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 SEPTEMBERJUNE 30, 20172022
Commission file number: 000-33063
SIERRA BANCORP
Sierra Bancorp
(Exact name of Registrant as specified in its charter)
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: |
| ☒ |
|
| ☐ |
| 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 August 1, 2022, the registrant had 15,091,213 shares of common stock outstanding, including 146,173 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
|
| | | | | ||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Page | ||||||||||
1 | |||||||||||
| 1 | ||||||||||
| | 1 | |||||||||
| | 2 | |||||||||
| | 3 | |||||||||
| | 4 | |||||||||
| |
| |||||||||
| |
| |||||||||
| | | | | |||||||
| Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations |
| |||||||||
| |
| |||||||||
| |
| |||||||||
| | Overview of the Results of Operations and Financial Condition |
| ||||||||
| |
| |||||||||
| | |
| ||||||||
| | | Provision for |
| |||||||
| | |
|
| |||||||
| | |
| ||||||||
| |
| |||||||||
| | |
| ||||||||
| | | |
| |||||||
| | | |
| |||||||
| | | |
| |||||||
| | | | Allowance for |
| ||||||
| | | |
| |||||||
| | |
| ||||||||
| | |
| ||||||||
| |||||||||||
| |||||||||||
| |||||||||||
| | | | 58 | |||||||
| | | | 59 | |||||||
| | | 60 | ||||||||
| |
| |||||||||
| |
| |||||||||
| | | | | |||||||
| Item 3. Qualitative & Quantitative Disclosures about Market Risk |
| |||||||||
| | | | | |||||||
|
| ||||||||||
| | ||||||||||
| |||||||||||
|
| ||||||||||
|
| ||||||||||
| Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds |
| |||||||||
|
| ||||||||||
|
| ||||||||||
|
| ||||||||||
|
| ||||||||||
| | ||||||||||
|
PART I - FINANCI
Item 1 – Financial Statements
SIERRA BANCORP
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, unaudited)thousands)
| | | | | | |
|
| June 30, 2022 |
| December 31, 2021 | ||
ASSETS | | (unaudited) | | (audited) | ||
Cash and due from banks | | $ | 82,081 | | $ | 63,147 |
Interest bearing deposits in banks | | | 79,794 | | | 194,381 |
Total cash & cash equivalents | | | 161,875 | | | 257,528 |
Investment securties | | | | | | |
Available-for-sale, at fair value (net of 0 allowance for credit losses at June 30, 2022 and December 31, 2021) | | | 864,178 | | | 973,314 |
| | | | | | |
Held-to-maturity, at amortized cost (fair value of $147,147 at June 30, 2022 and $0 at December 31, 2021) | | | 161,417 | | | — |
Allowance for credit losses on held-to-maturity securities | | | (18) | | | — |
Net, investment securities held-to-maturity | | | 161,399 | | | — |
| | | | | | |
Loans and leases: | | | | | | |
Gross loans and leases | | | 2,022,662 | | | 1,989,726 |
Deferred loan and lease fees, net | | | (1,081) | | | (1,865) |
Allowance for credit losses on loans and leases | | | (22,802) | | | (14,256) |
Net loans and leases | | | 1,998,779 | | | 1,973,605 |
Foreclosed assets | | | 2 | | | 93 |
Premises and equipment, net | | | 22,937 | | | 23,571 |
Goodwill | | | 27,357 | | | 27,357 |
Other intangible assets, net | | | 2,769 | | | 3,275 |
Bank-owned life insurance | | | 52,158 | | | 54,242 |
Other assets | | | 105,181 | | | 58,029 |
Total assets | | $ | 3,396,635 | | $ | 3,371,014 |
| | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | |
Deposits: | | | | | | |
Noninterest bearing | | $ | 1,120,413 | | $ | 1,084,544 |
Interest bearing | | | 1,730,586 | | | 1,697,028 |
Total deposits | | | 2,850,999 | | | 2,781,572 |
Repurchase agreements | | | 118,014 | | | 106,937 |
Long-term debt | | | 49,173 | | | 49,141 |
Subordinated debentures | | | 35,392 | | | 35,302 |
Allowance for credit losses on unfunded loan commitments | | | 893 | | | 203 |
Other liabilities | | | 43,117 | | | 35,365 |
Total liabilities | | | 3,097,588 | | | 3,008,520 |
| | | | | | |
Commitments and contingent liabilities (Note 7) | | | | | | |
| | | | | | |
Shareholders' equity | | | | | | |
Common stock, 0 par value; 24,000,000 shares authorized; 15,090,792 and 15,270,010 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | | | 111,727 | | | 113,007 |
Additional paid-in capital | | | 4,585 | | | 3,910 |
Retained earnings | | | 233,179 | | | 234,410 |
Accumulated other comprehensive (loss) income, net | | | (50,444) | | | 11,167 |
Total shareholders' equity | | | 299,047 | | | 362,494 |
Total liabilities and shareholders' equity | | $ | 3,396,635 | | $ | 3,371,014 |
|
| 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
SIERRA BANCORP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(dollars in thousands, except per share data, unaudited)
| | | | | | | | | | | | |
| | Three months ended June 30, | | | Six months ended June 30, | |||||||
|
| 2022 |
| 2021 | | 2022 | | 2021 | ||||
Interest and dividend income | | | | | | | | | | | | |
Loans and leases, including fees | | $ | 21,605 | | $ | 24,917 | | $ | 42,377 | | $ | 51,329 |
Taxable securities | | | 4,477 | | | 1,573 | | | 7,966 | | | 3,150 |
Tax-exempt securities | | | 1,854 | | | 1,517 | | | 3,581 | | | 2,967 |
Federal funds sold and other | | | 270 | | | 85 | | | 363 | | | 104 |
Total interest income | | | 28,206 | | | 28,092 | | | 54,287 | | | 57,550 |
Interest expense | | | | | | | | | | | | |
Deposits | | | 784 | | | 619 | | | 1,344 | | | 1,227 |
Short-term borrowings | | | 77 | | | 39 | | | 159 | | | 86 |
Subordinated debentures | | | 760 | | | 245 | | | 1,442 | | | 493 |
Total interest expense | | | 1,621 | | | 903 | | | 2,945 | | | 1,806 |
Net interest income | | | 26,585 | | | 27,189 | | | 51,342 | | | 55,744 |
Provision (benefit) for credit losses on loans and leases | | | 2,548 | | | (2,100) | | | 3,148 | | | (1,850) |
Benefit for credit losses on unfunded loan commitments | | | (147) | | | — | | | (241) | | | — |
Provision for credit losses on held-to-maturity securities | | | 18 | | | — | | | 18 | | | — |
Net interest income after provision for credit losses | | | 24,166 | | | 29,289 | | | 48,417 | | | 57,594 |
Noninterest income | | | | | | | | | | | | |
Service charges on deposits | | | 3,204 | | | 2,725 | | | 6,245 | | | 5,491 |
Other income | | | 7,235 | | | 3,887 | | | 10,257 | | | 7,951 |
Total noninterest income | | | 10,439 | | | 6,612 | | | 16,502 | | | 13,442 |
Noninterest expense | | | | | | | | | | | | |
Salaries and employee benefits | | | 11,745 | | | 10,425 | | | 23,550 | | | 21,576 |
Occupancy | | | 2,406 | | | 2,626 | | | 4,699 | | | 5,112 |
Other | | | 7,962 | | | 7,184 | | | 14,037 | | | 13,818 |
Total noninterest expense | | | 22,113 | | | 20,235 | | | 42,286 | | | 40,506 |
Income before taxes | | | 12,492 | | | 15,666 | | | 22,633 | | | 30,530 |
Provision for income taxes | | | 3,288 | | | 3,958 | | | 6,022 | | | 7,744 |
Net income | | $ | 9,204 | | $ | 11,708 | | $ | 16,611 | | $ | 22,786 |
| | | | | | | | | | | | |
PER SHARE DATA | | | | | | | | | | | | |
Book value | | $ | 19.82 | | $ | 23.21 | | $ | 19.82 | | $ | 23.21 |
Cash dividends | | $ | 0.23 | | $ | 0.21 | | $ | 0.46 | | $ | 0.42 |
Earnings per share basic | | $ | 0.62 | | $ | 0.77 | | $ | 1.11 | | $ | 1.49 |
Earnings per share diluted | | $ | 0.61 | | $ | 0.76 | | $ | 1.10 | | $ | 1.48 |
Average shares outstanding, basic | | | 14,931,701 | | | 15,243,698 | | | 14,976,774 | | | 15,242,451 |
Average shares outstanding, diluted | | | 15,004,017 | | | 15,375,825 | | | 15,063,804 | | | 15,365,966 |
| | | | | | | | | | | | |
Total shareholders' equity (in thousands) | | $ | 299,047 | | $ | 357,729 | | $ | 299,047 | | $ | 357,729 |
Shares outstanding | | | 15,090,792 | | | 15,410,763 | | | 15,090,792 | | | 15,410,763 |
Dividends paid (in thousands) | | $ | 3,470 | | $ | 3,237 | | $ | 6,978 | | $ | 6,468 |
|
| 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
SIERRA BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(dollars in thousands, unaudited)
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2022 |
| 2021 | | 2022 | | 2021 | ||||
Net income | | $ | 9,204 | | $ | 11,708 | | $ | 16,611 | | $ | 22,786 |
Other comprehensive (loss) income, before tax: | | | | | | | | | | | | |
Unrealized (loss) gains on securities: | | | | | | | | | | | | |
Unrealized holding (loss) gain arising during period | | | (46,476) | | | 1,489 | | | (86,438) | | | (4,270) |
Less: reclassification adjustment for gains included in net income (1) | | | — | | | — | | | (1,032) | | | — |
Other comprehensive (loss) gain, before tax | | | (46,476) | | | 1,489 | | | (87,470) | | | (4,270) |
Income tax benefit (income) related to items of other comprehensive (loss) income, net of tax | | | 13,740 | | | (441) | | | 25,859 | | | 1,262 |
Other comprehensive (loss) income, before tax: | | | (32,736) | | | 1,048 | | | (61,611) | | | (3,008) |
Comprehensive (loss) income | | $ | (23,532) | | $ | 12,756 | | $ | (45,000) | | $ | 19,778 |
|
| 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 |
The accompanying notes are an integral part of these consolidated financial statementsstatements.
3
SIERRA BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021
(dollars in thousands, except per share data, unaudited)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | Additional | | | | | Other | | | | ||
| | Common Stock | | Paid In | | Retained | | Comprehensive | | Shareholders' | |||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Equity | |||||
Balance, March 31, 2021 | | 15,410,763 | | $ | 113,453 | | $ | 3,961 | | $ | 216,218 | | $ | 14,349 | | $ | 347,981 |
Net income | | — | | | — | | | — | | | 11,708 | | | — | | | 11,708 |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 1,048 | | | 1,048 |
Stock compensation costs | | — | | | — | | | 229 | | | — | | | — | | | 229 |
Cash dividends - $0.21 per share | | — | | | — | | | — | | | (3,237) | | | — | | | (3,237) |
Balance, June 30, 2021 | | 15,410,763 | | $ | 113,453 | | $ | 4,190 | | $ | 224,689 | | $ | 15,397 | | $ | 357,729 |
| | | | | | | | | | | | | | | | | |
Balance, March 31, 2022 | | 15,086,032 | | $ | 111,673 | | $ | 4,281 | | $ | 227,445 | | $ | (17,708) | | $ | 325,691 |
Net income | | — | | | — | | | — | | | 9,204 | | | — | | | 9,204 |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (32,736) | | | (32,736) |
Stock options exercised, net of shares surrendered for cashless exercises | | 5,200 | | | 54 | | | (1) | | | — | | | — | | | 53 |
Restricted stock forfeited / cancelled | | (440) | | | — | | | — | | | — | | | — | | | — |
Stock based compensation - stock options | | — | | | — | | | 18 | | | — | | | — | | | 18 |
Stock based compensation - restricted stock | | — | | | — | | | 287 | | | — | | | — | | | 287 |
Cash dividends - $0.23 per share | | — | | | — | | | — | | | (3,470) | | | — | | | (3,470) |
Balance, June 30, 2022 | | 15,090,792 | | $ | 111,727 | | $ | 4,585 | | $ | 233,179 | | $ | (50,444) | | $ | 299,047 |
|
| 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 CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(dollars in thousands, except per share data, unaudited)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | Additional | | | | | Other | | | | ||
| | Common Stock | | Paid In | | Retained | | Comprehensive | | Shareholders' | |||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Equity | |||||
Balance, December 31, 2020 | | 15,388,423 | | $ | 113,384 | | $ | 3,736 | | $ | 208,371 | | $ | 18,405 | | $ | 343,896 |
Net income | | — | | | — | | | — | | | 22,786 | | | — | | | 22,786 |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (3,008) | | | (3,008) |
Exercise of stock options | | 4,160 | | | 69 | | | (15) | | | — | | | — | | | 54 |
Stock based compensation expense | | 18,180 | | | — | | | 469 | | | — | | | — | | | 469 |
Cash dividends - $0.42 per share | | — | | | — | | | — | | | (6,468) | | | — | | | (6,468) |
Balance, June 30, 2021 | | 15,410,763 | | $ | 113,453 | | $ | 4,190 | | $ | 224,689 | | $ | 15,397 | | $ | 357,729 |
| | | | | | | | | | | | | | | | | |
Balance, December 31, 2021 | | 15,270,010 | | $ | 113,007 | | $ | 3,910 | | $ | 234,410 | | $ | 11,167 | | $ | 362,494 |
Cumulative change in accounting principle | | — | | | — | | | — | | | (7,315) | | | — | | | (7,315) |
Net income | | — | | | — | | | — | | | 16,611 | | | — | | | 16,611 |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (61,611) | | | (61,611) |
Stock options exercised, net of shares surrendered for cashless exercises | | 5,200 | | | 54 | | | (1) | | | — | | | — | | | 53 |
Restricted stock surrendered due to employee tax liability | | (1,196) | | | (9) | | | — | | | (23) | | | — | | | (32) |
Restricted stock forfeited / cancelled | | (660) | | | — | | | — | | | — | | | — | | | — |
Stock based compensation - stock options | | — | | | — | | | 48 | | | — | | | — | | | 48 |
Stock based compensation - restricted stock | | — | | | — | | | 628 | | | — | | | — | | | 628 |
Stock repurchase | | (182,562) | | | (1,325) | | | — | | | (3,526) | | | — | | | (4,851) |
Cash dividends - $0.46 per share | | — | | | — | | | — | | | (6,978) | | | — | | | (6,978) |
Balance, June 30, 2022 | | 15,090,792 | | $ | 111,727 | | $ | 4,585 | | $ | 233,179 | | $ | (50,444) | | $ | 299,047 |
The accompanying notes are an integral part of these consolidated financial statements.
5
SIERRA BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(dollars in thousands, unaudited)
| | | | | | |
| | | Six months ended June 30, | |||
|
| 2022 |
| 2021 | ||
Cash flows from operating activities: | | | | | | |
Net income | | $ | 16,611 | | $ | 22,786 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Gain on sales of securities | | | (1,032) | | | — |
Loss on disposal of fixed assets | | | 6 | | | 4 |
Gain on sale on foreclosed assets | | | (5) | | | (116) |
Writedowns on foreclosed assets | | | 91 | | | 176 |
Stock based compensation expense | | | 676 | | | 469 |
Provision (benefit) for credit losses on loans and leases | | | 3,148 | | | (1,850) |
Provision for credit losses on held-to-maturity securities | | | 18 | | | — |
Depreciation and amortization | | | 1,284 | | | 1,924 |
Net amortization on securities premiums and discounts | | | 2,271 | | | 2,386 |
Amortization (accretion) of premiums (discounts) for loans acquired | | | (73) | | | (253) |
Decrease (increase) in cash surrender value of life insurance policies | | | 1,228 | | | (1,397) |
Amortization of core deposit intangible | | | 505 | | | 527 |
(Increase) decrease in interest receivable and other assets | | | (16,029) | | | 602 |
Increase (decrease) in other liabilities | | | 7,511 | | | (1,310) |
Deferred income tax benefit | | | (2,414) | | | (2,057) |
Decrease (increase) in value of restricted bank equity securities | | | 332 | | | (857) |
Net amortization of partnership investment | | | 225 | | | 267 |
Net cash provided by operating activities | | | 14,353 | | | 21,301 |
Cash flows from investing activities: | | | | | | |
Maturities and calls of securities available for sale | | | 4,123 | | | 4,000 |
Proceeds from sales of securities available for sale | | | 26,408 | | | — |
Purchases of securities available for sale | | | (215,269) | | | (130,696) |
Principal pay downs on securities available for sale | | | 43,748 | | | 56,540 |
Net purchases of FHLB stock | | | (336) | | | (1,666) |
Loan originations and payments, net | | | (37,703) | | | 319,697 |
Purchases of premises and equipment | | | (566) | | | (283) |
Proceeds from sales of foreclosed assets | | | 5 | | | 229 |
Purchase of bank-owned life insurance | | | (14) | | | (28) |
Liquidation of bank-owned life insurance | | | 11 | | | — |
Proceeds from BOLI death benefit | | | 859 | | | — |
Amortization of debt issuance costs | | | 32 | | | — |
Net cash (used in) provided by investing activities | | | (178,702) | | | 247,793 |
Cash flows from financing activities: | | | | | | |
Increase in deposits | | | 69,427 | | | 151,308 |
Decrease in borrowed funds | | | — | | | (142,900) |
Increase in customer repurchase agreements | | | 11,077 | | | 31,397 |
Cash dividends paid | | | (6,978) | | | (6,468) |
Repurchases of common stock | | | (4,883) | | | — |
Stock options exercised | | | 53 | | | 54 |
Net cash provided by financing activities | | | 68,696 | | | 33,391 |
| | | | | | |
(Decrease) increase in cash and cash equivalents | | | (95,653) | | | 302,485 |
| | | | | | |
Cash and cash equivalents | | | | | | |
Beginning of period | | | 257,528 | | | 71,417 |
End of period | | $ | 161,875 | | $ | 373,902 |
| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Interest paid | | $ | 3,459 | | $ | 1,800 |
Income taxes paid | | $ | 6,005 | | $ | 3,803 |
Supplemental noncash disclosures: | | | | | | |
Real estate acquired through foreclosure | | $ | — | | $ | 93 |
The accompanying notes are an integral part of these consolidated financial statements.
6
SIERRA BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20172022
(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 SeptemberJune 30, 2017,2022, 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 service35 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 include afocus on agricultural borrowers, commercial real estate, industries center, anand mortgage warehouse lending. In addition, in February 2020 the bank opened a loan production office which is currently located in Roseville, CA. To support organic growth in the agricultural credit center, and an SBA lending unit. We were close to $2.1 billionsector the bank also opened a loan production office in Templeton, CA in April 2022. The Company had total assets as of September$3.4 billion at June 30, 2017,2022, 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 SeptemberJune 30, 2017,2022, 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 interim unaudited consolidated financial statements have been prepared in a condensed format and thereforeas allowed under U.S. generally accepted accounting principles (“GAAP”). Therefore these financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete, audited financial statements.statements as presented in the Company’s Annual Report on Form 10-K. 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 20162021 have been reclassified to be consistent with the reporting for 2017.2022. 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, 2016,2021, 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
7
the contractual term for financial assets carried at amortized cost. This is commonly referredcost (generally loans and held-to-maturity investment securities) in addition to ascertain off balance-sheet credit exposure. Under the current expected credit losses (“CECL”) methodology. Expectedmethodology expected credit losses for financial assets held atare estimated over the reporting date will be measured based oncontractual life of the financial asset, adjusted for expected prepayments, considering historical experience, current conditions, and reasonable and supportable forecasts. Another change from existing U.S. GAAP involvesAdditionally, under CECL 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 securitiesis addressed through an allowance for credit losses rather thanwhich is a change from legacy GAAP which previously required the current practicedirect write-down of writing down securities forthrough the 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 becomes effective for theimpairment approach. The Companyimplemented CECL on January 1, 2020, although early application is permitted for 2019. On2022, using the effective date, institutions will apply the new accounting standard as follows: formodified retrospective approach to estimate lifetime expected losses on financial assets carriedmeasured at amortized cost a cumulative-effect adjustment will be recognized on thein addition to certain off balance sheet for any changecredit exposures. The January 1, 2022, increase in the relatedCompany’s allowance for loancredit losses, of $9.5 million on loans and lease losses generated byleases and $0.9 million in off balance sheet credit exposures, net of the impact of deferred taxes, was reflected in a transition adjustment of $7.3 million to retained earnings. There was 0 cumulative effect adjustment related to our available-for-sale investment portfolio upon adoption and the company had no securities designated as held-to-maturity as of January 1, 2022. Results for reporting periods beginning after December 31, 2021, are presented under CECL whereas prior comparative periods are presented under legacy GAAP.
The following table illustrates the impact of the adoption of CECL, and the new standard; financial assets classified as purchased credit impaired assets priortransition away from the incurred loss method, on January 1, 2022. The impact to the effective date will be reclassifiedAllowance for Credit losses (“ACL”) on the Loan Portfolio is broken out at the class level (dollars in thousands, unaudited):
| | | | | | | | | | | | | | | |
Transition Impact on Allowance for Credit Losses | | | | | | | | | | | | | | | |
(dollars in thousands, unaudited) | | | | | | | | | | | | | | | |
| | January 1, 2022 | |||||||||||||
| | Reserves Under Incurred Loss |
| Reserves Under CECL |
| Transition Impact Gross |
| Impact of Deferred Taxes |
| Impact to Retained Earnings | |||||
Real estate: | | | | | | | | | | | | | | | |
1-4 family residential construction | | $ | 135 | | $ | 28 | | $ | (107) | | $ | 32 | | $ | (75) |
Other construction/land | | | 228 | | | 254 | | | 26 | | | (8) | | | 18 |
1-4 family - closed-end | | | 1,618 | | | 2,310 | | | 692 | | | (205) | | | 487 |
Equity lines | | | 290 | | | 210 | | | (80) | | | 24 | | | (56) |
Multi-family residential | | | 274 | | | 574 | | | 300 | | | (89) | | | 211 |
Commercial real estate - owner occupied | | | 2,217 | | | 3,444 | | | 1,227 | | | (363) | | | 864 |
Commercial real estate - non-owner occupied | | | 6,199 | | | 14,380 | | | 8,181 | | | (2,418) | | | 5,763 |
Farmland | | | 737 | | | 340 | | | (397) | | | 117 | | | (280) |
Total real estate | | | 11,698 | | | 21,540 | | | 9,842 | | | (2,910) | | | 6,932 |
Agricultural | | | 465 | | | 382 | | | (83) | | | 25 | | | (58) |
Commercial and industrial | | | 1,060 | | | 1,418 | | | 358 | | | (106) | | | 252 |
Mortgage warehouse lines | | | 512 | | | 91 | | | (421) | | | 124 | | | (297) |
Consumer loans | | | 521 | | | 279 | | | (242) | | | 72 | | | (170) |
Total allowance for credit losses - loans | | $ | 14,256 | | $ | 23,710 | | $ | 9,454 | | $ | (2,795) | | $ | 6,659 |
| | | | | | | | | | | | | | | |
Allowance for credit losses - unfunded loan commitments | | $ | 203 | | | 1,134 | | | 931 | | | (275) | | | 656 |
The Company currently categorizes all of its loans and leases as purchased credit deteriorated assets as ofheld-for-investment and following CECL implementation, reports loans and leases on 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,Company’s amortized cost basis is comprised of the principal balance outstanding, net of remaining purchase discount or premium and any deferred fees or costs. Notably, the Company elected the practical expedient available under CECL to exclude accrued interest receivable from the amortized cost basis of all categorizations of loans and investment securities, and resultingly did not estimate reserves on accrued interest receivable balances, as any past due interest income is reversed on a timely basis. Accrued interest receivable continues to be included in other assets on the Company’s executive officersbalance sheet and certain other membersas of our credit administrationJune 30, 2022, measured at $6.0 million, $0.8 million and finance departments$5.4 million for available-for-sale securities, held-to-maturity securities and chaired by our Chief Credit Officer. Furthermore, after extensive discussion
8
loans, respectively. During 2022 0 accrued interest receivable on loans or available for sale investment securities was reversed against interest income.
Similar to practice under legacy GAAP, the Company generally continues to place loans 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 indicatesleases on nonaccrual status when management has determined that the provisionsfull repayment of ASU 2016-13 will likely haveprincipal and collection of contractually agreed upon interest is unlikely or when the loan in question has become delinquent more than 90 days. The Company may decide that it is appropriate to continue to accrue interest on certain loans and leases more than 90 days delinquent if they are well-secured by collateral and collection is in process. When a material impactloan is placed on our consolidated financial statements, particularlynonaccrual status, any accrued but uncollected interest for 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 indicate that our allowance for loan and lease losses could increaseis reversed out of interest income in the period in which the loan’s status changed. For loans and leases with an interest reserve, i.e., where loan and lease proceeds are advanced to the borrower to make interest payments, all interest recognized from the inception of the loan and lease is reversed when the loan and lease is placed on non-accrual. Once a loan and lease is on non-accrual status subsequent payments received from the customer are applied to principal, and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as much as two timescontractually required. Generally, loans and leases are not restored to accrual status until the obligation is brought current levels if utilizingand has performed in accordance with the contractual terms for a discounted cash flow methodology with forecasting.reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
In January 2017Similar to practice under legacy GAAP, the FASB issued ASU 2017-01, Business Combinations (Topic 805): ClarifyingACL on the Definition of 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 to as a “set”) thatloan portfolio is a business usually has outputs, outputs arevaluation allowance deducted from the recorded balance in loans and leases. However, under CECL the ACL represents principal which is not required. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. This led many transactionsexpected to be accounted for as business combinations rather than asset purchases under legacy GAAP. 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 all 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 operations 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 impact on the Company’s consolidated financial position, results of operations and cash flows.
In March 2017 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 yieldcollected over the contractual life of the instrument,loans and any unamortized premiumleases, adjusted for expected prepayment, whereas under legacy GAAP the allowance represented only losses already incurred as of the balance sheet date. The ACL is recordedincreased by a provision for credit losses charged to expense, and by principal recovered on charged-off balances. It is reduced by principal charge-offs. The amount of the allowance is based on management’s evaluation of the collectability of the loan and lease portfolio, using information from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Adjustments are also made for changes in risk profile, credit concentrations, historical trends, and other economic conditions.
The ACL for loans and leases is separated between a collective reserve evaluation, for loans where similar risk characteristics exist and an individual reserve evaluation for loans without similar risk characteristics. The collective evaluation of loans is performed at the portfolio segment level, using call code as a lossthe primary segmentation key but also considering similarity in earnings upon the debtor’s exercise of a call provision. Under ASU 2017-08, because the premium will be amortizedquantitative reserve methodology. The Company’s ACL is categorized according to the earliest call date, entities willfollowing portfolio segments: 1-4 Family Real Estate, Commercial Real Estate, Farmland & Agricultural Production, Commercial & Industrial, Mortgage Warehouse, and Consumer. Management utilizes a discounted cash flow methodology to estimate the quantitative portion of collectively evaluated reserves for the 1-4 Family Real Estate, Commercial Real Estate, Commercial & Industrial and Mortgage Warehouse portfolio segments. Management utilizes a Remaining Life Quantitative Reserve Methodology for the Farmland & Agricultural Production, and Consumer portfolio segments. Within the portfolio segments utilizing the DCF quantitative reserve methodology, management has made the election to adjust the effective interest rate to consider the impact of expected prepayments.
Loans and leases where similar risk characteristics exist are evaluated for the ACL in the collective reserve evaluation. The Company’s policy is that loans designated as nonaccrual no longer recognize a loss in earningsshare risk characteristics similar to other loans and leases evaluated collectively and as such, all nonaccrual loans and leases are individually evaluated for reserves. As of June 30, 2022 the Bank’s nonaccrual loans and leases comprised the entire population of loans and leases individually evaluated. The Company’s policy is that nonaccrual loans also represent the subset of loans and leases where borrowers are experiencing financial difficulty where an evaluation of the source of repayment is required to determine if a debt securitythe nonaccrual loan and lease should be categorized as collateral dependent. It is called priorthe Company’s policy that the only loans and leases where the credit quality has deteriorated to the contractual maturity date. point where foreclosure is probable are the Company’s nonaccrual loans and leases.
The amendments do not require an accounting change for securities held at a discount; discounts will continue to be amortizedimplementation of CECL also impacted the Company’s ACL on unfunded loan commitments, as an adjustment to yieldthis ACL now represents expected credit losses over the contractual life of commitments not identified as unconditionally cancellable by the Company. The Reserve for Unfunded Commitments is estimated using the same reserve or coverage rates calculated on collectively evaluated loans following the application of a funding rate to the amount of the unfunded
9
commitment. The funding rate represents management’s estimate of the amount of the current unfunded commitment that will be funded over the remaining contractual life of the commitment and is based on historical data. Under CECL the ACL on unfunded loan commitments remains in Other Liabilities while any related provision expense has been moved to provision for credit loss expense from its prior presentation in noninterest expense. Prior period expense has been reclassified for comparative purposes.
For available-for-sale 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 adoptionsecurities in an interim period. Ifunrealized loss position for which management has an entity early adoptsintent to sell the security or considers it more likely-than-not that the security in question will be sold prior to a recovery of its amortized cost basis, the security will be written down to fair value through a direct charge to income. For the remainder of available sale debt securities in an interim period, any adjustments must be reflected asunrealized loss position, which don’t meet the previously outlined criteria, management evaluates whether the decline in fair value is a reflection of credit deterioration or other factors. In performing this evaluation, management considers the extent which fair value has fallen below amortized cost, changes in rating by rating agencies, and other information indicating a deterioration in repayment capacity of either the underlying issuer or the borrowers providing repayment capacity in a securitization. If management’s evaluation indicates that a credit loss exists then a present value of the beginningexpected cash flows is calculated and compared to the amortized cost basis of the fiscal yearsecurity in question and to the degree that includes that interim period. To apply ASU 2017-08, entities must use a modified retrospective approach,the amortized cost basis exceeds the present value an allowance for credit loss (“ACL”) is established, with the cumulative-effect adjustment recognized to retained earnings atcaveat that the beginningmaximum amount of the period of adoption. Entities are also required to provide disclosures about a change in accounting principle inreserve on any individual security is 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.
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)difference between the fair value and amortized cost balance of the modified awardsecurity in question. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.
On April 1, 2022 the same as the fair valueCompany transferred $162.1 million of Agency, Mortgaged-Backed and Municipal securities from available-for-sale to held-to maturity. Because of the original award immediately before the original award is modified; 2) the vesting conditionsimplicit and explicit guarantees of the modified award areFederal Government on the same asAgency and Mortgage-Backed securities there is no expectation of future losses on any of these securities. The Bank’s municipal bonds moved to the vesting conditionsheld-to-maturity designation all have credit ratings considered investment grade or equivalent. A discounted-cash-flow reserve calculation was performed upon the transfer of these securities into the original award immediately before the original award is modified; 3) the classificationheld-to-maturity designation and a reserve 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$0.02 million was calculated and charged 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.provision expense.
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 5 – 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 492,240172,489 shares that were granted under the 2007 Plan were still outstanding as of SeptemberJune 30, 2017,2022 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 June 30, 2022 was 418,912. Options to purchase 382,311 shares granted under the 2017 Plan.Plan were outstanding as of June 30, 2022. 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 or award. The Company is utilizing theutilizes a Black-Scholes model to valuedetermine grant date fair values for options, 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 methodreflected in compensation costs as they occur for option grants with graded vesting.both types of awards. A pre-tax charge of $18,000$0.3 million was reflected in the Company’s income statement during the thirdsecond quarter of 20172022 and $11,000$0.2 million was charged during the thirdsecond quarter of 2016,2021, as expense related to stock options.options and restricted stock awards. For the first three quarters,half, the charges totaled $460,000$0.7 million in 2022 and $0.5 million in 2021.
10
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. There were no shares granted to employees and directors of the Company during the first six months of 2022. These awards are expensed on a straight-line basis over the vesting period. As of June 30, 2022, there was $2.3 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 2.8 years.
The Company’s time-vested award activity for the six months ended June 30, 2022 and $180,0002021 is summarized below (unaudited):
| | | | | | | | | | |
| | Six months ended June 30, | ||||||||
| | 2022 | | 2021 | ||||||
| | Shares | | | Weighted Average Grant-Date Fair Value | | Shares | | | Weighted Average Grant-Date Fair Value |
Unvested shares, January 1, | | 161,217 | | $ | 21.72 | | 148,885 | | $ | 18.00 |
Granted | | — | | | — | | 18,180 | | | 25.30 |
Vested | | (17,194) | | | 20.35 | | — | | | — |
Forfeited | | (660) | | | 27.16 | | — | | | — |
Unvested shares, June 30, | | 143,363 | | $ | 21.84 | | 167,065 | | $ | 18.79 |
Stock Option Grants
The Company has issued equity instruments in 2016.the form 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 six months ended June 30, 2022 and 2021 are summarized below (dollars in thousands, except per share data, unaudited):
| | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, | ||||||||||||||||||
| | 2022 | | 2021 | ||||||||||||||||
|
| Shares |
| Weighted Average | | Weighted Average Remaining Contractual Term (in years) |
| Aggregate |
| Shares |
| Weighted Average | | Weighted Average Remaining Contractual Term (in years) |
| Aggregate | ||||
Outstanding at January 1, | | 415,870 | | $ | 24.15 | | | | $ | 1,338 | | 495,489 | | $ | 23.67 | | | | $ | 1,340 |
Granted | | — | | $ | — | | | | $ | — | | — | | $ | — | | | | $ | — |
Exercised | | (200) | | $ | 10.21 | | | | $ | 3 | | (4,160) | | $ | 12.95 | | | | $ | 50 |
Forfeited/Expired | | (3,681) | | $ | 27.27 | | | | $ | — | | (21,719) | | $ | 27.51 | | | | $ | 1 |
Outstanding at June 30, | | 411,989 | | $ | 24.13 | | 5.41 | | $ | 733 | | 469,610 | | $ | 23.59 | | 6.20 | | $ | 1,500 |
Exercisable at June 30, | | 370,589 | | $ | 23.79 | | 5.19 | | $ | 733 | | 389,010 | | $ | 22.89 | | 5.80 | | $ | 1,500 |
(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 June 30, 2022. This amount changes based on changes in the market value of the Company's stock. |
11
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 13,839,11114,931,701 weighted average shares outstanding during the thirdsecond quarter of 2017,2022 and 13,790,10715,243,698 during the thirdsecond quarter of 2016. There2021, while there were 13,824,17314,976,774 weighted average shares outstanding during the first ninesix months of 2017,2022 and 13,446,56715,242,451 during the first ninesix months of 2016.
2021.
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 2017,2022, calculations under the treasury stock method resulted in the equivalent of 174,87672,316 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of 120,700354,612 stock options were excluded from the calculation because they were underwater and thus anti-dilutive. For the thirdsecond quarter of 20162021 the equivalent of 114,353132,127 shares were added in calculating diluted earnings per share, while 146,900335,481 anti-dilutive stock options were not factored into the computation. Likewise, for the first nine monthshalf of 20172022 the equivalent of 186,72187,030 shares were added to basic weighted average shares outstanding in calculating diluted earnings per share and a weighted average of 120,700 stock303,543 options that were anti-dilutive for the period were not included, compared to the addition of the equivalent of 114,149123,515 shares and non-inclusion of 196,900345,748 anti-dilutive options in calculating diluted earnings per share for first nine monthshalf of 2016.2021.
Note 76 – Comprehensive Income (Loss)
As presented in the Consolidated Statements of Comprehensive Income (Loss), comprehensive income (loss) includes net income and other comprehensive income.income (loss). The Company’s only source of other comprehensive income (loss) 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 (loss) 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 (loss) in the current period.
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 |
| ||||||||
| | | | | | | ||||||||
|
| June 30, 2022 |
| December 31, 2021 | ||||||||||
Commitments to extend credit |
| $ | 639,177 |
|
| $ | 463,923 |
| | $ | 670,756 | | $ | 554,028 |
Standby letters of credit |
| $ | 7,936 |
|
| $ | 8,582 |
| | $ | 6,196 | | $ | 6,651 |
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.
12
At SeptemberJune 30, 2017,2022, the Company was also utilizing a letter of credit in the amount of $86$128.6 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.
The Company is subject to loss contingencies, including claims and legal actions arising in the ordinary course of business, which are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.
As noted under footnote 3 the adoption of CECL on January 1, 2022 impacted the Company’s ACL on unfunded loan commitments. Additional information is included in footnote 3.
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 impairedindividually identified 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.
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.
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.13
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.Table of Contents
10
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 |
|
| | | | | | | | | | | | | | | |
| | | June 30, 2022 | ||||||||||||
| | | | | Fair Value Measurements | ||||||||||
|
| Carrying |
| Quoted Prices in |
| Significant |
| Significant |
| Total | |||||
Financial assets: | | | | | | | |||||||||
Cash and cash equivalents | | $ | 161,875 | | $ | 161,875 | | $ | 0 | | $ | 0 | | $ | 161,875 |
Investment securities available-for-sale | | | 864,178 | | | 0 | | | 817,639 | | | 46,539 | | | 864,178 |
Investment securities held-to-maturity | | | 161,399 | | | 0 | | | 147,147 | | | 0 | | | 147,147 |
Loans and leases, net held for investment | | | 1,980,317 | | | 0 | | | 0 | | | 1,960,923 | | | 1,960,923 |
Collateral dependent loans | | | 18,462 | | | 0 | | | 18,462 | | | 0 | | | 18,462 |
| | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | |
Deposits | | | 2,850,999 | | | 1,120,413 | | | 1,727,383 | | | 0 | | | 2,847,796 |
Repurchase agreements | | | 118,014 | | | 0 | | | 118,014 | | | 0 | | | 118,014 |
Long-term debt | | | 49,173 | | | 0 | | | 44,890 | | | 0 | | | 44,890 |
Subordinated debentures | | | 35,392 | | | 0 | | | 33,683 | | | 0 | | | 33,683 |
|
| Notional Amount |
|
|
|
|
|
|
|
|
| |
Off-balance-sheet financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit |
| $ | 463,923 |
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
| 8,582 |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | |
| | | December 31, 2021 | ||||||||||||
| | | | | Fair Value Measurements | ||||||||||
|
| Carrying |
| Quoted Prices in |
| Significant |
| Significant |
| Total | |||||
Financial assets: | | | | | | | |||||||||
Cash and cash equivalents | | $ | 257,528 | | $ | 257,528 | | $ | 0 | | $ | 0 | | $ | 257,528 |
Investment securities available for sale | | | 973,314 | | | 0 | | | 750,077 | | | 223,237 | | | 973,314 |
Loans and leases, net held for investment | | | 1,973,207 | | | 0 | | | 0 | | | 1,960,966 | | | 1,960,966 |
Collateral dependent loans | | | 398 | | | 0 | | | 221 | | | 177 | | | 398 |
| | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | |
Deposits | | | 2,781,572 | | | 1,084,544 | | | 1,696,124 | | | 0 | | | 2,780,668 |
Repurchase agreements | | | 106,937 | | | 0 | | | 106,937 | | | 0 | | | 106,937 |
Short term borrowings | | | 49,141 | | | 0 | | | 49,118 | | | 0 | | | 49,118 |
Subordinated debentures | | | 35,302 | | | 0 | | | 33,281 | | | 0 | | | 33,281 |
For financial asset categories that were actually reportedcarried on our balance sheet at fair value as of SeptemberJune 30, 20172022 and December 31, 2016,2021, 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. |
● | Collateral-dependent loans: Collateral-dependent 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 |
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.14
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
costs for OREO; 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 reevaluation 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 June 30, 2022, using | | | | ||||||||||
|
| Quoted Prices in |
| Significant |
| Significant |
| Total |
| Realized | |||||
Securities: | | | | | | | | | | | | | | | |
U.S. government agencies | | $ | 0 | | $ | 981 | | $ | 0 | | $ | 981 | | $ | — |
Mortgage-backed securities | | | 0 | | | 181,446 | | | 0 | | | 181,446 | | | — |
State and political subdivisions | | | 0 | | | 254,888 | | | 0 | | | 254,888 | | | — |
Corporate bonds | | | 0 | | | — | | | 46,539 | | | 46,539 | | | — |
Collateralized loan obligations | | | 0 | | | 380,324 | | | 0 | | | 380,324 | | | — |
Total available-for-sale securities | | $ | 0 | | $ | 817,639 | | $ | 46,539 | | $ | 864,178 | | $ | — |
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2021, using | | | | ||||||||||
|
| Quoted Prices in |
| Significant |
| Significant |
| Total |
| Realized | |||||
Securities: | | | | | | | | | | | | | | | |
U.S. government agencies | | $ | 0 | | $ | 1,574 | | $ | 0 | | $ | 1,574 | | $ | — |
Mortgage-backed securities | | | 0 | | | 306,727 | | | 0 | | | 306,727 | | | — |
State and political subdivisions | | | 0 | | | 304,268 | | | 0 | | | 304,268 | | | — |
Corporate bonds | | | 0 | | | 999 | | | 27,530 | | | 28,529 | | | — |
Collateralized loan obligations | | | 0 | | | 136,509 | | | 195,707 | | | 332,216 | | | — |
Total available-for-sale securities | | $ | 0 | | $ | 750,077 | | $ | 223,237 | | $ | 973,314 | | $ | — |
| | | | | | | | | | | | |
Fair Value Measurements - Level 3 Recurring | | | | | | | | | | | | |
(dollars in thousands, unaudited) | | | | | | | | | | | | |
|
| Collateralized Loan Obligations |
| Corporate Bonds | ||||||||
| | 2022 | | 2021 | | 2022 | | 2021 | ||||
Balance of recurring Level 3 assets at January 1, | | $ | 195,707 | | $ | — | | $ | 27,530 | | $ | — |
Purchases | | | — | | | — | | | 19,009 | | | — |
Transfers out of Level 3 | | | (195,707) | | | — | | | — | | | — |
Balance of recurring Level 3 assets at June 30, | | $ | — | | $ | — | | $ | 46,539 | | $ | — |
All of the Company’s collateralized loan obligations with a fair value of $195.7 million as of January 1, 2022 were transferred from Level 3 to Level 2 during the first quarter of 2022 because observable market data became available due to a significant increase in trading volume for these securities during that time.
15
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 |
| ||||||||||||||||
Impaired loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
| | | | | | | | | | | | | ||||||||||||||||
| | Fair Value Measurements at June 30, 2022, using | ||||||||||||||||||||||||||
|
| Quoted Prices in |
| Significant |
| Significant |
| Total | ||||||||||||||||||||
Collateral dependent 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 | | | 0 | | | 0 | | | 0 |
Multi-family residential |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| | | 0 | | | 0 | | | 0 | | | 0 |
Commercial real estate - owner occupied |
|
| — |
|
|
| 281 |
|
|
| — |
|
|
| 281 |
| | | 0 | | | 51 | | | 0 | | | 51 |
Commercial real estate - non-owner occupied |
|
| — |
|
|
| 67 |
|
|
| — |
|
|
| 67 |
| | | 0 | | | 0 | | | 0 | | | 0 |
Farmland |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| | | 0 | | | 18,411 | | | 0 | | | 18,411 |
Total real estate |
|
| — |
|
|
| 348 |
|
|
| — |
|
|
| 348 |
| | | 0 | | | 18,462 | | | 0 | | | 18,462 |
Agriculture |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||
Agricultural | | | 0 | | | 0 | | | 0 | | | 0 | ||||||||||||||||
Commercial and industrial |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| | | 0 | | | 0 | | | 0 | | | 0 |
Consumer loans |
|
| — |
|
|
| 58 |
|
|
| — |
|
|
| 58 |
| | | 0 | | | 0 | | | 0 | | | 0 |
Total impaired loans |
|
| — |
|
| $ | 406 |
|
|
| — |
|
|
| 406 |
| ||||||||||||
Total collateral dependent loans | | $ | 0 | | $ | 18,462 | | $ | 0 | | $ | 18,462 | ||||||||||||||||
Foreclosed assets |
| $ | — |
|
| $ | 2,225 |
|
| $ | — |
|
| $ | 2,225 |
| | $ | 0 | | $ | 2 | | $ | 0 | | $ | 2 |
Total assets measured on a nonrecurring basis |
| $ | — |
|
| $ | 2,631 |
|
| $ | — |
|
| $ | 2,631 |
| | $ | 0 | | $ | 18,464 | | $ | 0 | | $ | 18,464 |
| | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2021, using | ||||||||||
|
| Quoted Prices in |
| Significant |
| Significant |
| Total | ||||
Collateral dependent 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 | | | 161 | | | 0 | | | 161 |
Multi-family residential | | | 0 | | | 0 | | | 0 | | | 0 |
Commercial real estate - owner occupied | | | 0 | | | 60 | | | 0 | | | 60 |
Commercial real estate - non-owner occupied | | | 0 | | | 0 | | | 0 | | | 0 |
Farmland | | | 0 | | | 0 | | | 0 | | | 0 |
Total real estate | | | 0 | | | 221 | | | 0 | | | 221 |
Agricultural | | | 0 | | | 0 | | | 0 | | | 0 |
Commercial and industrial | | | 0 | | | 0 | | | 177 | | | 177 |
Consumer loans | | | 0 | | | 0 | | | 0 | | | 0 |
Total collateral dependent loans | | $ | 0 | | $ | 221 | | $ | 177 | | $ | 398 |
Foreclosed assets | | $ | 0 | | $ | 93 | | $ | 0 | | $ | 93 |
Total assets measured on a nonrecurring basis | | $ | 0 | | $ | 314 | | $ | 177 | | $ | 491 |
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 impairedcollateral dependent loan balances and specific loss reserves associated with those balances is included in Note 11 below, and in Management’s Discussion and Analysis10 below.
16
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 impairedindividually identified 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. Held-to-maturity securities are carried on the Company’s financial statements at their amortized cost, net of the allowance for credit losses.
The amortized cost, and estimated fair value, and allowance for credit losses of available-for-sale and held-to-maturity investment securities available-for-sale are as follows:
Amortized Cost And Estimated Fair Value
(dollars in thousands, unaudited)
| | | | | | | | | | | | | | | |
| | June 30, 2022 | |||||||||||||
|
| Amortized |
| Gross |
| Gross | | Allowance for Credit Losses |
| Estimated Fair | |||||
Available-for-sale | | | | | | | | | | | | | | | |
U.S. government agencies | | $ | 1,000 | | $ | — | | $ | (19) | | $ | — | | $ | 981 |
Mortgage-backed securities | | | 190,417 | | | 18 | | | (8,989) | | | — | | | 181,446 |
State and political subdivisions | | | 286,650 | | | 198 | | | (31,960) | | | — | | | 254,888 |
Corporate bonds | | | 49,708 | | | 10 | | | (3,179) | | | — | | | 46,539 |
Collateralized loan obligations | | | 396,763 | | | — | | | (16,439) | | | — | | | 380,324 |
Total available-for-sale securities | | $ | 924,538 | | $ | 226 | | $ | (60,586) | | $ | — | | $ | 864,178 |
| | | | | | | | | | | | | | | |
| | Amortized |
| Gross |
| Gross | | Estimated Fair |
| Allowance for Credit Losses | |||||
Held-to-maturity | | | | | | | | | | | | | | | |
U.S. government agencies | | $ | 6,762 | | $ | — | | $ | (346) | | $ | 6,416 | | $ | — |
Mortgage-backed securities | | | 103,888 | | | — | | | (8,006) | | | 95,882 | | | — |
State and political subdivisions | | | 50,767 | | | 25 | | | (5,943) | | | 44,849 | | | (18) |
Total held-to-maturity securities | | $ | 161,417 | | $ | 25 | | $ | (14,295) | | $ | 147,147 | | $ | (18) |
| | | | | | | | | | | | | | | |
| | December 31, 2021 | |||||||||||||
|
| Amortized |
| Gross |
| Gross | | Allowance for Credit Losses |
| Estimated Fair | |||||
Available-for-sale | | | | | | | | | | | | | | | |
U.S. government agencies | | $ | 1,546 | | $ | 28 | | $ | — | | $ | — | | $ | 1,574 |
Mortgage-backed securities | | | 303,912 | | | 4,772 | | | (1,957) | | | — | | | 306,727 |
State and political subdivisions | | | 290,729 | | | 13,807 | | | (268) | | | — | | | 304,268 |
Corporate bonds | | | 28,436 | | | 94 | | | (1) | | | — | | | 28,529 |
Collateralized loan obligations | | | 332,836 | | | 68 | | | (688) | | | — | | | 332,216 |
Total securities | | $ | 957,459 | | $ | 18,769 | | $ | (2,914) | | $ | — | | $ | 973,314 |
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 |
|
17
| 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 |
|
The Company reassessed classification of certain investments and effective April 1, 2022 the Company transferred $162.1 million of Agency, Mortgaged-Backed and Municipal securities from available-for-sale to held-to-maturity securities. The securities were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income. The related unrealized loss of $11.5 million included in other comprehensive income remained in other comprehensive income, to be amortized out of other comprehensive income with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. Subsequent to transfer, a discounted-cash-flow reserve calculation was performed upon the transfer of these securities into the held-to-maturity designation and a allowance for credit losses of $0.02 million was calculated and charged to provision for credit loss expense. The Company did not have any securities classified as held-to-maturity as of December 31, 2021.
The Company did not record an ACL on the AFS portfolio at June 30, 2022 or upon the implementation of CECL on January 1, 2022. As of both dates the Company considers the unrealized loss across the classes of major security-type to be related to fluctuations in market conditions, primarily interest rates, and not reflective of a deterioration in credit value in any case. The Company maintains that it has intent and ability to hold these securities until the amortized cost basis of each security is recovered and likewise concluded as of both January 1, 2022 and June 30, 2022 that it was not more likely than not that any of the securities in an unrealized loss position would be required to be sold. The following bullets outline additional support for management’s conclusion that no amount of the unrealized loss of the securities in an unrealized loss position as of January 1, 2022 and June 30, 2022 was attributable to credit deterioration and a risk of loss, requiring a allowance for credit losses.
● | US Government Agencies are supported by the full faith and credit-worthiness of the U.S. Federal Government and the management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either January 1, 2022 or June 30, 2022. |
● | Mortgage-backed securities issued by government sponsored entities (“GSEs”) carry an implicit guarantee by the U.S. Federal Government, as the GSEs can draw funds from the U.S. Federal Government up to a limit, with an implied ability to draw funds beyond the limit. Management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either January 1, 2022 or June 30, 2022. |
● | Management routinely monitors third party credit grades of the municipal issuers in the Company’s state and political subdivisions portfolio and as of both January 1, 2022 and June 30, 2022 noted that all municipal securities in an unrealized loss position were either investment grade rated or guaranteed. On a quarterly basis management receives financial information from a third-party service related to underlying issuer’s financial stability. In addition, management performs annual reviews of the underlying municipal issuers financial statements in order to evaluate stability and repayment capacity and has noted no concerns with any of the bonds in the Company’s State and Local portfolio. As of both January 1, 2022 and June 30, 2022 management concluded that no allowance for credit losses was warranted on any of the Company’s municipal securities and the unrealized loss position of each of the securities reflected fluctuations in market conditions, primarily interest rates, since the time of purchase. |
● | The Company has invested in corporate debt issuances of other financial institutions. Various financial metrics of each of the issuing financial institutions are reviewed by management quarterly, these metrics include credit quality, reserve adequacy, capital, profitability and capital. Following review of the financial metrics available for each of the underlying institutions as of January 1, 2022 and June 30, 2022 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest rates, from the date of purchase, and were not reflective of any credit concerns with the issuing financial institution. These bonds were subject to a credit review by the credit administration department prior to their purchase and are subject to quarterly potential impairment reviews. |
● | The Company has invested exclusively in AA and AAA tranches of various collateralized debt obligations, which are securitizations of commercial loans. Each purchase is subject to a credit, concentration, and structure review by the credit administration department prior to their purchase and are subject to quarterly potential impairment reviews. Management monitors the credit rating of these investments on a quarterly basis in addition to various performance metrics available through a third-party informational service. Following review of financial metrics as of both January 1, 2022 and June 30, 2022 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest |
18
rate spreads, from the date of purchase, and were not reflective of any credit concerns with the tranches comprising the Company’s investments. |
At SeptemberJune 30, 20172022 and December 31, 2016,2021, the Company had 329961 securities and 43198 securities, respectively, with gross unrealized losses. Management has evaluated thoseSince the declines in market values were primarily attributable to changes in interest rates and volatility in the financial markets and not a result of an expected credit loss, 0 allowance for credit losses on available-for-sale securities was recorded as of the respective dates, and does not believe that any of the unrealized losses are other than temporary.June 30, 2022. 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)
| | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | ||||||||||||||||
| | Less than twelve months | | Twelve months or more | | Total | ||||||||||||
|
| Gross |
| Fair Value |
| Gross |
| Fair Value |
| Gross |
| Fair Value | ||||||
Available-for-sale | | | | | | | | | | | | | | | | | | |
U.S. government agencies | | $ | (19) | | $ | 981 | | $ | — | | $ | — | | $ | (19) | | $ | 981 |
Mortgage-backed securities | | | (8,941) | | | 176,718 | | | (48) | | | 853 | | | (8,989) | | | 177,571 |
State and political subdivisions | | | (31,960) | | | 221,848 | | | — | | | — | | | (31,960) | | | 221,848 |
Corporate bonds | | | (3,179) | | | 43,562 | | | — | | | — | | | (3,179) | | | 43,562 |
Collateralized loan obligations | | | (16,439) | | | 380,324 | | | — | | | — | | | (16,439) | | | 380,324 |
Total available-for-sale | | $ | (60,538) | | $ | 823,433 | | $ | (48) | | $ | 853 | | $ | (60,586) | | $ | 824,286 |
| | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | ||||||||||||||||
| | Less than twelve months | | Twelve months or more | | Total | ||||||||||||
| | Gross |
| Fair Value |
| Gross |
| Fair Value |
| Gross |
| Fair Value | ||||||
Held-to-maturity | | | | | | | | | | | | | | | | | | |
U.S. government agencies | | $ | (346) | | $ | 6,416 | | $ | — | | $ | — | | $ | (346) | | $ | 6,416 |
Mortgage-backed securities | | | (8,006) | | | 95,882 | | | — | | | — | | | (8,006) | | | 95,882 |
State and political subdivisions | | | (5,943) | | | 41,148 | | | — | | | — | | | (5,943) | | | 41,148 |
Total held-to-maturity | | $ | (14,295) | | $ | 143,446 | | $ | — | | $ | — | | $ | (14,295) | | $ | 143,446 |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | ||||||||||||||||
| | Less than twelve months | | Twelve months or more | | Total | ||||||||||||
|
| Gross |
| Fair Value |
| Gross |
| Fair Value |
| Gross |
| Fair Value | ||||||
Available-for-sale | | | | | | | | | | | | | | | | | | |
U.S. government agencies | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Mortgage-backed securities | | | (1,797) | | | 107,026 | | | (160) | | | 2,808 | | | (1,957) | | | 109,834 |
State and political subdivisions | | | (268) | | | 30,170 | | | — | | | — | | | (268) | | | 30,170 |
Corporate bonds | | | (1) | | | 499 | | | — | | | — | | | (1) | | | 499 |
Collateralized loan obligations | | | (688) | | | 175,581 | | | — | | | — | | | (688) | | | 175,581 |
Total available-for-sale | | $ | (2,754) | | $ | 313,276 | | $ | (160) | | $ | 2,808 | | $ | (2,914) | | $ | 316,084 |
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 |
|
19
|
| 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 |
|
Mortgage-backed securities |
|
| (4,303 | ) |
|
| 271,276 |
|
|
| (868 | ) |
|
| 43,570 |
|
State and political subdivisions |
|
| (1,466 | ) |
|
| 49,195 |
|
|
| — |
|
|
| — |
|
Total |
| $ | (6,269 | ) |
| $ | 341,527 |
|
| $ | (874 | ) |
| $ | 44,281 |
|
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 June 30, | | | Six months ended June 30, | |||||||
|
| 2022 |
| 2021 | | 2022 | | 2021 | ||||
Proceeds from sales, calls and maturities of securities available for sale | | $ | 1,750 | | $ | 2,295 | | $ | 30,531 | | $ | 4,000 |
Gross gains on sales, calls and maturities of securities available for sale | | | — | | | 0 | | | 1,032 | | | — |
Gross losses on sales, calls and maturities of securities available for sale | | | — | | | 0 | | | — | | | — |
Net gains on sale of securities available for sale | | $ | — | | $ | 0 | | $ | 1,032 | | $ | — |
The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at SeptemberJune 30, 20172022 and December 31, 20162021 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 |
|
| | | | | | | | | | | | |
| | June 30, 2022 | ||||||||||
| | Available-for-Sale | | Held-to-Maturity | ||||||||
|
| Amortized Cost |
| Fair Value |
| Amortized Cost |
| Fair Value | ||||
Maturing within one year | | $ | 3,008 | | $ | 3,014 | | $ | 1,225 | | $ | 1,227 |
Maturing after one year through five years | | | 8,376 | | | 8,267 | | | 1,880 | | | 1,850 |
Maturing after five years through ten years | | | 71,878 | | | 68,281 | | | 17,096 | | | 15,925 |
Maturing after ten years | | | 251,829 | | | 220,579 | | | 37,327 | | | 32,263 |
Securities not due at a single maturity date: | | | | | | | | | | | | |
Mortgage-backed securities | | | 192,684 | | | 183,713 | | | 103,889 | | | 95,882 |
Collateralized loan obligations | | | 396,763 | | | 380,324 | | | — | | | — |
| | $ | 924,538 | | $ | 864,178 | | $ | 161,417 | | $ | 147,147 |
| | | | | | | | | | | | |
| | December 31, 2021 | ||||||||||
| | Available-for-Sale | | Held-to-Maturity | ||||||||
|
| Amortized Cost |
| Fair Value |
| Amortized Cost |
| Fair Value | ||||
Maturing within one year | | $ | 3,513 | | $ | 3,547 | | $ | — | | $ | — |
Maturing after one year through five years | | | 26,422 | | | 26,718 | | | — | | | — |
Maturing after five years through ten years | | | 36,840 | | | 38,314 | | | — | | | — |
Maturing after ten years | | | 253,936 | | | 265,792 | | | — | | | — |
Securities not due at a single maturity date: | | | | | | | | | — | | | — |
Mortgage-backed securities | | | 303,912 | | | 306,727 | | | — | | | — |
Collateralized loan obligations | | | 332,836 | | | 332,216 | | | — | | | — |
| | $ | 957,459 | | $ | 973,314 | | $ | — | | $ | — |
At SeptemberJune 30, 2017,2022, the Company’s investment portfolio included 330442 “muni” bonds issued by 368 different government municipalities and agencies located within 3234 different states, with an aggregate fair value of $142$299.7 million. The largest exposure to any single municipality or agency was a combined $2.588$5.7 million (fair value) in general obligation bonds issued by the Lindsay (CA) Unified School District.City of New York (NY). In addition, the Company owned 40 subordinated debentures issued by bank holding companies totaling $46.5 million (fair value).
20
At December 31, 2021, the Company’s investment portfolio included 403 “muni” bonds issued by 335 different government municipalities and agencies located within 33 states, with an aggregate fair value of $304.3 million. The largest exposure to any single municipality or agency was $4.0 million (fair value) in 3 bonds issued by the Charter Township of Washington. In addition, the company owned 23 subordinated debentures issued by bank holding companies totaling $28.5 million (fair value).
The Company’s investments in bonds issued by corporations, states, municipalities and political subdivisions are evaluated in accordance with Supervision and RegulationFinancial Institution Letter 12-1548-2012, issued by the BoardFDIC, “Revised Standards of Governors of the Federal Reserve System, “Investing inCreditworthiness for Investment 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-ratedsimilarly rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third partythird-party credit rating agencies.
18
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)
| | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 | ||||||||
| | Amortized | | Fair Market | | Amortized | | Fair Market | ||||
General obligation bonds |
| Cost |
| Value |
| Cost |
| Value | ||||
State of issuance | | | | | | | | | | | | |
Texas | | $ | 114,615 | | $ | 100,728 | | $ | 85,045 | | $ | 89,225 |
California | | | 64,337 | | | 56,481 | | | 64,092 | | | 67,066 |
Washington | | | 20,724 | | | 19,476 | | | 23,858 | | | 24,812 |
Other (27 & 26 states, respectively) | | | 91,855 | | | 82,271 | | | 75,037 | | | 78,579 |
Total general obligation bonds | | | 291,531 | | | 258,956 | | | 248,032 | | | 259,682 |
| | | | | | | | | | | | |
Revenue bonds | | | | | | | | | | | | |
State of issuance | | | | | | | | | | | | |
Texas | | | 5,739 | | | 5,118 | | | 7,038 | | | 7,377 |
California | | | 3,997 | | | 3,616 | | | 4,334 | | | 4,602 |
Washington | | | 4,103 | | | 3,502 | | | 1,349 | | | 1,392 |
Other (17 & 15 states, respectively) | | | 32,047 | | | 28,545 | | | 29,976 | | | 31,215 |
Total revenue bonds | | | 45,886 | | | 40,781 | | | 42,697 | | | 44,586 |
Total obligations of states and political subdivisions | | $ | 337,417 | | $ | 299,737 | | $ | 290,729 | | $ | 304,268 |
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
21
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)
| | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 | ||||||||
| | Amortized | | Fair Market | | Amortized | | Fair Market | ||||
Revenue bonds |
| Cost |
| Value |
| Cost |
| Value | ||||
Revenue source: | | | | | | | | | | | | |
Water | | $ | 17,120 | | $ | 15,112 | | $ | 15,534 | | $ | 16,220 |
Sewer | | | 6,107 | | | 5,356 | | | 3,932 | | | 4,165 |
Lease | | | 4,665 | | | 4,341 | | | 6,556 | | | 6,718 |
Sales tax revenue | | | 3,559 | | | 3,067 | | | — | | | — |
Intergovernmental agreement | | | 2,838 | | | 2,680 | | | — | | | — |
Other (9 and 9 sources, respectively) | | | 11,597 | | | 10,225 | | | 16,675 | | | 17,483 |
Total revenue bonds | | $ | 45,886 | | $ | 40,781 | | $ | 42,697 | | $ | 44,586 |
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.
The Company investedcurrently has investments in ninethree different LIHTC fund limited partnerships from 2001 through 2017,made in 2014, 2015, and 2022, 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 SeptemberJune 30, 20172022, our total LIHTC investment book balance was $8.9$7.7 million, which includes $3.5$5.1 million in remaining commitments for additional capital contributions. There were $533,000$0.3 million in tax credits derived from our LIHTC investments that were recognized during the ninesix months ended SeptemberJune 30, 2017,2022, and amortization expense of $837,000$0.2 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.
As of December 31, 2021, our total LIHTC investment book balance was $2.9 million, which includes $0.1 million in remaining commitments for additional capital contributions. There were $0.5 million in tax credits derived from our LIHTC investments that were recognized during the year ended December 31, 2022, and amortization expense of $0.5 million associated with those investments was netted against pre-tax noninterest income for the same time period.
Note 1110 – Loans and Leases and Allowance for Credit QualityLosses
We adopted the new current expected credit loss accounting guidance, CECL, and Nonperforming Assets
Credit Quality Classifications
The Company monitors theall related amendments as of January 1, 2022. Certain prior period credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the current guidance and have not been included below as of loansJune 30, 2022. Under CECL, disclosures are required on a continuousthe amortized cost basis, usingwhereas legacy GAAP required presentation on the regulatoryrecorded investment basis, with the primary difference being net deferred fees 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:costs. Unless specifically noted otherwise,
Pass: Larger non-homogeneous loans not meeting the risk rating definitions below, and smaller homogeneous loans that are not assessed on an individual basis.22
Special mention: Loans which have potential issues that deserveTable of Contents
June 30, 2022 disclosures are prepared on the close attention of Management. If left uncorrected, those potential weaknesses could eventually diminish the prospects for full repayment of principalamortized cost basis and interestDecember 31, 2021 disclosures present information according to the contractual termsrecorded investment basis.
The following table presents loans by class as of June 30, 2022 and December 31, 2021. Accrued interest receivable on loans of $5.4 million and $6.8 million at June 30, 2022 and December 31, 2021 respectively is not included in the loans included in the table below but is included in other assets on the Company’s balance sheet. The June 30, 2022, balance in 1-4 family closed end loans reflects year-to-date 2022 loan purchase of $173.1 million. The majority of the loan agreement,disclosures in this footnote are prepared at the class level which is equivalent to the call report classification or could resultcall code classification. The final table in deteriorationthis section separates a roll forward of the Company’s credit positionAllowance for Credit Losses at some future date.the portfolio segment level.
23
Substandard: Loans that have at least one clearTable of Contents
| | | | | | |
Loan And Lease Distribution | | | | | | |
(dollars in thousands, unaudited) | | | | | | |
|
| June 30, 2022 |
| December 31, 2021 | ||
Real estate: | | | | | | |
1-4 family residential construction | | $ | 5,542 | | $ | 21,369 |
Other construction/land | | | 20,816 | | | 25,299 |
1-4 family - closed-end | | | 429,109 | | | 289,457 |
Equity lines | | | 25,260 | | | 26,588 |
Multi-family residential | | | 66,367 | | | 53,458 |
Commercial real estate - owner occupied | | | 312,060 | | | 334,446 |
Commercial real estate - non-owner occupied | | | 898,158 | | | 882,888 |
Farmland | | | 101,675 | | | 106,706 |
Total real estate | | | 1,858,987 | | | 1,740,211 |
Agricultural | | | 28,660 | | | 33,990 |
Commercial and industrial | | | 72,617 | | | 109,791 |
Mortgage warehouse lines | | | 58,134 | | | 101,184 |
Consumer loans | | | 4,264 | | | 4,550 |
Subtotal | | | 2,022,662 | | | 1,989,726 |
Less net deferred loan fees and costs | | | (1,081) | | | (1,865) |
Loans and leases, amortized cost basis | | | 2,021,581 | | | 1,987,861 |
Allowance for credit losses | | | (22,802) | | | (14,256) |
Net loans and leases | | $ | 1,998,779 | | $ | 1,973,605 |
The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and well-defined weakness that could jeopardize the ultimate recoverabilitywithout individually evaluated reserves as 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.June 30, 2022:
| | | | | | | | | | | | |
Nonaccrual Loans and Leases | | | | | | | | | | | | |
(dollars in thousands, unaudited) | | | | | | | | | | | | |
| | June 30, 2022 | ||||||||||
| | Nonaccrual Loans | | | | |||||||
|
| With no allowance for credit loss |
| With an allowance for credit loss | | Total | | Loans Past Due 90+ Accruing | ||||
Real estate: | | | | | | | | | | | | |
1-4 family residential construction | | $ | — | | $ | — | | $ | — | | $ | 632 |
Other construction/land | | | — | | | — | | | — | | | — |
1-4 family - closed-end | | | 745 | | | — | | | 745 | | | — |
Equity lines | | | 62 | | | — | | | 62 | | | — |
Multi-family residential | | | — | | | — | | | — | | | — |
Commercial real estate - owner occupied | | | 379 | | | — | | | 379 | | | — |
Commercial real estate - non-owner occupied | | | — | | | — | | | — | | | — |
Farmland | | | 19,301 | | | — | | | 19,301 | | | — |
Total real estate | | | 20,487 | | | — | | | 20,487 | | | 632 |
Agricultural | | | 8,414 | | | 30 | | | 8,444 | | | — |
Commercial and industrial | | | 584 | | | 230 | | | 814 | | | 7 |
Mortgage warehouse lines | | | — | | | — | | | — | | | — |
Consumer loans | | | — | | | — | | | — | | | — |
Total | | $ | 29,485 | | $ | 260 | | $ | 29,745 | | $ | 639 |
24
Impaired: ATable of Contents
The following table presents the impaired loans as of December 31, 2021, according to loan is considered impaired when, based on current informationclass, with and events, it is probable that the Company will be unable to collect all amounts duewithout an individually evaluated reserve according to the contractual terms of the loan agreement.recorded investment basis. Impaired loans include all nonperformingas of December 31, 2021 included both nonaccrual loans and restructured troubled debt (“TDRs”).performing TDRs. A TDR may be nonperforming or performing, depending on its accrual status and the demonstrated abilityseparate breakout 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,nonaccrual loans by class 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 |
|
|
| December 31, 2016 |
| |||||||||||||||||
|
| Pass |
|
| Special Mention |
|
| Substandard |
|
| Impaired |
|
| Total |
| |||||
Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction |
| $ | 32,417 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 32,417 |
|
Other construction/land |
|
| 38,699 |
|
|
| 888 |
|
|
| — |
|
|
| 1,063 |
|
|
| 40,650 |
|
1-4 family - closed end |
|
| 129,726 |
|
|
| 624 |
|
|
| 403 |
|
|
| 6,390 |
|
|
| 137,143 |
|
Equity lines |
|
| 35,159 |
|
|
| 3,165 |
|
|
| 698 |
|
|
| 4,421 |
|
|
| 43,443 |
|
Multi-family residential |
|
| 31,058 |
|
|
| — |
|
|
| — |
|
|
| 573 |
|
|
| 31,631 |
|
Commercial real estate - owner occupied |
|
| 243,366 |
|
|
| 4,991 |
|
|
| 2,892 |
|
|
| 2,286 |
|
|
| 253,535 |
|
Commercial real estate - non-owner occupied |
|
| 233,584 |
|
|
| 5,597 |
|
|
| 3,220 |
|
|
| 1,797 |
|
|
| 244,198 |
|
Farmland |
|
| 132,613 |
|
|
| 1,020 |
|
|
| 808 |
|
|
| 39 |
|
|
| 134,480 |
|
Total real estate |
|
| 876,622 |
|
|
| 16,285 |
|
|
| 8,021 |
|
|
| 16,569 |
|
|
| 917,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural |
|
| 45,249 |
|
|
| 891 |
|
|
| — |
|
|
| 89 |
|
|
| 46,229 |
|
Commercial and industrial |
|
| 107,404 |
|
|
| 13,186 |
|
|
| 732 |
|
|
| 2,273 |
|
|
| 123,595 |
|
Mortgage warehouse |
|
| 163,045 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 163,045 |
|
Consumer loans |
|
| 10,303 |
|
|
| 191 |
|
|
| 9 |
|
|
| 1,662 |
|
|
| 12,165 |
|
Total gross loans and leases |
| $ | 1,202,623 |
|
| $ | 30,553 |
|
| $ | 8,762 |
|
| $ | 20,593 |
|
| $ | 1,262,531 |
|
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 million at September 30, 2017, which includes one single-family residential property with a carrying value of $51,000 and two relatively low-value mobile homes, and $2.225 million at December 31, 2016, which includes two relatively low-value mobile homes but no single-family residential properties.2021 is included in the past due loans table as of December 31, 2021, later in this footnote.
Nonperforming loans and leases result when reasonable doubt surfaces with regard to the ability of the
| | | | | | | | | | | | | | | |
| | December 31, 2021 | |||||||||||||
| | Unpaid Principal | | Recorded | | | | Average Recorded | | Interest Income | |||||
|
| Balance(1) |
| Investment(2) |
| Related Allowance |
| Investment |
| Recognized(3) | |||||
With an Allowance Recorded | | | | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | |
Other construction/land | | $ | 341 | | $ | 341 | | $ | 64 | | $ | 352 | | $ | 55 |
1-4 family - closed-end | | | 1,048 | | | 1,048 | | | 37 | | | 1,096 | | | 104 |
Equity lines | | | 2,005 | | | 1,993 | | | 182 | | | 2,056 | | | 138 |
Commercial real estate - owner occupied | | | 1,249 | | | 1,248 | | | 19 | | | 1,278 | | | 144 |
Commercial real estate - non-owner occupied | | | 367 | | | 367 | | | 126 | | | 393 | | | 32 |
Total real estate | | | 5,010 | | | 4,997 | | | 428 | | | 5,175 | | | 473 |
Agricultural | | | 244 | | | 244 | | | 244 | | | 246 | | | — |
Commercial and industrial | | | 757 | | | 757 | | | 127 | | | 873 | | | 41 |
Consumer loans | | | 164 | | | 164 | | | 19 | | | 180 | | | 28 |
| | | 6,175 | | | 6,162 | | | 818 | | | 6,474 | | | 542 |
With no Related Allowance Recorded | | | | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | |
1-4 family - closed-end | | | 788 | | | 788 | | | — | | | 869 | | | — |
Equity lines | | | 648 | | | 648 | | | — | | | 690 | | | 6 |
Commercial real estate - owner occupied | | | 1,353 | | | 1,234 | | | — | | | 1,282 | | | — |
Total real estate | | | 2,789 | | | 2,670 | | | — | | | 2,841 | | | 6 |
Agricultural | | | 134 | | | 134 | | | — | | | 186 | | | — |
Commercial and industrial | | | 466 | | | 466 | | | — | | | 550 | | | — |
| | | 3,389 | | | 3,270 | | | — | | | 3,577 | | | 6 |
Total | | $ | 9,564 | | $ | 9,432 | | $ | 818 | | $ | 10,051 | | $ | 548 |
(1) | Contractual principal balance due from customer. |
(2) | Principal balance on Company’s books, less any direct charge offs. |
(3) | Interest income is recognized on performing balances on a regular accrual basis. |
The Company to collect all principal and interest. At that point, we stop accruingrecognized $0 in interest on nonaccrual loans during the loan or lease in questionsecond quarter 2022 and reverse any previously-recognizedwould have recognized an additional $0.6 million on nonaccrual loans had those loans not been designated as nonaccrual.
21
interest25
The following table presents the amortized cost basis of collateral-dependent loans by class as of June 30, 2022:
| | | | | | |
Collateral Dependent Loans | | | | | | |
(dollars in thousands, unaudited) | | | | | | |
| | June 30, 2022 | ||||
|
| Amortized Cost | | Individual Reserves | ||
Real estate: | | | | | | |
1-4 family residential construction | | $ | — | | $ | — |
Other construction/land | | | — | | | — |
1-4 family - closed-end | | | 41 | | | — |
Equity lines | | | — | | | — |
Multi-family residential | | | — | | | — |
Commercial real estate - owner occupied | | | 204 | | | — |
Commercial real estate - non-owner occupied | | | — | | | — |
Farmland | | | 19,300 | | | — |
Total real estate | | | 19,545 | | | — |
Agricultural | | | 8,414 | | | — |
Commercial and industrial | | | 478 | | | — |
Mortgage warehouse lines | | | — | | | — |
Consumer loans | | | — | | | — |
Total loans and leases | | $ | 28,437 | | $ | — |
During the second quarter the amortized cost balance of collateral-dependent loans declined by $1.3 million due to declines resulting from upgrades and payoffs, partially offset by additional collateral dependent loans downgraded during 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 andquarter. The weighted average loan-to-value ratio of collateral dependent loans was 91% at June 30, 2022. There were 0 collateral dependent loans in the process of collection. Anforeclosure as of June 30, 2022
26
The following table presents the aging of the Company’s loan balances is presentedamortized cost basis in the following tables, by number of days past duepast-due loans, according to class, as of June 30, 2022:
| | | | | | | | | | | | | | | | | | |
Past Due Loans and Leases | | | | | | | | | | | | | | | | | | |
(dollars in thousands, unaudited) | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | ||||||||||||||||
|
| 30-59 Days Past Due |
| 60-89 Days Past Due | | Loans Past Due 90+ Days | | Total Past Due | | Loans not Past Due | | Total Loans | ||||||
Real estate: | | | | | | | | | | | | | | | | | | |
1-4 family residential construction | | $ | — | | $ | — | | $ | 632 | | $ | 632 | | $ | 4,910 | | $ | 5,542 |
Other construction/land | | | — | | | — | | | — | | | — | | | 20,757 | | | 20,757 |
1-4 family - closed-end | | | 32 | | | — | | | 8 | | | 40 | | | 430,095 | | | 430,135 |
Equity lines | | | — | | | — | | | — | | | — | | | 25,575 | | | 25,575 |
Multi-family residential | | | — | | | — | | | — | | | — | | | 66,291 | | | 66,291 |
Commercial real estate - owner occupied | | | — | | | 124 | | | — | | | 124 | | | 311,965 | | | 312,089 |
Commercial real estate - non-owner occupied | | | — | | | — | | | — | | | — | | | 895,352 | | | 895,352 |
Farmland | | | 5,129 | | | 13,932 | | | 342 | | | 19,403 | | | 82,358 | | | 101,761 |
Total real estate | | | 5,161 | | | 14,056 | | | 982 | | | 20,199 | | | 1,837,303 | | | 1,857,502 |
Agricultural | | | — | | | 7,760 | | | 597 | | | 8,357 | | | 20,400 | | | 28,757 |
Commercial and industrial | | | 174 | | | — | | | 263 | | | 437 | | | 72,389 | | | 72,826 |
Mortgage warehouse lines | | | — | | | — | | | — | | | — | | | 58,134 | | | 58,134 |
Consumer loans | | | 7 | | | 2 | | | — | | | 9 | | | 4,353 | | | 4,362 |
Total loans and leases | | $ | 5,342 | | $ | 21,818 | | $ | 1,842 | | $ | 29,002 | | $ | 1,992,579 | | $ | 2,021,581 |
The following table presents the indicated dates:aging of the recorded investment in past-due and nonaccrual loans, according to class, as of December 31, 2021:
Loan Portfolio Aging
| | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | 30-59 Days | | 60-89 Days | | 90 Days Or | | | | | | | | Total Financing | | Non-Accrual | |||||
|
| Past Due |
| Past Due |
| Due(2) |
| Total Past Due |
| Current |
| Receivables |
| Loans(1) | |||||||
Real Estate: | | | | | | | | | | | | | | | | | | | | | |
1-4 family residential construction | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 21,369 | | $ | 21,369 | | $ | — |
Other construction/land | | | — | | | — | | | — | | | — | | | 25,299 | | | 25,299 | | | — |
1-4 family - closed-end | | | 1,532 | | | 132 | | | — | | | 1,664 | | | 287,793 | | | 289,457 | | | 1,023 |
Equity lines | | | 30 | | | — | | | — | | | 30 | | | 26,558 | | | 26,588 | | | 892 |
Multi-family residential | | | — | | | — | | | — | | | — | | | 53,458 | | | 53,458 | | | — |
Commercial real estate owner occupied | | | 124 | | | — | | | 698 | | | 822 | | | 333,624 | | | 334,446 | | | 1,234 |
Commercial real estate non-owner occupied | | | — | | | — | | | — | | | — | | | 882,888 | | | 882,888 | | | — |
Farmland | | | — | | | — | | | — | | | — | | | 106,706 | | | 106,706 | | | — |
Total real estate loans | | | 1,686 | | | 132 | | | 698 | | | 2,516 | | | 1,737,695 | | | 1,740,211 | | | 3,149 |
| | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | — | | | — | | | 284 | | | 284 | | | 33,706 | | | 33,990 | | | 378 |
Commercial and industrial | | | 473 | | | — | | | 283 | | | 756 | | | 109,035 | | | 109,791 | | | 973 |
Mortgage warehouse lines | | | — | | | — | | | — | | | — | | | 101,184 | | | 101,184 | | | — |
Consumer loans | | | 6 | | | 3 | | | — | | | 9 | | | 4,541 | | | 4,550 | | | 22 |
Total gross loans and leases | | $ | 2,165 | | $ | 135 | | $ | 1,265 | | $ | 3,565 | | $ | 1,986,161 | | $ | 1,989,726 | | $ | 4,522 |
(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) | Included in Total Financing Receivables |
(2) | As of |
|
|
|
| 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 |
|
|
|
|
|
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. At SeptemberJune 30, 2017,2022, the Company had a total of $14.3$5.1 million in TDRs, including $1.6$0.3 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
27
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.
23
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,three and six months ended June 30, 2021, by type of concession:concession. For the three and six months ended June 30, 2022, there were 0 new TDRs and 0 modifications of existing TDRs
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 June 30, 2021 | ||||||||||||||||
|
| Rate Modification |
| Term |
| Interest Only |
| 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 | | | 136 | | | 0 | | | 0 | | | — | | | 136 |
Farmland | | | 0 | | | 0 | | | 0 | | | 0 | | | — | | | 0 |
Total real estate loans | | | 0 | | | 136 | | | 0 | | | 0 | | | — | | | 136 |
Agricultural | | | 0 | | | 0 | | | 0 | | | 0 | | | — | | | 0 |
Commercial and industrial | | | 0 | | | 0 | | | 0 | | | 0 | | | — | | | 0 |
Consumer loans | | | 0 | | | 0 | | | 0 | | | 0 | | | — | | | 0 |
Total | | $ | 0 | | $ | 136 | | $ | 0 | | $ | 0 | | $ | — | | $ | 136 |
| | | | | | | | | | | | | | | | | | |
| | | Six months ended June 30, 2021 | |||||||||||||||
|
| Rate Modification |
| Term |
| Interest Only Modification |
| Rate & Term Modification |
| Term & Interest Modification | | Total | ||||||
Real estate: | | | | | | | | | | | | | | | | | | |
Other construction/land | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
1-4 family - closed-end | | | — | | | — | | | — | | | — | | | — | | | — |
Equity lines | | | — | | | — | | | — | | | 83 | | | — | | | 83 |
Multi-family residential | | | — | | | — | | | — | | | — | | | — | | | — |
Commercial real estate - owner occupied | | | — | | | 136 | | | — | | | — | | | — | | | 136 |
Farmland | | | — | | | — | | | — | | | — | | | — | | | — |
Total real estate loans | | | — | | | 136 | | | — | | | 83 | | | — | | | 219 |
Agricultural | | | — | | | 118 | | | — | | | — | | | | | | 118 |
Commercial and industrial | | | — | | | 185 | | | — | | | — | | | — | | | 185 |
Consumer loans | | | — | | | 41 | | | — | | | — | | | — | | | 41 |
Total | | $ | — | | $ | 480 | | $ | — | | $ | 83 | | $ | — | | $ | 563 |
28
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 June 30, 2021 | ||||||||||||
| | | | Pre- | | Post- | | | | | | | ||
|
| Number of |
| Outstanding |
| Outstanding |
| Reserve |
| 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 | | | 137 | | | 136 | | | (1) | | | 0 |
Farmland | | 0 | | | 0 | | | 0 | | | 0 | | | 0 |
Total real estate loans | | | | | 137 | | | 136 | | | (1) | | | 0 |
| | | | | | | | | | | | | | |
Agricultural | | 0 | | | 0 | | | 0 | | | 0 | | | 0 |
Commercial and industrial | | 0 | | | 0 | | | 0 | | | 0 | | | 0 |
Consumer loans | | 0 | | | 0 | | | 0 | | | 0 | | | 0 |
Total | | | | $ | 137 | | $ | 136 | | $ | ($1) | | $ | 0 |
(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 |
| | | | | | | | | | | | | | |
| | Six months ended June 30, 2021 | ||||||||||||
| | | | Pre- | | Post- | | | | | | | ||
|
| Number of |
| Outstanding |
| Outstanding |
| Reserve |
| Reserve | ||||
Real estate: | | | | | | | | | | | | | | |
Other construction/land | | 0 | | $ | — | | $ | — | | $ | — | | $ | — |
1-4 family - closed-end | | 0 | | | — | | | — | | | — | | | — |
Equity lines | | 1 | | | 83 | | | 83 | | | — | | | 1 |
Multi-family residential | | 0 | | | — | | | — | | | — | | | — |
Commercial real estate - owner occupied | | 1 | | | 137 | | | 136 | | | (1) | | | — |
Farmland | | 0 | | | — | | | — | | | — | | | — |
Total real estate loans | | | | | 220 | | | 219 | | | (1) | | | 1 |
| | | | | | | | | | | | | | |
Agricultural | | 1 | | | 118 | | | 118 | | | 116 | | | — |
Commercial and industrial | | 1 | | | 185 | | | 185 | | | (1) | | | 48 |
Consumer loans | | 1 | | | 41 | | | 41 | | | — | | | — |
Total | | | | $ | 564 | | $ | 563 | | $ | 114 | | $ | 49 |
|
| 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 |
26
(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 |
|
|
|
|
| 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 |
|
|
|
The companyCompany had no0 finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during the three-three or nine-monthsix-month periods ended Septemberending June 30, 20172022 and 2016, respectively.
27
Purchased Credit Impaired Loans2021.
The Company monitors the credit quality of loans on a continuous basis using the regulatory and accounting classifications of pass, special mention and substandard to characterize and qualify the associated credit risk. Loans classified as “loss” are immediately charged-off. The Company uses the following definitions of risk classifications:
29
Pass – Loans listed as pass include larger non-homogeneous loans not meeting the risk rating definitions below and smaller, homogeneous loans not assessed on an individual basis.
Special Mention – Loans classified as special mention have the potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may acquireresult in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard – Loans classified as substandard are those loans with clear and well-defined weaknesses such as a highly leveraged position, unfavorable financial operating results and/or trends, or uncertain repayment sources or poor financial condition, which show evidencemay jeopardize ultimate recoverability of the debt.
30
The following tables present the amortized cost of loans and leases by credit deterioration since origination. Thesequality classification in addition to loan and lease vintage as of June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
Loan and Lease Credit Quality by Vintage | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands, unaudited) | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans and Loans Amortized Cost Basis by Origination Year | | | | | | | ||||||||||||||||
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving Loans Amortized Cost | | Total Loans | ||||||||
1-4 family construction | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 4,910 | | $ | 4,910 |
Special Mention | | | — | | | — | | | — | | | — | | | — | | | — | | | 632 | | | 632 |
Substandard | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Subtotal | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,542 | | | 5,542 |
Other construction/land | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | — | | $ | 3,591 | | $ | 4,343 | | $ | 777 | | $ | 1,054 | | $ | 1,116 | | $ | 9,802 | | | 20,683 |
Special Mention | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Substandard | | | — | | | — | | | 74 | | | — | | | — | | | — | | | — | | | 74 |
Subtotal | | | — | | | 3,591 | | | 4,417 | | | 777 | | | 1,054 | | | 1,116 | | | 9,802 | | | 20,757 |
1-4 family - closed-end | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 110,397 | | $ | 243,625 | | $ | 8,058 | | $ | 2,094 | | $ | 11,042 | | $ | 50,354 | | $ | — | | | 425,570 |
Special Mention | | | 264 | | | — | | | — | | | — | | | 1,022 | | | 2,095 | | | — | | | 3,381 |
Substandard | | | — | | | — | | | — | | | — | | | 32 | | | 1,152 | | | — | | | 1,184 |
Subtotal | | | 110,661 | | | 243,625 | | | 8,058 | | | 2,094 | | | 12,096 | | | 53,601 | | | — | | | 430,135 |
Equity lines | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 2,355 | | $ | 171 | | $ | 551 | | $ | 361 | | $ | 79 | | $ | — | | $ | 20,691 | | | 24,208 |
Special Mention | | | — | | | — | | | 20 | | | — | | | — | | | — | | | 790 | | | 810 |
Substandard | | | — | | | 118 | | | — | | | — | | | — | | | — | | | 439 | | | 557 |
Subtotal | | | 2,355 | | | 289 | | | 571 | | | 361 | | | 79 | | | — | | | 21,920 | | | 25,575 |
Multi-family residential | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 19,320 | | $ | 522 | | $ | 9,504 | | $ | 668 | | $ | 13,159 | | $ | 12,757 | | $ | 4,720 | | | 60,650 |
Special Mention | | | — | | | — | | | 2,240 | | | — | | | — | | | 3,401 | | | — | | | 5,641 |
Substandard | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Subtotal | | | 19,320 | | | 522 | | | 11,744 | | | 668 | | | 13,159 | | | 16,158 | | | 4,720 | | | 66,291 |
Commercial real estate - OO | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 9,855 | | $ | 26,311 | | $ | 63,756 | | $ | 38,080 | | $ | 39,071 | | $ | 118,601 | | $ | 7,346 | | | 303,020 |
Special Mention | | | — | | | — | | | — | | | 2,403 | | | — | | | 2,107 | | | — | | | 4,510 |
Substandard | | | 326 | | | — | | | — | | | — | | | 80 | | | 3,393 | | | 760 | | | 4,559 |
Subtotal | | | 10,181 | | | 26,311 | | | 63,756 | | | 40,483 | | | 39,151 | | | 124,101 | | | 8,106 | | | 312,089 |
Commercial real estate - NOO | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 51,922 | | $ | 19,710 | | $ | 451,234 | | $ | 26,810 | | $ | 56,883 | | $ | 165,217 | | $ | 62,955 | | | 834,731 |
Special Mention | | | — | | | — | | $ | 33,613 | | | — | | | 7,266 | | | 3,121 | | | 12,671 | | | 56,671 |
Substandard | | | — | | | — | | $ | — | | | — | | | 852 | | | 3,098 | | | — | | | 3,950 |
Subtotal | | | 51,922 | | | 19,710 | | | 484,847 | | | 26,810 | | | 65,001 | | | 171,436 | | | 75,626 | | | 895,352 |
Farmland | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | — | | $ | 1,377 | | $ | 5,008 | | $ | 1,978 | | $ | 8,202 | | $ | 25,700 | | $ | 27,588 | | | 69,853 |
Special Mention | | | — | | | — | | | — | | | — | | | 7,116 | | | 4,385 | | | 1,004 | | | 12,505 |
Substandard | | | — | | | — | | | — | | | — | | | 4,722 | | | 14,133 | | | 548 | | | 19,403 |
Subtotal | | | — | | | 1,377 | | | 5,008 | | | 1,978 | | | 20,040 | | | 44,218 | | | 29,140 | | | 101,761 |
Agricultural | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 549 | | $ | 1,684 | | $ | 475 | | $ | 30 | | $ | 1,092 | | $ | 6,882 | | $ | 9,329 | | | 20,041 |
Special Mention | | | — | | | — | | | — | | | — | | | — | | | — | | | 272 | | | 272 |
Substandard | | | — | | | 7,847 | | | — | | | — | | | — | | | — | | | 597 | | | 8,444 |
Subtotal | | | 549 | | | 9,531 | | | 475 | | | 30 | | | 1,092 | | | 6,882 | | | 10,198 | | | 28,757 |
Commercial and industrial | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 1,272 | | $ | 11,449 | | $ | 8,021 | | $ | 6,977 | | $ | 5,682 | | $ | 10,004 | | $ | 19,576 | | | 62,981 |
Special Mention | | | — | | | 312 | | | 3,186 | | | 50 | | | — | | | 1,553 | | | 3,772 | | | 8,873 |
Substandard | | | — | | | — | | | 44 | | | 143 | | | 93 | | | 643 | | | 49 | | | 972 |
Subtotal | | | 1,272 | | | 11,761 | | | 11,251 | | | 7,170 | | | 5,775 | | | 12,200 | | | 23,397 | | | 72,826 |
Mortgage warehouse lines | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 58,134 | | | 58,134 |
Subtotal | | | — | | | — | | | — | | | — | | | — | | | — | | | 58,134 | | | 58,134 |
Consumer loans | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 953 | | $ | 275 | | $ | 173 | | $ | 299 | | $ | 19 | | $ | 429 | | $ | 2,163 | | | 4,311 |
Special Mention | | | — | | | — | | | 40 | | $ | — | | | — | | | — | | | 7 | | | 47 |
Substandard | | | 2 | | | — | | | — | | $ | — | | | — | | | 2 | | | — | | | 4 |
Subtotal | | | 955 | | | 275 | | | 213 | | | 299 | | | 19 | | | 431 | | | 2,170 | | | 4,362 |
Total | | $ | 197,215 | | $ | 316,992 | | $ | 590,340 | | $ | 80,670 | | $ | 157,466 | | $ | 430,143 | | $ | 248,755 | | $ | 2,021,581 |
31
The following table presents the Company’s loan portfolio on the recorded investment basis, according to loan class and credit grade as of December 31, 2021:
| | | | | | | | | | | | | | | |
|
| Pass |
| Special |
| Substandard |
| Impaired |
| Total | |||||
Real estate: | | | | | | | | | | | | | | | |
1-4 family residential construction | | $ | 19,669 | | $ | 1,700 | | $ | — | | $ | — | | $ | 21,369 |
Other construction/land | | | 24,958 | | | — | | | — | | | 341 | | | 25,299 |
1-4 family - closed-end | | | 282,717 | | | 4,703 | | | 201 | | | 1,836 | | | 289,457 |
Equity lines | | | 23,277 | | | 615 | | | 55 | | | 2,641 | | | 26,588 |
Multi-family residential | | | 49,986 | | | 3,472 | | | — | | | — | | | 53,458 |
Commercial real estate owner occupied | | | 321,996 | | | 6,108 | | | 3,860 | | | 2,482 | | | 334,446 |
Commercial real estate non-owner occupied | | | 841,728 | | | 26,364 | | | 14,429 | | | 367 | | | 882,888 |
Farmland | | | 92,479 | | | 10,266 | | | 3,961 | | | — | | | 106,706 |
Total real estate | | | 1,656,810 | | | 53,228 | | | 22,506 | | | 7,667 | | | 1,740,211 |
Agricultural | | | 32,513 | | | — | | | 1,099 | | | 378 | | | 33,990 |
Commercial and industrial | | | 98,367 | | | 9,989 | | | 212 | | | 1,223 | | | 109,791 |
Mortgage warehouse lines | | | 101,184 | | | — | | | — | | | — | | | 101,184 |
Consumer loans | | | 4,349 | | | 31 | | | 6 | | | 164 | | | 4,550 |
Total gross loans and leases | | $ | 1,893,223 | | $ | 63,248 | | $ | 23,823 | | $ | 9,432 | | $ | 1,989,726 |
CECL replaces the legacy accounting for loans designated as purchased credit impaired (“PCI”) with loans designated as purchased credit deteriorated (“PCD”). PCD loans are recorded at the amount paid, since there is no carryoverloans acquired or purchased, which as 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) 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 acquisitions 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 shownhad evidence of more than insignificant 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 principalorigination. Due to the immaterial balance of those PCI loans was as follows, as ofin 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 allowance for loan losses totaling $130,000 was allocated forCompany’s PCI loans as of September 30, 2017, as compared to $58,000 at December 31, 2016. We also recorded approximately $6,0002021 management elected not to transition these loans into the PCD designation. As of June 30, 2022 the Company had 0 loans categorized as PCD.
As noted in discount accretionfootnote 3, on PCI loans duringJanuary 1, 2022 the nine months ended September 30, 2017.
Note 12 – Allowance for LoanCompany implemented CECL 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 ofincreased our ACL, previously the allowance for loan and lease losses, with a $9.5 million cumulative adjustment. The Company’s ACL is calculated quarterly, with any difference in the calculated ACL and adjusting itthe recorded ACL trued-up through an entry 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 statusprovision for credit losses. Management calculates the quantitative portion of the borrower and, if applicable, the characteristics and condition of collateral and any associated liquidation plan. A specific loss allowance is createdcollectively evaluated reserves for each impairedall 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,categories, with the associated allowance disclosed for those that required such. Included in the valuation allowance for impairedexception of Farmland, Agricultural Production and Consumer loans, shown in the tables below are specific reserves allocated to TDRs, totaling $886,000 at September 30, 2017 and $1.048 million at December 31, 2016.
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 |
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
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 byusing a discounted cash flow analysis. (“DCF”) methodology. For purposes of calculating the quantitative portion of collectively evaluated reserves on Farmland, Agricultural Production, and Consumer categories a Remaining Life methodology is utilized. For purposes of estimating the Company’s ACL, Management generally evaluates collectively evaluated loans by Federal Call code in order to group loans with similar risk characteristics together, however management has grouped loans in selected call codes together in determining portfolio segments, due to similar risk characteristics and reserve methodologies used for certain call code classifications.
The discountedDCF quantitative reserve methodology incorporates the consideration of probability of default (“PD”) and loss given default (“LGD”) estimates to estimate periodic losses. The PD estimates are derived through the application of reasonable and supportable economic forecasts to call code specific regression models, derived from the consideration of historical bank-specific and peer loss-rate data. The loss rate data has been regressed against benchmark economic indicators, for which reasonable and supportable forecasts exist, in the development of the call-code specific regression models. Regression models are generally refreshed on an annual basis, in order to pull in more recent loss rate data. Reasonable and supportable forecasts of the selected economic metric are then input into the regression model to calculate an expected default rate. The expected default rates are then applied to expected monthly loan balances estimated through the consideration of contractual repayment terms and expected prepayments. The Company utilizes a four-quarter forecast period, after which the expected default rates revert to the historical average for each call code, over a four-quarter reversion period, on a straight-line basis. The prepayment assumptions applied to expected cash flow approachover the contractual life of the loans are estimated based on historical, bank-specific experience, peer data and current conditions and circumstances including the level of interest rates. The prepayment assumptions may be updated by
32
Management in the event that changing conditions impact Management’s estimate or additional historical data gathered has resulted in the need for a reevaluation. LGD utilized in the DCF is typically usedderived from the application of the Frye-Jacobs theory which relates LGD to measure impairmentPD based on historical peer data, as calculated by a third-party. Economic forecasts are considered over a four-quarter forecast period, with reversion to mean occurring on a straight-line basis over four quarters. The call code regression models utilized upon implementation of CECL on January 1, 2022, and as of June 30, 2022, were identical, and relied upon reasonable and supportable forecasts of the National Unemployment Rate. Management selected the National Unemployment Rate as the driver of quantitative portion of collectively reserves on loan classes reliant upon the DCF methodology, primarily as a result of high correlation coefficients identified in regression modeling, the availability of forecasts including the quarterly FOMC forecast, and given the widespread familiarity of stakeholders with this economic metric.
The quantitative reserves for Farmland, Agricultural Production and Consumer 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,are calculated using a Remaining Life methodology where average historical bank specific and peer loss rates are applied to expected loan balances over an estimated remaining life of loans in calculation of the quantitative portion of collectively evaluated loans in these classes. The estimated remaining life is calculated using historical bank-specific loan attrition data. For the Farmland, Agricultural Production and Consumer classes of loans, reasonable and supportable forecasts of the National Unemployment rate, real GDP and the housing price index are considered through estimation of qualitative reserves.
Management recognizes that there are additional factors impacting risk of loss in the loan portfolio beyond what is captured in the quantitative portion of reserves on collectively evaluated loans. As current and expected conditions, may vary compared with conditions over the historical lookback period, which is utilized in the calculation of quantitative reserves, management considers whether additional or reduced reserve levels on collectively evaluated loans may be usedwarranted given the consideration of a variety of qualitative factors. Several of the following qualitative factors (“Q-factors”) considered by management reflect the legacy regulatory guidance on Q-factors, whereas several others represent factors unique to the Company or unique to the current time period.
● | Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices |
● | Changes in international, regional and local economic and business conditions, and developments that affect the collectability of the portfolio, as reflected in forecasts of the Housing Price Index, Real GDP and the National Unemployment Rate (Farmland & Agricultural Production and Consumer segments only) |
● | Changes in the nature and volume of the loan portfolio |
● | Changes in the experience, ability, and depth of lending management and other relevant staff |
● | Changes in the volume and severity of past due, non-accruals loans, and adversely classified loans, as reflected in changes of the relative level of loans classified as substandard and special mention |
● | Changes in the quality of the Bank’s loan review processes |
● | Changes in the value of underlying collateral for loans not identified as collateral dependent |
● | Changes in loan categorization concentrations |
● | Other external factors, which include, the influence of peer data on estimated quantitative reserves, residual COVID-19 related risk, expected impact of current and expected inflationary environment, reliance on the National Unemployment rate as opposed to the California unemployment rate in the calculation of quantitative reserves, the expected impact of current and expected geo-political conditions |
The qualitative portion of the Company’s reserves on collectively evaluated loans are calculated using a combination of numeric frameworks and management judgement, to determine a specific loss allowance if they indicate a higher potential reserve need than the discounted cash flow analysis. Any changerisk categorizations 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 operationeach of the underlying collateral, impairmentQ-factors presented above. The amount of qualitative reserves is measured usingalso contingent upon the fair valuehistorical peer, life-of-loan-equivalent, loss rate ranges and the relative weighting of Q-factors according to management’s judgement.
Although collectively evaluated reserves are generally calculated separately at the collateral. Ifcall code or loan class level, management has grouped loan classes with similar risk characteristics into the collateral value, netfollowing portfolio segments: 1-4 Family Real Estate, Commercial Real Estate, Farmland & Agricultural Production, Commercial & Industrial, Mortgage Warehouse and Consumer loans. Loans secured by 1-4 family residences have a different profile from loans secured by Commercial Real Estate. Generally, the borrowers for 1-4 Family loans are consumers whereas borrowers for
33
Commercial Real Estate are often businesses. The COVID-19 pandemic illustrated how these different categories of 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 althoughwere subject to different risks, which was exacerbated by the widespread work-from-home model adopted by many companies during and since the pandemic. Farmland and Agricultural Production loans are included in a single segment as these loans are often times to the same borrowers, facing the same risks relating to commodity prices, water supply and drought conditions in addition to other environmental concerns. Commercial & Industrial loans are separated into a unique segment given the uniqueness of these loans, which are often revolving and secured by other business assets as opposed to real estate. Mortgage warehouse loans are also unique in the Company’s licensed staff appraisers may update older appraisals based on current market conditionsportfolio and property value trends. Untilwarrant separate presentation as an updated appraisal is received,individual portfolio segment, given the specific nature of these constantly revolving lines to mortgage originators and also attributable to a very limited loss history, even after consideration of peer data. Finally, the Company uses the existing appraisal to determine the amountsplits out Consumer loans as a separate segment as a result of the specificsmall balance, homogeneous terms that characterize these loans.
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-dependentManagement individually evaluates loans that remain impaired. Current appraisals were available or in process for alldo not share risk characteristics with other loans when estimating reserves. As of June 30, 2022, the Company’s impaired real estate loan balances at September 30, 2017. Furthermore, the Company analyzes collateral-dependentonly loans on at least a quarterly basis,that Management considered to determine if any portion of the recorded investment in suchhave different risk characteristics from other 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 onsharing the same segmentation of loan types presentedFederal Call Report code were loans designated nonaccrual.
The following table presents the activity 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 leasecredit 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,by portfolio segment for the quarter ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | |
Allowance for Credit Losses and Recorded Investment in Financing Receivables | | | | ||||||||||||||||||
(dollars in thousands, unaudited) | | | | | | | | | | | | | | | | | | | | | |
|
| 1-4 Family Real Estate | | Commercial Real Estate |
| Farmland & Agricultural Production |
| Commercial & Industrial | | Mortgage Warehouse |
| Consumer |
| Total | |||||||
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2022 | | $ | 3,329 | | $ | 17,043 | | $ | 606 | | $ | 1,231 | | $ | 51 | | $ | 270 | | $ | 22,530 |
Charge-offs | | | — | | | (1,911) | | | (213) | | | (86) | | | — | | | (313) | | | (2,523) |
Recoveries | | | 12 | | | — | | | — | | | 62 | | | — | | | 173 | | | 247 |
Provision for credit losses | | | 252 | | | 2,187 | | | (17) | | | (74) | | | (10) | | | 210 | | | 2,548 |
Ending allowance balance: | | $ | 3,593 | | $ | 17,319 | | $ | 376 | | $ | 1,133 | | $ | 41 | | $ | 340 | | $ | 22,802 |
The $0.3 million increase 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 ofCompany’s loan portfolio growth, and changesACL in legal or regulatory requirements are additional factors that are considered. The total general reserve established for probable incurred losses on unimpaired loans was $7.738the second quarter 2022 from $22.5 million at SeptemberMarch 31, 2022 to $22.8 million at June 30, 2017.2022, is primarily a reflection of growth in loan balances recognized in the second quarter 2022.
There were no material changes toThe following table presents the methodology used to determine our allowance for loan and lease losses during the three months ended September 30, 2017, althoughactivity in recognition of relatively low loan loss rates in recent periods upward adjustments have been made to certain qualitative factor multipliers. As we add new products and expand our geographic coverage, and as the economic environment changes, we expect to enhance our methodology to keep pace with the size and complexity of the 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 credit losses by portfolio segment for the six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | |
Allowance for Credit Losses and Recorded Investment in Financing Receivables | | | | ||||||||||||||||||
(dollars in thousands, unaudited) | | | | | | | | | | | | | | | | | | | | | |
|
| 1-4 Family Real Estate | | Commercial Real Estate |
| Farmland & Agricultural Production |
| Commercial & Industrial | | Mortgage Warehouse |
| Consumer |
| Total | |||||||
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2021 | | $ | 1,909 | | $ | 9,052 | | $ | 1,202 | | $ | 1,060 | | $ | 512 | | $ | 521 | | $ | 14,256 |
Impact of adopting ASC 326 | | | 611 | | | 9,628 | | | (480) | | | 358 | | | (421) | | | (242) | | | 9,454 |
Charge-offs | | | — | | | (1,911) | | | (2,171) | | | (160) | | | — | | | (612) | | | (4,854) |
Recoveries | | | 99 | | | 260 | | | — | | | 82 | | | — | | | 357 | | | 798 |
Provision for credit losses | | | 974 | | | 290 | | | 1,825 | | | (207) | | | (50) | | | 316 | | | 3,148 |
Ending allowance balance: | | $ | 3,593 | | $ | 17,319 | | $ | 376 | | $ | 1,133 | | $ | 41 | | $ | 340 | | $ | 22,802 |
34
The $0.9 million decline in the Company’s loan portfolio ACL between the $23.7 million ACL recognized upon implementation of CECL on January 1, 2022 and lease lossesthe $22.8 million as an integral part of June 30, 2022, reflects a narrowing of the gap between the California unemployment rate and the National Unemployment rate during the first six months of 2022, compared with December 31, 2021. The $2.2 million in charge-offs recognized in the Farmland and Agricultural Production portfolio segment is primarily the result of a reduction in the expected valuation of collateral on a single loan relationship, recorded in the first quarter 2022. The $1.9 million charge-off in Commercial Real Estate was recognized during the second quarter, when Management became aware of a borrower’s reduced ability to service their audit and examination processes. Management believes thatloan primarily as a result of increased vacancy rates related to the current methodology is appropriate given our size and level of complexity.remote work which has increased following the pandemic.
31
The tables that follow detailfollowing table presents the activity in the allowance for loan and lease losses by portfolio segment for the periods noted:three and six months ended June 30, 2021:
| | | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, 2021 | |||||||||||||||
| | | Real Estate | | | Agricultural | | | Commercial and | | | Consumer | | | Unallocated | | | Total |
| | | | | | | | | | | | | | | | | | |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 12,806 | | $ | 672 | | $ | 4,205 | | $ | 593 | | $ | 43 | | $ | 18,319 |
Charge-offs | | | (11) | | | (50) | | | (25) | | | (169) | | | — | | | (255) |
Recoveries | | | 195 | | | — | | | 82 | | | 180 | | | — | | | 457 |
(Benefit) provision | | | (915) | | | (98) | | | (1,190) | | | 86 | | | 17 | | | (2,100) |
Ending balance | | $ | 12,075 | | $ | 524 | | $ | 3,072 | | $ | 690 | | $ | 60 | | $ | 16,421 |
| | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2021 | ||||||||||||||||
|
| Real Estate |
| Agricultural |
| Commercial and |
| Consumer |
| Unallocated |
| Total | ||||||
Allowance for credit losses: | | | | | | | | | | | | | | | | | | |
Beginning balance |
| $ | 11,766 |
| $ | 482 |
| $ | 4,721 |
| $ | 720 |
| $ | 49 |
| $ | 17,738 |
Charge-offs | | | (245) | | | (50) | | | (77) | | | (331) | | | — | | | (703) |
Recoveries | | | 648 | | | — | | | 192 | | | 396 | | | — | | | 1,236 |
(Benefit) provision | | | (94) | | | 92 | | | (1,764) | | | (95) | | | 11 | | | (1,850) |
Ending balance | | $ | 12,075 | | $ | 524 | | $ | 3,072 | | $ | 690 | | $ | 60 | | $ | 16,421 |
Reserves: | | | | | | | | | | | | | | | | | | |
Specific | | $ | 641 | | $ | 246 | | $ | 381 | | $ | 16 | | $ | — | | $ | 1,284 |
General | | | 11,434 | | | 278 | | | 2,691 | | | 674 | | | 60 | | | 15,137 |
Ending balance | | $ | 12,075 | | $ | 524 | | $ | 3,072 | | $ | 690 | | $ | 60 | | $ | 16,421 |
Loans evaluated for impairment: | | | | | | | | | | | | | | | | | | |
Individually | | $ | 15,677 | | $ | 517 | | $ | 1,649 | | $ | 207 | | $ | — | | $ | 18,050 |
Collectively | | | 1,780,290 | | | 42,435 | | | 299,334 | | | 4,687 | | | — | | | 2,126,746 |
Ending balance | | $ | 1,795,967 | | $ | 42,952 | | $ | 300,983 | | $ | 4,894 | | $ | — | | $ | 2,144,796 |
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 |
|
Note 11 – Long-Term Debt
Long-Term Debt
(dollars in thousands, unaudited)
| | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 | ||||||||
| | | | Unamortized | | | | Unamortized | ||||
| | | | Debt Issuance | | | | Debt Issuance | ||||
|
| Principal |
| Costs |
| Principal |
| Costs | ||||
Fixed - floating rate subordinated debentures, due 2031 (1) |
| $ | 50,000 |
| $ | (827) |
| $ | 50,000 |
| $ | (859) |
Total long-term debt | | $ | 50,000 | | $ | (827) | | $ | 50,000 | | $ | (859) |
(1) | 3.25% fixed rate for five years, then floating rate beginning October 1, 2026 at 253.5 basis points over 3-month term SOFR adjusted quarterly. |
35
Note 1312 – 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, and the transaction was completed on October 1, 2017. Immediately following the acquisition, Ojai Community Bank was merged with and into BankGAAP.
All of the Sierra. Ojai Community Bank had its head officeCompany’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 sources of noninterest income for the three and six-month periods ended June 30, 2022 and 2021. Items outside the scope of ASC 606 are noted as such (dollars in Ojai,thousands, unaudited).
| | | | | | | | | | | | |
| | For the three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Noninterest income | | | | | | | | | | | | |
Service charges on deposits | | | | | | | | | | | | |
Returned item and overdraft fees |
| $ | 1,372 |
| $ | 1,148 |
| $ | 2,700 |
| $ | 2,254 |
Other service charges on deposits | | | 1,832 | | | 1,577 | | | 3,545 | | | 3,237 |
Debit card interchange income | | | 2,161 | | | 2,235 | | | 4,218 | | | 4,128 |
Loss on limited partnerships(1) | | | (113) | | | (114) | | | (225) | | | (247) |
Dividends on equity investments(1) | | | 183 | | | 164 | | | 429 | | | 357 |
Unrealized gains recognized on equity investments(1) | | | — | | | — | | | (332) | | | 857 |
Net gains on sale of securities(1) | | | — | | | — | | | 1,032 | | | — |
Other(1) | | | 5,004 | | | 1,602 | | | 5,135 | | | 2,856 |
Total noninterest income | | $ | 10,439 | | $ | 6,612 | | $ | 16,502 | | $ | 13,442 |
| | | | | | | | | | | | |
Noninterest expense | | | | | | | | | | | | |
Salaries and employee benefits (1) | | $ | 11,745 | | $ | 10,425 | | $ | 23,550 | | $ | 21,576 |
Occupancy expense (1) | | | 2,406 | | | 2,626 | | | 4,699 | | | 5,112 |
(Gain) loss on sale of OREO | | | — | | | (101) | | | (5) | | | (116) |
Other (1) | | | 7,962 | | | 7,285 | | | 14,042 | | | 13,934 |
Total noninterest expense | | $ | 22,113 | | $ | 20,235 | | $ | 42,286 | | $ | 40,506 |
Percentage of noninterest income not within scope of ASC 606. | | | 48.61% | | | 24.98% | | | 36.60% | | | 28.44% |
(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.
36
34
PART I - FINANCIAL INFORMATION
ITEM 2
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q10-Q includes forward-looking statements that involve inherent risks and uncertainties. These forward-looking statements are within the meaning of Section 27A of the Securities Act of 1933 (“1933 Act”), as amended and Section 21E of the Securities Exchange Act of 1934 (“1934 Act”), as amended. Those sections of the 1933 Act and 1934 Act provide a “safe harbor” for forward-looking statements in order to encourage companies to provide prospective information about their financial performance as long as important factors that could cause actual results to differ significantly from projected results are identified with meaningful cautionary statements. Words such as “expects”, “anticipates”, “believes”, “projects”, “intends”, and “estimates” or variations of such words and similar expressions, as well as future or conditional verbs preceded by “will”, “would”, “should”, “could” or “may” are intended to identify forward-looking statements. These forward-looking 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.
These statements are based on management’s current expectations regarding economic, legislative, regulatory and other environmental issues that may affect our earnings in future periods. 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, to:
● | the risk of unfavorable economic conditions in the Company’s market areas; |
● | risks associated with fluctuations in interest rates; |
● | risks associated with the current national emergency with respect to COVID-19 and its variants, including the impact that national, state, and local responses, including limitations on business and personal activity as well as any stimulus or relief efforts have on customers’ continued ability to repay loans; |
● | risks associated with inflation (including efforts by the Board of Governors of the Federal Reserve to control the same); |
● | liquidity risks, including the ability to effectively manage the additional liquidity from the significant increase in deposits during the COVID-19 pandemic including managing the potential loss of a portion of such deposits; |
● | 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 diversify and grow its loan portfolio; |
● | 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; |
37
● | the outcome of any existing or future legal action for which the Company or Bank is a defendant; |
● | the success of acquisitions or branch expansions, closures or consolidations; and |
● | risks associated with the multitude of or changes to current and prospective laws and regulations, and related interpretations, 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 discloseddetailed in the Company’s Form 10-K for the fiscal year ended December 31, 2016.2021 and in Item 1A, herein. We do not update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.
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 12 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 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 exists, as discussed in the “Other Assets” section of this discussion and analysis.
● | the establishment of the allowance for credit losses, as explained in detail in Note 10 to the consolidated financial statements and in the “Provision for Credit Losses” and “Allowance for Credit Losses” sections of this discussion and analysis; |
● | the valuation of individually evaluated loans and foreclosed assets, as discussed in Notes 8 and 10 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 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
ThirdSecond Quarter 20172022 compared to ThirdSecond Quarter 20162021
NetSecond quarter 2022 net income for the quarter ended September 30, 2017 was $5.742 million, representing an increase of $1.813$9.2 million, or 46%, relative to net income of $3.929 million for the quarter ended September 30, 2016. Basic and$0.61 per diluted earnings per share, for the third quarter of
35
2017 were both $0.41, compared to $0.28 basic and$11.7 million, or $0.76 per diluted earnings per share forin the thirdsecond quarter of 2016.2021. The Company’s annualized return on average equity was 10.45%11.68% and annualized return on average assets was 1.10%1.07% for the quarter ended SeptemberJune 30, 2017,2022, compared to 7.50%13.29% and 0.81%1.42%, respectively, for the same quarter ended September 30, 2016.in 2021. The primary drivers behind the variance in thirdsecond quarter net income are as follows:
● | Net interest income decreased $0.6 million, or 2%, due primarily to a $0.4 million increase in interest expense from the issuance of subordinated debt during the third quarter of 2021 and higher cost of funds on interest-bearing liabilities due to the recent increases in the prime interest rate. |
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.38
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 quarterTable 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.Contents
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.
● | The provision for credit losses on loans and leases was $2.5 million under the new current expected credit losses (“CECL”) methodology, as compared to a $2.1 million benefit under the incurred loss model in the same quarter of 2021, for a net increase of $4.6 million. This is driven primarily from the replacement of allowance due to $4.1 million in net loan charge offs during the second quarter of 2022. |
● | Noninterest income increased $3.8 million, primarily due to a $3.2 million gain on sale of other assets, $0.4 million in life insurance proceeds, a $0.2 million recovery on an acquired loan, and a $1.0 million recovery of prior year legal expenses, partially offset by a $1.4 million negative variance in Corporate Owned Life Insurance with income linked to the Company’s nonqualified deferred compensation plan. |
● | Total noninterest expense increased $1.9 million, or 9%, in the second quarter of 2022 as compared to the second quarter of 2021. Higher salaries and benefits costs accounted for $1.3 million of the increase as we added new lending teams, and $0.8 million of the increase was due to higher other expenses, mostly for the accrual of restitution payments to customers charged nonsufficient fund fees for representments in the past five years and $0.3 million in postage and mailing costs associated with new disclosure agreements which detail updated service charges on returned items and overdraft fees. |
First Nine Months of 2017Half 2022 compared to First Nine Months of 2016Half 2021
Net income for the first nine monthshalf of 20172022 was $15.496 million, representing an increase of $3.446$16.6 million, or 29%, relative$1.10 per diluted share, compared to net income of $12.050$22.8 million, for the first nine months of 2016. Basic andor $1.48 per 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.same period in 2021. The Company’s annualized return on average equity was 9.70%10.10% and annualized return on average assets was 1.02%0.98% for the ninesix months ended SeptemberJune 30, 2017,2022, compared to a return on equity of 8.08%13.11% and return on assets of 0.89%1.41% for the ninesix months ended SeptemberJune 30, 2016.2021. The primary drivers behind the variance in year-to-date net income are as follows:
● | The provision for credit losses on loans and leases was $3.1 million, an increase of $5.0 million, due to a change from the incurred loss method to the current expected credit loss method, coupled with higher charge-offs in 2022 on two loan relationships. |
● | Net interest income decreased by $4.4 million, or 8%, due mostly to the change in mix of interest earning assets with average loan balances increasing and investments increasing. In addition, the cost of interest-bearing liabilities was higher due to increases in index rates on certain floating rate liabilities. |
● | Noninterest income increased $3.1 million, or 23%, for the same reasons as noted above in the quarterly comparison, combined with a $1.0 million gain on the sale of investment securities, and a $2.6 million negative variance in BOLI income tied to our nonqualified deferred compensation plan. |
● | Noninterest expense increased $1.8 million, or 4% for the same reasons as outlined in the quarterly comparison above. |
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
SeptemberFINANCIAL CONDITION SUMMARY
June 30, 20172022 relative to December 31, 20162021
The Company’s assets totaled $2.078$3.4 billion at SeptemberJune 30, 2017, relative to $2.033 billion at2022 unchanged from 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, 2016.2021. The following provides a summary of key balance sheet changes during the first ninesix months of 2017:2022:
● | The Company’s balance of cash and cash equivalents declined by $95.7 million, or 37% from December 31, 2021. The overall increase in cash balances was due primarily to increases in investment securities and loans and leases during the first half 2022. |
● | Investment securities were $1.0 billion at June 30, 2022, an increase of $52.3 million, or 5% from December 31, 2021. The Company purchased $158.2 million in various government agency sponsored mortgage-backed securities, agency securities, municipal securities, corporate bonds and collateralized mortgage obligations. On April 1, 2022, the Company transferred $162.1 million of “available-for-sale” investment securities to “held-to-maturity”. The securities were transferred at fair market value on the date of transfer. The transfer was initiated to partially insulate other comprehensive income and equity from changes in interest rates. This transfer had no |
39
Cash balances were down $66Table of Contents
impact on net income, and future price changes on these securities due to changes in interest rates will not affect capital. |
● | Gross loans increased $32.9 million due predominantly to the purchase of high quality jumbo single family mortgage loan pool purchases. This increase was offset by reductions in almost all loan categories as loan maturities and payoffs exceeded the increases in loan production for the first six months of 2022. |
● | Deposits increased by $69.4 million, or 2%. The growth in deposits came primarily from noninterest-bearing or low-cost transaction and savings accounts, while higher-cost time deposits increased $5.9 million. |
Total shareholders’ equity of $299.0 million at June 30, 2022 reflects a decrease of $63.4 million, or 55%18%, including a $27 million reduction in non-earning balances.
Investment securities were up $53 million, or 10%,due in partrelative 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 payoff of sizeable agricultural and commercial loans, and a drop of $44 million in mortgage warehouse loans.
36
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.
Junior subordinated debentures increased slightly from accretion of 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.
Total capital reflects an increase of $13 million, or 6%,year-end 2021, due to the addition of $16.6 million in net income, offset by a $61.6 million unfavorable swing in accumulated other comprehensive income/loss due principally to changes in investment securities’ fair value, a one-time adjustment from the impactimplementation of CECL on January 1, 2022 for $7.3 million, $4.9 million in share repurchases and net of $7.0 million in dividends paid. The remaining difference is related to stock options exercised and restricted stock compensation recognized during the quarter.
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 $2 million absolute increase in accumulatedpublic 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 many actions impacting the Company. These actions included, among other comprehensive income, netthings, the Federal Open Market Committee (FOMC) reducing the federal funds rate; California issuing a state-wide shelter-in-place order and various other orders at the state and local levels restricting business operations, closing schools, and thereafter prescribing requirements for reopening; and various pieces of dividends paid. Our consolidated total risk-based capital ratio was 17.26% at September 30, 2017 as comparedfederal legislation were passed to 17.25% at year-end 2016, and our regulatory capital ratios remain very strong relativeattempt to peer banks.address the impact of COVID-19 on the economy.
Impact of COVID-19 on the Company’s Operations
● | 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. The Company had no loans remaining on deferral, which were modified under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, as amended. |
● | The uncertainty of national and local economic conditions had an impact on our provision for credit losses in early 2022 and on our provision for loan and lease losses in 2021. The Company implemented the Current Expected Credit Loss ("CECL") accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) on January 1, 2022, after having elected under Section 4014 of the CARES Act and the Consolidated Appropriations Act, 2021 to defer earlier implementation. |
● | The Company expects that net interest income may continue to be adversely impacted given pressure on the net interest margin as a result of the current interest rate environment. Although the FOMC has raised the fed funds rate three times in the first half of 2022; 25 basis points on March 16, 2022, 50 basis points on May 4, 2022 and 75 basis points on June 16, 2022, the overall rate environment is still relatively low. The FOMC has indicated potential future increases to the overnight fed funds rate but uncertainty as to when and at what rate this may occur still remains. These lower rates have impacted our net interest margin. Our net interest margin for the six months ended June 30, 2022, was 3.31%, compared to a net interest margin of 3.76% for the same period in 2021. Additional liquidity from significant deposit growth in 2021 and the first six months of 2022, coupled with lower loan balances has negatively impacted our net interest margin. This additional liquidity was mostly deployed in overnight funding resulting in $170.4 million in average overnight cash during the first half of 2022. This overnight funding earned an average rate of 43 basis points, for the first six months ending June |
40
30, 2022. In addition, the Company had $1.0 billion in investment securities at average tax effective yield 207 basis points lower than that of current loan yields. |
● | The COVID-19 pandemic has not adversely affected our capital or financial resources as of June 30, 2022. During the first half of 2022, total shareholders’ equity decreased by $63.4 million, or 18%, to $299.0 million. The Company earned $16.6 million in net income in the first six months of 2022, but had a $61.6 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. If interest rates continue to rise, this component of equity would be expected to further decline. The Company also paid dividends of $7.0 million and repurchased shares of stock for $4.9 million during the first half of 2022. On July 21, 2022, the Company declared a twenty-three cent per share dividend to be paid on August 15, 2022. 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. |
● | The Company continues to serve its customers. Several of our branch locations were closed during the height of the pandemic, but have since re-opened. Five branch locations were permanently closed in June 2021. This decision to close these branches was made as a result of a change in customer behaviors brought about by the COVID-19 pandemic along with an efficiency review. All of the five closed locations were located outside of Tulare County, the Bank’s primary market area. 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. Overall deposits at these five closed branches increased during the period of time from announcement to closure and consolidation into a nearby branch. |
● | As a financial institution providing essential services, the Company expects continued demand for loans and deposits. In addition, strong mortgage warehouse utilization that resulted from the low rate refinance environment of 2020 and 2021 is not expected to return in 2022 and hence our loans outstanding in this sector remain at lower levels. Further, it is expected that SBA PPP loans will continue to be forgiven, with the remainder expected to be forgiven in 2022. |
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.BOLI and investment gains. The majority of the Company’s non-interestnoninterest expense is comprised of operating costs that facilitate offering a full range of banking services to our customers.
.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income increased by $1.528decreased $0.6 million to $26.6 million, for the second quarter of 2022 over the second quarter of 2021 and decreased $4.4 million, or 9%,8% to $51.3 million for the third quarterfirst six months of 20172022 relative to the thirdsame period in 2021.
For the second quarter of 2016 and by $5.7422022 as compared to the same quarter in 2021, average loan balances decreased $173.0 million, or 12%8%, primarily due to decreases in commercial loans of $86.0 million, or 52%, a $13.5 million, or 31% decrease in agricultural production loans, and a $92.5 million, or 65%, decrease in the utilization of mortgage warehouse lines. These decreases were partially offset by an $18.8 million, or 1% increase in real estate loans. The yield on the loan and lease portfolio was 26 basis points lower in the second quarter of 2022 as compared to the same period in 2021. Average investment balances also increased $290.6 million with a 79 basis point increase in yield, mostly due to a $388.9 million increase in average collateralized loan obligation balances which have variable rates, which helped
41
alleviate some of the negative pressure on our net interest margin. Adding to the pressure on our net interest margin, was a 13 basis points unfavorable increase in the cost of interest-bearing liabilities in the second quarter of 2022 as compared to the second quarter of 2021.
For the first half of 2022 as compared to the same period in 2021, average loan balances decreased $293.5 million or 13%. All categories of loans decreased with the primary decrease in commercial loans for $90.3 million and a $136.8 million decline in mortgage warehouse line utilization. There was a 24 basis points decrease in loan yield for the first nine monthshalf of 20172022 as compared to the first nine months of 2016. same period in 2021. Average investment balances increased $451.0 million yielding 28 basis points higher for the same period, which helped offset the negative loan yield variances. Adding to the unfavorable decrease in yield was an 11 basis point decrease in the yield on interest bearing liabilities, driven by the recent increases in the prime interest rate.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(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 | % |
42
Average Balances and Rates
(dollars in thousands, unaudited)
| | | | | | | | | | | | | | | | |
| | For the three months ended | | For the three months ended | ||||||||||||
| | June 30, 2022 | | June 30, 2021 | ||||||||||||
Assets |
| Average |
| Income/ |
| Average |
| Average |
| Income/ |
| Average | ||||
Investments: | | | | | | | | | | | | | | | | |
Interest-earning due from banks | | $ | 146,287 | | $ | 270 | | 0.74% | | $ | 308,453 | | $ | 85 | | 0.11% |
Taxable | | | 752,693 | | | 4,477 | | 2.39% |
| | 340,690 | | | 1,573 | | 1.85% |
Non-taxable | | | 284,198 | | | 1,854 | | 3.31% | | | 243,461 | | | 1,517 | | 3.16% |
Total investments | | | 1,183,178 | | | 6,601 | | 2.40% | | | 892,604 | | | 3,175 | | 1.61% |
| | | | | | | | | | | | | | | | |
Loans and leases:(3) | | | |
| | | | | | | | | | | | |
Real estate | | | 1,844,367 | | | 19,659 | | 4.28% | | | 1,825,600 | | | 21,015 | | 4.62% |
Agricultural | | | 30,466 | | | 232 | | 3.05% | | | 43,959 | | | 408 | | 3.72% |
Commercial | | | 80,533 | | | 980 | | 4.88% | | | 166,554 | | | 2,124 | | 5.12% |
Consumer | | | 4,264 | | | 207 | | 19.47% | | | 4,978 | | | 193 | | 15.55% |
Mortgage warehouse lines | | | 49,884 | | | 493 | | 3.96% | | | 142,348 | | | 1,151 | | 3.24% |
Other | | | 2,354 | | | 34 | | 5.79% | | | 1,460 | | | 26 | | 7.14% |
Total loans and leases | | | 2,011,868 | | | 21,605 | | 4.31% | | | 2,184,899 | | | 24,917 | | 4.57% |
Total interest earning assets (4) |
| | 3,195,046 | | | 28,206 | | 3.60% | | | 3,077,503 | | | 28,092 | | 3.71% |
Other earning assets | | | 15,628 | | | | | | | | 15,438 | | | | | |
Non-earning assets | | | 239,803 | | | | | | | | 209,218 | | | | | |
Total assets | | $ | 3,450,477 | | | | | | | $ | 3,302,159 | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Liabilities and shareholders' equity | | | | | | | | | | | | | | | | |
Interest bearing deposits: | | | | | | | | | | | | | | | | |
Demand deposits | | $ | 221,322 | | $ | 120 | | 0.22% | | $ | 161,871 | | $ | 91 | | 0.23% |
NOW | | | 542,915 | | | 82 | | 0.06% | | | 601,339 | | | 116 | | 0.08% |
Savings accounts | | | 480,654 | | | 70 | | 0.06% | | | 424,512 | | | 59 | | 0.06% |
Money market | | | 155,574 | | | 23 | | 0.06% | | | 139,336 | | | 30 | | 0.09% |
Time Deposits | | | 295,850 | | | 441 | | 0.60% | | | 337,270 | | | 262 | | 0.31% |
Brokered deposits | | | 60,000 | | | 48 | | 0.32% | | | 92,418 | | | 61 | | 0.26% |
Total interest bearing deposits | | | 1,756,315 | | | 784 | | 0.18% | | | 1,756,746 | | | 619 | | 0.14% |
Borrowed funds: | | | | | | | | | | | | | | | | |
Federal funds purchased | | | 168 | | | — | | — | | | 168 | | | — | | 0.00% |
Repurchase agreements | | | 112,417 | | | 77 | | 0.27% | | | 57,885 | | | 39 | | 0.27% |
Short term borrowings | | | 1 | | | — | | — | | | 3,133 | | | — | | 0.00% |
Long-term debt | | | 49,160 | | | 430 | | 3.51% | | | | | | — | | — |
Subordinated debentures | | | 35,365 | | | 330 | | 3.74% | | | 35,185 | | | 245 | | 2.79% |
Total borrowed funds | | | 197,111 | | | 837 | | 1.70% | | | 96,371 | | | 284 | | 1.18% |
Total interest bearing liabilities | | | 1,953,426 | | | 1,621 | | 0.33% | | | 1,853,117 | | | 903 | | 0.20% |
Demand deposits - noninterest bearing | | | 1,132,601 | | | | | | | | 1,052,494 | | | | | |
Other liabilities | | | 48,458 | | | | | | | | 43,095 | | | | | |
Shareholders' equity | | | 315,992 | | | | | | | | 353,453 | | | | | |
Total liabilities and shareholders' equity | | $ | 3,450,477 | | | | | | | $ | 3,302,159 | | | | | |
Interest income/interest earning assets | | | | | | | | 3.60% | | | | | | | | 3.71% |
Interest expense/interest earning assets | | | | | | | | 0.20% | | | | | | | | 0.12% |
Net interest income and margin(5) | | | | | $ | 26,585 | | 3.40% | | | | | $ | 27,189 | | 3.60% |
(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 |
(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 |
(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 |
43
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(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 | % |
| | | | | | | | | | | | | | | | |
Average Balances and Rates | | | | | | | | | | | | | | | | |
(Dollars in Thousands, Unaudited) | | | | | | | | | | | | | | |||
| | For the six months ended | | | For the six months ended | |||||||||||
| | June 30, 2022 | | | June 30, 2021 | |||||||||||
Assets | | Average | | Income/ | | Average | | Average | | Income/ | | Average | ||||
Investments: | | | | | | | | | | | | | | | | |
Interest-earning due from banks | | $ | 170,432 | | $ | 363 | | 0.43% | | $ | 193,120 | | $ | 104 | | 0.11% |
Taxable | | | 756,061 | | | 7,966 | | 2.12% | | | 329,029 | | | 3,150 | | 1.93% |
Non-taxable | | | 281,882 | | | 3,581 | | 3.24% | | | 235,204 | | | 2,967 | | 3.21% |
Total investments | | | 1,208,375 | | | 11,910 | | 2.15% | | | 757,353 | | | 6,221 | | 1.87% |
| | | | | | | | | | | | | | | | |
Loans and leases:(3) | | | | | | | | | | | | | | | | |
Real estate | | | 1,799,132 | | | 37,984 | | 4.26% | | | 1,852,330 | | | 42,407 | | 4.62% |
Agricultural | | | 32,216 | | | 534 | | 3.34% | | | 45,050 | | | 827 | | 3.70% |
Commercial | | | 88,784 | | | 2,378 | | 5.40% | | | 179,036 | | | 4,575 | | 5.15% |
Consumer | | | 4,355 | | | 413 | | 19.12% | | | 5,199 | | | 389 | | 15.09% |
Mortgage warehouse lines | | | 55,538 | | | 1,003 | | 3.64% | | | 192,329 | | | 3,078 | | 3.23% |
Other | | | 1,922 | | | 65 | | 6.82% | | | 1,523 | | | 53 | | 7.02% |
Total loans and leases | | | 1,981,947 | | | 42,377 | | 4.31% | | | 2,275,467 | | | 51,329 | | 4.55% |
Total interest earning assets (4) | | | 3,190,322 | | | 54,287 | | 3.49% | | | 3,032,820 | | | 57,550 | | 3.88% |
Other earning assets | | | 15,654 | | | | | | | | 14,363 | | | | | |
Non-earning assets | | | 225,345 | | | | | | | | 205,187 | | | | | |
Total assets | | $ | 3,431,321 | | | | | | | $ | 3,252,370 | | | | | |
Liabilities and shareholders' equity | | | | | | | | | | | | | | | | |
Interest bearing deposits: | | | | | | | | | | | | | | | | |
Demand deposits | | $ | 212,193 | | $ | 226 | | 0.21% | | $ | 146,403 | | $ | 164 | | 0.23% |
NOW | | | 544,589 | | | 164 | | 0.06% | | | 585,344 | | | 217 | | 0.07% |
Savings accounts | | | 474,213 | | | 137 | | 0.06% | | | 407,894 | | | 112 | | 0.06% |
Money market | | | 153,469 | | | 46 | | 0.06% | | | 137,887 | | | 60 | | 0.09% |
Time Deposits | | | 294,773 | | | 675 | | 0.46% | | | 374,636 | | | 551 | | 0.30% |
Brokered deposits | | | 60,000 | | | 96 | | 0.32% | | | 96,188 | | | 123 | | 0.26% |
Total interest bearing deposits | | | 1,739,237 | | | 1,344 | | 0.16% | | | 1,748,352 | | | 1,227 | | 0.14% |
Borrowed funds: | | | | | | | | | | | | | | | | |
Federal funds purchased | | | 169 | | | 1 | | 1.19% | | | 2,980 | | | 1 | | 0.07% |
Repurchase agreements | | | 108,762 | | | 158 | | 0.29% | | | 52,024 | | | 83 | | 0.32% |
Short term borrowings | | | 1 | | | — | | 0.00% | | | 7,308 | | | 2 | | 0.06% |
Long-term debt | | | 49,152 | | | 857 | | 3.52% | | | — | | | — | | — |
Subordinated debentures | | | 35,342 | | | 585 | | 3.34% | | | 35,164 | | | 493 | | 2.83% |
Total borrowed funds | | | 193,426 | | | 1,601 | | 1.67% | | | 97,476 | | | 579 | | 1.20% |
Total interest bearing liabilities | | | 1,932,663 | | | 2,945 | | 0.31% | | | 1,845,828 | | | 1,806 | | 0.20% |
Demand deposits - noninterest bearing | | | 1,113,262 | | | | | | | | 1,015,023 | | | | | |
Other liabilities | | | 53,712 | | | | | | | | 41,156 | | | | | |
Shareholders' equity | | | 331,684 | | | | | | | | 350,363 | | | | | |
Total liabilities and shareholders' equity | | $ | 3,431,321 | | | | | | | $ | 3,252,370 | | | | | |
Interest income/interest earning assets | | | | | | | | 3.49% | | | | | | | | 3.88% |
Interest expense/interest earning assets | | | | | | | | 0.18% | | | | | | | | 0.12% |
Net interest income and margin(5) | | | | | $ | 51,342 | | 3.31% | | | | | $ | 55,744 | | 3.76% |
(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 |
(3) | Loans are gross of the allowance for possible loan losses. |
(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. |
3944
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
(dollars in thousands, unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||||||||||||||
| | 2022 over 2021 | | 2022 over 2021 | ||||||||||||||||||||
| | Increase (decrease) due to | | Increase (decrease) due to | ||||||||||||||||||||
Assets: |
| Volume |
| Rate | | Mix |
| Net | | Volume | | Rate | | Mix | | Net | ||||||||
Investments: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal funds sold/due from time |
| $ | (45) |
| $ | 485 | | $ | (255) |
| $ | 185 | | $ | (12) | | $ | 307 | | $ | (36) | | $ | 259 |
Taxable | | | 1,902 | | | 453 | | | 548 | | | 2,904 | | | 4,088 | | | 317 | | | 411 | | | 4,816 |
Non-taxable | | | 63 | | | 72 | | | 202 | | | 337 | | | 589 | | | 23 | | | 2 | | | 614 |
Total investments (1) | | | 1,920 | | | 1,010 | | | 495 | | | 3,426 | | | 4,665 | | | 647 | | | 377 | | | 5,689 |
Loans and leases: | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate | | | 216 | | | (1,556) | | | (16) | | | (1,356) | | | (1,218) | | | (3,300) | | | 95 | | | (4,423) |
Agricultural | | | (125) | | | (73) | | | 22 | | | (176) | | | (236) | | | (80) | | | 23 | | | (293) |
Commercial | | | (1,097) | | | (97) | | | 50 | | | (1,144) | | | (2,306) | | | 220 | | | (111) | | | (2,197) |
Consumer | | | (28) | | | 49 | | | (7) | | | 14 | | | (63) | | | 104 | | | (17) | | | 24 |
Mortgage warehouse | | | (748) | | | 256 | | | (166) | | | (658) | | | (2,189) | | | 395 | | | (281) | | | (2,075) |
Other | | | 16 | | | (5) | | | (3) | | | 8 | | | 14 | | | (2) | | | — | | | 12 |
Total loans and leases (1) | | | (1,766) | | | (1,426) | | | (120) | | | (3,312) | | | (5,998) | | | (2,663) | | | (291) | | | (8,952) |
Total interest earning assets (1) | | $ | 154 | | $ | (416) | | $ | 375 | | $ | 114 | | $ | (1,333) | | $ | (2,016) | | $ | 86 | | $ | (3,263) |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | $ | 33 | | | (3) | | | (1) | | $ | 29 | | $ | 74 | | $ | (8) | | | (4) | | $ | 62 |
NOW | | | (11) | | | (25) | | | 2 | | | (34) | | | (15) | | | (41) | | | 3 | | | (53) |
Savings accounts | | | 8 | | | 3 | | | — | | | 11 | | | 18 | | | 6 | | | 1 | | | 25 |
Money market | | | 3 | | | (9) | | | (1) | | | (7) | | | 7 | | | (19) | | | (2) | | | (14) |
Time Deposits | | | (32) | | | 241 | | | (30) | | | 179 | | | (117) | | | 306 | | | (65) | | | 124 |
Brokered deposits | | | (21) | | | 13 | | | (5) | | | (13) | | | (46) | | | 31 | | | (12) | | | (27) |
Total interest bearing deposits (1) | | | (20) | | | 220 | | | (35) | | | 165 | | | (79) | | | 275 | | | (79) | | | 117 |
Borrowed funds: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal funds purchased | | | — | | | — | | | — | | | — | | | (1) | | | 17 | | | (16) | | | — |
Repurchase agreements | | | 36 | | | 1 | | | 1 | | | 38 | | | 91 | | | (8) | | | (8) | | | 75 |
Short term borrowings | | | — | | | — | | | — | | | — | | | (2) | | | (2) | | | 2 | | | (2) |
Long-term debt | | | — | | | — | | | 430 | | | 430 | | | — | | | — | | | 857 | | | 857 |
Subordinated debt | | | 1 | | | 84 | | | — | | | 85 | | | 2 | | | 90 | | | — | | | 92 |
Total borrowed funds (1) | | | 37 | | | 85 | | | 431 | | | 553 | | | 90 | | | 97 | | | 835 | | | 1,022 |
Total interest bearing liabilities (1) | | | 17 | | | 305 | | | 396 | | | 718 | | | 11 | | | 372 | | | 756 | | | 1,139 |
Net interest income (1) | | $ | 137 | | $ | (721) | | $ | (21) | | $ | (604) | | $ | (1,344) | | $ | (2,388) | | $ | (670) | | $ | (4,402) |
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 |
|
(1) |
|
40
The volume variance calculated for the thirdsecond quarter of 20172022 relative to the thirdsecond quarter of 20162021 was a favorable $1.446 million, due to$0.1 million; although average balances of interest earning assets were flat, we had an increase in investment securities, offset by a decrease in almost all categories of $142 million, or 8%, in the average balance of interest-earning assets resulting from organic growth in loans and investments.loans. There was also a favorablean unfavorable rate variance of $82,000$0.7 million for the third quarter comparison. Ourcomparative quarters since the weighted average yield on interest-earninginterest earning assets was updecreased by 1311 basis points whileand the weighted average cost of interest-bearing liabilitiesliabilities increased by 1513 basis points, but therepoints. There was also an unfavorable mix
45
variance of $0.02 million primarily from the issuance of variable rate subordinated debentures issued in September of 2021. The $0.7 million negative rate variance was impacted by the following factors: relatively high average balances of cash and due from banks earning on average 74 bps, new loans and investments having lower yields overall, including low-yielding purchased 1-4 SFD mortgage loans. Increased costs on interest bearing liabilities also had a net benefit tonegative impact on the Company because the yield increase on earning assets was applied to a much higher balance than thevariance primarily from two Federal Reserve fed funds rate change for interest-bearing liabilities. Investment yields have started to increase due to the recent rising rate environment, and also in response to limited investment portfolio restructuring which took placeincreases in the second quarter of 2017. Loan yields have risen due to the impact2022 for a total 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 four125 basis points, relative toand the third quarterissuance 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 million attributable to volume changes, and an unfavorable rate variance of $63,000.subordinated debt mentioned above. 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.second quarter of 2022 was 3.40%, as compared to 3.60% for the second quarter of 2021.
The volume variance calculated for the first six months of 2022 relative to the first six months of 2021 reflects an unfavorable variance of $1.3 million, an unfavorable rate variance of $2.4 million, and an unfavorable mix variance of $0.7 million. There was a decline in loan balances, partially offset by an increase in investment securities. Interest bearing liabilities were relatively flat with an 11 basis point increase in cost, primarily from three Federal Reserve fed funds interest rate increases totaling 150 basis points and the issuance of variable rate subordinated debentures issued in September 2021. The Company’s net interest margin for the first half of 2022 was 3.31%, as compared to 3.76% in the first half of 2021.
At June 30, 2022, approximately 8% of our total portfolio, or $122.7 million, consists of variable rate loans. Of these variable rate loans, approximately $34.0 million have floors. At June 30, 2022, our outstanding fixed rate loans represented 26% of our loan portfolio. The remaining 66% of our loan portfolio at June 30, 2022 consists of adjustable-rate loans; 74% of these loans (approximately $930.9 million) will not begin adjusting for at least another 3 years, but up to 10 years. These loans are typically adjustable every five years after the initial adjustment. Approximately $54.3 million of these adjustable-rate loans have the ability to reprice next quarter, which will have a positive impact on earnings.
Cash balances for the quarter and year-to-date comparisons have decreased and having less of a negative impact on our net interest margin since cash balances earn considerably lower yields than other earning assets. Average cash and due from banks was $146.3 million, a decrease of $162.2 million, or 53% for the second quarter of 2022, and was $22.7 million lower, or 12% for the first half of 2022 as compared to the same period in 2021.
Overall average investment securities increased by $452.7 million for the second quarter of June 30, 2022 as compared to June 30, 2021, and increased by $473.7 million for the first half of 2022. For the quarter ending June 30, 2022 over the same period for 2021, average non-taxable securities increased $40.7 million and taxable securities increased $412.0 million. For the first half of 2022 over the same period in 2021, average non-taxable securities increased $46.7 million and taxable securities increased $427.0 million. The overall investment portfolio had a tax-equivalent yield of 2.65% at June 30, 2022, with an average life of 7.55 years.
Interest expense was $1.6 million for the second quarter of 2022, an increase of $0.7 million, or 80%, compared to the second quarter of 2021, and increased $1.1 million or 63% for the first six-months of 2022 as compared to the same period in 2021. The increase in interest expense for the quarter is primarily attributable to the increase in the cost of time deposits tied to prime interest rate increases, while the year-to-date comparison included the increase in the cost of time deposits as well as the issuance of subordinated debentures in September of 2021 at a variable rate. The average cost of interest-bearing deposits increased by 4 basis points to 18 basis points for the second quarter of 2022 compared to the second quarter of 2021, and by 2 basis points to 16 basis points for the first six-months of 2022 as compared to the same period in 2021. The average cost of borrowed funds increased 52 basis points for the second quarter of 2022 as compared to the same period in 2021 and by 47 basis points for the first six-months of 2022 as compared to the first six-months of 2021. Non-interest bearing demand deposits increased $80.1 million or 8% for the second quarter of 2022 as compared to the second quarter of 2021, and increased by $98.2 million or 10% for the first half of 2022 as compared to the first half of 2021.
46
PROVISION FOR CREDIT LOSSES ON LOANS AND LEASES
The Company implemented the Current Expected Credit Loss ("CECL") accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) on January 1, 2022. Upon implementation the Company recorded a $10.4 million increase in the allowance for loan and LEASEcredit losses, which included a $0.9 million reserve for unfunded commitments as an adjustment to equity, net of deferred taxes.
Credit risk is inherent in the business of making loans. The Company sets aside an allowance for loancredit losses on loans and lease losses,leases, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for loancredit losses on loans and lease losses. There was noleases. The Company recorded an expense related to a credit loss provision for loan losses in the third quartersloans and leases of 2017 or 2016, but the year-to-date comparison was impacted by a $300,000 loan loss provision that was recorded$2.5 million in the second quarter of 2017,2022 relative to a provision for loan and lease losses benefit of $2.1 million in the second quarter of 2021, and a year-to-date credit loss provision for loans and leases of $3.1 million in 2022 as compared to a $1.9 million loan and lease loss provision benefit in 2021. The higher provision for credit losses in the second quarter of 2022 over the same quarter in 2021, was primarily due to the impact of the change in reserve methodology from the incurred loss method to the current expected credit loss method combined with $2.3 million in net charge-offs in the second quarter of 2022 from a single office building loan relationship that was sold at a discount due to an increased risk of default that would have likely led to a prolonged collection period. For the first such provision since the third quartersix months of 2014. The provision helped replenish reserves subsequent2022 compared to the unanticipatedsame period in 2021 the $5.0 million increase in provision for credit losses on loans and leases is due to the change in reserve methodology along with the impact of $4.1 million in net charge offs for the first six months of 2022. The first half of 2022 was not only impacted by the loan relationship as mentioned above in the quarterly discussion but also by a charge-off of a $224,000 overdraft on a business account, and also provided limited reserves for growthsingle dairy loan relationship that defaulted in performing loan balances. March 2022.
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 quarter of 2017 relative to $162,000 in the third quarter of 2016, and net charge-offs were $1.217of $2.3 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 able2022 as compared to maintain ournet recoveries of $0.2 million for the comparative period of 2021. For the first six months of 2022, net charge-offs were $4.1 million as compared to $0.5 million in net recoveries for the same period of 2021.
The allowance for loancredit losses on loans and lease lossesleases is at a level that, in Management’s judgment, is adequate to absorb probable loancredit losses on loans related to specifically-identified impairedindividually identified loans as well as probable incurred credit 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 1210 to the consolidated financial statements,
41
and below, under “Allowance for Loan and LeaseCredit Losses.” The process utilized to establish an appropriate credit allowance for loanlosses on loans and lease lossesleases can result in a high degree of variability in the Company’s loancredit loss provision, and consequently in our net earnings.
47
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-monthsix-month periods ended SeptemberJune 30, 20172022 and 2016:2021:
Noninterest Income/Expense
(dollars in thousands, unaudited)
| | | | | | | | | | | | |
| | For the three months ended June 30, | | For the six months ended June 30, | ||||||||
Noninterest income: | | 2022 | | 2021 | | 2022 | | 2021 | ||||
Service charges on deposit accounts |
| $ | 3,204 |
| $ | 2,725 | | $ | 6,245 | | $ | 5,491 |
Other service charges and fees | | | 2,893 | | | 3,050 | | | 5,680 | | | 5,611 |
Net gains on sale of securities available-for-sale | | | — | | | — | | | 1,032 | | | — |
Bank-owned life insurance | | | (582) | | | 814 | | | (1,228) | | | 1,397 |
Other | | | 4,924 | | | 23 | | | 4,773 | | | 943 |
Total noninterest income | | $ | 10,439 | | $ | 6,612 | | $ | 16,502 | | $ | 13,442 |
As a % of average interest earning assets (1) | | | 1.31% | | | 0.86% | | | 1.04% | | | 0.89% |
| | | | | | | | | | | | |
Noninterest expense: | | | | | | | | | | | | |
Salaries and employee benefits | | $ | 11,745 | | $ | 10,425 | | $ | 23,550 | | $ | 21,576 |
Occupancy costs | | | | | | | | | | | | |
Furniture & equipment | | | 511 | | | 453 | | | 964 | | | 905 |
Premises | | | 1,895 | | | 2,173 | | | 3,735 | | | 4,207 |
Advertising and marketing costs | | | 449 | | | 292 | | | 855 | | | 612 |
Data processing costs | | | 1,525 | | | 1,513 | | | 3,010 | | | 2,939 |
Deposit services costs | | | 2,417 | | | 2,282 | | | 4,662 | | | 4,350 |
Loan services costs | | | | | | | | | | | | |
Loan processing | | | 186 | | | 65 | | | 297 | | | 234 |
Foreclosed assets | | | 92 | | | (10) | | | 87 | | | 98 |
Other operating costs | | | | | | | | | | | | |
Telephone & data communications | | | 377 | | | 668 | | | 821 | | | 1,048 |
Postage & mail | | | 223 | | | 109 | | | 279 | | | 193 |
Other | | | 1,447 | | | 337 | | | 1,868 | | | 799 |
Professional services costs | | | | | | | | | | | | |
Legal & accounting | | | 673 | | | 682 | | | 1,219 | | | 1,125 |
Acquisition costs | | | — | | | — | | | — | | | — |
Other professional service | | | 259 | | | 1,004 | | | 402 | | | 1,899 |
Stationery & supply costs | | | 116 | | | 73 | | | 201 | | | 151 |
Sundry & tellers | | | 198 | | | 169 | | | 336 | | | 370 |
Total noninterest expense | | $ | 22,113 | | $ | 20,235 | | $ | 42,286 | | $ | 40,506 |
As a % of average interest earning assets (1) | | | 2.78% | | | 2.64% | | | 2.67% | | | 2.68% |
Efficiency ratio (2)(3) | | | 59.19% | | | 58.79% | | | 62.70% | | | 57.58% |
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 |
(3) | The efficiency ratio is a non-GAAP measure and is a calculation of 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. |
48
Noninterest Income:
Total non-interestnoninterest income increased by $919,000,$3.8 million, or 18%58%, for the third quarter of 2017 overended June 30, 2022 as compared to the thirdsame quarter of 2016,in 2021 and increased $3.1 million, or 23% for the comparable year-to-date periods.
Service charges on customer deposit account income increased by $2.549$0.5 million, or 18%, for the first nine months of 2017 relative to the first nine months of 2016. As discussed below, relatively large investment gains realized 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$3.2 million 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 relative2022 as compared 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 months 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 as2021. This service charge income was $0.8 million 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 part 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 $465,00014% in the first ninesix 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 cost of insurance for certain policies created downward pressure on general account 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, relative2022, as compared to the same periodsperiod 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 investment2021. These increases in the Federal Home Loan Bank),quarterly and other miscellaneousyear-to-date comparisons are primarily a result of increased analysis fees and overdraft income. Amortization expense associated with our investments in low-income housing tax credit fundsOverdraft fees and other limited partnership investments is netted against this category, and third quarter 2017 adjustmentsreturned check charges increased $0.2 million 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 2017 to write off obsolete equipment, and by lower dividends on restricted stock as the FHLB dividend payout ratio has been declining in 2017 relative to historically high ratios in prior years.
Total non-interest expense was down by $676,000, or 4%, for the third quarter 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$1.4 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 thirdsecond quarter of 2017 from 3.66% in the third quarter of 2016,2022, and increased $0.4 million to 3.32% for the first nine months of 2017 relative to 3.51% for the first nine months of 2016. The reduction in the ratio for the third quarter is logical given the drop in total non-interest expense, but the year-to-date ratio is also down primarily as the result of a sizeable increase 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$2.7 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.2022.
Occupancy expense increased by $305,000, or 15%,Effective in the third quarter of 2017 over2022, the thirdCompany made several changes to its NSF fees (i.e. returned item) and overdraft fees for customers. In particular, NSF fees will no longer be charged, and overdraft fees will be limited to 4 per day and no continuous overdraft fee will be charged. In addition, the amount of overdraft privilege (i.e. the amount to which the Company will pay overdrafts for customers) was increased by $250. Although the exact impact of these changes is unknown, the combination of eliminating NSF fees and increasing overdraft privilege is not expected to have a material impact on overall overdraft income.
Other service charges and fees decreased $0.2 million or 5% for the second quarter of 2016,2022 as compared to the same period in 2021, and by $1.243increased $0.1 million or 22%, for the comparative year-to-date periods, due to ongoing occupancy costs associated with the former Coast National Bank branches and our newer de-novo branches, certain non-recurring start-up costs associated with the new branches, and higher rent and depreciation expense in other locations. Despite an 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 monthshalf of 2017 due largely2022 as compared 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%,same periods in 2021. The unfavorable variance for the quarterly comparison but increased by $355,000, or 13%is mostly due to lower miscellaneous loan fees while the increase for the first nine months. The year-to-date increaseyear to date comparison 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 dropped by $41,000, or 49%, in the third quarter of 2017 relative to the third quarter of 2016, and by $328,000, or 61%, 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 monthsmainly due to an increase in corporate travel expenses.debit card interchange fees from higher usage.
Under professional services costs, legal and accounting expenses fell slightlyThere were no gains of the sales of securities for the thirdsecond quarter of 2022 or 2021, but increased by $69,000, or 5%,there was a $1.0 million gain on the sale of securities for the comparativefirst half of 2022 with no sales in the comparable year-to-date periodsperiod of 2021. The sale in the first half of 2022 was a strategic effort to rebalance the portfolio by selling longer duration and higher price volatility securities as a hedge against rising interest rates, due to likely persistent inflationary pressures in the near-intermediate term environment.
BOLI income decreased by $1.4 million for the second quarter of 2022 as compared to the second quarter of 2021. At June 30, 2022, there was $42.9 million in traditional BOLI policies and $9.3 million in separate account corporate owned life insurance policies associated with the deferred compensation plans. Investments in the separate account variable life insurance policies are invested in a negotiated settlementsimilar proportionate mix of asset classes that added $85,000our deferred compensation participants have elected, with the exception of participant elections in a fixed income account. Such election by plan participants in the fixed income account is ignored which creates greater volatility of the corporate owned life insurance asset value as compared to legalthe related liability balance for deferred compensation. More specifically, the specific account life insurance policies are designed to hold similar assets to the deemed investments in the director and employee deferred compensation plans. Directors and officers are allowed to make a deemed investment in a fixed income account designed to mirror the crediting rate on one of the life insurance policies. However, the amount of deferred compensation elected to attributed to the fixed income account significantly exceeds the amount of life insurance invested in a similar fixed income account. As the life insurance funding does not closely match the deferred compensation deemed investments, fluctuations occur in earnings of the life insurance plan as compared to the related expense of the deferred compensation plan. If earnings on the life insurance plan are negative, it creates a scenario where the negative income is not tax deductible and has an unfavorable impact on the Company’s tax rate. This occurred in 2022 as the lower quarterly values in the life insurance policies were only partially offset by lower deferred compensation expense reflected primarily in director fees expense. For the first half of 2022 as compared to the same period in 2021 life insurance income was $2.6 million lower and the related deferred compensation was $1.8 million lower.
In the “other” category of noninterest income the Company reflected a $4.9 million increase in the second quarter of 2017. Acquisition costs, which include nonrecurring acquisition2022 as compared to the second quarter of 2021, and a $3.8 million increase in the first half of 2022 as compared to the same period in 2021. The quarterly and year-to-date comparison includes non-recurring gains resulting from the sale of Visa B stock of $2.6 million and a small business investment company fund investment of $0.6 million, as well as $0.4
49
million in life insurance proceeds, a $1.0 million recovery of prior year legal expenses, forand a $0.2 million gain from a recovery on an acquired loan.
Noninterest Expense:
Total noninterest expense increased by $1.9 million, or 9%, in the Ojai acquisitionsecond quarter of 2022 relative to the second quarter of 2021, and by $1.8 million, or 4%, in 2017the first six months of 2022 as compared to the first six months of 2021.
The tax-equivalent efficiency ratio was 59.19% in the second quarter of 2022 as compared to 58.79% in the same quarter of 2021, and the Coast acquisition in 2016, were reduced by $1.271 million for the third quarter and $1.452 millionwas 62.70% for the first nine months, since the bulkhalf of the Coast acquisition costs were recorded in the third quarter of 2016. We expect that the majority of non-recurring costs related2022 as compared 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%,57.58% for the first nine monthshalf 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.2021. 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.
44
The Company’s tax-equivalent overhead efficiency ratio declined 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% in the first nine months of 2016. 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 loancredit losses on loans and leases and investment gains/losses are excluded from the equation.
Salaries and Benefits were $1.3 million, or 13%, higher in the second quarter of 2022 as compared to the second quarter of 2021 and $2.0 million, or 9% higher for the first six months of 2022 compared to the same period in 2021. The reason for this increase is primarily due to increased salary expense due to the strategic hiring of lending and management staff for both the quarterly and year-to-date comparisons. Overall full-time equivalent employees were 504 at June 30, 2022 as compared to 486 at June 30, 2021.
Occupancy expenses were $0.2 million lower for the second quarter of 2022 as compared to the same quarter in 2021 and $0.4 million lower for the first half of 2022 as compared to the first half of 2021. The primary reason for this decrease was from a decrease in premises depreciation due to the sale of a branch building which was closed in the third quarter of 2021.
Other noninterest expense increased $0.8 million, or 11% for the second quarter 2022 as compared to the second quarter in 2021, and increased $0.2 million, or 2% for the first half of 2022 as compared to the same period in 2021. The variance for the second quarter of 2022 compared to the same period in 2021 was driven by a $0.7 million accrual for restitution payments to customers charged nonsufficient fund fees in the past five years for representments. This accrual was established after the FDIC published a change in its position in how such representments are characterized for regulatory purposes. The Company also incurred higher costs of $0.3 million associated with postage and mailing of new account agreements to customers as well as higher professional fees associated with this matter. Beginning in the third quarter of 2022, the Company will no longer charge customers for returned item fees, commonly referred to as nonsufficient fund fees. In addition, the Company increased overdraft privilege for both commercial and consumer customers, but will limit the number of daily overdraft fees to four per day (previously five per day) and will no longer charge a fee for continuous overdrafts (previously a $35 charge after the 10th consecutive day an account is in an overdraft position). These changes to our nonsufficient fund fees, overdraft fees and overdraft privilege program are not expected to have a material impact on deposit fee income. In addition, there was a $0.4 million increase in recruitment costs associated with new lending teams and management staff. For the quarterly and year-to-date comparisons decreases in deferred compensation expense for directors, which is linked to the changes in life insurance income partially offset the increases.
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’sCompany's provision for income taxes was 35%26.3% of pre-tax income in the thirdsecond quarter of 2017 as compared2022 relative to 32%25.3% in the thirdsecond quarter of 2016,2021, and was 33%26.6% of pre-tax income for the first nine monthshalf of 2017 and 2016.2022 relative to 25.4% for the same period in 2021. The higherincrease in effective tax accrual rate for both the thirdquarterly and year-to-date comparisons is due to the volatility in the Corporate Owned Life Insurance asset value associated with our non-qualified deferred compensation plans. In the
50
second quarter and first half of 2017 is primarily2022, the result of higher 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 methodologyinvestments associated with the disqualifying disposition of Company shares issued pursuantnon-qualified deferred compensation plans declined in value, resulting in a non-deductible expense as compared to an increase in value generating non-taxable income for 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 thirdsecond quarter, but they occurred at a higher rate during theand first half of 2017 and thus had a more material impact on our year-to-date tax accrual.2021.
BALANCE SHEET ANALYSIS
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.
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 million,$1.03 billion, or 28%30% of total assets at SeptemberJune 30, 2017, compared to $5712022, and $973.3 million, or 28%29% of total assets at December 31, 2016.
We had no fed funds sold2021. The increase was primarily due to purchases of $215.3 million to deploy cash into interest earning assets and to provide Balance Sheet diversification. In addition, within the Cash and Due from Banks account on the balance sheet was $79.8 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 declinedJune 30, 2022, as compared to $2 million at September 30, 2017 from $41$193.2 million at December 31, 2016 as2021. 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 “available for sale” investments at their fair market values.values and “held to maturity” investments at amortized cost. We currently have the intent and ability to hold our investment securities to maturity, but the securities are all marketablemarketable. The expected average duration was 3.2 years at June 30, 2022, and are classified asat year-end 2021.
In the second quarter of 2022 the Company transferred $162.1 million of “available for sale” investments to allow maximum flexibility with regard“held to interest rate risk and liquidity management. The expected average life for bonds in our investment portfolio was 4.0 years and their average effective duration was 2.9 yearsmaturity”. Those securities were transferred at September 30, 2017, withfair market value on the duration up slightly from 2.6 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 durationdate of the portfolio.transfer. The transfer was initiated to reduce the effect of potential future rate increases on the available-for-sale portfolio, mark-to-market, other comprehensive income and equity. See Note 9, Investment Securities for additional information.
4551
The following table sets forth the carrying amount for available-for-sale securities, at fair value, and held-to-maturity securities, at amortized cost, and fair market valuenet of the allowance for credit losses of the Company’s investment portfolio by investment type as of the dates noted:
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 |
|
Investment Portfolio
The net unrealized gain on our investment portfolio, or the difference between the fair market value and amortized cost, was $1 million at September 30, 2017, an absolute difference of about $4 million relative to the net unrealized loss of $3 million at December 31, 2016. The improvement is due primarily to lower long-term interest rates. The balance of US Government agency securities(dollars in our portfolio declined by $2 million, or 8%, during the first nine months of 2017 due primarily to 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. Municipal bond balances were also up by $28 million, or 24%, due to bond purchases and increases in market valuations. Municipal bonds purchased in recent periods have strong underlying ratings, and all municipal bonds in our portfolio undergo a detailed quarterly review 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.thousands, unaudited)
| | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 | ||||||
|
| Carrying Amount |
| Percent |
| Carrying Amount |
| Percent | ||
Available for sale | | | | | | | | | | |
U.S. government agencies |
| $ | 981 |
| 0% |
| $ | 1,574 | | 0% |
Mortgage-backed securities | | | 181,446 | | 18% | | | 306,727 | | 32% |
State and political subdivisions | | | 254,888 | | 25% | | | 304,268 | | 31% |
Corporate bonds | | | 46,539 | | 5% | | | 28,529 | | 3% |
Collateralized loan obligations | | | 380,324 | | 37% | | | 332,216 | | 34% |
Total available for sale | | | 864,178 | | 84% | | | 973,314 | | 100% |
Held to maturity | | | | | | | | | | |
U.S. government agencies | | | 6,762 | | 1% | | | — | | — |
Mortgage-backed securities | | | 103,888 | | 10% | | | — | | — |
State and political subdivisions | | | 50,749 | | 5% | | | — | | — |
Total held to maturity | | | 161,399 | | 16% | | | — | | — |
Total securities | | $ | 1,025,577 | | 100% | | $ | 973,314 | | 100% |
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$169.2 million at SeptemberJune 30, 20172022 and $194$167.2 million at December 31, 2016,2021, leaving $395$842.1 million in unpledged debt securities at SeptemberJune 30, 20172022 and $336$806.1 million at December 31, 2016.2021. Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled $33$38.2 million at SeptemberJune 30, 20172022 and $51$47.0 million at December 31, 2016. 2021.
46
LOAN AND LoanLEASE 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.
52
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(dollars in thousands, unaudited)
| | | | | | | | | | |
|
| June 30, 2022 |
| December 31, 2021 | ||||||
| | Amount | | Percent | | Amount | | Percent | ||
Real estate: | | | | | | | | | | |
1-4 family residential construction | | $ | 5,542 | | 0.28% | | $ | 21,369 | | 1.08% |
Other construction/land | | | 20,758 | | 1.04% | | | 25,299 | | 1.28% |
1-4 family - closed-end | | | 430,135 | | 21.52% | | | 289,457 | | 14.65% |
Equity lines | | | 25,574 | | 1.28% | | | 26,588 | | 1.35% |
Multi-family residential | | | 66,291 | | 3.32% | | | 53,458 | | 2.71% |
Commercial real estate - owner occupied | | | 312,089 | | 15.61% | | | 334,446 | | 16.93% |
Commercial real estate - non-owner occupied | | | 895,353 | | 44.79% | | | 882,888 | | 44.69% |
Farmland | | | 101,761 | | 5.09% | | | 106,706 | | 5.40% |
Total real estate | | | 1,857,503 | | 92.93% | | | 1,740,211 | | 88.09% |
Agricultural | | | 28,757 | | 1.44% | | | 33,990 | | 1.72% |
Commercial and industrial | | | 72,825 | | 3.64% | | | 109,791 | | 5.56% |
Mortgage warehouse lines | | | 58,134 | | 2.91% | | | 101,184 | | 5.12% |
Consumer loans | | | 4,362 | | 0.22% | | | 4,550 | | 0.23% |
Total loans and leases | | | 2,021,581 | | 101.14% | | | 1,989,726 | | 100.72% |
Allowance for credit losses on loans | | | (22,802) | | (1.14)% | | | (14,256) | | (0.72)% |
Total loans and leases, net | | $ | 1,998,779 | | 100.00% | | $ | 1,975,470 | | 100.00% |
Gross loans and leases at $2.0 billion, increased $32.9 million during the first nine monthshalf of 2017, total2022 with an overall 2% change. The increase in gross loan balances as compared to December 31, 2021 was primarily a result of an increase in 1-4 family residential real estate loans, increased by $104mostly from the purchase of $173.1 million or 11%, duein high quality jumbo mortgage loans designed as a bridge to strongorganic growth, and a $12.8 million organic increase in multi-family residential loans. Organic loan production for the first half of 2022 was $142.1 million, a 61% increase, as compared to $88.3 million for the comparative period in 2021, as the new lending teams hired earlier in the year have been gaining traction in our market. Counterbalancing these positive variances were loan paydowns, charge-offs and maturities resulting in net declines in many categories even with higher loan production. In particular, there was a $20.4 million net decrease in construction loans, secured bya $9.9 million net decline in commercial real estate farmlandloans, a $37.0 million net reduction in commercial and residential properties. Agricultural productionindustrial loans, were also up by $3a $43.0 million or 7%. Net growthunfavorable change in mortgage warehouse line utilization, and a $10.2 million net decline in agricultural loans, including loans secured by farmland, was negatively impacted by the prepayment ofloans. Further, SBA PPP loan forgiveness resulted in a large dairy$23.6 million decline in loan balances, included in the second quarter subsequentcommercial and industrial variance noted above.
The following table presents a roll forward of the Company’s gross loan balances for each of the periods noted:
| | | | | | | | | | | | | | | |
LOAN ROLLFORWARD | | | | | | | | | | | | | | | |
(Dollars in Thousands, Unaudited) | | | | | | | | | | | | | | | |
| | For the three months ended: | | For the six months ended: | |||||||||||
| | | June 30, 2022 | | | March 31, 2022 | | | June 30, 2021 | | | June 30, 2022 | | | June 30, 2021 |
Gross loans beginning balance | | $ | 1,983,331 | | $ | 1,989,726 | | $ | 2,288,468 | | $ | 1,989,726 | | $ | 2,463,111 |
New credit extended | | | 119,553 | | | 22,543 | | | 21,698 | | | 142,096 | | | 88,294 |
Loan purchases | | | 46,364 | | | 126,718 | | | — | | | 173,082 | | | — |
Changes in line of credit utilization | | | (17,837) | | | (19,553) | | | (17,071) | | | (37,390) | | | (39,657) |
Change in mortgage warehouse | | | 956 | | | (44,005) | | | (37,588) | | | (43,049) | | | (157,327) |
Pay-downs, maturities, charge-offs and amortization (1) | | | (109,705) | | | (92,098) | | | (110,711) | | | (201,803) | | | (209,625) |
Gross loans ending balance | | | 2,022,662 | | | 1,983,331 | | | 2,144,796 | | | 2,022,662 | | | 2,144,796 |
Deferred costs and (fees), net | | | (1,081) | | | (1,200) | | | (3,835) | | | (1,081) | | | (3,835) |
Loans, net of deferred costs and (fees) | | $ | 2,021,581 | | $ | 1,982,131 | | $ | 2,140,961 | | $ | 2,021,581 | | $ | 2,140,961 |
53
The Company’s regulatory commercial real estate concentration ratio decreased to the borrower’s sale238% at June 30, 2022 as compared to 248% at December 31, 2021.
Unused commitments, excluding mortgage warehouse and overdraft lines, were $199.4 million at June 30, 2022, compared to $242.3 million at December 31, 2021. Total line utilization, excluding mortgage warehouse and consumer overdraft lines, was 61.2% at June 30, 2022 and 61.0% at December 31, 2021. Mortgage warehouse utilization declined significantly to 12% at June 30, 2022, as compared to 28% at December 31, 2021. It should be noted that approximately $278.0 million of land adjacent to the business. As noted, outstanding balances on mortgage warehouse lines were down $44 million, or 27%, duemoved to a drop in utilization on thoserepurchase agreement lines that provide stronger credit protection to 31% at September 30, 2017 from 48% at December 31, 2016. Commercial loan and lease balances reflect a net decline of $12 million, or 10%,the Company, as the addition of new commercial lending relationships waswell as 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. Consumerfavorable regulatory capital treatment as these repurchase lines are not considered off-balance sheet commitments.
As expected, PPP loans also declined by $2 million, or 15%. We continue to actively seek quality loan participationsdecline as borrowers receive forgiveness on these loans. There were 107 loans for $8.2 million outstanding at June 30, 2022, compared 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 $41438 loans for $31.8 million at December 31, 2016.2021.
Management remains focused on loan growth, which combined with stronger economic activity in some of our markets has led to record levels for our pipeline 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.
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 include 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 4013 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)
| | | | | | | | | |
|
| June 30, 2022 |
| December 31, 2021 |
| June 30, 2021 | |||
NON-ACCRUAL LOANS: | | | | | | | | | |
Real estate: | | | | | | | | | |
Other construction/land | | $ | — | | $ | — | | $ | — |
1-4 family - closed-end | | | 745 | | | 1,023 | | | 1,473 |
Equity lines | | | 62 | | | 892 | | | 2,138 |
Commercial real estate - owner occupied | | | 379 | | | 1,234 | | | 1,278 |
Commercial real estate - non-owner occupied | | | — | | | — | | | — |
Farmland | | | 19,301 | | | — | | | 427 |
TOTAL REAL ESTATE | | | 20,487 | | | 3,149 | | | 5,316 |
Agriculture | | | 8,444 | | | 378 | | | 517 |
Commercial and industrial | | | 814 | | | 973 | | | 1,423 |
Consumer loans | | | — | | | 22 | | | 20 |
TOTAL NONPERFORMING LOANS | | | 29,745 | | | 4,522 | | | 7,276 |
| | | | | | | | | |
Foreclosed assets | | | 2 | | | 93 | | | 774 |
Total nonperforming assets | | $ | 29,747 | | $ | 4,615 | | $ | 8,050 |
Performing TDRs (1) | | $ | 4,714 | | $ | 4,910 | | $ | 10,774 |
Nonperforming loans as a % of total gross loans and leases | | | 1.47% | | | 0.23% | | | 0.34% |
Nonperforming assets as a % of total gross loans and leases and foreclosed assets | | | 1.47% | | | 0.23% | | | 0.38% |
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. |
54
Total nonperforming assets were reducedincreased by $1.8$25.1 million, or 21%,to $29.7 million during the first nine monthshalf of 2017. Nonperforming2022, primarily as a result of a downgrade in the first quarter of 2022, consisting of one relationship in the dairy industry comprising four separate loans. These loans declinedwere written down by $2.2$1.96 million or 35%, while foreclosed assets increased by $449,000, or 20%. Non-accruing loan balances secured by real estate totaled $3.3 million at September 30, 2017, comprising 80% of total nonperforming loans and reflecting a decline of $1.8 million, or 35%, since December 31, 2016 due primarily to principal pay-downs and balances returned to accrual status.no further allowance for credit losses was deemed necessary on these loans. The balanceCompany's ratio of nonperforming loans to gross loans increased to 1.47% at SeptemberJune 30, 2017 includes $2.5 million in TDRs2022 from 0.23% at December 31, 2021. All of the Company's nonperforming assets are periodically reviewed and other loans that were paying as agreed, but which metare either well-reserved based on current loss expectations or are carried at 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$4.7 million in loans classified as performing TDRs foron which we were still accruing interest as of SeptemberJune 30, 2017,2022, a reductiondecrease of $1.5$0.2 million, or 10%4%, relative to December 31, 2016.2021.
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$0.002 million at SeptemberJune 30, 2017,2022 and was$0.1 million December 31, 2021 comprised of 14 propertiesone property classified as OREOOREO. The property was written down to fair value less disposition costs in the second quarter of 2022 and two mobile homes. Atsubsequently sold in the endthird quarter of 2016 foreclosed assets totaled just over $2.2 million, consisting of 11 properties classified as OREO and two mobile homes.2022. 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 $5.3 million in loans past due 30-59 days at June 30, 2022. This is an increase of $3.1 million over the balance at December 31, 2021. 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.
ALLOWANCE FOR CREDIT LOSSES – LOANS AND LEASES RECEIVABLE
The allowance for loancredit losses on loans and lease losses,leases, a contra-asset, is established through a provisionperiodic provisions for loancredit losses on loans and lease losses.leases. It is maintained at a level that is considered adequate to absorb probablemeasure expected losses on specificallyindividually identified impaired loans, as well as probable incurredexpected 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.
The Company’sAfter deferring implementation of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) under section 4014 of the CARES Act, the Company implemented CECL on January 1, 2022. Upon implementation the Company recorded a $10.4 million increase in the allowance for credit losses, which included a $0.9 million reserve for unfunded commitments as an adjustment to equity, net of deferred taxes.
The Company's allowance for credit losses on loans and leases was $22.8 million at June 30, 2022, as compared to $14.3 million at December 31, 2021, and $16.4 million at June 30, 2021. The $8.5 million increase in the allowance for credit losses on loans and leases during the first half of 2022 is due to a $9.5 million one-time adjustment from the implementation of CECL on January 1, 2022, a $3.1 million provision for credit losses on loans and leases, and net loan and lease lossescharge-offs of $4.1 million.
The allowance was $8.8 million, or 0.67%1.13% of gross loans at SeptemberJune 30, 2017, relative to $9.7 million, or 0.77%2022, 0.72% of gross loans at December 31, 2016. The decline resulted from2021, and 0.77% of total loans at June 30, 2021. Management's detailed analysis indicates that the charge-off of certain impaired loan balances against previously-established reserves, partially offset by reserves providedCompany's allowance for credit losses inherent in incremental loan balanceson loans and unanticipated charge-offs. Moreover, our needleases should be sufficient to cover credit losses 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 booked at their fair values and thus initially did not necessarily require loss reserves. The ratiolife of the allowance to nonperforming loans was 213.31% at Septemberand leases outstanding as of June 30, 2017,2022, but no assurance can be given that the Company will not experience substantial future losses relative to 152.41% at December 31, 2016the size of the loan and 157.20% at September 30, 2016. lease loss allowance.
A separate allowance of $344,000$0.9 million for potential credit losses inherent in unused commitments is included in other liabilities at SeptemberJune 30, 2017.2022, as compared to $0.2 million at December 31, 2021. As mentioned previously a $0.9 million
55
one-time adjustment was recorded to the reserve for unfunded commitments on January 1, 2022 upon the implementation of CECL.
49
56
The following table that follows summarizes the activity in the credit allowance for loanlosses on loans and lease lossesleases for the noted periods:
Allowance for Credit Losses on Loans and Leases
(dollars in thousands, unaudited)
| | | | | | | | | | | | | | | |
| | For the three | | For the three | | For the six | | For the six | | For the year ended | |||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| December 31, | |||||
Balances: | | 2022 | | 2021 | | 2022 | | 2021 | | 2021 | |||||
Average gross loans and leases outstanding during period (1) | | $ | 2,011,868 | | $ | 2,184,899 | | $ | 1,981,947 | | $ | 2,275,467 | | $ | 2,169,582 |
Gross loans and leases outstanding at end of period | | $ | 2,022,662 | | $ | 2,144,796 | | $ | 2,022,662 | | $ | 2,144,796 | | $ | 1,989,726 |
| | | | | | | | | | | | | | | |
Allowance for credit losses on loans and leases: | | | | | | | | | | | | | | | |
Balance at beginning of period | | $ | 22,530 | | $ | 18,319 | | $ | 14,256 | | $ | 17,738 | | $ | 17,738 |
Adoption of ASC 326 | | | — | | | — | | | 9,454 | | | — | | | — |
Provision charged to expense | | | 2,548 | | | (2,100) | | | 3,148 | | | (1,850) | | | (3,650) |
Charge-offs | | | | | | | | | | | | | | | |
Real estate | | | | | | | | | | | | | | | |
1-4 family residential construction | | | — | | | — | | | — | | | — | | | — |
Other construction/land | | | — | | | — | | | — | | | — | | | — |
1-4 family - closed-end | | | — | | | — | | | — | | | — | | | — |
Equity lines | | | — | | | 11 | | | — | | | 12 | | | 12 |
Multi-family residential | | | — | | | — | | | — | | | — | | | — |
Commercial real estate- owner occupied | | | — | | | — | | | — | | | 233 | | | 233 |
Commercial real estate- non-owner occupied | | | 1,911 | | | — | | | 1,911 | | | — | | | — |
Farmland | | | — | | | — | | | 1,958 | | | — | | | — |
Total real estate | | | 1,911 | | | 11 | | | 3,869 | | | 245 | | | 245 |
Agricultural | | | 212 | | | 50 | | | 212 | | | 50 | | | 50 |
Commercial and industrial | | | 86 | | | 25 | | | 159 | | | 77 | | | 159 |
Consumer loans | | | 314 | | | 169 | | | 612 | | | 331 | | | 946 |
Total | | $ | 2,523 | | $ | 255 | | $ | 4,852 | | $ | 703 | | $ | 1,400 |
Recoveries | | | | | | | | | | | | | | | |
Real estate | | | | | | | | | | | | | | | |
1-4 family residential construction | | | — | | | — | | | — | | | — | | | — |
Other construction/land | | | — | | | 110 | | | 259 | | | 328 | | | 328 |
1-4 family - closed-end | | | 1 | | | 3 | | | 86 | | | 5 | | | (67) |
Equity lines | | | 12 | | | — | | | 12 | | | — | | | 25 |
Multi-family residential | | | — | | | — | | | — | | | — | | | — |
Commercial real estate- owner occupied | | | — | | | — | | | — | | | 233 | | | 233 |
Commercial real estate- non-owner occupied | | | — | | | 82 | | | — | | | 82 | | | 82 |
Farmland | | | — | | | — | | | — | | | — | | | — |
Total real estate | | | 13 | | | 195 | | | 357 | | | 648 | | | 601 |
Agricultural | | | — | | | — | | | — | | | — | | | — |
Commercial and industrial | | | 62 | | | 82 | | | 82 | | | 192 | | | 223 |
Consumer loans | | | 172 | | | 180 | | | 357 | | | 396 | | | 744 |
Total | | $ | 247 | | $ | 457 | | $ | 796 | | $ | 1,236 | | $ | 1,568 |
Net loan charge offs (recoveries) | | $ | 2,276 | | $ | (202) | | $ | 4,056 | | $ | (533) | | $ | (168) |
Balance at end of period | | $ | 22,802 | | $ | 16,421 | | $ | 22,802 | | $ | 16,421 | | $ | 14,256 |
| | | | | | | | | | | | | | | |
RATIOS | | | | | | | | | | | | | | | |
Net charge-offs (recoveries) to average loans and leases (annualized) | | | 0.45% | | | (0.04)% | | | 0.41% | | | (0.05)% | | | (0.01)% |
Allowance for credit losses on loans and leases to gross loans and leases at end of period | | | 1.13% | | | 0.77% | | | 1.13% | | | 0.77% | | | 0.72% |
Allowance for credit losses on loans and leases to nonperforming loans | | | 76.66% | | | 225.69% | | | 76.66% | | | 225.69% | | | 315.26% |
Net loan charge-offs (recoveries) to allowance for credit losses on loans and leases at end of period | | | 9.98% | | | (1.23)% | | | 17.79% | | | (3.25)% | | | (1.18)% |
Net loan charge-offs (recoveries) to provision for credit losses on loans and leases | | | 89.32% | | | 9.62% | | | 128.84% | | | 28.81% | | | 4.60% |
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
overdraft on a business account that did not previously have specifically allocated reserves, compared to $543,000 in the first nine months of 2016. Any shortfall in the allowance identified pursuant to our analysis of remaining probable losses is covered by quarter-end. OurThe Company’s credit allowance for probable losses on specifically identified impaired loans was reduced by $316,000, or 23%, during the nine months ended Septemberand leases at June 30, 2017, due to the charge-off of losses against the allowance. The allowance for probable losses inherent in non-impaired loans was reduced by $601,000, or 7%, during the first nine months of 2017, primarily from the impact of improved credit quality, net of reserves provided to accommodate loan growth. The “Provision for Loan and Lease Losses” section above includes additional details on our provision and its relationship to actual charge-offs.
The Company’s allowance for loan and lease losses at September 30, 20172022 represents Management’s best estimate of probableexpected 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 $513 million at June 30, 2022 and $561 million at December 31, 2021, representing approximately 49%25% of gross loans outstanding at SeptemberJune 30, 20172022 and 37%28% at December 31, 2016,2021. The decrease in unused commitments is due in large part to the decrease in loan balances with the increase due primarily to lower utilization on mortgage warehouse lines and an increase in commercial construction loanunfunded commitments. The Company also had undrawn letters of credit issued to customers totaling $8$3.6 million at SeptemberJune 30, 20172022 and $9 million at December 31, 2016.2021. The effect on the Company’s
57
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 $125 million letter of credit issued by the Federal Home Loan Bank on the Company’s behalf as security for certain local agency deposits and to facilitate certain credit arrangements with the Company’s customers.which totaled $77.5 million at June 30, 2022. 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.
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 in higher-yielding, longer-term bonds.into investments or loans, subject to the bank’s risk tolerances. The Company’s balance of non-interest earningnon-earning cash and due from banks was $52$82.1 million at SeptemberJune 30, 2017 and $792022 relative to $63.1 million at December 31, 2016, with the drop due primarily to a lower level of cash items in process 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.2021.
Foreclosed assets are discussed above in the section titled “Nonperforming Assets.”
Net premises and equipment was down $520,000, or 2%,decreased by $0.6 million during the first nine monthshalf of 2017, as the2022, to $22.9 million. This decline was primarily a result of depreciation. normal depreciation, net of new purchases.
Goodwill was $8$27.4 million at SeptemberJune 30, 2017,2022, unchanged for the first nine months. Other intangible assets were down $320,000, or 11%, during the first nine months, due to amortization on core deposit intangibles. The Company’s goodwillhalf of 2022. Goodwill is tested for impairment annually, unless events and other intangible assets are evaluated annually for potentialcircumstances exist which indicate that an impairment test should be performed. A Goodwill impairment test was last performed during the fourth quarter 2021 and pursuant to that analysis Management has concludeddetermined that no impairment exists asexisted. There have been no triggering events in the first six months of September 30, 2017.2022 that would require the Company ownedto perform a Goodwill impairment test, however the Company will continue to monitor its Goodwill for potential impairment.
Bank-owned life insurance, with a balance of $45$52.2 million at SeptemberJune 30, 2017,2022, 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
settlement, as well as the net addition of $2.1 million to our investment in low-income housing tax credit funds and a $2.0 million increase in our capital commitment to a small business investment corporation. Those increases were offset in part by a $2.1 million reduction in our net deferred tax asset. At September 30, 2017, the balance of other assets included as its largest components an $8.9 million investment in low-income housing tax credit funds, an $8.7 million investment in restricted stock, a net deferred tax asset of $7.5 million, accrued interest receivable totaling $6.7 million, a $6.4 million balance in suspense resources, and a $3.2 million investment in a small business investment corporation. Restricted stock is comprised primarily of Federal Home Loan Bank of San Francisco stock held in conjunction with our FHLB borrowings, and is not deemed to be marketable or liquid. Our net deferred tax asset is evaluated as of every reporting date pursuant to FASB guidance, and we have determined that no impairment exists.
DEPOSITS AND INTEREST BEARING LIABILITIES
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.
58
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)
| | | | | | |
|
| June 30, 2022 |
| December 31, 2021 | ||
Noninterest bearing demand deposits | | $ | 1,120,413 | | $ | 1,084,544 |
Interest bearing demand deposits | | | 203,032 | | | 129,783 |
NOW | | | 533,002 | | | 614,770 |
Savings | | | 482,140 | | | 450,785 |
Money market | | | 152,596 | | | 147,793 |
Time | | | 299,816 | | | 293,897 |
Brokered deposits | | | 60,000 | | | 60,000 |
Total deposits | | $ | 2,850,999 | | $ | 2,781,572 |
| | | | | | |
Percentage of Total Deposits | | | | | | |
Noninterest bearing demand deposits | | | 39.30% | | | 38.99% |
Interest bearing demand deposits | | | 7.12% | | | 4.67% |
NOW | | | 18.70% | | | 22.10% |
Savings | | | 16.91% | | | 16.21% |
Money market | | | 5.35% | | | 5.31% |
Time | | | 10.52% | | | 10.57% |
Brokered deposits | | | 2.10% | | | 2.16% |
Total | | | 100.00% | | | 100.00% |
Deposit balances fellreflect net growth of $69.4 million, or 2%, during the third quarterfirst half of 2017 due2022. Time deposits were $299.8 million at June 30, 2022 as compared to the runoff of seasonal$293.9 million at December 31, 2021. Brokered deposits they still reflect net organicwere unchanged at $60.0 million at June 30, 2022 from December 31, 2021. Non-maturity deposit growth of $84$63.5 million or 5%, for the first nine monthshalf of 2017 due2022 was 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 accounts 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 more than offset a slight decline in deposits under $250,000. customers was relatively unchanged.
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 39.3% at June 30, 2022 as compared to 39.0% at December 31, 2021.
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.
Total non-deposit interest-bearing liabilities were reducedincreased by $52$11.2 million, or 49%, induring the first nine monthshalf of 2017,2022 primarily due to a drop in FHLB borrowings facilitated by thean 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.customer repurchase agreements. Repurchase agreements totaled $9$118.0 million at SeptemberJune 30, 2017, constituting a slight increase2022 relative to theira balance of $106.9 million at year-end 2016.2021. Repurchase agreements represent “sweep accounts”, where certain customers have elected to have their commercial deposit balances above a specified threshold are transferred at the close of each business day into non-deposit accounts securedinvestments accounts. The balance in the investment account is used to have the customer purchase securities or a perfected interest in specifically identified pledged securities from the bank, which are then repurchased by investment securities. the bank from the customer the next business day.
The Company had Long term debt totaling $49.2 million and $49.1 million at June 30, 2022 and December 31, 2021, respectively, in the form of 3.25% fixed – floating subordinated debt with a ten-year maturity and junior subordinated debentures totaling $34.5$35.4 million at SeptemberJune 30, 20172022 and $34.4$35.3 million at December 31, 2016,2021, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities. The small increase resulted from the amortization
59
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 duringwas $43.1 million at June 30, 2022 as compared to $35.4 million at December 31, 2021, an increase of $7.8 million or 22%. The increase was primarily driven by the first nine months of 2017. There were sizeable increasesCompany’s investment commitment in accruals for capital commitments to low-incomea $2.0 million low income housing tax credit fundsfund and $5.0 million investment commitment in a small business investment corporation, but those were largely offset by lower balances in clearing accounts.FinTech Fund.
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
At June 30, 2022 and December 31, 2021, the Company had the following sources of primary and secondary liquidity (dollars in thousands):
| | | | | | |
Primary and secondary liquidity sources | | | June 30, 2022 | | | December 31, 2021 |
Cash and cash equivalents | | $ | 161,875 | | $ | 257,528 |
Unpledged investment securities | | | 839,833 | | | 806,132 |
Excess pledged securities | | | 38,245 | | | 47,024 |
FHLB borrowing availability | | | 830,615 | | | 787,519 |
Unsecured lines of credit | | | 305,000 | | | 305,000 |
Funds available through fed discount window | | | 32,762 | | | 50,608 |
Totals | | $ | 2,208,330 | | $ | 2,253,811 |
In addition to the above sources, the Company could obtain brokered deposits, obtain deposits via deposit listing services, or offer higher rate time deposits within our market.
Cash and cash equivalents during the first half of 2022, declined $95.7 million due to increases in investment securities and loans and leases. Utilization of remaining excess liquidity is expected to come from a combination of new organic loan originations, and new investment purchases, mostly in the form of collateralization loan obligations. In addition, it is possible that a portion of the deposits built-up during the COVID-19 pandemic could be withdrawn by customers. When looking to reduce these low-yielding cash balances with earning assets, management considers interest rate risk, including duration and extension risk; credit from correspondent banksrisk; and the FHLB totaled $398 million at September 30, 2017. An additional $105 million in credit is available from the FHLB if the Company were to pledge sufficient collateral and maintain the required amountliquidity risk of FHLB stock. such alternative assets.
The Company is also eligible to borrow approximately $74 millionperforms regular stress tests on its liquidity and at the Federal Reserve Discount Window, if necessary, based on pledged assets at September 30, 2017. Furthermore, funds can be obtained by drawing down the Company’s correspondent bank deposit accounts, or by liquidating unpledged investments or other readily saleable assets. In addition, the Company can raise immediate cashthis 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. As of September 30, 2017, unpledged debt securities plus pledged securities in excess of current pledging requirements comprised $429 million of the Company’s investment balances, compared to $386 million at December 31, 2016. Other sources of potential liquidity include but are not necessarily limited to any outstanding fed funds sold and vault cash. operations.
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$125 million at SeptemberJune 30, 2017.2022 and December 31, 2021. Other sources of liquidity include 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
60
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 primary liquidity ratio and net loans to assetsdeposits were 36.56% and available investments to assets ratios were 63% and 21%70.11%, respectively, at SeptemberJune 30, 2017,2022, as compared to internal policy guidelines of “greater than 15%” and “less than 78%” and “greater than 3%95%.” Other liquidity ratios reviewed periodically by Management and the Board include net loans to total deposits and wholesale funding to total assets (including ratiosRatios and sub-limits for the various components comprising wholesale funding),funding, which were all well within policy guidelines at SeptemberJune 30, 2017. Favorable trends in core deposits2022, are also periodically reviewed by Management and relatively high levels of liquid investments have hadthe Board. 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 and subordinated debt, shareholder dividends, and stockshare repurchases. Its primary source of funds is dividends from the Bank since the holding company does not conduct regular banking operations. As of June 30, 2022, the holding company maintained a cash balance of $7.5 million. Management anticipates that the Bank will haveholding company has sufficient earnings to provide dividends to the holding companyliquidity 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, 20162021 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.
The Company reclassified $162.1 million of securities that have the highest level of volatility to changes in interest rates from available-for-sale to held-to-maturity to mitigate the impact on tangible capital.
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 at least eight standardother interest rate scenarios in conducting our rolling 12-month12-month net interest income simulations: “stable,” upward shocks of 100, 200, 300, and 400 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. The downward shock scenarios of 200 300 and 400 basis points were temporarily suspended in the second quarter of 2020 after concurrence by the Company’s Board of Directors, due to the fact that in these down scenarios, projected interest rates would be near or below zero. At the June 2022 Finance & Sustainability Committee Meeting, Management reinstituted the down 200 scenario, due to the Federal Open Market Committee increasing rates by 150 basis points during the quarter. Pursuant to policy guidelines, we typicallygenerally attempt to limit the projected decline in net interest income relative to the 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
61
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% |
| | | | | | | | | | | | |
| | June 30, 2022 | | June 30, 2021 | ||||||||
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 | | | 9.5% | | $ | 11,559 | | | 11.3% | | $ | 11,645 |
+300 | | | 7.5% | | $ | 9,053 | | | 9.1% | | $ | 9,384 |
+200 | | | 5.6% | | $ | 6,778 | | | 6.9% | | $ | 7,072 |
+100 | | | 3.3% | | $ | 3,939 | | | 4.1% | | $ | 4,226 |
Base | | | | | | | | | | | | |
-100 | | | (6.9)% | | $ | (8,316) | | | (8.1)% | | $ | (8,306) |
-200 | | | (15.9)% | | $ | (19,279) | | | N/A | | | N/A |
Our current simulations indicateFor the periods ending June 30, 2022 and June 30, 2021, management believes that the Company has an asset-sensitive profile, meaning thatwas asset sensitive, with net income increasing in a rising rate environment in all scenarios but declining in the down shocks. The Company’s asset sensitivity based on its interest rate risk model at June 30, 2022 as compared to June 30, 2021, is similar. In the up 400 basis point shock scenario, expected net interest income over the next twelve months increases with a parallel shift up$11.6 million, or 10%, to $132.7 million at June 30, 2022 compared to an 11% increase or $11.6 million for the same period in 2021.
The Company reclassified $162.1 million of securities that have the yield curve but a drophighest level of volatility to changes in interest rates from available-for-sale to held-to-maturity to mitigate the impact on tangible capital.
Over the next twelve months, $161.9 million in surplus cash is projected to decline due to expected core loan growth as our pipelines begin to increase, and a redeployment of excess cash into variable rate investment vehicles such as collateralized loan obligations. Further, a portion of the significant increase in deposits during the COVID-19 pandemic could havebe withdrawn by customers. These expected changes in earnings assets, including overnight cash, are not modeled in the immediate rate shock model described above. Although the cost of interest-bearing liabilities will also increase in a negative impact. This profile is consistent withrate shock, the Company’s relatively large balancedeposit betas utilized in the interest rate model mitigate the magnitude of less rate-sensitive non-maturity deposits and large volume of variable-rate loans, which contribute to higher net interest income in risinga deposit rate scenarios and compressionincrease.
The change in net interest income in declining rateis similar for the up 100, 200, 300, and 400 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,$3.9 million, or 1.22%3%, 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 likelydrop $8.3 million or a negative variance of 7%. The change in net interest income in the down 200 basis point scenario is a decrease of $19.3 million or 16%. The reason for the drop in net interest income in the down 200 basis points scenario over the 100 basis point scenario is that many of the deposit products reach their floors and cannot be around $5.603 millionrepriced lower thanwhile, non-floored interest earning assets such as loans and securities can theoretically still be re-priced lower in a stable interestfalling rate scenario, for a negative
54
variance of 7.31%.environment. The unfavorable variance increases when 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 while non-floored variable-rate loan yields continue to drop. This effect is exacerbated by accelerated prepayments on fixed-rate loans and mortgage-backed securities when rates decline, although rate floors on some of our variable-rate loans partially offset other negative pressures. While we view material interest rate reductions as unlikely in the near term, the potential percentage drop in net interest income in the “down 200 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 action asimplement remedial changes if deemed appropriate. The percentage drop in net interest income exceeding internal policy guidelines will most likely continue until interest rates return to historically higher levels.
If there was an immediate downward adjustment of 100 basis points in interest rates, net interest income would drop $8.3 million or a negative variance of 8%. The reason for the drop in net interest income is, most deposit products are at their floors of 0.10% and cannot be re-priced lower, while non-floored interest earning assets such as loans and securities can theoretically still be re-priced lower in a falling rate environment. Due to the historically low current rate environment, we view any material interest rate reductions as unlikely in the near term. However, the potential percentage drop in net interest income in the “down 100 basis points” interest rate scenario exceeds our internal policy guidelines and we will continue to monitor our interest rate risk profile and implement remedial changes if deemed appropriate. | | | | | | | |
In addition to the net interest income simulations shown above, we run stress scenarios for the unconsolidated Bank modelingwhere we model 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 $2$8.0 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 level of non-maturity deposit runoff is assumed or unfavorable deposit rate changes are factored into the model, projected net interest income in declining and flat rate scenarios does not change materially relative to standard rate projections but net interest income drops and the slope reverses in rising rate scenarios.simulation.
The modeled 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
62
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 June 30, 2022 and 2021, 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 primarily driven by an increase in deposits and an increase in deposit values. The tabletables below showsshow estimated changes in the Company’s EVE as of September 30, 2017,modeled under different interest rate scenarios relative to athe base case of current interest rates:case:
| | | | | | | | | | | | |
| | June 30, 2022 | | June 30, 2021 | ||||||||
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 | | | 13.4% | | $ | 95,479 | | | 35.6% | | $ | 202,631 |
+300 | | | 10.9% | | $ | 77,821 | | | 31.8% | | $ | 181,010 |
+200 | | | 8.2% | | $ | 58,626 | | | 25.9% | | $ | 147,560 |
+100 | | | 3.6% | | $ | 25,282 | | | 15.7% | | $ | 89,293 |
Base | | | | | | | | | | | | |
-100 | | | (18.9)% | | $ | (134,337) | | | (21.3)% | | $ | (120,991) |
-200 | | | (38.6)% | | $ | (274,465) | | | N/A | | | N/A |
| 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 generallyis modeled to deteriorate in declining rate scenarios but should benefit from a parallelparallel shift upward in the yield curve. While still negative relative toThe rate of increase in EVE accelerates the base case we see a favorable swinghigher interest rates rise. This increase in EVEsensitivity is caused by the increase in gross deposits, namely, an increase in noninterest bearing deposits which become more valuable as interest rates drop more than 200 basis points, and the change 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 inherent in our balance sheet.rise. 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.
55The potential percentage drop in EVE in the “down 100 and 200 basis points” interest rate scenario exceeds our internal policy guidelines, and we will continue to monitor our interest rate risk profile and implement remedial changes if deemed appropriate. The percentage drop in EVE exceeding internal policy guidelines will most likely continue until interest rates and deposit rates return to historically higher levels.
CAPITAL R
The Company had total shareholders’ equity of $219.1$299.0 million at SeptemberJune 30, 2017,2022, comprised of $73.7$111.7 million in common stock, $2.9$4.6 million in additional paid-in capital, $141.9$233.2 million in retained earnings, and accumulated other
63
comprehensive incomeloss of $605,000.$50.4 million. At the end of 2016,2021, total shareholders’ equity was $205.9$362.5 million. The increase of $13.2 million, or 6%,decrease in shareholders’ equity during the first nine monthshalf of 20172022 is due to net income of $16.6 million, offset by a $7.0 million dividend paid to shareholders, $4.9 million in share repurchases, a $61.6 million unfavorable swing in other comprehensive income/loss due principally to changes in investment securities' fair value and a $7.3 million decrease in retained earnings due to the cumulative effect of a change in accounting principal from the additionimplementation of income, the impact ofCECL, topic 326. The remaining difference is related to stock options exercised and a $2restricted stock compensation recognized during the quarter.
The Company’s strong liquidity position enabled the transfer of $162.1 million absolute increase in accumulated otherof “available-for-sale” investment securities to “held-to-maturity” classification effective April 1, 2022. The transfer was initiated to reduce the effect of future rate increases on the available-for-sale portfolio, mark-to-market adjustments, comprehensive income net of dividends paid.and equity.
The Company approved a new share repurchase program (the 2021 Share Repurchase Plan) on October 21, 2021 and authorized one million shares to be repurchased under this plan. The previous 2003 Share Repurchase Plan was cancelled and the 268,301 shares remaining in that plan were incorporated into the 2021 Share Repurchase Plan. There were no share repurchases executed by the Company during182,562 shares repurchased in the first three quartershalf of 2017.2022, with 630,000 shares remaining to be repurchased under the 2021 Share Repurchase Plan.
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 | |
| | June 30, | | December 31, | | to be | | Community Bank | |
|
| 2022 |
| 2021 |
| Well Capitalized (1) | | Leverage Ratio (2) | |
Bank of the Sierra | | | | | | | | | |
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio") (3) | | 11.72 | % | 11.31 | % | 5.00 | % | 9.00 | % |
Sierra Bancorp | | | | | | | | | |
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio") (3) | | 10.45 | % | 10.43 | % | 5.00 | % | N/A | |
(1) | The Company was subject to these minimum requirements under the regulatory framework for Prompt Corrective Action at December 31, 2019. |
(2) | 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. |
(3) | The Company has elected to phase in the impact of implementing CECL on regulatory capital over a three-year period. |
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 1,
64
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 September 30, 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.”
PART I – FINANCIAL INFORMATION
Item 4
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 six months of 20172022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
57
65
PART II - OTHE
The Company is involvedand the Bank are defendants, from time to time, in various legal proceedings in various points of the normallegal process arising from transactions conducted in the ordinary course of business. In the opinion of Management, anyin consultation with legal counsel, it is not probable that current legal actions will result in an unfavorable outcome that has a material adverse effect on the Company’s consolidated financial condition, results of operations, comprehensive income, or cash flows. In the event that such legal action results in an unfavorable outcome, the resulting liability resulting from such proceedings would notcould have a material adverse effect on the Company’s consolidated financial condition orposition, results of operation.operations, comprehensive income, or cash flows.
There were no material changes from the risk factors disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2016.2021.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
(c) Stock Repurchases
In September of 2016October 2021 the Board approved the 2021 Share Repurchase Plan by authorizing 1,000,000 shares of common stock for repurchase. In conjunction with this action, the Board terminated the current Share Repurchase Plan which authorized 500,000 shares of common stock for repurchase, subsequent to the completion of previous stock buyback plans. The authorization ofrepurchase. There are 630,000 shares remaining for repurchase does not provide assurance that a specific quantity of shares will be repurchased, andunder the program may be suspended at any time at Management’s discretion. The Company did not repurchase any shares 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.current Share Repurchase Plan.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable
Not applicable
58
ITEM 5: OTHER INFORMATION On August 3, 2022, the Company entered into its standard form of indemnification agreement for directors and senior officers with its two new directors, Ermina Karim and Michele Gil (the “Indemnitees”). The form indemnification agreement provides that the Indemnitees are entitled to indemnification from the Company for expenses, judgments, fines, penalties or amounts paid in settlement incurred in a proceeding against the Indemnitee by reason of their service as an officer or director of the Company, but only if the Indemnitee acted in good faith and in a manner reasonably believed to be in the best interests of the Company, and with respect to any criminal proceeding they had no reasonable cause to believe their conduct was unlawful; that the obligation for indemnification continues so long as the Indemnitee shall be subject to any possible proceeding by reason of the fact that Indemnitee served in any capacity referred to in the Indemnification Agreement; and that Indemnification is limited in certain situations as when required by law. Indemnitees are entitled as well to any broader indemnification protections provided by law or subsequently adopted through amended bylaws. The foregoing summary of the terms of the Indemnification Agreements is qualified in its entirety by reference to the complete text of the Indemnification Agreement, and the form of such Indemnification Agreements is filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 29, 2021 and incorporated herein by reference.
66
ITEM 6: ExhibitsEXHIBITS
104 |
|
|
(1) |
|
|
|
|
| Filed as Exhibit 3.1 to the Form 10-Q filed with the SEC on August 7, 2009 and incorporated herein by reference. |
(2) |
| Filed as an Exhibit to the Form 8-K filed with the SEC on |
(3) |
| Filed as an Exhibit |
(4) |
| Filed as an Exhibit to the Form 8-K filed with the SEC on |
(5) |
| Filed as Exhibits |
(6) |
| 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) |
| 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) |
| Filed as Exhibit 10.20 to the Form 10-K filed with the SEC on March 15, 2007 and incorporated herein by reference. |
(9) |
| Filed as Exhibits 10.1 through |
(10) |
|
|
| Filed as Exhibit 10.24 to the Form 10-Q filed with the SEC on May 7, 2015 and incorporated herein by reference. |
(11) |
| 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. |
(12) |
| Filed as Exhibit 10.1 to the Form 8-K filed with the SEC on March 17, 2017 and incorporated herein by reference. |
(13) |
|
|
(14) | Filed as Exhibit 99.1 to |
(15) | Filed as Exhibit 99.1 to the Form 8-K filed with the SEC on January 21, 2020 and incorporated by reference. |
(16) | Filed as Exhibit 10.1 to the Form 8-K filed with the SEC on December 09, 2020 and incorporated herein by reference. |
(17) | 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.
5967
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:
| | |
August 4, 2022 |
| /s/ Kevin J. McPhaill |
Date | | SIERRA BANCORP |
| | Kevin J. McPhaill |
| | President & Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| | /s/ |
Date | | SIERRA BANCORP |
| |
|
| | Chief Financial Officer |
| |
|
August 4, 2022 | | /s/ Cindy L. Dabney |
Date | | SIERRA BANCORP |
| | Cindy L. Dabney |
| | Principal Accounting |
60
68