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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017MARCH 31, 2021

Commission file number: 000-33063

SIERRA BANCORP

Sierra Bancorp

(Exact name of Registrant as specified in its charter)

California

33-0937517

(State of Incorporation)

(IRS Employer Identification No)

86 North Main Street, Porterville, California93257

(Address of principal executive offices)                  (Zip Code)

(559) 782-4900

(559) 782-4900

(Registrant’s telephone number, including area code)

Not Applicable

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

BSRR

The NASDAQ Stock Market LLC

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 requirements for the past 90 days.  Yes      No  

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 smaller 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.(Check one):

Large Accelerated Filer

 

  

Accelerated Filer:

 

Non‑acceleratedNon-accelerated Filer:

 

  (Do not check if a smaller reporting company)

  

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 Section7(a)(2)(B) of the Securities Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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.

As of May 1, 2021, the registrant had 15,410,763 shares of common stock outstanding, including 167,065 shares of unvested restricted stock.

Common stock, no par value, 15,218,740 shares outstanding as of November 1, 2017


FORM 10-Q

Table of Contents

FORM 10-Q

Table of Contents

Page

Page

Part I - Financial Information

1

Item 1. Financial Statements (Unaudited)

1

Consolidated Balance Sheets

1

Consolidated Statements of Income

2

Consolidated Statements of Comprehensive Income

3

Consolidated Statements of Changes In Shareholders’ Equity

4

Consolidated Statements of Cash Flows

45

Notes to Consolidated Financial Statements (Unaudited)

56

Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations

3532

Forward-Looking Statements

3532

Critical Accounting Policies

3532

Overview of the Results of Operations and Financial Condition

3533

Earnings Performance

37

Net Interest Income and Net Interest Margin

37

Provision for Loan and Lease Losses

4140

Non-InterestNoninterest Income and Non-InterestNoninterest Expense

42

Provision for Income Taxes

4544

Balance Sheet Analysis

4544

Earning Assets

4544

Investments

4544

Loan and Lease Portfolio

45

Nonperforming Assets

47

Nonperforming Assets

48

Allowance for Loan and Lease Losses

4948

Off-Balance Sheet Arrangements

51

Other Assets

51

Deposits and Interest-BearingInterest Bearing Liabilities

52

Deposits

52

Other Interest-BearingInterest Bearing Liabilities

52

Noninterest Bearing Liabilities

53

Non-Interest Bearing Liabilities

53

Liquidity and Market Risk Management

53

Capital Resources

56

Item 3. Qualitative & Quantitative Disclosures about Market Risk

57

Item 4. Controls and Procedures

5758

Part II - Other Information

5859

Item 1. - Legal Proceedings

5859

Item 1A. - Risk Factors

5859

Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds

5859

Item 3. - Defaults upon Senior Securities

5859

Item 4. - (Removed and Reserved)Mine Safety Disclosures

5859

Item 5. - Other Information

5859

Item 6. - Exhibits

59

Signatures

60

Signatures

61


Table of Contents

PART I - FINANCIALFINANCIAL INFORMATION

Item 1 – Financial Statements

SIERRA BANCORP

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, unaudited)thousands)

    

March 31, 2021

    

December 31, 2020

ASSETS

(unaudited)

(audited)

Cash and due from banks

$

77,845

$

67,908

Interest bearing deposits in banks

268,366

3,509

Total cash & cash equivalents

346,211

71,417

Securities available-for-sale

552,931

543,974

Loans and leases:

Gross loans and leases

2,288,468

2,463,111

Deferred loan and lease fees, net

(3,717)

(3,147)

Allowance for loan and lease losses

(18,319)

(17,738)

Net loans and leases

2,266,432

2,442,226

Foreclosed assets

945

971

Premises and equipment, net

26,795

27,505

Goodwill

27,357

27,357

Other intangible assets, net

4,038

4,307

Bank-owned life insurance

53,255

52,539

Other assets

48,073

50,446

Total assets

$

3,326,037

$

3,220,742

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits:

Noninterest bearing

$

1,020,350

$

943,664

Interest bearing

1,833,542

1,680,942

Total deposits

2,853,892

2,624,606

Repurchase agreements

51,527

39,138

Short-term borrowings

5,000

142,900

Subordinated debentures, net

35,169

35,124

Other liabilities

32,468

35,078

Total liabilities

2,978,056

2,876,846

Commitments and contingent liabilities (Note 7)

Shareholders' equity

Common stock, 0 par value; 24,000,000 shares authorized; 15,410,763 and 15,388,423 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

113,453

113,384

Additional paid-in capital

3,961

3,736

Retained earnings

216,218

208,371

Accumulated other comprehensive income, net

14,349

18,405

Total shareholders' equity

347,981

343,896

Total liabilities and shareholders' equity

$

3,326,037

$

3,220,742

 

 

September 30, 2017

 

 

December 31, 2016

 

ASSETS

 

(unaudited)

 

 

(audited)

 

Cash and due from banks

 

$

52,358

 

 

$

79,087

 

Interest-bearing deposits in banks

 

 

2,249

 

 

 

41,355

 

Total cash & cash equivalents

 

 

54,607

 

 

 

120,442

 

Securities available-for-sale

 

 

583,200

 

 

 

530,083

 

Loans and leases:

 

 

 

 

 

 

 

 

Gross loans and leases

 

 

1,311,625

 

 

 

1,262,531

 

Allowance for loan and lease losses

 

 

(8,784

)

 

 

(9,701

)

Deferred loan and lease costs, net

 

 

2,705

 

 

 

2,924

 

Net loans and leases

 

 

1,305,546

 

 

 

1,255,754

 

Foreclosed assets

 

 

2,674

 

 

 

2,225

 

Premises and equipment, net

 

 

28,373

 

 

 

28,893

 

Goodwill

 

 

8,268

 

 

 

8,268

 

Other intangible assets, net

 

 

2,483

 

 

 

2,803

 

Company owned life insurance

 

 

45,270

 

 

 

43,706

 

Other assets

 

 

47,572

 

 

 

40,699

 

Total assets

 

$

2,077,993

 

 

$

2,032,873

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Non-interest bearing

 

$

571,509

 

 

$

524,552

 

Interest bearing

 

 

1,208,070

 

 

 

1,170,919

 

Total deposits

 

 

1,779,579

 

 

 

1,695,471

 

Repurchase agreements

 

 

8,679

 

 

 

8,094

 

Federal funds purchased

 

 

1,600

 

 

 

 

Short-term borrowings

 

 

10,500

 

 

 

65,000

 

Subordinated debentures, net

 

 

34,544

 

 

 

34,410

 

Other liabilities

 

 

24,008

 

 

 

24,020

 

Total Liabilities

 

 

1,858,910

 

 

 

1,826,995

 

 

 

 

 

 

 

 

 

 

Commitments and contingent liabilities (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

Common stock, no par value; 24,000,000 shares authorized; 13,840,429 and

   13,776,589 shares issued

 

 

 

 

 

 

 

 

   and outstanding at September 30, 2017 and

 

 

 

 

 

 

 

 

   December 31, 2016, respectively

 

 

73,668

 

 

 

72,626

 

Additional paid-in capital

 

 

2,940

 

 

 

2,832

 

Retained earnings

 

 

141,870

 

 

 

132,180

 

Accumulated other comprehensive income (loss), net

 

 

605

 

 

 

(1,760

)

Total shareholders' equity

 

 

219,083

 

 

 

205,878

 

Total liabilities and shareholder's equity

 

$

2,077,993

 

 

$

2,032,873

 

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

1


Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(dollars in thousands, except per share data, unaudited)

Three months ended March 31,

    

2021

    

2020

Interest and dividend income

Loans and leases, including fees

$

26,412

$

22,112

Taxable securities

1,578

2,460

Tax-exempt securities

1,449

1,339

Federal funds sold and other

19

140

Total interest income

29,458

26,051

Interest expense

Deposits

608

1,834

Short-term borrowings

48

36

Subordinated debentures

247

394

Total interest expense

903

2,264

Net interest income

28,555

23,787

Provision for loan losses

250

1,800

Net interest income after provision for loan losses

28,305

21,987

Non-interest income

Service charges on deposits

2,767

3,183

Other income

4,063

2,923

Total noninterest income

6,830

6,106

Noninterest expense

Salaries and employee benefits

11,151

10,172

Occupancy and equipment

2,486

2,327

Other

6,634

5,319

Total noninterest expense

20,271

17,818

Income before taxes

14,864

10,275

Provision for income taxes

3,786

2,468

Net income

$

11,078

$

7,807

PER SHARE DATA

Book value

$

22.58

$

21.03

Cash dividends

$

0.21

$

0.20

Earnings per share basic

$

0.73

$

0.51

Earnings per share diluted

$

0.72

$

0.51

Average shares outstanding, basic

15,223,010

15,262,252

Average shares outstanding, diluted

15,337,710

15,340,017

Total shareholders' equity (in thousands)

$

347,981

$

319,459

Shares outstanding

15,410,763

15,190,038

Dividends paid (in thousands)

$

3,231

$

3,059

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

Interest and dividend income

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Loans and leases, including fees

 

$

16,543

 

 

$

15,121

 

 

$

47,349

 

 

$

41,360

 

Taxable securities

 

 

2,224

 

 

 

1,879

 

 

 

6,385

 

 

 

6,114

 

Tax-exempt securities

 

 

1,002

 

 

 

765

 

 

 

2,739

 

 

 

2,225

 

Federal funds sold and other

 

 

63

 

 

 

29

 

 

 

317

 

 

 

61

 

Total interest income

 

 

19,832

 

 

 

17,794

 

 

 

56,790

 

 

 

49,760

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,032

 

 

 

575

 

 

 

2,588

 

 

 

1,573

 

Short-term borrowings

 

 

14

 

 

 

51

 

 

 

34

 

 

 

107

 

Subordinated debentures

 

 

351

 

 

 

261

 

 

 

1,009

 

 

 

663

 

Total interest expense

 

 

1,397

 

 

 

887

 

 

 

3,631

 

 

 

2,343

 

Net interest income

 

 

18,435

 

 

 

16,907

 

 

 

53,159

 

 

 

47,417

 

Provision for loan losses

 

 

 

 

 

 

 

 

300

 

 

 

 

Net interest income after provision for loan losses

 

 

18,435

 

 

 

16,907

 

 

 

52,859

 

 

 

47,417

 

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposits

 

 

2,916

 

 

 

2,686

 

 

 

8,263

 

 

 

7,535

 

Net gains on sale of securities available-for-sale

 

 

918

 

 

 

90

 

 

 

984

 

 

 

212

 

Other income

 

 

2,076

 

 

 

2,215

 

 

 

7,161

 

 

 

6,112

 

Total non-interest income

 

 

5,910

 

 

 

4,991

 

 

 

16,408

 

 

 

13,859

 

Other operating expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

7,478

 

 

 

6,866

 

 

 

22,617

 

 

 

20,355

 

Occupancy and equipment

 

 

2,368

 

 

 

2,063

 

 

 

6,923

 

 

 

5,680

 

Other

 

 

5,599

 

 

 

7,192

 

 

 

16,698

 

 

 

17,280

 

Total other operating expense

 

 

15,445

 

 

 

16,121

 

 

 

46,238

 

 

 

43,315

 

Income before taxes

 

 

8,900

 

 

 

5,777

 

 

 

23,029

 

 

 

17,961

 

Provision for income taxes

 

 

3,158

 

 

 

1,848

 

 

 

7,533

 

 

 

5,911

 

Net income

 

$

5,742

 

 

$

3,929

 

 

$

15,496

 

 

$

12,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value

 

$

15.83

 

 

$

15.12

 

 

$

15.83

 

 

$

15.12

 

Cash dividends

 

$

0.14

 

 

$

0.12

 

 

$

0.42

 

 

$

0.36

 

Earnings per share basic

 

$

0.41

 

 

$

0.28

 

 

$

1.12

 

 

$

0.90

 

Earnings per share diluted

 

$

0.41

 

 

$

0.28

 

 

$

1.11

 

 

$

0.89

 

Average shares outstanding, basic

 

 

13,839,111

 

 

 

13,790,107

 

 

 

13,824,173

 

 

 

13,446,567

 

Average shares outstanding, diluted

 

 

14,013,987

 

 

 

13,904,460

 

 

 

14,010,894

 

 

 

13,560,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shareholder equity (in thousands)

 

$

219,083

 

 

$

208,528

 

 

$

219,083

 

 

$

208,528

 

Shares outstanding

 

 

13,840,429

 

 

 

13,789,501

 

 

 

13,840,429

 

 

 

13,789,501

 

Dividends Paid (in thousands)

 

$

1,937

 

 

$

1,666

 

 

$

5,805

 

 

$

4,851

 

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

2


Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(dollars in thousands, unaudited)

Three months ended March 31,

    

2021

    

2020

Net income

$

11,078

$

7,807

Other comprehensive (loss) income, before tax:

Unrealized gains on securities:

Unrealized holding (loss) gain arising during period

(5,759)

10,902

Other comprehensive (loss) income, before tax

(5,759)

10,902

Income tax benefit (expense) related to items of other comprehensive (loss) income, net of tax

1,703

(3,224)

Other comprehensive (loss) income

(4,056)

7,678

Comprehensive income

$

7,022

$

15,485

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

5,742

 

 

$

3,929

 

 

$

15,496

 

 

$

12,050

 

Other comprehensive income, before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) arising during period

 

 

(713

)

 

 

(674

)

 

 

5,065

 

 

 

3,813

 

Less: reclassification adjustment for gains included in net income (1)

 

 

(918

)

 

 

(90

)

 

 

(984

)

 

 

(212

)

Other comprehensive (loss) income, before tax

 

 

(1,631

)

 

 

(764

)

 

 

4,081

 

 

 

3,601

 

Income tax expense related to items of other comprehensive

   income (loss), net of tax

 

 

686

 

 

 

362

 

 

 

(1,716

)

 

 

(1,452

)

Other comprehensive income (loss) gain

 

 

(945

)

 

 

(402

)

 

 

2,365

 

 

 

2,149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

4,797

 

 

$

3,527

 

 

$

17,861

 

 

$

14,199

 

(1)

Amounts are included in net gains on investment securities available-for-sale on the Consolidated Statements of Income in non-interest revenue.  Income tax expense associated with the reclassification adjustment for the three months ended September 30, 2017 and 2016 was $386 thousand and $38 thousand respectively.  Income tax expense associated with the reclassification adjustment for the nine months ended September 30, 2017 and 2016 was $414 thousand and $89 thousand respectively.

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

3


Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(dollars in thousands, except per share data, unaudited)

Accumulated 

Additional

Other

Common Stock

 Paid In

Retained

Comprehensive

Shareholders'

    

Shares

    

Amount

    

Capital

    

 Earnings

    

Income

    

 Equity

Balance, December 31, 2019

15,285,118

$

113,179

$

3,307

$

186,867

$

5,932

$

309,285

Net income

7,807

7,807

Other comprehensive income, net of tax

7,678

7,678

Exercise of stock options

16,970

250

(69)

181

Stock based compensation expense

129

129

Stock repurchase

(112,050)

(829)

(1,733)

(2,562)

Cash dividends - $0.20 per share

(3,059)

(3,059)

Balance, March 31, 2020

15,190,038

$

112,600

$

3,367

$

189,882

$

13,610

$

319,459

Balance, December 31, 2020

15,388,423

$

113,384

$

3,736

$

208,371

$

18,405

$

343,896

Net income

11,078

11,078

Other comprehensive loss, net of tax

(4,056)

(4,056)

Exercise of stock options

4,160

69

(15)

54

Stock based compensation expense

18,180

240

240

Cash dividends - $0.21 per share

(3,231)

(3,231)

Balance, March 31, 2021

15,410,763

$

113,453

$

3,961

$

216,218

$

14,349

$

347,981

 

 

Nine months ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

15,496

 

 

$

12,050

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Gain on sales of securities

 

 

(984

)

 

 

(212

)

   Gain on sales of loans

 

 

(3

)

 

 

 

   Loss on disposal of fixed assets

 

 

66

 

 

 

 

   (Gain) loss on sale on foreclosed assets

 

 

(12

)

 

 

3

 

Writedowns on foreclosed assets

 

 

75

 

 

 

275

 

Share-based compensation expense

 

 

459

 

 

 

180

 

Provision for loan losses

 

 

300

 

 

 

 

Depreciation and amortization

 

 

2,177

 

 

 

1,880

 

Net amortization on securities premiums and discounts

 

 

5,083

 

 

 

5,208

 

Amortization/(accretion) of discounts for loans acquired and net deferred loan fees

 

 

276

 

 

 

(303

)

(Increase) decrease in cash surrender value of life insurance policies

 

 

(1,188

)

 

 

249

 

Amortization of core deposit intangible

 

 

320

 

 

 

101

 

Decrease in interest receivable and other assets

 

 

4,004

 

 

 

11,830

 

Increase in other liabilities

 

 

(12

)

 

 

(8,995

)

   Deferred income tax (benefit) provision

 

 

(336

)

 

 

1,998

 

Net cash provided by operating activities

 

 

25,721

 

 

 

24,264

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Maturities of securities available for sale

 

 

1,165

 

 

 

1,195

 

Proceeds from sales/calls of securities available for sale

 

 

22,325

 

 

 

23,753

 

Purchases of securities available for sale

 

 

(151,711

)

 

 

(103,334

)

Principal pay downs on securities available for sale

 

 

75,086

 

 

 

72,463

 

Net purchases of FHLB stock

 

 

(235

)

 

 

(960

)

Net increase in loans receivable, net

 

 

(50,976

)

 

 

(31,086

)

Purchases of premises and equipment, net

 

 

(1,589

)

 

 

(4,016

)

Proceeds from sale premises and equipment

 

 

 

 

 

1,204

 

Proceeds from sales of foreclosed assets

 

 

99

 

 

 

982

 

Purchase of company owned life insurance

 

 

(376

)

 

 

(300

)

Net increase in partnership investment

 

 

(12,132

)

 

 

(8,338

)

Net cash from bank acquisition

 

 

 

 

 

15,502

 

Net cash used in investing activities

 

 

(118,344

)

 

 

(32,935

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

   Increase in deposits

 

 

84,108

 

 

 

40,165

 

   Decrease in borrowed funds

 

 

(54,500

)

 

 

(8,200

)

Increase in Fed funds purchased

 

 

1,600

 

 

 

2,500

 

   Increase (decrease) in repurchase agreements

 

 

585

 

 

 

(2,635

)

Cash dividends paid

 

 

(5,804

)

 

 

(4,851

)

Repurchases of common stock

 

 

 

 

 

(1,723

)

Stock options exercised

 

 

799

 

 

 

234

 

          Net cash provided by financing activities

 

 

26,788

 

 

 

25,490

 

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash and due from banks

 

 

(65,835

)

 

 

16,819

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Beginning of period

 

 

120,442

 

 

 

48,623

 

End of period

 

$

54,607

 

 

$

65,442

 

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

4


Table of ContentsSierra Bancorp

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(dollars in thousands, unaudited)

Three months ended March 31,

    

2021

    

2020

Cash flows from operating activities:

Net income

$

11,078

$

7,807

Loss on disposal of fixed assets

4

(Gain) loss on sale on foreclosed assets

(15)

2

Writedowns on foreclosed assets

98

Stock based compensation expense

240

129

Provision for loan losses

250

1,800

Depreciation and amortization

819

771

Net amortization on securities premiums and discounts

1,152

1,050

Accretion of discounts for loans acquired and net deferred loan fees

(98)

(225)

Increase in cash surrender value of life insurance policies

(583)

(38)

Amortization of core deposit intangible

269

269

Decrease in interest receivable and other assets

5,690

1,467

Decrease in other liabilities

(1,499)

(2,336)

Deferred income tax benefit

(2,002)

(114)

Increase in value of restricted bank equity securities

(857)

(447)

Net amortization of partnership investment

133

158

Net cash provided by operating activities

14,679

10,293

Cash flows from investing activities:

Maturities and calls of securities available for sale

1,705

2,430

Purchases of securities available for sale

(45,713)

(33,285)

Principal pay downs on securities available for sale

28,141

21,351

Loan originations and payments, net

175,550

(35,350)

Purchases of premises and equipment

(68)

(1,716)

Proceeds from sales of foreclosed assets

35

32

Purchase of bank-owned life insurance

(133)

(167)

Net cash provided by (used in) investing activities

159,517

(46,705)

Cash flows from financing activities:

Increase in deposits

229,286

11,017

(Decrease) increase in borrowed funds

(137,900)

54,100

Increase in repurchase agreements

12,389

3,650

Cash dividends paid

(3,231)

(3,059)

Repurchases of common stock

(2,562)

Stock options exercised

54

181

Net cash provided by financing activities

100,598

63,327

Increase in cash and cash equivalents

274,794

26,915

Cash and cash equivalents

Beginning of period

71,417

80,077

End of period

$

346,211

$

106,992

Supplemental disclosure of cash flow information:

Interest paid

$

879

$

2,359

Supplemental noncash disclosures:

Real estate acquired through foreclosure

$

94

$

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

5

Table of Contents

SIERRA BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017March 31, 2021

(Unaudited)

Note 1 – The Business of Sierra Bancorp

Sierra Bancorp (the “Company”) is a California corporation headquartered in Porterville, California, and is a registered bank holding company under federal banking laws. The Company was formed to serve as the holding company for Bank of the Sierra (the “Bank”), and has been the Bank’s sole shareholder since August 2001. The Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries it may acquire or establish. As of September 30, 2017,March 31, 2021, the Company’s only other subsidiaries were Sierra Statutory Trust II, Sierra Capital Trust III, and Coast Bancorp Statutory Trust II, which were formed solely to facilitate the issuance of capital trust pass-through securities (“TRUPS”). Pursuant to the Financial Accounting Standards Board (“FASB”) standard on the consolidation of variable interest entities, these trusts are not reflected on a consolidated basis in the Company’s financial statements. References herein to the “Company” include Sierra Bancorp and its consolidated subsidiary, the Bank, unless the context indicates otherwise.

Bank of the Sierra, a California state-chartered bank headquartered in Porterville, California, offers a fullwide range of retail and commercial banking services invia branch offices located throughout California’s South San Joaquin Valley, the Central Coast, Ventura County, the Sacramento area, and neighboring communities. The Bank was incorporated in September 1977, and opened for business in January 1978 as a one-branch1-branch bank with $1.5 million in capital. Our growth in the ensuing years has largely been organic in nature, but includes four4 whole-bank acquisitions: Sierra National Bank in 2000, Santa Clara Valley Bank in 2014, Coast National Bank in 2016, and Ojai Community Bank in October of 2017, subsequent to the reporting date of this 10-Q.  Certain branching activity also occurred after the reporting date, namely the consolidation of our Oxnard loan production office into the Ventura branch (a former Ojai Community Bank location), the acquisition of the Woodlake branch from Citizens Business Bank, and the closure of our Fresno Herndon branch.  We plan to open a new branch on Palm Avenue in Fresno in 2018, in close proximity to the former Herndon Branch but with easier access and superior visibility.  Additional branching activity that has taken place in 2017 includes the opening of a de novo branch in Pismo Beach, California in the third quarter, preceded by the opening of a de novo branch on California Avenue in Bakersfield and the relocation of our Paso Robles branch earlier in the year.  Counting our latest acquisitions and branching activity, as2017. As of the filing date of this report the Bank operates 39 full service40 full-service branches and an online branch, and we maintainmaintains ATMs at all but one of our branch locations andas well as seven non-branch locations. Details on our most recent acquisitions are provided in Note 13 to the financial statements, Recent Developments.  In addition to our stand-alone officesMoreover, the Bank has specialized lending units which includefocus on agricultural borrowers, SBA loans, and mortgage warehouse lending. In addition, the bank opened a real estate industries center, an agricultural credit center, and an SBA lending unit.  We were close to $2.1 billionloan production office in Rocklin, CA in February 2020. The Company had total assets as of September 30, 2017,$3.3 billion at March 31, 2021, and for the past severala number of years we have claimed the distinction of being the largest bank headquartered in the South San Joaquin Valley. Total assets surpassed $2.3 billion subsequent to our recent acquisitions.  The Bank’s deposit accounts, which totaled almost $1.8$2.9 billion at September 30, 2017,March 31, 2021, are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to maximum insurable amounts.  Immediately after the acquisitions, total deposits exceeded $2.0 billion.

Note 2 – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in a condensed format, and therefore do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. The information furnished in these interim statements reflects all adjustments that are, in the opinion of Management, necessary for a fair statement of the results for such periods. Such adjustments can generally be considered as normal and recurring unless otherwise disclosed in this Form 10-Q. In preparing the accompanying financial statements, Management has taken subsequent events into consideration and recognized them where appropriate. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter, or for the full year. Certain amounts reported for 20162020 have been reclassified to be consistent with the reporting for 2017.2021. The interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2020, as filed with the Securities and Exchange Commission (the “SEC”).

Note 3 – Current Accounting Developments

In May 2014 the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606).  This ASU is the result of a joint project initiated by the FASB and the International Accounting Standards Board (IASB) to clarify the principles for recognizing revenue, and to develop common revenue standards and disclosure requirements that would: (1) remove

5


inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosures; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.  The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets.  The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The guidance provides steps to follow to achieve the core principle.  An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  Qualitative and quantitative information is required with regard to contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.  This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods therein, with early adoption permitted for reporting periods beginning after December 15, 2016.  The Company plans to adopt ASU 2014-09 on January 1, 2018 utilizing the modified retrospective approach.  Since the guidance does not apply to revenue associated with financial instruments such as loans and investments, which are accounted for under other provisions of GAAP, we do not expect it to impact interest income, our largest component of income.  The Company is currently performing an overall assessment of revenue streams potentially affected by the ASU, including certain deposit related fees and interchange fees, to determine the impact this guidance will have on our consolidated financial statements.

In January 2016 the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.  This guidance primarily affects the accounting for equity securities with readily determinable fair values, by requiring that the changes in fair value for such securities will be reflected in earnings rather than in other comprehensive income.  The accounting for other financial instruments such as loans, debt securities, and financial liabilities is largely unchanged.  ASU 2016-01 also changes the presentation and disclosure requirements for financial instruments, including a requirement that public business entities use exit pricing when estimating fair values for financial instruments measured at amortized cost for disclosure purposes.  ASU 2016-01 is generally effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Based on Management’s evaluation of the provisions of ASU 2016-01 and the fact that we had no equity positions with readily determinable market values remaining at September 30, 2017, we do not anticipate any impact on our consolidated financial statements upon adoption of ASU 2016-01.

In February 2016 the FASB issued ASU 2016-02, Leases (Topic 842).  The intention of this standard is to increase the transparency and comparability around lease obligations.  Previously unrecorded off-balance sheet obligations will now be brought more prominently to light by presenting lease liabilities on the face of the balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements.  ASU 2016-02 is generally effective for public business entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company has leases on 21 branch locations and an administrative office building, which are considered operating leases and are not currently reflected in our financial statements.  We expect that these lease agreements will be recognized on our consolidated statements of condition as right-of-use assets and corresponding lease liabilities subsequent to implementing ASU 2016-02, but we are still evaluating the extent to which this will impact our consolidated financial statements.

In March 2016 the FASB issued ASU 2016-09, Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, as part of its simplification initiative.  ASU 2016-09 became effective for public business entities for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period.  Accordingly, the Company adopted ASU 2016-09 effective January 1, 2017.  Prior guidance dictated that as they relate to share-based payments, tax benefits in excess of compensation costs (“windfalls”) were to be recorded in equity, and tax deficiencies (“shortfalls”) were to be recorded in equity to the extent of previous windfalls and then to the income statement.  ASU 2016-09 reduced some of the administrative complexities by eliminating the need to track a windfall “pool,” but as we have already experienced, it also increases the volatility of income tax expense.  ASU 2016-09 also removed the requirement to delay recognition of a windfall tax benefit until such time as it reduces current taxes payable.  Under the new guidance, the benefit is recorded when it arises, subject to normal valuation allowance considerations.  This change was applied by us on a modified retrospective basis, as required, with a cumulative-effect adjustment to opening retained earnings.  Furthermore, all tax-related cash flows resulting from share-based payments are now reported as operating activities on the statement of cash flows, a change from the previous requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities.  However, cash paid by an employer when directly withholding shares for tax withholding purposes is classified as a financing activity.  Under the new guidance, entities were permitted to make an accounting policy election for the impact of forfeitures on expense recognition for share-based payment awards.  Forfeitures can be estimated in advance, as required previously, or recognized as they occur.  Estimates are still required in certain

6


circumstances, such as at the time of modification of an award or issuance of a replacement award in a business combination.  If elected, the change to recognize forfeitures when they occur would have been adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to opening retained earnings.  We did not elect to recognize forfeitures as they occur, and continue to estimate potential forfeitures in advance.

In September 2016 the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which eliminates the probable initial recognition threshold for credit losses in current U.S. GAAP, and instead requires an organization to record a current estimate of all expected credit losses over the contractual term for financial assets carried at amortized cost. This is commonly referred to as the current expected credit losses (“CECL”) methodology. Expected credit losses for financial assets held at the reporting date will be measured based on historical experience, current conditions, and reasonable and supportable forecasts. Another change

6

Table of Contents

from existing U.S. GAAP involves the treatment of purchased credit deteriorated assets, which are more broadly defined than purchased credit impaired assets in current accounting standards. When such assets are purchased, institutions will estimate and record an allowance for credit losses that is added to the purchase price rather than being reported as a credit loss expense. Furthermore, ASU 2016-13 updates the measurement of credit losses on available-for-sale debt securities, by mandating that institutions record credit losses on available-for-sale debt securities through an allowance for credit losses rather than the current practice of writing down securities for other-than-temporary impairment. ASU 2016-13 will also require the enhancement of financial statement disclosures regarding estimates used in calculating credit losses. ASU 2016-13 does not change the existing write-off principle in U.S. GAAP or current nonaccrual practices, nor does it change accounting requirements for loans held for sale or certain other financial assets which are measured at the lower of amortized cost or fair value. As a public business entity that is an SEC filer, ASU 2016-13 becomeswas originally scheduled to become effective for the Company on January 1, 2020. In March 2020, although early application is permitted for 2019.the Company elected under Section 4014 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. In December 2020, the Consolidated Appropriations Act 2021, extended the deferral of implementation of CECL from December 31, 2020, to the earlier of the first day of the fiscal year, beginning after the national emergency terminates or January 1, 2022. The Company will now continue to postpone implementation in order to provide additional time to assess better the impact of the COVID-19 pandemic on the expected lifetime credit losses. On the effective date, institutions will apply the new accounting standard as follows: for financial assets carried at amortized cost, a cumulative-effect adjustment will be recognized on the balance sheet for any change in the related allowance for loan and lease losses generated by the adoption of the new standard; financial assets classified as purchased credit impaired assets prior to the effective date will be reclassified as purchased credit deteriorated assets as of the effective date, and will be grossed up for the related allowance for expected credit losses created as of the effective date; and, debt securities on which other-than-temporary impairment had been recognized prior to the effective date will transition to the new guidance prospectively with no change in their amortized cost basis. The Company commenced its transition efforts by establishing an implementation team, comprisedplans to implement CECL on January 1, 2022 and while the exact extent of the Company’s executive officers and certain other members of our credit administration and finance departments and chaired by our Chief Credit Officer.  Furthermore, after extensive discussion and due diligence, we engaged an external vendor to assist in our calculation of potential required reserves utilizing the CECL methodology and help validate our current reserving methodology.  A preliminary evaluation indicates that the provisions of ASU 2016-13 will likely have a material impact on our consolidated financial statements, particularly the level of our allowance for credit losses and shareholders’ equity.  While the potential extent of that impact has not yet been definitively determined, initial estimates indicatethe Company’s calculation as of March 31, 2021 indicates that our allowance for loan and lease losses couldwill increase by approximately 50% relative to as much as two times current levels, if utilizingunder CECL. The Company plans to continue to sensitize inputs, assumptions, and methodologies within its CECL estimation process during 2021 as we prepare for implementation on January 1, 2022. Changes in economic forecasts, or other key assumptions, prior to the implementation of CECL on January 1, 2022, could impact the magnitude of the implementation adjustment.

On March 22, 2020, a discounted cash flow methodologystatement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with forecasting.

In January 2017Customers Affected by the FASB issued ASU 2017-01, Business Combinations (Topic 805): ClarifyingCoronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the Definitioneffects of COVID-19. Additionally, Section 4013 of the CARES Act, that passed on March 27, 2020, further provides that a Business.  Currently, Topic 805 specifies three elements of a business – inputs, processes, and outputs.  While an integrated set of assets and activities (collectively referred toqualified loan modification is exempt by law from classification as a “set”troubled debt restructuring (“TDR”) as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is a business usually has outputs, outputs are not required.60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations.  In addition, alllate December 2020, Section 4013 of the inputs and processes that a seller uses in operating a set are not required if market participants can acquireCARES Act was extended through January 1, 2022 by the set2021 Consolidated Appropriations Act. In accordance with such guidance, we offered and continue to produce outputs,offer on a limited-based, short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note 10 for example, by integrating the acquired set with their own inputs and processes.  This led many transactions to be accounted for as business combinations rather than asset purchases under legacy GAAP.further information on non-TDR loan modifications. The primary goal of ASU 2017-01 is to narrow the definition of a business, and the guidance in this update provides a screen to determine when a set is not a business.  The screen requires that when substantially allimpact of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business.  This screen reduces the number of transactions that need to be further evaluated.  The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The amendments in this update should be applied prospectively on or after the effective date.  The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operationsInteragency Guidance and cash flows.

In January 2017 the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.  This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation, and goodwill impairment will simply be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.  All other goodwill impairment guidance will remain largely unchanged.  Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary.  The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts.  Entities

7


will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts.  The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019.  We have not been required to record any goodwill impairment to date, and after a preliminary review do not expect that this guidance would require us to do so given current circumstances.  Nevertheless, we will continue to evaluate ASU 2017-04 to more definitely determine its potential impactSection 4013, as amended, on the Company’s consolidated financial position, results of operations and cash flows.

Instatements has not been material through March 201731, 2021, but the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.  The amendments in this update shorten the amortization period for certain callable debt securities held at a premium, by requiring the premium to be amortized to the earliest call date.  Under current guidance, the premium on a callable debt security is generally amortized as an adjustment to yield over the contractual lifeultimate impact of the instrument, and any unamortized premium is recorded as a loss in earnings upon the debtor’s exerciserelief provided by these government loan modification provisions cannot be determined at this time.

7

Table of a call provision.  Under ASU 2017-08, because the premium will be amortized to the earliest call date, entities will no longer recognize a loss in earnings if a debt security is called prior to the contractual maturity date.  The amendments do not require an accounting change for securities held at a discount; discounts will continue to be amortized as an adjustment to yield over the contractual life of the debt instrument.  ASU 2017-08 is effective for public business entities, including the Company, for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted, including adoption in an interim period.  If an entity early adopts in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period.  To apply ASU 2017-08, entities must use a modified retrospective approach, with the cumulative-effect adjustment recognized to retained earnings at the beginning of the period of adoption.  Entities are also required to provide disclosures about a change in accounting principle in the period of adoption.  The Company has evaluated the potential impact of this guidance, and does not expect the adoption of ASU 2017-08 to have a material impact on our financial statements or operations.Contents

In May 2017 the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718):  Scope of Modification Accounting.  This update was issued to provide clarity, reduce diversity in practice, and lower cost and complexity when applying the guidance in Topic 718.  Under the updated guidance, an entity will be expected to account for the effects of an equity award modification unless all the following are met: 1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; 2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; 3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.  The current disclosure requirements in Topic 718 continue to apply.  ASU 2017-09 is effective for public business entities, including the Company, for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.  Early adoption is permitted, including adoption in an interim period for public business entities for reporting periods for which financial statements have not yet been issued.  Since the Company has not modified equity awards in the past and does not expect to do so in the future, we do not anticipate any impact on our financial statements or operations from the adoption of ASU 2017-09.

Note 4 – Supplemental Disclosure of Cash Flow Information

During the nine months ended September 30, 2017 and 2016, cash paid for interest due on interest-bearing liabilities was $3.645 million and $2.362 million, respectively.  There was $6.497 million in cash paid for income taxes during the nine months ended September 30, 2017, and $2.900 million for the nine months ended September 30, 2016.  Assets totaling $648,000 and $847,000 were acquired in settlement of loans for the nine months ended September 30, 2017 and September 30, 2016, respectively.  We received $99,000 in cash from the sale of foreclosed assets during the first nine months of 2017 relative to $837,000 during the first nine months of 2016, which represents sales proceeds less loans (if any) extended to finance such sales.

Note 54 – Share Based Compensation

On March 16, 2017 the Company’s Board of Directors approved and adopted the 2017 Stock Incentive Plan (the “2017 Plan”), which became effective May 24, 2017, the date approved by the Company’s shareholders. The 2017 Plan replaced the Company’s 2007 Stock Incentive Plan (the “2007 Plan”), which expired by its own terms on March 15, 2017. Options to purchase 492,240198,929 shares that were granted under the 2007 Plan were still outstanding as of September 30, 2017,March 31, 2021 and remain unaffected by that plan’s expiration. The 2017 Plan provides for the issuance of both “incentive” and “nonqualified” stock options to officers and employees, and of “nonqualified” stock options to non-employee directors and consultants of the Company. The 2017 Plan also provides for the issuance of restricted stock awards to these same classes of eligible participants, although no restricted stock awards have ever been issued by the Company.participants. The total number of shares of the Company’s authorized but unissued stock reserved for issuance pursuant to

8


awards under the 2017 Plan iswas initially 850,000 shares; no awards have yet beenshares, and the number remaining available for grant as of March 31, 2021 was 395,935. Options to purchase 448,865 shares granted under the 2017 Plan.Plan were outstanding as of March 31, 2021. The potential dilutive impact of unexercised stock options outstanding is discussed below in Note 6,5, Earnings per Share.

Pursuant to FASB’s standards on stock compensation, the value of each stock option grantedand restricted stock award is reflected in our income statementstate­ment as employee compensation or directors’ expense by expensing its fair value as of the grant date in the case of immediately vested options, or by amortizing its grant date fair value over the vesting period for options with graded vesting.of the option. The Company is utilizing theutilizes a Black-Scholes model to valuedetermine grant date fair values, while the market price of the Company’s common stock options, andat the “multiple option” approachdate of grant is used to allocate the resulting valuation to actual expense.  Under the multiple option approach an employee’s options for each vesting periodrestricted stock awards. Forfeitures are separately valued and amortized, which appears to be the preferred methodrecognized as they occur for option grants with graded vesting.both types of awards. A pre-tax charge of $18,000$0.2 million was reflected in the Company’s income statement during the thirdfirst quarter of 20172021 and $11,000$0.1 million was charged during the thirdfirst quarter of 2016,2020, as expense related to stock options.  Foroptions and restricted stock awards.

Restricted Stock Grants

The Company’s Restricted Stock Awards are awards of time-vested, non-transferrable shares of common stock and are available to be granted to the Company’s employees and directors. The vesting period of Restricted Stock Awards is determined at the time the awards are issued, and different awards may have different vesting terms; provided, however, that no installment of any Restricted Stock Award shall become vested less than one year from the grant date. Restricted Stock Awards are valued utilizing the fair value of the Company’s stock at the grant date. During the first quarter of 2021 18,180 shares were granted to employees and directors of the Company. These awards are expensed on a straight-line basis over the vesting period. As of March 31, 2021, there was $2.7 million of unamortized compensation cost related to unvested Restricted Stock Awards granted under the 2017 plan. That cost is expected to be amortized over a weighted average period of 4.0 years.

The Company’s time-vested award activity for the three quarters,months ended March 31, 2021 and 2020 is summarized below:

Three Months Ended March 31,

2021

2020

Shares

Weighted Average Grant-Date Fair Value

Shares

Weighted Average Grant-Date Fair Value

Unvested shares, January 1,

148,885

$

18.00

$

Granted

18,180

25.30

Vested

Forfeited

Unvested shares March 31,

167,065

$

18.79

$

8

Table of Contents

Stock Option Grants

The Company has issued equity instruments in the charges totaled $460,000form of Incentive Stock Options and Nonqualified Stock Options to certain officers and directors and may continue to do so under the 2017 Plan. The exercise price of each stock option is determined at the time of the grant and may be no less than 100% of the fair market value of such stock at the time the option is granted.

The Company’s stock option activity during the three months ended March 31, 2021 and 2020 are summarized below (dollars in 2017 and $180,000 in 2016.thousands, except per share data, unaudited):

Three Months Ended March 31,

2021

2020

    

Shares

    

Weighted Average
Exercise Price

Weighted Average Remaining Contractual Term (in years)

    

Aggregate
Intrinsic
Value
(1)

    

Shares

    

Weighted Average
Exercise Price

Weighted Average Remaining Contractual Term (in years)

    

Aggregate
Intrinsic
Value
(1)

Outstanding at January 1,

495,489

$

23.67

$

1,340

457,959

$

21.08

$

3,684

Granted

$

$

126,000

$

27.11

$

Exercised

(4,160)

$

12.95

$

50

(16,970)

$

10.65

$

248

Canceled

(10,600)

$

27.64

$

(5,400)

$

28.15

$

Outstanding at March 31,

480,729

$

23.68

6.47

$

1,701

561,589

$

22.68

6.98

$

753

Exercisable at March 31,

393,129

$

22.96

6.05

$

1,684

369,189

$

20.64

5.77

$

747

(1)The aggregate intrinsic value of stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on March 31, 2021. This amount changes based on changes in the market value of the Company's stock.

Note 65 – Earnings per Share

The computation of earnings per share, as presented in the Consolidated Statements of Income, is based on the weighted average number of shares outstanding during each period.period, excluding unvested restricted stock awards. There were 13,839,111 weighted average shares outstanding during the third quarter of 2017, and 13,790,107 during the third quarter of 2016.  There were 13,824,17315,223,010 weighted average shares outstanding during the first nine monthsquarter of 2017,2021 and 13,446,56715,262,252 during the first nine monthsquarter of 2016.

2020.

Diluted earnings per share calculations include the effect of the potential issuance of common shares, which for the Company is limited to shares that would be issued on the exercise of “in-the-money” stock options.options, and unvested restricted stock awards. For the thirdfirst quarter of 2017,2021, calculations under the treasury stock method resulted in the equivalent of 174,876114,700 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of 120,700351,827 stock options were excluded from the calculation because they were underwater and thus anti-dilutive. For the thirdfirst quarter of 20162020 the equivalent of 114,35377,765 shares were added in calculating diluted earnings per share, while 146,900304,763 anti-dilutive stock options were not factored into the computation.  Likewise, for the first nine months of 2017 the equivalent of 186,721 shares were added to basic weighted average shares outstanding in calculating diluted earnings per share and a weighted average of 120,700 stock options that were anti-dilutive for the period were not included, compared to the addition of the equivalent of 114,149 shares and non-inclusion of 196,900 anti-dilutive options in calculating diluted earnings per share for first nine months of 2016.

Note 76 – Comprehensive Income

As presented in the Consolidated Statements of Comprehensive Income, comprehensive income includes net income and other comprehensive income. The Company’s only source of other comprehensive income is unrealized gains and losses on available-for-sale investment securities. GainsInvestment gains or losses on investment securities that were realized and reflected in net income of the current period, which had previously been included in other comprehensive income as unrealized holding gains or losses in the period in which they arose, are considered to be reclassification adjustments that are excluded from other comprehensive income in the current period.

9

Table of Contents

Note 87 – Financial Instruments with Off-Balance-Sheet RiskCommitments and Contingent Liabilities

The Company is a party to financial instruments with off‑balance‑sheetoff-balance-sheet risk in the normal course of business. Those financial instruments currently consist of unused commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by counterparties for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and issuing letters of credit as it does for originating loans included on the balance sheet. The following financial instruments represent off‑balance‑sheetoff-balance-sheet credit risk (dollars in thousands):

 

September 30, 2017

 

 

December 31, 2016

 

    

March 31, 2021

    

December 31, 2020

Commitments to extend credit

 

$

639,177

 

 

$

463,923

 

$

476,898

$

441,816

Standby letters of credit

 

$

7,936

 

 

$

8,582

 

$

8,378

$

8,104


9


Commitments to extend credit consist primarily of the unused or unfunded portions of the following: home equity lines of credit; commercial real estate construction loans, where disbursements are made over the course of construction; commercial revolving lines of credit; mortgage warehouse lines of credit; unsecured personal lines of credit; and formalized (disclosed) deposit account overdraft lines. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments are expected to expire without being drawn upon, the unused portions of committed amounts do not necessarily represent future cash requirements. Standby letters of credit are generally unsecured and are issued by the Company to guarantee the performance of a customer to a third party, and the credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers.

At September 30, 2017,March 31, 2021, the Company was also utilizing a letter of credit in the amount of $86$105 million issued by the Federal Home Loan Bank on the Company’s behalf as security for certain deposits and to facilitate certain credit arrangements with the Company’s customers. That letter of credit is backed by loans which are pledged to the FHLB by the Company.

Note 98 – Fair Value Disclosures and Reporting the Fair Value Option and Fair Value Measurements

FASB’s standards on financial instruments, and on fair value measurements and disclosures, require allpublic business entities to disclose in their financial statement footnotes the estimated fair values of financial instruments for which it is practicable to estimate such.instruments. In addition to disclosure requirements, FASB’s standard on investments requires that our debt securities whichthat are classified as available for sale and any equity securities thatwhich have readily determinable fair values be measured and reported at fair value in our statement of financial position. Certain impaired loans are also reported at fair value, as explained in greater detail below, and foreclosed assets are carried at the lower of cost or fair value. FASB’s standard on financial instruments permits companies to report certain other financial assets and liabilities at fair value, but we havethe Company has not elected the fair value option for any of those financial instruments.

Fair value measurement and disclosure standards also establish a framework for measuring fair values. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Further, the standards establish a fair value hierarchy that encourages an entity to maximize the use of observable inputs and limit the use of unobservable inputs when measuring fair values. The standards describe three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the factors that market participants would likely consider in pricing an asset or liability.

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.10

Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the factors that market participants would likely consider in pricing an asset or liability.Table of Contents

Fair value estimates are made at a specific point in time based on relevant market data and information about the financial instruments. The estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to those instruments.  In addition, the tax ramifications related to realized gains and losses could have a significant effect on fair value estimates but have not been considered in determining those estimates.  Because no active market exists for a significant portion of our financial instruments, fairFair value disclosures for deposits include demand deposits, which are, by definition, equal to the amount payable on demand at the reporting date. Fair value calculations for loans and leases reflect exit pricing, and incorporate our assumptions with regard to the impact of prepayments on future cash flows and credit quality adjustments based on judgments regarding current economic conditions, risk characteristics of various financial instruments, andamong other factors.  Thethings. Since the estimates are subjective and involve uncertainties and matters of significant judgment and thereforethey cannot be determined with precision.  Changesprecision, and changes in assumptions could significantly alter the fair values presented.  The following methods and assumptions were used by the Company to estimate its financial instrument fair values disclosed at September 30, 2017 and December 31, 2016:

Cash and cash equivalents and fed funds sold:  The carrying amount is estimated to be fair value.

Investment securities:  Fair values are determined by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities when quoted prices for specific securities are not readily available.

Other investments:  Certain investments for which no secondary market exists are carried at cost and the carrying amount for those investments typically approximates their estimated fair value, unless an impairment analysis indicates the need for adjustments.

10


Loans and leases:  For variable-rate loans and leases that re-price frequently with no significant changes in credit risk or interest rate spreads relative to current market pricing, fair values are based on carrying values.  Fair values for other loans and leases are estimated by discounting projected cash flows at interest rates being offered at each reporting date for loans and leases with similar terms, to borrowers of comparable creditworthiness.  The carrying amount of accrued interest receivable approximates its fair value.

Loans held for sale:  Since loans designated by the Company as available-for-sale are typically sold shortly after making the decision to sell them, realized gains or losses are usually recognized within the same period and fluctuations in fair values are not relevant for reporting purposes.  If available-for-sale loans are on our books for an extended period of time, the fair value of those loans is determined using quoted secondary-market prices.

Collateral-dependent impaired loans:  Collateral-dependent impaired loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected disposition costs where applicable.

Cash surrender value of life insurance policies:  Fair values are based on net cash surrender values at each reporting date.

Deposits:  Fair values for non-maturity deposits are equal to the amount payable on demand at the reporting date, which is the carrying amount.  Fair values for fixed-rate certificates of deposit are estimated using a cash flow analysis, discounted at interest rates being offered at each reporting date by the Bank for certificates with similar remaining maturities.  The carrying amount of accrued interest payable approximates its fair value.

Short-term borrowings:  Current carrying amounts are used as an approximation of fair values for federal funds purchased, overnight advances from the Federal Home Loan Bank (“FHLB”), borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days of the reporting dates.  Fair values of other short-term borrowings are estimated by discounting projected cash flows at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Long-term borrowings:  Fair values are estimated using projected cash flows discounted at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Subordinated debentures:  Fair values are determined based on the current market value for like instruments of a similar maturity and structure.

Commitments to extend credit and letters of credit:  If funded, the carrying amounts for currently unused commitments would provide an equivalent measure of fair values for the newly created financial assets at the funding date.  However, because of the high degree of uncertainty with regard to whether or not those commitments will ultimately be funded, fair values for loan commitments and letters of credit in their current undisbursed state cannot reasonably be estimated, and only notional values are disclosed in the table below.

11


Estimated fair values for the Company’s financial instruments are as follows, as of the dates noted:

Fair Value of Financial Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

September 30, 2017

 

 

 

 

 

 

 

Estimated Fair Value

 

 

 

Carrying

Amount

 

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

 

 

Significant

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

Financial assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

54,607

 

 

$

54,610

 

 

$

 

 

$

 

 

$

54,610

 

Investment securities available for sale

 

 

583,200

 

 

 

 

 

 

583,200

 

 

 

 

 

 

583,200

 

Loans and leases, net held for investment

 

 

1,305,507

 

 

 

 

 

 

1,317,560

 

 

 

 

 

 

1,317,560

 

Collateral dependent impaired loans

 

 

39

 

 

 

 

 

 

39

 

 

 

 

 

 

39

 

Cash surrender value of life insurance policies

 

 

45,270

 

 

 

 

 

 

45,270

 

 

 

 

 

 

45,270

 

Other investments

 

 

8,741

 

 

 

 

 

 

8,741

 

 

 

 

 

 

8,741

 

Accrued interest receivable

 

 

6,676

 

 

 

 

 

 

6,676

 

 

 

 

 

 

6,676

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

571,509

 

 

$

571,509

 

 

$

 

 

$

 

 

$

571,509

 

Interest-bearing

 

 

1,208,070

 

 

 

 

 

 

1,207,808

 

 

 

 

 

 

1,207,808

 

Fed funds purchased and repurchase agreements

 

 

10,279

 

 

 

 

 

 

10,279

 

 

 

 

 

 

10,279

 

Short-term borrowings

 

 

10,500

 

 

 

 

 

 

10,500

 

 

 

 

 

 

10,500

 

Subordinated debentures

 

 

34,544

 

 

 

 

 

 

24,095

 

 

 

 

 

 

24,095

 

Accrued interest payable

 

 

175

 

 

 

 

 

 

175

 

 

 

 

 

 

175

 

 

 

Notional Amount

 

 

 

 

 

 

 

 

 

Off-balance-sheet financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

$

639,177

 

 

 

 

 

 

 

 

 

Standby letters of credit

 

 

7,936

 

 

 

 

 

 

 

 

 

Fair Value of Financial Instruments


(dollars in thousands, unaudited)


 

 

December 31, 2016

 

 

 

 

 

 

 

Estimated Fair Value

 

 

 

Carrying

Amount

 

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

 

 

Significant

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

Financial assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

120,442

 

 

$

120,442

 

 

$

 

 

$

 

 

$

120,442

 

Investment securities available for sale

 

 

530,083

 

 

 

1,546

 

 

 

528,537

 

 

 

 

 

 

530,083

 

Loans and leases, net held for investment

 

 

1,255,348

 

 

 

 

 

 

1,266,447

 

 

 

 

 

 

1,266,447

 

Collateral dependent impaired loans

 

 

406

 

 

 

 

 

 

406

 

 

 

 

 

 

406

 

Cash surrender value of life insurance policies

 

 

43,706

 

 

 

 

 

 

43,706

 

 

 

 

 

 

43,706

 

Other investments

 

 

8,506

 

 

 

 

 

 

8,506

 

 

 

 

 

 

8,506

 

Accrued interest receivable

 

 

6,354

 

 

 

 

 

 

6,354

 

 

 

 

 

 

6,354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

524,552

 

 

$

524,552

 

 

$

 

 

$

 

 

$

524,552

 

Interest-bearing

 

 

1,170,919

 

 

 

 

 

 

1,171,188

 

 

 

 

 

 

1,171,188

 

Fed funds purchased and repurchase agreements

 

 

8,094

 

 

 

 

 

 

8,094

 

 

 

 

 

 

8,094

 

Short-term borrowings

 

 

65,000

 

 

 

 

 

 

65,000

 

 

 

 

 

 

65,000

 

Subordinated debentures

 

 

34,410

 

 

 

 

 

 

22,633

 

 

 

 

 

 

22,633

 

Accrued interest payable

 

 

188

 

 

 

 

 

 

188

 

 

 

 

 

 

188

 

March 31, 2021

Fair Value Measurements

    

Carrying
Amount

    

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

Financial assets:

Cash and cash equivalents

$

346,211

$

346,211

$

0

$

0

$

346,211

Investment securities available for sale

552,931

0

552,931

0

552,931

Loans and leases, net held for investment

2,261,448

0

0

2,254,439

2,254,439

Collateral dependent impaired loans

4,984

0

4,984

114

5,098

Financial liabilities:

Deposits

2,853,892

1,020,350

1,833,054

0

2,853,404

Repurchase agreements

51,527

0

51,527

0

51,527

Short term borrowings

5,000

0

4,999

0

4,999

Subordinated debentures

35,169

0

28,279

0

28,279

 

 

Notional Amount

 

 

 

 

 

 

 

 

 

Off-balance-sheet financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

$

463,923

 

 

 

 

 

 

 

 

 

Standby letters of credit

 

 

8,582

 

 

 

 

 

 

 

 

 

December 31, 2020

Fair Value Measurements

    

Carrying
Amount

    

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

Financial assets:

Cash and cash equivalents

$

71,417

$

71,417

$

0

$

0

$

71,417

Investment securities available for sale

543,974

0

543,974

0

543,974

Loans and leases, net held for investment

2,441,676

0

0

2,450,340

2,450,340

Collateral dependent impaired loans

550

0

550

0

550

Financial liabilities:

Deposits

2,624,606

943,664

1,680,814

0

2,624,478

Repurchase agreements

39,138

0

39,138

0

39,138

Short term borrowings

142,900

0

142,896

0

142,896

Subordinated debentures

35,124

0

24,364

0

24,364

For financial asset categories that were actually reportedcarried on our balance sheet at fair value as of September 30, 2017March 31, 2021 and December 31, 2016,2020, the Company used the following methods and significant assumptions:

Investment securities: Fair values are determined by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities.

Investment securities:  Fair values are determined by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities.11

Collateral-dependent impaired loans:  Collateral-dependent impaired loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected disposition costs where applicable.

Foreclosed assets:  Repossessed real estate (known as other real estate owned, or “OREO”) and other foreclosed assets are carried at the lowerTable of cost or fair value.  Fair value is the appraised value less expected selling costs for OREO and some other assets such as mobile homes; fair values for any other foreclosed assets are represented by estimated sales proceeds as determined using reasonably available sources.  Foreclosed assets for which appraisals can be feasibly obtained are periodically measured for impairment using updated appraisals.  Fair values for other foreclosed assets are adjusted as necessary, subsequent to a periodic re-evaluation of expected cash flows and the timing of resolution.  If impairment is determined to exist, the book value of a foreclosed asset is immediately written down to its estimated impaired value through the income statement, thus the carrying amount is equal to the fair value and there is no valuation allowance.Contents

Collateral-dependent impaired loans: Collateral-dependent impaired loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected disposition costs where applicable.
Foreclosed assets: Repossessed real estate (known as other real estate owned, or “OREO”) and other foreclosed assets are carried at the lower of cost or fair value. Fair value is the appraised value less expected disposition costs for OREO and some other assets such as mobile homes; fair values for any other foreclosed assets are represented by estimated sales proceeds as determined using reasonably available sources. Foreclosed assets for which appraisals can be feasibly obtained are periodically measured for impairment using updated appraisals. Fair values for other foreclosed assets are adjusted as necessary, subsequent to a periodic re-evaluation of expected cash flows and the timing of resolution. If impairment is determined to exist, the book value of a foreclosed asset is immediately written down to its estimated impaired value through the income statement, thus the carrying amount is equal to the fair value and there is no valuation allowance.

13


Assets reported at fair value on a recurring basis are summarized below:

Fair Value Measurements - Recurring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at September 30, 2017, using

 

 

 

 

 

 

 

Quoted Prices in Active Markets for

Identical Assets

(Level 1)

 

 

Significant

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

 

Realized

Gain/(Loss) (Level 3)

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Government agencies

 

$

 

 

$

24,422

 

 

$

 

 

$

24,422

 

 

$

 

Mortgage-backed securities

 

 

 

 

 

417,038

 

 

 

 

 

 

417,038

 

 

 

 

State and political subdivisions

 

 

 

 

 

141,740

 

 

 

 

 

 

141,740

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

 

 

$

583,200

 

 

$

 

 

$

583,200

 

 

$

 

 

 

Fair Value Measurements at December 31, 2016, using

 

 

 

 

 

 

 

Quoted Prices in Active Markets for

Identical Assets

(Level 1)

 

 

Significant

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

 

Realized

Gain/(Loss) (Level 3)

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Government agencies

 

$

 

 

$

26,468

 

 

$

 

 

$

26,468

 

 

$

 

Mortgage-backed securities

 

 

 

 

 

387,876

 

 

 

 

 

 

387,876

 

 

 

 

State and political subdivisions

 

 

 

 

 

114,193

 

 

 

 

 

 

114,193

 

 

 

 

Equity securities

 

 

1,546

 

 

 

 

 

 

 

 

 

1,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale securities

 

$

1,546

 

 

$

528,537

 

 

$

 

 

$

530,083

 

 

$

 

Fair Value Measurements – Recurring

14(dollars in thousands, unaudited)


Fair Value Measurements at March 31, 2021, using

    

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

    

Realized
Gain/(Loss)
(Level 3)

Securities:

U.S. government agencies

$

0

$

1,780

$

0

$

1,780

$

0

Mortgage-backed securities

0

316,833

0

316,833

0

State and political subdivisions

0

234,318

0

234,318

0

Total available-for-sale securities

$

0

$

552,931

$

0

$

552,931

$

0

Fair Value Measurements at December 31, 2020, using

    

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

    

Realized
Gain/(Loss)
(Level 3)

Securities:

U.S. government agencies

$

0

$

1,800

$

0

$

1,800

$

0

Mortgage-backed securities

0

314,435

0

314,435

0

State and political subdivisions

0

227,739

0

227,739

0

Total available-for-sale securities

$

0

$

543,974

$

0

$

543,974

$

0

12

Table of Contents

Assets reported at fair value on a nonrecurring basis are summarized below:

Fair Value Measurements – Nonrecurring

Fair Value Measurements - Nonrecurring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at September 30, 2017, using

 

 

 

Quoted Prices in Active Markets for

Identical Assets

(Level 1)

 

 

Significant Observable Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

 

Total

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

$

 

 

$

 

 

$

 

 

$

 

Other construction/land

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family - closed-end

 

 

 

 

 

12

 

 

 

 

 

 

12

 

Equity lines

 

 

 

 

 

14

 

 

 

 

 

 

14

 

Multi-family residential

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate - owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate - non-owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

Farmland

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate

 

 

 

 

 

26

 

 

 

 

 

 

26

 

Agriculture

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

 

 

 

13

 

 

 

 

 

 

13

 

Total impaired loans

 

 

 

 

 

39

 

 

 

 

 

 

39

 

Foreclosed assets

 

$

 

 

$

2,674

 

 

$

 

 

$

2,674

 

Total assets measured on a nonrecurring basis

 

$

 

 

$

2,713

 

 

$

 

 

$

2,713

 

(dollars in thousands, unaudited)

 

Fair Value Measurements at December 31, 2016, using

 

 

Quoted Prices in Active Markets for

Identical Assets

(Level 1)

 

 

Significant Observable Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

 

Total

 

Fair Value Measurements at March 31, 2021, using

    

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

    

Significant
Observable Inputs
(Level 2)

    

Significant
Unobservable Inputs
(Level 3)

    

Total

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate:

1-4 family residential construction

 

$

 

 

$

 

 

$

 

 

$

 

$

0

$

0

$

0

$

0

Other construction/land

 

 

 

 

 

 

 

 

 

 

 

 

0

0

0

0

1-4 family - closed-end

 

 

 

 

 

 

 

 

 

 

 

 

0

0

0

0

Equity lines

 

 

 

 

 

 

 

 

 

 

 

 

0

202

0

202

Multi-family residential

 

 

 

 

 

 

 

 

 

 

 

 

0

0

0

0

Commercial real estate - owner occupied

 

 

 

 

 

281

 

 

 

 

 

 

281

 

0

4,737

0

4,737

Commercial real estate - non-owner occupied

 

 

 

 

 

67

 

 

 

 

 

 

67

 

0

0

0

0

Farmland

 

 

 

 

 

 

 

 

 

 

 

 

0

0

0

0

Total real estate

 

 

 

 

 

348

 

 

 

 

 

 

348

 

0

4,939

0

4,939

Agriculture

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

0

0

0

0

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

0

45

114

159

Consumer loans

 

 

 

 

 

58

 

 

 

 

 

 

58

 

0

0

0

0

Total impaired loans

 

 

 

 

$

406

 

 

 

 

 

 

406

 

$

0

$

4,984

$

114

$

5,098

Foreclosed assets

 

$

 

 

$

2,225

 

 

$

 

 

$

2,225

 

$

0

$

945

$

0

$

945

Total assets measured on a nonrecurring basis

 

$

 

 

$

2,631

 

 

$

 

 

$

2,631

 

$

0

$

5,929

$

114

$

6,043

Fair Value Measurements at December 31, 2020, using

    

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

    

Significant
Observable Inputs
(Level 2)

    

Significant
Unobservable Inputs
(Level 3)

    

Total

Impaired loans

Real estate:

1-4 family residential construction

$

0

$

0

$

0

$

0

Other construction/land

0

0

0

0

1-4 family - closed-end

0

0

0

0

Equity lines

0

295

0

295

Multi-family residential

0

0

0

0

Commercial real estate - owner occupied

0

78

0

78

Commercial real estate - non-owner occupied

0

0

0

0

Farmland

0

0

0

0

Total real estate

0

373

0

373

Agricultural

0

0

0

0

Commercial and industrial

0

177

0

177

Consumer loans

0

0

0

0

Total impaired loans

$

0

$

550

$

0

$

550

Foreclosed assets

$

0

$

971

$

0

$

971

Total assets measured on a nonrecurring basis

$

0

$

1,521

$

0

$

1,521

The table above includes collateral-dependent impaired loan balances for which a specific reserve has been established or on which a write-down has been taken. Information on the Company’s total impaired loan balances and specific loss reserves associated with those balances is included in Note 11 below, and in Management’s Discussion and Analysisbelow.

13

Table of Financial Condition and Results of Operation in the “Nonperforming Assets” and “Allowance for Loan and Lease Losses” sections.Contents

15


The unobservable inputs are based on Management’s best estimates of appropriate discounts in arriving at fair market value. Adjusting any of those inputs could result in a significantly lower or higher fair value measurement. For example, an increase or decrease in actual loss rates would create a directionally opposite change in the fair value of unsecured impaired loans.

Note 109 – Investments

Investment Securities

Although the Company currently has the intent and the ability to hold the securities in its investment portfolio to maturity, the securities are all marketable and are classified as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity management. Pursuant to FASB’s guidance on accounting for debt and equity securities, available for sale securities are carried on the Company’s financial statements at their estimated fair market values, with monthly tax-effected “mark-to-market” adjustments made vis-à-vis accumulated other comprehensive income in shareholders’ equity.

The amortized cost and estimated fair value of available-for-sale investment securities available-for-sale are as follows:

Amortized Cost And Estimated Fair Value

(dollars in thousands, unaudited)

March 31, 2021

    

Amortized
Cost

    

Gross
Unrealized
Gains

    

Gross
Unrealized
Losses

    

Estimated Fair
Value

U.S. government agencies

$

1,724

$

56

$

$

1,780

Mortgage-backed securities

307,973

9,631

(771)

316,833

State and political subdivisions

222,863

11,584

(129)

234,318

Total securities

$

532,560

$

21,271

$

(900)

$

552,931

December 31, 2020

    

Amortized
Cost

    

Gross
Unrealized
Gains

    

Gross
Unrealized
Losses

    

Estimated Fair
Value

U.S. government agencies

$

1,725

$

75

$

$

1,800

Mortgage-backed securities

304,108

10,389

(62)

314,435

State and political subdivisions

212,011

15,728

227,739

Total securities

$

517,844

$

26,192

$

(62)

$

543,974

Amortized Cost And Estimated Fair Value

 

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated Fair

Value

 

US Government agencies

$

24,574

 

 

$

112

 

 

$

(264

)

 

$

24,422

 

Mortgage-backed securities

 

418,961

 

 

 

1,416

 

 

 

(3,339

)

 

 

417,038

 

State and political subdivisions

 

138,621

 

 

 

3,401

 

 

 

(282

)

 

 

141,740

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

Total securities

$

582,156

 

 

$

4,929

 

 

$

(3,885

)

 

$

583,200

 

14

Table of Contents

 

December 31, 2016

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated Fair

Value

 

US Government agencies

$

26,926

 

 

$

48

 

 

$

(506

)

 

$

26,468

 

Mortgage-backed securities

 

391,555

 

 

 

1,492

 

 

 

(5,171

)

 

 

387,876

 

State and political subdivisions

 

114,140

 

 

 

1,519

 

 

 

(1,466

)

 

 

114,193

 

Equity securities

 

500

 

 

 

1,046

 

 

 

 

 

 

1,546

 

Total securities

$

533,121

 

 

$

4,105

 

 

$

(7,143

)

 

$

530,083

 

At September 30, 2017March 31, 2021 and December 31, 2016,2020, the Company had 32922 securities and 4312 securities, respectively, with gross unrealized losses. Management has evaluated those securities as of the respective dates, and does not believe that any of the unrealized losses are other than temporary. Gross unrealized losses on our investment securities as of the indicated dates are disclosed in the table below, categorized by investment type and by the duration of time that loss positions on individual securities have continuously existed (over or under twelve months).

Investment Portfolio - Unrealized Losses


(dollars in thousands, unaudited)


Investment Portfolio - Unrealized Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

September 30, 2017

 

 

 

Less than twelve months

 

 

Twelve months or more

 

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

US Government agencies

 

$

(136

)

 

$

12,379

 

 

$

(128

)

 

$

4,512

 

Mortgage-backed securities

 

 

(1,906

)

 

 

231,968

 

 

 

(1,433

)

 

 

79,052

 

State and political subdivisions

 

 

(120

)

 

 

13,042

 

 

 

(162

)

 

 

7,018

 

Total

 

$

(2,162

)

 

$

257,389

 

 

$

(1,723

)

 

$

90,582

 

 

December 31, 2016

 

 

Less than twelve months

 

 

Twelve months or more

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

US Government agencies

 

$

(500

)

 

$

21,056

 

 

$

(6

)

 

$

711

 

March 31, 2021

Less than twelve months

Twelve months or more

    

Gross
Unrealized
Losses

    

Fair Value

    

Gross
Unrealized
Losses

    

Fair Value

U.S. government agencies

$

$

$

$

Mortgage-backed securities

 

 

(4,303

)

 

 

271,276

 

 

 

(868

)

 

 

43,570

 

(771)

31,988

State and political subdivisions

 

 

(1,466

)

 

 

49,195

 

 

 

 

 

 

 

(129)

11,469

Total

 

$

(6,269

)

 

$

341,527

 

 

$

(874

)

 

$

44,281

 

$

(900)

$

43,457

$

$

December 31, 2020

Less than twelve months

Twelve months or more

    

Gross
Unrealized
Losses

    

Fair Value

    

Gross
Unrealized
Losses

    

Fair Value

U.S. government agencies

$

$

$

$

Mortgage-backed securities

(62)

4,286

State and political subdivisions

Total

$

(62)

$

4,286

$

$

The table below summarizes the Company’s gross realized gains and losses as well as gross proceeds from the sales of securities, for the periods indicated:

Investment Portfolio - Realized Gains/(Losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Proceeds from sales, calls and maturities of securities

   available for sale

 

$

5,865

 

 

$

19,723

 

 

$

23,490

 

 

$

24,948

 

Gross gains on sales, calls and maturities of securities

    available for sale

 

$

918

 

 

$

90

 

 

$

1,024

 

 

$

250

 

Gross losses on sales, calls and maturities of securities

    available for sale

 

 

 

 

 

 

 

 

(40

)

 

 

(38

)

Net gains on sale of securities available for sale

 

$

918

 

 

$

90

 

 

$

984

 

 

$

212

 

Investment Portfolio - Realized Gains/(Losses)

17(dollars in thousands, unaudited)


Three months ended March 31,

    

2021

    

2020

Proceeds from sales, calls and maturities of securities available for sale

$

1,705

$

2,430

Gross gains on sales, calls and maturities of securities available for sale

0

Gross losses on sales, calls and maturities of securities available for sale

0

Net gains on sale of securities available for sale

$

$

0

15

Table of Contents

The amortized cost and estimated fair value of investment securities available-for-sale at September 30, 2017March 31, 2021 and December 31, 20162020 are shown below, grouped by the remaining time to contractual maturity dates. The expected life of investment securities may not be consistent with contractual maturity dates, since the issuers of the securities might have the right to call or prepay obligations with or without penalties.

Estimated Fair Value of Contractual Maturities

Estimated Fair Value of Contractual Maturities

 

 

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

September 30, 2017

 

 

 

Amortized Cost

 

 

Fair Value

 

Maturing within one year

 

$

7,657

 

 

$

7,736

 

Maturing after one year through five years

 

 

252,046

 

 

 

252,582

 

Maturing after five years through ten years

 

 

44,786

 

 

 

45,702

 

Maturing after ten years

 

 

75,744

 

 

 

76,935

 

 

 

 

 

 

 

 

 

 

Securities not due at a single maturity date:

 

 

 

 

 

 

 

 

US Government agencies collateralized by mortgage

   obligations

 

 

201,923

 

 

 

200,245

 

Other securities

 

 

-

 

 

 

-

 

 

 

$

582,156

 

 

$

583,200

 

(dollars in thousands, unaudited)

 

 

December 31, 2016

 

 

 

Amortized Cost

 

 

Fair Value

 

Maturing within one year

 

$

8,488

 

 

$

8,573

 

Maturing after one year through five years

 

 

260,387

 

 

 

259,535

 

Maturing after five years through ten years

 

 

50,823

 

 

 

50,687

 

Maturing after ten years

 

 

47,132

 

 

 

46,190

 

 

 

 

 

 

 

 

 

 

Securities not due at a single maturity date:

 

 

 

 

 

 

 

 

US Government agencies collateralized by mortgage

   obligations

 

 

165,791

 

 

 

163,552

 

Other securities

 

 

500

 

 

 

1,546

 

 

 

$

533,121

 

 

$

530,083

 

March 31, 2021

    

Amortized Cost

    

Fair Value

Maturing within one year

$

3,711

$

3,750

Maturing after one year through five years

9,300

9,518

Maturing after five years through ten years

25,751

26,960

Maturing after ten years

185,825

195,869

Securities not due at a single maturity date:

Mortgage-backed securities

178,018

182,835

Collateralized mortgage obligations

129,955

133,999

$

532,560

$

552,931

December 31, 2020

    

Amortized Cost

    

Fair Value

Maturing within one year

$

3,812

$

3,857

Maturing after one year through five years

9,475

9,732

Maturing after five years through ten years

27,250

28,745

Maturing after ten years

173,199

187,205

Securities not due at a single maturity date:

Mortgage-backed securities

157,201

163,029

Collateralized mortgage obligations

146,907

151,406

$

517,844

$

543,974

At September 30, 2017,March 31, 2021, the Company’s investment portfolio included 330356 “muni” bonds issued by 295 different government municipalities and agencies located within 3231 different states, with an aggregate fair value of $142$234.3 million. The largest exposure to any single municipality or agency was a combined $2.588$3.9 million (fair value) in general obligation bonds issued by the Lindsay (CA) Unified School District.Charter Township of Washington County (MI).

The Company’s investments in bonds issued by states, municipalities and political subdivisions are evaluated in accordance with Supervision and Regulation Letter 12-15 issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Organization Ratings,” and other regulatory guidance. Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third party credit rating agencies.

1816


Table of Contents

The following table summarizes the amortized cost and fair values of general obligation and revenue bonds in the Company’s investment securities portfolio at the indicated dates, identifying the state in which the issuing municipality or agency operates for our largest geographic concentrations:

Revenue and General Obligation Bonds by Location

Revenue and General Obligation Bonds by Location

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

September 30, 2017

 

 

December 31, 2016

 

 

 

Amortized

 

 

Fair Market

 

 

Amortized

 

 

Fair Market

 

General obligation bonds

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

State of issuance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Texas

 

$

32,352

 

 

$

32,826

 

 

$

20,170

 

 

$

19,875

 

California

 

 

26,677

 

 

 

27,638

 

 

 

25,457

 

 

 

25,799

 

Washington

 

 

13,108

 

 

 

13,392

 

 

 

5,928

 

 

 

5,970

 

Ohio

 

 

9,355

 

 

 

9,464

 

 

 

9,412

 

 

 

9,324

 

Illinois

 

 

8,388

 

 

 

8,565

 

 

 

9,873

 

 

 

9,871

 

Other (21 states)

 

 

24,236

 

 

 

24,831

 

 

 

22,637

 

 

 

22,698

 

Total General Obligation Bonds

 

 

114,116

 

 

 

116,716

 

 

 

93,477

 

 

 

93,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State of issuance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Texas

 

 

7,105

 

 

 

7,248

 

 

 

5,727

 

 

 

5,702

 

California

 

 

1,029

 

 

 

1,046

 

 

 

1,283

 

 

 

1,298

 

Washington

 

 

2,108

 

 

 

2,177

 

 

 

1,302

 

 

 

1,299

 

Ohio

 

 

 

 

 

 

 

 

261

 

 

 

261

 

Illinois

 

 

284

 

 

 

290

 

 

 

287

 

 

 

284

 

Other (12 states)

 

 

13,979

 

 

 

14,263

 

 

 

11,803

 

 

 

11,812

 

Total Revenue Bonds

 

 

24,505

 

 

 

25,024

 

 

 

20,663

 

 

 

20,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Obligations of States and Political Subdivisions

 

$

138,621

 

 

$

141,740

 

 

$

114,140

 

 

$

114,193

 

(dollars in thousands, unaudited)

March 31, 2021

December 31, 2020

Amortized

Fair Market

Amortized

Fair Market

General obligation bonds

    

Cost

    

Value

    

Cost

    

Value

State of issuance

Texas

$

77,198

$

81,619

$

76,794

$

82,888

California

34,304

35,624

31,122

33,100

Washington

24,133

25,748

22,896

25,072

Other (24 & 21 states, respectively)

56,375

59,066

51,827

55,352

Total general obligation bonds

192,010

202,057

182,639

196,412

Revenue bonds

State of issuance

Texas

6,773

7,181

7,023

7,516

Washington

2,245

2,366

2,249

2,406

California

363

374

363

379

Other (15 & 14 states, respectively)

21,471

22,340

19,737

21,026

Total revenue bonds

30,853

32,261

29,372

31,327

Total obligations of states and political subdivisions

$

222,863

$

234,318

$

212,011

$

227,739

The revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as utilities (water, sewer, and power), educational facilities, and general public and economic improvements. The primary sources of revenue for these bonds are delineated in the table below, which shows the amortized cost and fair market values for the largest revenue concentrations as of the indicated dates.

Revenue Bonds by Type

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

September 30, 2017

 

 

December 31, 2016

 

 

 

Amortized

 

 

Fair Market

 

 

Amortized

 

 

Fair Market

 

Revenue bonds

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Revenue source:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Water

 

$

7,236

 

 

$

7,362

 

 

$

4,788

 

 

$

4,722

 

Sales Tax

 

 

2,963

 

 

 

3,005

 

 

 

2,981

 

 

 

2,927

 

College & University

 

 

2,619

 

 

 

2,710

 

 

 

3,401

 

 

 

3,472

 

Lease

 

 

2,320

 

 

 

2,387

 

 

 

3,119

 

 

 

3,123

 

Local Housing

 

 

1,535

 

 

 

1,552

 

 

 

168

 

 

 

167

 

Other (13 sources)

 

 

7,832

 

 

 

8,008

 

 

 

6,206

 

 

 

6,245

 

Total Revenue Bonds

 

$

24,505

 

 

$

25,024

 

 

$

20,663

 

 

$

20,656

 

Revenue Bonds by Type


(dollars in thousands, unaudited)


March 31, 2021

December 31, 2020

Amortized

Fair Market

Amortized

Fair Market

Revenue bonds

    

Cost

    

Value

    

Cost

    

Value

Revenue source:

Water

$

13,151

$

13,756

$

12,609

$

13,526

Sewer

5,051

5,291

4,584

4,891

Sales tax

3,078

3,234

3,083

3,308

Lease

2,704

2,754

2,707

2,773

Other (8 and 8 sources, respectively)

���

6,869

7,226

6,389

6,829

Total revenue bonds

$

30,853

$

32,261

$

29,372

$

31,327

Low-Income Housing Tax Credit (“LIHTC”) Fund Investments

The Company has the ability to invest in limited partnerships which own housing projects that qualify for federal and/or California state tax credits, by mandating a specified percentage of low-income tenants for each project. The primary investment return comes from tax credits that flow through to investors, supplementing any returns that might be derived from an increase in property values.investors. Because rent levels are lower than standard market rents and the projects are generally highly leveraged, each project also typically generates tax-deductible operating losses that are allocated to the limited partners.partners for tax purposes.

17

Table of Contents

The Company invested inmade investment commitments to nine different LIHTC fund limited partnerships from 2001 through 2017, all of which were California-focused funds that help the Company meet its obligations under the Community Reinvestment Act. We utilize the cost method of accounting for our LIHTC fund investments, under which we initially record on our balance sheet an asset that represents the total cash expected to be invested over the life of the partnership. Any commitments or contingent commitments for future investment are reflected as a liability. The income statement reflects tax credits and any other tax benefits from these investments “below the line” within our income tax provision, while the initial book value of the investment is amortized on a straight-line basis as an offset to non-interestnoninterest income, over the time period in which the tax credits and tax benefits are expected to be received.

As of September 30, 2017March 31, 2021, our total LIHTC investment book balance was $8.9$3.3 million, which includes $3.5$0.1 million in remaining commitments for additional capital contributions. There were $533,000$0.1 million in tax credits derived from our LIHTC investments that were recognized during the ninethree months ended September 30, 2017,March 31, 2021, and amortization expense of $837,000$0.1 million associated with those investments was netted against pre-tax non-interestnoninterest income for the same time period. Our LIHTC investments are evaluated annually for potential impairment, and we have concluded that the carrying value of the investments is stated fairly and is not impaired.

Note 1110 – Credit Quality and Nonperforming Assets

Credit Quality Classifications

The Company monitors the credit quality of loans on a continuous basis using the regulatory and accounting classifications of pass, special mention, substandard and impaired to characterize the associated credit risk. Balances classified as “loss” are immediately charged off. The Company conforms to the following definitions for its risk classifications:

Pass: Larger non-homogeneous loans not meeting the risk rating definitions below, and smaller homogeneous loans that are not assessed on an individual basis.
Special mention: Loans which have potential issues that deserve the close attention of Management. If left uncorrected, those potential weaknesses could eventually diminish the prospects for full repayment of principal and interest according to the contractual terms of the loan agreement, or could result in deterioration of the Company’s credit position at some future date.
Substandard: Loans that have at least one clear and well-defined weakness that could jeopardize the ultimate recoverability of all principal and interest, such as a borrower displaying a highly leveraged position, unfavorable financial operating results and/or trends, uncertain repayment sources or an otherwise deteriorated financial condition.
Impaired: A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include all nonperforming loans and restructured troubled debt (“TDRs”). A TDR may be nonperforming or performing, depending on its accrual status and the demonstrated ability of the borrower to comply with restructured terms (see “Troubled Debt Restructurings” section below for additional information on TDRs).

Pass:  Larger non-homogeneous loans not meeting the risk rating definitions below, and smaller homogeneous loans that are not assessed on an individual basis.18

Special mention:  Loans which have potential issues that deserve the close attention of Management.  If left uncorrected, those potential weaknesses could eventually diminish the prospects for full repayment of principal and interest according to the contractual terms of the loan agreement, or could result in deterioration of the Company’s credit position at some future date.

Substandard:  Loans that have at least one clear and well-defined weakness that could jeopardize the ultimate recoverabilityTable of all principal and interest, such as a borrower displaying a highly leveraged position, unfavorable financial operating results and/or trends, uncertain repayment sources or a deteriorated financial condition.Contents

Impaired:  A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans include all nonperforming loans and restructured troubled debt (“TDRs”).  A TDR may be nonperforming or performing, depending on its accrual status and the demonstrated ability of the borrower to comply with restructured terms (see “Troubled Debt Restructurings” section below for additional information on TDRs).

20


Credit quality classifications for the Company’s loan balances were as follows, as of the dates indicated:

Credit Quality Classifications

(dollars in thousands, unaudited)

 

September 30, 2017

 

 

 

Pass

 

 

Special

Mention

 

 

Substandard

 

 

Impaired

 

 

Total

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

$

53,035

 

 

$

 

 

$

 

 

$

 

 

$

53,035

 

Other construction/land

 

 

46,317

 

 

 

281

 

 

 

 

 

 

562

 

 

 

47,160

 

1-4 family - closed end

 

 

148,652

 

 

 

626

 

 

 

794

 

 

 

4,862

 

 

 

154,934

 

Equity lines

 

 

33,411

 

 

 

3,555

 

 

 

538

 

 

 

4,618

 

 

 

42,122

 

Multi-family residential

 

 

31,020

 

 

 

 

 

 

 

 

 

394

 

 

 

31,414

 

Commercial real estate - owner occupied

 

 

253,912

 

 

 

4,343

 

 

 

2,766

 

 

 

1,844

 

 

 

262,865

 

Commercial real estate - non-owner occupied

 

 

275,251

 

 

 

4,464

 

 

 

3,154

 

 

 

1,668

 

 

 

284,537

 

Farmland

 

 

143,742

 

 

 

996

 

 

 

515

 

 

 

297

 

 

 

145,550

 

Total real estate

 

 

985,340

 

 

 

14,265

 

 

 

7,767

 

 

 

14,245

 

 

 

1,021,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

 

48,663

 

 

 

652

 

 

 

 

 

 

 

 

 

49,315

 

Commercial and industrial

 

 

98,822

 

 

 

10,539

 

 

 

679

 

 

 

1,325

 

 

 

111,365

 

Mortgage warehouse

 

 

119,031

 

 

 

 

 

 

 

 

 

 

 

 

119,031

 

Consumer loans

 

 

8,609

 

 

 

320

 

 

 

68

 

 

 

1,300

 

 

 

10,297

 

Total gross loans and leases

 

$

1,260,465

 

 

$

25,776

 

 

$

8,514

 

 

$

16,870

 

 

$

1,311,625

 

(dollars in thousands, unaudited)

 

December 31, 2016

 

 

Pass

 

 

Special

Mention

 

 

Substandard

 

 

Impaired

 

 

Total

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2021

    

Pass

    

Special
Mention

    

Substandard

    

Impaired

    

Total

Real estate:

1-4 family residential construction

 

$

32,417

 

 

$

 

 

$

 

 

$

 

 

$

32,417

 

$

35,791

$

1,027

$

0

$

0

$

36,818

Other construction/land

 

 

38,699

 

 

 

888

 

 

 

 

 

 

1,063

 

 

 

40,650

 

34,929

8,469

6,500

535

50,433

1-4 family - closed end

 

 

129,726

 

 

 

624

 

 

 

403

 

 

 

6,390

 

 

 

137,143

 

118,364

4,687

944

2,954

126,949

Equity lines

 

 

35,159

 

 

 

3,165

 

 

 

698

 

 

 

4,421

 

 

 

43,443

 

28,796

2,580

207

4,693

36,276

Multi-family residential

 

 

31,058

 

 

 

 

 

 

 

 

 

573

 

 

 

31,631

 

54,519

3,565

240

0

58,324

Commercial real estate - owner occupied

 

 

243,366

 

 

 

4,991

 

 

 

2,892

 

 

 

2,286

 

 

 

253,535

 

334,894

12,161

5,290

7,432

359,777

Commercial real estate - non-owner occupied

 

 

233,584

 

 

 

5,597

 

 

 

3,220

 

 

 

1,797

 

 

 

244,198

 

1,025,976

19,885

25,108

563

1,071,532

Farmland

 

 

132,613

 

 

 

1,020

 

 

 

808

 

 

 

39

 

 

 

134,480

 

114,079

8,193

3,451

434

126,157

Total real estate

 

 

876,622

 

 

 

16,285

 

 

 

8,021

 

 

 

16,569

 

 

 

917,497

 

1,747,348

60,567

41,740

16,611

1,866,266

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

 

45,249

 

 

 

891

 

 

 

 

 

 

89

 

 

 

46,229

 

42,035

1,345

1,629

467

45,476

Commercial and industrial

 

 

107,404

 

 

 

13,186

 

 

 

732

 

 

 

2,273

 

 

 

123,595

 

169,693

11,051

1,120

1,898

183,762

Mortgage warehouse

 

 

163,045

 

 

 

 

 

 

 

 

 

 

 

 

163,045

 

187,940

0

0

0

187,940

Consumer loans

 

 

10,303

 

 

 

191

 

 

 

9

 

 

 

1,662

 

 

 

12,165

 

4,749

48

8

219

5,024

Total gross loans and leases

 

$

1,202,623

 

 

$

30,553

 

 

$

8,762

 

 

$

20,593

 

 

$

1,262,531

 

$

2,151,765

$

73,011

$

44,497

$

19,195

$

2,288,468

December 31, 2020

    

Pass

    

Special
Mention

    

Substandard

    

Impaired

    

Total

Real estate:

1-4 family residential construction

$

40,044

$

8,521

$

0

$

0

$

48,565

Other construction/land

61,809

7,478

2,148

545

71,980

1-4 family - closed end

130,559

4,922

1,356

2,999

139,836

Equity lines

30,479

2,581

58

4,957

38,075

Multi-family residential

57,934

3,597

0

334

61,865

Commercial real estate - owner occupied

308,819

21,148

5,652

7,580

343,199

Commercial real estate - non-owner occupied

1,026,041

10,827

25,048

582

1,062,498

Farmland

104,826

21,468

3,169

442

129,905

Total real estate

1,760,511

80,542

37,431

17,439

1,895,923

Agricultural

39,391

3,617

1,614

250

44,872

Commercial and industrial

194,876

11,819

1,259

1,094

209,048

Mortgage warehouse

307,679

0

0

0

307,679

Consumer loans

5,323

58

11

197

5,589

Total gross loans and leases

$

2,307,780

$

96,036

$

40,315

$

18,980

$

2,463,111

Past Due and Nonperforming Assets

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets. The Company’s foreclosed assets can include mobile homes and/or OREO, which consists of commercial and/or residential real estate properties acquired by foreclosure or similar means that the Company is offering or will offer for sale. Foreclosed assets totaled $2.674$0.9 million at September 30, 2017, which includes one single-family residential property with a carrying value of $51,000March 31, 2021, and two relatively low-value mobile homes, and $2.225$1.0 million at December 31, 2016, which includes two relatively low-value mobile homes but no single-family residential properties.

Nonperforming2020. Gross nonperforming loans totaled $8.6 million at March 31, 2021 and $7.6 million at December 31, 2020. Loans and leases resultare classified as nonperforming when reasonable doubt surfaces with regard to the ability of the Company to collect all principal and interest. At that point, we stop accruing interest on the loan or lease in question and reverse any previously-recognizedpreviously-

2119


Table of Contents

recognized interest to the extent that it is uncollected or associated with interest-reserve loans. Any asset for which principal or interest has been in default for 90 days or more is also placed on non-accrual status even if interest is still being received, unless the asset is both well secured and in the process of collection. As of March 31, 2021, the Company had $22.4 million in loans with payment deferrals either under section 4013 of the CARES Act or the April 7, 2020 Interagency Statement.

An aging of the Company’s loan balances is presented in the following tables, by number of days past due as of the indicated dates:

Loan Portfolio Aging

(dollars in thousands, unaudited)

March 31, 2021

    

30-59 Days
Past Due

    

60-89 Days
Past Due

    

90 Days Or
More Past Due
(1)

    

Total
Past Due

    

Current

    

Total Financing
Receivables

    

Non-Accrual
Loans
(2)

Real estate:

1-4 family residential construction

$

0

$

0

$

0

$

0

$

36,818

$

36,818

$

0

Other construction/land

0

0

0

0

50,433

50,433

0

1-4 family - closed end

142

0

36

178

126,771

126,949

1,530

Equity lines

1,025

149

304

1,478

34,798

36,276

2,176

Multi-family residential

0

240

0

240

58,084

58,324

0

Commercial real estate - owner occupied

210

0

405

615

359,162

359,777

1,574

Commercial real estate - non-owner occupied

0

0

152

152

1,071,380

1,071,532

563

Farmland

989

0

0

989

125,168

126,157

434

Total real estate

2,366

389

897

3,652

1,862,614

1,866,266

6,277

Agricultural

819

191

250

1,260

44,216

45,476

466

Commercial and industrial

974

384

195

1,553

182,209

183,762

1,835

Mortgage warehouse lines

0

0

0

0

187,940

187,940

0

Consumer

27

5

0

32

4,992

5,024

21

Total gross loans and leases

$

4,186

$

969

$

1,342

$

6,497

$

2,281,971

$

2,288,468

$

8,599

(dollars in thousands, unaudited)

 

September 30, 2017

 

 

 

30-59 Days

Past Due

 

 

60-89 Days

Past Due

 

 

90 Days Or

More Past Due(1)

 

 

Total

Past Due

 

 

Current

 

 

Total Financing

Receivables

 

 

Non-Accrual

Loans(2)

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

   construction

 

$

 

 

$

 

 

$

 

 

$

 

 

$

53,035

 

 

$

53,035

 

 

$

 

Other construction/land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47,160

 

 

 

47,160

 

 

 

83

 

1-4 family - closed end

 

 

298

 

 

 

90

 

 

 

540

 

 

 

928

 

 

 

154,006

 

 

 

154,934

 

 

 

886

 

Equity lines

 

 

334

 

 

 

 

 

 

203

 

 

 

537

 

 

 

41,585

 

 

 

42,122

 

 

 

893

 

Multi-family residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,414

 

 

 

31,414

 

 

 

 

Commercial real estate -

   owner occupied

 

 

191

 

 

 

 

 

 

114

 

 

 

305

 

 

 

262,560

 

 

 

262,865

 

 

 

1,148

 

Commercial real estate -

   non-owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

284,537

 

 

 

284,537

 

 

 

 

Farmland

 

 

 

 

 

 

 

 

 

 

 

 

 

 

145,550

 

 

 

145,550

 

 

 

297

 

Total real estate

 

 

823

 

 

 

90

 

 

 

857

 

 

 

1,770

 

 

 

1,019,847

 

 

 

1,021,617

 

 

 

3,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49,315

 

 

 

49,315

 

 

 

 

Commercial and industrial

 

 

463

 

 

 

 

 

 

519

 

 

 

982

 

 

 

110,383

 

 

 

111,365

 

 

 

734

 

Mortgage warehouse lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

119,031

 

 

 

119,031

 

 

 

 

Consumer

 

 

206

 

 

 

15

 

 

 

 

 

 

221

 

 

 

10,076

 

 

 

10,297

 

 

 

77

 

Total gross loans and leases

 

$

1,492

 

 

$

105

 

 

$

1,376

 

 

$

2,973

 

 

$

1,308,652

 

 

$

1,311,625

 

 

$

4,118

 

(1)

As of September 30, 2017March 31, 2021, there were no0 loans over 90 days past due and still accruing.

(2)

Included in total financing receivables


20

 

 

December 31, 2016

 

 

 

30-59 Days

Past Due

 

 

60-89 Days

Past Due

 

 

90 Days Or

More Past Due(1)

 

 

Total

Past Due

 

 

Current

 

 

Total Financing

Receivables

 

 

Non-Accrual

Loans(2)

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

   construction

 

$

 

 

$

 

 

$

 

 

$

 

 

$

32,417

 

 

$

32,417

 

 

$

 

Other construction/land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,650

 

 

 

40,650

 

 

 

558

 

1-4 family - closed end

 

 

99

 

 

 

23

 

 

 

575

 

 

 

697

 

 

 

136,446

 

 

 

137,143

 

 

 

963

 

Equity lines

 

 

397

 

 

 

 

 

 

320

 

 

 

717

 

 

 

42,726

 

 

 

43,443

 

 

 

1,926

 

Multi-family residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,631

 

 

 

31,631

 

 

 

 

Commercial real estate -

   owner occupied

 

 

338

 

 

 

 

 

 

28

 

 

 

366

 

 

 

253,169

 

 

 

253,535

 

 

 

1,572

 

Commercial real estate -

   non-owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

 

 

244,198

 

 

 

244,198

 

 

 

67

 

Farmland

 

 

 

 

 

 

 

 

 

 

 

 

 

 

134,480

 

 

 

134,480

 

 

 

39

 

Total real estate

 

 

834

 

 

 

23

 

 

 

923

 

 

 

1,780

 

 

 

915,717

 

 

 

917,497

 

 

 

5,125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

 

 

 

 

 

 

 

89

 

 

 

89

 

 

 

46,140

 

 

 

46,229

 

 

 

89

 

Commercial and industrial

 

 

168

 

 

 

3

 

 

 

292

 

 

 

463

 

 

 

123,132

 

 

 

123,595

 

 

 

692

 

Mortgage warehouse lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

163,045

 

 

 

163,045

 

 

 

 

Consumer

 

 

94

 

 

 

9

 

 

 

52

 

 

 

155

 

 

 

12,010

 

 

 

12,165

 

 

 

459

 

Total gross loans and leases

 

$

1,096

 

 

$

35

 

 

$

1,356

 

 

$

2,487

 

 

$

1,260,044

 

 

$

1,262,531

 

 

$

6,365

 

Loan Portfolio Aging

(dollars in thousands, unaudited)

December 31, 2020

    

30-59 Days
Past Due

    

60-89 Days
Past Due

    

90 Days Or
More Past Due
(1)

    

Total
Past Due

    

Current

    

Total Financing
Receivables

    

Non-Accrual
Loans
(2)

Real estate:

1-4 family residential construction

$

0

$

0

$

0

$

0

$

48,565

$

48,565

$

0

Other construction/land

0

0

0

0

71,980

71,980

0

1-4 family - closed end

210

37

150

397

139,439

139,836

1,193

Equity lines

1,409

0

551

1,960

36,115

38,075

2,403

Multi-family residential

0

0

0

0

61,865

61,865

0

Commercial real estate - owner occupied

101

1,187

78

1,366

341,833

343,199

1,678

Commercial real estate - non-owner occupied

0

0

152

152

1,062,346

1,062,498

582

Farmland

0

211

442

653

129,252

129,905

442

Total real estate

1,720

1,435

1,373

4,528

1,891,395

1,895,923

6,298

Agricultural

0

0

250

250

44,622

44,872

250

Commercial and industrial

325

0

237

562

208,486

209,048

1,026

Mortgage warehouse lines

0

0

0

0

307,679

307,679

0

Consumer

38

0

0

38

5,551

5,589

24

Total gross loans and leases

$

2,083

$

1,435

$

1,860

$

5,378

$

2,457,733

$

2,463,111

$

7,598

(1)

As of December 31, 20162020, there were no0 loans over 90 days past due and still accruing.

(2)

Included in total financing receivables

Troubled Debt Restructurings

A loan that is modified for a borrower who is experiencing financial difficulty is classified as a troubled debt restructuring (TDR) if the modification constitutes a concession.concession, excluding loan modifications that are COVID-19 related and made in accordance with the interagency guidance and the CARES Act as described in Note 3, above. At September 30, 2017,March 31, 2021, the Company had a total of $14.3$13.0 million in TDRs, including $1.6$2.3 million in TDRs that were on non-accrual status. Generally, a non-accrual loan that has been modified as a TDR remains on non-accrual status for a period of at least six months to demonstrate the borrower’s ability to comply with the modified terms. However, performance prior to the modification, or significant events that coincide with the modification, could result in a loan’s return to accrual status after a shorter performance period or even at the time of loan modification. Regardless of the period of time that has elapsed, if the borrower’s ability to meet the revised payment schedule is uncertain, then the loan will be kept on non-accrual status.  Moreover, a TDR is generally considered to be in default when it appears that the customer will not likely be able to repay all principal and interest pursuant to restructured terms.

2321


Table of Contents

The Company may agree to different types of concessions when modifying a loan or lease. The tables below summarize TDRs which were modified during the noted periods, by type of concession:

Troubled Debt Restructurings, by Type of Loan Modification

(dollars in thousands, unaudited)

 

Three months ended September 30, 2017

 

 

 

Term

Modification

 

 

Interest Only Modification

 

 

Rate & Term Modification

 

 

Total

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

$

 

 

$

 

 

$

 

 

$

 

1-4 family - closed-end

 

 

 

 

 

 

 

 

250

 

 

 

250

 

Equity lines

 

 

40

 

 

 

 

 

 

96

 

 

 

136

 

Multi-family residential

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate - owner occupied

 

 

529

 

 

 

 

 

 

 

 

 

529

 

Farmland

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate loans

 

 

569

 

 

 

 

 

 

346

 

 

 

915

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

7

 

 

 

 

 

 

 

 

 

7

 

 

 

$

576

 

 

$

 

 

$

346

 

 

$

922

 

 

 

Three months ended September 30, 2016

 

 

 

Term

Modification

 

 

Interest Only Modification

 

 

Rate & Term Modification

 

 

Total

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

$

 

 

$

 

 

$

 

 

$

 

1-4 family - closed-end

 

 

 

 

 

 

 

 

178

 

 

 

178

 

Equity lines

 

 

135

 

 

 

 

 

 

97

 

 

 

232

 

Multi-family residential

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate - owner occupied

 

 

 

 

 

 

 

 

 

 

 

 

Farmland

 

 

 

 

 

 

 

 

258

 

 

 

258

 

Total real estate loans

 

 

135

 

 

 

 

 

 

533

 

 

 

668

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

5

 

 

 

 

 

 

 

 

 

5

 

 

 

$

140

 

 

$

 

 

$

533

 

 

$

673

 


(dollars in thousands, unaudited)

Three months ended March 31, 2021

    

Rate Modification

    

Term
Modification

    

Interest Only Modification

    

Rate & Term Modification

    

Term & Interest Modification

Total

Real estate:

Other construction/land

$

0

$

0

$

0

$

0

$

$

1-4 family - closed-end

0

0

0

0

Equity lines

0

0

0

83

83

Multi-family residential

0

0

0

0

Commercial real estate - owner occupied

0

0

0

0

Farmland

0

0

0

0

Total real estate loans

0

0

0

83

83

Agricultural

0

118

0

0

118

Commercial and industrial

0

185

0

0

185

Consumer loans

0

41

0

0

41

Total

$

0

$

344

$

0

$

83

$

$

427

Three months ended March 31, 2020

    

Rate Modification

    

Term
Modification

    

Interest Only
Modification

    

Rate & Term Modification

    

Term & Interest Modification

Total

Real estate:

Other construction/land

$

0

$

0

$

0

$

0

$

$

0

1-4 family - closed-end

0

0

0

0

0

Equity lines

0

0

0

0

0

Multi-family residential

0

0

0

0

0

Commercial real estate - owner occupied

0

0

0

0

86

86

Farmland

0

0

0

0

0

Total real estate loans

0

0

0

0

86

86

Agricultural

0

0

0

0

0

Commercial and industrial

0

0

0

0

0

Consumer loans

0

0

0

0

0

Total

$

0

$

0

$

0

$

0

$

86

$

86


22

Table of Contents

Troubled Debt Restructurings by Type of Loan Modification

(dollars in thousands, unaudited)

 

Nine months ended September 30, 2017

 

 

 

Term

Modification

 

 

Interest Only Modification

 

 

Rate & Term Modification

 

 

Total

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

$

 

 

$

 

 

$

 

 

$

 

1-4 family - closed-end

 

 

 

 

 

 

 

 

340

 

 

 

340

 

Equity lines

 

 

643

 

 

 

 

 

 

96

 

 

 

739

 

Multi-family residential

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate - owner occupied

 

 

529

 

 

 

 

 

 

 

 

 

529

 

Farmland

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate loans

 

 

1,172

 

 

 

 

 

 

436

 

 

 

1,608

 

Commercial and industrial

 

 

15

 

 

 

 

 

 

 

 

 

15

 

Consumer loans

 

 

7

 

 

 

 

 

 

 

 

 

7

 

 

 

$

1,194

 

 

$

 

 

$

436

 

 

$

1,630

 

 

 

Nine months ended September 30, 2016

 

 

 

Term

Modification

 

 

Interest Only Modification

 

 

Rate & Term Modification

 

 

Total

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

$

17

 

 

$

 

 

$

 

 

$

17

 

1-4 family - closed-end

 

 

 

 

 

547

 

 

 

437

 

 

 

984

 

Equity lines

 

 

1,415

 

 

 

 

 

 

97

 

 

 

1,512

 

Multi-family residential

 

 

 

 

 

 

 

 

132

 

 

 

132

 

Commercial real estate - owner occupied

 

 

 

 

 

 

 

 

266

 

 

 

266

 

Farmland

 

 

 

 

 

 

 

 

258

 

 

 

258

 

Total real estate loans

 

 

1,432

 

 

 

547

 

 

 

1,190

 

 

 

3,169

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

25

 

 

 

 

 

 

60

 

 

 

85

 

 

 

$

1,457

 

 

$

547

 

 

$

1,250

 

 

$

3,254

 

25


The following tables present, by class, additional details related to loans classified as TDRs during the referenced periods, including the recorded investment(dollars in the loan both before and after modification and balances that were modified during the period:thousands, unaudited)

Troubled Debt Restructurings

Three months ended March 31, 2021

Pre-
Modification

Post-
Modification

    

Number of
Loans

    

Outstanding
Recorded
Investment

    

Outstanding
Recorded
Investment

    

Reserve
Difference
¹

    

Reserve

Real estate:

Other construction/land

0

$

0

$

0

$

0

$

0

1-4 family - closed-end

0

0

0

0

0

Equity lines

1

83

83

0

1

Multi-family residential

0

0

0

0

0

Commercial real estate - owner occupied

0

0

0

0

0

Farmland

0

0

0

0

0

Total real estate loans

83

83

0

1

Agricultural

1

118

118

116

111

Commercial and industrial

1

185

185

(1)

48

Consumer loans

1

41

41

0

0

Total

$

427

$

427

$

115

$

160

(dollars in thousands, unaudited)

 

Three months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-

Modification

 

 

Post-

Modification

 

 

 

 

 

 

 

 

 

 

 

Number of

Loans

 

Outstanding

Recorded

Investment

 

 

Outstanding

Recorded

Investment

 

 

Reserve

Difference⁽¹⁾

 

 

Reserve

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

0

 

$

 

 

$

 

 

$

 

 

$

 

1-4 family - closed-end

 

3

 

 

250

 

 

 

250

 

 

 

 

 

 

8

 

Equity lines

 

2

 

 

136

 

 

 

136

 

 

 

3

 

 

 

2

 

Multi-family residential

 

0

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate - owner occupied

 

1

 

 

529

 

 

 

529

 

 

 

 

 

 

6

 

Farmland

 

0

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate loans

 

 

 

 

915

 

 

 

915

 

 

 

3

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

0

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

1

 

 

7

 

 

 

7

 

 

 

 

 

 

2

 

 

 

 

 

$

922

 

 

$

922

 

 

$

3

 

 

$

18

 

(1)

This represents the change in the ALLL reserve for these credits measured as the difference between the specific post-modification impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology.

Three months ended March 31, 2020

Pre-
Modification

Post-
Modification

    

Number of
Loans

    

Outstanding
Recorded
Investment

    

Outstanding
Recorded
Investment

    

Reserve
Difference
¹

    

Reserve

Real estate:

Other construction/land

0

$

0

$

0

$

0

$

0

1-4 family - closed-end

0

0

0

0

0

Equity lines

0

0

0

0

0

Multi-family residential

0

0

0

0

0

Commercial real estate - owner occupied

1

86

86

0

0

Farmland

0

0

0

0

0

Total real estate loans

86

86

0

0

Agricultural

0

0

0

0

0

Commercial and industrial

0

0

0

0

0

Consumer loans

0

0

0

0

0

Total

$

86

$

86

$

0

$

0

 

 

Three months ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-

Modification

 

 

Post-

Modification

 

 

 

 

 

 

 

 

 

 

 

Number of

Loans

 

Outstanding

Recorded

Investment

 

 

Outstanding

Recorded

Investment

 

 

Reserve

Difference⁽¹⁾

 

 

Reserve

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

0

 

$

 

 

$

 

 

$

 

 

$

 

1-4 family - closed-end

 

3

 

 

178

 

 

 

178

 

 

 

41

 

 

 

80

 

Equity lines

 

3

 

 

232

 

 

 

232

 

 

 

15

 

 

 

17

 

Multi-family residential

 

0

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate - owner occupied

 

0

 

 

 

 

 

 

 

 

 

 

 

 

Farmland

 

1

 

 

258

 

 

 

258

 

 

 

(26

)

 

 

-

 

Total real estate loans

 

 

 

 

668

 

 

 

668

 

 

 

30

 

 

 

97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

0

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

1

 

 

4

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

$

672

 

 

$

673

 

 

$

30

 

 

$

97

 

(1)

This represents the change in the ALLL reserve for these credits measured as the difference between the specific post-modification impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology.

26


Troubled Debt Restructurings

(dollars in thousands, unaudited)

 

Nine months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-

Modification

 

 

Post-

Modification

 

 

 

 

 

 

 

 

 

 

 

Number of

Loans

 

Outstanding

Recorded

Investment

 

 

Outstanding

Recorded

Investment

 

 

Reserve

Difference⁽¹⁾

 

 

Reserve

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

0

 

$

 

 

$

 

 

$

 

 

$

 

1-4 family - closed-end

 

6

 

 

340

 

 

 

340

 

 

 

32

 

 

 

12

 

Equity lines

 

7

 

 

739

 

 

 

739

 

 

 

85

 

 

 

25

 

Multi-family residential

 

0

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate - owner occupied

 

1

 

 

529

 

 

 

529

 

 

 

 

 

 

6

 

Farmland

 

0

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate loans

 

 

 

 

1,608

 

 

 

1,608

 

 

 

117

 

 

 

43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

1

 

 

15

 

 

 

15

 

 

 

 

 

 

 

Consumer loans

 

1

 

 

7

 

 

 

7

 

 

 

 

 

 

2

 

 

 

 

 

$

1,630

 

 

$

1,630

 

 

$

117

 

 

$

45

 

(1)

This represents the change in the ALLL reserve for these credits measured as the difference between the specific post-modification impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology.

 

 

Nine months ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-

Modification

 

 

Post-

Modification

 

 

 

 

 

 

 

 

 

 

 

Number of

Loans

 

Outstanding

Recorded

Investment

 

 

Outstanding

Recorded

Investment

 

 

Reserve

Difference⁽¹⁾

 

 

Reserve

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

1

 

$

17

 

 

$

17

 

 

$

 

 

$

2

 

1-4 family - closed-end

 

8

 

 

984

 

 

 

984

 

 

 

116

 

 

 

107

 

Equity lines

 

13

 

 

1,512

 

 

 

1,512

 

 

 

(27

)

 

 

46

 

Multi-family residential

 

1

 

 

132

 

 

 

132

 

 

 

 

 

 

6

 

Commercial real estate - owner occupied

 

1

 

 

266

 

 

 

266

 

 

 

 

 

 

4

 

Farmland

 

1

 

 

258

 

 

 

258

 

 

 

(26

)

 

 

 

Total real estate loans

 

 

 

 

3,169

 

 

 

3,169

 

 

 

63

 

 

 

165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

0

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

4

 

 

84

 

 

 

85

 

 

 

(7

)

 

 

6

 

 

 

 

 

$

3,253

 

 

$

3,254

 

 

$

56

 

 

$

171

 

(1)

This represents the change in the ALLL reserve for these credits measured as the difference between the specific post-modification impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology.

The companyCompany had no0 finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during the three- or nine-monththree-month periods ended September 30, 2017March 31, 2021 and 2016, respectively.2020.

2723


Purchased Credit Impaired Loans

The Company may acquire loans which show evidence of credit deterioration since origination. These purchased credit impaired (“PCI”) loans are recorded at the amount paid, since there is no carryover of the seller’s allowance for loan losses. Potential losses on PCI loans subsequent to acquisition are recognized by an increase in the allowance for loan losses. PCI loans are accounted for individually or are aggregated into pools of loans based on common risk characteristics. The Company projects the amount and timing of expected cash flows, and expected cash receipts in excess of the amount paid for the loan(s)any such loans are recorded as interest income over the remaining life of the loan or pool of loans (accretable yield). The excess of contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Expected cash flows are periodically re-evaluated throughout the life of the loan or pool of loans. If the present value of the expected cash flows is determined at any time to be less than the carrying amount, a reserve is recorded. If the present value of the expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Our acquisitionsacquisition of Santa Clara Valley Bank in the fourth quarter of 2014 and Coast Bancorp in the third quarter of 2016 included certain loans which have shown evidence of credit deterioration since origination, and for which it was probable at acquisition that all contractually required payments would not be collected. The carrying amount and unpaid principal balance of those PCI loans was as follows, as of the dates indicated:

Purchased Credit Impaired Loans:

(dollars in thousands, unaudited)

 

September 30, 2017

 

 

 

Unpaid Principal Balance

 

 

Carrying Value

 

Real estate secured

 

$

254

 

 

$

37

 

Commercial and industrial

 

 

8

 

 

 

-

 

Total purchased credit impaired loans

 

$

262

 

 

$

37

 

 

 

December 31, 2016

 

 

 

Unpaid Principal Balance

 

 

Carrying Value

 

Real estate secured

 

$

712

 

 

$

47

 

Commercial and industrial

 

 

23

 

 

 

 

Total purchased credit impaired loans

 

$

735

 

 

$

47

 

An(dollars in thousands, unaudited)

March 31, 2021

    

Unpaid Principal Balance

    

Carrying Value

Real estate secured

$

73

$

Total purchased credit impaired loans

$

73

$

December 31, 2020

    

Unpaid Principal Balance

    

Carrying Value

Real estate secured

$

78

$

Total purchased credit impaired loans

$

78

$

There was 0 allowance for loan losses totaling $130,000 was allocated for PCI loans as of September 30, 2017, as compared to $58,000 atMarch 31, 2021 or December 31, 2016.  We also recorded approximately $6,000 in2020. There was 0 discount accretion recorded on PCI loans during the ninethree months ended September 30, 2017.March 31, 2021.

Note 1211 – Allowance for Loan and Lease Losses

The Company’s allowance for loan and lease losses, a contra-asset, is established through a provision for loan and lease losses. The allowance is maintained at a level that is considered adequate to absorb probable losses on certain specifically identified impaired loans, as well as probable incurred losses inherent in the remaining loan portfolio. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when cash payments are received subsequent to the charge off. We employ a systematic methodology, consistent with FASB guidelines on loss contingencies and impaired loans, for determining the appropriate level of the allowance for loan and lease losses and adjusting it to that level at least quarterly. Pursuant to our methodology, impaired loans and leases are individually analyzed and a criticized asset action plan is completed specifying the financial status of the borrower and, if applicable, the characteristics and condition of collateral and any associated liquidation plan. A specific loss allowance is created for each impaired loan, if necessary.

28


The following tables disclose the unpaid principal balance, recorded investment, average recorded investment, and interest income recognized for impaired loans on our books as of the dates indicated. Balances are shown by loan type, and are further broken out by those that required an allowance and those that did not, with the associated allowance disclosed for those that required such. Included in the valuation allowance for impaired loans shown in the tables below are specific reserves allocated to TDRs, totaling $886,000 at September 30, 2017 and $1.048$0.6 million at both March 31, 2021 and December 31, 2016.2020.

24

Impaired Loans

(dollars in thousands, unaudited)

March 31, 2021

    

Unpaid Principal
Balance
(1)

    

Recorded
Investment
(2)

    

Related
Allowance

    

Average
Recorded
Investment

    

Interest Income
Recognized
(3)

With an allowance recorded

Real estate:

Other construction/land

$

535

$

535

$

94

$

538

$

51

1-4 family - closed-end

2,030

2,030

48

2,048

105

Equity lines

2,841

2,841

182

2,860

115

Multi-family residential

0

0

0

0

0

Commercial real estate- owner occupied

5,858

5,858

74

5,873

175

Commercial real estate- non-owner occupied

0

0

0

0

0

Farmland

0

0

0

0

0

Total real estate

11,264

11,264

398

11,319

446

Agricultural

361

361

361

365

0

Commercial and industrial

1,253

1,253

409

1,279

6

Consumer loans

219

219

17

223

21

Subtotal

13,097

13,097

1,185

13,186

473

With no related allowance recorded

Real estate:

Other construction/land

$

111

$

0

$

$

0

$

0

1-4 family - closed-end

942

924

938

0

Equity lines

1,877

1,852

1,862

9

Multi-family residential

0

0

221

27

Commercial real estate- owner occupied

1,693

1,574

1,595

0

Commercial real estate- non-owner occupied

563

563

570

0

Farmland

434

434

437

0

Total real estate

5,620

5,347

5,623

36

Agricultural

106

106

106

0

Commercial and industrial

652

645

651

1

Consumer loans

40

0

0

2

Subtotal

6,418

6,098

6,380

39

Total

$

19,515

$

19,195

$

1,185

$

19,566

$

512

Impaired Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

September 30, 2017

 

 

 

Unpaid Principal

Balance(1)

 

 

Recorded

Investment(2)

 

 

Related

Allowance

 

 

Average

Recorded

Investment

 

 

Interest Income

Recognized(3)

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

$

688

 

 

$

533

 

 

$

31

 

 

$

772

 

 

$

33

 

1-4 family - closed-end

 

 

6,108

 

 

 

4,160

 

 

 

88

 

 

 

6,933

 

 

 

314

 

Equity lines

 

 

4,404

 

 

 

4,318

 

 

 

327

 

 

 

4,550

 

 

 

113

 

Multi-family residential

 

 

394

 

 

 

394

 

 

 

30

 

 

 

412

 

 

 

17

 

Commercial real estate- owner occupied

 

 

519

 

 

 

400

 

 

 

136

 

 

 

524

 

 

 

30

 

Commercial real estate- non-owner occupied

 

 

1,815

 

 

 

1,668

 

 

 

34

 

 

 

1,907

 

 

 

95

 

Total real estate

 

 

13,928

 

 

 

11,473

 

 

 

646

 

 

 

15,098

 

 

 

602

 

Agriculture

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

739

 

 

 

707

 

 

 

170

 

 

 

1,826

 

 

 

74

 

Consumer loans

 

 

1,280

 

 

 

1,270

 

 

 

230

 

 

 

1,461

 

 

 

75

 

 

 

 

15,947

 

 

 

13,450

 

 

 

1,046

 

 

 

18,385

 

 

 

751

 

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

 

29

 

 

 

29

 

 

 

 

 

 

34

 

 

 

 

1-4 family - closed-end

 

 

760

 

 

 

702

 

 

 

 

 

 

828

 

 

 

2

 

Equity lines

 

 

329

 

 

 

300

 

 

 

 

 

 

333

 

 

 

 

Commercial real estate- owner occupied

 

 

1,445

 

 

 

1,444

 

 

 

 

 

 

1,808

 

 

 

8

 

Commercial real estate- non-owner occupied

 

 

10

 

 

 

 

 

 

 

 

 

28

 

 

 

 

Farmland

 

 

297

 

 

 

297

 

 

 

 

 

 

328

 

 

 

 

Total real estate

 

 

2,870

 

 

 

2,772

 

 

 

 

 

 

3,359

 

 

 

10

 

Agriculture

 

 

132

 

 

 

 

 

 

 

 

 

397

 

 

 

 

Commercial and industrial

 

 

619

 

 

 

618

 

 

 

 

 

 

854

 

 

 

 

Consumer loans

 

 

155

 

 

 

30

 

 

 

 

 

 

238

 

 

 

 

 

 

 

3,776

 

 

 

3,420

 

 

 

 

 

 

4,848

 

 

 

10

 

Total

 

$

19,723

 

 

$

16,870

 

 

$

1,046

 

 

$

23,233

 

 

$

761

 

(1)

Contractual principal balance due from customer.

(2)

Principal balance on Company'sCompany’s books, less any direct charge offs.

(3)

Interest income is recognized on performing balances on a regular accrual basis.


25

Impaired Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

December 31, 2016

 

 

 

Unpaid Principal

Balance(1)

 

 

Recorded

Investment(2)

 

 

Related

Allowance

 

 

Average

Recorded

Investment

 

 

Interest Income

Recognized(3)

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

$

854

 

 

$

699

 

 

$

20

 

 

$

624

 

 

$

14

 

1-4 family - closed-end

 

 

7,730

 

 

 

5,783

 

 

 

163

 

 

 

8,008

 

 

 

462

 

Equity lines

 

 

3,991

 

 

 

3,906

 

 

 

214

 

 

 

4,110

 

 

 

49

 

Multi-family residential

 

 

573

 

 

 

573

 

 

 

7

 

 

 

588

 

 

 

50

 

Commercial real estate- owner occupied

 

 

1,287

 

 

 

1,287

 

 

 

49

 

 

 

1,641

 

 

 

14

 

Commercial real estate- non-owner occupied

 

 

1,877

 

 

 

1,730

 

 

 

35

 

 

 

1,969

 

 

 

131

 

Total real estate

 

 

16,312

 

 

 

13,978

 

 

 

488

 

 

 

16,940

 

 

 

720

 

Agriculture

 

 

24

 

 

 

24

 

 

 

24

 

 

 

24

 

 

 

 

Commercial and industrial

 

 

2,211

 

 

 

2,211

 

 

 

608

 

 

 

2,652

 

 

 

99

 

Consumer loans

 

 

1,633

 

 

 

1,633

 

 

 

287

 

 

 

1,847

 

 

 

94

 

 

 

 

20,180

 

 

 

17,846

 

 

 

1,407

 

 

 

21,463

 

 

 

913

 

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

 

364

 

 

 

364

 

 

 

 

 

 

374

 

 

 

27

 

1-4 family - closed-end

 

 

666

 

 

 

607

 

 

 

 

 

 

685

 

 

 

3

 

Equity lines

 

 

544

 

 

 

515

 

 

 

 

 

 

550

 

 

 

 

Commercial real estate- owner occupied

 

 

999

 

 

 

999

 

 

 

 

 

 

1,773

 

 

 

98

 

Commercial real estate- non-owner occupied

 

 

77

 

 

 

67

 

 

 

 

 

 

85

 

 

 

 

Farmland

 

 

39

 

 

 

39

 

 

 

 

 

 

50

 

 

 

 

Total real estate

 

 

2,689

 

 

 

2,591

 

 

 

 

 

 

3,517

 

 

 

128

 

Agriculture

 

 

65

 

 

 

65

 

 

 

 

 

 

 

65

 

 

 

 

 

Commercial and industrial

 

 

62

 

 

 

62

 

 

 

 

 

 

277

 

 

 

 

Consumer loans

 

 

148

 

 

 

29

 

 

 

 

 

 

238

 

 

 

 

 

 

 

2,964

 

 

 

2,747

 

 

 

 

 

 

4,097

 

 

 

128

 

Total

 

$

23,144

 

 

$

20,593

 

 

$

1,407

 

 

$

25,560

 

 

$

1,041

 

Impaired Loans

(dollars in thousands, unaudited)

December 31, 2020

    

Unpaid Principal
Balance
(1)

    

Recorded
Investment
(2)

    

Related
Allowance

    

Average
Recorded
Investment

    

Interest Income
Recognized
(3)

With an allowance recorded

Real estate:

1-4 family residential construction

$

0

$

0

$

$

0

$

0

Other construction/land

545

545

171

565

40

1-4 family - closed-end

2,078

2,077

51

2,141

104

Equity lines

2,875

2,875

233

2,989

98

Multi-family residential

334

334

16

343

23

Commercial real estate- owner occupied

6,076

6,076

54

6,135

226

Commercial real estate- non-owner occupied

0

0

0

0

0

Farmland

0

0

0

0

0

Total real estate

11,908

11,907

525

12,173

491

Agricultural

250

250

250

250

0

Commercial and industrial

945

935

202

1,152

6

Consumer loans

235

197

19

221

16

Subtotal

13,338

13,289

996

13,796

513

With no related allowance recorded

Real estate:

1-4 family residential construction

$

0

$

0

$

$

0

$

0

Other construction/land

$

114

0

5

0

1-4 family - closed-end

942

922

960

0

Equity lines

2,160

2,082

2,127

3

Multi-family residential

0

0

0

0

Commercial real estate- owner occupied

1,624

1,504

1,590

0

Commercial real estate- non-owner occupied

582

582

617

0

Farmland

442

442

446

0

Total real estate

5,864

5,532

5,745

3

Agricultural

0

0

0

0

Commercial and industrial

189

159

165

0

Consumer loans

5

0

5

2

Subtotal

6,058

5,691

5,915

5

Total

$

19,396

$

18,980

$

996

$

19,711

$

518

(1)

Contractual principal balance due from customer.

(2)

Principal balance on Company'sCompany’s books, less any direct charge offs.

(3)

Interest income is recognized on performing balances on a regular accrual basis.

The specific loss allowance for an impaired loan generally represents the difference between the book value of the loan and either the fair value of underlying collateral less estimated disposition costs, or the loan’s net present value as determined by a discounted cash flow analysis. The discounted cash flow approach is typically used to measure impairment on loans for which it is anticipated that repayment will be provided from cash flows other than those generated solely by the disposition or operation of underlying collateral. However, historical loss rates may be used by the Company to determine a specific loss allowance if theythose rates indicate a higher potential reserve need than the discounted cash flow analysis. Any change in impairment attributable to the passage of time is accommodated by adjusting the loss allowance accordingly.

For loans where repayment is expected to be provided by the disposition or operation of the underlying collateral, impairment is measured using the fair value of the collateral. If the collateral value, net of the expected costs of

26

disposition, where applicable, is less than the loan balance, then a specific loss reserve is established for the shortfall in collateral coverage. If the discounted collateral value is greater than or equal to the loan balance, no specific loss reserve is required. At the time a collateral-dependent loan is designated as nonperforming, a new appraisal is ordered and typically received within 30 to 60 days if a recent appraisal is not already available. We generally use external appraisals to determine the fair value of the underlying collateral for nonperforming real estate loans, although the Company’s licensed staff appraisers may update older appraisals based on current market conditions and property value trends.loans. Until an updated appraisal is received, the Company uses the existing appraisal to determine the amount of the specific

30


loss allowance that may be required. The specific loss allowance is adjusted, as necessary, once a new appraisal is received. Updated appraisals are generally ordered at least annually for collateral-dependent loans that remain impaired.  Currentimpaired, and current appraisals were available or in process for all56% of the Company’s impaired real estate loan balances at September 30, 2017.March 31, 2021. Furthermore, the Company analyzes collateral-dependent loans on at least a quarterly basis, to determine if any portion of the recorded investment in such loans can be identified as uncollectible and would therefore constitute a confirmed loss. All amounts deemed to be uncollectible are promptly charged off against the Company’s allowance for loan and lease losses, with the loan then carried at the fair value of the collateral, as appraised, less estimated costs of disposition if applicable. Once a charge-off or write-down is recorded, it will not be restored to the loan balance on the Company’s accounting books.

Our methodology also provides for the establishment of a “general” allowance for probable incurred losses inherent in loans and leases that are not impaired. Unimpaired loan balances are segregated by credit quality, and are then evaluated in pools with common characteristics. At the present time, pools are based on the same segmentation of loan types presented in our regulatory filings. While this methodology utilizes historical loss data and other measurable information, the credit classification of loans and the establishment of the allowance for loan and lease losses are both to some extent based on Management’s judgment and experience. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that Management believes is appropriate at each reporting date. Quantitative information includes our historical loss experience, delinquency and charge-off trends, and current collateral values. Qualitative factors include the general economic environment in our markets and, in particular, the condition of the agricultural industry and other key industries. Lending policies and procedures (including underwriting standards), the experience and abilities of lending staff, the quality of loan review, credit concentrations (by geography, loan type, industry and collateral type), the rate of loan portfolio growth, and changes in legal or regulatory requirements are additional factors that are considered. The total general reserve established for probable incurred losses on unimpaired loans was $7.738$17.1 million at September 30, 2017.March 31, 2021.

There were no material changes to the methodology used to determine our allowance for loan and lease losses during the three months ended September 30, 2017,March 31, 2021, although as outlined in recognitionNote 3 to the consolidated financial statements we will substantially update our methodology upon the implementation of relatively low loan loss rates in recent periods upward adjustments have been madethe CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update ASU 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326) when the earlier of the national emergency related to certain qualitative factor multipliers.  Asthe outbreak of COVID-19 ends or December 31, 2020. Moreover, we add new products and expand our geographic coverage, and as the economic environment changes, we expectwill continue to enhance our methodology as needed in order to comply with regulatory and accounting requirements, keep pace with the size and complexity of theour loan and lease portfolio, and respond to pressures created by external forces. We engage outside firms on a regular basis to assess our methodology and perform independent credit reviews of our loan and lease portfolio.  In addition, the Company’s external auditors, the FDIC, and the California DBO review the allowance for loan and lease losses as an integral part

27

The tables that follow detail the activity in the allowance for loan and lease losses for the periods noted:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

 

(dollars in thousands, unaudited)

 

Three months ended September 30, 2017

 

 

 

Real Estate

 

 

Agricultural

Products

 

 

Commercial and

Industrial

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

4,104

 

 

$

243

 

 

$

3,452

 

 

$

1,149

 

 

$

282

 

 

$

9,230

 

Charge-offs

 

 

(1

)

 

 

(132

)

 

 

(192

)

 

 

(561

)

 

 

 

 

 

(886

)

Recoveries

 

 

69

 

 

 

 

 

 

87

 

 

 

284

 

 

 

 

 

 

440

 

Provision

 

 

369

 

 

 

108

 

 

 

(568

)

 

 

315

 

 

 

(224

)

 

 

 

Ending Balance

 

$

4,541

 

 

$

219

 

 

$

2,779

 

 

$

1,187

 

 

$

58

 

 

$

8,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2017

 

 

 

Real Estate

 

 

Agricultural

Products

 

 

Commercial and

Industrial

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

3,548

 

 

$

209

 

 

$

4,279

 

 

$

1,208

 

 

$

457

 

 

$

9,701

 

Charge-offs

 

 

(146

)

 

 

(154

)

 

 

(576

)

 

 

(1,606

)

 

 

 

 

 

(2,482

)

Recoveries

 

 

214

 

 

 

5

 

 

 

282

 

 

 

764

 

 

 

 

 

 

1,265

 

Provision

 

 

925

 

 

 

159

 

 

 

(1,206

)

 

 

821

 

 

 

(399

)

 

 

300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

4,541

 

 

$

219

 

 

$

2,779

 

 

$

1,187

 

 

$

58

 

 

$

8,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific

 

$

646

 

 

$

 

 

$

170

 

 

$

230

 

 

$

 

 

$

1,046

 

General

 

 

3,895

 

 

 

219

 

 

 

2,609

 

 

 

957

 

 

 

58

 

 

 

7,738

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

4,541

 

 

$

219

 

 

$

2,779

 

 

$

1,187

 

 

$

58

 

 

$

8,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans evaluated for impairment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$

14,245

 

 

$

 

 

$

1,325

 

 

$

1,300

 

 

$

 

 

$

16,870

 

Collectively

 

 

1,007,372

 

 

 

49,315

 

 

 

229,071

 

 

 

8,997

 

 

 

 

 

 

 

1,294,755

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

1,021,617

 

 

$

49,315

 

 

$

230,396

 

 

$

10,297

 

 

$

 

 

$

1,311,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32


 

 

Year ended December 31, 2016

 

 

 

Real Estate

 

 

Agricultural

Products

 

 

Commercial and

Industrial

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

4,783

 

 

$

722

 

 

$

2,533

 

 

$

1,263

 

 

$

1,122

 

 

$

10,423

 

Charge-offs

 

 

(962

)

 

 

 

 

 

(344

)

 

 

(1,905

)

 

 

 

 

 

(3,211

)

Recoveries

 

 

983

 

 

 

14

 

 

 

477

 

 

 

1,015

 

 

 

 

 

 

2,489

 

Provision

 

 

(1,256

)

 

 

(527

)

 

 

1,613

 

 

 

835

 

 

 

(665

)

 

 

 

Ending Balance

 

$

3,548

 

 

$

209

 

 

$

4,279

 

 

$

1,208

 

 

$

457

 

 

$

9,701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific

 

$

488

 

 

$

24

 

 

$

608

 

 

$

287

 

 

$

 

 

$

1,407

 

General

 

 

3,060

 

 

 

185

 

 

 

3,671

 

 

 

921

 

 

 

457

 

 

 

8,294

 

Ending Balance

 

$

3,548

 

 

$

209

 

 

$

4,279

 

 

$

1,208

 

 

$

457

 

 

$

9,701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans evaluated for impairment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$

16,569

 

 

$

89

 

 

$

2,273

 

 

$

1,662

 

 

$

 

 

$

20,593

 

Collectively

 

 

900,928

 

 

 

46,140

 

 

 

284,367

 

 

 

10,503

 

 

 

 

 

 

1,241,938

 

Ending Balance

 

$

917,497

 

 

$

46,229

 

 

$

286,640

 

 

$

12,165

 

 

$

 

 

$

1,262,531

 

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)

Three months ended March 31, 2021

    

Real Estate

    

Agricultural
Products

    

Commercial and
Industrial
(1)

    

Consumer

    

Unallocated

    

Total

Allowance for credit losses:

Beginning balance

    

$

11,766

    

$

482

    

$

4,721

    

$

720

    

$

49

    

$

17,738

Charge-offs

(233)

(52)

(163)

(448)

Recoveries

453

110

216

779

Provision

820

190

(574)

(180)

(6)

250

Ending balance

$

12,806

$

672

$

4,205

$

593

$

43

$

18,319

Reserves:

Specific

$

398

$

361

$

409

$

17

$

$

1,185

General

12,408

311

3,796

576

43

17,134

Ending balance

$

12,806

$

672

$

4,205

$

593

$

43

$

18,319

Loans evaluated for impairment:

Individually

$

16,611

$

467

$

1,898

$

219

$

$

19,195

Collectively

1,849,655

45,009

369,804

4,805

2,269,273

Ending balance

$

1,866,266

$

45,476

$

371,702

$

5,024

$

$

2,288,468

Year ended December 31, 2020

    

Real Estate

    

Agricultural
Products

    

Commercial and
Industrial
(1)

    

Consumer

    

Unallocated

    

Total

Allowance for credit losses:

Beginning balance

$

5,635

193

2,685

1,278

132

$

9,923

Charge-offs

(436)

(1,397)

(1,833)

Recoveries

87

129

882

1,098

Provision

6,044

289

2,343

(43)

(83)

8,550

Ending balance

$

11,766

$

482

$

4,721

$

720

$

49

$

17,738

Reserves:

Specific

$

525

$

250

$

202

$

19

$

$

996

General

11,241

232

4,519

701

49

16,742

Ending balance

$

11,766

$

482

$

4,721

$

720

$

49

$

17,738

Loans evaluated for impairment:

Individually

$

17,439

$

250

$

1,094

$

197

$

$

18,980

Collectively

1,878,484

44,622

515,633

5,392

2,444,131

Ending balance

$

1,895,923

$

44,872

$

516,727

$

5,589

$

$

2,463,111

(1)Includes mortgage warehouse lines.

28

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)

Three months ended March 31, 2020

    

Real Estate

    

Agricultural
Products

    

Commercial and
Industrial
(1)

    

Consumer

    

Unallocated

    

Total

Allowance for credit losses:

Beginning balance

$

5,635

    

$

193

    

$

2,685

    

$

1,278

    

$

132

    

$

9,923

Charge-offs

(25)

(617)

(642)

Recoveries

72

28

272

372

Provision

1,608

42

66

204

(120)

1,800

Ending balance

$

7,315

$

235

$

2,754

$

1,137

$

12

$

11,453

Reserves:

Specific

$

490

$

$

520

$

98

$

$

1,108

General

6,825

235

2,234

1,039

12

10,345

Ending balance

$

7,315

$

235

$

2,754

$

1,137

$

12

$

11,453

Loans evaluated for impairment:

Individually

$

13,753

$

5

$

1,405

$

376

$

$

15,539

Collectively

1,387,435

49,194

339,193

6,664

1,782,486

Ending balance

$

1,401,188

$

49,199

$

340,598

$

7,040

$

$

1,798,025

(1)Includes mortgage warehouse lines.

Note 12 – Operating Leases

We lease space under non-cancelable operating leases for 21 branch locations, 3 off-site ATM locations, 1 administrative building, one loan production office and a warehouse. Many of our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs). Payments for taxes and insurance as well as non-lease components are not included in the accounting of the lease component, but are separately accounted for in occupancy expense. The Company recognized lease expense of $0.5 million and $0.6 million for the three-month periods ended March 31, 2021 and March 31, 2020, respectively. Most leases include one or more renewal options available to exercise. The exercise of lease renewal options is typically at the Company’s sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right-of-use assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term. As most of our leases do not provide an implicit rate, we used our incremental borrowing rate in determining the present value of the lease payments.

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three months ended March 31, 2021.

At March 31, 2021, the Company’s right-of-use assets and operating lease liabilities were $6.3 million and $6.8 million, respectively. The weighted average remaining lease term for the lease liabilities was 6.4 years, and the weighted average discount rate of remaining payments was 5.5 percent. There were 0 lease liabilities from new right-of-use assets obtained during the three months ended March 31, 2021. Cash paid on operating leases was $0.6 million for the three months ended March 31, 2021.

29

Maturities of our lease liabilities for all operating leases are as follows (dollars in thousands, unaudited):

    

March 31, 2021

2021 (1)

    

$

2,163

2022

1,460

2023

1,067

2024

797

2025

615

Thereafter

2,081

Total

8,183

Less: present value discount

(1,345)

Lease liability (2)

$

6,838

(1)Contractual maturities for the nine months remaining in 2021.
(2)Lease liability is included in other liabilities.

The following table presents the future minimum rental payments under leases with terms in excess of one year as of December 31, 2020 presented in accordance with ASC Topic 840, “Leases”:

December 31, 2020

2021

$

2,130

2022

1,722

2023

1,269

2024

910

2025

750

Thereafter

2,612

Total undiscounted lease payments

$

9,393

Note 13 – Recent DevelopmentsRevenue Recognition.

On April 24, 2017,The Company utilizes the guidance found in ASU 2014-09, Revenue from Contracts with Customers (ASC 606), when accounting for certain noninterest income. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Sufficient information should be provided to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company’s revenue streams that are within the scope of and accounted for under Topic 606 include service charges on deposit accounts, debit card interchange fees, and fees levied for other services the Company announced the signingprovides its customers. The guidance does not apply to revenue associated with financial instruments such as loans and investments, and other noninterest income such as loan servicing fees and earnings on bank-owned life insurance, which are accounted for on an accrual basis under other provisions of a definitive agreement to acquire OCB Bancorp (“Ojai”), the holding company for Ojai Community Bank,GAAP. In total, approximately 31.8% and the transaction was completed on October 1, 2017.  Immediately following the acquisition, Ojai Community Bank was merged with and into Bank21.1% of the Sierra.  Ojai Community Bank had its head officeCompany’s noninterest revenue was outside of the scope of the ASC 606 for the three-month periods ended March 31, 2020, respectively.

All of the company’s revenue from contracts within the scope of ASC 606 is recognized as noninterest income, except for gains on the sale of OREO which is classified as noninterest expense. The following table presents the Company’s

30

sources of noninterest income for the three-month periods ended March 31, 2021 and 2020. Items outside the scope of ASC 606 are noted as such (dollars in Ojai,thousands, unaudited).

For the three months ended March 31,

    

2021

    

2020

Noninterest income

Service charges on deposits

Returned item and overdraft fees

    

$

1,105

    

$

1,663

Other service charges on deposits

1,662

1,520

Debit card interchange income

1,894

1,632

Loss on limited partnerships(1)

(133)

(158)

Dividends on equity investments(1)

192

194

Unrealized gains recognized on equity investments(1)

857

447

Other(1)

1,253

808

Total noninterest income

$

6,830

$

6,106

Noninterest expense

Salaries and employee benefits (1)

$

11,151

$

10,172

Occupancy expense (1)

2,486

2,327

(Gain) loss on sale of OREO

(15)

2

Other (1)

6,649

5,317

Total noninterest expense

$

20,271

$

17,818

(1)Not within scope of ASC 606. Revenue streams are not related to contract with customers and are accounted for on an accrual basis under other provisions of GAAP.

With regard to noninterest income associated with customer contracts, the Company has determined that transaction prices are fixed, and branch offices in Ventura, Santa Paula, and Santa Barbara, conducting businessperformance obligations are satisfied as services are rendered, thus there is little or no judgment involved in the respective communities as Ventura Community Bank, Santa Paula Community Bank, and Santa Barbara Community Bank.  Those locations are now being operated as our branch officestiming of revenue recognition under the Bank of the Sierra name, but it should be noted that we plan to consolidate Ojai’s former Santa Paula office into our Santa Paula branch in early 2018.  The aggregate consideration tendered by the Company in its acquisition of OCB Bancorp consisted of 1.376 million shares of Sierra Bancorp common stock, approximately $1.2 million in cash in lieu of shares for certain convertible debt and unexercised stock options, and a nominal amount of cash for fractional shares.  One-time acquisition costs are expected to add $2.5 million to $3.0 million to the Company’s pre-tax non-interest expense, primarily in 2017.  At the merger date the Ojai acquisition contributed approximately $220 million to the Company’s outstanding loan balances, over $5 million to investment securities, and $231 million to total deposits.  In accordance with GAAP, assets and liabilities will be reflected on the Company’s books at their estimated fair values and there was no carryover of the allowance for loan losses that had previously been recorded by Ojai.  The Company will also record a deferred income tax asset, goodwill, and a core deposit intangible (“CDI”) in conjunction with the acquisition, although those amounts have not yet been definitively determined.  Goodwill represents the excess of consideration transferred over the fair values of the identifiable net assets acquired; it is not amortized but could be written down if deemed to be impaired at some point.  The CDI is essentially the premium paid for core deposits over the fair value of those deposits, and it will be amortized on a straight line basis over eight years commencing at the date of acquisition.  Goodwill and core deposit intangibles are not deductible for income tax purposes.

On July 5, 2017, Bank of the Sierra, the banking subsidiary of Sierra Bancorp, entered into an agreement with Citizens Business Bank, the banking subsidiary of CVB Financial Corp., to acquire the Citizens branch located in Woodlake, California.  The transaction closed on November 3, 2017, and the Woodlake branch is now being operated as a full-service branch of Bank of the Sierra.  Woodlake branch deposits totaled approximately $26 million at the acquisition date, consisting largely of non-maturity deposits.  Bank of the Sierra already had a number of deposits in the Woodlake zip codecontracts that are domiciled at nearby branches, and this branch purchase is intended to enhancewithin the levelscope of service for those customers as well as provide additional core deposits for the Bank.  The acquisition also included the purchaseASC 606.

31

33


The Company acquired Coast Bancorp (“Coast”), the holding company for Coast National Bank, on July 8, 2016, and immediately following the acquisition, Coast National Bank was merged with and into Bank of the Sierra.  Coast National Bank was a community bank with branch offices in San Luis Obispo, Paso Robles, and Arroyo Grande, and a loan production office in Atascadero, California.  Shortly after transaction closing, the Atascadero location was converted into a full-service branch office.  At the acquisition date, the fair value of Coast’s loans totaled $94 million and deposits totaled $129 million.  The acquisition also involved $7 million in trust preferred securities, which were booked by the Company at their initial fair value of $3.4 million.  This acquisition had, and will continue to have, a material impact on comparative 2017 and 2016 average balances and associated income and expense.  Furthermore, one-time acquisition costs added over $2.4 million to the Company’s pre-tax non-interest expense in 2016.

34


PART I - FINANCIAL INFORMATION

ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Form 10-Q includes forward-looking statements that involve inherent risks and uncertainties. Words such as “expects”, “anticipates”, “believes”, “projects”, and “estimates” or variations of such words and similar expressions are intended to identify forward-looking statements. These statements are based on certain underlying assumptions and are not guarantees of future performance, as they could be impacted by a number ofseveral potential risks and developments that cannot be predicted with any degree of certainty. Therefore, actual outcomes and results may differ materially from what is expressed, forecast in, or implied by such forward-looking statements.

A variety of factors could have a material adverse impact on the Company’s financial condition or results of operations, and should be considered when evaluating the Company’s potential future financial performance. They include, but are not limited to, the risk of unfavorable economic conditions in the Company’s market areas; risks associated with the current national emergency with respect to COVID-19 including the impact that national, state, and local responses, including shelter-at-home orders and limitations on business and personal activity as well as any stimulus or relief efforts, have on customers’ ability to repay loans or to resume normal payments following the end of COVID-19 related deferrals granted by the Bank; the Company’s delayed implementation of CECL; the ability for the Company to serve its customers with modified branch operations as well as social distancing guidelines and mandates under state and local stay-at-home orders; risks associated with fluctuations in interest rates;rates or a sustained low interest rate environment; liquidity risks; increases in nonperforming assets and credit losses that could occur, particularly in times of weak economic conditions or rising interest rates; reductions in the market value of available-for-sale securities that could result if interest rates increase substantially or an issuer has real or perceived financial difficulties; the Company’s ability to attract and retain skilled employees; the Company’s ability to successfully deploy new technology; the Company’s ability to receive regulatory approval for acquisitions or branch expansion while having a less than satisfactory rating under the Community Reinvestment Act; the success of acquisitions or branch expansion;expansion, closure or consolidation; and risks associated with the multitude of current and prospective laws and regulations to which the Company is and will be subject. Risk factors that could cause actual results to differ materially from results that might be implied by forward-looking statements include the risk factors disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2016.2020 and in Item 1A, herein.

CRITICAL ACCOUNTING POLICIES

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. The financial information and disclosures contained within those statements are significantly impacted by Management’s estimates and judgments, which are based on historical experience and incorporate various assumptions that are believed to be reasonable under current circumstances. Actual results may differ from those estimates under divergent conditions.

Critical accounting policies are those that involve the most complex and subjective decisions and assessments, and have the greatest potential impact on the Company’s stated results of operations. In Management’s opinion, the Company’s critical accounting policies deal with the following areas: the establishment of the allowance for loan and lease losses, as explained in detail in Note 1211 to the consolidated financial statements and in the “Provision for Loan and Lease Losses” and “Allowance for Loan and Lease Losses” sections of this discussion and analysis; the valuation of impaired loans and foreclosed assets, as discussed in Note 11 to the consolidated financial statements; income taxes and related deferred tax assets and liabilities, especially with regard to the ability of the Company to recover deferred tax assets as discussed in the “Provision for Income Taxes” and “Other Assets” sections of this discussion and analysis; and goodwill and other intangible assets, which are evaluated annually for impairment and for which we have determined that no impairment

32

exists, as discussed in the “Other Assets” section of this discussion and analysis. Critical accounting areas are evaluated on an ongoing basis to ensure that the Company’s financial statements incorporate our most recent expectations with regard toregarding those areas.

OVERVIEW OF THE RESULTS OF OPERATIONS

AND FINANCIAL CONDITION

results of operations SummaryRESULTS OF OPERATIONS SUMMARY

ThirdFirst Quarter 20172021 compared to ThirdFirst Quarter 20162020

NetFirst quarter 2021 net income for the quarter ended September 30, 2017 was $5.742 million, representing an increase of $1.813$11.1 million, or 46%, relative to net income of $3.929 million for the quarter ended September 30, 2016.  Basic and$0.72 per diluted earnings per share, for the third quarter of

35


2017 were both $0.41, compared to $0.28 basic and$7.8 million, or $0.51 per diluted earnings per share forin the thirdfirst quarter of 2016.2020. The Company’s annualized return on average equity was 10.45%12.94% and annualized return on average assets was 1.10%1.40% for the quarter ended September 30, 2017,March 31, 2021, compared to 7.50%9.97% and 0.81%1.23%, respectively, for the same quarter ended September 30, 2016.in 2020. The primary drivers behind the variance in thirdfirst quarter net income are as follows:

The $4.8 million, or 20%, increase in net interest income is due mostly to a $3.4 million increase in interest income resulting primarily from higher loan volumes as compared to March 31, 2020, accelerated fee income recognition from the forgiveness of SBA PPP loans, partially offset by lower rates. In addition, there was a $1.4 million favorable decline in interest expense due to a higher mix of noninterest bearing deposits and lower rates on the remaining deposits and borrowed funds. The provision for loan & lease losses is $1.6 million lower as a result of higher economic uncertainty as the primary driver for provision, offset by net loan recoveries and lower historical loss rates used in the calculation.
The $0.7 million, or 12%, favorable increase in noninterest income is due to a $0.4 million favorable change in the annual fair market value adjustment of restricted equity investments, and fluctuations in income on bank- owned life insurance (BOLI) associated with deferred compensation plans. Customer service charges on deposit accounts were lower in the quarterly comparison, but were partially offset by increases in debit card interchange income.
The efficiency ratio improved to 56.43% from 58.88%. Although there was a $2.5 million increase in noninterest expense, net interest income increased $4.8 million as described above. The largest expense item with an increase was salaries and benefits, with a $1.0 million increase due to lower deferred loan costs and higher bonus expense in the first quarter of 2021 as compared to the same period in 2020.

Net interest income was up by $1.528 million, or 9%, due to growth in average interest-earning assets totaling $142 million, or 8%, as well as improvement of four basis points in our net interest margin.

Total non-interest income increased by $919,000, or 18%, due to a $918,000 gain realized on the sale of certain investment securities in the third quarter of 2017.  An increase in deposit service charges was largely offset by a net drop in other non-interest income.

Total non-interest expense fell by $676,000, or 4%, due to lower nonrecurring acquisition costs, which totaled $424,000 in the third quarter of 2017 relative to $1.695 million in the third quarter of 2016.  This favorable variance was partially offset by other large variances within non-interest expense, including an increase of $612,000, or 9%, in personnel costs.  Fluctuations in operating costs are discussed in greater detail in the “Non-Interest Income and Non-Interest Expense” section of this Management Discussion and Analysis.

While pre-tax income increased by 54%, net income reflects a lower percentage increase due to a higher income tax accrual rate.  The Company’s provision for income taxes increased to 35% of pre-tax income in the third quarter of 2017 from 32% in the third quarter of 2016, due primarily to higher taxable income and a declining level of tax credits.  

First Nine Months of 2017 compared to First Nine Months of 2016

Net income for the first nine months of 2017 was $15.496 million, representing an increase of $3.446 million, or 29%, relative to net income of $12.050 million for the first nine months of 2016.  Basic and diluted earnings per share for the first nine months of 2017 were $1.12 and $1.11, respectively, compared to $0.90 basic earnings per share and $0.89 diluted earnings per share for the first nine months of 2016.  The Company’s annualized return on average equity was 9.70% and annualized return on average assets was 1.02% for the nine months ended September 30, 2017, compared to a return on equity of 8.08% and return on assets of 0.89% for the nine months ended September 30, 2016.  The primary drivers behind the variance in year-to-date net income are as follows:

Net interest income increased $5.742 million, or 12%, due to the positive impact of a $202 million increase in average interest-earning assets resulting in part from the Coast acquisition in 2016.

The year-to-date comparison was impacted by a $300,000 loan loss provision that was recorded in the second quarter of 2017, the first such provision since the third quarter of 2014.

Total non-interest income was up $2.549 million, or 18%, due to an increase of $772,000 in investment gains, a $728,000 increase in service charges on deposits, a $447,000 increase in bank-owned life insurance (BOLI) income, and a $602,000 increase in other non-interest income.

Total non-interest expense increased by $2.923 million, or 7%, due in large part to ongoing operating expenses associated with the Coast acquisition and recent branch openings; other significant variances are detailed below in the “Non-Interest Income and Non-Interest Expense” section of this Management Discussion and Analysis.

Financial Condition Summary

September 30, 2017FINANCIAL CONDITION SUMMARY

March 31, 2021 relative to December 31, 20162020

The Company’s assets totaled $2.078$3.3 billion at September 30, 2017,March 31, 2021 relative to $2.033$3.2 billion at December 31, 2016.  Total liabilities were $1.859 billion at September 30, 2017 compared to $1.827 billion at the end of 2016, and shareholders’ equity totaled $219 million at September 30, 2017 compared to $206 million at December 31, 2016.2020. The following provides a summary of key balance sheet changes during the first ninethree months of 2017:2021:

The Company’s balance of cash and cash equivalents was up by $274.8 million, or 385% from December 31, 2020. The overall increase in cash balances was due primarily to increases in deposit accounts and decreases in loan balances during the first quarter 2021.
Securities available-for-sale were $552.9 million at March 31, 2021, an increase of $9.0 million, or 2% from December 31, 2020. The Company purchased $45.2 million in various Government Agency sponsored mortgage-backed securities and municipal securities.

The year-to-date 2021 loan balance decline of $175.2 million, or 7%, was highlighted by declines in outstanding balances on mortgage warehouse lines of $119.7 million, as well as a $19.3 million decline in SBA Paycheck Protection Program (PPP) loans. During the first quarter of 2021 the Bank had $33.2 million in SBA PPP loan originations, but overall SBA balances declined due to SBA forgiveness of $52.8 million in PPP loans during the same period. The remainder of the decline was primarily in real estate secured loans with an increased strategic focus of building our commercial & industrial loans, including owner-occupied CRE loans

Cash balances were down $66 million, or 55%, including a $27 million reduction in non-earning balances.33

Investment securities were up $53 million, or 10%,due in part to the longer-term investment of cash balances.

Gross loans increased by $49 million, or 4%, due to strong organic growth in real estate loans and agricultural production loans.  Loan growth would have been greater if not for the payoffTable of sizeable agricultural and commercial loans, and a drop of $44 million in mortgage warehouse loans.Contents

36


Total nonperforming assets, namely non-accrual loans

and foreclosed assets, were reduced by almost $2 million, or 21%.small business lending. The Company’s regulatory commercial real estate concentration ratio of nonperforming assetsdecreased to total loans plus foreclosed assets was 0.52%352% at September 30, 2017,March 31, 2021 as compared to 0.68%378% at December 31, 20162020.
Deposits increased by $229.3 million, or 9%, in the first quarter of 2021. The growth in deposits came primarily from noninterest bearing or low-cost transaction, and 0.72%savings accounts, while higher-cost time deposits decreased slightly.

Short-term borrowings decreased by $125.5 million during the first quarter of 2021 to $56.5 million at September 30, 2016.March 31, 2021. The decrease was due to a decrease in Federal Home Loan Bank (FHLB) overnight borrowings due to an increase in deposit balances.

Total shareholders’ equity of $348.0 million at March 31, 2021 reflects an increase of $4.1 million, or 1%, relative to year-end 2020 due to capital from the $11.1 million addition of net income, a $4.1 million unfavorable swing in accumulated other comprehensive income/loss, stock options exercised, restricted stock compensation, net of $3.2 million in dividends paid.

IMPACT OF CORONAVIRUS DISEASE 2019 (COVID-19) PANDEMIC ON THE COMPANY’S OPERATIONS

Overview

On January 31, 2020, the United States Department of Health and Human Services declared a public health emergency with respect to the Coronavirus Disease 2019 (COVID-19). Subsequent to this date, federal, state, and local governmental agencies, regulatory agencies, and the Federal Reserve Board took actions impacting the Company including these more significant items:

On March 3, 2020, the Federal Open Market Committee (FOMC) of the Federal Reserve Board lowered the federal funds rate by 50 basis points in its first emergency move since October 2008.
On March 4, 2020, the Governor of the state of California declared a state of emergency to help make additional resources available and formalize emergency actions to address COVID-19.
On March 6, 2020, the Federal Financial Institutions Examination Council (FFIEC) issued guidance to financial institutions reminding them to include pandemic planning in business continuity plans.
Starting on March 9, 2020, the Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and Conference of State Bank Supervisors began issuing various Interagency Guidance Statements to encourage financial institutions to meet the financial needs of customers affected by the Coronavirus.
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.
On March 15, 2020, the FOMC of the Federal Reserve Board lowered the federal funds rate by 100 basis points in its second emergency move in two weeks, this time on a Sunday. In addition, the FOMC announced that it would let banks borrow from the discount window for up to 90 days, reduced the reserve requirement ratios to zero percent, united with five other central banks to ensure dollars are available via swap lines, and increased bond holdings by at least $700 billion.
Effective March 20, 2020, the state of California ordered the closure of all non-essential workplaces, restricting non-essential travel, and ordering a state-wide shelter-in-place order. This was followed by extensions of these orders in April and many local municipalities in which the Company operates issued orders mandating additional requirements to protect their citizens. Although many counties in California began phased reopening

Despite a quarterly decline resulting from the runoff of seasonal deposits, deposits were still up $84 million, or 5%, for the first nine months of 2017, ending the period at $1.780 billion due largely to growth in core non-maturity deposits.34

Junior subordinated debentures increased slightly from accretionTable of Contents

plans, due to recent increases in cases effective July 13, 2020, the Governor ordered that dine-in restaurants, wineries and tasting rooms, movie theaters, family entertainment centers, zoos and museums, and cardrooms immediately close all indoor operations. Effective August 31, 2020, a new simplified, four-tier guideline was implemented for counties to reopen. Counties must remain in a tier for at least three weeks before moving to the next tier.
On March 22, 2020, the federal financial institution regulatory agencies (the agencies) issued guidance to financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (TDRs). The guidance was subsequently modified on April 7, 2020 to conform with Section 4013 of the Coronavirus Aid, Relief and Economic Security (CARES) Act. Further interagency guidance for financial institutions was issued in June, August, and September 2020.
On March 27, 2020, the CARES Act was enacted by Congress and signed into law by the President to address the impact of the COVID-19 on the economy. Among other things, the CARES Act provided banking institutions with the option of deferring the implementation of the Current Expected Credit Loss (“CECL”) accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326) until later in 2020; confirmed that certain loan modifications would not be treated as a TDR; authorized the Small Business Administration to create the Paycheck Protection Program (PPP) which allows banking institutions to offer a certain amount of forgivable loans to primarily assist with funding payroll for small businesses; and provides a temporary reduction to the minimum ratio under the Community Bank Leverage Ratio framework.
On December 21, 2020, the Consolidated Appropriation Act, 2021 was enacted by Congress and signed into law by the President on December 27, 2020. Among other things, this bill provided $600 per person (subject to income limits), included $284 billion in additional forgivable loans via the PPP, extended the suspension of TDR identification, and extended the temporary delay of the implementation of CECL through January 2022.
On March 10, 2021, the American Rescue Plan Act was enacted by Congress and signed into law by the President on March 11, 2021. Among other things, this bill provided an additional economic impact payment of $1,400 per-person (subject to income limits), and many other economic incentives and benefits to individuals, businesses, states, municipalities, and tribal governments.
In 2021, COVID-19 vaccinations began rolling out across the country and in California. In early April 2021, with over 20 million vaccines administered in California, a Blueprint for a Safer Economy was announced to fully reopen the California economy on June 15, 2021, subject to certain health requirements, if two criteria are met regarding equitable vaccine availability and a consistently low burden of disease.

Impact of COVID-19 on the discount on trust-preferred securities gained in the Coast acquisition, but other borrowings were reduced by $52 million, or 72%, as facilitated by deposit growth.Company’s Operations

The Company had $10.4 million in classified assets at March 31, 2021, from loans modified under the Interagency Guidance or CARES Act, as amended, that are either not expected to make all principal and interest payments in a timely manner, or will need further modifications or assistance. Starting in April 2020, the Company took actions to mitigate the impact on credit losses including permitting short-term payment deferrals to current customers, as well as providing bridge loans and SBA Paycheck Protection Program (PPP) loans. For further information on the principal and interest deferrals, please see the “Nonperforming Assets” section below.
The uncertainty of national and local economic conditions had an impact on our provision for loan and lease losses in 2020 and continuing into 2021. The Company elected under Section 4014 of the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. In December 2020, the Consolidated Appropriations Act, 2021, extended the deferral of implementation of CECL from December 31, 2020, to the earlier of the first day of the fiscal year, beginning after the national emergency terminates or January 1, 2022. Although this deferral will

35

still require CECL to be implemented as of January 1, 2022, the Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit losses in our loan and lease portfolio. The most significant unknown factor is how long economic activity will be impacted by COVID-19, and in turn how deeply that will impact the markets in which we operate. Therefore, more time was needed to assess the impact of this economic uncertainty and related actions taken such as the stimulus provisions of the CARES Act on the Company’s allowance for loan and lease losses under the CECL methodology.
The Company expects that net interest income will continue to be adversely impacted over time given pressure on net interest margin as a result of the current interest rate environment. As described above, in March 2020, the FOMC cut short-term rates by 150 basis points to near zero. The uncertainty with COVID-19 and the lower targeted fed funds rates also impacted other rates including the Prime Rate and treasury yields. These lower rates impacted our net interest margin. Our net interest margin for the three months ended March 31, 2021, was 3.93%, compared to a net interest margin of 4.13% for the same period in 2020. New loans booked in 2021 have been at lower rates and although deposit costs have also declined, deposit costs were already low or at their floors.
The COVID-19 pandemic has not adversely affected our capital or financial resources as of March 31, 2021. During the first three months of 2021, total shareholders’ equity increased by $4.1 million, or 1%, to $348.0 million. The Company earned $11.1 million in net income in the first three months of 2021, but had a $4.1 million decrease in accumulated other comprehensive income as a result of decreases in the value of our investment portfolio due to an uptick in interest rates. The Company also paid dividends of $3.2 million during the first quarter of 2021. On April 15, 2021, the Company declared a twenty-one cent per share dividend to be paid on May 12, 2021. Although presently not expected, if the Company were to incur significant credit losses as a result of COVID-19’s impact on our customers’ ability to repay loans, capital could be adversely impacted. With respect to liquidity, the Company maintains strong primary and secondary liquidity sources as further described under “Liquidity and Market Risk Management” below.
While we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet, this could change in future periods. Certain valuation assumptions and judgments continue to change to account for pandemic-related circumstances such as widening credit spreads. However, we do not anticipate any significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP. As of March 31, 2021, our goodwill was not impaired. The Company last performed an assessment of potential impairment to its goodwill at December 31, 2020 and concluded that it was not more likely than not that a goodwill impairment exists. The Company continues to monitor its goodwill recorded on the balance sheet for potential impairment and did not believe there was any event that would trigger a potential impairment in the first quarter of 2021. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. At March 31, 2021, we had goodwill of $27.4 million which represented 8% of total equity.
The Company continues to serve its customers. Out of our 40 branch locations, four are open with drive-up only access, and five branches are currently closed except by appointment. Approximately 45% of our back-office and corporate employees are working remotely and it has not adversely affected our operations. In addition, none of our internal controls have changed or are expected to change as a result of the remote work arrangements other than the use of remote approvals. The Company is preparing to bring all the branch locations back to normal operating hours in the next 30 days and is analyzing the return of the corporate office staff over the next 90 days. As a result of a change in customer behaviors brought about by the COVID-19 pandemic along with an efficiency review, the Company has decided to permanently close five branch locations effective June 18, 2021. Many of our customers have found an added convenience and ease of transacting business through online and mobile banking services which precipitated our decision to close locations where in-person transaction volumes no longer warranted a traditional brick-and-mortar branch. The acceleration of leasehold improvements for these locations increased depreciation expense by $0.1 million in the first quarter of 2021 and is expected to increase depreciation expense by an additional $0.4 million in the second quarter of 2021. Further, it is anticipated that there will be additional amortization expense of $0.2 million related to the

36

right of use asset from lease cancellations. It is projected that closing these five branch locations will result in annual noninterest expense savings of between $0.8 and $1.0 million.
To date, the Company did not experience any challenges in implementing its business continuity plans. The Company’s Risk Management team began preparing in early 2020, with ordering of supplies such as hand sanitizer, masks and cleaning supplies, as well as laptops for those who did not have one. This enabled the Company to immediately communicate and implement plans to continue operations in our banking facilities while enabling those non-customer facing employees to immediately begin working remotely. The Company did not face any material resource constraints in implementing these plans.
As a financial institution providing essential services, the Company expects continued demand for loans and deposits, albeit at a much slower pace than in 2020 for mortgage warehouse utilization and SBA PPP loan demand. In addition, it is expected that the Company’s strategic shift to focus more on loan categories other than non-owner occupied real estate will result in lower overall loan originations in 2021 than in 2020. It is further expected that certain services may see continued declines in demand for certain deposit services, such as debit and credit card interchange, given lower consumer spending.
The Company loosened its vacation and sick-time policies to accommodate our employees who were affected by COVID-19. The Company has hired an additional 28 temporary employees throughout the pandemic related to higher demand for loan processing and forgiveness, and to provide enhanced customer service. It is expected that the number of temporary employees will begin to decline through the second and third quarters of 2021.

EARNINGS PERFORMANCE

The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed money. The second is non-interestnoninterest income, which primarily consists of customer service charges and fees but also comes from non-customer sources such as bank-owned life insurance.insurance and certain non-debt investments. The majority of the Company’s non-interestnoninterest expense is comprised of operating costs that facilitate offering a fullbroad range of banking services to our customers.

Net interest income

NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income increased by $1.528$4.8 million or 9%, for the third quarter of 2017 relative to the third quarter of 2016 and by $5.742$28.6 million, or 12%, for the first nine monthsquarter of 20172021 over the first quarter of 2020.

For the first quarter of 2021 as compared to the first nine monthssame quarter in 2020, average loan balances increased $658.5 million, primarily due to increases in real estate loans of 2016.  $484.4 million, mortgage warehouse lines of $98.2 million and SBA PPP loans of $109.7 million contributing to the $4.3 million increase in loan interest income, however the volume increase was offset by lower yields. Overall, there was a decline of 68 bps in loan yield for the quarter ending March 31, 2021 as compared to the same period in 2020. Offsetting declines in yield on earnings assets, there was a 40 bps decrease in the cost of interest-bearing liabilities for the same period.

The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earninginterest earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities.  Net interest income is also impacted by the reversal of interest for loans placed on non-accrual status during the reporting period, and the recovery of interest on loans that had been on non-accrual and were paid off, sold or returned to accrual status.

The following tables show average balances for significant balance sheet categories and the amount of interest income or interest expense associated with each category for the noted periods. The tables also display calculated yields on each major component of the Company’s investment and loan portfolios, average rates paid on each key segment of the Company’s interest-bearing liabilities, and our net interest margin for the noted periods.periods.

37


Average Balances and Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

For the three months ended

 

 

 

Ended September 30, 2017

 

 

Ended September 30, 2016

 

Assets

 

Average

Balance (1)

 

 

Income/

Expense

 

 

Average

Rate/Yield (2)

 

 

Average

Balance (1)

 

 

Income/

Expense

 

 

Average

Rate/Yield (2)

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold/due from time

 

$

18,743

 

 

$

63

 

 

 

1.32

%

 

$

11,221

 

 

$

29

 

 

 

1.01

%

Taxable

 

 

446,395

 

 

 

2,224

 

 

 

1.95

%

 

 

419,218

 

 

 

1,879

 

 

 

1.75

%

Non-taxable

 

 

142,544

 

 

 

1,002

 

 

 

4.23

%

 

 

112,600

 

 

 

765

 

 

 

4.09

%

Total investments

 

 

607,682

 

 

 

3,289

 

 

 

2.47

%

 

 

543,039

 

 

 

2,673

 

 

 

2.22

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and Leases:(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

999,692

 

 

 

12,772

 

 

 

5.07

%

 

 

860,753

 

 

 

10,931

 

 

 

5.05

%

Agricultural

 

 

51,063

 

 

 

651

 

 

 

5.06

%

 

 

52,979

 

 

 

576

 

 

 

4.33

%

Commercial

 

 

113,166

 

 

 

1,483

 

 

 

5.20

%

 

 

126,190

 

 

 

1,685

 

 

 

5.31

%

Consumer

 

 

11,046

 

 

 

328

 

 

 

11.78

%

 

 

13,456

 

 

 

395

 

 

 

11.68

%

Mortgage warehouse lines

 

 

109,547

 

 

 

1,258

 

 

 

4.56

%

 

 

155,487

 

 

 

1,501

 

 

 

3.84

%

Other

 

 

3,392

 

 

 

51

 

 

 

5.97

%

 

 

2,035

 

 

 

33

 

 

 

6.45

%

Total loans and leases

 

 

1,287,906

 

 

 

16,543

 

 

 

5.10

%

 

 

1,210,900

 

 

 

15,121

 

 

 

4.97

%

Total interest earning assets (4)

 

 

1,895,588

 

 

 

19,832

 

 

 

4.26

%

 

 

1,753,939

 

 

 

17,794

 

 

 

4.13

%

Other earning assets

 

 

8,741

 

 

 

 

 

 

 

 

 

 

 

8,268

 

 

 

 

 

 

 

 

 

Non-earning assets

 

 

163,525

 

 

 

 

 

 

 

 

 

 

 

156,657

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,067,854

 

 

 

 

 

 

 

 

 

 

$

1,918,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

136,304

 

 

$

106

 

 

 

0.31

%

 

$

136,467

 

 

$

105

 

 

 

0.31

%

NOW

 

 

376,067

 

 

 

106

 

 

 

0.11

%

 

 

338,086

 

 

 

95

 

 

 

0.11

%

Savings accounts

 

 

238,824

 

 

 

65

 

 

 

0.11

%

 

 

211,900

 

 

 

59

 

 

 

0.11

%

Money market

 

 

120,086

 

 

 

24

 

 

 

0.08

%

 

 

117,854

 

 

 

24

 

 

 

0.08

%

CDAR's

 

 

 

 

 

 

 

 

 

 

 

477

 

 

 

 

 

 

 

Certificates of deposit, under $100,000

 

 

70,884

 

 

 

78

 

 

 

0.44

%

 

 

76,609

 

 

 

61

 

 

 

0.32

%

Certificates of deposit, $100,000 or more

 

 

272,680

 

 

 

653

 

 

 

0.95

%

 

 

249,132

 

 

 

231

 

 

 

0.37

%

Brokered deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest bearing deposits

 

 

1,214,845

 

 

 

1,032

 

 

 

0.34

%

 

 

1,130,525

 

 

 

575

 

 

 

0.20

%

Borrowed Funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds purchased

 

 

174

 

 

 

1

 

 

 

2.28

%

 

 

898

 

 

 

1

 

 

 

0.44

%

Repurchase agreements

 

 

8,247

 

 

 

8

 

 

 

0.38

%

 

 

7,704

 

 

 

8

 

 

 

0.41

%

Short term borrowings

 

 

1,441

 

 

 

5

 

 

 

1.38

%

 

 

36,293

 

 

 

42

 

 

 

0.46

%

TRUPS

 

 

34,519

 

 

 

351

 

 

 

4.03

%

 

 

37,319

 

 

 

261

 

 

 

2.78

%

Total borrowed funds

 

 

44,381

 

 

 

365

 

 

 

3.26

%

 

 

82,214

 

 

 

312

 

 

 

1.51

%

Total interest bearing liabilities

 

 

1,259,226

 

 

 

1,397

 

 

 

0.44

%

 

 

1,212,739

 

 

 

887

 

 

 

0.29

%

Demand deposits - non-interest bearing

 

 

560,057

 

 

 

 

 

 

 

 

 

 

 

481,996

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

30,487

 

 

 

 

 

 

 

 

 

 

 

15,678

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

218,084

 

 

 

 

 

 

 

 

 

 

 

208,451

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

2,067,854

 

 

 

 

 

 

 

 

 

 

$

1,918,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income/interest earning assets

 

 

 

 

 

 

 

 

 

 

4.26

%

 

 

 

 

 

 

 

 

 

 

4.13

%

Interest expense/interest earning assets

 

 

 

 

 

 

 

 

 

 

0.29

%

 

 

 

 

 

 

 

 

 

 

0.20

%

Net interest income and margin(5)

 

 

 

 

 

$

18,435

 

 

 

3.97

%

 

 

 

 

 

$

16,907

 

 

 

3.93

%

Average Balances and Rates

(dollars in thousands, unaudited)

For the three months ended

For the three months ended

March 31, 2021

March 31, 2020

Assets

    

Average
Balance 
(1)

    

Income/
Expense

    

Average
Rate/Yield 
(2)

    

Average
Balance 
(1)

    

Income/
Expense

    

Average
Rate/Yield 
(2)

Investments:

Federal funds sold/due from time

$

76,504

$

19

0.10%

$

37,124

    

$

140

1.52%

Taxable

317,254

1,578

2.02%

    

408,841

2,460

2.42%

Non-taxable

226,838

1,449

3.28%

195,440

1,339

3.48%

Total investments

620,596

3,046

2.24%

641,405

3,939

2.69%

Loans and leases:(3)

    

Real estate

1,879,359

21,391

4.62%

1,394,911

18,723

5.40%

Agricultural

46,153

419

3.68%

48,532

583

4.83%

Commercial

191,656

2,451

5.19%

107,696

1,096

4.10%

Consumer

5,422

196

14.66%

7,583

368

19.52%

Mortgage warehouse lines

242,865

1,928

3.22%

144,621

1,264

3.52%

Other

1,588

27

6.90%

5,242

78

5.98%

Total loans and leases

2,367,043

26,412

4.53%

1,708,585

22,112

5.21%

Total interest earning assets (4)

    

2,987,639

29,458

4.05%

2,349,990

26,051

4.52%

Other earning assets

13,275

12,841

Non-earning assets

201,114

196,906

Total assets

$

3,202,028

$

2,559,737

Liabilities and shareholders' equity

Interest bearing deposits:

Demand deposits

$

130,763

$

73

0.23%

$

88,731

$

62

0.28%

NOW

569,171

101

0.07%

456,586

122

0.11%

Savings accounts

391,091

53

0.05%

297,721

73

0.10%

Money market

136,422

30

0.09%

117,249

43

0.15%

Certificates of deposit, under $100,000

72,147

51

0.29%

80,852

134

0.67%

Certificates of deposit, $100,000 or more

340,269

238

0.28%

379,699

1,233

1.31%

Brokered deposits

100,000

62

0.25%

40,824

167

1.65%

Total interest bearing deposits

1,739,863

608

0.14%

1,461,662

1,834

0.50%

Borrowed funds:

Federal funds purchased

5,822

1

0.07%

4

Repurchase agreements

46,097

45

0.40%

27,482

27

0.40%

Short term borrowings

11,530

2

0.07%

5,946

9

0.61%

TRUPS

35,141

247

2.85%

34,962

394

4.53%

Total borrowed funds

98,590

295

1.21%

68,394

430

2.53%

Total interest bearing liabilities

1,838,453

903

0.20%

1,530,056

2,264

0.60%

Demand deposits - noninterest bearing

977,137

678,592

Other liabilities

39,199

36,220

Shareholders' equity

347,239

314,869

Total liabilities and shareholders' equity

$

3,202,028

$

2,559,737

Interest income/interest earning assets

4.05%

4.52%

Interest expense/interest earning assets

0.12%

0.39%

Net interest income and margin(5)

$

28,555

3.93%

$

23,787

4.13%

(1)

Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

(2)

Yields and net interest margin have been computed on a tax equivalent basis utilizing a 35%21% effective tax rate.

(3)

Loans are gross of the allowance for possible loan losses. Loan fees have been included in the calculation of interest income. Net loan fees and loan acquisition FMV amortization were $(22) thousand$1.4 million and $156 thousand$(0.1) million for the quarters ended September 30, 2017March 31, 2021 and 2016.

2020, respectively.

(4)

Non-accrual loans have been included in total loans for purposes of computing total earning assets.

(5)

Net interest margin represents net interest income as a percentage of average interest-earninginterest earning assets.

38


Average Balances and Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

 

 

For the nine months ended

 

 

 

September 30, 2017

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

Average

Balance (1)

 

 

Income/

Expense

 

 

Average

Rate/Yield (2)

 

 

Average

Balance (1)

 

 

Income/

Expense

 

 

Average

Rate/Yield (2)

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold/due from time

 

$

42,983

 

 

$

317

 

 

 

0.97

%

 

$

11,996

 

 

$

61

 

 

 

0.67

%

Taxable

 

 

436,818

 

 

 

6,385

 

 

 

1.93

%

 

 

416,177

 

 

 

6,114

 

 

 

1.93

%

Non-taxable

 

 

130,285

 

 

 

2,739

 

 

 

4.27

%

 

 

106,396

 

 

 

2,225

 

 

 

4.23

%

Total investments

 

 

610,086

 

 

 

9,441

 

 

 

2.36

%

 

 

534,569

 

 

 

8,400

 

 

 

2.36

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and Leases:(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

965,980

 

 

 

36,586

 

 

 

5.06

%

 

 

803,958

 

 

 

30,287

 

 

 

5.03

%

Agricultural

 

 

49,851

 

 

 

1,826

 

 

 

4.90

%

 

 

48,678

 

 

 

1,598

 

 

 

4.39

%

Commercial

 

 

116,628

 

 

 

4,558

 

 

 

5.23

%

 

 

114,040

 

 

 

4,189

 

 

 

4.91

%

Consumer

 

 

11,569

 

 

 

982

 

 

 

11.35

%

 

 

14,140

 

 

 

1,218

 

 

 

11.51

%

Mortgage warehouse lines

 

 

98,994

 

 

 

3,253

 

 

 

4.39

%

 

 

136,899

 

 

 

3,972

 

 

 

3.88

%

Other

 

 

3,228

 

 

 

144

 

 

 

5.96

%

 

 

2,004

 

 

 

96

 

 

 

6.40

%

Total loans and leases

 

 

1,246,250

 

 

 

47,349

 

 

 

5.08

%

 

 

1,119,719

 

 

 

41,360

 

 

 

4.93

%

Total interest earning assets (4)

 

 

1,856,336

 

 

 

56,790

 

 

 

4.20

%

 

 

1,654,288

 

 

 

49,760

 

 

 

4.11

%

Other earning assets

 

 

8,646

 

 

 

 

 

 

 

 

 

 

 

7,890

 

 

 

 

 

 

 

 

 

Non-earning assets

 

 

158,502

 

 

 

 

 

 

 

 

 

 

 

142,825

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,023,484

 

 

 

 

 

 

 

 

 

 

$

1,805,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

142,840

 

 

$

328

 

 

 

0.31

%

 

$

136,708

 

 

$

309

 

 

 

0.30

%

NOW

 

 

373,022

 

 

 

311

 

 

 

0.11

%

 

 

320,151

 

 

 

261

 

 

 

0.11

%

Savings accounts

 

 

229,774

 

 

 

186

 

 

 

0.11

%

 

 

203,639

 

 

 

168

 

 

 

0.11

%

Money market

 

 

119,541

 

 

 

69

 

 

 

0.08

%

 

 

105,065

 

 

 

56

 

 

 

0.07

%

CDAR's

 

 

42

 

 

 

-

 

 

 

0.00

%

 

 

4,858

 

 

 

3

 

 

 

0.08

%

Certificates of deposit, under $100,000

 

 

72,761

 

 

 

204

 

 

 

0.37

%

 

 

75,039

 

 

 

175

 

 

 

0.31

%

Certificates of deposit, $100,000 or more

 

 

269,775

 

 

 

1,490

 

 

 

0.74

%

 

 

230,436

 

 

 

601

 

 

 

0.35

%

Brokered deposits

 

 

 

 

 

 

 

 

0.00

%

 

 

-

 

 

 

-

 

 

 

0.00

%

Total interest bearing deposits

 

 

1,207,755

 

 

 

2,588

 

 

 

0.29

%

 

 

1,075,896

 

 

 

1,573

 

 

 

0.20

%

Borrowed Funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds purchased

 

 

61

 

 

 

1

 

 

 

2.19

%

 

 

766

 

 

 

4

 

 

 

0.70

%

Repurchase agreements

 

 

8,878

 

 

 

26

 

 

 

0.39

%

 

 

8,872

 

 

 

26

 

 

 

0.39

%

Short term borrowings

 

 

1,029

 

 

 

7

 

 

 

0.91

%

 

 

23,239

 

 

 

77

 

 

 

0.44

%

Long term borrowings

 

 

 

 

 

 

 

 

 

 

 

409

 

 

 

 

 

 

 

TRUPS

 

 

34,474

 

 

 

1,009

 

 

 

3.91

%

 

 

33,074

 

 

 

663

 

 

 

2.68

%

Total borrowed funds

 

 

44,442

 

 

 

1,043

 

 

 

3.14

%

 

 

66,360

 

 

 

770

 

 

 

1.55

%

Total interest bearing liabilities

 

 

1,252,197

 

 

 

3,631

 

 

 

0.39

%

 

 

1,142,256

 

 

 

2,343

 

 

 

0.27

%

Demand deposits - non-interest bearing

 

 

529,997

 

 

 

 

 

 

 

 

 

 

 

448,502

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

27,763

 

 

 

 

 

 

 

 

 

 

 

15,001

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

213,527

 

 

 

 

 

 

 

 

 

 

 

199,244

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

2,023,484

 

 

 

 

 

 

 

 

 

 

$

1,805,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income/interest earning assets

 

 

 

 

 

 

 

 

 

 

4.20

%

 

 

 

 

 

 

 

 

 

 

4.11

%

Interest expense/interest earning assets

 

 

 

 

 

 

 

 

 

 

0.27

%

 

 

 

 

 

 

 

 

 

 

0.18

%

Net interest income and margin(5)

 

 

 

 

 

$

53,159

 

 

 

3.93

%

 

 

 

 

 

$

47,417

 

 

 

3.93

%

(1)

Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

(2)

Yields and net interest margin have been computed on a tax equivalent basis utilizing a 35% effective tax rate.

(3)

Loans are gross of the allowance for possible loan losses. Net loan fees have been included in the calculation of interest income. Net loan fees and loan acquistion FMV amortization were $57 thousand and $(7) thousand for the nine months ended September 30, 2017 and 2016.

(4)

Non-accrual loans have been included in total loans for purposes of computing total earning assets.

(5)

Net interest margin represents net interest income as a percentage of average interest-earning assets.

39


The Volume and Rate Variances table below sets forth the dollar difference for the comparative periods in interest earned or paid for each major category of interest-earninginterest earning assets and interest-bearing liabilities, and the amount of such change attributable to fluctuations in average balances (volume) or differences in average interest rates. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates, and rate variances are equal to the change in rates multiplied by prior period average balances. Variances attributable to both rate and volume changes, calculated by multiplying the change in rates by the change in average balances, have been allocated to the rate variance.

Volume & Rate Variances

Volume & Rate Variances

Three months ended September 30,

 

 

Nine months ended September 30,

 

(dollars in thousands, unaudited)

2017 over 2016

 

 

2017 over 2016

 

 

Increase (decrease) due to

 

 

Increase (decrease) due to

 

Assets:

Volume

 

 

Rate

 

 

Net

 

 

Volume

 

 

Rate

 

 

Net

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold/due from time

$

19

 

 

$

15

 

 

$

34

 

 

$

158

 

 

$

98

 

 

$

256

 

Taxable

 

122

 

 

 

223

 

 

 

345

 

 

 

303

 

 

 

(32

)

 

 

271

 

Non-taxable(1)

 

203

 

 

 

34

 

 

 

237

 

 

 

500

 

 

 

14

 

 

 

514

 

Total investments

 

344

 

 

 

272

 

 

 

616

 

 

 

961

 

 

 

80

 

 

 

1,041

 

Loans and Leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

1,764

 

 

 

77

 

 

 

1,841

 

 

 

6,104

 

 

 

195

 

 

 

6,299

 

Agricultural

 

(21

)

 

 

96

 

 

 

75

 

 

 

39

 

 

 

189

 

 

 

228

 

Commercial

 

(174

)

 

 

(28

)

 

 

(202

)

 

 

95

 

 

 

274

 

 

 

369

 

Consumer

 

(71

)

 

 

4

 

 

 

(67

)

 

 

(221

)

 

 

(15

)

 

 

(236

)

Mortgage warehouse

 

(443

)

 

 

200

 

 

 

(243

)

 

 

(1,100

)

 

 

381

 

 

 

(719

)

Other

 

22

 

 

 

(4

)

 

 

18

 

 

 

59

 

 

 

(11

)

 

 

48

 

Total loans and leases

 

1,077

 

 

 

345

 

 

 

1,422

 

 

 

4,976

 

 

 

1,013

 

 

 

5,989

 

Total interest earning assets

$

1,421

 

 

$

617

 

 

$

2,038

 

 

$

5,937

 

 

$

1,093

 

 

$

7,030

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

$

-

 

 

$

1

 

 

$

1

 

 

$

14

 

 

$

5

 

 

$

19

 

NOW

 

11

 

 

 

 

 

 

11

 

 

 

43

 

 

 

7

 

 

 

50

 

Savings accounts

 

7

 

 

 

(1

)

 

 

6

 

 

 

22

 

 

 

(4

)

 

 

18

 

Money market

 

 

 

 

 

 

 

 

 

 

8

 

 

 

5

 

 

 

13

 

CDAR's

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

(3

)

Certificates of Deposit, under

   $100,000

 

(5

)

 

 

22

 

 

 

17

 

 

 

(5

)

 

 

34

 

 

 

29

 

Certificates of Deposit, $100,000 or

   more

 

22

 

 

 

400

 

 

 

422

 

 

 

103

 

 

 

786

 

 

 

889

 

Total interest bearing deposits

 

35

 

 

 

422

 

 

 

457

 

 

 

182

 

 

 

833

 

 

 

1,015

 

Borrowed Funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds purchased

 

(1

)

 

 

1

 

 

 

-

 

 

 

(4

)

 

 

1

 

 

 

(3

)

Repurchase agreements

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

-

 

Short term borrowings

 

(40

)

 

 

3

 

 

 

(37

)

 

 

(74

)

 

 

4

 

 

 

(70

)

TRUPS

 

(20

)

 

 

110

 

 

 

90

 

 

 

28

 

 

 

318

 

 

 

346

 

Total borrowed funds

 

(60

)

 

 

113

 

 

 

53

 

 

 

(50

)

 

 

323

 

 

 

273

 

Total interest bearing liabilities

 

(25

)

 

 

535

 

 

 

510

 

 

 

132

 

 

 

1,156

 

 

 

1,288

 

Net interest income

$

1,446

 

 

$

82

 

 

$

1,528

 

 

$

5,805

 

 

$

(63

)

 

$

5,742

 

(dollars in thousands, unaudited)

Three months ended March 31,

2021 over 2020

Increase (decrease) due to

Assets:

    

Volume

    

Rate

    

Net

Investments:

Federal funds sold/due from time

    

$

149

    

$

(270)

    

$

(121)

Taxable

(551)

(331)

(882)

Non-taxable

215

(105)

110

Total investments

(187)

(706)

(893)

Loans and leases:

Real estate

6,502

(3,834)

2,668

Agricultural

(29)

(135)

(164)

Commercial

854

501

1,355

Consumer

(105)

(67)

(172)

Mortgage warehouse

859

(195)

664

Other

(54)

3

(51)

Total loans and leases

8,027

(3,727)

4,300

Total interest earning assets

$

7,840

$

(4,433)

$

3,407

Liabilities

Interest bearing deposits:

Demand deposits

$

29

(18)

$

11

NOW

30

(51)

(21)

Savings accounts

23

(43)

(20)

Money market

7

(20)

(13)

Certificates of deposit, under $100,000

(14)

(69)

(83)

Certificates of deposit, $100,000 or more

(128)

(867)

(995)

Brokered deposits

242

(347)

(105)

Total interest bearing deposits

189

(1,415)

(1,226)

Borrowed funds:

Repurchase agreements

18

18

Short term borrowings

8

(15)

(7)

TRUPS

2

(149)

(147)

Total borrowed funds

28

(163)

(135)

Total interest bearing liabilities

217

(1,578)

(1,361)

Net interest income

$

7,623

$

(2,855)

$

4,768

(1)

Yields on tax exempt income have not been computed on a tax equivalent basis.

40


The volume variance calculated for the third quarterfirst three months of 20172021 relative to the third quarterfirst three months of 20162020 was a favorable $1.446$7.6 million due to an increasehigher average balances of $142 million, or 8%, in the average balance of interest-earninginterest earning assets, resulting from organic growth in commercial real estate loans, growth in commercial loans due to our participation in the SBA PPP program and investments.higher utilization of mortgage warehouse lines. There was also a favorablean unfavorable rate variance of $82,000$2.9 million for the third quarter comparison.  Ourcomparative quarters since the weighted average yield on interest-earninginterest earning assets was upfell by 1347 basis points whileand the weighted average cost of interest-bearing liabilities increasedliabil­ities decreased by 1540 basis points, but therepoints. The rate variance was negatively impacted by the following factors: rate cuts by the FOMC in March 2020 and resulting lower rates and yields given the uncertainty of the pandemic, new loans and investments having lower yields overall, including an increase in low-yielding SBA PPP loans.

39

These negative factors were partially offset by an increase in loans overall as a percent of overall earning assets, as well as lower costs of time-deposits and other interest-bearing liabilities. The average fees on the SBA PPP loans was approximately 5.5%. These fees, net benefitof loan costs, are being accreted over the stated life of the loan (generally two years for PPP loans generated in 2020 and 5 years for PPP loans generated in 2021), net of loan costs. Our customers with an SBA PPP loan are generally eligible to apply for loan forgiveness after 24 weeks. After the Company because24-week covered period, PPP borrowers have ten months to apply for forgiveness. During this period, payments are not due on the yield increaseloan. If a loan is forgiven, upon repayment of principal and interest by the SBA, any unaccreted fee income, net of unamortized costs, would be recognized as interest income at such time. The decrease in rate on interest earning assets was applied to a much higher balanceless than the net volume/rate change for interest-bearing liabilities.  Investment yields have started to increase due to the recent rising rate environment,decrease in interest bearing liabilities and alsoresulted in response to limited investment portfolio restructuring which took place in the second quarter of 2017.  Loan yields have risen due to the impact of higher short-term interest rates on our variable-rate loans and discount accretion on loans from the Coast acquisition.  The comparative results were also impacted by non-recurring interest items, which can include things such as interest recoveries on non-accrual loans, interest reversals for loans placed on non-accrual status, accelerated fee recognition for loan prepayments, and late fees.  We had net interest reversals of $54,000 in the third quarter of 2017 relative to net interest recoveries of $117,000 in the third quarter of 2016, for an unfavorable swing of $171,000.  Our weighted average cost of interest-bearing liabilities increased primarily because of higher rates paid on adjustable-rate trust-preferred securities (“TRUPS”), short-term borrowings and large time deposits.

The Company’s net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, was affected by the same factors discussed above relative to rate and volume variances.  Our net interest margin was 3.97% in the third quarter of 2017, up four basis points relative to the third quarter of 2016 primarily as the result of higher loan and investment yields.  However, the fact that average investment balances have grown faster than higher-yielding loans has somewhat restrained net interest margin expansion in recent periods.

Net interest income in the first nine months of 2017 relative to the first nine months of 2016 reflects a favorable variance of $5.805$4.8 million attributable to volume changes, and an unfavorable net volume/rate variance of $63,000.difference. The volume variance for the year-to-date period was due primarily to an increase of $202 million, or 12%, in average interest-earning assets, including the impact of the Coast acquisition.  The negative rate variance for the first nine months is the result of a 12 basis point increase in our average cost of interest-bearing liabilities, relative to an increase of only nine basis points in our average yield on earning assets.  Nonrecurring interest items had a slight unfavorable impact on the year-to-date results, with net interest recoveries of $164,000 for the first nine months of 2017 relative to net interest recoveries of $181,000 for the first nine months of 2016.  There was no net change in the Company’s net interest margin for the nine month comparison.first three months of 2021 was 3.93%, as compared to 4.13% in the first three months of 2020.

As described above, a lower rate environment precipitated by two interest rate cuts by the Federal Open Market Committee totaling 150 bps in March 2020 and other economic uncertainty negatively impacted our yield on existing adjustable and variable rate portfolio loans and created a lower initial interest rate for new loan volumes. At March 31, 2021, approximately 10% of our total portfolio, or $226.2 million, consists of variable rate loans. Of these variable rate loans, approximately $84.1 million have floors that limited the overall reduction in rates. At March 31, 2021, our outstanding fixed rate loans represented 22% of our loan portfolio. The remaining 68% of our loan portfolio at March 31, 2021 consists of adjustable rate loans. However, the majority of these loans (approximately $1.2 billion) will not begin adjusting for at least another 3 years. Approximately $70.1 million of these adjustable rate loans will reprice in the next quarter.

Cash balances have increased on March 31, 2021 as compared to December 31, 2020 due to the increase in deposit balances and lower loan balances in the first quarter of 2021. For the quarterly comparisons, there was an unfavorable net volume rate variance since cash balances earned considerably lower yields than other earning assets.

Overall average investment securities decreased by $60.2 million for the quarter ending March 31, 2021 as compared to March 31, 2020. For the three months ending March 31, 2021 over the same period for 2020, average non-taxable securities increased $31.4 million and taxable securities decreased $91.6 million. The overall investment portfolio had a tax-equivalent yield of 2.66% at March 31, 2021, with an average life of 4.5 years.

Interest expense was $0.9 million in the first quarter of 2021, a decline of $1.4 million, or 60%, compared to the first quarter of 2020. The significant decline in interest expense for the quarterly comparisons is attributable to a favorable shift in deposit mix as average noninterest bearing demand deposits increased $298.5 million in the first quarter of 2021 as compared to the same quarter in 2020. Lower cost transaction, savings and money market accounts increased $267.2 million in the first quarter of 2021 as compared to the same quarter in 2020. The average cost of interest-bearing deposits declined by 36 basis points, or 72%, to 14 basis points for the first quarter of 2021 compared to the first quarter of 2020.

Provision for loan and

PROVISION FOR LOAN AND LEASE lossesLOSSES

Credit risk is inherent in the business of making loans. The Company sets aside an allowance for loan and lease losses, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for loan and lease losses. The Company recorded a loan loss provision of $0.3 million in the first quarter of 2021 compared to $1.8 million in the first quarter of 2020. The decrease in provision for loan and lease losses is due to a decrease in loan balances and the receipt of net loan recoveries for the first three months of 2021.

There was no provision for loan and lease losses, or related allowance for loan and leases losses, associated with the SBA PPP loans as those loans carry a full guarantee by the SBA, subject to the financial institution meetings its Bank Secrecy Act obligations and other diligence requirements in making such loans.

40

Management also evaluated its qualitative risk factors under our current incurred loss model and adjusted for changes as deemed appropriate in the third quarterscurrent environment. These qualitative risk factors accounted for the majority of 2017 or 2016, but the year-to-date comparison was impacted by a $300,000 loan loss provision that was recordedexpense in both the first quarter of 2020 and in the secondfirst quarter of 2017,2021.

As described above, the Company was subject to the adoption of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326). However, the Company elected under Section 4014 of the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. The Consolidated Appropriations Act, 2021 extended the deferral of implementation of CECL to the earlier of the first such provision sinceday of the third quarterfiscal year, beginning after the national emergency terminates or January 1, 2022. The Company has elected this deferral to provide time to better assess the impact of 2014.  The provision helped replenish reserves subsequentthe COVID-19 pandemic and changing economic forecasts on the expected lifetime credit losses. It is expected that the Company’s Allowance for Credit Loss under CECL will be approximately 50% higher than the current Allowance for Loan and Lease Losses, with the initial adjustment being recorded as an adjustment to equity, as previously disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2020. If the CECL adjustment is to increase the current Allowance for Loan and Lease Losses by 50% at 1/1/2022, the adjustment to equity will also be adjusted for income taxes, causing a net decrease to equity of approximately $5.8 million to $6.5 million. This adjustment is not expected to immediately impact our regulatory capital ratios given the Interagency Guidance to phase-in the CECL adjustment as adopted in 2020. At this time, the Company is not anticipating any need to raise capital due to the unanticipated charge-offCECL implementation.

The Company has taken actions to mitigate the impact on credit losses including permitting short-term payment deferrals to current customers, as well as providing bridge loans and SBA PPP loans. As described below under Nonperforming Assets, since April 2020, the Company modified approximately $425.9 million of loans under either Section 4013 of the CARES Act or the April 7, 2020 Interagency statement that offered some practical expedients for loan modifications. These modifications generally provided for a $224,000 overdraftsix-month deferral of both interest and principal and the vast majority of the customers on a business account,deferral resumed making scheduled payments upon the expiration of the deferral. As of March 31, 2021, the Company had $22.4 million in remaining loan modifications; all but two small balance consumer loans are fully secured by real estate. The Company expects that all customers show an ability and also provided limited reserves for growth in performing loan balances.  willingness to pay full principal and interest upon maturity of their deferment period. These deferrals had an impact on how the Company internally grades its loans and as such had an impact on the overall provision under the incurred loss method. The performance on these loans after the end of the deferral period could impact future provision.

Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance, with subsequent recoveries reflected as an increase to the allowance. The Company recorded $446,000 in net loan balances charged off in the third quarterrecoveries of 2017 relative to $162,000 in the third quarter of 2016, and net charge-offs were $1.217$0.3 million in the first nine months of 2017 relative to $543,000 in the first nine months of 2016.

With the loan loss provision that was recorded in the second quarter of 2017, we have been able2021 as compared to maintain ournet charge-offs of $0.3 million for the comparative period of 2020.

The allowance for loan and lease losses is at a level that, in Management’s judgment, is adequate to absorb probable loan losses related to specifically-identifiedspecifically identified impaired loans as well as probable incurred losses in the remaining loan portfolio.  The need for reserve replenishment via a loan loss provision has been minimized in recent periods for the following reasons:  all of our acquired loans were booked at their fair values on the acquisition date, and thus did not initially require a loan loss allowance; with the exception of the overdraft noted in the previous paragraph, charge-offs have primarily been recorded against pre-established reserves which alleviated what otherwise might have been a need for reserve replenishment; organic growth in our performing loan portfolio has been concentrated in loan types with low historical loss rates, and loss rates for most loan types have been declining, thus having a positive impact on general reserves for performing loans; and, new loans booked during and since the great recession have been underwritten using tighter credit standards than was the case for many legacy loans.

The Company’s policies for monitoring the adequacy of the allowance, and determining loan amountsbalances that should be charged off, and other detailed information with regard to changes in the allowance are discussed in Note 1211 to the consolidated financial statements,

41


and below, under “Allowance for Loan and Lease Losses.” The process utilized to establish an appropriate allowance for loan and lease losses can result in a high degree of variability in the Company’s loan loss provision, and consequently in our net earnings.

41

NON-INTEREST

NONINTEREST INCOME and NON-INTEREST expenseAND NONINTEREST EXPENSE

The following table provides details on the Company’s non-interestnoninterest income and non-interestnoninterest expense for the three- and nine-monththree periods ended September 30, 2017March 31, 2021 and 2016:2020:

Noninterest Income/Expense

(dollars in thousands, unaudited)

For the three months ended March 31,

Noninterest income:

2021

% of Total

2020

% of Total

Service charges on deposit accounts

    

$

2,767

    

40.51%

    

$

3,183

    

52.13%

Other service charges and fees

2,560

37.48%

2,404

39.37%

Net gains on sale of securities available-for-sale

Bank-owned life insurance

583

8.54%

38

0.62%

Other

920

13.47%

481

7.88%

Total noninterest income

$

6,830

100.00%

$

6,106

100.00%

As a % of average interest earning assets (1)

0.93%

1.05%

Noninterest expense:

Salaries and employee benefits

$

11,151

55.01%

$

10,172

57.08%

Occupancy costs

Furniture & equipment

452

2.23%

465

2.61%

Premises

2,034

10.04%

1,862

10.44%

Advertising and marketing costs

321

1.58%

601

3.37%

Data processing costs

1,426

7.03%

1,142

6.41%

Deposit services costs

2,068

10.21%

1,797

10.09%

Loan services costs

Loan processing

169

0.83%

171

0.96%

Foreclosed assets

107

0.53%

6

0.03%

Other operating costs

Telephone & data communications

380

1.87%

368

2.07%

Postage & mail

84

0.41%

68

0.38%

Other

462

2.28%

386

2.17%

Professional services costs

Legal & accounting

442

2.18%

328

1.84%

Acquisition costs

Other professional service

897

4.43%

247

1.39%

Stationery & supply costs

78

0.38%

115

0.65%

Sundry & tellers

200

0.99%

90

0.51%

Total noninterest expense

$

20,271

100.00%

$

17,818

100.00%

As a % of average interest earning assets (1)

2.75%

3.05%

Efficiency ratio (2)(3)

56.43%

58.88%

Non Interest Income/Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30,

 

 

For the nine months ended September 30,

 

NON-INTEREST INCOME:

 

2017

 

 

% of Total

 

 

2016

 

 

% of Total

 

 

2017

 

 

% of Total

 

 

2016

 

 

% of Total

 

Service charges on deposit accounts

 

$

2,916

 

 

 

49.34

%

 

$

2,686

 

 

 

53.82

%

 

$

8,263

 

 

 

50.36

%

 

$

7,535

 

 

 

54.37

%

Other service charges, commissions &

   fees

 

 

1,975

 

 

 

33.42

%

 

 

1,893

 

 

 

37.93

%

 

 

6,249

 

 

 

38.09

%

 

 

5,484

 

 

 

39.57

%

Gains on securities

 

 

918

 

 

 

15.53

%

 

 

90

 

 

 

1.80

%

 

 

984

 

 

 

6.00

%

 

 

212

 

 

 

1.53

%

Bank owned life insurance

 

 

377

 

 

 

6.38

%

 

 

302

 

 

 

6.05

%

 

 

1,188

 

 

 

7.24

%

 

 

741

 

 

 

5.35

%

Other

 

 

(276

)

 

 

-4.67

%

 

 

20

 

 

 

0.40

%

 

 

(276

)

 

 

-1.69

%

 

 

(113

)

 

 

-0.82

%

Total non-interest income

 

$

5,910

 

 

 

100.00

%

 

$

4,991

 

 

 

100.00

%

 

$

16,408

 

 

 

100.00

%

 

$

13,859

 

 

 

100.00

%

As a % of average interest-

   earning assets (1)

 

 

 

 

 

 

1.24

%

 

 

 

 

 

 

1.13

%

 

 

 

 

 

 

1.18

%

 

 

 

 

 

 

1.12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER OPERATING EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

7,478

 

 

 

48.42

%

 

$

6,866

 

 

 

42.59

%

 

$

22,617

 

 

 

48.91

%

 

$

20,355

 

 

 

46.99

%

Occupancy costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Furniture & equipment

 

 

641

 

 

 

4.15

%

 

 

651

 

 

 

4.04

%

 

 

1,888

 

 

 

4.08

%

 

 

1,814

 

 

 

4.19

%

Premises

 

 

1,727

 

 

 

11.18

%

 

 

1,412

 

 

 

8.76

%

 

 

5,035

 

 

 

10.89

%

 

 

3,866

 

 

 

8.93

%

Advertising and marketing costs

 

 

552

 

 

 

3.57

%

 

 

576

 

 

 

3.57

%

 

 

1,675

 

 

 

3.62

%

 

 

1,761

 

 

 

4.07

%

Data processing costs

 

 

1,040

 

 

 

6.73

%

 

 

933

 

 

 

5.79

%

 

 

3,049

 

 

 

6.59

%

 

 

2,560

 

 

 

5.91

%

Deposit services costs

 

 

1,029

 

 

 

6.66

%

 

 

1,063

 

 

 

6.59

%

 

 

3,140

 

 

 

6.79

%

 

 

2,785

 

 

 

6.43

%

Loan services costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan processing

 

 

195

 

 

 

1.26

%

 

 

148

 

 

 

0.92

%

 

 

634

 

 

 

1.37

%

 

 

506

 

 

 

1.17

%

Foreclosed assets

 

 

43

 

 

 

0.28

%

 

 

84

 

 

 

0.52

%

 

 

207

 

 

 

0.45

%

 

 

535

 

 

 

1.24

%

Other operating costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telephone & data communications

 

 

406

 

 

 

2.63

%

 

 

392

 

 

 

2.43

%

 

 

1,278

 

 

 

2.76

%

 

 

1,141

 

 

 

2.63

%

Postage & mail

 

 

284

 

 

 

1.84

%

 

 

284

 

 

 

1.76

%

 

 

762

 

 

 

1.65

%

 

 

737

 

 

 

1.70

%

Other

 

 

273

 

 

 

1.77

%

 

 

252

 

 

 

1.57

%

 

 

809

 

 

 

1.76

%

 

 

638

 

 

 

1.47

%

Professional services costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legal & accounting

 

 

448

 

 

 

2.90

%

 

 

463

 

 

 

2.87

%

 

 

1,381

 

 

 

2.99

%

 

 

1,312

 

 

 

3.03

%

Acquisition Costs

 

 

424

 

 

 

2.75

%

 

 

1,695

 

 

 

10.51

%

 

 

585

 

 

 

1.27

%

 

 

2,037

 

 

 

4.70

%

Other professional service

 

 

440

 

 

 

2.85

%

 

 

596

 

 

 

3.70

%

 

 

1,766

 

 

 

3.82

%

 

 

1,464

 

 

 

3.38

%

Stationery & supply costs

 

 

329

 

 

 

2.13

%

 

 

416

 

 

 

2.58

%

 

 

962

 

 

 

2.08

%

 

 

1,066

 

 

 

2.46

%

Sundry & tellers

 

 

136

 

 

 

0.88

%

 

 

290

 

 

 

1.80

%

 

 

450

 

 

 

0.97

%

 

 

738

 

 

 

1.70

%

Total non-interest expense

 

$

15,445

 

 

 

100.00

%

 

$

16,121

 

 

 

100.00

%

 

$

46,238

 

 

 

100.00

%

 

$

43,315

 

 

 

100.00

%

As a % of average interest-

   earning assets (1)

 

 

 

 

 

 

3.23

%

 

 

 

 

 

 

3.66

%

 

 

 

 

 

 

3.32

%

 

 

 

 

 

 

3.51

%

Efficiency Ratio (2)

 

 

63.90

%

 

 

 

 

 

 

72.02

%

 

 

 

 

 

 

65.40

%

 

 

 

 

 

 

69.13

%

 

 

 

 

(1)

Annualized

(2)

Tax Equivalent

equivalent
(3)Noninterest expense as a percentage of the sum of net interest income and noninterest income excluding net gains (losses) from securities and bank owned life insurance income.

Noninterest Income:

Total non-interestnoninterest income increased by $919,000,reflected an increase of $0.7 million, or 18%12%, for the third quarter of 2017 over the third quarter of 2016, and by $2.549 million, or 18%, for the first nine months of 2017 relativeended March 31, 2021 as compared to the first nine months of 2016.  As discussed below, relatively large investment gains realizedsame quarter in the third quarter of 2017 had a significant impact on the comparative results, and the year-to-date

42


comparison also includes a $141,000 prepayment charge on a large dairy loan that paid off in the second quarter of 2017.  Total non-interest income was an annualized 1.24% of average interest-earning assets in the third quarter of 2017 relative to 1.13% in the third quarter of 2016, and was 1.18% of average earning assets for the first nine months of 2017 relative to 1.12% for the first nine months of 2016.

Service charge income on deposits increased by $230,000, or 9%, for the third quarter comparison and $728,000, or 10%, for the first nine months2020 due primarily to fees earned from accounts added over the past year, including from the Coast acquisition.  The increase also includes higher revenue-generating activity on certain commercial accounts, and additional fees on higher-risk commercial accounts.  Other service charges, commissions, and fees increased by $82,000, or 4%, for the third quarter and $765,000, or 14%, for the first nine months.  This category includes the aforementioned $141,000 prepayment penalty recorded in the second quarter of 2017, as well as higher levels of debit card interchange fees and an increase in fees related to commercial customer activities.  

The Company sold its remaining equity position in other community banks during the third quarter of 2017, for a net gain of $918,000.  Gains realized on the sale of investment securities thus totaled $918,000 in the third quarter of 2017 relative to $90,000 in the third quarter of 2016, and $984,000 for the first nine months of 2017 relative to $212,000 for the first nine months of 2016, resulting in material increases for the comparative periods.

BOLI income is derived from two types of policies owned by the Company:  “separate account” life insurance policies associated with deferred compensation plans, and “general account” life insurance.   BOLI income increased by $75,000, or 25%, in the third quarter of 2017 over the third quarter of 2016, and by $447,000, or 60%, for the first nine months due in partmostly to higher income on separate account BOLI.  The Company had $6.2 million invested in separate account BOLI at September 30, 2017, which produces income that helps offset expense accruals for deferred compensation accounts the Company maintains on behalf of certain directors and senior officers.  Those accounts have returns pegged to participant-directed investment allocations that can include equity, bond, or real estate indices, and are thus subject to gains or losses which often contribute to significant fluctuations in income (and associated expense accruals).  Gains on separate account BOLI totaled $144,000 in the third quarter of 2017 relative to $109,000 in the third quarter of 2016, for an increase of $35,000, and $465,000 in the first nine months of 2017 relative to $121,000 in the first nine months of 2016, for an increase of $344,000.  As noted, gains and losses on separate account BOLI are related to expense accruals or reversals associated with participant gains and losses on deferred compensation balances, thus their net impact on taxable income tends to be minimal.  At September 30, 2017, the Company’s books also reflect a net cash surrender value of $39.1 million for general account BOLI.  General account BOLI generates income that is used to help offset expenses associated with executive salary continuation plans, director retirement plans and other employee benefits.  Interest credit rates on general account BOLI do not change frequently so the income has typically been fairly consistent.  While rate reductions and an increase in the costother noninterest income category.

42

BOLI income over the past few years, the average income crediting rate increased in 2017 due to the termination of a high-cost policy in late 2016.  Income on general account BOLI thus shows increases of $40,000 for the third quarter, and $103,000 for the first nine months of 2017.  

The “Other” category under non-interest income reflects unfavorable swings of $296,000 for the third quarter and $163,000 for the first nine months of 2017, relativeby $0.5 million as compared to the same periods in 2016.  This line item includes gains and losses on the disposition of assets other than OREO, rent on bank-owned property other than OREO, dividends on restricted stock (including dividends on our equity investment in the Federal Home Loan Bank), and other miscellaneous income.  Amortization expense associated with our investments in low-income housing tax credit funds and other limited partnership investments is netted against this category, and third quarter 2017 adjustments to true-up those investments contributed $201,000 to the unfavorable category variance for the third quarter and $157,000 for the first nine months.  The unfavorable variance in “Other” non-interest income was exacerbated by a non-recurring charge of $68,000 in the third quarter of 20172020. This BOLI variance was due mostly to write off obsolete equipment, and by lower dividends on restricted stock as the FHLB dividend payout ratio has been decliningfluctuations in 2017 relative to historically high ratios in prior years.

Total non-interest expense was down by $676,000, or 4%, for the third quarterunderlying values of 2017 relative to the third quarter of 2016, but reflects an increase of $2.923 million, or 7%, for the comparative nine-month periods.  As detailed below there were several significant fluctuations within non-interest expense, including some items of a non-recurring nature.  Acquisition costs, in particular, had a material impact on the comparative results, declining by $1.271 million for the third quarter and $1.452 million for the first nine months.  Total non-interest expense fell to an annualized 3.23% of average interest-earning assets in the third quarter of 2017 from 3.66%specific account BOLI policies that are designed to have similar assets to those in the third quarter of 2016, and to 3.32% fordeferred compensation plans. Thus, the first nine months of 2017 relative to 3.51% for the first nine months of 2016.  The reductionhigher values in the ratio for the third quarter is logical given the dropBOLI policies are offset by higher deferred compensation expense reflected primarily in total non-interest expense, but the year-to-date ratio is also down primarily as the result of a sizeable increasedirector fees expense. At March 31, 2021, there was $43.5 million in average earning assets.

43


The largest component of non-interest expense, salaries and benefits, increased by $612,000, or 9%, for the third quarter and $2.262 million, or 11%, for the first nine months, with the disproportionate increase for the year-to-date period due primarily to the fact that personnel expense for the first six months of 2016 did not include expenses for former Coast employees retained subsequent to the Coast acquisition in July of 2016.  Both the third quarter and year-to-date comparisons reflect staffing costs for our Sanger branch which opened in May of 2016, our newest Bakersfield branch that commenced operations in March of 2017, and our Pismo Beach office that opened for business in September of 2017.  The increase also includes salary adjustments in the normal course of business, a relatively large increase in group health insurance costs, and, for the year-to-date comparison, higher stock option expense stemming from options granted in February of 2017.  The comparative periods were also impacted by fluctuations in salaries directly related to successful loan originations, which are deferred and amortized as loan costs and thus reduce current period compensation expense.  Those deferrals declined by $63,000 for the third quarter, but were up by $572,000 for the comparative year-to-date periods.

Occupancy expense increased by $305,000, or 15%, in the third quarter of 2017 over the third quarter of 2016, and by $1.243 million, or 22%, for the comparative year-to-date periods, due to ongoing occupancy costsBOLI policies associated with the former Coast National Bank branchesdeferred compensation plans and our newer de-novo branches, certain non-recurring start-up costs associated with$9.8 million in separate account BOLI policies.

Additionally, in the new branches, and higher rent and depreciation expense in other locations.  Despite an“other” category of noninterest income the Company reflected a $0.4 million increase in marketing efforts targeting our expanded geography, marketing costs were down $24,000, or 4%, for the third quarter and also fell by $86,000, or 5%, for the first nine months of 2017 due largely to the timing of payments.  Data processing costs increased by $107,000, or 11%, for the third quarter and $489,000, or 19%, for the first nine months of 2017, primarily from ongoing expenses related to the Coast acquisition and our new branches but also due to costs associated with an online lending platform that was implemented at the beginning of 2017.  Deposit services costs fell by $34,000, or 3%, for the quarterly comparison, but increased by $355,000, or 13% for the first nine months.  The year-to-date increase is due largely to higher ATM costs, and amortization expense on the core deposit intangible created via the Coast acquisition.

Loan processing costs increased by $47,000, or 32% for the third quarter and $128,000, or 25%, for the first nine months of 2017, with the year-to-date increase resulting largely from certain non-recurring costs incurred in the first quarter of 2017.  Net expenses associated with foreclosed assets dropped2021 as compared to the first quarter of 2020 the valuation of restricted stock held by $41,000,the Company as required under FASB ASU 2016-01. This stock is related to an equity investment in Pacific Coast Bankers’ Bank and is adjusted when financial information and an updated valuation report becomes available, generally in the late first quarter of each year.

Offsetting the above increases, there was a $0.4 million decrease in service charges on deposit accounts mostly from lower returned items and overdraft fees for the quarter ending March 31, 2021 over the comparable period in 2020. Customer spending behaviors have changed since the onset of the COVID-19 pandemic, reducing disbursement activity that creates overdrafts. It is unknown how long this trend will continue.

Noninterest Expense:

Total noninterest expense increased by $2.5 million, or 49%14%, in the thirdfirst quarter of 20172021 relative to the thirdfirst quarter of 2016, and by $328,000, or 61%,2020. Noninterest expense dropped to 2.8% of average earning assets in the first quarter of 2021 from 3.1% for the first nine months of 2017, primarily due to a reduced level of OREO write-downs and operating costs.

Telecommunications expense increased by $14,000, or 4%, in the third quarter of 2017 relative to the third quarter of 2016 and $137,000, or 12%, for the first nine months of 2017.  Negotiated rate reductions in effect for much of the third quarter of 2017 helped minimize cost increases in the telecommunications area for the quarterly comparison, but the year-to-date increase includes the impact of the Coast acquisition and branch expansion, and well as certain circuit enhancements.  Postage costs were the same for the quarterly comparison, but increased by $25,000, or 3%, for the year-to-date comparison, primarily from increased mailings associated with growth in our customer base.  The “Other” category under other operating costs increased by $21,000, or 8%, for the third quarter and $171,000, or 27%, for the first nine months due to an increase in corporate travel expenses.

Under professional services costs, legal and accounting expenses fell slightly for the third quarter, but increased by $69,000, or 5%, for the comparative year-to-date periods due to a negotiated settlement that added $85,000 to legal expense in the second quarter of 2017.  Acquisition costs, which include nonrecurring acquisition expenses for the Ojai acquisition in 20172020 and the Coast acquisition in 2016, were reduced by $1.271 million for the third quarter and $1.452 million for the first nine months, since the bulk of the Coast acquisition costs were recorded in the third quarter of 2016.  We expect that the majority of non-recurring costs related to the Ojai acquisition will be recorded in the fourth quarter of 2017.  The cost of other professional services fell by $156,000, or 26% for the third quarter, but reflects an increase of $302,000, or 21%, for the first nine months of 2017 primarily for the following reasons:  FDIC assessment costs were down $194,000 for the third quarter and $438,000 for the first nine months; directors’ deferred compensation expense rose by $275,000 for the first nine months in conjunction with the aforementioned increase in separate account BOLI income; equity incentive compensation costs for stock options issued to our directors was $177,000 higher for the year-to-date comparison, due to three additional directors as well as a higher stock option grant date fair value for stock options issued in February 2017; and, director retirement plan expense accruals were also higher for the year-to-date comparison due to a non-recurring expense reversal of $173,000 in director retirement plan accruals in the third quarter of 2016, subsequent to the death of a former director.

Stationery and supply costs were reduced by $87,000, or 21%, for the third quarter and $104,000, or 10%, for the first nine months of 2017 due to prior-year costs associated with the issuance of new debit cards incorporating EMV technology.  Sundry and teller losses were also reduced by $154,000, or 53%, for the third quarter and $288,000, or 39% for the first nine months of 2017 due to reduced debit card losses, with the year-to-date reduction also reflective of lower operations-related losses within our branch system.  The drop in debit card losses is the result of new technology implemented in the latter part of 2016, although no assurance can be provided that those losses will remain at reduced levels.

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The Company’s tax-equivalent overhead efficiency ratio declinedimproved to 63.90% in the third quarter of 2017 from 72.02% in the third quarter of 2016, and to 65.40% for the first nine months of 2017 from 69.13%56.43 % in the first nine monthsquarter of 2016.2021 as compared to 58.88% in the same quarter of 2020. The overhead efficiency ratio represents total non-interestnoninterest expense divided by the sum of fully tax-equivalent net interest and non-interest income, withnoninterest income; the provision for loan losses and investment gains/losses are excluded from the equation. The Company continues to actively consider a wide variety of operational efficiency opportunities, however with softening loan demand and reduced noninterest income further improvement of the efficiency ratio is difficult to predict.

Salaries and Benefits were $1.0 million, or 10%, higher in the first quarter of 2021 as compared to the same quarter in 2020. The reason for the increase is merit increases for employees due to annual performance evaluations for 2021 and the addition of and a focus on hiring higher-level staff and management. Salary expense deferrals related to loan originations were $0.4 million lower in the first quarter of 2021 as compared to the same quarter in 2020.

Occupancy expenses were $0.2 million higher for the first quarter of 2021 as compared to the first quarter of 2020. We experienced higher depreciation expense related to an acceleration of expense associated with the branch closures as described further below. In addition, we incurred higher janitorial costs due to intermittent COVID-19 sanitization of facilities.

Further, other noninterest expense categories were $1.3 million higher for the first quarter 2021 as compared to the first quarter in 2020. The Company experienced increases in every expense category except advertising and marketing. Advertising and marketing declined due to the COVID-19 pandemic as much of our in-person marketing efforts were temporarily suspended. The principal increases were in data processing for $0.3 million due to increased network security and additional software required for the efficient processing of SBA PPP loans, a $0.3 million increase in debit card processing costs, $0.1 million increase in foreclosed asset expenses, an increase in FDIC assessments for $0.2 million, as the first quarter of 2020 included Small Bank Assessment credits applied against the FDIC deposit insurance assessment, a $0.3 million increase in directors deferred compensation expense, which is linked to changes in BOLI income, a $0.1 million increase in debit card losses, and other costs associated with five branch closures scheduled for June 2021 as discussed in the paragraph below.

As a result of an ongoing COVID-19 pandemic, several of our branch lobbies were closed throughout the pandemic. Many of these lobbies have reopened, but a few remain closed. As a result a change in customer behaviors brought about by the COVID-19 pandemic along with an efficiency review, the Company has decided to permanently close five branch locations outside of our primary market area, effective June 18, 2021. Many of our customers have found an added convenience and ease of transacting business through online and mobile banking services which precipitated our

43

decision to close locations where in-person transaction volumes no longer warranted a traditional brick-and-mortar branch. The acceleration of amortization of leasehold improvements for these locations increased depreciation expense by $0.1 million in the first quarter of 2021 and is expected to increase depreciation expense by an additional $0.4 million in the second quarter of 2021. Further, it is anticipated that there will be additional lease expense of $0.2 million related to right of use asset due to lease cancellations. It is projected that closing these five branch locations will result in annual noninterest expense savings, realized fully by the end of the fourth quarter 2021, of between $0.8 and $1.0 million.

PROVISION FOR INCOME TAXES

The Company sets aside a provision for income taxes on a monthly basis. The amount of that provision is determineddeter­mined by first applying the Company’s statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent differences,dif­ferences, and then subtracting available tax credits. Permanent differences include but are not limited to tax-exempt interest income, BOLI income, and certain book expenses that are not allowed as tax deductions. Our tax credits consist primarily of those generated by investments in low-income housing tax credit funds, and California state employment tax credits.

funds. The Company’s provision for income taxes was 35%25.47% of pre-tax income in the thirdfirst quarter of 2017 as compared2021 relative to 32%24.02% in the thirdfirst quarter of 2016, and was 33% of pre-tax income2020. The increase in the effective tax rate for the first nine months of 2017 and 2016.  The higher tax accrual rate for the third quarter of 20172021 is primarily the resultdue to tax credits and tax-exempt income representing a smaller percentage of highertotal taxable income and a declining level of employment tax credits.  Our year-to-date tax accrual rate would also have been higher if not for our adoption of FASB’s Accounting Standards Update 2016-09 effective January 1, 2017, and the subsequent change in accounting methodology associated with the disqualifying disposition of Company shares issued pursuant to the exercise of incentive stock options.  Prior to January 1, 2017, the favorable tax impact of disqualifying dispositions was recorded directly to equity, whereas it is now reflected in the income statement as an adjustment to our income tax provision.  Disqualifying dispositions had a marginal effect on our tax accrual rate during the third quarter, but they occurred at a higher rate during the first half of 2017 and thus had a more material impact on our year-to-date tax accrual.income.

balance sheet analysis

BALANCE SHEET ANALYSIS

EARNING ASSETS

The Company’s interest-earninginterest earning assets are comprised of loans and investments, including overnight investments and loans, and thesurplus balances held in interest earning accounts in our Federal Reserve Bank account. The composition, growth characteristics, and credit quality of both of those components are significant determinants of the Company’s financial condition. Investments are analyzed in the section immediately below, while the loan and lease portfolio and other factors affecting earning assets are discussed in the sections following investments.

INVESTMENTS

The Company’s investments canmay at any given time consist of debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits of other banks, surplus interest-earninginterest earning balances in our Federal Reserve Bank (“FRB”) account, and overnight fed funds sold. Surplus FRB balances and fed funds sold to correspondent banks represent the temporary investment of excess liquidity.  The Company’s investments can serve several purposes:purposes, including the following: 1) they can provide liquidity to even out cash flows from the loan and deposit activities of customers;for potential funding needs; 2) they provide a source of pledged assets for securing public deposits, bankruptcy deposits and certain borrowed funds which require collateral; 3) they constitute a large base of assets with maturity and interest ratestructural characteristics that can be changed more readily than the loan portfolio, to better match changes in theor deposit base and other funding sources of the Company;portfolios, as might be required for interest rate risk management purposes; 4) they are another interest-earninginterest earning option for the placement of surplus funds when loan demand is light; and 5) they can provide partially tax exempt income.  Aggregate investments

The investment portfolio is reflected on the balance sheet as investment securities and totaled $585$552.9 million, or 28%17% of total assets at September 30, 2017, compared to $571March 31, 2021, and $544.0 million, or 28%17% of total assets at December 31, 2016.

We had no fed funds sold2020. In addition, within the Cash and Due from Banks account on the balance sheet was $268.4 million of surplus interest earning balances in our Federal Reserve Bank account at the end of the reporting periods, and interest-bearing balances at other banks declinedMarch 31, 2021, as compared to $2 million at September 30, 2017 from $41$3.5 million at December 31, 2016 as2020. Surplus balances in our Federal Reserve Bank account and fed funds sold to correspondent banks typically represent the temporary investment of excess liquidity was repositioned into longer-term investment securities.  The Company’s investment portfolio had a book balance of $583 million at September 30, 2017, reflecting an increase of $53 million, or 10%, for the first nine months of 2017.  liquidity.

The Company carries investments at their fair market values. We currently have the intent and ability to hold our investment securities to maturity, but the securities are all marketable and are classified as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity management. The expected average life for bonds in

44

our investment portfolio was 4.04.5 years and their average effective duration was 2.93.0 years at September 30, 2017, with theMarch 31, 2021, up from an expected average life of 4.2 years and an average effective duration up slightly from 2.6of 2.4 years at year-end 2016 due to a modest portfolio restructuring took place primarily in June of 2017.  That restructuring involved the sale of certain underperforming bonds and the addition of longer-term municipal bonds, which improved yields in addition to increasing the effective duration of the portfolio.2020.

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The following table sets forth the amortized cost and fair market value of Company’s investment portfolio by investment type as of the dates noted:

Investment Portfolio

Investment Portfolio

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

September 30, 2017

 

 

December 31, 2016

 

 

 

Amortized

 

 

Fair Market

 

 

Amortized

 

 

Fair Market

 

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Government agencies

 

$

24,574

 

 

$

24,422

 

 

$

26,926

 

 

$

26,468

 

Mortgage-backed securities

 

 

418,961

 

 

 

417,038

 

 

 

391,555

 

 

 

387,876

 

State and political subdivisions

 

 

138,621

 

 

 

141,740

 

 

 

114,140

 

 

 

114,193

 

Equity securities

 

 

 

 

 

 

 

 

500

 

 

 

1,546

 

Total securities

 

$

582,156

 

 

$

583,200

 

 

$

533,121

 

 

$

530,083

 

(dollars in thousands, unaudited)

March 31, 2021

December 31, 2020

Amortized

Fair Market

Amortized

Fair Market

    

Cost

    

Value

    

Cost

    

Value

Available for Sale

U.S. government agencies

    

$

1,724

    

$

1,780

    

$

1,725

    

$

1,800

Mortgage-backed securities

307,973

316,833

304,108

314,435

State and political subdivisions

222,863

234,318

212,011

227,739

Total securities

$

532,560

$

552,931

$

517,844

$

543,974

The net unrealized gain on our investment portfolio, or the difference between theamount by which aggregate fair market value andvalues exceeded amortized cost, was $1$20.4 million at September 30, 2017, an absolute difference of about $4March 31, 2021, a $5.7 million decrease relative to the net unrealized lossgain of $3$26.1 million at December 31, 2016.2020. The improvement is due primarily to lowerchange was caused by increased long-term market interest rates.  The balance of US Government agency securities in our portfolio declined by $2 million, or 8%, during the first nine months of 2017 due primarily torates on fixed-rate bond maturities.  Mortgage-backed securities increased by $29 million, or 8%, due to bond purchases and higher market valuations, net of prepayments in the portfolio.values. Municipal bond balances were also up by $28 million, or 24%, duecomprise 42% of our total securities portfolio at March 31, 2021, as compared to bond purchases and increases in market valuations.42% at December 31, 2020. Municipal bonds purchased in recent periods have strong underlying ratings, and we review all municipal bonds in our portfolio undergo a detailed quarterly reviewevery quarter for potential impairment.  The balance of equity securities fell to zero at September 30, 2017, due to the sale of our last remaining equity position in other community banks during the third quarter.

Investment securities that were pledged as collateral for borrowings and/or potential borrowings from the Federal Home Loan Bank borrowings,and the Federal Reserve Bank, customer repurchase agreements, public deposits and other purposes as required or permitted by law totaled $188$246.7 million at September 30, 2017March 31, 2021 and $194$232.0 million at December 31, 2016,2020, leaving $395$306.3 million in unpledged debt securities at September 30, 2017March 31, 2021 and $336$312.0 million at December 31, 2016.2020. Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled $33$53.8 million at September 30, 2017March 31, 2021 and $51$52.9 million at December 31, 2016.  2020.

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Loan

LOAN AND LEASE PortfolioLEASE PORTFOLIO

Despite a drop of $44 million in balances outstanding on mortgage warehouse lines, total loans and leases, gross of the associated allowance for losses and deferred fees and origination costs, reflect a net increase of $49 million, or 4%, to $1.312 billion at September 30, 2017 from $1.263 billion at December 31, 2016.  A distribution of the Company’s loans showing the balance and percentage of loans by type is presented for the noted periods in the table below. The balances in the table are before deferred or unamortized loan origination, extension, or commitment fees, and deferred origination costs. While not reflected in the loan totals and not currently comprising a material segment of our lending activities, the Company also occasionally originates and sells, or participates out portions of, loans to non-affiliated investors.

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Loan and Lease Distribution

 

 

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

September 30, 2017

 

 

December 31, 2016

 

Real Estate:

 

 

 

 

 

 

 

 

1-4 family residential construction

 

$

53,035

 

 

$

32,417

 

Other construction/land

 

 

47,160

 

 

 

40,650

 

1-4 family - closed-end

 

 

154,934

 

 

 

137,143

 

Equity lines

 

 

42,122

 

 

 

43,443

 

Multi-family residential

 

 

31,414

 

 

 

31,631

 

Commercial real estate - owner occupied

 

 

262,865

 

 

 

253,535

 

Commercial real estate - non-owner occupied

 

 

284,537

 

 

 

244,198

 

Farmland

 

 

145,550

 

 

 

134,480

 

Total real estate

 

 

1,021,617

 

 

 

917,497

 

Agricultural

 

 

49,315

 

 

 

46,229

 

Commercial and industrial

 

 

111,365

 

 

 

123,595

 

Mortgage warehouse lines

 

 

119,031

 

 

 

163,045

 

Consumer loans

 

 

10,297

 

 

 

12,165

 

Total loans and leases

 

$

1,311,625

 

 

$

1,262,531

 

Percentage of Total Loans and Leases

 

 

 

 

 

 

 

 

Real Estate:

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

4.04

%

 

 

2.57

%

Other construction/land

 

 

3.60

%

 

 

3.22

%

1-4 family - closed-end

 

 

11.81

%

 

 

10.86

%

Equity lines

 

 

3.21

%

 

 

3.44

%

Multi-family residential

 

 

2.40

%

 

 

2.51

%

Commercial real estate - owner occupied

 

 

20.03

%

 

 

20.08

%

Commercial real estate - non-owner occupied

 

 

21.69

%

 

 

19.34

%

Farmland

 

 

11.10

%

 

 

10.65

%

Total real estate

 

 

77.88

%

 

 

72.67

%

Agricultural

 

 

3.76

%

 

 

3.66

%

Commercial and industrial

 

 

8.49

%

 

 

9.79

%

Mortgage warehouse lines

 

 

9.08

%

 

 

12.92

%

Consumer loans

 

 

0.79

%

 

 

0.96

%

Total loans and leases

 

 

100.00

%

 

 

100.00

%

Loan and Lease Distribution

For the first nine months(dollars in thousands, unaudited)

    

March 31, 2021

    

December 31, 2020

Real estate:

1-4 family residential construction

$

36,818

$

48,565

Other construction/land

50,433

71,980

1-4 family - closed-end

126,949

139,836

Equity lines

36,276

38,075

Multi-family residential

58,324

61,865

Commercial real estate - owner occupied

359,777

343,199

Commercial real estate - non-owner occupied

1,071,532

1,062,498

Farmland

126,157

129,905

Total real estate

1,866,266

1,895,923

Agricultural

45,476

44,872

Commercial and industrial

183,762

209,048

Mortgage warehouse lines

187,940

307,679

Consumer loans

5,024

5,589

Total loans and leases

$

2,288,468

$

2,463,111

Percentage of Total Loans and Leases

Real estate:

1-4 family residential construction

1.61%

    

1.97%

Other construction/land

2.20%

2.92%

1-4 family - closed-end

5.55%

5.68%

Equity lines

1.59%

1.55%

Multi-family residential

2.55%

2.51%

Commercial real estate - owner occupied

15.72%

13.93%

Commercial real estate - non-owner occupied

46.82%

43.14%

Farmland

5.51%

5.27%

Total real estate

81.55%

76.97%

Agricultural

1.99%

1.82%

Commercial and industrial

8.03%

8.49%

Mortgage warehouse lines

8.21%

12.49%

Consumer loans

0.22%

0.23%

Total loans and leases

100.00%

100.00%

Gross loans and leases at $2.3 billion, reflected a decrease of 2017, total real estate loans increased by $104$174.6 million, or 11%7%, at March 31, 2021 from $2.5 billion at December 31, 2020 due mostly to strong growthdeclines in loans secured by commercial real estate, farmland and residential properties.  Agricultural production loans were also up by $3 million, or 7%.  Net growth in agricultural loans, including loans secured by farmland, was negatively impacted by the prepayment of a large dairy loan in the second quarter subsequent to the borrower’s sale of land adjacent to the business.  As noted, outstanding balances on mortgage warehouse lines, as well as the forgiveness of PPP loans.

Balances on mortgage warehouse lines were down $44$119.7 million or 27%,39% during the first quarter of 2021, due to seasonal fluctuations and a decline in mortgage refinancing activity. Mortgage warehouse utilization was 51% at March 31, 2021, as compared to 71% at December 31, 2020. Utilization of mortgage warehouse lines in the future could be impacted by fluctuations in interest rates and from economic uncertainty including the impact of the COVID-19 pandemic.

Non-agricultural real estate loan balances decreased due to a dropdeliberate decision to supplement the Company’s core commercial real estate franchise with an increased strategic focus of building our commercial and industrial lending, including loans for owner-occupied commercial real estate and small business.

At March 31, 2021 the Bank’s regulatory credit concentration of commercial real estate loans (CRE), as defined in utilization on those lines to 31% at September 30, 2017the Interagency Guidance dated, December 12, 2006, was 352%, down from 48%378% at December 31, 2016.2020. Management employs heightened risk management practices with respect to CRE lending, including board and management oversight, strategic planning, development and underwriting standards, risk assessment and monitoring through market

46

analysis, and stress testing. At March 31, 2021 we have concluded that we have an acceptable and well-managed concentration in CRE lending under the foregoing standards, however, given the current level of CRE, and potential increased regulatory scrutiny it could bring, we are actively monitoring this segment of the loan portfolio.

The 12% decrease in Commercial loan and lease balances reflect a net decline of $12 million, or 10%, as the addition of new commercial lending relationships was more than offset by payoffs in the portfolio.  One large commercial relationship, in particular, had a detrimental impact when the borrower sold the business in the third quarter of 2017 and paid off $14 million in loans.  ConsumerIndustrial loans also declined by $2 million, or 15%.  We continue to actively seek quality loan participations to supplement organic

47


growth, but the Company’s loan participations purchased, which are included in the balances shown in the table above, declined during the first nine months of 2017, to $37 million at September 30, 2017 from $41$209.0 million at December 31, 2016.

Management remains focused on2020 to $183.8 million was primarily driven by loan growth, which combined with stronger economic activityforgiveness precipitated by the Company’s participation in somethe Small Business Administration’s PPP as authorized by the CARES Act. The Company began accepting and funding loans under this program in April 2020. There were 1,070 loans for $97.3 million outstanding at March 31, 2021, compared to 1,274 loans for $117.2 million at December 31, 2020. During the first quarter of our markets has led to record levels2021, the Bank originated, and the SBA approved, funding for our pipeline$33.2 million in PPP loans while the SBA forgave $52.8 million of loans in process of approval in recent periods.  However, we are still experiencing a relatively high level of prepayments and mortgage warehouse lending is subject to significant fluctuations, thus no assurance can be provided with regard to future net growth in aggregate loan balances.PPP loans.

NONPERFORMING ASSETS

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, andin addition to foreclosed assets including mobile homes and OREO.  which is primarily OREO, but can included other foreclosed assets.

If the Company grants a concession to a borrower in financial difficulty, the loan falls into the category of a troubled debt restructuring (“TDR”).TDR, unless the modification was granted under section 4016 of the CARES Act or the April 7, 2020 Interagency Statement. TDRs may be classified as either nonperforming or performing loans depending on their underlying characteristics and circumstances. The following table presents comparative data for the Company’s nonperforming assets and performing TDRs as of the dates noted:

Nonperforming assets and performing troubled debt restructurings

(dollars in thousands, unaudited)

    

March 31, 2021

    

December 31, 2020

    

March 31, 2020

NON-ACCRUAL LOANS:

Real estate:

Other construction/land

$

$

$

10

1-4 family - closed-end

1,530

1,193

866

Equity lines

2,176

2,403

535

Commercial real estate - owner occupied

1,574

1,678

1,941

Commercial real estate - non-owner occupied

563

582

2,608

Farmland

434

442

257

TOTAL REAL ESTATE

6,277

6,298

6,217

Agriculture

466

250

Commercial and industrial

1,835

1,026

1,116

Consumer loans

21

24

18

TOTAL NONPERFORMING LOANS

8,599

7,598

7,351

Foreclosed assets

945

971

766

Total nonperforming assets

$

9,544

$

8,569

$

8,117

Performing TDRs (1)

$

10,596

$

11,382

$

8,188

Nonperforming loans as a % of total gross loans and leases

0.38%

0.31%

0.41%

Nonperforming assets as a % of total gross loans and leases and foreclosed assets

0.42%

0.35%

0.45%

Nonperforming Assets and Performing Troubled Debt Restructurings

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

September 30, 2017

 

 

December 31, 2016

 

 

September 30, 2016

 

NON-ACCRUAL LOANS:

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

$

83

 

 

$

558

 

 

$

590

 

1-4 family - closed-end

 

 

886

 

 

 

963

 

 

 

975

 

Equity lines

 

 

893

 

 

 

1,926

 

 

 

1,898

 

Commercial real estate - owner occupied

 

 

1,148

 

 

 

1,572

 

 

 

1,485

 

Commercial real estate - non-owner occupied

 

 

 

 

 

67

 

 

 

69

 

Farmland

 

 

297

 

 

 

39

 

 

 

295

 

TOTAL REAL ESTATE

 

 

3,307

 

 

 

5,125

 

 

 

5,312

 

Agriculture

 

 

 

 

 

89

 

 

 

89

 

Commercial and industrial

 

 

734

 

 

 

692

 

 

 

438

 

Consumer loans

 

 

77

 

 

 

459

 

 

 

446

 

TOTAL NONPERFORMING LOANS

 

 

4,118

 

 

 

6,365

 

 

 

6,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreclosed assets

 

 

2,674

 

 

 

2,225

 

 

 

2,782

 

Total nonperforming assets

 

$

6,792

 

 

$

8,590

 

 

$

9,067

 

Performing TDRs (1)

 

$

12,707

 

 

$

14,182

 

 

$

14,478

 

Nonperforming loans as a % of total gross loans and

   leases

 

 

0.31

%

 

 

0.50

%

 

 

0.50

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming assets as a % of total gross loans

   and leases and foreclosed assets

 

 

0.52

%

 

 

0.68

%

 

 

0.72

%

(1)

Performing TDRs are not included in nonperforming loans above, nor are they included in the numerators used to calculate the ratios disclosed in this table.

Total nonperforming assets were reducedincreased by $1.8$1.0 million, or 21%11%, during the first ninethree months of 2017.  Nonperforming2021. The increase resulted from two loans declined by $2.2 million, or 35%, while foreclosedto one borrower. None of these increases were due to COVID-19. As a result of the decrease in the gross loan portfolio, the Company’s ratio of nonperforming assets to loans increased by $449,000, or 20%.  Non-accruing loan balances secured by real estate totaled $3.3 millionto 0.42% at September 30, 2017, comprising 80% of total nonperforming loans and reflecting a decline of $1.8 million, or 35%, sinceMarch 31, 2021, from 0.35% at December 31, 2016 due primarily to principal pay-downs2020. All of the Company’s impaired assets are periodically reviewed and balances returned to accrual status.  The balanceare either well-

47

reserved based on current loss expectations, or are carried at September 30, 2017 includes $2.5 million in TDRs and other loans that were paying as agreed, but which met the technical definitionfair value of nonperforming loans and were classified as such.  the underlying collateral net of expected disposition costs.

As shown in the table, we also had $12.7$10.6 million in loans classified as performing TDRs foron which we were still accruing interest as of September 30, 2017,March 31, 2021, a reductiondecrease of $1.5$0.8 million, or 10%7%, relative to December 31, 2016.2020.

48


As noted above, foreclosed assets increased by $449,000, or 20%, during the first nine months of 2017 due to gross additions totaling $648,000, partially offset by the sale of certain small properties and $75,000 in write-downs on OREO.  The balance of foreclosedForeclosed assets had a carrying value of $2.7$0.9 million at September 30, 2017, and wasMarch 31, 2021 comprised of 147 properties classified as OREO and two mobile homes.  At the end of 2016 foreclosed assets totaled just over $2.2as compared to 7 properties for $1.0 million consisting of 11 properties classified as OREO and two mobile homes.at December 31, 2020. All foreclosed assets are periodically evaluated and written down to their fair value less expected disposition costs, if lower than the then-current carrying value.

Total nonperforming assets were 0.52% of gross loans and leases plus foreclosed assets at September 30, 2017, down from 0.68% at December 31, 2016 and 0.72% at September 30, 2016.  An action plan is in place for each of our non-accruing loans and foreclosed assets and they are all being actively managed. Collection efforts are continuously pursued for all nonperforming loans, but we cannot provide assurance that they will be resolved in a timely manner or that nonperforming balances will not increase.

The Company had $4.2 million in loans past due 30-59 days at March 31, 2021. This is an increase of $2.1 million over the balance at December 31, 2020. All of these past due loans are under management supervision and every effort is being taken to assist the borrowers and manage credit risk in this regard.

As described above, the Company is providing loan modifications to certain customers and taking advantage of either Section 4013 of the CARES Act or the April 7, 2020 Interagency Statement, which provides that such modifications do not result in treatment of such loan as a TDR. Since April 2020, the Company modified approximately $426 million of its loans under this guidance. For the Company, these modifications typically provided a deferral of both principal and interest for 180 days. Interest continues to accrue during the deferral period. At the end of the deferral period, for term loans, payments will be applied to accrued interest first and after the accrued interest is paid in full, the loan will be re-amortized with the maturity extended. For lines of credit, the borrower must repay the accrued interest at the end of the deferral period or take out a second credit facility to repay the accrued interest. As of March 31, 2021, the Company had $22.4 million remaining in loan modification under Section 4013 of the CARES Act. All but one small consumer relationship are fully secured by real estate collateral. We expect all customers to show an ability and willingness to pay full principal and interest upon maturity of their deferment periods. We monitor these loans during the deferral period and if circumstances change, we may downgrade the loan to a criticized asset. An additional modification, if necessary, could also result in the loan being treated as a TDR or classified asset. If some portion of the customers are not able to resume payments after the deferral period, it likely could result in higher classified and/or nonperforming assets, reversals of interest income, and/or higher charge-offs. At March 31, 2020, approximately $10.4 million of the $22.4 million in outstanding modification already are internally graded as a classified asset.

Allowance for loan and lease Losses

ALLOWANCE FOR LOAN AND LEASE LOSSES

The allowance for loan and lease losses, a contra-asset, is established through a provisionperiodic provisions for loan and lease losses. It is maintained at a level that is considered adequate to absorb probable losses on specifically identified impaired loans, as well as probable incurred losses inherent in the remaining loan portfolio. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge off.

As described above, the Company elected under Section 4014 of the CARES Act to defer the implementation of CECL until January 1, 2022. The Company made this election as it believed that the deferral provided additional time to better assess the impact of the COVID-19 pandemic and related stimulus and relief efforts on the expected lifetime credit losses.

The Company’s allowance for loan and lease losses was $8.8$18.3 million at March 31,2021, an increase of $0.6 million, or 0.67%3%, relative to December 31, 2020 resulting from a $0.3 million loan loss provision recorded during the first three months of gross2021, plus a $0.3 million in net recoveries during the same period. The loan loss provision in the first three months of 2021 was precipitated primarily by the decrease in loan balances as well as the impact of loan recoveries.

48

No allowance for loan and lease losses was considered necessary for the SBA PPP loans as those loans carry a 100 percent guarantee under the “Paycheck Protection Program”, subject to certain diligence requirements by the issuing financial institution. For further information regarding the Company's decision to defer the implementation of CECL under Section 4014 of the CARES Act, as well as further detail on the increase in provision during the first quarter of 2021, please see the discussion above under Provision for Loan and Lease Losses.

The allowance for loan and lease losses was 0.80% of total loans at September 30, 2017, relative to $9.7 million, or 0.77% of gross loansMarch 31, 2021, 0.72% at December 31, 2016.  The decline resulted from the charge-off of certain impaired loan balances against previously-established reserves, partially offset by reserves provided for losses inherent in incremental loan balances2020 and unanticipated charge-offs.  Moreover, our need for loss reserves has been favorably impacted in recent periods by loan growth in portfolio segments with relatively low historical loss rates, by continued credit quality improvement in the performing loan portfolio in general as loans booked or renewed during or since the great recession have been underwritten using tighter credit criteria, and by acquired loans that were booked0.64% at their fair values and thus initially did not necessarily require loss reserves.March 31, 2020. The ratio of the allowance for loan and lease losses to nonperforming loans was 213.31%213.0% at September 30, 2017,March 31, 2021, relative to 152.41%233.5% at December 31, 20162020 and 157.20% at September 30, 2016.  155.8% for March 31, 2020. Management's detailed analysis indicates that the Company's allowance for loan and lease losses should be sufficient to cover credit losses inherent in loan and lease balances outstanding as of March 31, 2021, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the allowance.

A separate allowance of $344,000$0.3 million for potential losses inherent in unused commitments is included in other liabilities at September 30, 2017.March 31, 2021.

49


The following table that follows summarizes the activity in the allowance for loan and lease losses for the noted periods:

Allowance for Loan and Lease Losses

(dollars in thousands, unaudited)

For the three
months ended

For the three
months ended

For the year ended

    

March 31,

    

March 31,

    

December 31,

Balances:

2021

2020

2020

Average gross loans and leases outstanding during period (1)

$

2,367,043

$

1,708,585

$

2,068,690

Gross loans and leases outstanding at end of period

$

2,288,468

$

1,798,025

$

2,463,111

Allowance for loan and lease losses:

Balance at beginning of period

$

17,738

$

9,923

$

9,923

Provision charged to expense

250

1,800

8,550

Charge-offs

Real estate

1-4 family residential construction

Other construction/land

1-4 family - closed-end

Equity lines

Multi-family residential

Commercial real estate- owner occupied

233

Commercial real estate- non-owner occupied

Farmland

Total real estate

233

Agricultural

436

Commercial and industrial

52

25

Consumer loans

163

617

1,397

Total

$

448

$

642

$

1,833

Recoveries

Real estate

1-4 family residential construction

Other construction/land

218

34

40

1-4 family - closed-end

3

4

13

Equity lines

34

34

Multi-family residential

Commercial real estate- owner occupied

233

Commercial real estate- non-owner occupied

Farmland

Total real estate

454

72

87

Agricultural

Commercial and industrial

110

28

129

Consumer loans

215

272

882

Total

$

779

$

372

$

1,098

Net loan (recoveries) charge offs

$

(331)

$

270

$

735

Balance at end of period

$

18,319

$

11,453

$

17,738

RATIOS

Net (recoveries) charge-offs to average loans and leases (annualized)

(0.06)%

0.06%

0.04%

Allowance for loan losses to gross loans and leases at end of period

0.80%

0.64%

0.72%

Allowance for loan losses to nonperforming loans

213.04%

155.80%

233.46%

Net loan (recoveries) charge-offs to allowance for loan losses at end of period

(1.81)%

2.36%

4.14%

Net loan (recoveries) charge-offs to provision for loan losses

(132.40)%

15.00%

8.60%

Allowance for Loan and Lease Losses

 

For the three

months

 

 

For the three

months

 

 

For the nine

months

 

 

For the nine

months

 

 

For the year

 

(dollars in thousands, unaudited)

 

ended September 30,

 

 

ended September 30,

 

 

ended September 30,

 

 

ended September 30,

 

 

ended December 31,

 

Balances:

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2016

 

Average gross loans and leases outstanding during period (1)

 

$

1,287,906

 

 

$

1,210,900

 

 

$

1,246,250

 

 

$

1,119,719

 

 

$

1,153,240

 

Gross loans and leases outstanding at end of period

 

$

1,311,625

 

 

$

1,256,330

 

 

$

1,311,625

 

 

$

1,256,330

 

 

$

1,262,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan and Lease Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

9,230

 

 

$

10,042

 

 

$

9,701

 

 

$

10,423

 

 

$

10,423

 

Provision charged to expense

 

 

 

 

 

 

 

 

300

 

 

 

 

 

 

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

144

 

1-4 family - closed-end

 

 

 

 

 

 

 

 

7

 

 

 

97

 

 

 

97

 

Equity lines

 

 

1

 

 

 

 

 

 

52

 

 

 

94

 

 

 

94

 

Multi-family residential

 

 

 

 

 

 

 

 

 

 

 

50

 

 

 

50

 

Commercial real estate- owner occupied

 

 

 

 

 

 

 

 

87

 

 

 

23

 

 

 

108

 

Commercial real estate- non-owner occupied

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

469

 

Farmland

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL REAL ESTATE

 

 

1

 

 

 

 

 

 

146

 

 

 

280

 

 

 

962

 

      Agricultural

 

 

132

 

 

 

 

 

 

154

 

 

 

 

 

 

 

 

      Commercial & industrial loans

 

 

192

 

 

 

23

 

 

 

576

 

 

 

197

 

 

 

344

 

      Consumer loans

 

 

561

 

 

 

458

 

 

 

1,606

 

 

 

1,443

 

 

 

1,905

 

Total

 

$

886

 

 

$

481

 

 

$

2,482

 

 

$

1,920

 

 

$

3,211

 

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

 

 

 

 

 

 

 

5

 

 

 

329

 

 

 

467

 

1-4 family - closed-end

 

 

3

 

 

 

6

 

 

 

8

 

 

 

10

 

 

 

15

 

Equity lines

 

 

3

 

 

 

2

 

 

 

8

 

 

 

9

 

 

 

17

 

Multi-family residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate- owner occupied

 

 

51

 

 

 

 

 

 

89

 

 

 

34

 

 

 

35

 

Commercial real estate- non-owner

   occupied

 

 

12

 

 

 

 

 

 

104

 

 

 

23

 

 

 

449

 

Farmland

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL REAL ESTATE

 

 

69

 

 

 

8

 

 

 

214

 

 

 

405

 

 

 

983

 

      Agricultural

 

 

-

 

 

 

3

 

 

 

5

 

 

 

7

 

 

 

14

 

Commercial and industrial

 

 

87

 

 

 

97

 

 

 

282

 

 

 

257

 

 

 

477

 

Consumer loans

 

 

284

 

 

 

211

 

 

 

764

 

 

 

708

 

 

 

1,015

 

Total

 

$

440

 

 

$

319

 

 

$

1,265

 

 

$

1,377

 

 

$

2,489

 

Net loan charge offs (recoveries)

 

$

446

 

 

$

162

 

 

$

1,217

 

 

$

543

 

 

$

722

 

Balance at end of period

 

$

8,784

 

 

$

9,880

 

 

$

8,784

 

 

$

9,880

 

 

$

9,701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RATIOS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Charge-offs to Average Loans and Leases (annualized)

 

 

0.14

%

 

 

0.05

%

 

 

0.13

%

 

 

0.06

%

 

 

0.06

%

Allowance for Loan Losses to Gross Loans and Leases at

   End of Period

 

 

0.67

%

 

 

0.79

%

 

 

0.67

%

 

 

0.79

%

 

 

0.77

%

Allowance for Loan Losses to Nonperforming Loans

 

 

213.31

%

 

 

157.20

%

 

 

213.31

%

 

 

157.20

%

 

 

152.41

%

Net Loan Charge-offs to Allowance for Loan Losses at End

   of Period

 

 

5.08

%

 

 

1.64

%

 

 

13.85

%

 

 

5.50

%

 

 

7.44

%

Net Loan Charge-offs to Provision for Loan Losses

 

 

 

 

 

 

406

%

 

 

 

 

(1)

Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

As reflected in the table above, the Company did not record a provision for loan and lease losses during 2016, but a $300,000 provision was required in the second quarter of 2017 to cover net loan growth and to replenish reserves subsequent to unanticipated charge-offs.  Net loans charged off against the allowance totaled $1.217 million in the first nine months of 2017, including a $224,000

50


The Company’s allowance for loan and lease losses at September 30, 2017March 31, 2021 represents Management’s best estimate of probable losses in the loan portfolio as of that date, but no assurance can be given that the Company will not experience substantial losses relative to the size of the allowance. Furthermore, fluctuations in credit quality, changes in economic conditions, updated accounting or regulatory requirements, and/or other factors could induce us to augment or reduce the allowance.

OFF-BALANCE SHEET ARRANGEMENTS

The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. Unused commitments to extend credit totaled $639 million at September 30, 2017 and $464 million at December 31, 2016, although itIt is not likelyunlikely that all of thoseunused commitments will ultimately be drawn down. Unused commitments representedto extend credit, which included standby letters of credit, totaled $485.3 million at March 31, 2021 and $449.9 million at December 31, 2020, representing approximately 49%21% of gross loans outstanding at September 30, 2017March 31, 2021 and 37%18% at December 31, 2016, with2020. The increase in unused commitments is due in large part to the increase due primarily to lower utilizationin unfunded commitments on mortgage warehouse lines and an increase in commercial construction loan commitments.lines. The Company also had undrawn letters of credit issued to customers totaling $8$8.4 million at September 30, 2017March 31, 2021 and $9$8.1 million at December 31, 2016.2020. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used. However, the “Liquidity” section in this Form 10-Q outlines resources available to draw upon should we be required to fund a significant portion of unused commitments.

In addition to unused commitments to provide credit, the Company is utilizing an $86a $100 million letter of credit issued by the Federal Home Loan Bank on the Company’s behalf as security for certain deposits and to facilitate certain credit arrangements with the Company’s customers.local agency deposits. That letter of credit is backed by loans that are pledged to the FHLB by the Company. For more information regardingon the Company’s off-balance sheet arrangements, see Note 87 to the consolidated financial statements located elsewhere herein.

OTHER ASSETS

TheInterest earning cash balances were discussed above in the “Investments” section, but the Company also maintains a certain level of cash on hand in the normal course of business as well as non-earning deposits at other financial institutions. Our balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the levelamount of cash maintained on handheld at our branches, and our reserve requirement among other things, and it is subject to significant fluctuationfluctuations in the normal course of business. While cash flows are normally predictable within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight loans to, and borrowings from, correspondent banks, including the Federal Reserve Bank and the Federal Home Loan Bank. Should a large “short” overnight position persist for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits. If a “long” position is prevalent, the Company willwe could let brokered deposits or other wholesale borrowings roll off as they mature, or we might invest excess liquidity ininto longer-term, higher-yielding longer-term bonds. The Company’s balance of non-interest earningnon-earning cash and due from banks was $52$77.8 million at September 30, 2017 and $79March 31, 2021 relative to $67.9 million at December 31, 2016, with the drop2020. The increase is primarily due primarily to a lower levelmaintaining higher amounts of cash items in processon hand due to the COVID-19 pandemic specifically government stimulus payments and customer needs for higher amounts of collection.  The average balance for the first nine months of 2017 was $50 million, relative to an average balance of $45 million for the first nine months of 2016.  The increase in the average balance in 2017 is largely a function of cash maintained on-premises for customer transactions at the former Coast branches, and our newer de novo branches.cash.

Foreclosed assets are discussed above in the section titled “Nonperforming Assets.” Net premises and equipment was down $520,000, or 2%,decreased by $0.7 million during the first ninethree months of 2017, as the result of depreciation.2021, to $26.8 million. Goodwill was $8$27 million at September 30, 2017,March 31, 2021, unchanged for the first nine months.  Other intangible assets were down $320,000, or 11%, during the first ninethree months dueof 2021. As mentioned above, the Company performed a qualitative assessment of goodwill impairment during the fourth quarter 2020 and determined that a quantitative analysis was not required. There have been no triggering events in the first quarter of 2021 that would require The Company to amortization on core deposit intangibles.  The Company’s goodwill and other intangible assets are evaluated annuallyperform a Goodwill impairment test, however the Company will continue to monitor its Goodwill for potential impairment and pursuant to that analysis Management has concluded that no impairment exists as of September 30, 2017.  Company ownedgiven the COVID-19 pandemic. Bank-owned life insurance, with a balance of $45$53.3 million at September 30, 2017,March 31, 2021, is discussed in detail above in the “Non-Interest“Noninterest Income and Non-InterestNoninterest Expense” section.

The aggregate balance of “Other assets” was $47.6 million at September 30, 2017, up by $6.9 million, or 17%, for the first nine months of 2017.  The increase is due to a $4.9 million increase in suspense resources, representing loan transactions in process of

51


DEPOSITS AND INTEREST BEARING LIABILITIES

DEPOSITS

DEPOSITS

Deposits represent another key balance sheet category impacting the Company’s net interest marginincome and other profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity depositsaccounts such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning average balances and rates paid by deposit type for the three- and nine-month periods ended September 30, 2017 and 2016 is included in the Average Balances and Rates tabletables appearing above, in the section titled “Net Interest Income and Net Interest Margin.” A distribution of the Company’s deposits by type, showing the period-end balance and percentage of total deposits, by type is presented as of the dates indicated in the following table.

Deposit Distribution

 

 

 

 

 

 

 

 

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Interest bearing demand deposits

 

$

115,024

 

 

$

132,586

 

Non-interest bearing demand deposits

 

 

571,509

 

 

 

524,552

 

NOW

 

 

381,623

 

 

 

366,238

 

Savings

 

 

245,093

 

 

 

215,693

 

Money market

 

 

122,772

 

 

 

119,417

 

CDAR's

 

 

-

 

 

 

251

 

Time, under $250,000

 

 

150,361

 

 

 

152,561

 

Time, $250,000 or more

 

 

193,197

 

 

 

184,173

 

Total deposits

 

$

1,779,579

 

 

$

1,695,471

 

 

 

 

 

 

 

 

 

 

Percentage of Total Deposits

 

 

 

 

 

 

 

 

Interest bearing demand deposits

 

 

6.46

%

 

 

7.82

%

Non-interest bearing demand deposits

 

 

32.12

%

 

 

30.94

%

NOW

 

 

21.44

%

 

 

21.60

%

Savings

 

 

13.77

%

 

 

12.72

%

Money market

 

 

6.90

%

 

 

7.04

%

CDAR's

 

 

-

 

 

 

0.01

%

Time, under $250,000

 

 

8.45

%

 

 

9.01

%

Time, $250,000 or more

 

 

10.86

%

 

 

10.86

%

Total

 

 

100.00

%

 

 

100.00

%

Deposit Distribution

While total deposit(dollars in thousands, unaudited)

    

March 31, 2021

    

December 31, 2020

Noninterest bearing demand deposits

$

1,020,350

$

943,664

Interest bearing demand deposits

163,618

109,938

NOW

606,653

558,407

Savings

415,230

368,420

Money market

136,653

131,232

Time, under $250,000

184,235

73,046

Time, $250,000 or more

227,153

339,899

Brokered deposits

100,000

100,000

Total deposits

$

2,853,892

$

2,624,606

Percentage of Total Deposits

Noninterest bearing demand deposits

35.75%

35.95%

Interest bearing demand deposits

5.73%

4.19%

NOW

21.26%

21.28%

Savings

14.55%

14.04%

Money market

4.79%

5.00%

Time, under $250,000

6.46%

2.78%

Time, $250,000 or more

7.96%

12.95%

Brokered deposits

3.50%

3.81%

Total

100.00%

100.00%

Deposit balances fellreflect net growth of $229.3 million, or 9%, during the third quarterfirst three months of 2017 due2021. Time deposits were $511.4 million at March 31, 2021 as compared to $512.9 million at December 31, 2020. Brokered deposits were flat for the runoff of seasonal deposits, they still reflect net organicsame period. Non-maturity deposit growth of $84$230.8 million or 5%, for the first ninethree months of 2017 due2021was primarily to an increasethe result of $78 million, or 6%,increases in core non-maturity deposits.  Non-interest bearing demand deposit balances grew by $47 million, or 9%, forof existing customers as the first nine monthstotal number of 2017, NOW accountscustomers increased by $15 million, or 4%, savings deposits rose by $29 million, or 14%, and money market demand deposits were up by $3 million, or 3%.  However, part of the growth in those deposit account types came from a shift out of interest-bearing demand deposits, which were down $18 million, or 13%, for the first nine months of 2017.  Total time deposits were up by $7 million, or 2%, as growth in larger time deposits moreless than offset a slight decline in deposits under $250,000.  1%.

Management is of the opinion that a relatively high level of core customer deposits is one of the Company’s key strengths, and we continue to strive for core deposit retention and growth. Our deposit-targeted promotions are still favorably impacting growth inIn particular, the numberCompany’s ratio of accounts and it is

52


expected that balances in these accounts will grow over time consistent with our past experience, although no assurance can be provided with regardnoninterest-bearing deposits to future core deposit increases.total deposits was 35.8% at March 31, 2021 as compared to 36.0% at December 31, 2020.

OTHER INTEREST-BEARING LIABILITIES

The Company’s non-deposit borrowings may, at any given time, include fed funds purchased from correspondent banks, borrowings from the Federal Home Loan Bank, advances from the Federal Reserve Bank, securities sold under agreementagreements to repurchase, and/or junior subordinated debentures. The Company uses short-term FHLB advances and fed funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes. The FHLB line is committed, but the amount of available credit depends on the level of pledged collateral.

52

Total non-deposit interest-bearing liabilities were reduceddecreased by $52$125.5 million, or 49%58%, induring the first ninethree months of 2017,2021 primarily due to a dropdecrease in federal funds purchased and borrowings from the FHLB, borrowings facilitated bydue to the increase in deposits. There were $11 million in overnight borrowings from the FHLB at September 30, 2017, down from $65 million at December 31, 2016, and we had $2 million in overnight funds purchased from other correspondent banks at September 30, 2017 but none at December 31, 2016.  There were no advances from the FRB on our books at September 30, 2017 or December 31, 2016.  Repurchase agreements totaled $9$51.5 million at September 30, 2017, constituting a slight increaseMarch 31, 2021 relative to theira balance of $39.1 million at year-end 2016.2020. Repurchase agreements represent “sweep accounts”, where commercial deposit balances above a specified threshold are transferred at the close of each business day into non-deposit accounts secured by investment securities. The Company had junior subordinated debentures totaling $34.5$35.2 million and $35.1 million at September 30, 2017March 31, 2021 and $34.4 million December 31, 2016,2020, respectively, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities.  The small increase resulted from the amortization of discount on junior subordinated debentures acquired with Coast Bancorp in 2016.

OTHER NON-INTERESTNONINTEREST BEARING LIABILITIES

Other liabilities are principally comprised of operating lease right-of-use liabilities, accrued interest payable, other accrued but unpaid expenses, and certain clearing amounts. OtherThe Company’s balance of other liabilities were virtually unchanged during the first nine months of 2017.  There were sizeable increases in accruals for capital commitmentswas $32.5 million at March 31, 2021 as compared to low-income housing tax credit funds and a small business investment corporation, but those were largely offset by lower balances in clearing accounts.$35.1 million at December 31, 2020.

LIQUIDITY AND MARKET RISK MANAGEMENT

liquidity and market RisK MANAGEMENT

LIQUIDITY

Liquidity management refers to the Company’s ability to maintain cash flows that are adequate to fund operations and meet other obligations and commitments in a timely and cost-effective manner. Detailed cash flow projections are reviewed by Management on a monthly basis, with various stress scenarios applied to assess our ability to meet liquidity needs under unusual or adverse conditions. Liquidity ratios are also calculated and reviewed on a regular basis. While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored, and we are committed to maintaining adequate liquidity resources to draw upon should unexpected needs arise.

The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases or liability repayments. To meet these short-term needs, the Companywe can borrow overnight funds from other financial institutions, draw advances via Federal Home Loan Bank lines of credit, or solicit brokered deposits if customer deposits are not immediately obtainable from local sources.  Availability on lines of credit from correspondent banks

At March 31, 2021 and the FHLB totaled $398 million at September 30, 2017.  An additional $105 million in credit is available from the FHLB ifDecember 31, 2020, the Company werehad the following sources of primary and secondary liquidity ($ in thousands):

Primary and Secondary Liquidity Sources

March 31, 2021

December 31, 2020

Cash and Cash Equivalents

$

346,211

$

71,417

Unpledged Investment Securities

306,256

311,983

Excess Pledged Securities

53,840

52,892

FHLB Borrowing Availability

665,756

535,404

Unsecured Lines of Credit

305,000

230,000

Funds Available through Fed Discount Window

59,643

58,127

Totals

$

1,736,706

$

1,259,823

In addition to pledge sufficient collateralthe above sources, the Company could obtain brokered deposits, obtain deposits via deposit listing services, or offer higher rate time deposits within our market. At March 31, 2021, the Company had previously applied for and maintain the required amount of FHLB stock.  The Company is also eligiblereceived approval to borrow approximately $74$99.8 million atfrom the Federal Reserve Discount Window, if necessary, based onBank for a Paycheck Protection Program Lending Facility (PPPLF) through June 30, 2021. The PPPLF provides the Company with the ability to pledge any PPP loan to the Federal Reserve Bank and obtain funding at 35 basis points. Further, any loans pledged assets at September 30, 2017.  Furthermore, funds canto the PPPLF will be obtained by drawing downexcluded from the regulatory leverage capital ratio. Due to the Company’s correspondent bank deposit accounts, or by liquidating unpledged investments or other readily saleable assets.  In addition,liquidity throughout the first three months of 2021 it elected not to utilize the PPPLF during the quarter. The Company can raise immediate cashwill continue to evaluate whether it should utilize the PPPLF in the second quarter 2021.

The Company performs regular stress tests on its liquidity and at this time, believes that we have sufficient primary and secondary liquidity sources for temporary needs by selling under agreement to repurchase those investments in its portfolio which are not pledged as collateral.  Asoperations.

53

The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since we utilize a letter of credit from the FHLB rather than investment securities for certain pledging requirements. That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $86$100 million at September 30, 2017.March 31, 2021 and December 31, 2020. Other sources of liquidity included the brokered deposit market, deposit listing services, and the ability to offer local time-deposit campaigns. Management is of the opinion that available

53


investments and other potentially liquid assets, along with the standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs.needs and that its liquidity has not been adversely impacted by COVID-19.

The Company’s net loans to assets and available investments to assets ratios were 63%68.7% and 21%18.9%, respectively, at September 30, 2017,March 31, 2021, as compared to internal policy guidelines of “less than 78%” and “greater than 3%.” Other liquidity ratios reviewed periodically by Management and the Board include net loans to total deposits and wholesale funding to total assets, (includingincluding ratios and sub-limits for the various components comprising wholesale funding),funding, which were all well within policy guidelines at September 30, 2017.  Favorable trends in core deposits and relatively high levels of liquid investments have hadMarch 31, 2021. The Company has been able to maintain a positive impact on ourrobust liquidity position in recent periods, but no assurance can be provided that our liquidity position will continue at current robuststrong levels.

The holding company’s primary uses of funds include operating expenses incurred in the normal course of business, interest on trust preferred securities, shareholder dividends, and stock repurchases. Its primary source of funds is dividends from the Bank, since the holding company does not conduct regular banking operations. As of March 31, 2021, the holding company maintained a cash balance of $12.4 million. Management anticipates that with the available cash and the continued ability for the Bank will have sufficient earnings to provide dividends to the holding company, that the holding company has sufficient liquidity to meet its funding requirements for the foreseeable future. Both the holding company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 5(c) Dividends in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162020 which was filed with the SEC.

INTEREST RATE RISK MANAGEMENT

Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company does not engage in the trading of financial instruments, nor does it have exposure to currency exchange rates. Our market risk exposure is primarily that of interest rate risk, and we have established policies and procedures to monitor and limit our earnings and balance sheet exposure to changes in interest rates. The principal objective of interest rate risk management is to manage the financial components of the Company’s balance sheet in a manner that will optimize the risk/reward equation for earnings and capital under a variety of interest rate scenarios.

To identify areas of potential exposure to interest rate changes, we utilize commercially available modeling software to perform monthly earnings simulations and calculate the Company’s market value of portfolio equity under varying interest rate scenarios. The model imports relevant information for the Company’s financial instruments and incorporates Management’s assumptions on pricing, duration, and optionality for anticipated new volumes. Various rate scenarios consisting of key rate and yield curve projections are then applied in order to calculate the expected effect of a given interest rate change on interest income, interest expense, and the value of the Company’s financial instruments. The rate projections can be shocked (an immediate and parallel change in all base rates, up or down), ramped (an incremental increase or decrease in rates over a specified time period), economic (based on current trends and econometric models) or stable (unchanged from current actual levels).

WeIn addition to a stable rate scenario, which presumes that there are no changes in interest rates, we typically use eight standardat least six other interest rate scenarios in conducting our rolling 12-month net interest income simulations: “stable,” upward shocks of 100, 200, 300 and 400300 basis points, and downward shocks of 100, 200, and 300 basis points. Those scenarios may be supplemented, reduced in number, or otherwise adjusted as determined by Management to provide the most meaningful simulations considering economic conditions and expectations at the time. Given the current near zero interest rate environment it is unlikely that rates could decline much further beyond the downward shock of 100 basis points, therefore the downward shock scenarios of 200 and 300 basis points are temporarily being suspended after concurrence by the Company’s Board of Directors. We currently utilize an additional upward rate shock scenario of 400 basis points. Pursuant to policy guidelines, we typicallygenerally attempt to limit the projected decline in net interest income relative to the

54

stable rate scenario to no more than 5% for a 100 basis point (bp) interest rate shock, 10% for a 200 bp shock, 15% for a 300 bp shock, and 20% for a 400 bp shock.  As of September 30, 2017 the

The Company had the following estimated net interest income sensitivity profile,profiles over one-year, without factoring in any potential negative impact on spreads resulting from competitive pressures or credit quality deterioration:

 

Immediate Change in Rate

 

 

 

 

 

 

 

 

 

 

-300 bp

-200 bp

-100 bp

+100 bp

+200 bp

+300 bp

+400 bp

Change in Net Int. Inc. (in $000’s)

-$18,793

-$12,659

-$5,603

+$938

+$1,340

+$1,788

+$1,839

% Change

-24.53%

-16.53%

-7.31%

+1.22%

+1.75%

+2.33%

+2.40%

March 31, 2021

March 31, 2020

Immediate change in Interest Rates (basis points)

% Change in Net Interest Income

$ Change in Net Interest Income

% Change in Net Interest Income

$ Change in Net Interest Income

+400

7.2%

$

7,726

5.0%

$

4,952

+300

5.7%

$

6,137

4.7%

$

4,603

+200

4.4%

$

4,741

3.7%

$

3,591

+100

2.8%

$

2,991

2.4%

$

2,404

Base

-100

(7.6)%

$

(8,181)

(7.4)%

$

(7,233)

Our current simulations indicateFor the periods ended March 31, 2021 and 2020, the Company was asset sensitive, with net income increasing in a rising rate environment in all scenarios but declining considerably in the down shocks.

The simulation for the period ending March 31, 2020 indicates that the Company has an asset-sensitive profile, meaning thatCompany’s net interest income increases withwill increase over the next 12 months in a parallel shift uprising rate environment in the yield curveall scenarios, but a continued drop in interest rates could have a substantial negative impact. This profileHowever the rate of increase is consistentnot as pronounced as in the March 31, 2021 scenario due to considerably less cash on hand and the impact of interest rate reductions and balance sheet changes including an increase in loans with variable rate characteristics (mortgage warehouse loans), the Company’s relatively large balancerunoff of less rate-sensitive non-maturity deposits and large volume of variable-rate loans which contribute to higherhad rates fixed for periods in excess of a year, and a projected slight shift in our deposit mix toward time deposits over time. In the up 400 basis point shock scenario, expected net interest income over the next twelve months increases $7.7 million, or 7%, to $115.7 million at March 31, 2021 compared to a 5% increase or $5.0 million for the same period in rising2020. The primary reason for the increase in expected net interest income despite a lower rate scenarios and compressionenvironment, was the increase in surplus interest-bearing cash in other banks. In an instantaneous parallel rate shock the entire balance of surplus cash would reprice immediately. Over the next twelve months, surplus cash is projected to remain at higher levels than prior years as the Company shifts from non-owner occupied commercial real estate to other types of lending. Although the cost of interest-bearing liabilities will also increase, the deposit betas utilized in the model mitigate the magnitude of a deposit rate increase.

The change in net interest income in declining rateis similar for the up 100, 200, and 300 basis point scenarios.

If there were an immediate and sustained upward adjustment of 100 basis points in interest rates, all else being equal, net interest income over the next 12 months is projected to improve by $938,000,$2.4 million, or 1.22%2.40%, relative to a stable interest rate scenario, with the favorable variance continuing to expand slightlyincreasing marginally as interest rates rise higher.

If interest rates were to decline bythere was an immediate downward adjustment of 100 basis points however,in interest rates, net interest income would likely be around $5.603drop $8.2 million lower than inor a stable interest rate scenario, for a negative

54


variance of 7.31%8%. TheSince many of deposit products are at their natural floors as reflected in our current cost of deposits of.14% for the first quarter of 2021, the unfavorable variance increases whenvariances increase as interest rates drop 200 or 300 basis points, due to the fact that certain deposit rates are already relatively low (on NOW accounts and savings accounts, for example), and will hit a natural floor of close to zero whiledecline because non-floored variable-rate loan yieldsloans continue to drop. This effect is further exacerbated by accelerated prepayments on fixed-rate loans and mortgage-backedmortgage- backed securities when rates decline, although rate floors on some of our variable-rate loans partially offset other negative pressures.decline. While we view material interest rate reductions as unlikely in the near term, the potential percentage drop in net interest income in the “down 100 basis points” interest rate scenario exceeds our internal policy guidelines in declining interest rate scenarios and we will continue to monitor our interest rate risk profile and take corrective actionimplement remedial changes as deemed appropriate.

In addition to the net interest income simulations shown above, we run stress scenarios for the unconsolidated Bank modeling the possibility of no balance sheet growth, the potential runoff of “surge” core deposits which flowed into the CompanyBank in the most recent economic cycle, and potential unfavorable movement in deposit rates relative to yields on earning assets (i.e., higher deposit betas). ProjectedWhen a static balance sheet and a stable interest rate environ­ment are assumed, projected annual net interest income is roughly $2more than $3 million lower than in the stable rate scenario if no balance sheet growth is assumed, but the rate-driven variances predicted for net interest income in a static growth environment are similar to the changes noted above for our standard projections.  When a greater levelsimulation.

55

The economic value (or “fair value”) of financial instruments on the Company’s balance sheet will also vary under the interest rate scenarios previously discussed. The difference between the projected fair value of the Company’s financial assets and the fair value of its financial liabilities is referred to as the economic value of equity (“EVE”), and changes in EVE under different interest rate scenarios are effectively a gauge of the Company’s longer-term exposure to interest rate fluctuations. Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at projectedanticipated replacement interest rates for each account type, while the fair value of non-financial accounts is assumed to equal their book value for all rate scenarios. An economic value simulation is a static measure utilizing balance sheet accounts at a given point in time, and the measurement can change substantiallysub­stantially over time, as is evident in the characteristics oftables below for the periods ending March 31, 2021 and 2020, respectively, as the Company’s balance sheet evolveevolves and interest rate and yield curve assumptions are updated.

The change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including stated interest rates or spreads relative to current or projected market-level interest rates or spreads, the likelihood of principal prepayments, whether contractual interest rates are fixed or floating, and the average remaining time to maturity. As a general rule, fixed-rate financial assets become more valuable in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical patterns and Management’s best estimates.

Our EVE increased in the past twelve months due to asset growth, but that trend slowed in the first quarter of 2021 as loan growth decelerated. The tabletables below showsshow estimated changes in the Company’s EVE, as of September 30, 2017, under different interest rate scenarios relative to a base case of current interest rates:

March 31, 2021

March 31, 2020

Immediate change in Interest Rates (basis points)

% Change in Fair Value of Equity

$ Change in Fair Value of Equity

% Change in Fair Value of Equity

$ Change in Fair Value of Equity

+400

31.5%

$

174,274

30.4%

$

152,966

+300

28.0%

$

155,182

27.1%

$

136,480

+200

22.8%

$

126,402

21.5%

$

108,427

+100

13.7%

$

76,032

12.5%

$

63,135

Base

-100

(20.1)%

$

(111,586)

(10.4)%

$

(52,569)

 

Immediate Change in Rate

 

 

 

 

 

 

 

 

 

 

-300 bp

-200 bp

-100 bp

+100 bp

+200 bp

+300 bp

+400 bp

Change in EVE (in $000’s)

-$75,290

-$94,028

-$68,448

+$34,099

+$52,699

+$62,062

+$63,632

% Change

-18.38%

-22.96%

-16.71%

+8.33%

+12.87%

+15.15%

+15.54%

The table shows that our EVE will generally deteriorate in moderate declining rate scenarios but should benefit from a parallelparal­lel shift upward in the yield curve. While still negative relative to the base case we see a favorable swingThe rate of increase in EVE asaccelerates the higher interest rates drop more than 200 basis points, andrise. This increase in sensitivity is caused by the changeincrease in EVE begins to level off as interest rates rise by more than 300 basis points.  This is due to the relative durations of our fixed-rate assets and liabilities, combined with the optionality inherentgross deposits, namely, an increase in our balance sheet.noninterest bearing deposits. We also run stress scenarios for the unconsolidated Bank’s EVE to simulate the possibility of higheradverse movement in loan prepaymentprepay­ment rates, unfavorable changes in deposit rates, and higher deposit decay rates. Model results are highly sensitive to changes in assumed decay rates for non-maturity deposits, in particular, with material unfavorable variances occurring relative to the standard simulations shown above as decay rates are increased. Furthermore, while not as extreme as the variances produced by increasing non-maturity deposit decay rates, EVE also displays a relatively high level of sensitivity to unfavorable changes in deposit rate betas in higherrising interest rate scenarios.

55


CAPITAL RESOURCESRESOURCES

The Company had total shareholders’ equity of $219.1$348.0 million at September 30, 2017,March 31, 2021, comprised of $73.7$113.5 million in common stock, $2.9$4.0 million in additional paid-in capital, $141.9$216.2 million in retained earnings, and accumulated other comprehensive income of $605,000.$14.3 million. At the end of 2016,2020, total shareholders’ equity was $205.9$343.9 million. The increase of $13.2 million, or 6%, in shareholders’ equity during the first ninethree months of 20172021 is fromdue to the addition of capital from net income, the impact of stock options exercised and restricted stock accrued. These positive changes were partially offset by a $2$4.1 million absolute increaseunfavorable swing in accumulated other comprehensive income, net and the impact of cash dividends paid. There were no share repurchases executed byThe Company has 268,301 shares authorized to repurchase under the current repurchase program. The Company during the first three quarterssuspended its stock repurchase program on March 16, 2020 and continues to evaluate when or if we will restart repurchasing shares.

56

The Company uses a variety of measures to evaluate its capital adequacy, including risk-based capital andthe leverage ratios that areratio which is calculated separately for the Company and the Bank. 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. As permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, the Company has elected to opt out of the Basel III requirement to include accumulated other comprehensive income in risk-based capital. The following table sets forth the consolidated Company’s and the Bank’s regulatory capital ratios as of the dates indicated.

Regulatory Capital Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

Minimum Requirement

 

 

 

2017

 

 

2016

 

 

to be Well Capitalized

 

Sierra Bancorp

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 Capital to Risk-Weighted Assets

 

 

14.28%

 

 

 

14.09%

 

 

 

6.50%

 

Tier 1 Capital to Risk-weighted Assets

 

 

16.64%

 

 

 

16.53%

 

 

 

8.00%

 

Total Capital to Risk-weighted Assets

 

 

17.26%

 

 

 

17.25%

 

 

 

10.00%

 

Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")

 

 

11.84%

 

 

 

11.92%

 

 

 

5.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank of the Sierra

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 Capital to Risk-Weighted Assets

 

 

15.86%

 

 

 

16.26%

 

 

 

6.50%

 

Tier 1 Capital to Risk-weighted Assets

 

 

15.86%

 

 

 

16.26%

 

 

 

8.00%

 

Total Capital to Risk-weighted Assets

 

 

16.48%

 

 

 

16.97%

 

 

 

10.00%

 

Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")

 

 

11.24%

 

 

 

11.73%

 

 

 

5.00%

 

WithRegulatory Capital Ratios

Minimum

Minimum

Requirement

Required

March 31,

December 31,

to be

Community Bank

    

2021

    

2020

    

 Well Capitalized (3)

Leverage Ratio (2) (4)

Bank of the Sierra

Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio")

10.36

%

10.12

%

5.00

%

8.50

%

(1)Current data is not applicable as the Bank adopted the Community Bank Leverage Ratio Framework as of the first quarter of 2020.
(2)The minimum required Community Bank Leverage Ratio is 9.00%, but the CARES Act temporarily lowers this to 8.5% as described below.
(3)The Company was subject to these minimum requirements under the regulatory framework for Prompt Corrective Action at December 31, 2019.
(4)If the subsidiary bank’s Leverage Ratio exceeds the minimum ratio under the Community Bank Leverage Ratio Framework, 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 if the subsidiary bank’s Leverage Ratio falls below the minimum under the Community Bank Leverage Ratio Framework.

The federal banking agencies published a final rule on November 13, 2019, that provided a simplified measure of capital adequacy for qualifying community banking organizations. A qualifying community banking organization that opts into the exception of Sierra Bancorp’scommunity bank leverage ratio which declined slightly, our consolidated risk-basedframework and maintains a leverage ratio greater than 9 percent will be considered to have met the minimum capital ratios experienced marginal increasesrequirements, the capital ratio requirements for the first nine monthswell capitalized category under the Prompt Corrective Action framework, and any other capital or leverage requirements to which the qualifying banking organization is subject. A qualifying community banking organization with a leverage ratio of 2017 since risk-based capital grew at a higher rategreater than risk-adjusted assets.  However, initial projections indicate that9 percent may opt into the impact of the Ojai acquisition could reduce ourcommunity bank leverage ratio framework if has average consolidated total risk-based capitalassets of less than $10 billion, has off-balance-sheet exposures of 25% or less of total consolidated assets, and has total trading assets and trading liabilities of 5 percent or less of total consolidated assets. Further, the bank must not be an advance approaches banking organization.

The final rule became effective January 1, 2020 and banks that meet the qualifying criteria can elect to use the community bank leverage framework starting with the quarter ended March 31, 2020. The CARES Act reduced the required community bank leverage ratio by close to 150 basis points, with other regulatory capital ratios declining by lesser amounts.  Bank8% until the earlier of December 31, 2020, or the Sierra’s standalone ratios already reflect material reductionsnational emergency is declared over. Beginning in 2021 the CBLR was increased to 8.5% for the year-to-date period, duecalendar year with the CBLR increasing to 9% on January 31, 2022. The federal bank regulatory agencies adopted an interim final rule to implement this change from the payment of an $11 million cash dividend to the holding company in August to ensure that Sierra Bancorp had enough cash on hand for the Ojai acquisition.  Even with potential reductions our capital ratios should be very strong relative to the median for peer financial institutions, and are expected to remain well above the threshold forCARES Act. At March 31, 2021, the Company and the Bank met the criteria outlined in the final rule and the interim final rule and elected to be classified as “well capitalized,” the highest rating of the categories definedmeasure capital adequacy under the Bank Holding Company Act and the Federal Deposit Insurance Corporation Improvement Act of 1991.  We do not foresee any circumstances that would cause the Company or the Bank to be less than well capitalized, although no assurance can be given that this will not occur.CBLR framework.

56


PART I – FINANCIAL INFORMATION

ITEM 3

Item 3

QUALITATIVE & QUANTITATIVE DISCLOSURES

ABOUT MARKET RISK

The information concerning quantitative and qualitative disclosures about market risk is included in Part I, Item 2 above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Market Risk Management.”

57

PART I – FINANCIAL INFORMATION

Item 4

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”) have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this quarterly report was being prepared.

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our Management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized, and reported within the time periods specified by the SEC.

Changes in Internal Controls

There were no significant changes in the Company’s internal controls over financial reporting that occurred in the third quarterfirst three months of 20172021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

57


58

PART II - OTHEROTHER 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 operation.operations.

ITEM 1A: RISK FACTORS

There were no material changes from the risk factors disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2016.2020.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c)

(c)   Stock Repurchases

In September of 2016 the Board authorized 500,000 shares of common stock for repurchase, subsequent to the completion of previous stock buyback plans. The authorization of shares for repurchase does not provide assurance that a specific quantity of shares will be repurchased, and the program maycan be suspended at any time at Management’s discretion. After a lengthy deferral of repurchase activity, the Company resumed share repurchases in mid-August 2019 through March 2020. There were no stock repurchase transactions during the first quarter of 2021. The balance of shares remaining for purchase under the plan was 268,301 at March 31, 2021. The Company did notcontinues to evaluate further repurchase any sharesactivity and whether to resume repurchases in the third quarter of 2017, and there were 478,954 authorized shares remaining available for repurchase at September 30, 2017.  As of the date of this report, Management has no immediate plans to resume stock repurchase activity.future.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable

ITEM 5: OTHER INFORMATION

Not applicable

59

Item 5: Other Information

Not applicable

58


ItemITEM 6: ExhibitsEXHIBITS

Exhibit #

Description

    3.1

Description

2.1

Agreement and Plan of Consolidation by and among Sierra Bancorp, Bank of the Sierra and Santa Clara Valley Bank, N.A., dated as of July 17, 2014 (1)

2.2

Agreement and Plan of Reorganization and Merger, dated as of January 4, 2016 by and between Sierra Bancorp and Coast Bancorp (2)

2.3

Agreement and Plan of Reorganization and Merger, dated as of April 24, 2017 by and between Sierra Bancorp and OCB Bancorp, as amended by Amendment No. 1 thereto dated May 4, 2017 and Amendment No. 2 thereto dated June 6, 2017 (3)

3.1

Restated Articles of Incorporation of Sierra Bancorp (1) (4)

3.2

Amended and Restated By-laws of the CompanySierra Bancorp (2) (5)

    4.1

Description of Securities (3)

10.1

Salary Continuation Agreement for Kenneth R. Taylor (4) (6)*

10.2

Salary Continuation Agreement and Split Dollar Agreement for James F. Gardunio (7)

10.3

Split Dollar Agreement for Kenneth R. Taylor (8) (5)*

10.4  10.3

Director Retirement Agreement and Split dollar AgreementAgreements Effective October 1, 2002, for Robert FieldsAlbert Berra, Morris Tharp, and Gordon Woods (8)(5)*

10.5  10.4

Director Retirement Agreement and Split dollar Agreement for Gordon Woods (8)

10.6

Director Retirement Agreement and Split dollar Agreement for Morris Tharp (8)

10.7

Director Retirement Agreement and Split dollar Agreement for Albert Berra (8)

10.8

401 Plus Non-Qualified Deferred Compensation Plan (5) (8)*

10.9  10.5

Indenture dated as of March 17, 2004 between U.S. Bank N.A., as Trustee, and Sierra Bancorp, as Issuer (6) (9)

10.10  10.6

Amended and Restated Declaration of Trust of Sierra Statutory Trust II, dated as of March 17, 2004 (9) (6)

10.11  10.7

Indenture dated as of June 15, 2006 between Wilmington Trust Co., as Trustee, and Sierra Bancorp, as Issuer (10) (7)

10.12  10.8

Amended and Restated Declaration of Trust of Sierra Capital Trust III, dated as of June 15, 2006 (7) (10)

10.13  10.9

2007 Stock Incentive Plan (8) (11)

10.14  10.10

Sample Retirement Agreement Entered into with Each Non-Employee Director Effective January 1, 2007 (12) (9)*

10.15  10.11

Salary Continuation Agreement for Kevin J. McPhaill (9) (12)*

10.16  10.12

First Amendment to the Salary Continuation Agreement for Kenneth R. Taylor (9) (12)*

10.17  10.13

Second Amendment to the Salary Continuation Agreement for Kenneth R. Taylor (10) (13)*

10.18  10.14

First Amendment to the Salary Continuation Agreement for Kevin J. McPhaill (14) (11)*

10.19  10.15

Indenture dated as of September 20, 2007 between Wilmington Trust Co., as Trustee, and Coast Bancorp, as Issuer (12) (15)

10.20  10.16

Amended and Restated Declaration of Trust of Coast Bancorp Statutory Trust II, dated as of September 20, 2007 (12) (15)

10.21  10.17

First Supplemental Indenture dated as of July 8, 2016, between Wilmington Trust Co. as Trustee, Sierra Bancorp as the “Successor Company”, and Coast Bancorp (12) (15)

10.22  10.18

2017 Stock Incentive Plan (13) (16)*

11  10.19

StatementEmployment agreements dated as of Computation of Per Share EarningsDecember 27, 2018 for Kevin McPhaill (17), CEO and Michael Olague, Chief Banking Officer (14)*

31.1  10.20

Employment agreement dated as of March 15, 2019 for Matthew Macia, Chief Risk Officer (15)*

  10.21

Employment agreement dated as of November 15, 2019 for Christopher Treece, Chief Financial Officer (16)*

  10.22

Employment agreement dated as of January 17, 2020 for Jennifer Johnson, Chief Administrative Officer (17)*

10.23

Employment agreement dated as of December 14, 2020 for Hugh Boyle, Chief Credit Officer (18)*

10.24

Form Indemnification Agreement dated as of January 28, 2021 for Directors and Executive Officers (19)*

  31.1

Certification of Chief Executive Officer (Section 302 Certification)

31.2

Certification of Chief Financial Officer (Section 302 Certification)

32

Certification of Periodic Financial Report (Section 906 Certification)

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

(1)

(1)

Filed as an Exhibit to the Form 8-K filed with the SEC on July 18, 2014 and incorporated herein by reference.

(2)

Filed as an Exhibit to the Form 8-K filed with the SEC on January 5, 2016 and incorporated herein by reference.

(3)

Original agreement filed as an exhibit to the Form 8-K filed with the SEC on April 25, 2017 and incorporated herein by reference, and amendments thereto filed as appendices to the proxy statement/prospectus included in the Form S-4/A filed with the SEC on July 24, 2017 and incorporated herein by reference.

(4)

Filed as Exhibit 3.1 to the Form 10-Q filed with the SEC on August 7, 2009 and incorporated herein by reference.

(2)

(5)

Filed as an Exhibit to the Form 8-K filed with the SEC on February 21, 2007 and incorporated herein by reference.

(3)

(6)

Filed as an Exhibit to the Form 10-K filed with the SEC on March 12, 2020 and incorporated herein by reference.
(4)

Filed as Exhibit 10.5 to the Form 10-Q filed with the SEC on May 15, 2003 and incorporated herein by reference.

(5)

(7)

Filed as an Exhibit to the Form 8-K filed with the SEC on August 11, 2005 and incorporated herein by reference.

(8)

Filed as Exhibits 10.10, 10.1710.18 through 10.20, and 10.22 to the Form 10-K filed with the SEC on March 15, 2006 and incorporated herein by reference.

(6)

(9)

Filed as Exhibits 10.9 and 10.10 to the Form 10-Q filed with the SEC on May 14, 2004 and incorporated herein by reference.

(7)

(10)

Filed as Exhibits 10.26 and 10.27 to the Form 10-Q filed with the SEC on August 9, 2006 and incorporated herein by reference.

(8)

(11)

Filed as Exhibit 10.20 to the Form 10-K filed with the SEC on March 15, 2007 and incorporated herein by reference.

(9)

(12)

Filed as Exhibits 10.1 through 10.3 to the Form 8-K filed with the SEC on January 8, 2007 and incorporated herein by reference.

(10)

(13)

Filed as Exhibit 10.23 to the Form 10-K filed with the SEC on March 13, 2014 and incorporated herein by reference.

(11)

(14)

Filed as Exhibit 10.24 to the Form 10-Q filed with the SEC on May 7, 2015 and incorporated herein by reference.

(12)

(15)

Filed as Exhibits 10.1 through 10.3 to the Form 8-K filed with the SEC on July 11, 2016 and incorporated herein by reference.

(13)

(16)

Filed as Exhibit 10.1 to the Form 8-K filed with the SEC on March 17, 2017 and incorporated herein by reference.

(14)

(17)

Computation of earnings per share isFiled as Exhibits 99.1 through 99.4 to the Form 8-K filed with the SEC on December 28, 2018 and incorporated by referencereference.

(15)Filed as Exhibit 99.2 to Note 6 of the Financial Statements included herein.

Form 8-K filed with the SEC on March 18, 2019 and incorporated by reference.
(16)Filed as Exhibit 99.1 to the Form 8-K filed with the SEC on November 11, 2019 and incorporated by reference.
(17)Filed as Exhibit 99.1 to the Form 8-K filed with the SEC on January 21, 2020 and incorporated by reference.
(18)Filed as Exhibit 10.1 to the Form 8-K filed with the SEC on December 09, 2020 and incorporated herein by reference.
(19)Filed as Exhibit 10.1 to the Form 8-K filed with the SEC on January 29, 2021 and incorporated herein by reference.

*Indicates management contract or compensatory plan or arrangement.

5960


SIGNATURES

Pursuant to the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

November 8, 2017

May 6, 2021

    

/s/ Kevin J. McPhaill

Date

SIERRA BANCORP

Kevin J. McPhaill

President & Chief Executive Officer

(Principal Executive Officer)

November 8, 2017May 6, 2021

/s/ Kenneth R. TaylorChristopher G. Treece

Date

SIERRA BANCORP

Kenneth R. TaylorChristopher G. Treece

Chief Financial Officer

(Principal Financial and

May 6, 2021

/s/ Cindy L. Dabney

Date

SIERRA BANCORP

Cindy L. Dabney

Principal Accounting Officer)Officer

60

61