation of OREO | | | 37 | | | (8) | | Net cost of operation of OREO | | 30 | | | 33 | | | 126 | | | 27 | |
Other | Other | | | 604 | | | 557 | | Other | | 559 | | | 641 | | | 1,731 | | | 1,755 | |
Total noninterest expense | Total noninterest expense | | | 6,240 | | | 5,816 | | Total noninterest expense | | 6,625 | | | 6,211 | | | 19,082 | | | 17,605 | |
Income before provision for taxes | Income before provision for taxes | | | 8,646 | | | 3,411 | | Income before provision for taxes | | 5,410 | | | 6,304 | | | 20,273 | | | 14,544 | |
Provision for income taxes | Provision for income taxes | | | 2,521 | | | 968 | | Provision for income taxes | | 1,557 | | | 1,837 | | | 5,878 | | | 4,199 | |
Net income | Net income | | | $ | 6,125 | | | $ | 2,443 | | Net income | | $ | 3,853 | | | $ | 4,467 | | | $ | 14,395 | | | $ | 10,345 | |
Net Income per common share | Net Income per common share | | | | | | Net Income per common share | | | | | | | | |
Basic | Basic | | | $ | 0.36 | | | $ | 0.14 | | Basic | | $ | 0.22 | | | $ | 0.26 | | | $ | 0.84 | | | $ | 0.61 | |
Diluted | Diluted | | | $ | 0.36 | | | $ | 0.14 | | Diluted | | $ | 0.22 | | | $ | 0.26 | | | $ | 0.84 | | | $ | 0.61 | |
Weighted average common shares outstanding | Weighted average common shares outstanding | | | Weighted average common shares outstanding | |
Basic | Basic | | | 17,076,510 | | | 17,030,409 | | Basic | | 17,132,080 | | | 17,042,479 | | | 17,103,982 | | | 17,036,460 | |
Diluted | Diluted | | | 17,092,460 | | | 17,051,819 | | Diluted | | 17,140,204 | | | 17,063,947 | | | 17,115,875 | | | 17,057,638 | |
United Security Bancshares and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
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| | Three Months Ended March 31, | | |
(In thousands) | | 2023 | | 2022 | | | | |
Net Income | | $ | 6,125 | | | $ | 2,443 | | | | | |
Unrealized holdings gain (loss) on debt securities | | 1,325 | | | (11,689) | | | | | |
Unrealized gain on unrecognized post-retirement costs | | 21 | | | 23 | | | | | |
Unrealized (loss) gain on junior subordinated debentures | | (440) | | | 1,302 | | | | | |
Other comprehensive income (loss), before tax | | 906 | | | (10,364) | | | | | |
Tax (expense) benefit provision related to debt securities | | (390) | | | 3,455 | | | | | |
Tax expense related to unrecognized post-retirement costs | | (7) | | | (7) | | | | | |
Tax benefit (expense) related to junior subordinated debentures | | 130 | | | (385) | | | | | |
Total other comprehensive income (loss) | | 639 | | | (7,301) | | | | | |
Comprehensive income (loss) | | $ | 6,764 | | | $ | (4,858) | | | | | |
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
Net Income | | $ | 3,853 | | | $ | 4,467 | | | $ | 14,395 | | | $ | 10,345 | |
Unrealized loss on debt securities | | (4,178) | | | (8,799) | | | (2,939) | | | (29,232) | |
Unrealized gain on unrecognized post-retirement costs | | 23 | | | 22 | | | 66 | | | 67 | |
Unrealized gain on junior subordinated debentures | | 576 | | | 825 | | | 523 | | | 3,419 | |
Other comprehensive loss, before tax | | (3,579) | | | (7,952) | | | (2,350) | | | (25,746) | |
Tax benefit related to debt securities | | 1,236 | | | 2,601 | | | 869 | | | 8,641 | |
Tax expense related to unrecognized post-retirement costs | | (9) | | | (7) | | | (22) | | | (20) | |
Tax expense related to junior subordinated debentures | | (170) | | | (243) | | | (152) | | | (1,011) | |
Total other comprehensive loss | | (2,522) | | | (5,601) | | | (1,655) | | | (18,136) | |
Comprehensive income (loss) | | $ | 1,331 | | | $ | (1,134) | | | $ | 12,740 | | | $ | (7,791) | |
United Security Bancshares and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
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| | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | |
(Dollars in thousands) | | Number of Shares | | Amount | | | | Total |
Balance December 31, 2021 (1) | | 17,028,239 | | | $ | 59,635 | | | $ | 61,746 | | | $ | (1,174) | | | $ | 120,207 | |
Other comprehensive loss | | — | | | — | | | — | | | (7,301) | | | (7,301) | |
Dividends payable ($0.11 per share) | | — | | | — | | | (1,874) | | | — | | | (1,874) | |
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Restricted stock units released | | 6,168 | | | — | | | — | | | — | | | — | |
Tax benefit from restricted stock units released | | — | | | (1) | | | — | | | — | | | (1) | |
Director stock grant | | — | | | 48 | | | — | | | — | | | 48 | |
Stock-based compensation expense | | — | | | 53 | | | — | | | — | | | 53 | |
Net income | | — | | | — | | | 2,443 | | | — | | | 2,443 | |
Balance March 31, 2022 (2) | | 17,034,407 | | | 59,735 | | | 62,315 | | | (8,475) | | | 113,575 | |
Other comprehensive income | | — | | | — | | | — | | | (5,235) | | | (5,235) | |
Dividends payable ($0.11 per share) | | — | | | — | | | (1,875) | | | — | | | (1,875) | |
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Restricted stock units released | | 6,142 | | | — | | | — | | | — | | | — | |
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Director stock grant | | — | | | 47 | | | — | | | — | | | 47 | |
Stock-based compensation expense | | — | | | 53 | | | — | | | — | | | 53 | |
Net income | | — | | | — | | | 3,435 | | | — | | | 3,435 | |
Balance June 30, 2022 (3) | | 17,040,549 | | | 59,835 | | | 63,875 | | | (13,710) | | | 110,000 | |
Other comprehensive loss | | — | | | — | | | — | | | (5,601) | | | (5,601) | |
Dividends payable ($0.11 per share) | | — | | | — | | | (1,877) | | | — | | | (1,877) | |
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Restricted stock units released | | 6,127 | | | — | | | — | | | — | | | — | |
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Director stock grant | | — | | | 44 | | | — | | | — | | | 44 | |
Stock-based compensation expense | | — | | | 45 | | | — | | | — | | | 45 | |
Net income | | — | | | — | | | 4,467 | | | — | | | 4,467 | |
Balance September 30, 2022 (4) | | 17,046,676 | | | 59,924 | | | 66,465 | | | (19,311) | | | 107,078 | |
Other comprehensive loss | | — | | | — | | | — | | | 1,816 | | | 1,816 | |
Dividends payable ($0.11 per share) | | — | | | — | | | (1,878) | | | — | | | (1,878) | |
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Stock options exercised | | 5,579 | | | 29 | | | — | | | — | | | 29 | |
Restricted stock units released | | 14,998 | | | — | | | — | | | — | | | — | |
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Director stock grant | | — | | | 42 | | | — | | | — | | | 42 | |
Stock-based compensation expense | | — | | | 35 | | | — | | | — | | | 35 | |
Net income | | — | | | — | | | 5,341 | | | — | | | 5,341 | |
Balance December 31, 2022 (5) | | 17,067,253 | | | 60,030 | | | 69,928 | | | (17,495) | | | 112,463 | |
Other comprehensive loss | | — | | | — | | | — | | | 639 | | | 639 | |
Dividends payable ($0.11 per share) | | — | | | — | | | (1,880) | | | — | | | (1,880) | |
Restricted stock units released | | 27,045 | | | — | | | — | | | — | | | — | |
Tax benefit from RSUs released | | — | | | (10) | | | — | | | — | | | (10) | |
Director stock grant | | — | | | 208 | | | — | | | — | | | 208 | |
Stock-based compensation expense | | — | | | 41 | | | — | | | — | | | 41 | |
Cumulative effect of adopting CECL | | — | | | — | | | (4,678) | | | — | | | (4,678) | |
Net income | | — | | | — | | | 6,125 | | | — | | | 6,125 | |
Balance March 31, 2023 (6) | | 17,094,298 | | | $ | 60,269 | | | $ | 69,495 | | | $ | (16,856) | | | $ | 112,908 | |
(1) Excludes 41,424 unvested restricted shares | | | | | | | | | | |
(2) Excludes 27,949 unvested restricted shares | | | | | | | | | | |
(3) Excludes 26,949 unvested restricted shares | | | | | | | | | | |
(4) Excludes 26,949 unvested restricted shares | | | | | | | | | | |
(5) Excludes 29,449 unvested restricted shares | | | | | | | | | | |
(6) Excludes 13,974 unvested restricted shares | | | | | | | | | | |
For the Three Months Ended September 30, 2023 and 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | |
(Dollars in thousands) | | Number of Shares | | Amount | | | | Total |
Balance June 30, 2022 | | 17,040,549 | | | $ | 59,835 | | | $ | 63,875 | | | $ | (13,709) | | | $ | 110,001 | |
Other comprehensive loss | | — | | | — | | | — | | | (5,601) | | | (5,601) | |
Dividends payable ($0.11 per share) | | — | | | — | | | (1,877) | | | — | | | (1,877) | |
Restricted stock units released | | 6,127 | | | — | | | — | | | — | | | — | |
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Director stock grant | | — | | | 44 | | | — | | | — | | | 44 | |
| | | | | | | | | | |
Stock-based compensation expense | | — | | | 45 | | | — | | | — | | | 45 | |
Net income | | — | | | — | | | 4,467 | | | — | | | 4,467 | |
Balance September 30, 2022 | | 17,046,676 | | | $ | 59,924 | | | $ | 66,465 | | | $ | (19,310) | | | $ | 107,079 | |
| | | | | | | | | | |
Balance June 30, 2023 | | 17,129,938 | | | $ | 60,451 | | | $ | 71,857 | | | $ | (16,628) | | | $ | 115,680 | |
Other comprehensive loss | | — | | | — | | | — | | | (2,522) | | | (2,522) | |
Dividends payable ($0.12 per share) | | — | | | — | | | (2,056) | | | — | | | (2,056) | |
Restricted stock units released | | 5,657 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | |
Director stock grant | | — | | | 41 | | | — | | | — | | | 41 | |
| | | | | | | | | | |
Stock-based compensation expense | | — | | | 32 | | | — | | | — | | | 32 | |
Net income | | — | | | — | | | 3,853 | | | — | | | 3,853 | |
Balance September 30, 2023 | | 17,135,595 | | | $ | 60,524 | | | $ | 73,654 | | | $ | (19,150) | | | $ | 115,028 | |
United Security Bancshares and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
For the Nine Months EndedSeptember 30, 2023 and 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | |
(Dollars in thousands) | | Number of Shares | | Amount | | | | Total |
Balance December 31, 2021 | | 17,028,239 | | | $ | 59,635 | | | $ | 61,746 | | | $ | (1,174) | | | $ | 120,207 | |
Other comprehensive loss | | — | | | — | | | — | | | (18,136) | | | (18,136) | |
Dividends paid and payable ($0.11 per share) | | — | | | — | | | (5,626) | | | — | | | (5,626) | |
| | | | | | | | | | |
Restricted stock units released | | 18,437 | | | — | | | — | | | — | | | — | |
Tax benefit from restricted stock units released | | — | | | (1) | | | — | | | — | | | (1) | |
Director stock grant | | — | | | 139 | | | — | | | — | | | 139 | |
Stock-based compensation expense | | — | | | 151 | | | — | | | — | | | 151 | |
Net income | | — | | | | | 10,345 | | | — | | | 10,345 | |
Balance September 30, 2022 | | 17,046,676 | | | $ | 59,924 | | | $ | 66,465 | | | $ | (19,310) | | | $ | 107,079 | |
| | | | | | | | | | |
Balance December 31, 2022 | | 17,067,253 | | | $ | 60,030 | | | $ | 69,928 | | | $ | (17,495) | | | $ | 112,463 | |
Other comprehensive loss | | — | | | — | | | — | | | (1,655) | | | (1,655) | |
Dividends paid ($0.11 per share) | | — | | | — | | | (1,880) | | | — | | | (1,880) | |
Dividends paid and payable ($0.12 per share) | | — | | | — | | | (4,111) | | | — | | | (4,111) | |
Restricted stock units released | | 68,342 | | | — | | | — | | | — | | | — | |
Tax benefit from restricted stock units released | | — | | | (10) | | | — | | | — | | | (10) | |
Director stock grant | | — | | | 290 | | | — | | | — | | | 290 | |
Stock options exercised | | | | 106 | | | | | | | 106 | |
Stock-based compensation expense | | — | | | 108 | | | — | | | — | | | 108 | |
Cumulative effect of adopting Current Expected Credit Losses (CECL) | | — | | | — | | | (4,678) | | | — | | | (4,678) | |
Net income | | — | | | — | | | 14,395 | | | — | | | 14,395 | |
Balance September 30, 2023 | | 17,135,595 | | | $ | 60,524 | | | $ | 73,654 | | | $ | (19,150) | | | $ | 115,028 | |
United Security Bancshares and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
| | | | Three months ended March 31, | | | Nine months ended September 30, |
(In thousands) | (In thousands) | | 2023 | | 2022 | (In thousands) | | 2023 | | 2022 |
Cash Flows From Operating Activities: | Cash Flows From Operating Activities: | | | | | Cash Flows From Operating Activities: | | | | |
Net Income | Net Income | | $ | 6,125 | | | $ | 2,443 | | Net Income | | $ | 14,395 | | | $ | 10,345 | |
Adjustments to reconcile net income to cash provided by operating activities: | Adjustments to reconcile net income to cash provided by operating activities: | | | | | Adjustments to reconcile net income to cash provided by operating activities: | | | | |
(Reversal) provision for credit losses | | (493) | | | 5 | | |
Provision for credit losses | | Provision for credit losses | | 587 | | | 1,217 | |
Depreciation and amortization | Depreciation and amortization | | 376 | | | 311 | | Depreciation and amortization | | 1,107 | | | 965 | |
Amortization of operating lease right-of-use assets | | 176 | | | 151 | | |
Noncash lease expense | | Noncash lease expense | | 487 | | | 459 | |
Amortization of premium/discount on investment securities, net | Amortization of premium/discount on investment securities, net | | 111 | | | 197 | | Amortization of premium/discount on investment securities, net | | 299 | | | 500 | |
Gain on sale of investment securities | | — | | | (30) | | |
Decrease (increase) in accrued interest receivable | Decrease (increase) in accrued interest receivable | | 660 | | | (271) | | Decrease (increase) in accrued interest receivable | | 394 | | | (936) | |
Decrease in accrued interest payable | | (17) | | | (1) | | |
Increase in accrued interest payable | | Increase in accrued interest payable | | 20 | | | 19 | |
Increase (decrease) in accounts payable and accrued liabilities | Increase (decrease) in accounts payable and accrued liabilities | | 2,539 | | | (248) | | Increase (decrease) in accounts payable and accrued liabilities | | 7,290 | | | 192 | |
Decrease in unearned fees and unamortized loan origination costs, net | | (130) | | | (219) | | |
(Decrease) increase in unearned fees and unamortized loan origination costs, net | | (Decrease) increase in unearned fees and unamortized loan origination costs, net | | (542) | | | 579 | |
(Increase) decrease in income taxes receivable | (Increase) decrease in income taxes receivable | | (355) | | | 1,263 | | (Increase) decrease in income taxes receivable | | (355) | | | 104 | |
(Gain) loss on marketable equity securities | | (43) | | | 182 | | |
Loss on marketable equity securities | | Loss on marketable equity securities | | 99 | | | 458 | |
Stock-based compensation expense | Stock-based compensation expense | | 240 | | | 100 | | Stock-based compensation expense | | 388 | | | 288 | |
(Provision) benefit for deferred income taxes | | (32) | | | 89 | | |
(Benefit) provision for deferred income taxes | | (Benefit) provision for deferred income taxes | | (9) | | | 281 | |
| Increase in cash surrender value of bank-owned life insurance | Increase in cash surrender value of bank-owned life insurance | | (132) | | | (139) | | Increase in cash surrender value of bank-owned life insurance | | (406) | | | (343) | |
(Gain) loss on fair value option of junior subordinated debentures | | (333) | | | 999 | | |
Loss on fair value option of junior subordinated debentures | | Loss on fair value option of junior subordinated debentures | | 553 | | | 2,469 | |
| Gain on sale of investment securities | | Gain on sale of investment securities | | — | | | (30) | |
| Net decrease (increase) in other assets | | 636 | | | (2,577) | | |
Net increase in other assets | | Net increase in other assets | | (9,644) | | | (1,540) | |
Net cash provided by operating activities | Net cash provided by operating activities | | 9,328 | | | 2,225 | | Net cash provided by operating activities | | 14,663 | | | 15,027 | |
Cash Flows From Investing Activities: | Cash Flows From Investing Activities: | | | | | Cash Flows From Investing Activities: | | | | |
| Purchase of correspondent bank stock | Purchase of correspondent bank stock | | (2) | | | (6) | | Purchase of correspondent bank stock | | (1,435) | | | (2,432) | |
Purchases of available-for-sale securities | Purchases of available-for-sale securities | | — | | | (34,734) | | Purchases of available-for-sale securities | | — | | | (81,762) | |
Maturities of available-for-sale securities | | Maturities of available-for-sale securities | | 10,000 | | | — | |
Principal payments of available-for-sale securities | | Principal payments of available-for-sale securities | | 9,666 | | | 6,726 | |
Cash proceeds from sale of available-for-sale securities | | Cash proceeds from sale of available-for-sale securities | | — | | | 15,676 | |
| Principal payments of available-for-sale securities | | 3,203 | | | 6,140 | | |
Cash proceeds from sale of investment securities | | — | | | 15,676 | | |
| Net increase (decrease) in loans | | 37,146 | | | (7,689) | | |
Net decrease (increase) in loans | | Net decrease (increase) in loans | | 6,480 | | | (91,700) | |
| Investment in limited partnership | | Investment in limited partnership | | (400) | | | (311) | |
| Capital expenditures of premises and equipment | Capital expenditures of premises and equipment | | (92) | | | (281) | | Capital expenditures of premises and equipment | | (534) | | | (1,500) | |
Net cash provided (used) in investing activities | | 40,255 | | | (20,894) | | |
Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | | 23,777 | | | (155,303) | |
Cash Flows From Financing Activities: | Cash Flows From Financing Activities: | | | | | Cash Flows From Financing Activities: | | | | |
Net (decrease) increase in demand deposits and savings accounts | Net (decrease) increase in demand deposits and savings accounts | | (65,912) | | | 29,178 | | Net (decrease) increase in demand deposits and savings accounts | | (191,631) | | | 45,316 | |
Net increase (decrease) in time deposits | | 11,561 | | | (2,952) | | |
Net increase in time deposits | | Net increase in time deposits | | 13,779 | | | 7,397 | |
| Net change in federal funds purchased | | 13,200 | | | — | | |
Proceeds from exercise of stock options | | Proceeds from exercise of stock options | | 106 | | | — | |
Net change in short-term borrowings | | Net change in short-term borrowings | | 142,000 | | | — | |
Dividends on common stock | Dividends on common stock | | (1,874) | | | (1,872) | | Dividends on common stock | | (5,992) | | | (5,624) | |
Net cash (used) provided by financing activities | | (43,025) | | | 24,354 | | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | | (41,738) | | | 47,089 | |
Net change in cash and cash equivalents | Net change in cash and cash equivalents | | 6,558 | | | 5,715 | | Net change in cash and cash equivalents | | (3,298) | | | (93,187) | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | | 38,595 | | | 219,219 | | Cash and cash equivalents at beginning of period | | 38,595 | | | 219,219 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | | $ | 45,153 | | | $ | 224,934 | | Cash and cash equivalents at end of period | | $ | 35,297 | | | $ | 126,032 | |
United Security Bancshares and Subsidiaries - Notes to Condensed Consolidated Financial Statements - (Unaudited)
1.Organization and Summary of Significant Accounting and Reporting Policies
The consolidated financial statements include the accounts of United Security Bancshares (Company(“Company” or USB)“USB”) and its wholly ownedwholly-owned subsidiary, United Security Bank (Bank)(“Bank”). Intercompany accounts and transactions have been eliminated in consolidation.
These unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information on a basis consistent with the accounting policies reflected in the audited consolidated financial statements of the Company included in its 2022 Annual Report on Form 10-K. These interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consistingconsisting of a normal, recurring nature)nature and considered necessary for a fair presentation, have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.
Reclassifications:
Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior period net income or shareholders’ equity.
Impact of New Financial Accounting Standards:
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). The FASB is issuing this UpdateThis update replaces the incurred loss methodology with a current expected loss methodology, commonly referred to as CECL, which seeks to improve financial reporting by requiring timelier recording of credit losses on loansassets measured at amortized cost, such as loan receivables, held-to-maturity securities, and other financial instruments held by financial institutions and other organizations.off-balance sheet exposures. The Update requires enhanced disclosures and judgments in estimating credit losses and also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. This original amendment was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In October 2019 FASB unanimously approved a vote to delay
On January 1, 2023, the effective date of this Standard to be effective for fiscal years beginning after December 15, 2022. The Company adopted ASC 326, (“CECL”) as of January 1, 2023Financial Instruments-Credit Losses, using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the reporting periods beginning after January 1, 2023, are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. The adoption of this new standard required a cumulative adjustment to the allowance for credit losses, leading to an increase in the credit loss balance of $6.4 million and an increase in the reserve for unfunded loan commitments of $273,000, resulting in a combined adjustment to retained earnings of $4.7 million, net of a $1.9 million tax adjustment.
The following table summarized the impact of the adoption of ASU 2016-13 by loan category:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Allowance for credit losses as reported under ASU 2016-13 | | Allowance before the adoption of ASU 2016-13 | | Impact to allowance of adoption of ASU 2016-13 |
Assets: | | | | | | |
Commercial and industrial: | | | | | | |
Commercial and business loans | | $ | 2,290 | | | $ | 954 | | | $ | 1,336 | |
Government program loans | | 2 | | | 2 | | | — | |
Total commercial and industrial | | 2,292 | | | 956 | | | 1,336 | |
Real estate mortgage: | | | | | | |
Commercial real estate | | 2,735 | | | 659 | | | 2,076 | |
Residential mortgages | | 986 | | | 703 | | | 283 | |
Home improvement and home equity loans | | 2 | | | 2 | | | — | |
Total real estate mortgage | | 3,723 | | | 1,364 | | | 2,359 | |
Real estate construction and development | | 4,129 | | | 3,408 | | | 721 | |
Agricultural | | 1,550 | | | 525 | | | 1,025 | |
Installment and student loans | | 4,855 | | | 2,898 | | | 1,957 | |
Unallocated | | — | | | 1,031 | | | (1,031) | |
Allowance for credit losses for all loans | | $ | 16,549 | | | $ | 10,182 | | | $ | 6,367 | |
Liabilities: | | | | | | |
Allowance for credit losses on off-balance sheet exposures | | $ | 805 | | | $ | 532 | | | $ | 273 | |
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU was effective for all entities as of March 12, 2020, through December 31, 2022. However, the effective date was updatedAvailable-for-sale debt securities in ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, and is currently set for December 31, 2024. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements. The Company anticipates impacts to junior subordinated debt and floating rate loans tied to LIBOR.
In March 2022, FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures. This ASU provides new guidance on the treatment of troubled debt restructurings in relation to the adoption of the CECL model for the accounting for credit losses (see note above regarding ASU 2016-13). Previous accounting guidance related to troubled debt restructurings is eliminated and new disclosure requirementsan unrealized loss position are adopted in regard to loan refinancing and restructurings made to borrowers experiencing financial difficulties under the assumption that the CECL model will capture credit losses related to troubled debt restructurings. New disclosures regarding gross write-offs for financing receivables by year of origination are also included in the update. This update has been adopted as of January 1, 2023. The Bank will no longer report trouble debt restructures or classify loans as such. TDRs previously recognized have been incorporated into the CECL methodology in regard to loan loss reserves as of January 1, 2023.
2.Investment Securities
Following is a comparison of the amortized cost and fair value of securities available-for-sale, as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
(In thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value (Carrying Amount) |
Securities available-for-sale: | | | | | | | | |
U.S. Government agencies | | $ | 7,483 | | | $ | 5 | | | $ | (55) | | | $ | 7,433 | |
U.S. Government sponsored entities & agencies collateralized by mortgage obligations | | 108,407 | | | 12 | | | (12,616) | | | 95,803 | |
U.S. Treasury securities | | 30,014 | | | — | | | (590) | | | 29,424 | |
Municipal bonds | | 50,630 | | | — | | | (9,153) | | | 41,477 | |
Corporate bonds | | 34,762 | | | 6 | | | (3,349) | | | 31,419 | |
Total securities available for sale | | $ | 231,296 | | | $ | 23 | | | $ | (25,763) | | | $ | 205,556 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
(In thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value (Carrying Amount) |
Securities available-for-sale: | | | | | | | | |
U.S. Government agencies | | $ | 8,275 | | | $ | 7 | | | $ | (51) | | | $ | 8,231 | |
U.S. Government sponsored entities & agencies collateralized by mortgage obligations | | 110,908 | | | 5 | | | (13,695) | | | 97,218 | |
U.S. Treasury securities | | 30,004 | | | — | | | (780) | | | 29,224 | |
| | | | | | | | |
Municipal bonds | | 50,678 | | | — | | | (10,508) | | | 40,170 | |
Corporate bonds | | 34,745 | | | 5 | | | (2,048) | | | 32,702 | |
Total securities available for sale | | $ | 234,610 | | | $ | 17 | | | $ | (27,082) | | | $ | 207,545 | |
The amortized cost and fair value of securities available for sale at March 31, 2023, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties. Contractual maturities on collateralized mortgage obligations cannot be anticipated due to allowed pay downs.
| | | | | | | | | | | | | | |
| | March 31, 2023 |
(In thousands) | | Amortized Cost | | Fair Value (Carrying Amount) |
Due in one year or less | | $ | 17,506 | | | $ | 17,272 | |
Due after one year through five years | | 31,772 | | | 30,280 | |
Due after five years through ten years | | 65,908 | | | 55,411 | |
Due after ten years | | 7,700 | | | 6,791 | |
Collateralized mortgage obligations | | 108,410 | | | 95,802 | |
| | $ | 231,296 | | | $ | 205,556 | |
Proceeds and gross realized gains (losses) from sales of available-for-sale investment securities are shown below:
| | | | | | | | | | | | | | |
| | Three Months Ended |
(In thousands) | | March 31, 2023 | | March 31, 2022 |
Proceeds from sales or calls | | — | | | 15,676 | |
Gross realized gains from sales or calls | | — | | | 78 | |
Gross realized losses from sales or calls | | — | | | (48) | |
As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that better fit with the Company’s current risk profile is appropriate and beneficial to the Company. There were no losses were recorded due to credit-related factors for the three month periods ended March 31, 2023 or March 31, 2022.
At March 31, 2023, available-for-sale securities with an amortized cost of approximately $77.0 million (fair value of $66.9 million) were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances.
The following summarizes temporarily impaired available-for-sale investment securities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or More | | Total |
(In thousands) | | Fair Value (Carrying Amount) | | Unrealized Losses | | Fair Value (Carrying Amount) | | Unrealized Losses | | Fair Value (Carrying Amount) | | Unrealized Losses |
March 31, 2023 | | | | | | | | | | | | |
U.S. Government agencies | | $ | — | | | $ | — | | | $ | 5,219 | | | $ | (55) | | | $ | 5,219 | | | $ | (55) | |
U.S. Government sponsored entities and agencies collateralized by mortgage obligations | | 26,845 | | | (1,168) | | | 68,402 | | | (11,448) | | | 95,247 | | | (12,616) | |
Corporate bonds | | 15,589 | | | (2,158) | | | 12,995 | | | (1,191) | | | 28,584 | | | (3,349) | |
Municipal bonds | | — | | | — | | | 41,477 | | | (9,153) | | | 41,477 | | | (9,153) | |
U.S. Treasury securities | | 9,908 | | | (30) | | | 19,516 | | | (560) | | | 29,424 | | | (590) | |
| | | | | | | | | | | | |
Total impaired securities | | $ | 52,342 | | | $ | (3,356) | | | $ | 147,609 | | | $ | (22,407) | | | $ | 199,951 | | | $ | (25,763) | |
| | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | |
U.S. Government agencies | | $ | — | | | $ | — | | | $ | 5,831 | | | $ | (51) | | | $ | 5,831 | | | $ | (51) | |
U.S. Government sponsored entities and agencies collateralized by mortgage obligations | | 47,968 | | | (3,949) | | | 48,763 | | | (9,746) | | | 96,731 | | | (13,695) | |
Corporate bonds | | 24,424 | | | (1,491) | | | 5,443 | | | (557) | | | 29,867 | | | (2,048) | |
Municipal bonds | | — | | | — | | | 40,170 | | | (10,508) | | | 40,170 | | | (10,508) | |
U.S. Treasury securities | | 14,714 | | | (190) | | | 14,510 | | | (590) | | | 29,224 | | | (780) | |
| | | | | | | | | | | | |
Total impaired securities | | $ | 87,106 | | | $ | (5,630) | | | $ | 114,717 | | | $ | (21,452) | | | $ | 201,823 | | | $ | (27,082) | |
The following summarizes the number of temporarily impaired investment securities:
| | | | | | | | | | | | | | |
| | March 31, |
| | 2023 | | 2022 |
Securities available for sale: | | | | |
U.S. Government agencies | | 4 | | | 4 | |
U.S. Government sponsored entities and agencies collateralized by mortgage obligations | | 51 | | | 33 | |
Municipal bonds | | 46 | | | 46 | |
Corporate bonds | | 9 | | | 4 | |
U.S. Treasury securities | | 4 | | | 3 | |
Total temporarily impaired securities | | 114 | | | 90 | |
Due to the adoption of ASU 2016-13, available-for-sale securities will no longer be evaluated for other-than-temporary impairment (OTTI). Instead, available-for-sale securities will be evaluated when the amortized cost of a security exceeds its fair value. If it is determined that it will be necessary to sell a security before the fair value increases to the amortized cost, the amortized cost will be written down to fair value through income. At that point, any previously recorded allowance for credit loss (ACL) would be written off and any additional impairment would be recognized through earnings. If it is believed that the Company will not be required to sell a security before the fair value recovers, a determination will be made as to whether or not the decline in fair value is the result of a credit loss or noncredit factors such as changes in current market rates. Some of the factors which would be considered in order to determine if a credit loss exists are: (1) the extent to which the fair value is less than the amortized cost basis, (2) any adverse conditions related to the security, an industry, or geographic area, (3) failure of the issuer to make scheduled interest or principal payments, and (4) any changes to the rating of the security by a rating agency. If it is determined that the decline is due to a credit loss, the amount recognized as the credit loss will be determined using a discounted cash flow approach. Cash flows expected to be collected would be discounted at the effective interest rate established at acquisition. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses would be recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Changes in the allowance for credit losses are recorded as credit loss expense (or reversal). Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. This ASU was effective for all entities as of March 12, 2020, through December 31, 2022. However, the effective date was updated in ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the sunset date of Topic 848, and is currently set for December 31, 2024. The Company is in the process of evaluating the provisions of this ASU and its effects on our consolidated financial statements. The Company anticipates a minimal impact to junior subordinated debt and floating rate loans tied to LIBOR.
In March 2022, FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures. This ASU provides new guidance on the treatment of troubled debt restructurings (TDRs) in relation to the adoption of the CECL model for the accounting for credit losses (see note above regarding ASU 2016-13). Previous accounting guidance related to troubled debt restructurings is eliminated and new disclosure requirements are adopted in regard to loan refinancing and restructurings made to borrowers experiencing financial difficulties under the assumption that the CECL
model will capture credit losses related to troubled debt restructurings. New disclosures regarding gross write-offs for financing receivables by year of origination are also included in the update. This update has been adopted as of January 1, 2023. The Bank will no longer report troubled debt restructurings or classify loans as such. TDRs previously recognized have been incorporated into the CECL methodology as it applies to loan loss reserves as of January 1, 2023.
2.Investment Securities
Following is a comparison of the amortized cost and fair value of securities available-for-sale, as of September 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2023 |
(In thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value (Carrying Amount) |
Securities available-for-sale: | | | | | | | | |
U.S. Government agencies | | $ | 6,441 | | | $ | 4 | | | $ | (49) | | | $ | 6,396 | |
U.S. Government sponsored entities & agencies collateralized by mortgage obligations | | 102,943 | | | 1 | | | (16,739) | | | 86,205 | |
U.S. Treasury securities | | 20,034 | | | — | | | (277) | | | 19,757 | |
Municipal bonds | | 50,431 | | | — | | | (10,404) | | | 40,027 | |
Corporate bonds | | 34,796 | | | 19 | | | (2,559) | | | 32,256 | |
Total securities available-for-sale | | $ | 214,645 | | | $ | 24 | | | $ | (30,028) | | | $ | 184,641 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
(In thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value (Carrying Amount) |
Securities available-for-sale: | | | | | | | | |
U.S. Government agencies | | $ | 8,275 | | | $ | 7 | | | $ | (51) | | | $ | 8,231 | |
U.S. Government sponsored entities & agencies collateralized by mortgage obligations | | 110,908 | | | 5 | | | (13,695) | | | 97,218 | |
U.S. Treasury securities | | 30,004 | | | — | | | (780) | | | 29,224 | |
| | | | | | | | |
Municipal bonds | | 50,678 | | | — | | | (10,508) | | | 40,170 | |
Corporate bonds | | 34,745 | | | 5 | | | (2,048) | | | 32,702 | |
Total securities available-for-sale | | $ | 234,610 | | | $ | 17 | | | $ | (27,082) | | | $ | 207,545 | |
The amortized cost and fair value of securities available for sale at September 30, 2023, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties. Contractual maturities on collateralized mortgage obligations cannot be anticipated due to allowed paydowns.
| | | | | | | | | | | | | | |
| | September 30, 2023 |
(In thousands) | | Amortized Cost | | Fair Value (Carrying Amount) |
Due in one year or less | | $ | 20,134 | | | $ | 19,854 | |
Due after one year through five years | | 28,967 | | | 27,129 | |
Due after five years through ten years | | 60,141 | | | 48,998 | |
Due after ten years | | 2,458 | | | 2,456 | |
Collateralized mortgage obligations | | 102,945 | | | 86,204 | |
| | $ | 214,645 | | | $ | 184,641 | |
Proceeds and gross realized gains (losses) from sales of available-for-sale debt securities are shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In thousands) | | September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
Proceeds from sales or calls | | $ | — | | | $ | — | | | $ | — | | | $ | 15,676 | |
Gross realized gains from sales or calls | | $ | — | | | $ | — | | | $ | — | | | $ | 78 | |
Gross realized losses from sales or calls | | $ | — | | | $ | — | | | $ | — | | | $ | (48) | |
As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using the proceeds to purchase securities that better fit with the Company’s current risk profile is appropriate and beneficial to the Company. There were no losses recorded due to credit-related factors for the three and nine month periods ended September 30, 2023 or September 30, 2022.
At September 30, 2023, available-for-sale securities with an amortized cost of approximately $73.8 million and a fair value of $63.1 million were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances. At December 31, 2022, available-for-sale securities with an amortized cost of approximately $78.8 million and a fair value of $69.0 million were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances.
The following summarizes available-for-sale debt securities in an unrealized loss position for which a credit loss has not been recorded:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or More | | Total |
(In thousands) | | Fair Value (Carrying Amount) | | Unrealized Losses | | Fair Value (Carrying Amount) | | Unrealized Losses | | Fair Value (Carrying Amount) | | Unrealized Losses |
September 30, 2023 | | | | | | | | | | | | |
U.S. Government agencies | | $ | — | | | $ | — | | | $ | 4,352 | | | $ | (49) | | | $ | 4,352 | | | $ | (49) | |
U.S. Government sponsored entities and agencies collateralized by mortgage obligations | | 242 | | | (3) | | | 85,729 | | | (16,736) | | | 85,971 | | | (16,739) | |
U.S. Treasury securities | | — | | | — | | | 19,757 | | | (277) | | | 19,757 | | | (277) | |
Municipal bonds | | — | | | — | | | 40,027 | | | (10,404) | | | 40,027 | | | (10,404) | |
Corporate bonds | | — | | | — | | | 27,425 | | | (2,559) | | | 27,425 | | | (2,559) | |
| | | | | | | | | | | | |
Total available-for-sale | | $ | 242 | | | $ | (3) | | | $ | 177,290 | | | $ | (30,025) | | | $ | 177,532 | | | $ | (30,028) | |
| | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | |
U.S. Government agencies | | $ | — | | | $ | — | | | $ | 5,831 | | | $ | (51) | | | $ | 5,831 | | | $ | (51) | |
U.S. Government sponsored entities and agencies collateralized by mortgage obligations | | 47,968 | | | (3,949) | | | 48,763 | | | (9,746) | | | 96,731 | | | (13,695) | |
U.S. Treasury securities | | 14,714 | | | (190) | | | 14,510 | | | (590) | | | 29,224 | | | (780) | |
Municipal bonds | | — | | | — | | | 40,170 | | | (10,508) | | | 40,170 | | | (10,508) | |
Corporate bonds | | 24,424 | | | (1,491) | | | 5,443 | | | (557) | | | 29,867 | | | (2,048) | |
| | | | | | | | | | | | |
Total available-for-sale | | $ | 87,106 | | | $ | (5,630) | | | $ | 114,717 | | | $ | (21,452) | | | $ | 201,823 | | | $ | (27,082) | |
The following summarizes the number of available-for-sale debt securities in an unrealized loss position for which a credit loss has not been recorded:
| | | | | | | | | | | | | | |
| | September 30, 2023 | | December 31, 2022 |
Securities available for sale: | | | | |
U.S. Government agencies | | 4 | | | 4 | |
U.S. Government sponsored entities and agencies collateralized by mortgage obligations | | 49 | | | 51 | |
Municipal bonds | | 45 | | | 46 | |
Corporate bonds | | 8 | | | 9 | |
U.S. Treasury securities | | 3 | | | 4 | |
Total available for sale | | 109 | | | 114 | |
Management has evaluated each available-for-sale investment security in an unrealized loss position to determine if it would be required to sell the security before the fair value increases to amortized cost and whether any unrealized losses are due to credit losses or noncredit factors such as current market rates, which would not require the establishment of an allowance for credit loss.losses. At March 31,September 30, 2023, the decline in fair value of the available-for-sale securities is attributed to changes in interest rates and not credit quality. TheThese declines are primarily the result of the fast pace and large increases in interest rates during the last yeartwo years, which have led to decreases in bond prices and increases in yields. Because the Company does not intend to sell these impaired securities, and because it is more likely than not that it will not be required to sell these securities before their anticipated recovery, the Company does not consider it necessary to provide an allowance for any securitiesavailable-for-sale security at March 31,September 30, 2023.
During the quarternine months ended March 31,September 30, 2023 and 2022, the Company recognized $43,000$99,000 of unrealized gainslosses and $182,000$458,000 of unrealized losses, respectively, related to marketable equity securities, related to one mutual fund, included in the consolidated statementsmarketable equity securities. During the quarters ended September 30, 2023 and 2022, the Company recognized $92,000 and $149,000 of income.unrealized losses related to the same mutual fund.
The Company had no held-to-maturity or trading securities at March 31,September 30, 2023 or December 31, 2022.
3.Loans
Loans, at amortized cost, are comprised of the following:
| (In thousands) | (In thousands) | | March 31, 2023 | | December 31, 2022 | (In thousands) | | September 30, 2023 | | December 31, 2022 |
Commercial and industrial: | Commercial and industrial: | | | | | Commercial and industrial: | | | | |
Commercial and business loans | Commercial and business loans | | $ | 50,379 | | | $ | 57,770 | | Commercial and business loans | | $ | 51,772 | | | $ | 57,770 | |
Government program loans | Government program loans | | 132 | | | 132 | | Government program loans | | 77 | | | 132 | |
Total commercial and industrial | Total commercial and industrial | | 50,511 | | | 57,902 | | Total commercial and industrial | | 51,849 | | | 57,902 | |
Real estate mortgage: | Real estate mortgage: | | | | | Real estate mortgage: | | | | |
Commercial real estate | Commercial real estate | | 395,669 | | | 398,115 | | Commercial real estate | | 419,916 | | | 398,115 | |
Residential mortgages | Residential mortgages | | 269,991 | | | 273,357 | | Residential mortgages | | 262,420 | | | 273,357 | |
Home improvement and home equity loans | Home improvement and home equity loans | | 46 | | | 49 | | Home improvement and home equity loans | | 40 | | | 49 | |
Total real estate mortgage | Total real estate mortgage | | 665,706 | | | 671,521 | | Total real estate mortgage | | 682,376 | | | 671,521 | |
Real estate construction and development | Real estate construction and development | | 137,257 | | | 153,374 | | Real estate construction and development | | 133,516 | | | 153,374 | |
Agricultural | Agricultural | | 45,513 | | | 52,722 | | Agricultural | | 61,501 | | | 52,722 | |
Installment and student loans | Installment and student loans | | 43,740 | | | 44,659 | | Installment and student loans | | 43,629 | | | 44,659 | |
Total loans | Total loans | | $ | 942,727 | | | $ | 980,178 | | Total loans | | $ | 972,871 | | | $ | 980,178 | |
The Company’s directly originateddirectly-originated loans are predominantly in the San Joaquin Valley and the greater Oakhurst/East Madera County area, as well as the Campbell area of Santa Clara County. The Company’s participation loans with other financial institutions are primarily in the state of California.
Commercial and industrial loans, representing 5.4%5.3% of total loans at March 31,September 30, 2023 and 5.9% at December 31, 2022, are generally made to support the ongoing operations of small-to-medium sizedsmall- to medium-sized commercial businesses. Commercial and industrial loans have a high degree of industry diversification and provide working capital, financing for the purchase of manufacturing plants and equipment, or funding for growth and general expansion of businesses. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases, or other collateral including real estate. Theestate; the remainder are unsecured; however, extensionsunsecured. Extensions of credit are predicated upon the financial capacity of the borrower. Repayment of commercial loansborrower and repayment is generally from the cash flow of the borrower.
Real estate mortgage loans, representing 70.6%70.1% of total loans at March 31,September 30, 2023 and 68.5% at December 31, 2022, are typically secured by either trust deeds on primarily commercial property or by trust deeds on single family residences. Repayment of real estate mortgage loans generally comes from the cash flow of the borrower and or guarantor(s).
•Commercial real estate mortgage loans comprise the largest segment of this loan category and are available on all types of income producingfor both income-producing and non-income producingnon-income-producing commercial properties, including: office buildings, shopping centers;centers, apartments and motels;motels, owner occupied buildings;buildings, manufacturing facilities, and more. Commercial real estate mortgage loans can also be used to refinance existing debt. Commercial real estateThese loans are made under the premise that the loan will betypically repaid from the borrower’s business operations, rental income associated with the real property, or personal assets.
•Residential mortgage loans are provided to individuals to finance or refinance single-family residences. Residential mortgages are not a primary business line offered by the Company, and a majority are conventional mortgages that were purchased as a pool.
•Home Improvementimprovement and Home Equityhome equity loans comprise a relatively small portion of total real estate mortgage loans. Home equity loans are generally secured by junior trust deeds, but may be secured by 1st trust deeds.
Real estate construction and development loans, representing 14.6%13.7% of total loans at March 31,September 30, 2023 and 15.7%15.5% at December 31, 2022, consist of loans for residential and commercial construction projects, as well as land acquisition and development, orand land held for future development. Loans in this category are secured by real estate, including improvedimproved- and unimproved land,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 completion of the project or from the sale of the constructed homes to individuals.
Agricultural loans, representing 4.8%6.3% of total loans at March 31,September 30, 2023 and 5.4% at December 31, 2022, are generally secured by land, equipment, inventory, and receivables. Repayment is from the cash flow of the borrower.
Installment loans, including student loans, which represented 4.6%4.5% of total loans at March 31,September 30, 2023 and 4.6% at December 31, 2022, generally consist of student loans,loans; loans to individuals for household, family and other personal expenditures, automobilesexpenditures; automobiles; or other consumer items. See Note 4 - Student Loans for specific information on the student loan portfolio.
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 March 31,September 30, 2023 and December 31, 2022, these financial instruments include commitments to extend credit of $214.7$193.3 million and $190.2 million, respectively, and standby letters of credit of $3.1 million and $1.6 million at bothfor the same period ends.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 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.
Commitments to extend credit are agreements to lend to a customer,continue as long as there is no violation of any condition established in the customer’s contract. Substantially all of these commitments are at floating interest rates based on the Prime rate. Commitmentsprime rate and generally have fixed expiration dates. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount ofbasis and collateral obtained, if deemed necessary, is based on management’s credit evaluation.may be required in some cases. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate, and income-producing properties.
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.
Past Due Loans
The Company monitors delinquency and potential problem loans on an ongoing basis through weekly reports to the Loan Committee and monthly reports to the Board of Directors.
The following is a summary of the amortized cost of delinquent loans at March 31,September 30, 2023:
| (In thousands) | (In thousands) | | Loans 30-60 Days Past Due | | Loans 61-89 Days Past Due | | Loans 90 or More Days Past Due | | Total Past Due Loans | | Current Loans | | Total Loans | | Accruing Loans 90 or More Days Past Due | (In thousands) | | Loans 30-60 Days Past Due | | Loans 61-89 Days Past Due | | Loans 90 or More Days Past Due | | Total Past Due Loans | | Current Loans | | Total Loans | | Accruing Loans 90 or More Days Past Due |
Commercial and business loans | Commercial and business loans | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 50,379 | | | $ | 50,379 | | | $ | — | | Commercial and business loans | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 51,772 | | | $ | 51,772 | | | $ | — | |
Government program loans | Government program loans | | — | | | — | | | — | | | — | | | 132 | | | 132 | | | — | | Government program loans | | — | | | — | | | — | | | — | | | 77 | | | 77 | | | — | |
Total commercial and industrial | Total commercial and industrial | | — | | | — | | | — | | | — | | | 50,511 | | | 50,511 | | | — | | Total commercial and industrial | | — | | | — | | | — | | | — | | | 51,849 | | | 51,849 | | | — | |
Commercial real estate loans | Commercial real estate loans | | — | | | — | | | — | | | — | | | 395,669 | | | 395,669 | | | — | | Commercial real estate loans | | — | | | — | | | — | | | — | | | 419,916 | | | 419,916 | | | — | |
Residential mortgages | Residential mortgages | | 2,732 | | | — | | | — | | | 2,732 | | | 267,259 | | | 269,991 | | | — | | Residential mortgages | | — | | | — | | | 1,008 | | | 1,008 | | | 261,412 | | | 262,420 | | | — | |
Home improvement and home equity loans | Home improvement and home equity loans | | 7 | | | — | | | — | | | 7 | | | 39 | | | 46 | | | — | | Home improvement and home equity loans | | 5 | | | — | | | — | | | 5 | | | 35 | | | 40 | | | — | |
Total real estate mortgage | Total real estate mortgage | | 2,739 | | | — | | | — | | | 2,739 | | | 662,967 | | | 665,706 | | | — | | Total real estate mortgage | | 5 | | | — | | | 1,008 | | | 1,013 | | | 681,363 | | | 682,376 | | | — | |
Real estate construction and development loans | Real estate construction and development loans | | — | | | — | | | 11,269 | | | 11,269 | | | 125,988 | | | 137,257 | | | — | | Real estate construction and development loans | | — | | | — | | | 11,390 | | | 11,390 | | | 122,126 | | | 133,516 | | | — | |
Agricultural loans | Agricultural loans | | — | | | — | | | 86 | | | 86 | | | 45,427 | | | 45,513 | | | — | | Agricultural loans | | — | | | — | | | 60 | | | 60 | | | 61,441 | | | 61,501 | | | — | |
| Installment and student loans | | 817 | | | 571 | | | 382 | | | 1,770 | | | 41,881 | | | 43,651 | | | 382 | | |
Overdraft protection lines | | — | | | — | | | — | | | — | | | 11 | | | 11 | | | — | | |
Overdrafts | | — | | | — | | | — | | | — | | | 78 | | | 78 | | | — | | |
Installment and student loans | Installment and student loans | | 817 | | | 571 | | | 382 | | | 1,770 | | | 41,970 | | | 43,740 | | | 382 | | Installment and student loans | | 1,303 | | | 679 | | | — | | | 1,982 | | | 41,647 | | | 43,629 | | | — | |
Total loans | Total loans | | $ | 3,556 | | | $ | 571 | | | $ | 11,737 | | | $ | 15,864 | | | $ | 926,863 | | | $ | 942,727 | | | $ | 382 | | Total loans | | $ | 1,308 | | | $ | 679 | | | $ | 12,458 | | | $ | 14,445 | | | $ | 958,426 | | | $ | 972,871 | | | $ | — | |
The following is a summary of the amortized cost of delinquent loans at December 31, 2022:
| (In thousands) | (In thousands) | | Loans 30-60 Days Past Due | | Loans 61-89 Days Past Due | | Loans 90 or More Days Past Due | | Total Past Due Loans | | Current Loans | | Total Loans | | Accruing Loans 90 or More Days Past Due | (In thousands) | | Loans 30-60 Days Past Due | | Loans 61-89 Days Past Due | | Loans 90 or More Days Past Due | | Total Past Due Loans | | Current Loans | | Total Loans | | Accruing Loans 90 or More Days Past Due |
Commercial and business loans | Commercial and business loans | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 57,770 | | | $ | 57,770 | | | $ | — | | Commercial and business loans | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 57,770 | | | $ | 57,770 | | | $ | — | |
Government program loans | Government program loans | | — | | | — | | | — | | | — | | | 132 | | | 132 | | | — | | Government program loans | | — | | | — | | | — | | | — | | | 132 | | | 132 | | | — | |
Total commercial and industrial | Total commercial and industrial | | — | | | — | | | — | | | — | | | 57,902 | | | 57,902 | | | — | | Total commercial and industrial | | — | | | — | | | — | | | — | | | 57,902 | | | 57,902 | | | — | |
| Commercial real estate loans | Commercial real estate loans | | — | | | — | | | — | | | — | | | 398,115 | | | 398,115 | | | — | | Commercial real estate loans | | — | | | — | | | — | | | — | | | 398,115 | | | 398,115 | | | — | |
Residential mortgages | Residential mortgages | | — | | | — | | | — | | | — | | | 273,357 | | | 273,357 | | | — | | Residential mortgages | | — | | | — | | | — | | | — | | | 273,357 | | | 273,357 | | | — | |
Home improvement and home equity loans | Home improvement and home equity loans | | 8 | | | — | | | — | | | 8 | | | 41 | | | 49 | | | — | | Home improvement and home equity loans | | 8 | | | — | | | — | | | 8 | | | 41 | | | 49 | | | — | |
Total real estate mortgage | Total real estate mortgage | | 8 | | | — | | | — | | | 8 | | | 671,513 | | | 671,521 | | | — | | Total real estate mortgage | | 8 | | | — | | | — | | | 8 | | | 671,513 | | | 671,521 | | | — | |
Real estate construction and development loans | Real estate construction and development loans | | — | | | — | | | 12,545 | | | 12,545 | | | 140,829 | | | 153,374 | | | — | | Real estate construction and development loans | | — | | | — | | | 12,545 | | | 12,545 | | | 140,829 | | | 153,374 | | | — | |
Agricultural loans | Agricultural loans | | — | | | — | | | 108 | | | 108 | | | 52,614 | | | 52,722 | | | — | | Agricultural loans | | — | | | — | | | 108 | | | 108 | | | 52,614 | | | 52,722 | | | — | |
| Installment and student loans | Installment and student loans | | 546 | | | 642 | | | 252 | | | 1,440 | | | 42,714 | | | 44,154 | | | 252 | | Installment and student loans | | 546 | | | 642 | | | 252 | | | 1,440 | | | 43,219 | | | 44,659 | | | 252 | |
Overdraft protection lines | | — | | | — | | | — | | | — | | | 17 | | | 17 | | | — | | |
Overdrafts | | — | | | — | | | — | | | — | | | 488 | | | 488 | | | — | | |
Installment and student loans | | 546 | | | 642 | | | 252 | | | 1,440 | | | 43,219 | | | 44,659 | | | 252 | | |
| Total loans | Total loans | | $ | 554 | | | $ | 642 | | | $ | 12,905 | | | $ | 14,101 | | | $ | 966,077 | | | $ | 980,178 | | | $ | 252 | | Total loans | | $ | 554 | | | $ | 642 | | | $ | 12,905 | | | $ | 14,101 | | | $ | 966,077 | | | $ | 980,178 | | | $ | 252 | |
Nonaccrual Loans
Commercial, construction and commercial real estate loansLoans are placed on nonaccrual status under the following circumstances:
- When there is doubt regarding the full repayment of interest and principal.
- When principal and/or interest on the loan has been in default for a period of 90-days90 days or more, unless the asset is both well secured and in the process of collection that will result in repayment in the near future.
- When the loan is identified as having loss elements and/or is risk rated “8” Doubtful.grade 8 (doubtful).
Loans on non-accrualnonaccrual status are usually not returned to accrual status unlesswhen all delinquent principal and/or interest has been brought current, when there is no identified element of loss, and when current and continued satisfactory performance is expected. Return to accrual is generally demonstrated through the timely receipt of at least six monthly payments on a loan with monthly amortization. There was no interest income recognized on nonaccrual loans for the nine months ended September 30, 2023 and 2022.
There were no remaining undisbursed commitments to extend credit on nonaccrual loans at March 31,September 30, 2023 or December 31, 2022.
The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 89 days and still accruing:
| | | March 31, 2023 | | December 31, 2022 | | September 30, 2023 | | December 31, 2022 |
(In thousands) | (In thousands) | | Nonaccrual Loans With No Allowance For Credit Losses | | Nonaccrual Loans | | Loans past due over 89 Days Still Accruing | | Nonaccrual Loans With No Allowance For Credit Losses | | Nonaccrual Loans | | Loans Past Due Over 89 Days Still Accruing | (In thousands) | | Nonaccrual Loans With No Allowance For Credit Losses | | Total Nonaccrual Loans | | Loans past due over 89 Days Still Accruing | | Nonaccrual Loans With No Allowance For Credit Losses | | Total Nonaccrual Loans | | Loans Past Due Over 89 Days Still Accruing |
| Residential mortgages | | Residential mortgages | | — | | | 1,008 | | | — | | | — | | | — | | | — | |
| Real estate construction and development loans | Real estate construction and development loans | | $ | 13,109 | | | $ | 13,109 | | | $ | — | | | $ | 14,436 | | | $ | 14,436 | | | $ | — | | Real estate construction and development loans | | 13,097 | | | 13,097 | | | — | | | 14,436 | | | 14,436 | | | — | |
Agricultural loans | Agricultural loans | | — | | | 86 | | | — | | | 108 | | | — | | Agricultural loans | | — | | | 60 | | | — | | | — | | | 108 | | | — | |
Installment and student loans | | — | | | — | | | 382 | | | 252 | | |
| Total | Total | | $ | 13,109 | | | $ | 13,195 | | | $ | 382 | | | $ | 14,436 | | | $ | 14,544 | | | $ | 252 | | Total | | $ | 13,097 | | | $ | 14,165 | | | $ | — | | | $ | 14,436 | | | $ | 14,544 | | | $ | 252 | |
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-going 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 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, 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 party support arrangements varies widely. Unconditional guaranties 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. When the borrower rating and the facility ratings differ, the lowest rating is applied. The Company uses the following risk rating grades:
Pass Ratings:
- 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 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 withand 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 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. TheAlthough, 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-borrowersasset borrowers who fully comply with all underwriting standards and are performing according to projections would beare 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, theseweaknesses. 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 of 5 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 special mention loans which are loans that are currently protected but are potentially weak. This is generally is an interim grade classification and these loans will usuallytypically 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. The main theme in special mention credits is theThis 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 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. 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. Substandard loans may also include impaired loans.
Doubtful Ratings:
- Grade 8 – This grade includes doubtful loans whichthat exhibit the same characteristics as the substandard loans. Additionally, loanLoan 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 specificdue to pending factors which may work totoward 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 as loss which are considered uncollectible and of such little value that their continuance as bankable assetsbankable-assets is not warranted. This classification does not mean that the asset has absolutely 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 type,class, net of deferred fees, by risk rating and origination year according to our internal risk ratingsperiod indicated as of March 31,September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Origination Year | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans | | |
(In thousands) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | | | Total |
Commercial and business | | | | | | | | | | | | | | |
Pass | | $ | 850 | | | $ | 1,465 | | | $ | 730 | | | $ | 1,340 | | | $ | 45 | | | $ | 995 | | | $ | 44,954 | | | $ | — | | | $ | 50,379 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 850 | | | 1,465 | | | 730 | | | 1,340 | | | 45 | | | 995 | | | 44,954 | | | — | | | 50,379 | |
Government program | | | | | | | | | | | | | | |
Pass | | — | | | — | | | — | | | 12 | | | — | | | 120 | | | — | | | — | | | 132 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | — | | | — | | | — | | | 12 | | | — | | | 120 | | | — | | | — | | | 132 | |
Commercial real estate | | | | | | | | | | | | | | |
Pass | | 2,887 | | | 89,262 | | | 36,313 | | | 59,853 | | | 54,170 | | | 110,070 | | | 17,291 | | | — | | | 369,846 | |
Special Mention | | — | | | — | | | — | | | 4,952 | | | 7,874 | | | 9,937 | | | 3,060 | | | — | | | 25,823 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 2,887 | | | 89,262 | | | 36,313 | | | 64,805 | | | 62,044 | | | 120,007 | | | 20,351 | | | — | | | 395,669 | |
Residential mortgages | | | | | | | | | | | | | | |
Not graded | | — | | | 27,680 | | | 213,059 | | | 3,236 | | | — | | | 10,149 | | | — | | | — | | | 254,124 | |
Pass | | — | | | — | | | — | | | — | | | — | | | 1,746 | | | 14,121 | | | — | | | 15,867 | |
Special Mention | | — | | | — | | | — | | | — | | | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year - As of September 30, 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 | | $ | 4,234 | | | $ | 5,008 | | | $ | 1,592 | | | $ | 829 | | | $ | 11 | | | $ | 1,090 | | | $ | 39,008 | | | $ | — | | | $ | 51,772 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 4,234 | | | 5,008 | | | 1,592 | | | 829 | | | 11 | | | 1,090 | | | 39,008 | | | — | | | 51,772 | |
Government program | | | | | | | | | | | | | | |
Pass | | — | | | — | | | — | | | 9 | | | — | | | 68 | | | — | | | — | | | 77 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | — | | | — | | | — | | | 9 | | | — | | | 68 | | | — | | | — | | | 77 | |
Commercial real estate | | | | | | | | | | | | | | |
Pass | | 29,078 | | | 102,435 | | | 53,425 | | | 59,281 | | | 53,378 | | | 108,122 | | | 1,501 | | | — | | | 407,220 | |
Special Mention | | — | | | — | | | — | | | 4,967 | | | 7,729 | | | — | | | — | | | — | | | 12,696 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 29,078 | | | 102,435 | | | 53,425 | | | 64,248 | | | 61,107 | | | 108,122 | | | 1,501 | | | — | | | 419,916 | |
Residential mortgages | | | | | | | | | | | | | | |
Not graded | | — | | | 24,956 | | | 207,665 | | | 2,312 | | | — | | | 10,043 | | | — | | | — | | | 244,976 | |
Pass | | 3,294 | | | 1,925 | | | 5,252 | | | 1,579 | | | 3,601 | | | 1,793 | | | — | | | — | | | 17,444 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 3,294 | | | 26,881 | | | 212,917 | | | 3,891 | | | 3,601 | | | 11,836 | | | — | | | — | | | 262,420 | |
Home improvement and home equity | | | | | | | | | | | | | | |
Not graded | | — | | | — | | | — | | | — | | | — | | | 35 | | | — | | | — | | | 35 | |
Pass | | — | | | — | | | — | | | — | | | — | | | 5 | | | — | | | — | | | 5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | — | | | 27,680 | | | 213,059 | | | 3,236 | | | — | | | 11,895 | | | 14,121 | | | — | | | 269,991 | |
(Continued) |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Origination Year | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term Loans | | |
(In thousands) | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | | | Total |
Home improvement and home equity | | | | | | | | | | | | | | |
Not graded | | — | | | — | | | — | | | — | | | — | | | 39 | | | — | | | — | | | 39 | |
Pass | | — | | | — | | | — | | | — | | | — | | | 7 | | | — | | | — | | | 7 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | — | | | — | | | — | | | — | | | — | | | 46 | | | — | | | — | | | 46 | |
Real estate construction and development | | | | | | | | | | |
Pass | | — | | | — | | | — | | | 4,606 | | | 180 | | | 4,896 | | | 114,466 | | | — | | | 124,148 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 4,836 | | | 8,273 | | | — | | | 13,109 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | — | | | — | | | — | | | 4,606 | | | 180 | | | 9,732 | | | 122,739 | | | — | | | 137,257 | |
Agricultural | | | | | | | | | | |
Pass | | — | | | 6,865 | | | 470 | | | 2,999 | | | 1,499 | | | 11,119 | | | 20,667 | | | — | | | 43,619 | |
Special Mention | | — | | | — | | | — | | | 589 | | | — | | | 428 | | | — | | | — | | | 1,017 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 87 | | | 790 | | | — | | | 877 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | — | | | — | | | — | | | 589 | | | — | | | 515 | | | 790 | | | — | | | 45,513 | |
Installment and student loans | | | | | | | | | | |
Not graded | | 237 | | | 337 | | | 244 | | | 179 | | | 1,598 | | | 40,470 | | | 675 | | | — | | | 43,740 | |
Pass | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 237 | | | 337 | | | 244 | | | 179 | | | 1,598 | | | 40,470 | | | 675 | | | — | | | 43,740 | |
Total Loans | | $ | 3,974 | | | $ | 118,744 | | | $ | 250,346 | | | $ | 74,767 | | | $ | 63,867 | | | $ | 183,780 | | | $ | 203,630 | | | $ | — | | | $ | 942,727 | |
The following table presents loans by type, risk rating, and origination year according to our internal risk ratings as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Origination Year | | Revolving loan amortized cost basis | | Revolving loan converted to term loans | | |
(In thousands) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | | | Total |
Commercial and business loans | | | | | | | | | | | | | | |
Pass | | $ | 1,486 | | | $ | 775 | | | $ | 1,471 | | | $ | 210 | | | $ | 1,081 | | | $ | 237 | | | $ | 52,310 | | | $ | — | | | $ | 57,570 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | 200 | | | — | | | 200 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | 1,486 | | | 775 | | | 1,471 | | | 210 | | | 1,081 | | | 237 | | | 52,510 | | | — | | | 57,770 | |
Government program loans | | | | | | | | | | | | | | |
Pass | | — | | | — | | | 13 | | | — | | | — | | | 119 | | | — | | | — | | | 132 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | — | | | — | | | 13 | | | — | | | — | | | 119 | | | — | | | — | | | 132 | |
(Continued) |
| | Origination Year | | Revolving loan amortized cost basis | | Revolving loan converted to term loans | | |
(In thousands) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total | |
Commercial real estate | | | | | | | | | | | | | | | |
Pass | | 89,610 | | | 36,506 | | | 60,293 | | | 54,595 | | | 32,935 | | | 82,170 | | | 15,987 | | | — | | | 372,096 | | |
Special Mention | | — | | | — | | | 4,979 | | | 7,935 | | | 408 | | | 9,637 | | | 3,060 | | | — | | | 26,019 | | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
| | 89,610 | | | 36,506 | | | 65,272 | | | 62,530 | | | 33,343 | | | 91,807 | | | 19,047 | | | — | | | 398,115 | | |
Residential mortgages | | |
Not graded | | 27,746 | | | 215,326 | | | 3,255 | | | — | | | — | | | 10,908 | | | — | | | — | | | 257,235 | | |
Pass | | — | | | — | | | — | | | — | | | — | | | 1,826 | | | 14,296 | | | — | | | 16,122 | | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
| | 27,746 | | | 215,326 | | | 3,255 | | | — | | | — | | | 12,734 | | | 14,296 | | | — | | | 273,357 | | |
Home improvement and home equity loans | | |
Not graded | | — | | | — | | | — | | | — | | | — | | | 41 | | | — | | | — | | | 41 | | |
Pass | | — | | | — | | | — | | | — | | | — | | | 8 | | | — | | | — | | | 8 | | |
Special Mention | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | — | | | — | | | — | | | — | | | — | | | 49 | | | — | | | — | | | 49 | | | — | | | — | | | — | | | — | | | — | | | 40 | | | — | | | — | | | 40 | |
Real estate construction and development | Real estate construction and development | | Real estate construction and development | |
Pass | Pass | | — | | | — | | | 4,842 | | | 180 | | | 824 | | | 6,599 | | | 126,493 | | | — | | | 138,938 | | Pass | | 20,453 | | | 13,861 | | | 743 | | | 29,246 | | | 180 | | | 4,431 | | | 51,505 | | | — | | | 120,419 | |
Special Mention | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | Substandard | | — | | | — | | | — | | | — | | | — | | | 5,372 | | | 9,064 | | | — | | | 14,436 | | Substandard | | — | | | — | | | — | | | 3,524 | | | — | | | 9,573 | | | — | | | — | | | 13,097 | |
Doubtful | Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | — | | | — | | | 4,842 | | | 180 | | | 824 | | | 11,971 | | | 135,557 | | | — | | | 153,374 | | | 20,453 | | | 13,861 | | | 743 | | | 32,770 | | | 180 | | | 14,004 | | | 51,505 | | | — | | | 133,516 | |
Agricultural | Agricultural | | Agricultural | |
Pass | Pass | | 7,051 | | 474 | | 3,010 | | 3,777 | | — | | | 11,421 | | | 24,924 | | | — | | | 50,657 | | Pass | | 2,420 | | | 6,460 | | | 461 | | | 3,023 | | | 1,591 | | | 12,617 | | | 33,610 | | | — | | | 60,182 | |
Special Mention | Special Mention | | — | | | — | | | 589 | | | — | | | 428 | | | — | | | — | | | — | | | 1,017 | | Special Mention | | — | | | — | | | — | | | 513 | | | — | | | 356 | | | — | | | — | | | 869 | |
Substandard | Substandard | | — | | | — | | | — | | | — | | | — | | | 258 | | | 790 | | | — | | | 1,048 | | Substandard | | — | | | — | | | — | | | — | | | — | | | 60 | | | 390 | | | — | | | 450 | |
Doubtful | Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | 7,051 | | | 474 | | | 3,599 | | | 3,777 | | | 428 | | | 11,679 | | | 25,714 | | | — | | | 52,722 | | | 2,420 | | | 6,460 | | | 461 | | | 3,536 | | | 1,591 | | | 13,033 | | | 34,000 | | | — | | | 61,501 | |
Installment and student loans | Installment and student loans | | Installment and student loans | |
Not Graded | | 373 | | | 272 | | | 196 | | | 1,623 | | | 10,759 | | | 30,905 | | | 531 | | | — | | | 44,659 | | |
Not graded | | Not graded | | 714 | | | 289 | | | 179 | | | 86 | | | 513 | | | 39,881 | | | 686 | | | — | | | 42,348 | |
Pass | Pass | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Pass | | 1,281 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,281 | |
Special Mention | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Doubtful | Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | 373 | | | 272 | | | 196 | | | 1,623 | | | 10,759 | | | 30,905 | | | 531 | | | — | | | 44,659 | | | 1,995 | | | 289 | | | 179 | | | 86 | | | 513 | | | 39,881 | | | 686 | | | — | | | 43,629 | |
Total Loans | Total Loans | | $ | 126,266 | | | $ | 253,353 | | | $ | 78,648 | | | $ | 68,320 | | | $ | 46,435 | | | $ | 159,501 | | | $ | 247,655 | | | $ | — | | | $ | 980,178 | | Total Loans | | $ | 61,474 | | | $ | 154,934 | | | $ | 269,317 | | | $ | 105,369 | | | $ | 67,003 | | | $ | 188,074 | | | $ | 126,700 | | | $ | — | | | $ | 972,871 | |
Allowance for LoanCredit Losses on Loans
The Company adopted ASU 2016-13, Financial Instrument-Credit Losses (Topic 326),effective January 1, 2023, and utilizes2023. This loss measurement, which uses the CECLcurrent expected credit loss (CECL) cohort methodology analysis, 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. Management estimates the allowance for loancredit 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 2022.2023. The Company expects that the markets in which it operates will experience a slight decline in economic conditions and an increase in unemployment raterates and levellevels and trendtrends 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 isare 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 experienced of both from the Company and peer statistics. These loanspeers. Loans in this category are secured by first deeds of trust.
Home improvement and home equity loans – Because of their junior lien position, these loans have an inherently higher risk level.
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, and marketing issues. In addition, concentrations in certain crops or certain agricultural areas can increase risk.crop concentration. Additionally, from time to time, California experiencesmay experience severe droughts, which can 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 thethis loan portfolio are alsoclosely monitored in an effort to manage credit quality and promote early efforts to work with borrowers where possiblein order to mitigate any potential losses.
Installment, and student loans (Includes consumer loans, student loans, overdrafts, and overdraft protection lines) lines – This segment is 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 category:
| | | Three Months Ended March 31, 2023 | | Three Months Ended September 30, 2023 |
(In thousands) | (In thousands) | | Commercial and Industrial | | Real Estate Mortgage | | Real Estate Construction Development | | Agricultural | | Installment and Student Loans | | | Total | (In thousands) | | Commercial and Industrial | | Real Estate Mortgage | | Real Estate Construction Development | | Agricultural | | Installment and Student Loans | | | Total |
Beginning balance, prior to adoption of ASC 326 | | $ | 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 (recapture of provision) for credit losses | | (383) | | | (37) | | | (542) | | | (294) | | | 763 | | | | (493) | | |
Beginning balance | | Beginning balance | | $ | 2,007 | | | $ | 3,731 | | | $ | 3,513 | | | $ | 1,504 | | | $ | 5,355 | | | | $ | 16,110 | |
Provision (reversal) for credit losses (1) | | Provision (reversal) for credit losses (1) | | (202) | | | (932) | | | 164 | | | 63 | | | 907 | | | | — | |
Charge-offs | Charge-offs | | — | | | — | | | — | | | — | | | (477) | | | | (477) | | Charge-offs | | — | | | — | | | — | | | — | | | (603) | | | | (603) | |
Recoveries | Recoveries | | — | | | 20 | | | — | | | — | | | 23 | | | | 43 | | Recoveries | | — | | | 2 | | | — | | | — | | | 140 | | | | 142 | |
Net recoveries (charge-offs) | | — | | | 20 | | | — | | | — | | | (454) | | | | (434) | | |
Net charge-offs | | Net charge-offs | | — | | | 2 | | | — | | | — | | | (463) | | | | (461) | |
Ending balance | Ending balance | | $ | 1,908 | | | $ | 3,705 | | | $ | 3,587 | | | $ | 1,256 | | | $ | 5,166 | | | | $ | 15,622 | | Ending balance | | $ | 1,805 | | | $ | 2,801 | | | $ | 3,677 | | | $ | 1,567 | | | $ | 5,799 | | | | $ | 15,649 | |
(1) There was no provision for unfunded loan commitments during the quarter.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 |
(In thousands) | | Commercial and Industrial | | Real Estate Mortgage | | Real Estate Construction Development | | Agricultural | | Installment and Student Loans | | Unallocated | | Total |
Beginning balance | | $ | 836 | | | $ | 1,298 | | | $ | 3,528 | | | $ | 1,120 | | | $ | 2,634 | | | $ | 491 | | | $ | 9,907 | |
Provision (reversal) for credit losses | | 111 | | | 23 | | | 81 | | | (554) | | | 413 | | | 533 | | | 607 | |
| | | | | | | | | | | | | | |
Charge-offs | | — | | | — | | | — | | | — | | | (464) | | | — | | | (464) | |
Recoveries | | 1 | | | 4 | | | — | | | — | | | 8 | | | — | | | 13 | |
Net recoveries (charge-offs) | | 1 | | | 4 | | | — | | | — | | | (456) | | | — | | | (451) | |
Ending balance | | $ | 948 | | | $ | 1,325 | | | $ | 3,609 | | | $ | 566 | | | $ | 2,591 | | | $ | 1,024 | | | $ | 10,063 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2023 |
(In thousands) | | Commercial and Industrial | | Real Estate Mortgage | | Real Estate Construction Development | | Agricultural | | Installment and Student Loans | | | | Total |
Beginning balance, prior to adoption of ASC 326 | | $ | 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) | | (487) | | | (974) | | | (452) | | | 17 | | | 2,348 | | | | | 452 | |
| | | | | | | | | | | | | | |
Charge-offs | | — | | | — | | | — | | | — | | | (1,587) | | | | | (1,587) | |
Recoveries | | 1 | | | 53 | | | — | | | — | | | 181 | | | | | 235 | |
Net recoveries (charge-offs) | | 1 | | | 53 | | | — | | | — | | | (1,406) | | | | | (1,352) | |
Ending balance | | $ | 1,805 | | | $ | 2,801 | | | $ | 3,677 | | | $ | 1,567 | | | $ | 5,799 | | | | | $ | 15,649 | |
(1) Includes a $135,000 provision for unfunded loan commitments.
| | | Three Months Ended March 31, 2022 | | Nine Months Ended September 30, 2022 |
(In thousands) | (In thousands) | | Commercial and Industrial | | Real Estate Mortgage | | Real Estate Construction Development | | Agricultural | | Installment and Student Loans | | | Total | (In thousands) | | Commercial and Industrial | | Real Estate Mortgage | | Real Estate Construction Development | | Agricultural | | Installment and Student Loans | | Unallocated | | Total |
Beginning balance | Beginning balance | | $ | 597 | | | $ | 1,174 | | | $ | 2,840 | | | $ | 1,233 | | | $ | 3,489 | | | | $ | 9,333 | | Beginning balance | | $ | 597 | | | $ | 1,174 | | | $ | 2,840 | | | $ | 1,233 | | | $ | 2,720 | | | $ | 769 | | | $ | 9,333 | |
Provision (recapture of provision) for credit losses | | (306) | | | 117 | | | 57 | | | (292) | | | 429 | | | | 5 | | |
Provision (reversal) for credit losses | | Provision (reversal) for credit losses | | 82 | | | 141 | | | 769 | | | (703) | | | 674 | | | 255 | | | 1,218 | |
| Charge-offs | Charge-offs | | — | | | — | | | — | | | — | | | (358) | | | | (358) | | Charge-offs | | — | | | — | | | — | | | — | | | (828) | | | — | | | (828) | |
Recoveries | Recoveries | | 268 | | | 4 | | | — | | | 16 | | | 8 | | | | 296 | | Recoveries | | 269 | | | 10 | | | — | | | 36 | | | 25 | | | — | | | 340 | |
Net (charge-offs) recoveries | | 268 | | | 4 | | | — | | | 16 | | | (350) | | | | (62) | | |
Net recoveries (charge-offs) | | Net recoveries (charge-offs) | | 269 | | | 10 | | | — | | | 36 | | | (803) | | | — | | | (488) | |
Ending balance | Ending balance | | $ | 559 | | | $ | 1,295 | | | $ | 2,897 | | | $ | 957 | | | $ | 3,568 | | | | $ | 9,276 | | Ending balance | | $ | 948 | | | $ | 1,325 | | | $ | 3,609 | | | $ | 566 | | | $ | 2,591 | | | $ | 1,024 | | | $ | 10,063 | |
The following summarizes information with respect to the loan balances:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | March 31, 2022 |
(In thousands) | | Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | Total Loans | | Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | Total Loans |
Commercial and business loans | | $ | — | | | $ | 50,379 | | | $ | 50,379 | | | $ | — | | | $ | 38,725 | | | $ | 38,725 | |
Government program loans | | — | | | 132 | | | 132 | | | — | | | 221 | | | 221 | |
Total commercial and industrial | | — | | | 50,511 | | | 50,511 | | | — | | | 38,946 | | | 38,946 | |
Commercial real estate loans | | — | | | 395,669 | | | 395,669 | | | — | | | 330,870 | | | 330,870 | |
Residential mortgage loans | | 74 | | | 269,917 | | | 269,991 | | | 145 | | | 256,766 | | | 256,911 | |
Home improvement and home equity loans | | — | | | 46 | | | 46 | | | — | | | 74 | | | 74 | |
Total real estate mortgage | | 74 | | | 665,632 | | | 665,706 | | | 145 | | | 587,710 | | | 587,855 | |
Real estate construction and development loans | | 13,109 | | | 124,148 | | | 137,257 | | | 11,147 | | | 141,820 | | | 152,967 | |
Agricultural loans | | 879 | | | 44,634 | | | 45,513 | | | 653 | | | 47,142 | | | 47,795 | |
Installment and student loans | | — | | | 43,740 | | | 43,740 | | | — | | | 49,400 | | | 49,400 | |
Total loans | | $ | 14,062 | | | $ | 928,665 | | | $ | 942,727 | | | $ | 11,945 | | | $ | 865,018 | | | $ | 876,963 | |
Collateral DependentCollateral-Dependent Loans
A loan is considered collateral dependentcollateral-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, 2023 | | December 31, 2022 | | | September 30, 2023 | | December 31, 2022 |
(Dollars in thousands) | (Dollars in thousands) | | Amount | | | Number of Collateral-Dependent Loans | | Amount | | | Number of Collateral-Dependent Loans | (Dollars in thousands) | | Amount | | | Number of Collateral-Dependent Loans | | Amount | | | Number of Collateral-Dependent Loans |
| Real estate construction and development loans | Real estate construction and development loans | | $ | 13,110 | | | | 4 | | | $ | 14,436 | | | | 4 | | Real estate construction and development loans | | $ | 13,096 | | | | 4 | | | $ | 14,436 | | | | 4 | |
Agricultural loans | Agricultural loans | | 790 | | | | 2 | | | 108 | | | | 2 | | Agricultural loans | | 390 | | | | 1 | | | 108 | | | | 2 | |
| Total | Total | | $ | 13,900 | | | | 6 | | | $ | 14,544 | | | | 6 | | Total | | $ | 13,486 | | | | 5 | | | $ | 14,544 | | | | 6 | |
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 associated withwithin the loan portfolio. The adoption of CECL as of January 1, 2023, required a cumulative adjustment of $273,000 to the reserve for unfunded loan commitments, increasing the liability balance to $805,000, post adoption. There was no provision for unfunded loan commitments formade during the quarter ended March 31,September 30, 2023. Year to date, the provision totaled $135,000, increasing the liability balance to $954,000. For the quarter ended September 30, 2022, a reversal of provision of $17,000 was made. For the nine months ended September 30, 2022, a reversal of provision of $210,000 was made, decreasing the liability balance to $474,000. The reserve for the unfunded loan commitments is a liability on the Company’s consolidated financial statements and is included in other liabilities.
Loan Modifications
Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, anand other-than-insignificant payment delay or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-offcharged off against the allowance for credit losses. There were no
The following tables present loan modifications made to borrowers experiencing financial difficulties for the quarter ended March 31, 2023.periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2023 |
(In thousands) | | Principal Forgiveness | | Term Extension | | Interest Rate Reduction | | Payment Delay | | Total % of Loans Outstanding |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Real estate construction and development loans | | — | | | 1,700 | | | — | | | — | | | 0.17 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2023 |
(In thousands) | | Principal Forgiveness | | Term Extension | | Interest Rate Reduction | | Payment Delay | | Total % of Loans Outstanding |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Real estate construction and development loans | | — | | | 1,700 | | | — | | | — | | | 0.17 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The following table presents the financial effects of loan modifications made to borrower experiencing financial difficulties:
| | | | | | | | | | | | | | |
| | Three months ended September 30, 2023 | | Nine months ended September 30, 2023 |
(In thousands) | | 24 months term extension | | 24 months term extension |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Real estate construction and development loans | | 1,700 | | | 1,700 | |
| | | | |
| | | | |
| | | | |
4.Student Loans
Included in the installment and student loans segment of the loan portfolio are $41.4$39.6 million and $42.1 million in student loans at March 31,September 30, 2023 and December 31, 2022, respectively, made to medical and pharmacy school students. Upon graduation the loan is automatically placed onin a grace for 6period of six months. This may be extended up to 48 months for graduates enrolling in Internship, Medical Residencyinternship, medical residency, or Fellowshipfellowship programs. As approved, the student may receive additional deferment for hardship or administrative reasons in the form of forbearance for a maximum of 36 months throughout the life of the loan. At March 31, 2023 there were 858 loans within repayment, deferment, and forbearance which represented $21.4 million, $10.8 million, and $6.9 million, respectively. At December 31, 2022, there were 875 loans within repayment, deferment, and forbearance which represented $23.4 million, $11.0 million and $5.0 million, respectively. No new student loans were originated or purchased during the periods ended March 31, 2023 and March 31, 2022.since April of 2019.
As of March 31,September 30, 2023 and December 31, 2022, the reserve against the student loan portfolio was $4.8$5.6 million and $2.6 million, respectively. At March 31,September 30, 2023, there were $382,000 inno student loans in the substandard category. At December 31, 2022, there were $252,000 in student loans included in the substandard category.
ZuntaFi is the third-party servicer for the student loan portfolio. ZuntaFi’s services include application administration, processing, approval, documenting, funding, and collection. They also provide borrower file custodial responsibilities. Except in cases where applicants/loans do not meet program requirements, or extreme delinquency, ZuntaFi provides complete program management. ZuntaFi is paid a monthly servicing fee based on the outstanding principal balance. The servicing fee is presented as part of professional fees within noninterest expense.
The following tables summarize the credit quality indicators for outstanding student loans:
| | | | March 31, 2023 | | December 31, 2022 | | | September 30, 2023 | | December 31, 2022 |
(Dollars in thousands) | (Dollars in thousands) | | Number of Loans | | Amount | | Accrued Interest | | Number of Loans | | Amount | | Accrued Interest | (Dollars in thousands) | | Number of Loans | | Principal Amount | | Accrued Interest | | Number of Loans | | Principal Amount | | Accrued Interest |
School | School | | 69 | | $ | 2,025 | | | $ | 967 | | | 70 | | | $ | 2,056 | | | $ | 908 | | School | | 46 | | $ | 1,267 | | | $ | 722 | | | 70 | | | $ | 2,056 | | | $ | 908 | |
Grace | Grace | | 12 | | | 327 | | | 163 | | | 27 | | | 667 | | | 348 | | Grace | | 23 | | | 735 | | | 358 | | | 27 | | | 667 | | | 348 | |
Repayment | Repayment | | 460 | | | 21,421 | | | 293 | | | 516 | | | 23,414 | | | 857 | | Repayment | | 418 | | | 19,547 | | | 261 | | | 516 | | | 23,414 | | | 857 | |
Deferment | Deferment | | 256 | | | 10,784 | | | 1,964 | | | 268 | | | 10,974 | | | 1,732 | | Deferment | | 257 | | | 11,227 | | | 1,959 | | | 268 | | | 10,974 | | | 1,732 | |
Forbearance | Forbearance | | 142 | | | 6,862 | | | 374 | | | 91 | | | 5,019 | | | 237 | | Forbearance | | 128 | | | 6,838 | | | 229 | | | 91 | | | 5,019 | | | 237 | |
Total | Total | | 939 | | | $ | 41,419 | | | $ | 3,761 | | | 972 | | | $ | 42,130 | | | $ | 4,082 | | Total | | 872 | | | $ | 39,614 | | | $ | 3,529 | | | 972 | | | $ | 42,130 | | | $ | 4,082 | |
School - The time in which the borrower is still actively in school at least half time.half-time. No payments are expected during this stage, though the borrower may begin immediate payments.make payments during this time.
Grace - A six monthsix-month period of time granted to the borrower immediately upon graduation, or if deemed no longer an active student. Interestend 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 is transferred to repayment status. Additionally, if applicable, thisThis status may also represent aan in-school borrower activated to military duty while in their in-school period, they will be allowed to return to that status once their active duty has expired.duty. The borrower must return to an at least half timehalf-time status within six months of the active dutytheir active-duty end date in order to return to an in-school status.
Repayment - The time in which the borrower is no longer attending school at least half-time, and 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 (1)either actively enrolled in an eligible school at least half time,half-time or (2) are 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 which may be granted fordue to either hardship or administrative reasons. Interest will continue to accrue on loans during periods of authorized forbearance.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 covered by the forbearance and all accrued and unpaid interest from the date of delinquency or if none, from the date of beginning of the forbearance period, will be capitalized at the end of each forbearance period. The term of the loancapitalized. Loan terms will not change as a result of forbearance and paymentspayment amounts may be increased to allow the loan to pay off in the required time frame. A forbearance that results in only 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 this designationand is considered standard industry practice, and is consistent with the succession of students migrating from school to employed medical professionals.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 anthe account becomes 120 days contractually past due. Accrued but unpaid interest related to charged offcharged-off student loans is reversed and charged against interest income. For the quarternine months ended March 31,September 30, 2023, $28,000$187,000 in accrued interest receivable was reversed, due to charge-offs of $406,000.$1.6 million. For the quarternine months ended March 31,September 30, 2022, $14,000$100,000 in accrued interest receivable was reversed, due to charge-offs of $353,000 within$810,000. For the student loan portfolio.quarter ended September 30, 2023, $102,000 in accrued interest receivable was reversed, due to charge-offs of $603,000. For the quarter ended September 30, 2022, $86,000 in accrued interest receivable was reversed, due to charge-offs of $457,000.
The following table summarize the amortized cost of student loan aging for loans in repayment and forbearance:
| | | | March 31, 2023 | | December 31, 2022 | | | September 30, 2023 | | December 31, 2022 |
(Dollars in thousands) | (Dollars in thousands) | | Number of Borrowers | | Amount | | Number of Borrowers | | Amount | (Dollars in thousands) | | Number of Borrowers | | Amount | | Number of Borrowers | | Amount |
Current or less than 31 days | Current or less than 31 days | | 239 | | $ | 26,512 | | | 251 | | $ | 26,993 | | Current or less than 31 days | | 220 | | $ | 24,403 | | | 251 | | $ | 26,993 | |
31 - 60 days | 31 - 60 days | | 6 | | 817 | | | 8 | | 546 | | 31 - 60 days | | 11 | | 1,303 | | | 8 | | 546 | |
61 - 90 days | 61 - 90 days | | 7 | | 571 | | | 5 | | 642 | | 61 - 90 days | | 5 | | 679 | | | 5 | | 642 | |
91 - 120 days | 91 - 120 days | | 4 | | | 382 | | | 4 | | 252 | | 91 - 120 days | | — | | | — | | | 4 | | 252 | |
| Total | Total | | 256 | | $ | 28,282 | | | 268 | | $ | 28,433 | | Total | | 236 | | $ | 26,385 | | | 268 | | $ | 28,433 | |
5.Deposits
Deposits include the following:
| (In thousands) | (In thousands) | | March 31, 2023 | | December 31, 2022 | (In thousands) | | September 30, 2023 | | December 31, 2022 |
Noninterest-bearing deposits | Noninterest-bearing deposits | | $ | 394,745 | | | $ | 481,629 | | Noninterest-bearing deposits | | $ | 386,258 | | | $ | 481,629 | |
Interest-bearing deposits: | Interest-bearing deposits: | | | | Interest-bearing deposits: | | | |
NOW and money market accounts | NOW and money market accounts | | 528,233 | | | 499,861 | | NOW and money market accounts | | 409,193 | | | 499,861 | |
Savings accounts | Savings accounts | | 118,544 | | | 125,946 | | Savings accounts | | 120,353 | | | 125,946 | |
Time deposits: | Time deposits: | | | | Time deposits: | | | |
Under $250,000 | Under $250,000 | | 52,835 | | | 42,933 | | Under $250,000 | | 69,875 | | | 42,933 | |
$250,000 and over | $250,000 and over | | 16,775 | | | 15,115 | | $250,000 and over | | 1,952 | | | 15,115 | |
Total interest-bearing deposits | Total interest-bearing deposits | | 716,387 | | | 683,855 | | Total interest-bearing deposits | | 601,373 | | | 683,855 | |
Total deposits | Total deposits | | $ | 1,111,132 | | | $ | 1,165,484 | | Total deposits | | $ | 987,631 | | | $ | 1,165,484 | |
|
6.Short-term Borrowings/Other Borrowings
The following table sets forth the Company’s credit lines, balances outstanding, and pledged collateral:
| (In thousands) | (In thousands) | | March 31, 2023 | | December 31, 2022 | (In thousands) | | September 30, 2023 | | December 31, 2022 |
Unsecured credit lines: | Unsecured credit lines: | | | | | Unsecured credit lines: | | | | |
Credit limit | Credit limit | | $ | 100,000 | | | $ | 120,000 | | Credit limit | | $ | 120,000 | | | $ | 120,000 | |
Balance outstanding | Balance outstanding | | 13,200 | | | — | | Balance outstanding | | 17,000 | | | — | |
Federal Home Loan Bank: | Federal Home Loan Bank: | | Federal Home Loan Bank: | |
Credit limit | Credit limit | | 2,108 | | | 2,151 | | Credit limit | | 135,302 | | | 2,151 | |
Balance outstanding | Balance outstanding | | — | | | — | | Balance outstanding | | 125,000 | | | — | |
Collateral pledged | Collateral pledged | | 2,263 | | | 2,307 | | Collateral pledged | | 238,320 | | | 2,151 | |
Federal Reserve Bank: | Federal Reserve Bank: | | | | Federal Reserve Bank: | | | |
Credit limit | Credit limit | | 432,584 | | | 435,599 | | Credit limit | | 463,556 | | | 435,599 | |
Balance outstanding | Balance outstanding | | — | | | — | | Balance outstanding | | — | | | — | |
Collateral pledged | Collateral pledged | | 579,777 | | | 590,427 | | Collateral pledged | | 618,147 | | | 590,427 | |
|
At September 30, 2023, pledged collateral at the Federal Home Loan Bank consisted of $2.1 million in available-for-sale investment securities and $236.3 million in loan balances. Pledged collateral at the Federal Reserve Bank consisted of $4.2 million in available-for-sale investment securities and $614.0 million in loan balances. At December 31, 2022, pledged collateral at the Federal Home Loan Bank consisted of $2.2 million in available-for-sale investment securities and pledged collateral at the Federal Reserve Bank consisted of $590.4 million in loan balances.
7.Leases
The Company leases land and premises for its branch banking offices,banking-offices, administration facilities,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 for changes reported into certain economic indices or as reflected by market conditions. Lease terms may also include options for termination. Under guidance from Topic 842, the discount rate applied to extend or terminate the lease when itliability is reasonably certaincalculated by determining the Company will exercise that option.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,September 30, 2023, the Company had 1413 operating leases and no financing leases. At March 31,September 30, 2022, the Company had 13 operating leases and no financing leases.
The components of lease expense are as follows:
| | | Three Months Ended | | | Three Months Ended | | Nine Months Ended |
(In thousands) | (In thousands) | | March 31, 2023 | | March 31, 2022 | | (In thousands) | | September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
| Operating lease expense | Operating lease expense | | $ | 178 | | | $ | 184 | | | Operating lease expense | | $ | 178 | | | $ | 185 | | | $ | 533 | | | $ | 553 | |
Variable lease expense | Variable lease expense | | — | | | — | | | Variable lease expense | | — | | | — | | | — | | | — | |
| Total | Total | | $ | 178 | | | $ | 184 | | | Total | | $ | 178 | | | $ | 185 | | | $ | 533 | | | $ | 553 | |
Supplemental information related to leases areis as follows:
| | | Three Months Ended | | Nine Months Ended |
(In thousands) | | March 31, 2023 | | March 31, 2022 | |
(Dollars in thousands) | | (Dollars in thousands) | | September 30, 2023 | | September 30, 2022 |
| Operating cash flows from operating leases | Operating cash flows from operating leases | | $ | 179 | | | $ | 184 | | Operating cash flows from operating leases | | $ | 533 | | | $ | 553 | |
| Weighted-average remaining lease term in years for operating leases | Weighted-average remaining lease term in years for operating leases | | 4.38 | | 4.89 | Weighted-average remaining lease term in years for operating leases | | 4.24 | | 4.59 |
| Weighted-average discount rate for operating leases | Weighted-average discount rate for operating leases | | 5.12 | % | | 5.13 | % | Weighted-average discount rate for operating leases | | 5.10 | % | | 5.12 | % |
Maturities of lease liabilities are as follows:
| (In thousands) | (In thousands) | | March 31, 2023 | (In thousands) | | September 30, 2023 |
2023 | 2023 | | $ | 723 | | 2023 | | $ | 640 | |
2024 | 2024 | | 519 | | 2024 | | 450 | |
2025 | 2025 | | 335 | | 2025 | | 218 | |
2026 | 2026 | | 159 | | 2026 | | 122 | |
2027 | 2027 | | 110 | | 2027 | | 110 | |
Thereafter | Thereafter | | 291 | | Thereafter | | 237 | |
Total undiscounted cash flows | Total undiscounted cash flows | | 2,137 | | Total undiscounted cash flows | | 1,777 | |
Less: present value discount | Less: present value discount | | (222) | | Less: present value discount | | (178) | |
Present value of net future minimum lease payments | Present value of net future minimum lease payments | | $ | 1,915 | | Present value of net future minimum lease payments | | $ | 1,599 | |
8.Supplemental Cash Flow Disclosures
| | | | Three Months Ended | | | Nine Months Ended |
(In thousands) | (In thousands) | | March 31, 2023 | | March 31, 2022 | (In thousands) | | September 30, 2023 | | September 30, 2022 |
Cash paid during the period for: | Cash paid during the period for: | | | | | Cash paid during the period for: | | | | |
Interest | Interest | | $ | 1,631 | | | $ | 554 | | Interest | | $ | 7,853 | | | $ | 1,907 | |
Income taxes | Income taxes | | — | | | — | | Income taxes | | — | | | 4,825 | |
Noncash investing activities: | Noncash investing activities: | | | | | Noncash investing activities: | | | | |
| Impact of ASC 326 CECL adoption | Impact of ASC 326 CECL adoption | | 6,367 | | | — | | Impact of ASC 326 CECL adoption | | 6,367 | | | — | |
Unrealized gain on unrecognized post retirement costs, net of tax | | 21 | | | 23 | | |
Unrealized gain (loss) on available for sale securities, net of tax | | 1,325 | | | (11,689) | | |
Unrealized gain on junior subordinated debentures, net of tax | | 2,947 | | | 1,302 | | |
Unrealized gain on unrecognized post retirement costs | | Unrealized gain on unrecognized post retirement costs | | 66 | | | 67 | |
Unrealized loss on available for sale securities | | Unrealized loss on available for sale securities | | (2,939) | | | (29,232) | |
Unrealized gain on junior subordinated debentures | | Unrealized gain on junior subordinated debentures | | 523 | | | 3,419 | |
| Cash dividend declared | Cash dividend declared | | 1,880 | | | 1,875 | | Cash dividend declared | | 2,056 | | | 1,874 | |
9.Dividends on Common Stock
On March 28,September 26, 2023, the Company’s Board of Directors declared a cash dividend of $0.11$0.12 per share on the Company’s common stock. The dividend was payable on April 21,October 25, 2023, to shareholders of record as of April 7,October 10, 2023. Approximately $1.9$2.1 million was transferred from retained earnings to dividends payable as of March 31,September 30, 2023 to allow for distribution of the dividend to shareholders.
The Company has a program to repurchase up to $3 million of its outstanding common 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 and nine months ended March 31,September 30, 2023 and March 31,September 30, 2022, no shares have been repurchased.
10.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 | | | | Three Months Ended | | Nine Months Ended | |
| | March 31, 2023 | | March 31, 2022 | | | September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 | |
Net income (in thousands) | Net income (in thousands) | | $ | 6,125 | | | $ | 2,443 | | | Net income (in thousands) | | $ | 3,853 | | | $ | 4,467 | | | $ | 14,395 | | | $ | 10,345 | | |
Weighted average shares issued | Weighted average shares issued | | 17,076,510 | | | 17,030,409 | | | Weighted average shares issued | | 17,132,080 | | | 17,042,479 | | | 17,103,982 | | | 17,036,460 | | |
Add: dilutive effect of stock options | Add: dilutive effect of stock options | | 15,950 | | | 21,410 | | | Add: dilutive effect of stock options | | 8,124 | | | 21,468 | | | 11,893 | | | 21,178 | | |
Weighted average shares outstanding adjusted for potential dilution | Weighted average shares outstanding adjusted for potential dilution | | 17,092,460 | | | 17,051,819 | | | Weighted average shares outstanding adjusted for potential dilution | | 17,140,204 | | | 17,063,947 | | | 17,115,875 | | | 17,057,638 | | |
Basic earnings per share | Basic earnings per share | | $ | 0.36 | | | $ | 0.14 | | | Basic earnings per share | | $ | 0.22 | | | $ | 0.26 | | | $ | 0.84 | | | $ | 0.61 | | |
Diluted earnings per share | Diluted earnings per share | | $ | 0.36 | | | $ | 0.14 | | | Diluted earnings per share | | $ | 0.22 | | | $ | 0.26 | | | $ | 0.84 | | | $ | 0.61 | | |
Anti-dilutive stock options excluded from earnings per share calculation | Anti-dilutive stock options excluded from earnings per share calculation | | 101,000 | | | 97,000 | | | Anti-dilutive stock options excluded from earnings per share calculation | | 90,000 | | | 93,000 | | | 98,000 | | | 93,000 | | |
11.Taxes on Income
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 March 31,September 30, 2023 and December 31, 2022, the Company had no recorded valuation allowance. The Company is no longer subject to examinations by taxing authorities for years before 2018 and 2017 for Federal and California jurisdictions, respectively.
The Company’s policy is to recognize any interest or penalties related to uncertain tax positions in income tax expense. There were no interest or penalties recognized on uncertain tax positions during the periods ended March 31,September 30, 2023 and 2022.
The Company recorded a provision for income taxes of $1.6 million for the three months ended September 30, 2023, and a provision of $1.8 million for the three months ended September 30, 2022. The Company reported a provision for income taxes of $2,521,000$5.9 million for the quarternine months ended March 31,September 30, 2023 compared to $968,000$4.2 million for the comparable period of 2022. The effective tax rate was 29.2%28.8% for the quarterthree months ended March 31,September 30, 2023, compared to 28.4%29.1% for the comparable period of 2022. The effective tax rate was 29.0% for the nine months ended September 30, 2023, compared to 28.9% for the comparable period of 2022.
12.Junior Subordinated Debt/Trust Preferred Securities
The contractual principal balance of the Company’s debentures relating to its trust preferred securities is $12.0 million as of March 31,September 30, 2023 and December 31, 2022. The Company may redeem the junior subordinated debentures at any time at par.
The Company accounts for its junior subordinated debt issued under USB Capital Trust 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. As of March 31,September 30, 2023, the rate paid on the junior subordinated debt issued under USB Capital Trust II is the forward 3-month LIBORSOFR plus 129 basis points, and is adjusted quarterly.
At March 31,September 30, 2023, 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 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. The 6.22%7.23% discount rate used represents what a market participant would consider under the circumstancesan investor yield based on current market assumptions. At March 31,September 30, 2023, the total cumulative gain recorded on the debt is $1.63was $1.70 million.
The net fair value calculation performed as of March 31,September 30, 2023 resulted in a net pretax lossgain adjustment of $107,000$29,000 for the quarternine months ended March 31,September 30, 2023 compared to a net pretax gain adjustment of $303,000$950,000 for the quarternine months ended March 31,September 30, 2022.
For the quarternine months ended March 31,September 30, 2023, the net $107,000$29,000 fair value lossgain adjustment was separately presented as a $333,000 gain ($235,000,$553,000 loss, $390,000, net of tax)tax, recognized on the consolidated statements of income, and a $440,000 loss ($310,000,$523,000 gain, $368,000, net of tax)tax, associated with the instrument-specific credit risk recognized in other comprehensive income. For the quarternine months ended March 31,September 30, 2022, the net $303,000$950,000 fair value gain adjustment was separately presented as a $1,302,000 gain ($917,000,$2.5 million loss, $1.7 million, net of tax)tax, recognized on the consolidated statements of income, and a $999,000 loss ($704,000,$3.4 million gain, $2.4 million, net of tax)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 ended.indicated.
The net fair value calculation performed as of September 30, 2023 resulted in a net pretax loss adjustment of $234,000 for the quarter ended September 30, 2023 compared to a net pretax gain adjustment of $225,000 for the quarter ended September 30, 2022.
For the quarter ended September 30, 2023, the net $234,000 fair value loss adjustment was separately presented as a $811,000 loss, $571,000, net of tax, recognized on the consolidated statements of income, and a $576,000 gain, $406,000, net of tax, associated with the instrument-specific credit risk recognized in other comprehensive income. For the quarter ended September 30, 2022, the net $225,000 fair value gain adjustment was separately presented as a $600,000 loss, $423,000, net of tax, recognized on the consolidated statements of income, and a $825,000 gain, $581,000, 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.
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, 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.
GAAP This 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 wheneverAdditionally, it is applicable to other accounting pronouncements requirerequiring or permitpermitting fair value measurements.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Levellevels: Level 1, Level 2, and Level 3).3. 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 assumptions regarding the pricing of an asset or liability by a market participant, (includingincluding assumptions about risk).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, 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 | | $ | 205,556 | | | $ | 205,556 | | | $ | — | | | $ | 205,556 | | | $ | — | |
Marketable equity securities | | 3,358 | | | 3,358 | | | 3,358 | | | | | |
Loans, net | | 927,105 | | | 872,532 | | | — | | | — | | | 872,532 | |
Financial Liabilities: | | | | | | | | | | |
Total deposits | | 1,111,132 | | | 1,110,363 | | | 1,041,522 | | | — | | | 68,841 | |
Junior subordinated debt | | 11,017 | | | 11,017 | | | — | | | — | | | 11,017 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | December 31, 2022 | | September 30, 2023 |
(In thousands) | (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 | (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: | Financial Assets: | | | | | | | | | | | Financial Assets: | | | | | | | | | | |
| Investment securities | Investment securities | | $ | 207,545 | | | $ | 207,545 | | | $ | — | | | $ | 207,545 | | | $ | — | | Investment securities | | $ | 184,641 | | | $ | 184,641 | | | $ | — | | | $ | 184,641 | | | $ | — | |
Marketable equity securities | Marketable equity securities | | 3,315 | | | 3,315 | | | 3,315 | | | — | | | — | | Marketable equity securities | | 3,216 | | | 3,216 | | | 3,216 | | | — | | | — | |
Loans, net | Loans, net | | 969,996 | | | 906,050 | | | — | | | — | | | 906,050 | | Loans, net | | 957,222 | | | 900,462 | | | — | | | — | | | 900,462 | |
Financial Liabilities: | Financial Liabilities: | | | | | | | | | | | Financial Liabilities: | | | | | | | | | | |
Time deposits | | 1,165,484 | | | 1,164,492 | | | 1,107,436 | | | — | | | 57,056 | | |
Deposits | | Deposits | | 987,631 | | | 985,322 | | | 915,804 | | | — | | | 69,518 | |
Junior subordinated debt | Junior subordinated debt | | 10,883 | | | 10,883 | | | — | | | — | | | 10,883 | | Junior subordinated debt | | 10,966 | | | 10,966 | | | — | | | — | | | 10,966 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
(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 | | $ | 207,545 | | | $ | 207,545 | | | $ | — | | | $ | 207,545 | | | $ | — | |
Marketable equity securities | | 3,315 | | | 3,315 | | | 3,315 | | | — | | | — | |
Loans, net | | 969,996 | | | 906,050 | | | — | | | — | | | 906,050 | |
Financial Liabilities: | | | | | | | | | | |
Deposits | | 1,165,484 | | | 1,164,492 | | | 1,107,436 | | | — | | | 57,056 | |
Junior subordinated debt | | 10,883 | | | 10,883 | | | — | | | — | | | 10,883 | |
| | | | | | | | | | |
| | | | | | | | | | |
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 those on investment securities 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 the 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 between fair value measurementsmeasurement classifications during the quarternine months ended March 31,September 30, 2023 or the quarternine months ended December 31,September 30, 2022.
The following methods and assumptions were used in estimating the fair values of financial instruments measured at fair value on a recurring and non-recurring basis:
Investment Securities - – Available for saleAvailable-for-sale and marketable equity securitiessecurity values are valued based uponon 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 pricing approachpricing-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 comprehensiveother-accumulated-comprehensive-income as an unrecognized gain or loss as the securities are available for sale.on 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 or observed market prices. Collateral dependentCollateral-dependent loans are measured for impairment using the fair value of the collateral. Changes are recorded directly as an adjustment to current earnings. There were no impairedindividually-evaluated loans measured at fair value as of March 31,September 30, 2023 or December 31, 2022.
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 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. ThereNo OREO properties were no OREO measured at fair value as of March 31,September 30, 2023 or December 31, 2022.
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 which 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 these inputs, and credit concerns in the capital markets, and inactivity in the trust preferred markets, that have limitedlimit the observability of the market spreads, requirerequiring the junior subordinated debt to be classified asat a Level 3 fair value.
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 March 31,September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2023 | |
(In thousands) | (In thousands) | | March 31, 2023 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | (In thousands) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
Assets: | Assets: | | | | | | | | | | Assets: | | | | | | | |
AFS Securities (1): | | | | | | | | | | |
AFS Securities: | | AFS Securities: | | | | | | | |
U.S. Government agencies | U.S. Government agencies | | $ | 7,433 | | | $ | — | | | $ | 7,433 | | | $ | — | | | U.S. Government agencies | | $ | — | | | $ | 6,396 | | | $ | — | | |
U.S. Government collateralized mortgage obligations | U.S. Government collateralized mortgage obligations | | 95,803 | | | — | | | 95,803 | | | — | | | U.S. Government collateralized mortgage obligations | | — | | | 86,205 | | | — | | |
| Municipal bonds | Municipal bonds | | 41,477 | | | — | | | 41,477 | | | — | | | Municipal bonds | | — | | | 40,027 | | | — | | |
U.S. Treasury securities | U.S. Treasury securities | | 29,424 | | | 29,424 | | | | U.S. Treasury securities | | — | | | 19,757 | | | — | | |
Corporate bond | Corporate bond | | 31,419 | | | — | | | 31,419 | | | — | | | Corporate bond | | — | | | 32,256 | | | — | | |
Total AFS securities | Total AFS securities | | 205,556 | | | — | | | 205,556 | | | — | | | Total AFS securities | | — | | | 184,641 | | | — | | |
Marketable equity securities (1) | | 3,358 | | | 3,358 | | | — | | | — | | | |
| Marketable equity securities | | Marketable equity securities | | 3,216 | | | — | | | — | | |
Total | Total | | $ | 208,914 | | | $ | 3,358 | | | $ | 205,556 | | | $ | — | | | Total | | $ | 3,216 | | | $ | 184,641 | | | $ | — | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | |
Junior subordinated debt (1) | | $ | 11,017 | | | — | | | — | | | $ | 11,017 | |
Total | | $ | 11,017 | | | — | | | — | | | $ | 11,017 | |
(1)Recurring
There were no non-recurring fair value adjustments at March 31, 2023 or December 31, 2022. | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | |
Junior subordinated debt | | — | | | — | | | $ | 10,966 | |
Total | | — | | | — | | | $ | 10,966 | |
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, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | December 31, 2022 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | |
AFS Securities (1): | | | | | | | | |
U.S. Government agencies | | $ | 8,231 | | | $ | — | | | $ | 8,231 | | | $ | — | |
U.S. Government collateralized mortgage obligations | | 97,218 | | | — | | | 97,218 | | | |
| | | | | | | | |
Municipal bonds | | 40,170 | | | — | | | 40,170 | | | |
Treasury securities | | 29,224 | | | | | 29,224 | | | |
Corporate bonds | | 32,702 | | | — | | | 32,702 | | | — | |
Total AFS securities | | 207,545 | | | — | | | 207,545 | | | — | |
Marketable equity securities (1) | | 3,315 | | | 3,315 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total | | $ | 210,860 | | | $ | 3,315 | | | $ | 207,545 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | |
Junior subordinated debt (1) | | $ | 10,883 | | | $ | — | | | $ | — | | | $ | 10,883 | |
Total | | $ | 10,883 | | | $ | — | | | $ | — | | | $ | 10,883 | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
(In thousands) | | 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 | | $ | — | | | $ | 8,231 | | | $ | — | |
U.S. Government collateralized mortgage obligations | | — | | | 97,218 | | | — | |
| | | | | | |
Municipal bonds | | — | | | 40,170 | | | — | |
Treasury securities | | — | | | 29,224 | | | — | |
Corporate bonds | | — | | | 32,702 | | | — | |
Total AFS securities | | — | | | 207,545 | | | — | |
Marketable equity securities | | 3,315 | | | — | | | — | |
Total | | $ | 3,315 | | | $ | 207,545 | | | $ | — | |
(1)
| | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | |
Junior subordinated debt | | $ | — | | | $ | — | | | $ | 10,883 | |
Total | | $ | — | | | $ | — | | | $ | 10,883 | |
Recurring
There were no non-recurring fair value adjustments at September 30, 2023 or December 31, 2022.
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 March 31,September 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2023 | | December 31, 2022 |
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 | | 6.22% | | Junior Subordinated Debt | | Discounted cash flow | | Market credit risk adjusted spreads | | 6.63% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2023 | | December 31, 2022 |
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 | | 7.23% | | Junior Subordinated Debt | | Discounted cash flow | | Market credit risk adjusted spreads | | 6.63% |
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. Generally, an increase in the credit risk 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 increase in discount rate between the periods ended March 31,September 30, 2023 and December 31, 2022, is primarily due to increases in rates for similar debt instruments.
The following table provides a reconciliation of assets and liabilities at fair value using Level 3 significant, unobservable inputs (Level 3) on a recurring basis:
| | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended |
(In thousands) | | | | | March 31, 2023 | | March 31, 2022 |
Junior Subordinated Debt: | | | | | | | |
Beginning balance | | | | | $ | 10,883 | | | $ | 11,189 | |
Gross (gain) loss included in earnings | | | | | (333) | | | 999 | |
Gross (gain) loss related to changes in instrument specific credit risk | | | | | 440 | | | (1,302) | |
Change in accrued interest | | | | | 27 | | | 1 | |
Ending balance | | | | | $ | 11,017 | | | $ | 10,887 | |
The amount of total (gain) loss for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date | | | | | $ | (333) | | | $ | 999 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In thousands) | | September 30, 2023 | | September 30, 2022 | | September 30, 2023 | | September 30, 2022 |
Junior Subordinated Debt: | | | | | | | | |
Beginning balance | | $ | 10,719 | | | $ | 10,489 | | | $ | 10,883 | | | $ | 11,189 | |
Gross loss included in earnings | | 811 | | | 600 | | | 553 | | | 2,469 | |
Gross gain related to changes in instrument specific credit risk | | (576) | | | (825) | | | (523) | | | (3,419) | |
Change in accrued interest | | 12 | | | $ | 41 | | | 53 | | | 66 | |
Ending balance | | $ | 10,966 | | | $ | 10,305 | | | $ | 10,966 | | | $ | 10,305 | |
The amount of total loss for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date | | $ | 811 | | | $ | 600 | | | $ | 553 | | | $ | 2,469 | |
14.Goodwill and Intangible Assets
At March 31,September 30, 2023, the Company hadheld goodwill in the amount of $4.5 million in connection with various business combinations and purchases. This amount was unchanged from the balance of $4.5 million at December 31, 2022. While goodwill is not amortized, theThe 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 as of December 31, 2022, with no materialtriggering events occurring through the period ended March 31,September 30, 2023.
15.Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income included in shareholders’ equity are as follows:
| | | March 31, 2023 | | December 31, 2022 | | September 30, 2023 | | December 31, 2022 |
(In thousands) | (In thousands) | | Net unrealized (loss) on available for sale securities
| | Unfunded status of the supplemental retirement plans
| | Net unrealized (loss) gain on junior subordinated debentures
| | Net unrealized (loss) gain on available for sale securities
| | Unfunded status of the supplemental retirement plans
| | Net unrealized gain (loss) on junior subordinated debentures
| (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 | Beginning balance | | $ | (19,066) | | | $ | (194) | | | $ | 1,765 | | | $ | (236) | | | $ | (627) | | | $ | (311) | | Beginning balance | | $ | (19,066) | | | $ | (194) | | | $ | 1,765 | | | $ | (236) | | | $ | (627) | | | $ | (311) | |
Current period comprehensive income (loss), net of tax | Current period comprehensive income (loss), net of tax | | 933 | | | 16 | | | (310) | | | (18,830) | | | 433 | | | 2,076 | | Current period comprehensive income (loss), net of tax | | (2,070) | | | 44 | | | 371 | | | (18,830) | | | 433 | | | 2,076 | |
Ending balance | Ending balance | | $ | (18,133) | | | $ | (178) | | | $ | 1,455 | | | $ | (19,066) | | | $ | (194) | | | $ | 1,765 | | Ending balance | | $ | (21,136) | | | $ | (150) | | | $ | 2,136 | | | $ | (19,066) | | | $ | (194) | | | $ | 1,765 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | | | | | | $ | (16,856) | | | | | | | $ | (17,495) | | Accumulated other comprehensive loss | | | | | | $ | (19,150) | | | | | | | $ | (17,495) | |
16.Investment in York Monterey Properties
As of March 31,September 30, 2023 and December 31, 2022, the Bank’s investment in York Monterey Properties, Inc., totaled $5.2$5.1 million. York Monterey Properties, Inc., is included within the consolidated financial statements of the Company, with $4.6 million of the total investment recognized within the balance of other real estate ownedother-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 risk which arise in the normal course of business. These instruments, which may contain elements of credit risk, interest rate risk, and liquidity risk, and include commitments to extend credit and standby letters of credit. The credit riskrisks associated with these instruments isare essentially the same as thatthose involved in extending credit to customers and isare represented by the contractual amount indicated in the table below:
| (In thousands) | (In thousands) | | March 31, 2023 | | December 31, 2022 | (In thousands) | | September 30, 2023 | | December 31, 2022 |
Commitments to extend credit | Commitments to extend credit | | $ | 214,725 | | | $ | 190,183 | | Commitments to extend credit | | $ | 193,269 | | | $ | 190,183 | |
Standby letters of credit | Standby letters of credit | | $ | 1,570 | | | $ | 1,570 | | Standby letters of credit | | $ | 3,081 | | | $ | 1,570 | |
Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any conditionconditions established in the contract. Substantially all of thesecontract have not been violated. These commitments are at floating interest ratesfloating-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 if deemed necessary, 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. ManyAs many of the commitments are expected to expire without being drawn upon, and, as a result, the total commitment amounts do not necessarily represent 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 terms from less than one month to approximately 3three years. At March 31, 2023, the maximum potential amount of future undiscounted payments the Company could be required to make under outstanding standby letters of credit totaled $1,570,000.
In the ordinary course of business, the Company becomesmay 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'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.projected. Such risks and uncertainties include, but are not limited to, the following factors: (i) the impact of recent bank failures and other adverse developments to financial institutions and the reaction by customers and investors in the capital markets regarding the stability and ability of banks to meet ongoing liquidity developments resulting in volatility and devaluation in the securities markets, (ii) our ability to attract and retain deposits and other sources of funding and liquidity; (iii) government policies that could lead to a tightening of credit and a requirement that the Company raise additional capital; (iv) adverse
•Adverse developments with respect to U.S. or global economic conditions and other uncertainties, including the impact of supply chain disruptions, global conflicts, inflationary pressures, labor shortages, and labor shortages; (v) severe weatherglobal conflict and unrest;
•Changes in general economic and financial market conditions either nationally or natural disasters, such as wildfires, earthquakes, drought, or flood; (vi) competitive pressures inlocally;
•Fiscal policies of the banking industry and changes inU.S. government including interest rate policies of the regulatory environment; (vii) exposure to changes inBoard of Governors of the interest-rate environmentFederal Reserve System and the resulting impact on the Company’s interest rateinterest-rate sensitive assets and liabilities; (viii) 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 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; (ix) creditoperational and/or security systems or infrastructure;
•The failure to maintain effective controls over our financial reporting;
•The quality deterioration that could adversely affectand quantity of our deposits and our ability to collect loansattract and cause an increaseretain deposits and other sources of funding and liquidity;
•Adverse developments in the provision for credit losses; (x) 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 risks; (xi) potential impairment
•Changes in the accounting policies or procedures; and
•The continuing adverse impact on the U.S. economy, including the markets in which we operate due to the lingering effects of goodwill and other intangible assets, and (xii) technology implementation problems and information security breaches. Therefore, the COVID-19 global pandemic.
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, 2022.
The Company
United Security Bancshares, a California corporation, is a bank holding company registered under the BHCABank Holding Company Act (BHCA) with corporate headquarters located in Fresno, California. The principal business of United Security Bancshares is to serve as the holding company for its wholly-owned subsidiary, United Security Bank. References to the “Bank” refer to United Security Bank together with its wholly-owned subsidiary, York Monterey Properties, Inc. References to the “Company” refer to United Security Bancshares together with its subsidiaries on a consolidated basis. References to the “Holding Company” refer to United Security Bancshares, the parent company, on a stand-alone basis. The Bank currently has twelvemaintains 12 banking branches, which provide banking 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 ITM (Intelligent Teller Machines)interactive teller machines (ITMs) within its geographic footprint.
Executive Summary
During 2023, the Company is workinghas worked closely with long-term, core customers to provide deposit and lending solutions that meet their business and individual needs. The Company ishas also focused on maintaining adequate liquidity, managing credit risk, and responsibly managing growth inon the balance sheet.
2023 Highlights:
▪Net incomeinterest margin increased to $6.14.05% for the quarter ended September 30, 2023, compared to 3.95% for the quarter ended September 30, 2022.
▪Annualized average cost of deposits was 0.71% for the quarter ended September 30, 2023, compared to 0.22% for the quarter ended September 30, 2022.
▪Net income decreased to $3.9 million for the quarter ended March 31,September 30, 2023 compared to the $2.4$4.5 million reported for the quarter ended March 31,September 30, 2022.
▪Loan interest income increased $3.9$2.2 million and investment securities income increased $711,000$169,000 as a result of growth in loan and investment securities portfolio balances and increases in interest rates, when compared to the firstsecond quarter of 2022.
▪A loss of $811,000 was recorded on the fair value of junior subordinated debt (TRUPS) during the quarter ended September 30, 2023, compared to a loss of $600,000 recorded during the third quarter of 2022, and a loss of $75,000 during the quarter ended June 30, 2023.
▪The Company recorded no provision for credit losses for the quarter ended September 30, 2023, compared to $607,000 for the quarter ended September 30, 2022.
▪Net interest income before the provision for credit losses decreased 6.4% to $11.9 million for the quarter ended September 30, 2023, compared to $12.7 million for the quarter ended September 30, 2022.
▪Return on average assets (ROAA) was 1.21% for the quarter ended September 30, 2023, compared to 1.28% for the quarter ended September 30, 2022.
▪Return on average equity (ROAE) was 13.06% for the quarter ended September 30, 2023, compared to 15.61% for the quarter ended September 30, 2022.
▪The Company had available secured lines of credit of $434.7$475.8 million, unsecured lines of credit of $100.0$120.0 million, unpledged investment securities of $138.7$121.5 million, and cash and cash equivalents of $45.2$35.3 million as of March 31,September 30, 2023. Total borrowings as of September 30, 2023 were $142.0 million.
▪Total assets decreased 2.9%2.0% to $1.26$1.27 billion, compared to $1.30 billion at December 31, 2022.
▪Total loans, net of unearned fees, decreased 3.8%0.7% to $942.7$972.9 million, compared to $980.2 million at December 31, 2022.
▪Total investments decreased 0.9%10.9%, or $1.9$23.0 million, to $208.9$187.9 million, compared to $210.9 million at December 31, 2022.
▪Total deposits decreased 4.7%15.3% to $1.11 billion,$987.6 million, compared to $1.17 billion at December 31, 2022.
▪Net charge-offs totaled $467,000, compared to net charge-offs of $451,000 for the quarter ended September 30, 2022.
▪The allowance for credit losses as a percentage of gross loans increased to 1.65%1.61%, compared to 1.04% at December 31, 2022. The increase is primarily the result of an accounting adjustment of $6.6 million related to the adoption of a new accounting standard referred to as the Current Expected Credit Losscurrent expected credit loss methodology, or “CECL.”
▪Net interest income before the provision for credit losses increased 37.2% to $12.9 million for the quarter ended March 31, 2023, compared to $9.4 million for the quarter ended March 31, 2022.
▪The Company recorded a reversal of provision for credit losses of $493,000 for the quarter ended March 31, 2023, compared to a provision for credit losses of $5,000 for the quarter ended March 31, 2022.accounting standard was adopted on January 1, 2023.
▪Book value per share decreasedincreased to $6.61,$6.71, compared to $6.59 at December 31, 2022.
▪Net interest margin increased to 4.45% for the quarter ended March 31, 2023, compared to 3.10% for the quarter ended March 31, 2022.
▪Annualized average cost of deposits was 0.48% for the quarter ended March 31, 2023, compared to 0.17% for the quarter ended March 31, 2022.
▪Net charge-offs totaled $434,000, compared to net charge-offs of $61,000 for the quarter ended March 31, 2022.
▪Capital position remains well-capitalized with a 10.89%11.36% Tier 1 Leverage Ratio compared to 10.10% as of December 31, 2022.
▪Return on average assets (“ROAA”) was 1.95%, compared to 0.74% for the quarter ended March 31, 2022.
▪Return on average equity (“ROAE”) was 22.05%, compared to 8.33% for the quarter ended March 31, 2022.
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. Business 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 upon the Bank. In addition,Due to the Central Valley remains largely dependentValley’s economic dependence on agriculture. Aagriculture, a downturn in agriculture and agricultural-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. 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. NotwithstandingDespite the unusually wet winter experienced in 2022/2023, periodically the state of California experienceshas experienced severe droughts and water allocations are significantly reducedwhich have resulted in water-allocation reductions for farmers in the Central Valley. Due to these uncertain water issues, the impact on businesses and consumers located in the Company’s market areas is not possible to predict or quantify. In response to drought conditions, the California state legislature passed the Sustainable Groundwater Management Act in 2014 with the purpose to ensuregoal of ensuring better local
and regional management of groundwater use and sustainable groundwater management in California by 2042. The local districts began to develop, prepare,Development, preparation, and begin implementation of the Groundwater Sustainability PlansPlan began in 2020. The effecteffects of such plansthis plan have yet to Central Valley agriculture, if any, is still unknown.be determined.
The Company’s earnings are impacted by the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank (“FRB”)(FRB) has and is likely to continue to have, an importanta significant impact on the operating results of depository institutions through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The FRB affects the levels of bank loans, investmentsinvestments. and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks, and its influence over reserve requirements to which member banks aremay be subject. The Federal Open Market Committee (“FOMC”)(FOMC) continued raising interest rates during 2023, with increases to the overnight benchmark rate of 25bps25 basis points in both February, 2023March, May, and MarchJuly 2023. However, it is unknown what effects increases or decreases in the inflation rate and the recent banking turmoil, in conjunction with continued international instability, will have on FRB monetary policies.
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.
Results of Operations
On a year-to-date basis, the Company reported net income of $6.1$14.4 million, or $0.36$0.84 per share ($0.360.84 diluted), for the quarternine months ended March 31,September 30, 2023, compared to $2.4$10.3 million, or $0.14$0.61 per share ($0.140.61 diluted), for the same period in 2022. The Company’s return on average assets was 1.95%1.52% for the quarternine months ended March 31,September 30, 2023, compared to 0.74%1.03% for the quarternine months ended
March 31, September 30, 2022. The Company’s return on average equity was 22.05%16.64% for the quarternine months ended March 31,September 30, 2023, compared to 8.33%11.99% for the quarternine months ended March 31,September 30, 2022. The increase in the return on average assets is primarily attributable to growth in interest income as a result of increased interest rates and the Company’s deployment of cash into its loan and investment portfolios during 2021 and 2022.decreases in average assets. The increase in the return on average equity is due to decreases in equity resulting from unrealized losses in the investment portfolio, dividends declared, and an accounting adjustment due to the transition to CECL, offset by an increase in income during the period.
Net Interest Income
The following tables present 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 March 31,September 30, 2023 and 2022.
Table 1. Distribution of Average Assets, Liabilities and Shareholders’ Equity:
Interest rates and Interest DifferentialsEquity:
Three Months Ended March 31,September 30, 2023 and 2022
| | | | 2023 | | 2022 | | | September 30, 2023 | | September 30, 2022 |
(Dollars in thousands) | (Dollars in thousands) | | Average Balance | | Interest | | Yield/Rate (2) | | Average Balance | | Interest | | Yield/Rate (2) | (Dollars in thousands) | | Average Balance | | Interest | | Yield/Rate (2) | | Average Balance | | Interest | | Yield/Rate (2) |
Assets: | Assets: | | | | | | | | | | | | | Assets: | | | | | | | | | | | | |
Interest-earning assets: | Interest-earning assets: | | | | | | | | | | | | | Interest-earning assets: | | | | | | | | | | | | |
Loans (1) | Loans (1) | | $ | 960,648 | | | $ | 13,000 | | | 5.49 | % | | $ | 870,851 | | | $ | 9,119 | | | 4.25 | % | Loans (1) | | $ | 958,861 | | | $ | 13,763 | | | 5.69 | % | | $ | 952,518 | | | $ | 11,514 | | | 4.80 | % |
Investment securities (3) | Investment securities (3) | | 211,523 | | | 1,501 | | | 2.88 | % | | 187,761 | | | 790 | | | 1.71 | % | Investment securities (3) | | 203,516 | | | 1,491 | | | 2.91 | % | | 215,416 | | | 1,322 | | | 2.43 | % |
Interest-bearing deposits in FRB | Interest-bearing deposits in FRB | | 5,493 | | | 58 | | | 4.28 | % | | 177,243 | | | 82 | | | 0.19 | % | Interest-bearing deposits in FRB | | 5,876 | | | 74 | | | 5.00 | % | | 111,704 | | | 683 | | | 2.43 | % |
Total interest-earning assets | Total interest-earning assets | | 1,177,664 | | | $ | 14,559 | | | 5.01 | % | | 1,235,855 | | | $ | 9,991 | | | 3.28 | % | Total interest-earning assets | | 1,168,253 | | | $ | 15,328 | | | 5.21 | % | | 1,279,638 | | | $ | 13,519 | | | 4.19 | % |
Allowance for credit losses | Allowance for credit losses | | (16,323) | | | | | | | (9,514) | | | | | | Allowance for credit losses | | (15,817) | | | | | | | (9,902) | | | | | |
Noninterest-earning assets: | Noninterest-earning assets: | | | | | | | | | | | Noninterest-earning assets: | | | | | | | | | | |
Cash and due from banks | Cash and due from banks | | 36,008 | | | | | | | 37,288 | | | | | | Cash and due from banks | | 33,172 | | | | | | | 37,547 | | | | | |
Premises and equipment, net | Premises and equipment, net | | 9,685 | | | | | | | 8,930 | | | | | | Premises and equipment, net | | 9,318 | | | | | | | 9,401 | | | | | |
Accrued interest receivable | Accrued interest receivable | | 7,696 | | | | | | | 7,077 | | | | | | Accrued interest receivable | | 7,046 | | | | | | | 7,853 | | | | | |
Other real estate owned | Other real estate owned | | 4,582 | | | | | | | 4,582 | | | | | | Other real estate owned | | 4,582 | | | | | | | 4,582 | | | | | |
Other assets | Other assets | | 61,169 | | | | | | | 49,377 | | | | | | Other assets | | 60,090 | | | | | | | 54,038 | | | | | |
Total average assets | Total average assets | | $ | 1,280,481 | | | | | | | $ | 1,333,595 | | | | | | Total average assets | | $ | 1,266,644 | | | | | | | $ | 1,383,157 | | | | | |
Liabilities and Shareholders’ Equity: | Liabilities and Shareholders’ Equity: | | | | | | | | | | | | | Liabilities and Shareholders’ Equity: | | | | | | | | | | | | |
Interest-bearing liabilities: | Interest-bearing liabilities: | | | | | | | | | | | | | Interest-bearing liabilities: | | | | | | | | | | | | |
NOW accounts | NOW accounts | | $ | 142,222 | | | $ | 40 | | | 0.11 | % | | $ | 150,120 | | | $ | 47 | | | 0.13 | % | NOW accounts | | $ | 134,143 | | | $ | 101 | | | 0.30 | % | | $ | 125,133 | | | $ | 35 | | | 0.11 | % |
Money market accounts | Money market accounts | | 363,717 | | | 1,071 | | | 1.19 | % | | 393,563 | | | 362 | | | 0.37 | % | Money market accounts | | 254,964 | | | 854 | | | 1.33 | % | | 395,665 | | | 511 | | | 0.51 | % |
Savings accounts | Savings accounts | | 124,840 | | | 33 | | | 0.11 | % | | 116,632 | | | 31 | | | 0.11 | % | Savings accounts | | 114,513 | | | 225 | | | 0.78 | % | | 124,962 | | | 35 | | | 0.11 | % |
Time deposits | Time deposits | | 58,927 | | | 199 | | | 1.37 | % | | 66,817 | | | 68 | | | 0.41 | % | Time deposits | | 95,117 | | | 661 | | | 2.76 | % | | 75,023 | | | 98 | | | 0.52 | % |
Other borrowings | Other borrowings | | 7,492 | | | 90 | | | 4.87 | % | | — | | | — | | | 0.00 | % | Other borrowings | | 99,854 | | | 1,356 | | | 5.36 | % | | — | | | — | | | 0.00 | % |
Junior subordinated debentures | Junior subordinated debentures | | 10,801 | | | 181 | | | 6.80 | % | | 11,156 | | | 45 | | | 1.64 | % | Junior subordinated debentures | | 10,615 | | | 209 | | | 7.81 | % | | 10,459 | | | 110 | | | 4.17 | % |
Total interest-bearing liabilities | Total interest-bearing liabilities | | 707,999 | | | $ | 1,614 | | | 0.92 | % | | 738,288 | | | $ | 553 | | | 0.30 | % | Total interest-bearing liabilities | | 709,206 | | | $ | 3,406 | | | 1.91 | % | | 731,242 | | | $ | 789 | | | 0.43 | % |
Noninterest-bearing liabilities: | Noninterest-bearing liabilities: | | | | | | | | | | | | | Noninterest-bearing liabilities: | | | | | | | | | | | | |
Noninterest-bearing checking | Noninterest-bearing checking | | 445,502 | | | | | | | 466,062 | | | | | | Noninterest-bearing checking | | 423,180 | | | | | | | 528,033 | | | | | |
Accrued interest payable | Accrued interest payable | | 256 | | | | | | | 113 | | | | | | Accrued interest payable | | 239 | | | | | | | 139 | | | | | |
Other liabilities | Other liabilities | | 13,758 | | | | | | | 9,857 | | | | | | Other liabilities | | 16,618 | | | | | | | 9,915 | | | | | |
Total liabilities | Total liabilities | | 1,167,515 | | | | | | | 1,214,320 | | | | | | Total liabilities | | 1,149,243 | | | | | | | 1,269,329 | | | | | |
Total shareholders’ equity | Total shareholders’ equity | | 112,966 | | | | | | | 119,275 | | | | | | Total shareholders’ equity | | 117,401 | | | | | | | 113,828 | | | | | |
Total average liabilities and shareholders’ equity | Total average liabilities and shareholders’ equity | | $ | 1,280,481 | | | | | | | $ | 1,333,595 | | | | | | Total average liabilities and shareholders’ equity | | $ | 1,266,644 | | | | | | | $ | 1,383,157 | | | | | |
Interest income as a percentage of average earning assets | Interest income as a percentage of average earning assets | | | | | | 5.01 | % | | | | | | 3.28 | % | Interest income as a percentage of average earning assets | | | | | | 5.21 | % | | | | | | 4.19 | % |
Interest expense as a percentage of average earning assets | Interest expense as a percentage of average earning assets | | | | | | 0.56 | % | | | | | | 0.18 | % | Interest expense as a percentage of average earning assets | | | | | | 1.16 | % | | | | | | 0.24 | % |
Net interest margin | Net interest margin | | | | | | 4.45 | % | | | | | | 3.10 | % | Net interest margin | | | | | | 4.05 | % | | | | | | 3.95 | % |
(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 costs includes loan fee income of approximately $26,000$14,000 for the three months ended March 31,September 30, 2023 and loan fee income of $300,000$51,000 for the three months ended March 31,September 30, 2022.
(2)Interest income/expense is divided by actual number of days in the period times 365 days in the yield calculation.
(3)Yields on investment securities, aside from marketable equity 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.
Distribution of Average Assets, Liabilities and Shareholders’ Equity:
Nine Months Ended September 30, 2023 and 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2023 | | September 30, 2022 |
(Dollars in thousands) | | Average Balance | | Interest | | Yield/Rate (2) | | Average Balance | | Interest | | Yield/Rate (2) |
Assets: | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | |
Loans (1) | | $ | 958,038 | | | $ | 40,292 | | | 5.62 | % | | $ | 910,221 | | | $ | 30,363 | | | 4.46 | % |
Investment securities (3) | | 207,530 | | | 4,492 | | | 2.89 | % | | 198,658 | | | 3,117 | | | 2.10 | % |
Interest-bearing deposits in FRB | | 5,016 | | | 187 | | | 4.98 | % | | 141,708 | | | 1,023 | | | 0.97 | % |
Total interest-earning assets | | 1,170,584 | | | $ | 44,971 | | | 5.14 | % | | 1,250,587 | | | $ | 34,503 | | | 3.69 | % |
Allowance for credit losses | | (15,986) | | | | | | | (9,577) | | | | | |
Noninterest-earning assets: | | | | | | | | | | | | |
Cash and due from banks | | 35,111 | | | | | | | 36,581 | | | | | |
Premises and equipment, net | | 9,466 | | | | | | | 9,134 | | | | | |
Accrued interest receivable | | 7,364 | | | | | | | 7,513 | | | | | |
Other real estate owned | | 4,582 | | | | | | | 4,582 | | | | | |
Other assets | | 59,650 | | | | | | | 52,859 | | | | | |
Total average assets | | $ | 1,270,771 | | | | | | | $ | 1,351,679 | | | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | |
NOW accounts | | $ | 138,381 | | | $ | 219 | | | 0.21 | % | | $ | 135,155 | | | $ | 119 | | | 0.12 | % |
Money market accounts | | 332,361 | | | 3,450 | | | 1.39 | % | | 400,154 | | | 1,255 | | | 0.42 | % |
Savings accounts | | 118,468 | | | 98 | | | 0.11 | % | | 122,183 | | | 101 | | | 0.11 | % |
Time deposits | | 74,854 | | | 1,361 | | | 2.43 | % | | 70,839 | | | 227 | | | 0.43 | % |
Other borrowings | | 47,088 | | | 1,888 | | | 5.36 | % | | — | | | — | | | — | % |
Junior subordinated debentures | | 10,775 | | | 586 | | | 7.27 | % | | 10,824 | | | 224 | | | 2.77 | % |
Total interest-bearing liabilities | | 721,927 | | | $ | 7,602 | | | 1.41 | % | | 739,155 | | | $ | 1,926 | | | 0.35 | % |
Noninterest-bearing liabilities: | | | | | | | | | | | | |
Noninterest-bearing checking | | 419,808 | | | | | | | 486,983 | | | | | |
Accrued interest payable | | 282 | | | | | | | 123 | | | | | |
Other liabilities | | 12,748 | | | | | | | 9,745 | | | | | |
Total liabilities | | 1,154,765 | | | | | | | 1,236,006 | | | | | |
Total shareholders’ equity | | 116,006 | | | | | | | 115,673 | | | | | |
Total average liabilities and shareholders’ equity | | $ | 1,270,771 | | | | | | | $ | 1,351,679 | | | | | |
Interest income as a percentage of average earning assets | | | | | | 5.14 | % | | | | | | 3.69 | % |
Interest expense as a percentage of average earning assets | | | | | | 0.87 | % | | | | | | 0.21 | % |
Net interest margin | | | | | | 4.27 | % | | | | | | 3.48 | % |
(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 costs includes loan fee income of approximately $182,000 for the nine months ended September 30, 2023 and loan fee income of $416,000 for the nine months ended September 30, 2022.
(2)Interest income/expense is divided by actual number of days in the period times 365 days in the yield calculation.
(3)Yields on investment securities, aside from marketable equity 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 increased from 3.50%4.75% at March 31,September 30, 2022 to 8.00%8.50% at March 31,September 30, 2023. Future increases or decreases will affect both interest income and expense and the resultant net interest margin.
Both 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 volume change. Both are also affected by changes in yields on interest-earning assets and rates paid on interest-bearing liabilities, referred to as rate 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 | | Three Months Ended |
| | March 31, 2023 compared to March 31, 2022 | | September 30, 2023 compared to September 30, 2022 |
(In thousands) | (In thousands) | | Total | | Rate | | Volume | (In thousands) | | Total | | Rate | | Volume |
Increase (decrease) in interest income: | Increase (decrease) in interest income: | | | | | | | Increase (decrease) in interest income: | | | | | | |
Loans | Loans | | $ | 3,881 | | | $ | 2,869 | | | $ | 1,012 | | Loans | | $ | 2,249 | | | $ | 2,172 | | | $ | 77 | |
Investment securities available for sale | Investment securities available for sale | | 711 | | | 600 | | | 111 | | Investment securities available for sale | | 169 | | | 245 | | | (76) | |
| Interest-bearing deposits in FRB | Interest-bearing deposits in FRB | | (24) | | | 1,863 | | | (1,887) | | Interest-bearing deposits in FRB | | (609) | | | 1,047 | | | (1,656) | |
Total interest income | Total interest income | | 4,568 | | | 5,332 | | | (764) | | Total interest income | | 1,809 | | | 3,464 | | | (1,655) | |
Increase (decrease) in interest expense: | Increase (decrease) in interest expense: | | Increase (decrease) in interest expense: | |
Interest-bearing demand accounts | Interest-bearing demand accounts | | 702 | | | 732 | | | (30) | | Interest-bearing demand accounts | | 909 | | | 1,079 | | | (170) | |
Savings and money market accounts | Savings and money market accounts | | 2 | | | — | | | 2 | | Savings and money market accounts | | (3) | | | — | | | (3) | |
Time deposits | Time deposits | | 131 | | | 140 | | | (9) | | Time deposits | | 257 | | | 223 | | | 34 | |
Other borrowings | Other borrowings | | 90 | | | 90 | | | — | | Other borrowings | | 1,356 | | | — | | | 1,356 | |
Subordinated debentures | Subordinated debentures | | 226 | | | 227 | | | (1) | | Subordinated debentures | | 99 | | | 97 | | | 2 | |
Total interest expense | Total interest expense | | 1,151 | | | 1,189 | | | (38) | | Total interest expense | | 2,618 | | | 1,399 | | | 1,219 | |
Increase (decrease) in net interest income | | $ | 3,417 | | | $ | 4,143 | | | $ | (726) | | |
Decrease in net interest income | | Decrease in net interest income | | $ | (809) | | | $ | 2,065 | | | $ | (2,874) | |
For the three months ended March 31,September 30, 2023, total interest income increased $4.6$1.8 million, or 45.7%13.4%, compared to the three months ended March 31,September 30, 2022. In comparing the two periods, average interest earninginterest-earning assets decreased $58.2$111.4 million, with an increase of $89.8 million in loan balances and an increase of $23.8 million in investment securities, partially offset by a decrease of $171.8$105.8 million in balances held at the Federal Reserve Bank.Bank and a decrease of $11.9 million in investment securities, partially offset by an increase of $6.3 million in loan balances. The increase in loan balances is partially attributed primarily to growth in the commercial real estate and residential mortgage portfolio, including the purchase of $26.2 million in residential mortgages, and growth in the commercial and industrial portfolio.portfolios. Investment securities yields increased 11748 basis points and loan yields increased 12489 basis points. The average yield on total interest-earning assets increased 173102 basis points. The increase in yields is a result of the purchases of treasury, corporate, and mortgage-backed securities at higher yields due to market rate increases, increases on loan yields, and increases in yields on overnight deposits related to the increase in the Fed Funds rate.
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, 2023 compared to September 30, 2022 |
(In thousands) | | Total | | Rate | | Volume |
Increase (decrease) in interest income: | | | | | | |
Loans | | $ | 9,929 | | | $ | 8,264 | | | $ | 1,665 | |
Investment securities available for sale | | 1,375 | | | 1,230 | | | 145 | |
Interest-bearing deposits in FRB | | (836) | | | 5,033 | | | (5,869) | |
Total interest income | | 10,468 | | | 14,527 | | | (4,059) | |
Increase (decrease) in interest expense: | | | | | | |
Interest-bearing demand accounts | | 2,295 | | | 2,480 | | | (185) | |
Savings and money market accounts | | (2) | | | — | | | (2) | |
Time deposits | | 1,134 | | | 1,120 | | | 14 | |
Other borrowings | | 1,888 | | | — | | | 1,888 | |
Subordinated debentures | | 362 | | | 363 | | | (1) | |
Total interest expense | | 5,677 | | | 3,963 | | | 1,714 | |
Increase (decrease) in net interest income | | $ | 4,791 | | | $ | 10,564 | | | $ | (5,773) | |
For the nine months ended September 30, 2023, total interest income increased 5.4 million, or 17.3%, compared to the nine months ended September 30, 2022. In comparing the two periods, average interest-earning assets decreased $80.0 million, with a decrease of $136.7 million in balances held at the Federal Reserve Bank, partially offset by an increase of $47.8 million in loan balances and an increase of $8.9 million in investment securities. Investment securities yields increased 79 basis points and loan yields increased 116 basis points. The average yield on total interest-earning assets increased 145 basis points. The increase in yields is a result of increases on loan yields, investment yields, and increases in yields on overnight deposits related to the increase in the Fed Funds rate.
The overall average yield on the loan portfolio increased to 5.49%5.62% for the quarternine months ended March 31,September 30, 2023, as compared to 4.25%4.46% for the quarternine months ended March 31,September 30, 2022. At March 31,September 30, 2023, 35.4%34.4% of the Company’s loan portfolio consisted of floating rate instruments, as compared to 40.7%40.3% of the portfolio at December 31, 2022, with the majority of those tied to the prime rate. Approximately 60.2%63.3%, or $200.8$211.7 million, of the floating ratefloating-rate loans had rate floors at March 31, 2023, making them effectively fixed-rate loans for certain decreases in interest rates.September 30, 2023.
The Company’s net interest margin increased to 4.45%4.27% for the quarternine months ended March 31,September 30, 2023, compared to 3.10%3.48% for the quarternine months ended March 31,September 30, 2022. The net interest margin increased primarily as a result of a shift in the mix to higher earning assets due to the growth in average loan and investment balances and an increase in loan and investment yields.
The Company’s disciplined deposit pricing efforts have helped keep the Company’s cost of funds relatively low. The rates paid on interest-bearing liabilities increased to 0.92%1.41% for the quarternine months ended March 31,September 30, 2023, compared to 0.30%0.35% for the quarternine months ended March 31,September 30, 2022. For the quarternine months ended March 31,September 30, 2023, total interest expense increased approximately $1,061,000,$5.7 million, or 191.9%294.8%, as compared to the quarternine months ended March 31,September 30, 2022. Between those two periods, average interest-bearing liabilities decreased by $30.3$17.2 million due to decreases in NOW and money market accounts and savings accounts, partially offset by increases in time deposits and time deposits.short-term borrowings. While the Company may utilize brokered deposits as an additional source of funding, the Company held no brokered deposits at MarchSeptember 30, 2023 or December 31, 2023.2022.
Table 3. Interest-Earning Assets and LiabilitiesLiabilities:
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 | | YTD Averages |
| | March 31, 2023 | | December 31, 2022 | | March 31, 2022 | | September 30, 2023 | | December 31, 2022 | | September 30, 2022 |
Loans | Loans | | 81.57% | | 74.02% | | 70.48% | Loans | | 81.84% | | 74.02% | | 72.79% |
Investment securities available for sale | Investment securities available for sale | | 17.96% | | 16.16% | | 15.19% | Investment securities available for sale | | 17.73% | | 16.16% | | 15.89% |
Interest-bearing deposits in FRB | Interest-bearing deposits in FRB | | 0.47% | | 9.82% | | 14.33% | Interest-bearing deposits in FRB | | 0.43% | | 9.82% | | 11.32% |
Total interest-earning assets | Total interest-earning assets | | 100.00% | | 100.00% | | 100.00% | Total interest-earning assets | | 100.00% | | 100.00% | | 100.00% |
NOW accounts | NOW accounts | | 20.09% | | 18.49% | | 20.32% | NOW accounts | | 19.17% | | 18.49% | | 18.28% |
Money market accounts | Money market accounts | | 51.37% | | 53.92% | | 53.31% | Money market accounts | | 46.04% | | 53.92% | | 54.14% |
Savings accounts | Savings accounts | | 17.63% | | 16.70% | | 15.80% | Savings accounts | | 16.41% | | 16.70% | | 16.53% |
Time deposits | Time deposits | | 8.32% | | 9.44% | | 9.05% | Time deposits | | 10.37% | | 9.44% | | 9.58% |
Other borrowings | Other borrowings | | 1.06% | | 0.00% | | 0.00% | Other borrowings | | 6.52% | | 0.00% | | 0.00% |
Subordinated debentures | Subordinated debentures | | 1.53% | | 1.45% | | 1.52% | Subordinated debentures | | 1.49% | | 1.45% | | 1.47% |
Total interest-bearing liabilities | Total interest-bearing liabilities | | 100.00% | | 100.00% | | 100.00% | Total interest-bearing liabilities | | 100.00% | | 100.00% | | 100.00% |
Noninterest Income
Table 4. Changes in Noninterest IncomeIncome:
The following tables set forth the amount and percentage changes in the categories presented for the three and nine month periods ended March 31,September 30, 2023 and 2022:
| | | Three Months Ended | | | Three Months Ended | |
(In thousands) | (In thousands) | | March 31, 2023 | | March 31, 2022 | | $ Change | | % Change | (In thousands) | | September 30, 2023 | | September 30, 2022 | | $ Change | | % Change |
Customer service fees | Customer service fees | | $ | 734 | | | $ | 654 | | | $ | 80 | | | 12.2 | % | Customer service fees | | $ | 686 | | | $ | 899 | | | $ | (213) | | | (23.7) | % |
Increase in cash surrender value of bank-owned life insurance | Increase in cash surrender value of bank-owned life insurance | | 132 | | | 139 | | | (7) | | | (5.0) | % | Increase in cash surrender value of bank-owned life insurance | | 102 | | | 89 | | | 13 | | | 14.6 | % |
Gain (loss) on fair value of marketable equity securities | | 43 | | | (182) | | | 225 | | | 123.6 | % | |
Loss on fair value of marketable equity securities | | Loss on fair value of marketable equity securities | | (92) | | | (149) | | | 57 | | | 38.3 | % |
| Gain (loss) on fair value of junior subordinated debentures | | 333 | | | (999) | | | 1,332 | | | 133.3 | % | |
Loss on fair value of junior subordinated debentures | | Loss on fair value of junior subordinated debentures | | (811) | | | (600) | | | (211) | | | (35.2) | % |
| Gain on sale of investment securities | | — | | | 30 | | | (30) | | | 100.0 | % | |
Other | Other | | 206 | | | 152 | | | 54 | | | 35.5 | % | Other | | 229 | | | 153 | | | 76 | | | 49.7 | % |
Total noninterest income | Total noninterest income | | $ | 1,448 | | | $ | (206) | | | $ | 1,654 | | | (802.9) | % | Total noninterest income | | $ | 114 | | | $ | 392 | | | $ | (278) | | | (70.9) | % |
Noninterest income for the quarter ended March 31,September 30, 2023 increased $1,654,000decreased $278,000 to $1,448,000$114,000 compared to the quarter ended March 31,September 30, 2022. Included in the increasedecrease is an increasea reduction in the gainloss on the fair value of marketable equity securities of $225,000.$57,000. Additionally, the change in fair value of junior subordinated debentures caused a $333,000 gain for the quarter ended March 31, 2023, compared to a $999,000$811,000 loss for the quarter ended March 31,September 30, 2023, compared to a $600,000 loss for the quarter ended September 30, 2022, resulting in a difference of $1,332,000.$211,000. The change in the fair value of junior subordinated debentures was caused by fluctuations in the LIBORSOFR yield curve. Customer service fees increased $80,000decreased $213,000 between the two quarters.
quarters primarily due to decreases in account analysis fees and ATM fees. Other noninterest income increased due to increases in FHLB dividends.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | |
(In thousands) | | September 30, 2023 | | September 30, 2022 | | $ Change | | % Change |
Customer service fees | | $ | 2,187 | | | $ | 2,328 | | | $ | (141) | | | (6.1) | % |
Increase in cash surrender value of bank-owned life insurance | | 406 | | | 343 | | | 63 | | | 18.4 | % |
Loss on fair value of marketable equity securities | | (99) | | | (458) | | | 359 | | | 78.4 | % |
Loss on fair value of junior subordinated debentures | | (553) | | | (2,469) | | | 1,916 | | | 77.6 | % |
| | | | | | | | |
Gain on sale of investment securities | | — | | | 30 | | | (30) | | | 100.0 | % |
Other | | 633 | | | 1,015 | | | (382) | | | (37.6) | % |
Total noninterest income | | $ | 2,574 | | | $ | 789 | | | $ | 1,785 | | | 226.2 | % |
Noninterest income for the nine months ended September 30, 2023 increased $1.8 million to $2.6 million compared to the nine months ended September 30, 2022. Included in the increase is a reduction in the loss on the fair value of marketable equity securities of $359,000. Additionally, the change in fair value of junior subordinated debentures caused a $553,000 loss for the quarter ended September 30, 2023, compared to a $2.5 million loss for the quarter ended September 30, 2022, resulting in an increased loss of $1.9 million. The change in the fair value of junior subordinated debentures was caused by fluctuations in the SOFR yield curve. Customer service fees decreased $141,000 between the two quarters due to decreases in account analysis fees, ATM fees, and the closure of the financial services department during the third quarter of 2022. Additionally, other noninterest income for the nine months ended September 30, 2023, included an increase of $151,000 in FHLB stock dividends. Included in other noninterest income for the nine months ended September 30, 2022, was $566,000 in nonrecurring income from an investment in a limited partnership which provides private capital for small to mid-sized businesses used to finance later stage growth, strategic acquisitions, ownership transitions, and recapitalizations, or mezzanine capital.
Noninterest Expense
Table 5. Changes in Noninterest ExpenseExpense:
The following tables set forth the amount and percentage changes in the categories presented for the three and nine month periods ended March 31,September 30, 2023 and 2022:
| | | Three Months Ended | | | Three Months Ended | |
(In thousands) | (In thousands) | | March 31, 2023 | | March 31, 2022 | | $ Change | | % Change | (In thousands) | | September 30, 2023 | | September 30, 2022 | | $ Change | | % Change |
Salaries and employee benefits | Salaries and employee benefits | | $ | 3,260 | | | $ | 3,049 | | | $ | 211 | | | 6.9 | % | Salaries and employee benefits | | $ | 3,376 | | | $ | 2,965 | | | $ | 411 | | | 13.9 | % |
Occupancy expense | Occupancy expense | | 963 | | | 780 | | | 183 | | | 23.5 | % | Occupancy expense | | 984 | | | 923 | | | 61 | | | 6.6 | % |
Data processing | Data processing | | 174 | | | 115 | | | 59 | | | 51.3 | % | Data processing | | 204 | | | 215 | | | (11) | | | (5.1) | % |
Professional fees | Professional fees | | 882 | | | 949 | | | (67) | | | (7.1) | % | Professional fees | | 1,177 | | | 1,089 | | | 88 | | | 8.1 | % |
Regulatory assessments | Regulatory assessments | | 192 | | | 231 | | | (39) | | | (16.9) | % | Regulatory assessments | | 169 | | | 212 | | | (43) | | | (20.3) | % |
Director fees | Director fees | | 109 | | | 118 | | | (9) | | | (7.6) | % | Director fees | | 106 | | | 110 | | | (4) | | | (3.6) | % |
Correspondent bank service charges | Correspondent bank service charges | | 19 | | | 25 | | | (6) | | | (24.0) | % | Correspondent bank service charges | | 20 | | | 23 | | | (3) | | | (13.0) | % |
Net cost on operation of OREO | | 37 | | | (8) | | | 45 | | | (562.5) | % | |
Net cost of operation of OREO | | Net cost of operation of OREO | | 30 | | | 33 | | | (3) | | | (9.1) | % |
Other | Other | | 604 | | | 557 | | | 47 | | | 8.4 | % | Other | | 559 | | | 641 | | | (82) | | | (12.8) | % |
Total expense | Total expense | | $ | 6,240 | | | $ | 5,816 | | | $ | 424 | | | 7.3 | % | Total expense | | $ | 6,625 | | | $ | 6,211 | | | $ | 414 | | | 6.7 | % |
Noninterest expense for the quarter ended March 31,September 30, 2023 increased $424,000$414,000 to $6,240,000,$6.6 million, compared to the quarter ended March 31,September 30, 2022. The increase was primarily attributed to increases in salaries and employeesemployee benefits, occupancy expense, and data processingprofessional fee expenses, partially offset by decreases in professionaldata processing, regulatory assessments, director fees, correspondent bank service charges, and regulatory assessments.net cost of operation of OREO. The increase in salaries and employee benefits was caused by increases in salary andexpense, group insurance expense.expense, and accruals for bonuses.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | |
(In thousands) | | September 30, 2023 | | September 30, 2022 | | $ Change | | % Change |
Salaries and employee benefits | | $ | 9,937 | | | $ | 8,791 | | | $ | 1,146 | | | 13.0 | % |
Occupancy expense | | 2,804 | | | 2,551 | | | 253 | | | 9.9 | % |
Data processing | | 583 | | | 475 | | | 108 | | | 22.7 | % |
Professional fees | | 2,969 | | | 2,957 | | | 12 | | | 0.4 | % |
Regulatory assessments | | 554 | | | 630 | | | (76) | | | (12.1) | % |
Director fees | | 321 | | | 345 | | | (24) | | | (7.0) | % |
Correspondent bank service charges | | 57 | | | 74 | | | (17) | | | (23.0) | % |
Net cost of operation of OREO | | 126 | | | 27 | | | 99 | | | (366.7) | % |
Other | | 1,731 | | | 1,755 | | | (24) | | | (1.4) | % |
Total expense | | $ | 19,082 | | | $ | 17,605 | | | $ | 1,477 | | | 8.4 | % |
Noninterest expense for the nine months ended September 30, 2023 increased $1.5 million to $19.1 million, compared to the nine months ended September 30, 2022. The increase was primarily attributed to increases in salaries and employee benefits, occupancy expense, and data processing expenses, partially offset by decreases in regulatory assessments, director fees, and correspondent bank service charges. The increase in salaries and employee benefits was caused by increases in salary expense, group insurance expense, and bonus accruals. Occupancy expense increased due to interactive teller machine (ITM) installationincreased depreciation expense, utility costs, and increase in fixed asset depreciation expense.building services expenses.
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 become 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 which would have to meet for some or all of thebe met in order 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 March 31,September 30, 2023, 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 quarterthree months ended March 31,September 30, 2023 was 29.16%28.78% compared to 28.38%29.14% for the quarterthree months ended March 31,September 30, 2022. The Company’s effective tax rate for the nine months ended September 30, 2023 was 28.99% compared to 28.87% for the nine months ended September 30, 2022.
Financial Condition
The following table illustrates the changes in balances as of and for the periods ended:
| | | | | | March 31, 2023 - December 31, 2022 | | March 31, 2023 - March 31, 2022 | | | | | | Year-to-Date | | Prior Period Comparison | |
(dollars in thousands) | | March 31, 2023 | | December 31, 2022 | | | March 31, 2022 | | $ Change | | $ Change | | |
(In thousands) | | (In thousands) | | September 30, 2023 | | December 31, 2022 | | | September 30, 2022 | | $ Change | | $ Change | |
Due from Federal Reserve Bank (FRB) | Due from Federal Reserve Bank (FRB) | | $ | 3,204 | | | $ | 6,945 | | | | $ | 186,691 | | | $ | (3,741) | | | $ | (183,487) | | | Due from Federal Reserve Bank (FRB) | | $ | 968 | | | $ | 6,945 | | | | $ | 88,060 | | | $ | (5,977) | | | $ | (87,092) | | |
Net loans | Net loans | | 927,105 | | | 969,996 | | | | 870,103 | | | (42,891) | | | 57,002 | | | Net loans | | 957,222 | | | 969,996 | | | | 952,103 | | | (12,774) | | | 5,119 | | |
Investment securities | Investment securities | | 208,914 | | | 210,860 | | | | 183,527 | | | (1,946) | | | 25,387 | | | Investment securities | | 187,857 | | | 210,860 | | | | 211,847 | | | (23,003) | | | (23,990) | | |
Total assets | Total assets | | 1,261,194 | | | 1,299,193 | | | | 1,349,802 | | | (37,999) | | | (88,608) | | | Total assets | | 1,273,092 | | | 1,299,193 | | | | 1,369,252 | | | (26,101) | | | (96,160) | | |
Total deposits | Total deposits | | 1,111,132 | | | 1,165,484 | | | | 1,214,332 | | | (54,352) | | | (103,200) | | | Total deposits | | 987,631 | | | 1,165,484 | | | | 1,240,818 | | | (177,853) | | | (253,187) | | |
Total liabilities | Total liabilities | | 1,148,286 | | | 1,186,730 | | | | 1,236,228 | | | (38,444) | | | (87,942) | | | Total liabilities | | 1,158,064 | | | 1,186,730 | | | | 1,262,173 | | | (28,666) | | | (104,109) | | |
Average interest-earning assets | Average interest-earning assets | | 1,177,664 | | | 1,242,657 | | | | 1,235,855 | | | (64,993) | | | (58,191) | | | Average interest-earning assets | | 1,170,584 | | | 1,248,578 | | | | 1,250,587 | | | (77,994) | | | (80,003) | | |
Average interest-earning liabilities | | 707,999 | | | 737,355 | | | | 738,288 | | | (29,356) | | | (30,289) | | | |
Average interest-bearing liabilities | | Average interest-bearing liabilities | | 721,927 | | | 738,766 | | | | 739,155 | | | (16,839) | | | (17,228) | | |
Total assets decreased 2.9%2.0% between March 31,September 30, 2023 and December 31, 2022, and 6.6%7.0% between March 31,September 30, 2023 and March 31,September 30, 2022. Total deposits decreased 4.7%15.3% and 8.5%20.40%, respectively, during the same periods. Net loans decreased $42.9$12.8 million, or 4.4%1.3%, and investment securities decreased $1.9$23.0 million, or 0.9%10.9%, between March 31,September 30, 2023 and December 31, 2022. Net loans increased on a year-over-year basis due to organic growth and the purchase of real estatereal-estate mortgage loan pools and declined during the quarter due tooffset by loan payoffs and paydowns. InvestmentsInvestment securities increaseddecreased on a year-over-year basis due to securities purchases and declined during the current quarter due to repayments of principal.principal and maturities. Deposits decreased on a year-over-year basis due to decreases in non-interest bearingsavings accounts, NOW and money market accounts, and time deposits and decreased year-to-date due to decreases in savings accounts, and NOW and money market accounts, and decreased on a quarterly basis due to decreasespartially offset by increases in non-interest bearingtime deposits. 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 the purchases of loan pools and investment securities.securities and decreases in deposits. Short-term borrowings at September 30, 2023 totaled $142.0 million. There were no short-term borrowings during the nine months ended September 30, 2022.
Earning assets averaged $1.18$1.17 billion during the quarternine months ended March 31,September 30, 2023, compared to $1.24$1.25 billion for the same period in 2022. Average interest-bearing liabilities decreased to $708.0$721.9 million for the quarternine months ended March 31,September 30, 2023, from $738.3$739.2 million for the comparative period of 2022.
Loans
The Company’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 $944.2$972.9 million at March 31,September 30, 2023, a decrease of $37.6$7.3 million, or 3.8%0.7%, when compared to the balance of $981.8$980.2 million at December 31, 2022, and an increase of $63.3$12.3 million, or 6.7%1.3%, when compared to the balance of $879.4$960.5 million reported at March 31,September 30, 2022. Loans on average increased $89.8$47.8 million, or 10.3%5.3%, between the quarternine months ended March 31,September 30, 2022 and March 31,September 30, 2023, with loans averaging $960.6$958.0 million for the quarternine months ended March 31,September 30, 2023, as compared to $870.9$910.2 million for the same period ofin 2022.
Table 6. Loans
The following table sets forth the amounts of loans outstanding by category and the category percentages for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
(In thousands) | | Amount | | % of Loans | | Amount | | % of Loans | | Amount | | % of Loans |
Commercial and industrial | | $ | 50,511 | | | 5.4 | % | | $ | 57,902 | | | 5.9 | % | | $ | 38,950 | | | 4.4 | % |
Real estate – mortgage | | 665,706 | | | 70.6 | % | | 671,521 | | | 68.5 | % | | 590,920 | | | 67.3 | % |
RE construction & development | | 137,257 | | | 14.6 | % | | 153,374 | | | 15.6 | % | | 152,375 | | | 17.3 | % |
Agricultural | | 45,513 | | | 4.8 | % | | 52,722 | | | 5.4 | % | | 47,725 | | | 5.4 | % |
Installment and student loans | | 43,740 | | | 4.6 | % | | 44,659 | | | 4.6 | % | | 49,409 | | | 5.6 | % |
Total gross loans | | $ | 942,727 | | | 100.00 | % | | $ | 980,178 | | | 100.00 | % | | $ | 879,379 | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2023 | | December 31, 2022 | | September 30, 2022 |
(In thousands) | | Amount | | % of Loans | | Amount | | % of Loans | | Amount | | % of Loans |
Commercial and industrial | | $ | 51,849 | | | 5.3 | % | | $ | 57,902 | | | 5.9 | % | | $ | 62,421 | | | 6.5 | % |
Real estate – mortgage | | 682,376 | | | 70.1 | % | | 671,521 | | | 68.5 | % | | 632,750 | | | 65.9 | % |
Real estate construction and development | | 133,516 | | | 13.7 | % | | 153,374 | | | 15.6 | % | | 161,571 | | | 16.8 | % |
Agricultural | | 61,501 | | | 6.3 | % | | 52,722 | | | 5.4 | % | | 57,296 | | | 6.0 | % |
Installment and student loans | | 43,629 | | | 4.6 | % | | 44,659 | | | 4.6 | % | | 46,511 | | | 4.8 | % |
Total gross loans | | $ | 972,871 | | | 100.00 | % | | $ | 980,178 | | | 100.00 | % | | $ | 960,549 | | | 100.00 | % |
Loan volume continues to be highest in what has historically been the Bank’s primary lending emphasis: real estate mortgage and construction lending. Total loans decreased $37.5$7.3 million during the first threenine months of 2023. There were decreasesincreases of $5.8
$10.9 million, or 0.9%1.6%, in real estate mortgage loans $16.1and $8.8 million, or 10.5%16.7%, in realagricultural loans. Real estate construction and development loans and $7.4decreased $19.9 million, or 12.8% in12.9%, commercial and industrial. Installmentindustrial loan decreased $6.1 million, or 10.5%, and installment loans decreased by $0.9$1.0 million, or 2.1% and agricultural loans decreased by $7.2 million, or 13.7%2.3%. The Bank is subject to internal limits of 115% of capital on the real estate construction and development portfolio and 345% of capital for the non-owner occupied commercial real estate portfolio, which also includes construction and development loans. In addition, there is also a limit of 50% growth over the three years for the non-owner occupied commercial real estate portfolio. At March 31, 2023, the real estate construction and development portfolio totaled 76% of capital. Non-owner occupied commercial real estate totaled 306% of capital and had a three year growth rate of 29.1%. The current limits may affect the ability of the Bank to significantly grow these segments of the loan portfolio. The Bank is not approaching internal or regulatory concentration limits in other loan segments.
The real estate mortgage loan portfolio was $665.7totaled $682.4 million at March 31,September 30, 2023, and consistsconsisted 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 42.0%43.2%, 40.6%, and 37.6%39.8% of the total loan portfolio at March 31,September 30, 2023, December 31, 2022, and March 31,September 30, 2022, respectively. Commercial real estate balances decreasedincreased to $395.7$419.9 million at March 31,September 30, 2023 from $398.1 million at December 31, 2022. Commercial real estate loans are generally a mix of shortshort- to medium-term, fixedfixed- and floating ratefloating-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 sixnine to eight11 years. These loans totaled $270.0$262.4 million, or 28.6%27.0%, of the portfolio at March 31,September 30, 2023, $273.4 million, or 27.9%, of the portfolio at December 31, 2022, and $260.1$250.1 million, or 29.6%26.0%, of the portfolio at March 31,September 30, 2022. Dovenmuehle Mortgage, Inc. (DMI) isIncluded in the third-party sub-servicer for the Company’s purchased residential mortgage portfolio are purchased home-mortgage loan pools with aggregate balances of $241.6$233.5 million, or 95.0%comprising 89.0% of the total residential mortgage portfolio at March 31,September 30, 2023. These loans were purchased in whole-loan form, in several pools, beginning in May 2021 and continuing through MarchDecember 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, (with the Company’s approval), escrow management, monitoring, and collection. DMI is paid a monthly servicing fee primarilybased onprimarily upon the number of loans being serviced which, at March 31,September 30, 2023, totaled 259.254.
Real estate construction and development loans, representing 14.6%13.7%, 15.6%, and 17.3%16.8% of total loans at March 31,September 30, 2023, December 31, 2022, and March 31,September 30, 2022, respectively, consistconsisted of loans for residential and commercial construction projects, as well as land acquisition and development, orand 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 decreased $7.4$6.1 million between December 31, 2022 and March 31,September 30, 2023 and increased $11.6decreased $10.6 million between March 31,September 30, 2022 and March 31,September 30, 2023. Agricultural loans decreased $7.2increased $8.8 million between December 31, 2022 and March 31,September 30, 2023 and decreased $2.2increased $4.2 million between March 31,September 30, 2022 and March 31,September 30, 2023. Installment and student loans decreased $0.9$1.03 million between December 31, 2022 and March 31,September 30, 2023 and decreased $5.7$2.9 million between March 31,September 30, 2022 and March 31,September 30, 2023, primarily due to decreases in student loan balances.
Installment andIncluded in installment loans are $39.6 million in unsecured student loans made to medical and pharmacy school students in the US and Caribbean. Student loans decreased $5.7$4.1 million between March 31,the nine months ended September 30, 2023 and 2022, and March 31, 2023, due to paydowns, consolidations with other lenders, and charge-offs within the student loan portfolio. Included in installment loans are $41.4 million in student loans made to medical and pharmacy school students. The student loan portfolio consists of unsecured loans to medical and pharmacy students currently enrolled in medical and pharmacy schools in the US and the Caribbean. The medical student loans are made to US citizens attending medical schools in the US and Caribbean, while the pharmacy student loans are made to pharmacy students attending pharmacy school in the US. Upon graduation the loan is automatically placed on grace for six months. This may be extended as a deferment up to 48 months for graduates enrolling in internship, medical residency or fellowship. As approved, the student may receive additional deferment for hardship or administrative reasons in the form of forbearance for a maximum of 36 months throughout the life of the loan.charge-offs. The outstanding balance of student loans thatfor students who are in school or a grace period and have not entered repayment status totaled $2.4$2.0 million at March 31,September 30, 2023. At March 31,September 30, 2023 there were 858803 loans within repayment, deferment, and forbearance which represented $21.4$19.5 million, $10.8$11.2 million, and $6.9$6.8 million in outstanding balances, respectively. Student loans are no longer originated by the bank.
Repayment of the unsecuredWhile student loans is reliant on the medical and pharmacy students graduating and becoming high-income earners. Under program guidelinesloan repayment terms canmay vary per borrower; however,borrower, repayment occurs on average within 10 to 20 years.years on average. Underwriting is premised on qualifying credit scores. The weighted average credit score for the
portfolio is in the mid-700s.loan origination was 737. In addition, there are non-student, co-borrowers for roughly one-third of the portfolio that provide additional repayment capacity. Graduation and employment placement rates are high for both medical and pharmacy students. The average student loan balance per borrower as of March 31,September 30, 2023, iswas approximately $103,000.$106,000. Loan interest rates rangeranged from 6.00% to 12.375%13.125%, with a weighted average rate of 11.385%12.14%.
ZuntaFi is the third-party servicer for the student loan portfolio. ZuntaFi’s services include application administration, processing, approval, documenting, funding, collection, and collection. They also provide 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,September 30, 2023 and December 31, 2022, reserves against the student loan portfolio totaled $4,754,000$5.6 million and $2,588,000,$2.6 million, respectively. For the quarternine months ended March 31,September 30, 2023, $28,000 accrued interest receivable was reversed due to $406,000 in charge-offs. For the quarter ended March 31, 2022, $14,000$187,000 in accrued interest receivable was reversed, due to charge-offs of $353,000 within$1,588,000. For the student loan portfolio.nine months ended September 30, 2022, $100,000 in accrued interest receivable was reversed, due to charge-offs of
$810,000. For the quarter ended September 30, 2023, $102,000 in accrued interest receivable was reversed, due to charge-offs of $603,000. For the quarter ended September 30, 2022, $86,000 in accrued interest receivable was reversed, due to charge-offs of $457,000.
The following table sets forth the Bank'sBank’s student loan portfolio with activity from December 31, 2022 to March 31,September 30, 2023:
| | | | | | | | |
(In thousands) | | Balance |
Student Loan Portfolio Balance as of December 31, 2022 | | $ | 42,132 | |
Disbursements | | — | |
Capitalized Interest | | 1,1012,912 | |
Loan Consolidations/Payoffs | | — (2,629) | |
Payments Received | | (1,411)(1,213) | |
Loans Charged-off | | (406)(1,588) | |
Student Loan Portfolio Balance as of March 31,September 30, 2023 | | $ | 41,41639,614 | |
Loan participations purchased decreased to $9.3$9.2 million, or 1.0%0.9% of the portfolio, at March 31,September 30, 2023, decreased from $9.4 million, or 1.0%, of the portfolio at December 31, 2022, and decreased from the $9.5 million reported at March 31, 2022. Loan participations sold increased from $3.8$9.4 million, or 0.4%1.0%, of the portfolio at March 31,September 30, 2022. Loan participations sold decreased from $12.9 million, or 1.3%, of the portfolio at September 30, 2022, to $9.7 million, or 1.0%, of the portfolio, at December 31, 2022, and decreasedincreased to $9.3$38.1 million, or 1.0%3.9%, of the portfolio, at March 31,September 30, 2023. This increase was primarily due to the addition of one real estate construction loan participation with a balance of $28.8 million at September 30, 2023.
Deposits
Deposit balances totaled $1.1 billion$987.6 million at March 31,September 30, 2023, representing a decrease of $54.4$177.9 million, or 4.7%15.3%, from the balance of $1.2$1.17 billion reported at December 31, 2022, and a decrease of $103.2$253.2 million, or 8.5%20.4%, from the balance of $1.2$1.24 billion at March 31,September 30, 2022.
Table 7. Deposits
The following table sets forth the amounts of deposits outstanding by category at March 31,September 30, 2023 and December 31, 2022, and the net change between the two periods presented.presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | March 31, 2023 | | December 31, 2022 | | $ Change | | % Change |
Noninterest-bearing deposits | | $ | 394,745 | | | $ | 481,629 | | | $ | (86,884) | | | (18.0) | % |
Interest-bearing deposits: | | | | | | | | |
NOW and money market accounts | | 528,233 | | | 499,861 | | | 28,372 | | | 5.7 | % |
Savings accounts | | 118,544 | | | 125,946 | | | (7,402) | | | (5.9) | % |
Time deposits: | | | | | | | | |
Under $250,000 | | 52,835 | | | 42,933 | | | 9,902 | | | 23.1 | % |
$250,000 and over | | 16,775 | | | 15,115 | | | 1,660 | | | 11.0 | % |
Total interest-bearing deposits | | 716,387 | | | 683,855 | | | 32,532 | | | 4.8 | % |
Total deposits | | $ | 1,111,132 | | | $ | 1,165,484 | | | $ | (54,352) | | | (4.7) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | September 30, 2023 | | December 31, 2022 | | $ Change | | % Change |
Noninterest-bearing deposits | | $ | 386,258 | | | $ | 481,629 | | | $ | (95,371) | | | (19.8) | % |
Interest-bearing deposits: | | | | | | | | |
NOW and money market accounts | | 409,193 | | | 499,861 | | | (90,668) | | | (18.1) | % |
Savings accounts | | 120,353 | | | 125,946 | | | (5,593) | | | (4.4) | % |
Time deposits: | | | | | | | | |
Under $250,000 | | 69,875 | | | 42,933 | | | 26,942 | | | 62.8 | % |
$250,000 and over | | 1,952 | | | 15,115 | | | (13,163) | | | (87.1) | % |
Total interest-bearing deposits | | 601,373 | | | 683,855 | | | (82,482) | | | (12.1) | % |
Total deposits | | $ | 987,631 | | | $ | 1,165,484 | | | $ | (177,853) | | | (15.3) | % |
The following tables set forth estimated deposit balances exceeding the FDIC insurance limits as of:
| (In thousands) | (In thousands) | | March 31, 2023 | | December 31, 2022 | | (In thousands) | | September 30, 2023 | | December 31, 2022 | |
Uninsured deposits (1) | Uninsured deposits (1) | | $ | 643,470 | | | $ | 706,183 | | | Uninsured deposits (1) | | $ | 511,426 | | | $ | 706,183 | | |
(1) Represents amount over insurance limit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 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) | | $ | 314 | | | $ | 1,686 | | | $ | 3,052 | | | $ | 972 | | | $ | 6,024 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 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) | | $ | 1,240 | | | $ | 1,841 | | | $ | 1,726 | | | $ | 6,714 | | | $ | 11,521 | |
(1) Represents amount over insurance limit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
(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) | | $ | 362 | | | $ | 412 | | | $ | 3,419 | | | $ | 1,173 | | | $ | 5,366 | |
(1) Represents amount over insurance limit
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’s principal sources of funding and liquidity. These core deposits amounted to 98.49%99.80% and 98.70% of total deposits at March 31,September 30, 2023 and December 31, 2022, respectively. The Company held no brokered deposits at March 31,September 30, 2023 or December 31, 2022.
On a year-to-date average basis, the Company experienced a decrease of $58.0$131.4 million, or 4.9%10.8%, in total deposits between the quarternine months ended March 31,September 30, 2023 and the quarternine months ended March 31,September 30, 2022. Between these two periods, interest-bearing deposits decreased $37.4$64.3 million, or 5.1%8.8%, and noninterest-bearing deposits decreased $20.6$67.2 million, or 4.4%13.8%.
Short-Term Borrowings
At March 31,September 30, 2023, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling $432.6$463.6 million, as well as Federal Home Loan Bank (FHLB) lines of credit totaling $2.1$135.3 million. At March 31,September 30, 2023, the Company had uncollateralized lines of credit with Pacific Coast Bankers Bank (PCBB), PNC, Zions Bank, and UnionUS Bank totaling $50 million, $40 million, $20 million and $10 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 March 31,September 30, 2023, the Company had outstanding borrowings of $13.2$142.0 million. At March 31,September 30, 2022, the Company had no outstanding borrowings. The Company had collateralized FRB lines of credit of $435.6 million, collateralized FHLB lines of credit totaling $2.2 million, and uncollateralized lines of credit of $50 million with PCBB, $40 million with PNC, $20 million with Zion’s Bank, and $10 million with Union Bank at December 31, 2022.
Asset Quality and Allowance for Credit Losses
Lending money is the Company’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”)(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 measured on a collective (pool) basis for loans with similar characteristics. The Company estimates the appropriate level of allowance for credit losses for collateral-dependent loans by evaluating them separately. The Company also uses the CECL model to calculate the allowance for credit losses on off-balance sheet credit exposures, such as undrawn amounts on lines of credit. While the allowance for credit losses on loans is reported as a contra-asset for loans, the allowance for credit losses on off-balance sheet credit exposure is reported as a liability.
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 allowance for credit losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in existing loans and commitments to extend credit. The adequacy of 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, past credit experience, collateral, and concentrations 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.
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 later in this section. The primary differences between impaired 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, modified loans and nonaccrual loans but may also include problem loans other than delinquent loans.
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 loan discounted at the loan’s stated interest rate. 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.
Real estate mortgage loans comprised approximately 0.5% of total impaired loan balances at March 31, 2023. 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 March 31, 2023, approximately $13.2 million, or 93.7%, 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.
Table 9. ImpairedIndividually-Evaluated Loans and Specific ReservesReserves:
The following table summarizes the components of impairedindividually-evaluated loans and their related specific reserves:
| | | March 31, 2023 | | December 31, 2022 | | September 30, 2023 | | December 31, 2022 |
(In thousands) | (In thousands) | | Impaired Loan Balance | | Reserve | | Impaired Loan Balance | | Reserve | (In thousands) | | Individually-Evaluated Loan Balances | | Specific Reserve | | Individually-Evaluated Loan Balances | | Specific Reserve |
Commercial and industrial | Commercial and industrial | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Commercial and industrial | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Real estate – mortgage | Real estate – mortgage | | 74 | | | 2 | | | 141 | | | 4 | | Real estate – mortgage | | 72 | | | — | | | 141 | | | 4 | |
RE construction & development | | 13,109 | | | — | | | 14,436 | | | — | | |
Real estate construction and development | | Real estate construction and development | | 13,130 | | | — | | | 14,436 | | | — | |
Agricultural | Agricultural | | 879 | | | 48 | | | 1,051 | | | 48 | | Agricultural | | 463 | | | 34 | | | 1,051 | | | 48 | |
Installment and student loans | Installment and student loans | | — | | | — | | | — | | | — | | Installment and student loans | | — | | | — | | | — | | | — | |
Total impaired loans | | $ | 14,062 | | | $ | 50 | | | $ | 15,628 | | | $ | 52 | | |
Total individually-evaluated loans | | Total individually-evaluated loans | | $ | 13,665 | | | $ | 34 | | | $ | 15,628 | | | $ | 52 | |
ImpairedIndividually-evaluated loans declined $1.6$2.0 million to $14.1$13.7 million at March 31,September 30, 2023 compared to $15.6 million at December 31, 2022. Included in the balance of specific reserves at March 31,September 30, 2023, are $2,000 allocated to one real estate mortgage loan and $48,000is $34,000 allocated to one agricultural loan. There were no reserves for real estate construction and development loans at March 31,September 30, 2023 and December 31, 2022, due to the value of the collateral securing those loans.
Table 11. Credit Quality Indicators for Outstanding Student LoansLoans:
The following table summarizes the credit quality indicators for outstanding student loans as of:
| | | | March 31, 2023 | | December 31, 2022 | | | September 30, 2023 | | December 31, 2022 |
(Dollars in thousands) | (Dollars in thousands) | | Number of Loans | | Amount | | Accrued Interest | | Number of Loans | | Amount | | Accrued Interest | (Dollars in thousands) | | Number of Loans | | Amount | | Accrued Interest | | Number of Loans | | Amount | | Accrued Interest |
School | School | | 69 | | | $ | 2,025 | | | $ | 967 | | | 70 | | | $ | 2,056 | | | $ | 908 | | School | | 46 | | | $ | 1,267 | | | $ | 722 | | | 70 | | | $ | 2,056 | | | $ | 908 | |
Grace | Grace | | 12 | | | 327 | | | 163 | | | 27 | | | 667 | | | 348 | | Grace | | 23 | | | 735 | | | 358 | | | 27 | | | 667 | | | 348 | |
Repayment | Repayment | | 460 | | | 21,421 | | | 293 | | | 516 | | | 23,414 | | | 857 | | Repayment | | 418 | | | 19,547 | | | 261 | | | 516 | | | 23,414 | | | 857 | |
Deferment | Deferment | | 256 | | | 10,784 | | | 1,964 | | | 268 | | | 10,974 | | | 1,732 | | Deferment | | 257 | | | 11,227 | | | 1,959 | | | 268 | | | 10,974 | | | 1,732 | |
Forbearance | Forbearance | | 142 | | | 6,862 | | | 374 | | | 91 | | | 5,019 | | | 237 | | Forbearance | | 128 | | | 6,838 | | | 229 | | | 91 | | | 5,019 | | | 237 | |
Total | Total | | 939 | | | $ | 41,419 | | | $ | 3,761 | | | 972 | | | $ | 42,130 | | | $ | 4,082 | | Total | | 872 | | | $ | 39,614 | | | $ | 3,529 | | | 972 | | | $ | 42,130 | | | $ | 4,082 | |
Included in installment loans are $41.4$39.6 million and $42.1 million in student loans at March 31,September 30, 2023 and December 31, 2022, respectively, made to medical and pharmacy school students. At March 31, 2023 there were 858 loans within repayment, deferment, and forbearance which represented $21.4 million, $10.8 million, and $6.9 million, respectively. At December 31, 2022, there were 875 loans within repayment, deferment, and forbearance which represented $23.4 million, $11.0 million and $5.0 million, respectively. As of March 31,September 30, 2023 and December 31, 2022, the reserve against the student loan portfolio was $4.8totaled $5.3 million and $2.6 million, respectively.
Loan interest rates on the student loan portfolio range from 6.00% to 12.375%13.125% and 5.75% to 10.75% at March 31,September 30, 2023 and December 31, 2022, respectively.
Table 12. Nonperforming AssetsAssets:
The following table summarizes the components of nonperforming assets as of March 31,September 30, 2023 and December 31, 2022, and the percentage of nonperforming assets to total gross loans, total assets, and the percentage of nonperforming assets to allowance for loan losses:
| (In thousands) | (In thousands) | | March 31, 2023 | | December 31, 2022 | (In thousands) | | September 30, 2023 | | December 31, 2022 |
Nonaccrual loans | Nonaccrual loans | | $ | 13,195 | | | $ | 14,544 | | Nonaccrual loans | | $ | 14,165 | | | $ | 14,544 | |
Loans past due 90 days or more, still accruing | Loans past due 90 days or more, still accruing | | 382 | | | 252 | | Loans past due 90 days or more, still accruing | | — | | | 252 | |
Total nonperforming loans | Total nonperforming loans | | 13,577 | | | 14,796 | | Total nonperforming loans | | 14,165 | | | 14,796 | |
Other real estate owned | Other real estate owned | | 4,582 | | | 4,582 | | Other real estate owned | | 4,582 | | | 4,582 | |
Total nonperforming assets | Total nonperforming assets | | $ | 18,159 | | | $ | 19,378 | | Total nonperforming assets | | $ | 18,747 | | | $ | 19,378 | |
Nonperforming loans to total gross loans | Nonperforming loans to total gross loans | | 1.44 | % | | 1.52 | % | Nonperforming loans to total gross loans | | 1.45 | % | | 1.51 | % |
Nonperforming assets to total assets | Nonperforming assets to total assets | | 1.44 | % | | 1.49 | % | Nonperforming assets to total assets | | 1.47 | % | | 1.48 | % |
Allowance for loan losses to nonperforming loans | Allowance for loan losses to nonperforming loans | | 115.06 | % | | 68.17 | % | Allowance for loan losses to nonperforming loans | | 110.48 | % | | 68.82 | % |
Nonperforming assets, which are primarily related to the real estate loan and other real estate ownedother-real-estate-owned portfolio, decreased $1,360,000$631,000 from $19.5$19.4 million at December 31, 2022 to $18.2$18.7 million at March 31,September 30, 2023. TheNonaccrual loan balances decreased to $14.2 million between the two periods, and the remaining nonaccrual loans are well collateralized and in the process of collection. The ratio of the allowance for credit losses to nonperforming loans increased from 68.2%68.82% at December 31, 2022 to 115.1%110.48% at March 31,September 30, 2023. The percentage increase is primarily due to the adjustment for CECL and reserve increases due to student loan delinquencies and charge-offs.
The following table summarizes the nonaccrual totals by loan category for the periods shown:
| (In thousands) | (In thousands) | | March 31, 2023 | | December 31, 2022 | | $ Change | (In thousands) | | September 30, 2023 | | December 31, 2022 | | $ Change |
Nonaccrual Loans: | Nonaccrual Loans: | | | | | | | Nonaccrual Loans: | | | | | | |
| RE construction & development | | $ | 13,112 | | | $ | 14,436 | | | $ | (1,324) | | |
Real estate construction and development | | Real estate construction and development | | $ | 13,097 | | | $ | 14,436 | | | $ | (1,339) | |
Agricultural | Agricultural | | 86 | | | 108 | | | (22) | | Agricultural | | 60 | | | 108 | | | (48) | |
| Total nonaccrual loans | Total nonaccrual loans | | $ | 13,198 | | | $ | 14,544 | | | $ | (1,346) | | Total nonaccrual loans | | $ | 14,165 | | | $ | 14,544 | | | $ | (379) | |
Loans past due more than 30 days receive increased management attention and are monitored for increased risk. The Company continues to move past 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 modified loans are reviewed for specific reserve allocations, the allowance for credit losses is adjusted accordingly.
Except for the nonaccrual loans included in the above table, or those included in the impairedindividually-evaluated loan totals, there were no loans at March 31,September 30, 2023, 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 modified loan at some future date.terms.
Nonaccrual loans, totaling $13.2$14.2 million at March 31,September 30, 2023, decreased $1.3 million$379,000 from $14.5 million at December 31, 2022, with real estate mortgage and real estate construction loans comprising 99.3%99.6% of total nonaccrual loans at March 31,September 30, 2023. 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 September 30, 2023 and December 31, 2022, nonaccrual loans represented 1.45% and 1.48% of total loans, respectively. The loan allowance for credit issues related toloss represented 110.5% and 70.0% of nonaccrual loans for the specific loans. Impaired loans decreased $1.6 million during the quarter ended March 31, 2023 to a balance of $14.1 million at March 31, 2023. same periods.
Other real estate owned through foreclosure remained at $4.6 million for the periods ended March 31,September 30, 2023 and December 31, 2022. Nonperforming assets as a percentage of total assets decreased from 1.49%1.48% at December 31, 2022 to 1.44%1.47% at March 31,September 30, 2023.
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.
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
(Reversal) provision for credit losses year-to-date | | $ | (493) | | | $ | 1,802 | | | $ | 5 | |
Allowance as % of nonperforming loans | | 115.1 | % | | 68.2 | % | | 80.8 | % |
Nonperforming loans as % total loans | | 1.4 | % | | 1.5 | % | | 1.3 | % |
Management continues to monitor economic conditions in the real estate market for signs of 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. Focus has been placed on monitoring and reducing the level of problem assets, while working with borrowers to find more options, including modifications.assets.
The following table summarizes special mention loans by type as of:
| (In thousands) | (In thousands) | | March 31, 2023 | | December 31, 2022 | (In thousands) | | September 30, 2023 | | December 31, 2022 |
Commercial and industrial | Commercial and industrial | | $ | — | | | $ | 200 | | Commercial and industrial | | $ | — | | | $ | 200 | |
| Commercial real estate mortgage | Commercial real estate mortgage | | 25,823 | | | 26,019 | | Commercial real estate mortgage | | 12,696 | | | 26,019 | |
| Agricultural | Agricultural | | 1,017 | | | 1,017 | | Agricultural | | 869 | | | 1,017 | |
| Total special mention loans | Total special mention loans | | $ | 26,840 | | | $ | 27,236 | | Total special mention loans | | $ | 13,565 | | | $ | 27,236 | |
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. 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 enters into loan modifications when it improves collection prospects. Management recognizes the increased risk of loss due to the 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’s allowance for loan credit losses, loan loss provisions, made to that allowance, and charge-off and recovery activity affecting the allowance for the quarternine months ended March 31,September 30, 2023 and March 31,September 30, 2022.
Table 13. Allowance for Credit Losses - Summary of ActivityActivity:
| (In thousands) | (In thousands) | | March 31, 2023 | | March 31, 2022 | (In thousands) | | September 30, 2023 | | September 30, 2022 |
Total loans outstanding at end of period before deducting allowances for credit losses | Total loans outstanding at end of period before deducting allowances for credit losses | | $ | 942,727 | | | $ | 879,379 | | Total loans outstanding at end of period before deducting allowances for credit losses | | $ | 972,871 | | | $ | 962,166 | |
Average loans outstanding during period | Average loans outstanding during period | | 960,648 | | | 870,851 | | Average loans outstanding during period | | 958,038 | | | 910,221 | |
| Balance of allowance at beginning of period | Balance of allowance at beginning of period | | $ | 10,182 | | | $ | 9,333 | | Balance of allowance at beginning of period | | $ | 10,182 | | | $ | 9,333 | |
Impact of adoption of ASU 2016-13 | Impact of adoption of ASU 2016-13 | | 6,367 | | | — | | Impact of adoption of ASU 2016-13 | | 6,367 | | | — | |
Loans charged-off: | Loans charged-off: | | | | | Loans charged-off: | | | | |
| Installment and student loans | Installment and student loans | | (477) | | | (358) | | Installment and student loans | | (1,587) | | | (828) | |
Total loans charged-off | Total loans charged-off | | (477) | | | (358) | | Total loans charged-off | | (1,587) | | | (828) | |
Recoveries of loans previously charged-off: | Recoveries of loans previously charged-off: | | | | | Recoveries of loans previously charged-off: | | | | |
Real estate | Real estate | | 20 | | | 4 | | Real estate | | 53 | | | 10 | |
Commercial and industrial | Commercial and industrial | | — | | | 284 | | Commercial and industrial | | 1 | | | 305 | |
Installment and student loans | Installment and student loans | | 23 | | | 8 | | Installment and student loans | | 181 | | | 25 | |
Total loan recoveries | Total loan recoveries | | 43 | | | 296 | | Total loan recoveries | | 235 | | | 340 | |
Net loans charged-off | Net loans charged-off | | (434) | | | (62) | | Net loans charged-off | | (1,352) | | | (488) | |
Provision charged to operating expense | Provision charged to operating expense | | (493) | | | 5 | | Provision charged to operating expense | | 452 | | | 1,217 | |
Balance of allowance for credit losses at end of period | Balance of allowance for credit losses at end of period | | $ | 15,622 | | | $ | 9,276 | | Balance of allowance for credit losses at end of period | | $ | 15,649 | | | $ | 10,062 | |
| Net loan charged-off to total average loans (annualized) | Net loan charged-off to total average loans (annualized) | | 0.18 | % | | 0.03 | % | Net loan charged-off to total average loans (annualized) | | 0.19 | % | | 0.07 | % |
Net loan charged-off to loans at end of period (annualized) | Net loan charged-off to loans at end of period (annualized) | | 0.18 | % | | 0.03 | % | Net loan charged-off to loans at end of period (annualized) | | 0.56 | % | | 0.20 | % |
Allowance for credit losses to total loans at end of period | Allowance for credit losses to total loans at end of period | | 1.65 | % | | 1.06 | % | Allowance for credit losses to total loans at end of period | | 1.61 | % | | 1.05 | % |
Net loan charged-off to allowance for credit losses (annualized) | Net loan charged-off to allowance for credit losses (annualized) | | 11.11 | % | | 2.63 | % | Net loan charged-off to allowance for credit losses (annualized) | | 34.56 | % | | 19.40 | % |
Provision for credit losses to net charged-off (annualized) | Provision for credit losses to net charged-off (annualized) | | (227.19) | % | | (16.13) | % | Provision for credit losses to net charged-off (annualized) | | 44.58 | % | | 499.18 | % |
Provisions for credit losses are determined on the basis of management’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 quarternine months ended March 31,September 30, 2023, a $493,000 reverse$587,000 provision was recorded to the allowance for credit losses as compared to a $5,000$1.2 million provision for the quarternine months ended March 31,September 30, 2022.
The following provides a summary of the Company’s net charge-offs as a percentage of average loan balances in each category for the quarters indicated:
| | | | March 31, 2023 | | March 31, 2022 | | | | September 30, 2023 | | September 30, 2022 | |
(In thousands) | (In thousands) | | Net Charge-offs (Recoveries) | | Average Loan Balance | | Percentage | | Net Charge-offs (Recoveries) | | Average Loan Balance | | Percentage | | (In thousands) | | Net Charge-offs (Recoveries) | | Average Loan Balance | | Percentage | | Net Charge-offs (Recoveries) | | Average Loan Balance | | Percentage | |
Commercial and industrial | Commercial and industrial | | $ | — | | | $ | 49,628 | | | — | % | | $ | (268) | | | $ | 39,613 | | | (0.68) | % | | Commercial and industrial | | $ | (1) | | | $ | 49,063 | | | <0.01% | | $ | (269) | | | $ | 58,596 | | | (0.46) | % | |
Real estate mortgages | Real estate mortgages | | (20) | | | 667,376 | | | <0.01% | | (4) | | | 576,512 | | | <0.01% | | Real estate mortgages | | (53) | | | 666,797 | | | <0.01% | | (10) | | | 606,621 | | | <0.01% | |
RE construction and development | RE construction and development | | — | | | 148,340 | | | — | % | | — | | | 155,077 | | | — | % | | RE construction and development | | — | | | 144,205 | | | — | % | | — | | | 183,934 | | | — | % | |
Agricultural | Agricultural | | — | | | 50,332 | | | — | % | | (16) | | | 48,695 | | | (0.03) | % | | Agricultural | | — | | | 53,201 | | | — | % | | (36) | | | 56,122 | | | (0.06) | % | |
Installment and student loans | Installment and student loans | | 454 | | | 44,972 | | | 1.01 | % | | 350 | | | 50,954 | | | 0.69 | % | | Installment and student loans | | 1,406 | | | 44,772 | | | 3.14 | % | | 803 | | | 47,245 | | | 1.70 | % | |
Total | Total | | $ | 434 | | | $ | 960,648 | | | 0.05 | % | | $ | 62 | | | $ | 870,851 | | | 0.01 | % | | Total | | $ | 1,352 | | | $ | 958,038 | | | 0.14 | % | | $ | 488 | | | $ | 952,518 | | | 0.05 | % | |
Net charge-offs during the quarternine months ended March 31,September 30, 2023 totaled $434,000$1,352,000 as compared to net charge-offs of $61,000$488,000 for the quarternine months ended March 31,September 30, 2022. The Company charged-off, or had partial charge-offs on 1224 loans during the quarternine months ended March 31,September 30, 2023, compared to 413 loans during the same period ended March 31, 2022, and 24 loans during the year ended December 31,September 30, 2022. The annualized percentage of net charge-offs to average loans was 0.18%0.19% for the quarternine months ended March 31, 2023. Annualized percentage net charge-offs were 0.19%September 30, 2023, 0.14% for the year ended December 31, 2022. Annualized percentage net charge-offs were 0.03%2022, and 0.07% for the quarternine months ended March 31,September 30, 2022. The Company’s loans net of unearned fees increased from $879.4$962.2 million at March 31,September 30, 2022 to $942.7$972.9 million at March 31,September 30, 2023.
The allowance for credit losses at March 31,September 30, 2023 was 1.65%1.61% of outstanding loan balances, as compared to 1.04% at December 31, 2022, and 1.06%1.05% at March 31,September 30, 2022.
At March 31,September 30, 2023 and March 31,September 30, 2022, unfunded loan commitment reserves of $805,000$954,000 and $569,000 respectively, were reported in other liabilities.
Management believes that the 1.65%loan allowance for credit loss allowancelosses, totaling 1.61% of the loan portfolio at March 31,September 30, 2023, 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’s service areas resultingand result in increased losses in the loan portfolio not captured by the current allowance for loancredit losses. Management is not currently aware of any conditions that may adversely affect the levels of losses incurred in the Company’s loan portfolio.
Liquidity and Capital Resources
The Company’s asset/liability management, liquidity strategy, and capital planning isare guided by policies formulated and monitored by the Asset and Liability Management Committee (“ALCO”)(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’s liquid asset base, which generally consists of cash and due from banks, federal funds sold, and investment securities, is maintained at levels deemed sufficient to provide the cash necessary to fund loan growth, unfunded loan commitments, and deposit runoff. 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 aretypically provide higher yielding assets compared to cash.yields than cash balances.
The following table sets forth asset balances as of:
| | | March 31, 2023 | | December 31, 2022 | | | September 30, 2023 | | December 31, 2022 | |
(Dollars in thousands) | (Dollars in thousands) | | Balance | | % Total Assets | | Balance | | % Total Assets | | (Dollars in thousands) | | Balance | | % Total Assets | | Balance | | % Total Assets | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 45,153 | | | 3.6 | % | | $ | 38,595 | | | 3.0 | % | | Cash and cash equivalents | | $ | 35,297 | | | 2.8 | % | | $ | 38,595 | | | 3.0 | % | |
Net loans | Net loans | | 927,105 | | | 73.5 | % | | 969,996 | | | 74.7 | % | | Net loans | | 957,222 | | | 75.2 | % | | 969,996 | | | 74.7 | % | |
Investment securities | Investment securities | | 208,914 | | | 16.6 | % | | 210,860 | | | 16.2 | % | | Investment securities | | 187,857 | | | 14.8 | % | | 210,860 | | | 16.2 | % | |
|
At March 31,September 30, 2023, the loan to deposit ratio was 84.84%98.51%, compared to a loan to deposit ratio of 84.10% at December 31, 2022.
Liabilities used to fund liquidity sources include core and non-core deposits as well as short-term borrowings capability.borrowing capabilities. Core deposits, which comprised approximately 98.5%99.8% of total deposits at March 31,September 30, 2023, provide a significant and stable funding source for the Company. At March 31, 2023, there were $13.2The bank held $125.0 million in borrowings againstfrom a secured credit line with the Bank’sFederal Home Loan Bank and $17.0 million in borrowings from an unsecured credit line with PCBB for a total of $142.0 million in short-term borrowings at PCBB.September 30, 2023. Unused lines of credit with the Federal Home Loan Bank, Pacific Coast Banker'’ Bank, Zion’s Bank, UnionReserve Bank and the Federal Reserve BankFHLB, totaling $481.5$453.8 million, were collateralized in part by investment securities and certain qualifying loans in the Company’s loan portfolio. The carrying value of loans pledged on these used and unused borrowing lines totaled $579.8$614.0 million at September 30, 2023. For further detail on
March 31, 2023. For a further detail of the Company’s borrowing arrangements, see Note 6 - Short-term Borrowings/Other Borrowings, in the notes to the consolidated financial statements.
The period-end balances of cash and cash equivalents for the periods shown are as follows (from Consolidated Statements of Cash Flows):
| | | | | | | | |
(In thousands) | | Balance |
December 31, 2021 | | $ | 219,219 | |
March 31,September 30, 2022 | | 224,934126,032 | |
December 31, 2022 | | 38,595 | |
March 31,September 30, 2023 | | 45,15335,297 | |
Capital and Dividends
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, 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 aboutin regard to components, risk weightings, and other factors.
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, ACL,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 Tier 1 Leverage Ratio equal to or greater than 9%. The Bank’s Tier 1 Capital Ratio was 10.88%11.42% and 9.55% at March 31,September 30, 2023 and 2022, respectively.
The Company uses a variety of measures to evaluate its capital adequacy. Management reviews these capital measurements on a quarterly basis and takes appropriate action to help ensure that they meet or surpass established internal and external guidelines. The following table sets forth the Company’s and the Bank’s actual capital positions at March 31,September 30, 2023:
Capital RatiosRatios:
| | | March 31, 2023 | | Ratios at December 31, 2022 | | Minimum Requirement to be Well Capitalized | | Minimum requirement for Community Bank Leverage Ratio (1) | | September 30, 2023 | | Ratios at December 31, 2022 | | Minimum Requirement to be Well Capitalized | | Minimum requirement for Community Bank Leverage Ratio (1) |
| Tier 1 capital to adjusted average assets (“Leverage Ratio”) | | | | | | | | | |
Tier 1 capital to adjusted average assets (Leverage Ratio) | | Tier 1 capital to adjusted average assets (Leverage Ratio) | | | | | | | | |
Company | Company | | 10.89% | | 10.10% | | 5.00% | | 9.00% | Company | | 11.36% | | 10.10% | | 5.00% | | 9.00% |
Bank | Bank | | 10.88% | | 10.11% | | 5.00% | | 9.00% | Bank | | 11.42% | | 10.11% | | 5.00% | | 9.00% |
(1) If the Bank’s Leverage Ratio exceeds the minimum ratio under the Community Bank Leverage Ratio Framework (CBLR), it is deemed to be “well capitalized” under all other regulatory capital requirements. The Company may revert back to the regulatory framework for Prompt Corrective Action ifIf the Bank’s Leverage Ratioleverage ratio falls below the minimum underrequired, it would no longer be eligible to elect use of the Community Bank Leverage Ratio Framework.CBLR framework.
As of March 31,September 30, 2023, 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 retained earnings 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 $3.0 million of the outstanding stock of the Holding Company. This amount represents 2.7%2.6% of total shareholders’ equity of $112.9$115.0 million at March 31,September 30, 2023. 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 quarternine months ended March 31,September 30, 2023, the Company did not repurchase any of the shares available.
During the quarternine months ended ended March 31,September 30, 2023, the Bank paid $2.0$6.3 million in cash dividends to the Holding Company which funded the Holding Company’s operating costs, payments of interest on its junior subordinated debt, and dividend payments to shareholders.
On March 28,September 26, 2023, the Company’s Board of Directors declared a cash dividend of $0.11$0.12 per share on the Company’s common stock. The dividend was payable on April 21,October 25, 2023, to shareholders of record as of April 7,October 10, 2023. Approximately $1.9$2.1 million was transferred from retained earnings to dividends payable to allow for 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 Department of Financial Protection and Innovation (Commissioner). As applicable to the Bank, the Financial Code provides that the Bank may not pay cash dividends in an amount which 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 shareholders’ 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.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
This item is not applicable to 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 March 31,September 30, 2023, the end of the period covered by this report, 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 not effective at thea reasonable assurance level.level due to the following material weakness in internal control over financial reporting.
Material Weakness in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness was identified in the Company’s internal control over financial reporting:
The Company failed to design and maintain effective controls over the completeness and accuracy of the underlying historical data utilized in the calculation of the allowance for credit losses at the date of adoption of ASC Topic 326, Financial Instruments – Credit Losses.
Notwithstanding the material weakness in our internal control over financial reporting, we have concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.
Remediation Efforts
Subsequent to the period covered by the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, with respect to the material weakness set forth above, management has been actively engaged in developing remediation plans to address the material weakness identified above.
The Company has devoted significant effort and resources to the remediation and will continue to design new and enhanced controls related to testing the completeness and accuracy of underlying data utilized in the calculation of the allowance for credit losses. The new and enhanced controls have not been designed and have not operated for a sufficient amount of time to conclude that the material weakness has been remediated. We will continue to monitor the effectiveness of these controls and will make any further changes management determines appropriate.
Changes in Internal Control over Financial Reporting
There have not been anywere no changes inmade to the Company’s internal control over financial reporting that occurred during the quarter ended March 31,September 30, 2023, that have materially affected, or arewas 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
The 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 2. Unregistered Sales of Equity Securities and Use of Proceeds
None during the quarter ended March 31,September 30, 2023.
Item 6. Exhibits:
(a)Exhibits:
| | | | | |
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 10 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: | MayNovember 15, 2023 | /S/ Dennis R. Woods |
| | Dennis R. Woods |
| | President and Chief Executive Officer |
| | |
| | /S/ David A. Kinross |
| | David A. Kinross |
| | Senior Vice President and Chief Financial Officer |