| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial condition. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the accompanying Notes to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q included in “Part I. Item 1. Financial Statements.”
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10–Q may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act. These forward-looking statements reflect our current views and are not historical facts. These statements may include statements regarding projected performance for periods following the date of this report. These statements can generally be identified by use of phrases such as “believe,” “expect,” “will,” “seek,” “should,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “project,” “commit” or other words of similar import. Similarly, statements that describe our future financial condition, results of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements. Statements that project future financial conditions, results of operations, and shareholder value are not guarantees of performance and many of the factors that will determine these results and values are beyond our ability to control or predict. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and other parts of this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (“Form 10-K”), could cause actual results to differ materially from those anticipated in these forward-looking statements. The following is a non-exclusive list of factors which could cause actual results to differ materially from forward-looking statements in this Quarterly Report on Form 10-Q:
| ◾ | changes in general economic conditions, either nationally, in California, or in our local markets; |
| ◾ | inflation, changes in interest rates, securities market volatility and monetary fluctuations; |
| ◾ | increases in competitive pressures among financial institutions and businesses offering similar products and services; |
| ◾ | risks associated with negative events in the banking industry in the past year, and any legislative and/or bank regulatory actions, that could potentially impact earnings, liquidity and/or the availability of capital or which could increase the cost of our deposit insurance by the FDIC; |
| ◾ | higher defaults in our loan and lease portfolio than we expect; |
| ◾ | changes in management’s estimate of the adequacy of the allowance for credit losses; |
| ◾ | risks associated with our growth and expansion strategy and related costs; |
| ◾ | increased lending risks associated with our high concentration of real estate loans; |
| ◾ | legislative or regulatory changes or changes in accounting principles, policies or guidelines; |
| ◾ | operational risks, including processing, information systems, cybersecurity, vendor problems, business interruption, and fraud; |
| ◾ | regulatory or judicial proceedings; and |
| ◾ | other factors and risks including those described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. |
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. Please take into account that forward-looking statements speak only as of the date of this Form 10-Q (or documents incorporated by reference, if applicable).
The Company does not undertake any obligation to publicly correct or update any forward-looking statements if it later becomes aware that actual results are likely to differ materially from those expressed in such forward-looking statements, except as required by law.
Overview
Farmers & Merchants Bancorp (the “Company” or “FMCB”) is a Delaware registered bank holding company organized in 1999. As a registered bank holding company, FMCB is subject to regulation, supervision, and examination by the Federal Reserve and by the California Department of Financial Protection and Innovation (“DFPI”). The Company’s principal business is to serve as a holding company for Farmers & Merchants Bank of Central California (the “Bank” or “F&M Bank”) and for other banking or banking related subsidiaries, which the Company may establish or acquire. Over 107 years ago, August 1, 1916, marked the first day of business for Farmers & Merchants Bank (the “Bank”). The Bank was incorporated under the laws of the State of California and licensed as a state-chartered bank. The Bank’s first venture out of Lodi occurred when the Galt office opened in 1948. Since then the Bank has opened full-service branches in Linden, Manteca, Riverbank, Modesto, Sacramento, Elk Grove, Turlock, Hilmar, Stockton, Merced, Walnut Creek, Concord, Walnut Grove, Oakland and Napa. As a legal entity separate and distinct from its subsidiary, the Company’s principal source of funds is, and will continue to be, dividends paid by and other funds received from the Bank. Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made by the Bank to the Company.
In March 2002, F & M Bancorp, Inc. was created to protect the name “F & M Bank.” During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name, “F & M Bank,” as part of a larger effort to enhance the Company’s image and build brand name recognition. Since 2002, the Company has converted all of its daily operating and image advertising to the “F & M Bank” name and the Company’s logo, slogan and signage were redesigned to incorporate the trade name, “F & M Bank.”
The Company’s outstanding common stock as of March 31, 2024, consisted of 742,770 shares of common stock, $0.01 par value. No shares of preferred stock were issued or outstanding as of March 31, 2024. The common stock of the Company is not widely held or listed on any exchange. However, trades are reported on the OTCQX under the symbol “FMCB.”
The primary source of funding for the Company’s growth has been the generation of core deposits, which the Company raises through its existing branch locations, newly opened branch locations, or through acquisitions. Loan growth over the years is the result of organic growth generated by the Company’s seasoned relationship managers and supporting associates who provide outstanding service and responsiveness to the Company’s clients.
The Company’s results of operations are largely dependent on net interest income. Net interest income is the difference between interest income earned on interest earning assets, which are comprised of loans and leases, investment securities, short-term investments and interest bearing deposits at other banks, and the interest the Company pays on interest bearing liabilities, which are primarily deposits, and, to a lesser extent, other borrowings. Management strives to match the re-pricing characteristics of the interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve.
The Company measures its performance by calculating the net interest margin, return on average assets, return on average equity and the efficiency ratio. Net interest margin is calculated by dividing net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities, by average interest earning assets. Net interest income is the Company’s largest source of revenue. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income. The return on average assets is calculated by dividing the Company’s net income by its total average assets and the return on average equity is calculated by dividing the Company’s net income by its shareholder equity. The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income.
Critical Accounting Policies and Estimates
Our accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies and estimates relate to the allowance for credit losses on loans and leases held for investment, investment securities, the carrying value of goodwill and other intangible assets, fair value measurements and the realization of deferred income tax assets and liabilities.
Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K.
Impact of Recently Issued Accounting Standards
See Note 1. “Basis of Presentation and Significant Accounting Policies” to the Unaudited Consolidated Financial Statements in “Item 1. Financial Information” in this Quarterly Report on Form 10-Q.
Non-GAAP Measurements
We use certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. We used the following non-GAAP measures in this Form 10-Q:
| • | Tangible common equity ratio and tangible book value per common share: Given that the use of these measures is prevalent among banking regulators, investors, and analysts, we disclose them in addition to the related GAAP measures of return on average equity and book value per common share. The reconciliations of these non-GAAP measurements to the GAAP measurements are presented in the following tables for and as of the periods presented. |
Tangible Common Equity Ratio and Tangible Book Value Per Common Share |
| | March 31, 2024 | | | December 31, 2023 | | | March 31, 2023 | |
| (Dollars in thousands, except per share data) | | | | | | | | | |
| Shareholders' equity | | $ | 565,217 | | | $ | 549,755 | | | $ | 508,902 | |
| Less: Intangible assets | | | 13,282 | | | | 13,419 | | | | 13,849 | |
| Tangible common equity | | $ | 551,935 | | | $ | 536,336 | | | $ | 495,053 | |
| | | | | | | | | | | | | |
| Total Assets | | $ | 5,714,573 | | | $ | 5,308,928 | | | $ | 5,133,771 | |
| Less: Intangible assets | | | 13,282 | | | | 13,419 | | | | 13,849 | |
| Tangible assets | | $ | 5,701,291 | | | $ | 5,295,509 | | | $ | 5,119,922 | |
| | | | | | | | | | | | | |
Tangible common equity ratio(1) | | | 9.68 | % | | | 10.13 | % | | | 9.67 | % |
Book value per common share(2) | | $ | 760.96 | | | $ | 735.00 | | | $ | 667.04 | |
Tangible book value per common share(3) | | $ | 743.08 | | | $ | 717.05 | | | $ | 648.88 | |
Common shares outstanding | | | 742,770 | | | | 747,971 | | | | 762,931 | |
(1) Tangible common equity divided by tangible assets
(2) Total common equity divided by common shares outstanding.
(3) Tangible common equity divided by common shares outstanding.
Results of Operations
The following discussion and analysis is intended to provide a better understanding of the Company’s and its subsidiaries’ performance during each of the three month periods ended March 31, 2024 and 2023, and at December 31, 2023 and the material changes in financial condition, operating income, and expense of the Company and its subsidiaries as shown in the accompanying consolidated financial statements. Information related to the comparison of the results of operations for the years ended December 31, 2023, and 2022 can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2023 Annual Report on Form 10-K filed with the SEC on March 14, 2024.
Factors that determine the level of net income include the volume of earning assets and interest bearing liabilities, yields earned and rates paid, fee income, non-interest expense, the level of non-performing loans and other non-earning assets, and the amount of non-interest bearing liabilities supporting earning assets. Non-interest income includes card processing fees, service charges on deposit accounts, bank-owned life insurance income, gains/losses on the sale of investment securities, and gains/losses on deferred compensation plan investments. Non-interest expense consists primarily of salaries and employee benefits, cost of deferred compensation benefits, occupancy, data processing, deposit insurance, marketing, professional services, and other expenses.
Earnings Performance
The following table presents performance metrics for the periods indicated:
| | | Three Months Ended | |
| (dollars in thousands, except per share amounts) | | March 31, 2024 | | | December 31, 2023 | | | March 31, 2023 | |
| Earnings Summary: | | | | | | | | | |
| Interest income | | $ | 66,641 | | | $ | 67,392 | | | $ | 59,632 | |
| Interest expense | | | 14,928 | | | | 13,592 | | | | 3,910 | |
| Net interest income | | | 51,713 | | | | 53,800 | | | | 55,722 | |
| Provision for credit losses | | | - | | | | 2,350 | | | | 1,500 | |
| Non-interest income | | | 5,075 | | | | 2,401 | | | | 3,460 | |
| Non-interest expense | | | 25,521 | | | | 24,866 | | | | 28,183 | |
| Income before taxes | | | 31,267 | | | | 28,985 | | | | 29,499 | |
| Income tax expense | | | 8,544 | | | | 7,560 | | | | 5,952 | |
| Net Income | | $ | 22,723 | | | $ | 21,425 | | | $ | 23,547 | |
| | | | | | | | | | | | | |
| Per Common Share Data: | | | | | | | | | | | | |
| Diluted earnings per common share | | $ | 30.56 | | | $ | 28.55 | | | $ | 30.80 | |
| Book value per common share | | $ | 760.96 | | | $ | 735.00 | | | $ | 667.04 | |
Tangible book value per common share(1) | | $ | 743.08 | | | $ | 717.05 | | | $ | 648.88 | |
| | | | | | | | | | | | | |
| Performance Ratios: | | | | | | | | | | | | |
| Return on average assets | | | 1.71 | % | | | 1.63 | % | | | 1.80 | % |
| Return on average equity | | | 16.33 | % | | | 16.54 | % | | | 18.93 | % |
| Net interest margin (tax equivalent) | | | 4.14 | % | | | 4.24 | % | | | 4.55 | % |
| Yield on average loans and leases (tax equivalent) | | | 6.09 | % | | | 6.10 | % | | | 5.69 | % |
| Cost of average total deposits | | | 1.27 | % | | | 1.14 | % | | | 0.32 | % |
| Efficiency ratio | | | 44.94 | % | | | 44.24 | % | | | 47.62 | % |
| Loan-to-deposit ratio | | | 74.73 | % | | | 78.52 | % | | | 75.73 | % |
| Percentage of checking deposits to total deposits | | | 49.39 | % | | | 51.76 | % | | | 55.89 | % |
| | | | | | | | | | | | | |
| Capital Ratios Bancorp: | | | | | | | | | | | | |
| Common equity tier 1 capital to risk-weighted assets | | | 12.73 | % | | | 12.30 | % | | | 12.19 | % |
| Tier 1 capital to risk-weighted assets | | | 12.95 | % | | | 12.53 | % | | | 12.43 | % |
| Risk-based capital to risk-weighted assets | | | 14.21 | % | | | 13.78 | % | | | 13.68 | % |
| Tier 1 leverage capital ratio | | | 10.83 | % | | | 10.38 | % | | | 9.94 | % |
Tangible common equity ratio(1) | | | 9.68 | % | | | 10.13 | % | | | 9.67 | % |
(1) See "Non-GAAP Measurements"
Average Balance and Yields
The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield, cost and net interest margin information for the periods presented. Average balances are derived from daily balances.
| | | Three Months Ended March 31, | |
| | | 2024 | | | 2023 | |
| (Dollars in thousands) | | Average Balance | | | Interest Income / Expense | | | Average Yield / Rate | | | Average Balance | | | Interest Income / Expense | | | Average Yield / Rate | |
| ASSETS | | | | | | | | | | | | | | | | | | |
| Interest earnings deposits in other banks and federal funds sold | | $ | 332,575 | | | $ | 4,530 | | | | 5.48 | % | | $ | 521,147 | | | $ | 5,961 | | | | 4.64 | % |
Investment Securities:(1) | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable securities | | | 969,234 | | | | 5,708 | | | | 2.37 | % | | | 967,699 | | | | 4,805 | | | | 2.01 | % |
Non-taxable securities(2) | | | 63,079 | | | | 762 | | | | 4.83 | % | | | 57,513 | | | | 704 | | | | 4.90 | % |
| Total investment securities | | | 1,032,313 | | | | 6,470 | | | | 2.52 | % | | | 1,025,212 | | | | 5,509 | | | | 2.18 | % |
Loans:(3) | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | | 1,322,337 | | | | 17,622 | | | | 5.36 | % | | | 1,280,959 | | | | 16,649 | | | | 5.27 | % |
| Agricultural | | | 725,078 | | | | 10,322 | | | | 5.73 | % | | | 715,756 | | | | 9,614 | | | | 5.45 | % |
| Residential and home equity | | | 401,578 | | | | 4,792 | | | | 4.80 | % | | | 387,369 | | | | 4,095 | | | | 4.29 | % |
| Construction | | | 225,430 | | | | 3,898 | | | | 6.95 | % | | | 169,913 | | | | 2,937 | | | | 7.01 | % |
| Total real estate | | | 2,674,423 | | | | 36,634 | | | | 5.51 | % | | | 2,553,997 | | | | 33,295 | | | | 5.29 | % |
| Commercial & industrial | | | 499,071 | | | | 9,261 | | | | 7.46 | % | | | 465,383 | | | | 7,624 | | | | 6.64 | % |
| Agricultural | | | 313,653 | | | | 6,479 | | | | 8.31 | % | | | 280,467 | | | | 5,204 | | | | 7.52 | % |
| Commercial leases | | | 168,526 | | | | 2,946 | | | | 7.03 | % | | | 116,948 | | | | 1,805 | | | | 6.26 | % |
| Consumer and other | | | 5,619 | | | | 88 | | | | 6.30 | % | | | 5,580 | | | | 80 | | | | 5.81 | % |
| Total loans and leases | | | 3,661,292 | | | | 55,408 | | | | 6.09 | % | | | 3,422,375 | | | | 48,008 | | | | 5.69 | % |
| Non-marketable securities | | | 15,549 | | | | 388 | | | | 10.04 | % | | | 15,549 | | | | 301 | | | | 7.85 | % |
| Total interest earning assets | | | 5,041,729 | | | | 66,796 | | | | 5.33 | % | | | 4,984,283 | | | | 59,779 | | | | 4.86 | % |
| Allowance for credit losses | | | (75,448 | ) | | | | | | | | | | | (67,691 | ) | | | | | | | | |
| Non-interest earning assets | | | 339,939 | | | | | | | | | | | | 311,140 | | | | | | | | | |
| Total average assets | | $ | 5,306,220 | | | | | | | | | | | $ | 5,227,732 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand | | $ | 914,618 | | | | 888 | | | | 0.39 | % | | $ | 1,068,504 | | | | 444 | | | | 0.17 | % |
| Savings and money market accounts | | | 1,618,678 | | | | 7,186 | | | | 1.79 | % | | | 1,561,684 | | | | 2,503 | | | | 0.65 | % |
| Certificates of deposit greater than $250,000 | | | 378,714 | | | | 3,094 | | | | 3.29 | % | | | 147,704 | | | | 487 | | | | 1.34 | % |
| Certificates of deposit less than $250,000 | | | 338,031 | | | | 3,477 | | | | 4.14 | % | | | 206,214 | | | | 280 | | | | 0.55 | % |
| Total interest bearing deposits | | | 3,250,041 | | | | 14,645 | | | | 1.81 | % | | | 2,984,106 | | | | 3,714 | | | | 0.50 | % |
| Short-term borrowings | | | 5,497 | | | | 62 | | | | 4.54 | % | | | 3 | | | | - | | | | 0.00 | % |
| Subordinated debentures | | | 10,310 | | | | 221 | | | | 8.62 | % | | | 10,310 | | | | 196 | | | | 7.71 | % |
| Total interest bearing liabilities | | | 3,265,848 | | | | 14,928 | | | | 1.84 | % | | | 2,994,419 | | | | 3,910 | | | | 0.53 | % |
| Non-interest bearing deposits | | | 1,403,384 | | | | | | | | | | | | 1,663,152 | | | | | | | | | |
| Total funding | | | 4,669,232 | | | | 14,928 | | | | 1.29 | % | | | 4,657,571 | | | | 3,910 | | | | 0.34 | % |
| Other non-interest bearing liabilities | | | 80,276 | | | | | | | | | | | | 72,710 | | | | | | | | | |
| Shareholders' equity | | | 556,712 | | | | | | | | | | | | 497,451 | | | | | | | | | |
| Total average liabilities and shareholders' equity | | $ | 5,306,220 | | | | | | | | | | | $ | 5,227,732 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income and margin(4) | | | | | | $ | 51,868 | | | | 4.14 | % | | | | | | $ | 55,869 | | | | 4.55 | % |
| Interest rate spread | | | | | | | | | | | 3.49 | % | | | | | | | | | | | 4.33 | % |
| Tax equivalent adjustment | | | | | | | (155 | ) | | | | | | | | | | | (147 | ) | | | | |
| Net interest income | | | | | | $ | 51,713 | | | | 4.13 | % | | | | | | $ | 55,722 | | | | 4.53 | % |
(1)Excludes average unrealized losses of $18.5 million and $28.2 million for the three months ended March 31, 2024, and 2023, respectively, which are included in non-interest earning assets.
(2) Yields and interest income are calculated on a fully taxable equivalent basis using the current statutory federal tax rate of 21%.
(3)Loan interest income includes loan fees of $1.4 million and $2.0 million for the three months ended March 31, 2024 and 2023, respectively.
(4)Net interest margin is computed by dividing net interest income by average interest earning assets.
Interest-bearing deposits with banks and FRB balances are earning assets available to the Company. Average interest-bearing deposits with banks consisted primarily of FRB deposits. Balances with the FRB earned an average interest rate of 5.48% and 4.64% for the three months ended March 31, 2024 and 2023, respectively. The increase was primarily the result of the Federal Reserve increasing rates by 75 basis points from March 2023 to July 2023. Average interest-bearing deposits with banks was $333 million and $521 million for the three months ended March 31, 2024 and 2023, respectively. Interest income on interest-bearing deposits with banks was $4.5 million and $6.0 million for the three months ended March 31, 2024 and 2023, respectively.
The investment portfolio is also a component of the Company’s earning assets. Historically, the Company invested primarily in: (1) mortgage-backed securities issued by government-sponsored entities; (2) debt securities issued by the U.S. Treasury, government agencies and government-sponsored entities; and (3) investment grade bank-qualified municipal bonds. However, at certain times the Company has selectively added investment grade corporate securities (floating rate and fixed rate with maturities less than 7 years) to the portfolio in order to obtain yields that exceed government agency securities of equivalent maturity. Since the risk factor for these types of investments is generally lower than that of loans and leases, the yield earned on investments is generally less than that of loans and leases.
Average total investment securities were $1.0 billion for the three months ended March 31, 2024 and 2023, respectively. The average yield on total investment securities was 2.52% and 2.18% for the three months ended March 31, 2024 and 2023, respectively. The increase in the yield reflects the increase in yields on purchases over the last year.
Average loans and leases held for investment were $3.7 billion and $3.4 billion for the three months ended March 31, 2024 and 2023, respectively. The average yield on the loan and lease portfolio was 6.09% and 5.69% for the three months ended March 31, 2024 and 2023, respectively. The increase in the loan yield reflects the increase in market interest rates over the last year.
Average interest-bearing deposits were $3.3 billion and $3.0 billion for the three months ended March 31, 2024 and 2023, respectively. The average rate paid on interest-bearing deposits was 1.81% and 0.50% for the three months ended March 31, 2024 and 2023, respectively. Total interest expense on interest-bearing deposits was $14.6 million and $3.7 million for the three months ended March 31, 2024 and 2023, respectively, with the increases driven by increases in short-term market interest rates from March 2023 to July 2023 and customers seeking higher rates on deposit products. The average rate paid on total funding costs was 1.29% and 0.34% for the three months ended March 31, 2024 and 2023, respectively.
Rate/Volume Analysis
The following table shows the change in interest income and interest expense and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates. For purposes of this table, the change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of change in each.
| | | Three Months Ended March 31, 2024 compared with 2023 | |
| | | Increase (Decrease) Due to: | |
| (Dollars in thousands) | | Volume | | | Rate | | | Net | |
| Interest income: | | | | | | | | | |
| Interest earnings deposits in other banks and federal funds sold | | $ | (6,787 | ) | | $ | 5,356 | | | $ | (1,431 | ) |
| Investment securities: | | | | | | | | | | | | |
| Taxable securities | | | 8 | | | | 895 | | | | 903 | |
| Non-taxable securities | | | 118 | | | | (60 | ) | | | 58 | |
| Total investment securities | | | 126 | | | | 835 | | | | 961 | |
| Loans: | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | |
| Commercial | | | 640 | | | | 333 | | | | 973 | |
| Agricultural | | | 144 | | | | 564 | | | | 708 | |
| Residential and home equity | | | 164 | | | | 534 | | | | 698 | |
| Construction | | | 1,123 | | | | (162 | ) | | | 961 | |
| Total real estate | | | 2,071 | | | | 1,269 | | | | 3,340 | |
| Commercial & industrial | | | 605 | | | | 1,032 | | | | 1,637 | |
| Agricultural | | | 678 | | | | 597 | | | | 1,275 | |
| Commercial leases | | | 892 | | | | 249 | | | | 1,141 | |
| Consumer and other | | | 1 | | | | 7 | | | | 8 | |
| Total loans and leases | | | 4,247 | | | | 3,154 | | | | 7,401 | |
| Non-marketable securities | | | - | | | | 87 | | | | 87 | |
| Total interest income | | | (2,414 | ) | | | 9,432 | | | | 7,018 | |
| | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | |
| Interest bearing deposits: | | | | | | | | | | | | |
| Demand | | | (424 | ) | | | 868 | | | | 444 | |
| Savings and money market accounts | | | 96 | | | | 4,587 | | | | 4,683 | |
| Certificates of deposit greater than $250,000 | | | 1,350 | | | | 1,257 | | | | 2,607 | |
| Certificates of deposit less than $250,000 | | | 286 | | | | 2,911 | | | | 3,197 | |
| Total interest bearing deposits | | | 1,308 | | | | 9,623 | | | | 10,931 | |
| | | | | | | | | | | | | |
| Short-term borrowings | | | - | | | | 62 | | | | 62 | |
| Subordinated debentures | | | - | | | | 25 | | | | 25 | |
| Total interest expense | | | 1,308 | | | | 9,710 | | | | 11,018 | |
| Net interest income | | $ | (3,722 | ) | | $ | (278 | ) | | $ | (4,000 | ) |
Comparison of Results of Operations for the Three Months Ended March 31, 2024 and 2023
| | Three Months Ended March 31, |
|
| $ Better / (Worse) |
|
| $ Better / (Worse) |
|
| |
| (Dollars in thousands) | | 2024 | | | 2023 | |
| Selected Income Statement Information: | | | | | | | | | | | | |
| Interest income | | $ | 66,641 | | | $ | 59,632 | | | $ | 7,009 | | | | 11.75 | % |
| Interest expense | | | 14,928 | | | | 3,910 | | | | (11,018 | ) | | | (281.79 | %) |
| Net interest income | | | 51,713 | | | | 55,722 | | | | (4,009 | ) | | | (7.19 | %) |
| Provision for credit losses | | | - | | | | 1,500 | | | | 1,500 | | | | N/A | |
| Net interest income after provision for credit losses | | | 51,713 | | | | 54,222 | | | | (2,509 | ) | | | (4.63 | %) |
| Non-interest income | | | 5,075 | | | | 3,460 | | | | 1,615 | | | | 46.68 | % |
| Non-interest expense | | | 25,521 | | | | 28,183 | | | | 2,662 | | | | 9.45 | % |
| Income before income tax expense | | | 31,267 | | | | 29,499 | | | | 1,768 | | | | 5.99 | % |
| Income tax expense | | | 8,544 | | | | 5,952 | | | | (2,592 | ) | | | (43.55 | %) |
| Net income | | $ | 22,723 | | | $ | 23,547 | | | $ | (824 | ) | | | (3.50 | %) |
For the three months ended March 31, 2024 and 2023, net income was $22.7 million compared with $23.5 million, respectively. The decrease in net income was primarily the result of lower net interest income of $4.0 million and a higher income tax expense of $2.6 million. The first quarter of 2023 benefited from cash proceeds from a non-taxable death benefited on bank-owned life insurance (“BOLI”) of $4.3 million which was partially offset by a $5.7 million loss on the sale of securities based on the decision to reposition the securities portfolio given the interest rate environment. This decrease was offset by an increase in non-interest income of $1.6 million, no provision for credits losses compared to $1.5 million in 2023 and a decrease in non-interest expense of $2.7 million.
Net Interest Income and Net Interest Margin
For the three months ended March 31, 2024 and 2023, net interest income was $51.7 million compared with $55.7 million, respectively. The decrease is primarily the result of the net interest margin (tax equivalent basis) decreasing 41 basis points to 4.14% compared with 4.55% for the same period a year earlier. The decrease in the net interest margin was primarily the result of the increase in deposit costs due the interest rate environment as the federal funds rate increased 75 basis points from March through July of 2023 and customer expectations for higher rates on deposit products. The loan yield increased 40 basis points from 5.69% to 6.09% compared to the first quarter of 2023. The deposit yield increased 131 basis points from 0.50% to 1.81% and outpaced the increase in loan yield over the same period a year earlier.
Provision for Credit Losses. The provision for credit losses in each period is a charge against earnings in that period. The provision is the amount required to maintain the allowance for credit losses at a level that, in management’s judgment, is adequate to absorb expected credit losses, over the life of the loans and leases, unfunded loan commitments and HTM securities portfolios.
The Company had no provision for credit losses during the first three months of 2024 compared to a $1.5 million provision for credit losses the same period a year earlier. For the three month ended March 31, 2024 net recoveries were $53,000 compared to net recoveries of $188,000 for the same period a year earlier.
Non-interest Income
| | | Three Months Ended
March 31, | | | | | | | |
| (Dollars in thousands) | | 2024 | | | 2023 | | | $ Better / (Worse) | | | % Better / (Worse) | |
| Non-interest Income: | | | | | | | | | | | | |
| Card processing | | | 1,629 | | | | 1,591 | | | $ | 38 | | | | 2.39 | % |
| Gain on BOLI death benefit | | | - | | | | 4,346 | | | | (4,346 | ) | | | - | |
| Net gain on deferred compensation benefits | | | 1,158 | | | | 896 | | | | 262 | | | | 29.24 | % |
| Service charges on deposit accounts | | | 748 | | | | 634 | | | | 114 | | | | 17.98 | % |
| Increase in cash surrender value of BOLI | | | 595 | | | | 444 | | | | 151 | | | | 34.01 | % |
| Net loss on sale of securities available-for-sale | | | - | | | | (5,686 | ) | | | 5,686 | | | | - | |
| Other | | | 945 | | | | 1,235 | | | | (290 | ) | | | (23.48 | %) |
| Total non-interest income | | $ | 5,075 | | | $ | 3,460 | | | $ | 1,615 | | | | 46.68 | % |
Non-interest income increased $1.6 million, or 46.7%, to $5.1 million for the three months ended March 31, 2024 compared with $3.5 million for the same period a year earlier. The year-over-year increase in non-interest income was primarily due to no loss on sale of investment securities during 2024 compared to a $5.7 million loss on sale of investment securities during the first quarter of 2023 and no gain on BOLI death benefits in the first quarter of 2024 compared to $4.3 million gain in the first quarter of 2023. Excluding these items, non-interest income in the first quarter of 2023 would have been $4.8 million with a net increase in the first quarter of 2024 of $0.3 million.
The Company recorded net gains on deferred compensation plan investments of $1.2 million for the three months ended March 31, 2024 compared with net gains of $0.9 million for the same period a year earlier. See Note 10, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2023 Form 10-K filed on March 14, 2024 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these investment gains/losses to be recorded in non-interest income, an offsetting entry is also required to be made to non-interest expense resulting in no net-effect on the Company’s net income.
Non-interest Expense
| | | Three Months Ended
March 31, | | | | | | | |
| (Dollars in thousands) | | 2024 | | | 2023 | | | $ Better / (Worse) | | | % Better / (Worse) | |
| Non-interest Expense: | | | | | | | | | | | | |
| Salaries and employee benefits | | | 17,503 | | | | 19,584 | | | $ | 2,081 | | | | 10.63 | % |
| Data processing | | | 1,455 | | | | 1,260 | | | | (195 | ) | | | (15.48 | %) |
| Occupancy | | | 1,232 | | | | 1,180 | | | | (52 | ) | | | (4.41 | %) |
| Net gain on deferred compensation benefits | | | 1,158 | | | | 896 | | | | 262 | | | | 29.24 | % |
| Deposit insurance | | | 712 | | | | 692 | | | | (20 | ) | | | (2.89 | %) |
| Professional services | | | 541 | | | | 682 | | | | 141 | | | | 20.67 | % |
| Marketing | | | 480 | | | | 470 | | | | (10 | ) | | | (2.13 | %) |
| Other | | | 2,440 | | | | 3,419 | | | | 979 | | | | 28.63 | % |
| Total non-interest expense | | $ | 25,521 | | | $ | 28,183 | | | $ | 2,662 | | | | 9.45 | % |
Non-interest expense decreased $2.7 million, or 9.45%, to $25.5 million for the three months ended March 31, 2024 compared with $28.2 million for the same period a year ago. This year-over-year decrease was primarily comprised of a $2.1 million decrease in salaries and employee benefits and a $1.0 million decrease in other miscellaneous expenses. The decrease in salaries and employee benefits was due primarily to reduced discretionary compensation. The decrease in miscellaneous expenses was due primarily to the adoption of ASU 2023-02 which shifts the benefits of low-income housing tax credits to the income tax line under the proportional amortization method. For the first quarter of 2024 this amounted to $1.0 million. These decreases were partially offset by a $0.3 million increase in net gains on deferred compensation plan investments and a $0.2 million increase in data processing expenses.
Net gains on deferred compensation plan obligations were $1.2 million for the three months ended March 31, 2024 compared with net gains of $0.9 million for the same respective period. See Note 10, located in “Item 8. Financial Statements and Supplementary Data” in the Company’s December 31, 2023 Form 10-K filed on March 14, 2024 for a description of these plans. Balances in non-qualified deferred compensation plans may be invested in financial instruments whose market value fluctuates based upon trends in interest rates and stock prices. Although GAAP requires these gains on obligations to be recorded in non-interest expense, an offsetting entry is also required to be made to non-interest income resulting in no net-effect on the Company’s net income.
Income Tax Expense
For the three months ended March 31, 2024, income tax expense was $8.5 million compared to $6.0 million for the same period a year earlier. For the three months ended March 31, 2024, the effective tax rate was 27.33% compared to 20.18% for the same period a year earlier. The Company’s effective tax rate for the three months ended March 31, 2023 was lower than its historical effective tax rate primarily due to a non-taxable BOLI death benefit of $4.3 million recognized during the three months ended March 31, 2023. The Company’s effective tax rate can fluctuate from quarter to quarter due primarily to changes in the mix of taxable and tax-exempt earning sources. The effective rates were lower than the combined Federal and State statutory rate of 30% credits associated with low income housing tax credit investments (LIHTC); and tax-exempt interest income on municipal securities and loans.
Balance Sheet Analysis
Total assets were $5.7 billion at March 31, 2024 compared with $5.3 billion at December 31, 2023, an increase of $405.6 million or 7.64%. Loans held for investment were $3.7 billion at March 31, 2024, an increase of $41.6 million, or 1.14% compared with $3.7 billion at December 31, 2023. Total deposits were $5.0 billion at March 31, 2024 compared with $4.7 billion at December 31, 2023, an increase of $291.5 million or 6.24%. Our loan to deposit ratio was 74.73% and 78.52% as of March 31, 2024 and December 31, 2023, respectively.
Cash and Cash Equivalents
The Company’s cash and cash equivalents consist of interest bearing deposits with banks and overnight investments in Federal Reserve balances. Interest bearing deposits with banks consisted primarily of FRB deposits. Since balances at the FRB are effectively risk free, the Company elected to maintain its excess cash at the FRB. Interest bearing deposits with banks totaled $672.6 million at March 31, 2024 and $338.4 million at December 31, 2023. The increase was primarily due to steps taken to manage on-balance sheet liquidity which included $200.0 million in brokered deposits and $100.0 million in FHLB advances. The Company’s total cash and cash equivalents as of March 31, 2024 represented 12.9% of the Company’s total assets as compared to 7.7% as of December 31, 2023.
Investment Securities
The Company’s net investment portfolio increased by $46.6 million or 4.66% to $1.0 billion at March 31, 2024 compared to December 31, 2023. During the first quarter of 2024 the Company purchased $64.9 million of investment securities. The Company uses its investment portfolio to manage interest rate and liquidity risks. The Company's total investment portfolio as of March 31, 2024 represents 18.32% of the Company’s total assets as compared to 18.84% at December 31, 2023.
The carrying value of our portfolio of investment securities was as follows:
| (Dollars in thousands) | | March 31, 2024 | | | December 31, 2023 | |
| Available-for-Sale Securities | | | | | | |
| U.S. Government-sponsored securities | | $ | 3,048 | | | $ | 3,224 | |
Mortgage-backed securities(1) | | | 216,093 | | | | 163,838 | |
Collateralized mortgage obligations(1) | | | 5,654 | | | | 535 | |
| Corporate securities | | | 14,751 | | | | 14,605 | |
| Other | | | 310 | | | | 310 | |
| Total available-for-sale securities | | $ | 239,856 | | | $ | 182,512 | |
(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.
| (Dollars in thousands) | | March 31, 2024 | | | December 31, 2023 | |
| Held-to-Maturity Securities | | | | | | |
Mortgage-backed securities(1) | | $ | 656,028 | | | $ | 664,728 | |
Collateralized mortgage obligations(1) | | | 72,950 | | | | 74,170 | |
| Municipal securities | | | 77,993 | | | | 78,790 | |
| Total held-to-maturity securities | | $ | 806,971 | | | $ | 817,688 | |
(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.
The following tables show the carrying value for contractual maturities of investment securities and the weighted average yields of such securities, including the benefit of tax-exempt securities:
| | | As of March 31, 2024 | |
| | | Within One Year | | | After One but Within Five Years | | | After Five but Within Ten Years | | | After Ten Years | | | Total | |
| (Dollars in thousands) | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
| Securities available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government-sponsored securities | | $ | 1 | | | | 6.87 | % | | $ | 88 | | | | 6.40 | % | | $ | 242 | | | | 6.63 | % | | $ | 2,717 | | | | 6.43 | % | | $
| 3,048 | | | | 6.44 | % |
Mortgage-backed securities(1) | | | 112 | | | | 1.90 | % | | | 5,404 | | | | 2.56 | % | | | 4,986 | | | | 3.76 | % | | | 205,592 | | | | 4.09 | % | | | 216,093 | | | | 4.04 | % |
Collateralized mortgage obligations(1) | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | 5,654 | | | | 6.27 | % | | | 5,654 | | | | 6.27 | % |
| Corporate securities | | | - | | | | 0.00 | % | | | 14,750 | | | | 5.80 | % | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | 14,751 | | | | 5.80 | % |
| Other | | | 310 | | | | 8.44 | % | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | 310 | | | | 8.44 | % |
| Total securities available-for-sale | | $ | 423 | | | | 6.70 | % | | $ | 20,242 | | | | 4.94 | % | | $ | 5,228 | | | | 3.89 | % | | $ | 213,963 | | | | 4.18 | % | | $ | 239,856 | | | | 4.24 | % |
(1) | All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. |
| | As of March 31, 2024 | |
| | | Within One Year | | | After One but Within Five Years | | | After Five but Within Ten Years | | | After Ten Years | | | Total | |
| (Dollars in thousands) | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
| Securities held-to-maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities(1) | | $ | - | | | | 0.00 | % | | $ | 1,887 | | | | 0.87 | % | | $ | 11,758 | | | | 1.44 | % | | $ | 642,382 | | | | 1.89 | % | | $ | 656,028 | | | | 1.88 | % |
Collateralized mortgage obligations(1) | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | 72,950 | | | | 1.75 | % | | | 72,950 | | | | 1.75 | % |
| Municipal securities | | | 2,230 | | | | 6.41 | % | | | 16,200 | | | | 3.60 | % | | | 9,251 | | | | 3.04 | % | | | 50,313 | | | | 4.00 | % | | | 77,993 | | | | 3.87 | % |
| Total securities held-to-maturity | | $ | 2,230 | | | | 6.41 | % | | $ | 18,087 | | | | 3.32 | % | | $ | 21,009 | | | | 2.14 | % | | $ | 765,645 | | | | 2.02 | % | | $ | 806,971 | | | | 2.06 | % |
(1) | All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government. |
| | | As of December 31, 2023 | |
| | | Within One Year | | | After One but Within Five Years | | | After Five but Within Ten Years | | | After Ten Years | | | Total | |
| (Dollars in thousands) | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
| Securities available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government-sponsored securities | | $ | 1 | | | | 5.91 | % | | $ | 99 | | | | 6.47 | % | | $ | 269 | | | | 6.65 | % | | $ | 2,855 | | | | 6.44 | % | | $
| 3,224 | | | | 6.46 | % |
Mortgage-backed securities(1) | | | 169 | | | | 1.79 | % | | | 6,138 | | | | 2.57 | % | | | 4,916 | | | | 3.78 | % | | | 152,615 | | | | 3.52 | % | | | 163,838 | | | | 3.44 | % |
Collateralized mortgage obligations(1) | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | 535 | | | | 2.27 | % | | | 535 | | | | 2.27 | % |
| Corporate securities | | | - | | | | 0.00 | % | | | 14,605 | | | | 5.71 | % | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | 14,605 | | | | 5.71 | % |
| Other | | | 310 | | | | 8.20 | % | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | 310 | | | | 8.20 | % |
| Total securities available-for-sale | | $ | 480 | | | | 5.94 | % | | $ | 20,842 | | | | 4.79 | % | | $ | 5,185 | | | | 3.93 | % | | $ | 156,005 | | | | 3.57 | % | | $ | 182,512 | | | | 3.68 | % |
(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.
| | | As of December 31, 2023 | |
| | | Within One Year | | | After One but Within Five Years | | | After Five but Within Ten Years | | | After Ten Years | | | Total | |
| (Dollars in thousands) | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
| Securities held-to-maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities(1) | | $ | - | | | | 0.00 | % | | $ | 2,058 | | | | 0.78 | % | | $ | 12,418 | | | | 1.41 | % | | $ | 650,252 | | | | 1.90 | % | | $ | 664,728 | | | | 1.88 | % |
Collateralized mortgage obligations(1) | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | - | | | | 0.00 | % | | | 74,170 | | | | 1.75 | % | | | 74,170 | | | | 1.75 | % |
| Municipal securities | | | 875 | | | | 4.01 | % | | | 15,962 | | | | 4.23 | % | | | 10,703 | | | | 3.76 | % | | | 51,250 | | | | 3.88 | % | | | 78,790 | | | | 3.93 | % |
| Total securities held-to-maturity | | $ | 875 | | | | 4.01 | % | | $ | 18,020 | | | | 3.84 | % | | $ | 23,121 | | | | 2.50 | % | | $ | 775,672 | | | | 2.02 | % | | $ | 817,688 | | | | 2.07 | % |
(1) All mortgage-backed securities and collateralized mortgage obligations were issued by an agency or government sponsored entity of the U.S. Government.
Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Expected maturities of mortgage-backed and CMO securities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without penalties. The Company evaluates securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.
Loans and Leases
Loans and leases can be categorized by borrowing purpose and use of funds. For detailed descriptions of the various loan types offered by the Company see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on March 14, 2024.
The Company's loan and lease portfolio at March 31, 2024 totaled $3.7 billion, an increase of $41.6 million or 1.14% over December 31, 2023.
The following table sets forth the distribution of the loan and lease portfolio by type and percent at the end of each period presented:
| | | March 31, 2024 | | | December 31, 2023 | |
| (Dollars in thousands) | | Dollars | | | Percent of
Total | | | Dollars | | | Percent of Total | |
| Gross loans and leases | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | |
| Commercial | | $ | 1,352,014 | | | | 36.48 | % | | $ | 1,323,038 | | | | 36.10 | % |
| Agricultural | | | 726,041 | | | | 19.59 | % | | | 742,009 | | | | 20.24 | % |
| Residential and home equity | | | 405,526 | | | | 10.94 | % | | | 399,982 | | | | 10.91 | % |
| Construction | | | 227,415 | | | | 6.13 | % | | | 212,362 | | | | 5.80 | % |
| Total real estate | | | 2,710,996 | | | | 73.14 | % | | | 2,677,391 | | | | 73.05 | % |
| Commercial & industrial | | | 497,028 | | | | 13.41 | % | | | 499,373 | | | | 13.62 | % |
| Agricultural | | | 317,955 | | | | 8.58 | % | | | 313,737 | | | | 8.56 | % |
| Commercial leases | | | 174,657 | | | | 4.71 | % | | | 169,684 | | | | 4.63 | % |
| Consumer and other | | | 5,801 | | | | 0.16 | % | | | 5,212 | | | | 0.14 | % |
| Total gross loans and leases | | $ | 3,706,437 | | | | 100.00 | % | | $ | 3,665,397 | | | | 100.00 | % |
The following table shows the maturity distribution and interest rate sensitivity of the loan and lease portfolio of the Company as of March 31, 2024.
| | | Loan Contractual Maturity | |
| (Dollars in thousands) | | One Year or Less | | | After One But Within Five Years | | | After Five Years But Within Fifteen Years | | | After Fifteen Years | | | Total | |
| Gross loan and leases: | | | | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | | | | |
| Commercial | | $ | 85,828 | | | $ | 388,701 | | | $ | 842,417 | | | $ | 35,068 | | | $ | 1,352,014 | |
| Agricultural | | | 51,740 | | | | 174,911 | | | | 438,218 | | | | 61,172 | | | | 726,041 | |
| Residential and home equity | | | 111 | | | | 4,315 | | | | 111,926 | | | | 289,174 | | | | 405,526 | |
| Construction | | | 183,815 | | | | 42,741 | | | | 859 | | | | - | | | | 227,415 | |
| Total real estate | | | 321,494 | | | | 610,668 | | | | 1,393,420 | | | | 385,414 | | | | 2,710,996 | |
| Commercial & industrial | | | 216,756 | | | | 179,670 | | | | 98,271 | | | | 2,331 | | | | 497,028 | |
| Agricultural | | | 194,378 | | | | 102,542 | | | | 21,035 | | | | 0 | | | | 317,955 | |
| Commercial leases | | | 4,939 | | | | 50,174 | | | | 119,544 | | | | - | | | | 174,657 | |
| Consumer and other | | | 731 | | | | 3,677 | | | | 922 | | | | 471.00 | | | | 5,801 | |
| Total gross loans and leases | | $ | 738,298 | | | $ | 946,731 | | | $ | 1,633,192 | | | $ | 388,216 | | | $ | 3,706,437 | |
| Rate structure for loans and leases | | | | | | | | | | | | | | | | | | | | |
| Fixed rate | | $ | 200,541 | | | $ | 589,620 | | | $ | 1,138,467 | | | $ | 223,302 | | | $ | 2,151,930 | |
| Adjustable rate | | | 537,757 | | | | 357,111 | | | | 494,725 | | | | 164,914 | | | | 1,554,507 | |
| Total gross loans and leases | | $ | 738,298 | | | $ | 946,731 | | | $ | 1,633,192 | | | $ | 388,216 | | | $ | 3,706,437 | |
The following table summarizes the loans for which the accrual of interest has been discontinued and loans more than 90 days past due and still accruing interest, and OREO (as hereinafter defined):
| (Dollars in thousands) | | March 31, 2024 | | | December 31, 2023 | |
| Non-performing assets: | | | | | | |
| Non-accrual loans and leases | | | | | | |
| Real estate: | | | | | | |
| Commercial | | $ | - | | | $ | - | |
| Agricultural | | | - | | | | - | |
| Residential and home equity | | | - | | | | - | |
| Construction | | | - | | | | - | |
| Total real estate | | | - | | | | - | |
| Commercial & industrial | | | - | | | | - | |
| Agricultural | | | - | | | | - | |
| Commercial leases | | | - | | | | - | |
| Consumer and other | | | - | | | | - | |
| Subtotal | | | - | | | | - | |
| Accruing loans and leases | | | | | | | | |
| Real estate: | | | | | | | | |
| Commercial | | $ | - | | | $ | - | |
| Agricultural | | | 3,550 | | | | - | |
| Residential and home equity | | | - | | | | - | |
| Construction | | | - | | | | - | |
| Total real estate | | | 3,550 | | | | - | |
| Commercial & industrial | | | - | | | | - | |
| Agricultural | | | - | | | | - | |
| Commercial leases | | | - | | | | - | |
| Consumer and other | | | - | | | | - | |
| Subtotal | | | 3,550 | | | | - | |
| Total non-performing loans and leases | | $ | 3,550 | | | $ | - | |
| Other real estate owned ("OREO") | | $ | 873 | | | $ | 873 | |
| Total non-performing assets | | $ | 4,423 | | | $ | 873 | |
| | | | | | | | | |
| Selected ratios: | | | | | | | | |
| Non-performing loans to total loans and leases | | | 0.10 | % | | | 0.00 | % |
| Non-performing assets to total assets | | | 0.08 | % | | | 0.02 | % |
Non-Accrual Loans and Leases - Accrual of interest on loans and leases is generally discontinued when a loan or lease becomes contractually past due by 90 days or more with respect to interest or principal. When loans and leases are 90 days past due, but in management's judgment are well secured and in the process of collection, they may not be classified as non-accrual. When a loan or lease is placed on non-accrual status, all interest previously accrued but not collected is reversed. Income on such loans and leases is then recognized only to the extent that cash is received and where the future collection of principal is probable. Non-accrual loans and leases were zero at March 31, 2024 and December 31, 2023. The Company had one non-performing loan which was 90+ days past due and still accruing interest at March 31, 2024 as steps were already in process of bringing the loan current. Those steps were completed in early April 2024 and the loan returned to current and performing status.
Other Real Estate Owned – OREO represents real property taken either through foreclosure or through a deed in lieu thereof from the borrower. The Company records all OREO properties at amounts equal to or less than the fair market value of the properties based on current independent appraisals reduced by estimated selling costs. The Company reported $873,000 of foreclosed OREO at March 31, 2024, and at December 31, 2023.
Although management believes that non-performing loans and leases are generally well-secured and that potential losses are provided for in the Company’s allowance for credit losses, there can be no assurance that future deterioration in economic conditions and/or collateral values will not result in future credit losses. See Note 3. “Loans and Leases”, located in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q for an allocation of the allowance classified to collateral dependent loans and leases.
Allowance for Credit Losses—Loans and Leases
The Company maintains an allowance for credit losses (“ACL”) under ASC Topic 326, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“CECL”). The allowance is established through a provision for credit losses, which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan and lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components: specific reserves related to impaired loans and leases and general reserves comprised of both quantitative and qualitative factors for current expected credit losses related to loans and leases that are not collateral dependent. The Company uses the Weighted Average Remaining Maturity (“WARM”) method to calculate the ACL, as this method is deemed the most appropriate given the Company’s current size and complexity. See “Critical Accounting Policies and Estimates - Allowance for Credit Losses – Loans and Leases.”
The following table sets forth the activity in our ACL for the periods indicated:
| | | Three Months Ended March 31, | |
| (Dollars in thousands) | | 2024 | | | 2023 | |
| Allowance for credit losses: | | | | | | |
| Balance at beginning of year | | $ | 74,965 | | | $ | 66,885 | |
| Provision for credit losses | | | - | | | | 1,500 | |
| Charge-offs: | | | | | | | | |
| Real estate: | | | | | | | | |
| Commercial | | | - | | | | - | |
| Agricultural | | | - | | | | - | |
| Residential and home equity | | | - | | | | (14 | ) |
| Construction | | | - | | | | - | |
| Total real estate | | | - | | | | (14 | ) |
| Commercial & industrial | | | - | | | | - | |
| Agricultural | | | - | | | | - | |
| Commercial leases | | | - | | | | - | |
| Consumer and other | | | (10 | ) | | | (10 | ) |
| Total charge-offs | | | (10 | ) | | | (24 | ) |
| Recoveries: | | | | | | | | |
| Real estate: | | | | | | | | |
| Commercial | | | - | | | | 170 | |
| Agricultural | | | - | | | | - | |
| Residential and home equity | | | 8 | | | | 10 | |
| Construction | | | - | | | | - | |
| Total real estate | | | 8 | | | | 180 | |
| Commercial & industrial | | | 18 | | | | 19 | |
| Agricultural | | | - | | | | 1 | |
| Commercial leases | | | - | | | | - | |
| Consumer and other | | | 37 | | | | 12 | |
| Total recoveries | | | 63 | | | | 212 | |
| Net recoveries / (charge-offs) | | | 53 | | | | 188 | |
| Balance at end of year | | $ | 75,018 | | | $ | 68,573 | |
| | | | | | | | | |
| Selected financial information: | | | | | | | | |
| Net loans and leases held-for-investment | | $ | 3,696,295 | | | $ | 3,427,133 | |
| Average loans and leases | | | 3,661,292 | | | | 3,422,375 | |
| Non-performing loans and leases | | | 3,550 | | | | 387 | |
| Allowance for credit losses to non-performing loans and leases | | | 2113.18 | % | | | 17719.12 | % |
| Net (recoveries)/charge-offs to average loans and leases | | | (0.00 | %) | | | (0.01 | %) |
| Provision for credit losses to average loans and leases | | | 0.00 | % | | | 0.04 | % |
| Allowance for credit losses to gross loans and leases held-for-investment | | | 2.02 | % | | | 1.99 | % |
The increase in ACL during the first quarter of 2024 was related to net recoveries.
| (Dollars in thousands) |
| March 31, 2024 |
|
| December 31, 2023 |
|
| | | | | | | |
| ACL - Loans and leases | | $ | 75,018 | | | $ | 74,965 | |
| ACL - Unfunded commitments | | | 3,690 | | | | 3,690 | |
| Total ACL | | | 78,708 | | | | 78,655 | |
The following table indicates management’s allocation of the ACL for loan and leases by loan type as of each of the following dates:
| | | March 31, 2024 | | | December 31, 2023 | |
| (Dollars in thousands) | | Dollars | | | Percent of Each Loan Type to Total Loans | | | Percent of ACL to Each Loan Type | | | Dollars | | | Percent of Each Loan Type to Total Loans | | | Percent of ACL to Each Loan Type | |
| Allowance for credit losses: | | | | | | | | | | | | | | | | | | |
| Real estate: | | | | | | | | | | | | | | | | | | |
| Commercial | | $ | 22,414 | | | | 36.48 | % | | | 1.66 | % | | $ | 26,093 | | | | 36.10 | % | | | 1.97 | % |
| Agricultural | | | 11,377 | | | | 19.59 | % | | | 1.57 | % | | | 7,744 | | | | 20.24 | % | | | 1.04 | % |
| Residential and home equity | | | 7,721 | | | | 10.94 | % | | | 1.90 | % | | | 7,770 | | | | 10.91 | % | | | 1.94 | % |
| Construction | | | 4,616 | | | | 6.13 | % | | | 2.03 | % | | | 4,432 | | | | 5.80 | % | | | 2.09 | % |
| Total real estate | | | 46,128 | | | | 73.14 | % | | | 1.70 | % | | | 46,039 | | | | 73.05 | % | | | 1.72 | % |
| Commercial & industrial | | | 11,559 | | | | 13.41 | % | | | 2.33 | % | | | 13,380 | | | | 13.62 | % | | | 2.68 | % |
| Agricultural | | | 10,292 | | | | 8.58 | % | | | 3.24 | % | | | 8,872 | | | | 8.56 | % | | | 2.83 | % |
| Commercial leases | | | 6,923 | | | | 4.71 | % | | | 3.96 | % | | | 6,537 | | | | 4.63 | % | | | 3.85 | % |
| Consumer and other | | | 116 | | | | 0.16 | % | | | 2.00 | % | | | 137 | | | | 0.14 | % | | | 2.63 | % |
| Total allowance for credit losses | | $ | 75,018 | | | | 100.00 | % | | | 2.02 | % | | $ | 74,965 | | | | 100.00 | % | | | 2.05 | % |
Deposits
Total deposits were $5.0 billion and $4.7 billion as of March 31, 2024 and December 31, 2023, respectively an increase of $291.5 million or 6.24%. The increase in deposits was primarily due to $100.0 million in a State of California certificate of deposit and $200.0 million in brokered deposits. Deposits, net of this $300.0 million, had a slight decrease of $8.5 million. The slight decrease in deposits was primarily attributable to the shift in customer behavior over the last year as customers seek higher yielding deposit products or other investment alternatives such as U.S. Treasuries or money market funds given the interest rate environment.
Non-interest bearing demand deposits were $1.4 billion as of March 31, 2024 and $1.5 billion at December 31, 2023. Non-interest bearing deposits were 28.44% of total deposits, as of March 31, 2024 and 31.76% as of December 31, 2023. Interest bearing deposits were $3.5 million and $3.2 million at March 31, 2024 and December 31, 2023, respectively. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit. Interest bearing deposits are comprised of interest-bearing transaction accounts, money market accounts, regular savings accounts, and certificates of deposit. The decrease in non-interest bearing deposits and the increase in interest-bearing deposits primarily reflects changes in customer behavior as customers shifted from non-interest bearing accounts to higher interest earning accounts given the interest rate environment. Checking account deposits were 49.39% of total deposits as of March 31, 2024 compared to 51.76% of total deposits as of December 31, 2023.
The following table shows the average amount and average rate paid on the categories of deposits for each of the periods presented:
| | | Three Months Ended March 31, | |
| | | 2024 | | | 2023 | |
| (Dollars in thousands) | | Average Balance | | | Interest Expense | | | Average Rate | | | Average Balance | | | Interest Expense | | | Average Rate | |
| Total deposits: | | | | | | | | | | | | | | | | | | |
| Interest bearing deposits: | | | | | | | | | | | | | | | | | | |
| Demand | | $ | 914,618 | | | $ | 888 | | | | 0.39 | % | | $ | 1,068,504 | | | $ | 444 | | | | 0.17 | % |
| Savings and money market | | | 1,618,678 | | | | 7,186 | | | | 1.79 | % | | | 1,561,684 | | | | 2,503 | | | | 0.65 | % |
| Certificates of deposit greater than $250,000 | | | 378,714 | | | | 3,094 | | | | 3.29 | % | | | 147,704 | | | | 487 | | | | 1.34 | % |
| Certificates of deposit less than $250,000 | | | 338,031 | | | | 3,477 | | | | 4.14 | % | | | 206,214 | | | | 280 | | | | 0.55 | % |
| Total interest bearing deposits | | | 3,250,041 | | | | 14,645 | | | | 1.81 | % | | | 2,984,106 | | | | 3,714 | | | | 0.50 | % |
| Non-interest bearing deposits | | | 1,403,384 | | | | | | | | | | | | 1,663,152 | | | | | | | | 0.00 | % |
| Total deposits | | $ | 4,653,425 | | | $ | 14,645 | | | | 1.27 | % | | $ | 4,647,258 | | | $ | 3,714 | | | | 0.32 | % |
Deposits are gathered from individuals and businesses in our market areas. The interest rates paid are competitively priced for each particular deposit product and structured to meet our funding requirements. The increase in short-term interest rates during 2023 and customers seeking higher yielding deposit products placed pressure on deposit pricing. The average cost of total deposits, including non-interest bearing deposits, increased to 1.27% for the three months ended March 31, 2024 compared with 0.32% for the same period a year ago and 1.14% as of December 31, 2023.
The following table shows deposits with a balance greater than $250,000 at March 31, 2024 and December 31, 2023:
| | | March 31, | | | December 31, | |
| (Dollars in thousands) | | 2024 | | | 2023 | |
| Non-maturity deposits greater than $250,000 | | $ | 2,401,894 | | | $ | 2,496,749 | |
| Certificates of deposit greater than $250,000, by maturity: | | | | | | | | |
| Less than 3 months | | | 215,377 | | | | 84,460 | |
| 3 months to 6 months | | | 109,740 | | | | 111,866 | |
| 6 months to 12 months | | | 148,784 | | | | 107,080 | |
| More than 12 months | | | 3,985 | | | | 15,423 | |
| Total certificates of deposit greater than $250,000 | | $ | 477,886 | | | $ | 318,829 | |
| Total deposits greater than $250,000 | | $ | 2,879,780 | | | $ | 2,815,578 | |
Refer to the Year-To-Date Average Balances and Rate Schedules located in this "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" for information on separate deposit categories.
The Bank participates in a program wherein the State of California places time deposits with the Bank at the Bank’s option. The Bank had $103.0 million and $3.0 million of these deposits at March 31, 2024 and December 31, 2023, respectively.
Total estimated uninsured deposits based on our regulatory reporting amounted to $2.4 billion and $2.2 billion at March 31, 2024 and December 31, 2023, respectively.
Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings
Lines of Credit with the Federal Home Loan Bank and FRB are other key sources of funds to support earning assets and liquidity. These sources of funds are also used to manage the Company’s interest rate risk exposure; and, as opportunities arise, to borrow and invest the proceeds at a positive spread through the investment portfolio. FHLB advances as of March 31, 2024 were $100.0 million compared to no advances at December 31, 2023. The average rate on FHLB advances during the first quarter of 2024 was 4.54% compared to zero during the first quarter of 2023. The $100.0 million in FHLB advances have a one-month term and may or may not be renewed. There were no Federal Funds purchased or advances from the FRB at March 31, 2024 or December 31, 2023.
Long-Term Subordinated Debentures
On December 17, 2003, the Company raised $10.0 million through the sale of subordinated debentures to an off-balance-sheet trust and its sale of trust-preferred securities. See Note 9. “Long-Term Subordinated Debentures” located in “Item 8. Financial Statements and Supplementary Data” in our Annual Report on Form 10-K filed with the SEC on March 14, 2024. Although this amount is reflected as subordinated debt on the Company’s balance sheet, under current regulatory guidelines, our Trust Preferred Securities will continue to qualify as regulatory capital.
These securities accrue interest at a variable rate based upon 3-month SOFR plus 2.85%. Interest rates reset quarterly (the next reset is June 18, 2024) and the rate was 8.44% as of March 31, 2024 and 8.49% at December 31, 2023. The average rate paid for these securities was 8.62% for the first three months of 2024 and 7.71% for the first three months of 2023. Additionally, if the Company decided to defer interest on the subordinated debentures, the Company would be prohibited from paying cash dividends on the Company’s common stock.
Capital Resources
The Company relies primarily on capital generated through the retention of earnings to satisfy its capital requirements. The Company engages in an ongoing assessment of its capital needs in order to support business growth and to insure depositor protection. Shareholders’ Equity totaled $565.2 million at March 31, 2024, and $549.8 million at December 31, 2023.
The Company and the Bank are subject to various regulatory capital adequacy guidelines as outlined under Part 324 of the FDIC Rules and Regulations. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
As of March 31, 2024, the Company was in compliance with all of these capital requirements and there were no restrictions on the Company’s business activity. As of March 31, 2024 the Bank met the requirements to be categorized as “well-capitalized” under the FDIC regulatory framework for prompt corrective action. To be categorized as “well-capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables as of March 31, 2024 and December 31, 2023.
The Company’s and Bank’s actual and required capital amounts and ratios are as follows:
| | | March 31, 2024 | |
| | | Actual | | | Required for Capital Adequacy Purposes | | | Minimum to be Categorized as "Well Capitalized" Under Prompt Corrective Action Regulation | |
| (Dollars in thousands) | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| Bancorp: | | | | | | | | | | | | | | | | | | |
| CET1 capital to risk-weighted assets | | $ | 565,238 | | | | 12.73 | % | | $ | 199,884 | | | | 4.50 | % | | | N/A | | | | N/A | |
| Tier 1 capital to risk-weighted assets | | | 575,238 | | | | 12.95 | % | | | 266,511 | | | | 6.00 | % | | | N/A | | | | N/A | |
| Risk-based capital to risk-weighted assets | | | 631,053 | | | | 14.21 | % | | | 355,349 | | | | 8.00 | % | | | N/A | | | | N/A | |
| Tier 1 leverage capital ratio | | | 575,238 | | | | 10.83 | % | | | 212,410 | | | | 4.00 | % | | | N/A | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Bank: | | | | | | | | | | | | | | | | | | | | | | | | |
| CET1 capital to risk-weighted assets | | $ | 575,347 | | | | 12.95 | % | | $ | 199,872 | | | | 4.50 | % | | $ | 288,704 | | | | 6.50 | % |
| Tier 1 capital to risk-weighted assets | | | 575,347 | | | | 12.95 | % | | | 266,496 | | | | 6.00 | % | | | 355,328 | | | | 8.00 | % |
| Risk-based capital to risk-weighted assets | | | 631,159 | | | | 14.21 | % | | | 355,328 | | | | 8.00 | % | | | 444,159 | | | | 10.00 | % |
| Tier 1 leverage capital ratio | | | 575,347 | | | | 10.84 | % | | | 212,322 | | | | 4.00 | % | | | 265,403 | | | | 5.00 | % |
| | | December 31, 2023 | |
| | | Actual | | | Required for Capital Adequacy Purposes | | | Minimum to be Categorized as "Well Capitalized" Under Prompt Corrective Action Regulation | |
| (Dollars in thousands) | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| Bancorp: | | | | | | | | | | | | | | | | | | |
| CET1 capital to risk-weighted assets | | $ | 546,045 | | | | 12.30 | % | | $ | 199,724 | | | | 4.50 | % | | | N/A | | | | N/A | |
| Tier 1 capital to risk-weighted assets | | | 556,045 | | | | 12.53 | % | | | 266,298 | | | | 6.00 | % | | | N/A | | | | N/A | |
| Risk-based capital to risk-weighted assets | | | 611,815 | | | | 13.78 | % | | | 355,064 | | | | 8.00 | % | | | N/A | | | | N/A | |
| Tier 1 leverage capital ratio | | | 556,045 | | | | 10.38 | % | | | 214,267 | | | | 4.00 | % | | | N/A | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Bank: | | | | | | | | | | | | | | | | | | | | | | | | |
| CET1 capital to risk-weighted assets | | $ | 557,500 | | | | 12.56 | % | | $ | 199,722 | | | | 4.50 | % | | $ | 288,487 | | | | 6.50 | % |
| Tier 1 capital to risk-weighted assets | | | 557,500 | | | | 12.56 | % | | | 266,295 | | | | 6.00 | % | | | 355,061 | | | | 8.00 | % |
| Risk-based capital to risk-weighted assets | | | 613,270 | | | | 13.82 | % | | | 355,061 | | | | 8.00 | % | | | 443,826 | | | | 10.00 | % |
| Tier 1 leverage capital ratio | | | 557,500 | | | | 10.42 | % | | | 214,078 | | | | 4.00 | % | | | 267,597 | | | | 5.00 | % |
On November 14, 2023, the Board of Directors authorized an extension to its share repurchase program through December 31, 2024 for an additional $25.0 million of the Company’s common stock (“Repurchase Plan”), which represented approximately 4% of outstanding shareholders’ equity at the time of approval. Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means.
During the first three months of 2024 the Company repurchased 5,201 shares under the Repurchase Plan, for a total of $5.5 million. As of March 31, 2024, there remains $19.1 million authorized for repurchases under the Repurchase Plan.
Off-Balance-Sheet Arrangements
Off-balance-sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity, or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to the Company, or engages in leasing, hedging, or research and development services with the Company. The Company had the following off balance sheet commitments as of the dates indicated.
The following table sets forth our off-balance-sheet lending commitments as of March 31, 2024:
| | | | | | Amount of Commitment Expiration per Period | |
| (Dollars in thousands) | | Total Committed Amount | | | Less than One Year | | | One to Three Years | | | Three to Five Years | | | After Five Years | |
| Off-balance sheet commitments | | | | | | | | | | | | | | | |
| Commitments to extend credit | | $ | 1,074,963 | | | $ | 508,786 | | | $ | 311,172 | | | $ | 75,258 | | | $ | 179,747 | |
| Standby letters of credit | | | 14,889 | | | | 12,629 | | | | 1,760 | | | | 500 | | | | - | |
| Total off-balance sheet commitments | | $ | 1,089,852 | | | $ | 521,415 | | | $ | 312,932 | | | $ | 75,758 | | | $ | 179,747 | |
The Company's exposure to credit loss in the event of nonperformance by the other party with regard to standby letters of credit, undisbursed loan commitments, and financial guarantees is represented by the contractual notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company uses the same credit policies in making commitments and conditional obligations as it does for recorded balance sheet items. The Company may or may not require collateral or other security to support financial instruments with credit risk. Evaluations of each customer's creditworthiness are performed on a case-by-case basis. Additionally, the Company maintains an allowance for credit losses for unfunded loan commitments, which totaled $3.7 million at March 31, 2024 and December 31, 2023.
Standby letters of credit are conditional commitments issued by the Company to guarantee performance of or payment for a customer to a third-party. Most standby letters of credit have maturity dates ranging from 1 to 60 months with final expiration in August 2028. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Liquidity
The ability to have readily available funds sufficient to repay maturing liabilities is of primary importance to depositors, creditors and regulators. In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities. We have access to immediate liquid resources in the form of cash, which totaled $738.4 million or 12.92% of total assets as of March 31, 2024. The majority of cash is on deposit with the FRB and amounted to $672.6 million. Potential sources of liquidity also include investment securities in our available-for-sale securities portfolio, our ability to sell loans in the secondary market, and our ability borrow from the FRB and FHLB. Our diversified deposit portfolio has historically provided us with a long-term source of stable low cost funding. Maturities and payments on outstanding loans and investment securities also provide a steady flow of funds. Our liquidity, represented by cash borrowing lines, federal funds and available-for-sale securities, is a result of our operating, investing and financing activities and related cash flows. In order to ensure funds are available at all times, we devote resources to projecting the amount of funds that will be required and we maintain relationships with a diversified client base so funds are accessible. Liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets. We had the following borrowing lines available at March 31, 2024:
| | | March 31, 2024 | |
| (Dollars in thousands) | | Total Credit Line Limit | | | Outstanding Amount | | | Remaining Credit Line Available | | | Value of Collateral Pledged | |
| Additional liquidity sources: | | | | | | | | | | | | |
| Federal Reserve Bank | | $ | 1,239,186 | | | $ | - | | | $ | 1,239,186 | | | $ | 1,583,638 | |
| Federal Home Loan Bank | | | 769,429 | | | | 200,000 | | | | 569,429 | | | | 1,263,816 | |
| US Bank Fed Funds | | | 50,000 | | | | - | | | | 50,000 | | | | - | |
| PCBB Fed Funds | | | 50,000 | | | | - | | | | 50,000 | | | | - | |
| FHLB Fed Funds | | | 18,000 | | | | - | | | | 18,000 | | | | - | |
| Total additional liquidity sources | | $ | 2,126,615 | | | $ | 200,000 | | | $ | 1,926,615 | | | $ | 2,847,454 | |
We continued our focus on maintaining a strong liquidity position throughout the first three months of 2024 and we believe our liquid assets and short-term borrowing credit lines are adequate to meet our cash flow needs for loan and lease funding and deposit cash withdrawal for the foreseeable future. As of March 31, 2024, we had internal sources of liquidity comprised of $738.4 million in cash and $287.4 million unencumbered investment securities, which represented in the aggregate 17.95% of total assets. We also had $1.9 billion in external sources of liquidity as outlined in the table above bringing our total available liquidity to $2.9 billion. Our pledged collateral on short-term borrowing lines was comprised of $2.8 billion in loans and $1.7 million in investment securities. We have the option of either borrowing on our credit lines or selling these investment securities for cash flow needs. The $200.0 million in outstanding at the FHLB represents $100.0 million in FHLB advances and $100.0 million in the form of a letter of credit to collateralize the State of California certificate of deposit. The letter of credit is not an on balance sheet liability but it does reduce our borrowing capacity as illustrated in the table above.
On a long-term basis, we intend to meet our liquidity needs by changing the relative distribution of our asset portfolios by reducing our investment or loan and lease volumes, or selling or encumbering assets. Further, we would increase liquidity by soliciting higher levels of deposit accounts through promotional activities and/or borrowing from our correspondent banks as well as the FHLB. At the current time, our long-term liquidity needs primarily relate to funds required to support loan and lease originations and commitments and deposit withdrawals.
We believe we can meet all of these needs from existing liquidity sources. Our liquidity is comprised of three primary classifications: cash flows from or used in operating activities; cash flows from or used in investing activities; and cash flows from or used in financing activities. Net cash provided by or used in operating activities has consisted primarily of net income adjusted for certain non-cash income and expense items such as the credit loss provision, investment and other amortization and depreciation.
Our primary investing activities are the origination of loans and lease and purchases and sales of investment securities. As of March 31, 2024, we had unfunded loan commitments of $1.1 billion and unfunded letters of credit of $14.9 million. At March 31, 2024, we believe that we had sufficient funds available to meet current loan commitments.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
The Company’s assessment of market risk at March 31, 2024 indicates there have been no material changes in the quantitative and qualitative disclosures from those made in the Company’s Annual Report on Form 10-K filed with the SEC on March 14, 2024.
Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices and equity prices. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. Management actively monitors and manages our interest rate risk exposure. We do not have any market-risk sensitive instruments entered into for trading purposes. In monitoring interest rate risk we continually analyze and manage our earning assets and funding liabilities based on their payment streams and interest rates, the timing of their maturities and/or prepayments, and their sensitivity to actual or potential changes in market interest rates.
Management uses various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited within our guidelines of acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of loans and deposits, and managing the deployment of our securities, are considered to reduce mismatches in interest rate re-pricing opportunities of portfolio assets and their funding sources.
Since our earnings are primarily dependent on our ability to generate net interest income, we focus on actively monitoring and managing the effects of adverse changes in interest rates on our net interest income. Our Asset Liability Management Committee (“ALCO”), which is comprised of members of the Board of Directors and Executive Officers, manages market risk. ALCO monitors interest rate risk by analyzing the potential impact on net interest income from potential changes in interest rates, and considers the impact of alternative strategies or changes in balance sheet structure. ALCO manages our balance sheet in part to maintain the potential impact of changes in interest rates on net interest income within acceptable ranges despite changes in interest rates. ALCO and management utilize a third party to assist with asset liability management including the use of simulation models.
Our exposure to interest rate risk is reviewed on at least a quarterly basis by ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine our change in net interest income in the event of hypothetical changes in interest rates. If potential changes to net interest income resulting from hypothetical interest rate changes are not within risk tolerances determined by ALCO, and approved by the full Board of Directors, management may make adjustments to the Company’s asset and liability mix to bring interest rate risk levels within the Board approved limits.
Net Interest Income Simulation. In order to measure interest rate risk, we use a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the difference between net interest income forecasted using a rising and a falling interest rate scenario and a net interest income forecast using a base market interest rate derived from the current Treasury yield curve. The income simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our assets are floating rate loans, which are assumed to re-price immediately, and to the same extent as the change in market rates according to their contracted index.
Some loans and investment vehicles include the opportunity of prepayment (embedded options), and accordingly the simulation model uses various proprietary models to estimate these prepayments and assumes the reinvestment of the proceeds at current yields. Our non-term deposit products re-price more slowly, usually changing less than the change in market rates and at our discretion.
This analysis indicates the impact of changes in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet size remains static throughout the simulation horizon by replacing existing cash flows/amortization into similar products at current rates to try and capture the ongoing activity of the balance sheet without forecasting any level of growth. It does not account for all factors that affect this analysis, including changes by management to mitigate the effect of interest rate changes or secondary impacts such as changes to our credit risk profile as interest rates change.
Furthermore, loan prepayment-rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this analysis. Changes that vary significantly from the assumptions may have significant effects on our net interest income.
For the rising and falling interest rate scenarios, the base market interest rate forecast was increased or decreased, on an instantaneous and sustained basis, by 100, 200 and 300 basis points. We then evaluate the simulation results using two approaches: Net Interest Income at Risk (“NII at Risk”) and Economic Value of Equity (“EVE”). Under NII at Risk, the impact on net interest income from the changes in interest rates on interest-earning assets and interest-bearing liabilities is modeled using various assumptions of assets and liabilities. EVE measures the period-end present value of assets minus the present value of liabilities. Management uses this value to measure the changes in the economic value of the Company under various interest rate scenarios.
Based on our quarterly simulations, our net interest margin exposure related to these hypothetical changes in market interest rates was within the current guidelines established by us. Our simulation model highlights the fact that our balance sheet is asset sensitive, which means that our net interest income rises in a rising interest rate environment as rates earned on our interest-bearing assets reprice higher and at a faster pace than rates paid on our interest-bearing liabilities.
The ratio of variable to fixed-rate loans in our loan portfolio, the ratio of short-term (maturing at a given time within 12 months) to long-term loans, and the ratio of our demand, money market and savings deposits to CDs (and their time periods), are the primary factors affecting the sensitivity of our net interest income to changes in market interest rates. Our short-term loans are typically priced at prime plus a margin, and our long-term loans are typically priced based on a specific term of the Treasury Curve for comparable maturities, plus a margin. The composition of our rate-sensitive assets or liabilities is subject to change and could result in a more unbalanced position that would cause market rate changes to have a greater impact on our net interest margin. As of March 31, 2024, our loan and lease portfolio was comprised of 58.1% fixed rate and 41.9% variable rate loans. The vast majority of our variable loans also contain interest rate floors which are designed to mitigate the impact of decreases in interest rates as index rates drop.
The following table presents the projected change in the Company’s net interest income over the next twelve months and the economic value of equity at March 31, 2024, that would occur upon an immediate change in interest rates, but without giving effect to any steps that management might take to counteract that change:
| | | Estimated Change in
Net Interest Income (NII)
(as a % of NII) | | | Estimated Change in
Economic Value of Equity
(EVE)
(as a % of EVE) | |
| March 31, 2024 | | | | | | |
| +300 bps | | | (0.2 | %) | | | (10.1 | %) |
| +200 bps | | | (0.4 | %) | | | (7.3 | %) |
| +100 bps | | | 0.0 | % | | | (2.9 | %) |
| 0 bps | | | - | | | | - | |
| -100 bps | | | (1.5 | %) | | | (0.6 | %) |
| -200 bps | | | (3.2 | %) | | | (3.6 | %) |
| -300 bps | | | (5.3 | %) | | | (9.2 | %) |
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)). Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this Report, the disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed by the Company in reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and timely reported as provided in the SEC’s rules and forms.
Changes in Internal Controls
There have been no material changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2024, to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against the Company or its subsidiaries. Based upon information available to the Company, its review of such lawsuits and claims and consultation with its counsel, the Company believes the liability relating to these actions, if any, would not have a material adverse effect on its consolidated financial statements.
There are no material proceedings adverse to the Company to which any director, officer or affiliate of the Company is a party.
There have been no material changes in the risk factors previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table reports information regarding repurchases of our common stock during the three months ended March 31, 2024:
| Period | | Total number of shares purchased | | | Average price paid per share(2) | | | Total number of shares purchased as part of publicly announced plans or programs | | | Maximum number (or approximate dollar value) of shares that may yet purchased under the plans or programs (In thousands) (1) | |
| | | | | | | | | | | | | |
| January 1, 2024 to January 31, 2024 | | | 4,853 | | | $ | 1,042.00 | | | | 4,853 | | | $ | 19,479 | |
| February 1, 2024 to February 29, 2024 | | | 87 | | | | 971.00 | | | | 87 | | | | 19,394 | |
| March 1, 2024 to March 31, 2024 | | | 261 | | | | 974.00 | | | | 261 | | | | 19,140 | |
| Total 1st Quarter 2024 | | | 5,201 | | | $ | 1,038.00 | | | | 5,201 | | | $ | 19,140 | |
(1)As of November 14, 2023 the Board approved a further extension to the repurchase program through December 31, 2024 and for an additional $25 million of the Company's common stock.
(2)The aggregate purchase price and weighted average price per share does not include the effect of excise tax expense incurred on net stock repurchases. For the three months ended March 31, 2024, the excise tax expense accrual totaled $54,000.
On November 14, 2023, the Board of Directors authorized an extension to its share repurchase program through December 31, 2024 for an additional $25.0 million of the Company’s common stock (“Repurchase Plan”), which represented approximately 4% of outstanding shareholders’ equity at the time of approval. Repurchases by the Company under the Repurchase Plan may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means.
During the first three months of 2024 the Company repurchased 5,201 shares under the Repurchase Plan, for a total of $5.5 million. As of March 31, 2024, there remains $19.1 million authorized for repurchases under the Repurchase Plan. All of these shares were purchased at prices ranging from $960.00 to $1,065.00 per share, based upon the then current price on the OTCQX.
| Item 3. | Defaults upon Senior Securities |
Not Applicable
| Item 4. | Mine Safety Disclosures |
Not Applicable
During the three months ended March 31, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
List of Financial Statements and Financial Statement Schedules
(a) The following documents are filed as a part of this Quarterly Report on Form 10-Q:
(1) Financial Statements and
(2) Financial Statement schedules required to be filed by Item 1 of this Quarterly Report on Form 10-Q.
(3) The following exhibits are required by Item 601 of Regulation S-K and are included as part of this Quarterly Report on Form 10-Q:
Exhibit Number | | Description |
| | Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and Kent A. Steinwert, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024. |
| | Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and Deborah E. Skinner, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024. |
| | Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and Bart R. Olson, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024. |
| | Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and Ryan J. Misasi, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024. |
| | Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and David M. Zitterow, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024. |
| | Amended and Restated Employment Agreement effective April 1, 2024, between Farmers & Merchants Bank of Central California and John W. Weubbe, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024. |
| | Employment Agreement effective April 22, 2024, between Farmers & Merchants Bank of Central California and Thomas Bennett, filed on Registrant’s Form 10-Q for the quarter ended March 31, 2024. |
| | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
| | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
| 101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
*Filed herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | FARMERS & MERCHANTS BANCORP |
| | |
Date: May 9, 2024 | /s/ Kent A. Steinwert |
| | Kent A. Steinwert |
| | Director, Chairman, President and Chief Executive Officer (Principal Executive Officer) |
| | |
Date: May 9, 2024 | /s/ Bart R. Olson |
| | Bart R. Olson |
| | Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
55
