NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2017
(Unaudited)
Note
1 – The Business of Sierra Bancorp
Sierra
Bancorp (the “Company”) is a California corporation headquartered in Porterville, California, and is a registered
bank holding company under federal banking laws. The Company was formed to serve as the holding company for Bank of the Sierra
(the “Bank”), and has been the Bank’s sole shareholder since August 2001. The Company exists primarily for the
purpose of holding the stock of the Bank and of such other subsidiaries it may acquire or establish. As of June 30, 2017, the
Company’s only other subsidiaries were Sierra Statutory Trust II, Sierra Capital Trust III, and Coast Bancorp Statutory
Trust II, which exist solely to facilitate the issuance of capital trust pass-through securities (“TRUPS”). Pursuant
to the Financial Accounting Standards Board (“FASB”) standard on the consolidation of variable interest entities,
these trusts are not reflected on a consolidated basis in the Company’s financial statements. References herein to the “Company”
include Sierra Bancorp and its consolidated subsidiary, the Bank, unless the context indicates otherwise.
Bank
of the Sierra, a California state-chartered bank headquartered in Porterville, California, offers a full range of retail and commercial
banking services in California’s South San Joaquin Valley, the Central Coast, Ventura County, and neighboring communities.
The Bank was incorporated in September 1977, and opened for business in January 1978 as a one-branch bank with $1.5 million in
capital. Our growth in the ensuing years has largely been organic in nature, but includes three whole-bank acquisitions: Sierra
National Bank in 2000, Santa Clara Valley Bank in 2014, and Coast National Bank in July of 2016. The Bank now operates 34 full-service
branches, a loan production office, and an online branch, and maintains ATMs at all branch locations and seven non-branch locations.
Our most recent branching activity occurred in the first quarter of 2017, with a de novo branch opened on California Avenue in
Bakersfield and our Paso Robles branch relocated to a superior site in reasonably close proximity to the previous location. The
Company plans to expand even further in the fourth quarter of 2017 with the acquisition of OCB Bancorp, the holding company for
Ojai Community Bank, and the purchase of the Woodlake branch of Citizens Business Bank (see Note 13 to the financial statements,
Recent Developments, for more details on the proposed acquisitions). We have also received regulatory approvals for a de novo
branch in Pismo Beach, California, although the timing for that branch opening remains uncertain, and have plans to relocate our
Fresno Herndon branch to a nearby location with easier access and better visibility. In addition to our stand-alone offices the
Bank has specialized lending units which include a real estate industries center, an agricultural credit center, and an SBA lending
unit. We were close to $2.1 billion in total assets as of June 30, 2017, and for the past several years have claimed the distinction
of being the largest bank headquartered in the South San Joaquin Valley. The Bank’s deposit accounts, which totaled almost
$1.8 billion at June 30, 2017, are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to maximum insurable
amounts.
Note
2 – Basis of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in a condensed format, and therefore do not include
all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete
financial statements. The information furnished in these interim statements reflects all adjustments that are, in the opinion
of Management, necessary for a fair statement of the results for such periods. Such adjustments can generally be considered as
normal and recurring unless otherwise disclosed in this Form 10-Q. In preparing the accompanying financial statements, Management
has taken subsequent events into consideration and recognized them where appropriate. The results of operations in the interim
statements are not necessarily indicative of the results that may be expected for any other quarter, or for the full year. Certain
amounts reported for 2016 have been reclassified to be consistent with the reporting for 2017. The interim financial information
should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed
with the Securities and Exchange Commission (the “SEC”).
Note
3 – Current Accounting Developments
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic
606)
. This ASU is the result of a joint project initiated by the FASB and the International Accounting Standards Board (IASB)
to clarify the principles for recognizing revenue, and to develop common revenue standards and disclosure requirements that would:
(1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue
issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets;
(4) provide more useful information to users of financial statements through improved disclosures; and (5) simplify the preparation
of financial statements by reducing the number of requirements to which an entity must refer. The guidance affects any entity
that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial
assets. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information
to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising
from contracts with customers. Qualitative and quantitative information is required with regard to contracts with customers, significant
judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This ASU is effective
for annual reporting periods beginning after December 15, 2017, including interim periods therein, with early adoption permitted
for reporting periods beginning after December 15, 2016. The Company plans to adopt ASU 2014-09 on January 1, 2018 utilizing the
modified retrospective approach. Since the guidance does not apply to revenue associated with financial instruments such as loans
and investments, which are accounted for under other provisions of GAAP, we do not expect it to impact interest income, our largest
component of income. The Company is currently performing an overall assessment of revenue streams potentially affected by the
ASU, including certain deposit related fees and interchange fees, to determine the potential impact of this guidance on our consolidated
financial statements.
In
January 2016 the FASB issued ASU 2016-01,
Financial Instruments–Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities
. This guidance primarily affects the accounting for equity securities with readily
determinable fair values, by requiring that the changes in fair value for such securities will be reflected in earnings
rather than in other comprehensive income. The accounting for other financial instruments such as loans, debt securities, and
financial liabilities is largely unchanged. ASU 2016-01 also changes the presentation and disclosure requirements for
financial instruments, including a requirement that public business entities use exit pricing when estimating fair values for
financial instruments measured at amortized cost for disclosure purposes. ASU 2016-01 is generally effective for public
business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
Based on Management’s evaluation of the provisions of ASU 2016-01, we have determined that the difference between the
amortized cost and fair market value of our equity securities, which constitutes a $993,000 gain at June 30, 2017, would be
credited to retained earnings, net of tax as a one-time cumulative-effect adjustment upon our adoption of this ASU on January
1, 2018, with any subsequent changes in fair market value reflected in our income statement. There would likely be no other
impact on our consolidated financial statements or disclosures. We are exploring the possibility of selling most of our
equity securities during the current fiscal year, in which case there would be no impact on our consolidated financial
statements upon adoption of ASU 2016-01.
In
February 2016 the FASB issued ASU 2016-02,
Leases (Topic 842)
. The intention of this standard is to increase the transparency
and comparability around lease obligations. Previously unrecorded off-balance sheet obligations will now be brought more prominently
to light by presenting lease liabilities on the face of the balance sheet, accompanied by enhanced qualitative and quantitative
disclosures in the notes to the financial statements. ASU 2016-02 is generally effective for public business entities in fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. The Company has leases on 17 branch
locations, a loan production office, and an administrative office, which are considered operating leases and are not currently
reflected in our financial statements. We expect that these lease agreements will be recognized on our consolidated statements
of condition as right-of-use assets and corresponding lease liabilities subsequent to implementing ASU 2016-02, but we are still
evaluating the extent to which this will impact our consolidated financial statements.
In
March 2016 the FASB issued ASU 2016-09,
Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting
, as part of its simplification initiative. ASU 2016-09 became effective for public business entities for
annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. The Company adopted
ASU 2016-09 effective January 1, 2017. Prior guidance dictated that as they relate to share-based payments, tax benefits in excess
of compensation costs (“windfalls”) were to be recorded in equity, and tax deficiencies (“shortfalls”)
were to be recorded in equity to the extent of previous windfalls and then to the income statement. ASU 2016-09 reduced some of
the administrative complexities by eliminating the need to track a windfall “pool,” but as we have already experienced,
it also increases the volatility of income tax expense. ASU 2016-09 also removed the requirement to delay recognition of a windfall
tax benefit until such time as it reduces current taxes payable. Under the new guidance, the benefit is recorded when it arises,
subject to normal valuation allowance considerations. This change was applied by us on a modified retrospective basis, as required,
with a cumulative-effect adjustment to opening retained earnings. Furthermore, all tax-related cash flows resulting from share-based
payments are now reported as operating activities on the statement of cash flows, a change from the previous requirement to present
windfall tax benefits as an inflow from financing activities and an outflow from operating activities. However, cash paid by an
employer when directly withholding shares for tax withholding purposes is classified as a financing activity. Under the new guidance,
entities were permitted to make an accounting policy election for the impact of forfeitures on expense recognition for share-based
payment awards. Forfeitures can be estimated in advance, as required previously, or recognized as they occur. Estimates are still
required in certain circumstances, such as at the time of modification of an award or issuance of a replacement award in a business
combination. If elected, the change to recognize forfeitures when they occur would have been adopted using a modified retrospective
approach, with a cumulative effect adjustment recorded to opening retained earnings. We did not elect to recognize forfeitures
as they occur, and continue to estimate potential forfeitures in advance.
In
June 2016 the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments
, which eliminates the probable initial recognition threshold for credit losses in current U.S. GAAP,
and instead requires an organization to record a current estimate of all expected credit losses over the contractual term for
financial assets carried at amortized cost. This is commonly referred to as the current expected credit losses (“CECL”)
methodology. Expected credit losses for financial assets held at the reporting date will be measured based on historical experience,
current conditions, and reasonable and supportable forecasts. Another change from existing U.S. GAAP involves the treatment of
purchased credit deteriorated assets, which are more broadly defined than purchased credit impaired assets in current accounting
standards. When such assets are purchased, institutions will estimate and record an allowance for credit losses that is added
to the purchase price rather than being reported as a credit loss expense. Furthermore, ASU 2016-13 updates the measurement of
credit losses on available-for-sale debt securities, by mandating that institutions record credit losses on available-for-sale
debt securities through an allowance for credit losses rather than the current practice of writing down securities for other-than-temporary
impairment. ASU 2016-13 will also require the enhancement of financial statement disclosures regarding estimates used in calculating
credit losses. ASU 2016-13 does not change the existing write-off principle in U.S. GAAP or current nonaccrual practices, nor
does it change accounting requirements for loans held for sale or certain other financial assets which are measured at the lower
of amortized cost or fair value. As a public business entity that is an SEC filer, ASU 2016-13 becomes effective for the Company
on January 1, 2020, although early application is permitted for 2019. On the effective date, institutions will apply the new accounting
standard as follows: for financial assets carried at amortized cost, a cumulative-effect adjustment will be recognized on the
balance sheet for any change in the related allowance for loan and lease losses generated by the adoption of the new standard;
financial assets classified as purchased credit impaired assets prior to the effective date will be reclassified as purchased
credit deteriorated assets as of the effective date, and will be grossed up for the related allowance for expected credit losses
created as of the effective date; and, debt securities on which other-than-temporary impairment had been recognized prior to the
effective date will transition to the new guidance prospectively with no change in their amortized cost basis. The Company has
commenced its transition efforts by establishing an implementation team, comprised of the Company’s executive officers and
certain other members of our credit administration and finance departments and chaired by our Chief Credit Officer. The Company’s
preliminary evaluation indicates that the provisions of ASU 2016-13 will impact our consolidated financial statements, in particular
the level of our reserve for credit losses and shareholders’ equity. However, we continue to evaluate the potential extent
of that impact.
In
January 2017 the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. Currently,
Topic 805 specifies three elements of a business – inputs, processes, and outputs. While an integrated set of assets and
activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required.
In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire
the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. This
led many transactions to be accounted for as business combinations rather than asset purchases under legacy GAAP. The primary
goal of ASU 2017-01 is to narrow the definition of a business, and the guidance in this update provides a screen to determine
when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or
disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business.
This screen reduces the number of transactions that need to be further evaluated. The amendments in this update are effective
for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal
years. The amendments in this update should be applied prospectively on or after the effective date. The Company is currently
evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.
In
January 2017 the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for
Goodwill Impairment
. This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase
price allocation, and goodwill impairment will simply be the amount by which a reporting unit’s carrying value exceeds its
fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged.
Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is
necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative
carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying
amounts. The amendments in this update are effective for public business entities for fiscal years beginning after December 15,
2019. We have not been required to record any goodwill impairment to date, and after a preliminary review do not expect that this
guidance would require us to do so given current circumstances. Nevertheless, we will continue to evaluate ASU 2017-04 to more
definitely determine its potential impact on the Company’s consolidated financial position, results of operations and cash
flows.
In
March 2017 the FASB issued ASU 2017-08,
Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization
on Purchased Callable Debt Securities
. The amendments in this update shorten the amortization period for certain callable
debt securities held at a premium, by requiring the premium to be amortized to the earliest call date. Under current guidance,
the premium on a callable debt security is generally amortized as an adjustment to yield over the contractual life of the instrument,
and any unamortized premium is recorded as a loss in earnings upon the debtor’s exercise of a call provision. Under ASU
2017-08, because the premium will be amortized to the earliest call date, entities will no longer recognize a loss in earnings
if a debt security is called prior to the contractual maturity date. The amendments do not require an accounting change for securities
held at a discount; discounts will continue to be amortized as an adjustment to yield over the contractual life of the debt instrument.
ASU 2017-08 is effective for public business entities, including the Company, for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity
early adopts in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that
interim period. To apply ASU 2017-08, entities must use a modified retrospective approach, with the cumulative-effect adjustment
recognized to retained earnings at the beginning of the period of adoption. Entities are also required to provide disclosures
about a change in accounting principle in the period of adoption. The Company has evaluated the potential impact of this guidance,
and does not expect the adoption of ASU 2017-08 to have a material impact on our financial statements or operations.
In
May 2017 the FASB issued ASU 2017-09,
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
.
This update was issued to provide clarity, reduce diversity in practice, and lower cost and complexity when applying the guidance
in Topic 718. Under the updated guidance, an entity will be expected to account for the effects of an equity award modification
unless all the following are met: 1) the fair value of the modified award is the same as the fair value of the original award
immediately before the original award is modified; 2) the vesting conditions of the modified award are the same as the vesting
conditions of the original award immediately before the original award is modified; 3) the classification of the modified award
as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the
original award is modified. The current disclosure requirements in Topic 718 continue to apply. ASU 2017-09 is effective for public
business entities, including the Company, for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2017. Early adoption is permitted, including adoption in an interim period for public business entities for reporting periods
for which financial statements have not yet been issued. Since the Company has not modified equity awards in the past and does
not expect to do so in the future, we do not anticipate any impact on our financial statements or operations from the adoption
of ASU 2017-09.
Note
4 – Supplemental Disclosure of Cash Flow Information
During
the six months ended June 30, 2017 and 2016, cash paid for interest due on interest-bearing liabilities was $2.273 million and
$1.423 million, respectively. There was $5.647 million in cash paid for income taxes during the six months ended June 30, 2017,
and $2.500 million for the six months ended June 30, 2016. Assets totaling $115,000 and $694,000 were acquired in settlement of
loans for the six months ended June 30, 2017 and June 30, 2016, respectively. We received $99,000 in cash from the sale of foreclosed
assets during the first six months of 2017 relative to $729,000 during the first six months of 2016, which represents sales proceeds
less loans (if any) extended to finance such sales.
Note
5 – Share Based Compensation
On
March 16, 2017 the Company’s Board of Directors approved and adopted the 2017 Stock Incentive Plan (the “2017 Plan”),
which became effective May 24, 2017 pursuant to the approval of the Company’s shareholders. The 2017 Plan replaced the Company’s
2007 Stock Incentive Plan (the “2007 Plan”), which expired by its own terms on March 15, 2017. Options to purchase
500,120 shares that were granted under the 2007 Plan were still outstanding as of June 30, 2017, and remain unaffected by that
plan’s expiration. The 2017 Plan provides for the issuance of both “incentive” and “nonqualified”
stock options to officers and employees, and of “nonqualified” stock options to non-employee directors and consultants
of the Company. The 2017 Plan also provides for the issuance of restricted stock awards to these same classes of eligible participants,
although no restricted stock awards have ever been issued by the Company. The total number of shares of the Company’s authorized
but unissued stock reserved for issuance pursuant to awards under the 2017 Plan is 850,000 shares. The dilutive impact of stock
options outstanding is discussed below in Note 6, Earnings per Share.
Pursuant
to FASB’s standards on stock compensation, the value of each stock option granted is reflected in our income statement as
employee compensation or directors’ expense by expensing its fair value as of the grant date in the case of immediately
vested options, or by amortizing its grant date fair value over the vesting period for options with graded vesting. The Company
is utilizing the Black-Scholes model to value stock options, and the “multiple option” approach is used to allocate
the resulting valuation to actual expense. Under the multiple option approach an employee’s options for each vesting period
are separately valued and amortized, which appears to be the preferred method for option grants with graded vesting. A pre-tax
charge of $18,000 was reflected in the Company’s income statement during the second quarter of 2017 and $12,000 was charged
during the second quarter of 2016, as expense related to stock options. For the first half, the charges totaled $441,000 in 2017
and $169,000 in 2016.
Note
6 – Earnings per Share
The
computation of earnings per share, as presented in the Consolidated Statements of Income, is based on the weighted average number
of shares outstanding during each period. There were 13,831,345 weighted average shares outstanding during the second quarter
of 2017, and 13,280,433 during the second quarter of 2016. There were 13,816,576 weighted average shares outstanding during the
first six months of 2017, and 13,272,903 during the first six months of 2016.
Diluted
earnings per share include the effect of the potential issuance of common shares, which for the Company is limited to shares that
would be issued on the exercise of “in-the-money” stock options. For the second quarter of 2017, calculations under
the treasury stock method resulted in the equivalent of 178,983 shares being added to basic weighted average shares outstanding
for purposes of determining diluted earnings per share, while a weighted average of 120,700 stock options were excluded from the
calculation because they were underwater and thus anti-dilutive. For the second quarter of 2016 the equivalent of 113,015 shares
were added in calculating diluted earnings per share, while 162,700 anti-dilutive stock options were not factored into the computation.
Likewise, for the first half of 2017 the equivalent of 192,909 shares were added to basic weighted average shares outstanding
in calculating diluted earnings per share and a weighted average of 120,700 stock options that were anti-dilutive for the period
were not included, compared to the addition of the equivalent of 115,761 shares and non-inclusion of 212,700 anti-dilutive options
in calculating diluted earnings per share for first half of 2016.
Note
7 – Comprehensive Income
As
presented in the Consolidated Statements of Comprehensive Income, comprehensive income includes net income and other comprehensive
income. The Company’s only source of other comprehensive income is unrealized gains and losses on available-for-sale investment
securities. Gains or losses on investment securities that were realized and reflected in net income of the current period, which
had previously been included in other comprehensive income as unrealized holding gains or losses in the period in which they arose,
are considered to be reclassification adjustments that are excluded from other comprehensive income in the current period.
Note
8 – Financial Instruments with Off-Balance-Sheet Risk
The
Company is a party to financial instruments with off-balance-sheet risk in the normal course of business. Those financial instruments
currently consist of unused commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements
of risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance
by counterparties for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and issuing letters of credit as it does for originating loans
included on the balance sheet. The following financial instruments represent off-balance-sheet credit risk (dollars in thousands):
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Commitments to extend credit
|
|
$
|
583,562
|
|
|
$
|
463,923
|
|
Standby letters
of credit
|
|
$
|
8,432
|
|
|
$
|
8,582
|
|
Commitments
to extend credit consist primarily of the unused or unfunded portions of the following: home equity lines of credit; commercial
real estate construction loans, where disbursements are made over the course of construction; commercial revolving lines of credit;
mortgage warehouse lines of credit; unsecured personal lines of credit; and formalized (disclosed) deposit account overdraft lines.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments
are expected to expire without being drawn upon, the unused portions of committed amounts do not necessarily represent future
cash requirements. Standby letters of credit are generally unsecured and are issued by the Company to guarantee the performance
of a customer to a third party, and the credit risk involved in issuing letters of credit is essentially the same as the risk
involved in extending loans to customers.
At
June 30, 2017, the Company was also utilizing a letter of credit in the amount of $87 million issued by the Federal Home Loan
Bank on the Company’s behalf as security for certain deposits and to facilitate certain credit arrangements with the Company’s
customers. That letter of credit is backed by loans which are pledged to the FHLB by the Company.
Note
9 – Fair Value Disclosures and Reporting, the Fair Value Option and Fair Value Measurements
FASB’s
standards on financial instruments, and on fair value measurements and disclosures, require all entities to disclose in their
financial statement footnotes the estimated fair values of financial instruments for which it is practicable to estimate such.
In addition to disclosure requirements, FASB’s standard on investments requires that our debt securities which are classified
as available for sale and our equity securities that have readily determinable fair values be measured and reported at fair value
in our statement of financial position. Certain impaired loans are also reported at fair value, as explained in greater detail
below, and foreclosed assets are carried at the lower of cost or fair value. FASB’s standard on financial instruments permits
companies to report certain other financial assets and liabilities at fair value, but we have not elected the fair value option
for any of those financial instruments.
Fair
value measurement and disclosure standards also establish a framework for measuring fair values. Fair value is defined as the
exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability, in an orderly transaction between market participants on the measurement date. Further, the
standards establish a fair value hierarchy that encourages an entity to maximize the use of observable inputs and limit the use
of unobservable inputs when measuring fair values. The standards describe three levels of inputs that may be used to measure fair
values:
|
·
|
Level
1
: Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement date.
|
|
·
|
Level
2
: Significant observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities, quoted prices in markets that are not active, and
other inputs that are observable or can be corroborated by observable market data.
|
|
·
|
Level
3
: Significant unobservable inputs that reflect a company’s own assumptions
about the factors that market participants would likely consider in pricing an asset
or liability.
|
Fair
value estimates are made at a specific point in time based on relevant market data and information about the financial instruments.
The estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a
particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business
related to the instruments. In addition, the tax ramifications related to realized gains and losses could have a significant effect
on fair value estimates but have not been considered in those estimates. Because no active market exists for a significant portion
of our financial instruments, fair value disclosures are based on judgments regarding current economic conditions, risk characteristics
of various financial instruments and other factors. The estimates are subjective and involve uncertainties and matters of significant
judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly alter the fair values
presented. The following methods and assumptions were used by the Company to estimate its financial instrument fair values disclosed
at June 30, 2017 and December 31, 2016:
|
·
|
Cash
and cash equivalents and fed funds sold
: The carrying amount is estimated to be fair
value.
|
|
·
|
Investment
securities
: Fair values are determined by obtaining quoted prices on nationally recognized
securities exchanges or by matrix pricing, which is a mathematical technique used widely
in the industry to value debt securities by relying on their relationship to other benchmark
quoted securities when quoted prices for specific securities are not readily available.
|
|
·
|
Loans
and leases
: For variable-rate loans and leases that re-price frequently with no significant
changes in credit risk or interest rate spreads relative to current market pricing, fair
values are based on carrying values. Fair values for other loans and leases are estimated
by discounting projected cash flows at interest rates being offered at each reporting
date for loans and leases with similar terms, to borrowers of comparable creditworthiness.
The carrying amount of accrued interest receivable approximates its fair value.
|
|
·
|
Loans
held for sale
: Since loans designated by the Company as available-for-sale are typically
sold shortly after making the decision to sell them, realized gains or losses are usually
recognized within the same period and fluctuations in fair values are not relevant for
reporting purposes. If available-for-sale loans are on our books for an extended period
of time, the fair value of those loans is determined using quoted secondary-market prices.
|
|
·
|
Collateral-dependent
impaired loans
: Collateral-dependent impaired loans are carried at fair value when
it is probable that the Company will be unable to collect all amounts due according to
the contractual terms of the original loan agreement and the loan has been written down
to the fair value of its underlying collateral, net of expected disposition costs where
applicable.
|
|
·
|
Cash
surrender value of life insurance policies
: Fair values are based on net cash surrender
values at each reporting date.
|
|
·
|
Other
investments
: Certain investments for which no secondary market exists are carried
at cost and the carrying amount for those investments typically approximates their estimated
fair value, unless an impairment analysis indicates the need for adjustments.
|
|
·
|
Deposits
:
Fair values for non-maturity deposits are equal to the amount payable on demand at the
reporting date, which is the carrying amount. Fair values for fixed-rate certificates
of deposit are estimated using a cash flow analysis, discounted at interest rates being
offered at each reporting date by the Bank for certificates with similar remaining maturities.
The carrying amount of accrued interest payable approximates its fair value.
|
|
·
|
Short-term
borrowings
: Current carrying amounts are used as an approximation of fair values
for federal funds purchased, overnight advances from the Federal Home Loan Bank (“FHLB”),
borrowings under repurchase agreements, and other short-term borrowings maturing within
ninety days of the reporting dates. Fair values of other short-term borrowings are estimated
by discounting projected cash flows at the Company’s current incremental borrowing
rates for similar types of borrowing arrangements.
|
|
·
|
Long-term
borrowings
: Fair values are estimated using projected cash flows discounted at the
Company’s current incremental borrowing rates for similar types of borrowing arrangements.
|
|
·
|
Subordinated
debentures
: Fair values are determined based on the current market value for like
instruments of a similar maturity and structure.
|
|
·
|
Commitments
to extend credit and letters of credit
: If funded, the carrying amounts for currently
unused commitments would provide an equivalent measure of fair values for the newly created
financial assets at the funding date. However, because of the high degree of uncertainty
with regard to whether or not those commitments will ultimately be funded, fair values
for loan commitments and letters of credit in their current undisbursed state cannot
reasonably be estimated, and only notional values are disclosed in the table below.
|
Estimated
fair values for the Company’s financial instruments are as follows, as of the dates noted:
Fair
Value of Financial Instruments
(dollars in thousands, unaudited)
|
|
June
30, 2017
|
|
|
|
|
|
|
|
Estimated
Fair Value
|
|
|
|
Carrying
Amount
|
|
|
Quoted
Prices in
Active Markets
for
Identical Assets
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
77,175
|
|
|
$
|
77,175
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
77,175
|
|
Investment securities
available for sale
|
|
|
579,581
|
|
|
|
1,487
|
|
|
|
578,094
|
|
|
|
-
|
|
|
|
579,581
|
|
Loans and leases, net
held for investment
|
|
|
1,292,777
|
|
|
|
-
|
|
|
|
1,304,509
|
|
|
|
-
|
|
|
|
1,304,509
|
|
Collateral dependent
impaired loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash surrender value
of life insurance policies
|
|
|
44,815
|
|
|
|
-
|
|
|
|
44,815
|
|
|
|
-
|
|
|
|
44,815
|
|
Other investments
|
|
|
8,741
|
|
|
|
-
|
|
|
|
8,741
|
|
|
|
-
|
|
|
|
8,741
|
|
Accrued interest receivable
|
|
|
6,490
|
|
|
|
-
|
|
|
|
6,490
|
|
|
|
-
|
|
|
|
6,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
557,617
|
|
|
$
|
557,617
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
557,617
|
|
Interest-bearing
|
|
|
1,234,240
|
|
|
|
-
|
|
|
|
1,234,690
|
|
|
|
-
|
|
|
|
1,234,690
|
|
Fed
funds purchased and repurchase agreements
|
|
|
11,296
|
|
|
|
-
|
|
|
|
11,296
|
|
|
|
-
|
|
|
|
11,296
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated debentures
|
|
|
34,499
|
|
|
|
-
|
|
|
|
23,995
|
|
|
|
-
|
|
|
|
23,995
|
|
Accrued interest payable
|
|
|
150
|
|
|
|
-
|
|
|
|
150
|
|
|
|
-
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance-sheet
financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend
credit
|
|
$
|
583,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of
credit
|
|
|
8,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
Estimated
Fair Value
|
|
|
|
Carrying
Amount
|
|
|
Quoted
Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
120,442
|
|
|
$
|
120,442
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
120,442
|
|
Investment securities available for
sale
|
|
|
530,083
|
|
|
|
1,546
|
|
|
|
528,537
|
|
|
|
-
|
|
|
|
530,083
|
|
Loans and leases, net held for investment
|
|
|
1,255,348
|
|
|
|
-
|
|
|
|
1,266,447
|
|
|
|
-
|
|
|
|
1,266,447
|
|
Collateral dependent impaired loans
|
|
|
406
|
|
|
|
-
|
|
|
|
406
|
|
|
|
-
|
|
|
|
406
|
|
Cash surrender value of life insurance
policies
|
|
|
43,706
|
|
|
|
-
|
|
|
|
43,706
|
|
|
|
-
|
|
|
|
43,706
|
|
Other investments
|
|
|
8,506
|
|
|
|
-
|
|
|
|
8,506
|
|
|
|
-
|
|
|
|
8,506
|
|
Accrued interest receivable
|
|
|
6,354
|
|
|
|
-
|
|
|
|
6,354
|
|
|
|
-
|
|
|
|
6,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
524,552
|
|
|
$
|
524,552
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
524,552
|
|
Interest-bearing
|
|
|
1,170,919
|
|
|
|
-
|
|
|
|
1,171,188
|
|
|
|
-
|
|
|
|
1,171,188
|
|
Fed
funds purchased and repurchase agreements
|
|
|
8,094
|
|
|
|
-
|
|
|
|
8,094
|
|
|
|
-
|
|
|
|
8,094
|
|
Short-term borrowings
|
|
|
65,000
|
|
|
|
-
|
|
|
|
65,000
|
|
|
|
-
|
|
|
|
65,000
|
|
Subordinated debentures
|
|
|
34,410
|
|
|
|
-
|
|
|
|
22,633
|
|
|
|
-
|
|
|
|
22,633
|
|
Accrued interest payable
|
|
|
188
|
|
|
|
-
|
|
|
|
188
|
|
|
|
-
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance-sheet
financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
463,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
|
8,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
financial asset categories that were actually reported at fair value as of June 30, 2017 and December 31, 2016, the Company used
the following methods and significant assumptions:
|
·
|
Investment
securities
: Fair values are determined by obtaining quoted prices on nationally recognized
securities exchanges or by matrix pricing, which is a mathematical technique used widely
in the industry to value debt securities by relying on their relationship to other benchmark
quoted securities.
|
|
·
|
Collateral-dependent
impaired loans
: Collateral-dependent impaired loans are carried at fair value when
it is probable that the Company will be unable to collect all amounts due according to
the contractual terms of the original loan agreement and the loan has been written down
to the fair value of its underlying collateral, net of expected disposition costs where
applicable.
|
|
·
|
Foreclosed
assets
: Repossessed real estate (known as other real estate owned, or “OREO”)
and other foreclosed assets are carried at the lower of cost or fair value. Fair value
is the appraised value less expected selling costs for OREO and some other assets such
as mobile homes, and fair values for any other foreclosed assets are represented by estimated
sales proceeds as determined using reasonably available sources. Foreclosed assets for
which appraisals can be feasibly obtained are periodically measured for impairment using
updated appraisals. Fair values for other foreclosed assets are adjusted as necessary,
subsequent to a periodic re-evaluation of expected cash flows and the timing of resolution.
If impairment is determined to exist, the book value of a foreclosed asset is immediately
written down to its estimated impaired value through the income statement, thus the carrying
amount is equal to the fair value and there is no valuation allowance.
|
Assets
reported at fair value on a recurring basis are summarized below:
Fair Value Measurements -
Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements at June 30, 2017, using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Realized
Gain/(Loss)
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agencies
|
|
$
|
-
|
|
|
$
|
25,717
|
|
|
$
|
-
|
|
|
$
|
25,717
|
|
|
$
|
-
|
|
Mortgage-backed securities
|
|
|
-
|
|
|
|
412,745
|
|
|
|
-
|
|
|
|
412,745
|
|
|
|
-
|
|
State and political subdivisions
|
|
|
-
|
|
|
|
139,632
|
|
|
|
-
|
|
|
|
139,632
|
|
|
|
-
|
|
Equity securities
|
|
|
1,487
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,487
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
securities
|
|
$
|
1,487
|
|
|
$
|
578,094
|
|
|
$
|
-
|
|
|
$
|
579,581
|
|
|
$
|
-
|
|
|
|
Fair
Value Measurements at December 31, 2016, using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Realized
Gain/(Loss)
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agencies
|
|
$
|
-
|
|
|
$
|
26,468
|
|
|
$
|
-
|
|
|
$
|
26,468
|
|
|
$
|
-
|
|
Mortgage-backed securities
|
|
|
-
|
|
|
|
387,876
|
|
|
|
-
|
|
|
|
387,876
|
|
|
|
-
|
|
State and political subdivisions
|
|
|
-
|
|
|
|
114,193
|
|
|
|
-
|
|
|
|
114,193
|
|
|
|
-
|
|
Equity securities
|
|
|
1,546
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,546
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale
securities
|
|
$
|
1,546
|
|
|
$
|
528,537
|
|
|
$
|
-
|
|
|
$
|
530,083
|
|
|
$
|
-
|
|
Assets
reported at fair value on a nonrecurring basis are summarized below:
Fair Value Measurements -
Nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements at June 30, 2017, using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
construction
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other construction/land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
1-4
family - closed-end
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
13
|
|
Equity lines
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
17
|
|
Multi-family residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real
estate - owner occupied
|
|
|
-
|
|
|
|
210
|
|
|
|
-
|
|
|
|
210
|
|
Commercial real
estate-non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total real estate
|
|
|
-
|
|
|
|
240
|
|
|
|
-
|
|
|
|
240
|
|
Agriculture
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
loans
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
14
|
|
Total impaired loans
|
|
|
-
|
|
|
|
254
|
|
|
|
-
|
|
|
|
254
|
|
Foreclosed assets
|
|
$
|
-
|
|
|
$
|
2,141
|
|
|
$
|
-
|
|
|
$
|
2,141
|
|
Total
assets measured on a norecurring basis
|
|
$
|
-
|
|
|
$
|
2,395
|
|
|
$
|
-
|
|
|
$
|
2,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements at December 31, 2016, using
|
|
|
|
Quoted
Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
construction
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other construction/land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
1-4 family - closed-end
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Equity lines
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Multi-family residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
real estate - owner occupied
|
|
|
-
|
|
|
|
281
|
|
|
|
-
|
|
|
|
281
|
|
Commercial real
estate-non-owner occupied
|
|
|
-
|
|
|
|
67
|
|
|
|
-
|
|
|
|
67
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total real estate
|
|
|
-
|
|
|
|
348
|
|
|
|
-
|
|
|
|
348
|
|
Agriculture
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
loans
|
|
|
-
|
|
|
|
58
|
|
|
|
-
|
|
|
|
58
|
|
Total impaired loans
|
|
|
-
|
|
|
|
406
|
|
|
|
-
|
|
|
|
406
|
|
Foreclosed assets
|
|
$
|
-
|
|
|
$
|
2,225
|
|
|
$
|
-
|
|
|
$
|
2,225
|
|
Total
assets measured on a norecurring basis
|
|
$
|
-
|
|
|
$
|
2,631
|
|
|
$
|
-
|
|
|
$
|
2,631
|
|
The
table above includes collateral-dependent impaired loan balances for which a specific reserve has been established or on which
a write-down has been taken. Information on the Company’s total impaired loan balances and specific loss reserves associated
with those balances is included in Note 11 below, and in Management’s Discussion and Analysis of Financial Condition and
Results of Operation in the “Nonperforming Assets” and “Allowance for Loan and Lease Losses” sections.
The
unobservable inputs are based on Management’s best estimates of appropriate discounts in arriving at fair market value.
Adjusting any of those inputs could result in a significantly lower or higher fair value measurement. For example, an increase
or decrease in actual loss rates would create a directionally opposite change in the fair value of unsecured impaired loans.
Note
10 – Investments
Investment
Securities
Although
the Company currently has the intent and the ability to hold the securities in its investment portfolio to maturity, the securities
are all marketable and are classified as “available for sale” to allow maximum flexibility with regard to interest
rate risk and liquidity management. Pursuant to FASB’s guidance on accounting for debt and equity securities, available
for sale securities are carried on the Company’s financial statements at their estimated fair market values, with monthly
tax-effected “mark-to-market” adjustments made vis-à-vis accumulated other comprehensive income in shareholders’
equity.
The
amortized cost and estimated fair value of investment securities available-for-sale are as follows:
Amortized Cost
And Estimated Fair Value
|
(dollars in thousands, unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2017
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agencies
|
|
$
|
25,793
|
|
|
$
|
162
|
|
|
$
|
(238
|
)
|
|
$
|
25,717
|
|
Mortgage-backed securities
|
|
|
414,065
|
|
|
|
1,641
|
|
|
|
(2,961
|
)
|
|
|
412,745
|
|
State and political subdivisions
|
|
|
136,554
|
|
|
|
3,372
|
|
|
|
(294
|
)
|
|
|
139,632
|
|
Equity securities
|
|
|
494
|
|
|
|
993
|
|
|
|
-
|
|
|
|
1,487
|
|
Total
securities
|
|
$
|
576,906
|
|
|
$
|
6,168
|
|
|
$
|
(3,493
|
)
|
|
$
|
579,581
|
|
|
|
December
31, 2016
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agencies
|
|
$
|
26,926
|
|
|
$
|
48
|
|
|
$
|
(506
|
)
|
|
$
|
26,468
|
|
Mortgage-backed securities
|
|
|
391,555
|
|
|
|
1,492
|
|
|
|
(5,171
|
)
|
|
|
387,876
|
|
State and political subdivisons
|
|
|
114,140
|
|
|
|
1,519
|
|
|
|
(1,466
|
)
|
|
|
114,193
|
|
Equity securities
|
|
|
500
|
|
|
|
1,046
|
|
|
|
-
|
|
|
|
1,546
|
|
Total
securities
|
|
$
|
533,121
|
|
|
$
|
4,105
|
|
|
$
|
(7,143
|
)
|
|
$
|
530,083
|
|
At
June 30, 2017 and December 31, 2016, the Company had 296 securities and 431 securities, respectively, with gross unrealized losses.
Management has evaluated those securities as of the respective dates, and does not believe that any of the unrealized losses are
other than temporary. Gross unrealized losses on our investment securities as of the indicated dates are disclosed in the table
below, categorized by investment type and by the duration of time that loss positions on individual securities have continuously
existed (over or under twelve months).
Investment Portfolio - Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
June
30, 2017
|
|
|
|
Less
than twelve months
|
|
|
Twelve
months or more
|
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agencies
|
|
$
|
(193
|
)
|
|
$
|
11,451
|
|
|
$
|
(45
|
)
|
|
$
|
1,454
|
|
Mortgage-backed securities
|
|
|
(2,086
|
)
|
|
|
234,206
|
|
|
|
(875
|
)
|
|
|
54,646
|
|
State and political
subdivisions
|
|
|
(282
|
)
|
|
|
17,465
|
|
|
|
(12
|
)
|
|
|
696
|
|
Total
|
|
$
|
(2,561
|
)
|
|
$
|
263,122
|
|
|
$
|
(932
|
)
|
|
$
|
56,796
|
|
|
|
December
31, 2016
|
|
|
|
Less
than twelve months
|
|
|
Twelve
months or more
|
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agencies
|
|
$
|
(500
|
)
|
|
$
|
21,056
|
|
|
$
|
(6
|
)
|
|
$
|
711
|
|
Mortgage-backed securities
|
|
|
(4,303
|
)
|
|
|
271,276
|
|
|
|
(868
|
)
|
|
|
43,570
|
|
State and political
subdivisions
|
|
|
(1,466
|
)
|
|
|
49,195
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
(6,269
|
)
|
|
$
|
341,527
|
|
|
$
|
(874
|
)
|
|
$
|
44,281
|
|
The
table below summarizes the Company’s gross realized gains and losses as well as gross proceeds from the sales of securities,
for the periods indicated:
Investment Portfolio - Realized
Gains/(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Proceeds
from sales, calls and maturities of securities available for sale
|
|
$
|
4,721
|
|
|
$
|
2,790
|
|
|
$
|
17,625
|
|
|
$
|
5,395
|
|
Gross
gains on sales, calls and maturities of securities available for sale
|
|
$
|
63
|
|
|
$
|
146
|
|
|
$
|
106
|
|
|
$
|
160
|
|
Gross
losses on sales, calls and maturities of securities available for sale
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
(40
|
)
|
|
|
(38
|
)
|
Net gains on
sale of securities available for sale
|
|
$
|
58
|
|
|
$
|
146
|
|
|
$
|
66
|
|
|
$
|
122
|
|
The
amortized cost and estimated fair value of investment securities available-for-sale at June 30, 2017 and December 31, 2016 are
shown below, grouped by the remaining time to contractual maturity dates. The expected life of investment securities may not be
consistent with contractual maturity dates, since the issuers of the securities might have the right to call or prepay obligations
with or without penalties.
Estimated Fair Value of Contractual
Maturities
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
June
30, 2017
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Maturing within one year
|
|
$
|
8,552
|
|
|
$
|
8,600
|
|
Maturing after one year through five
years
|
|
|
258,614
|
|
|
|
259,441
|
|
Maturing after five years through ten
years
|
|
|
40,566
|
|
|
|
41,538
|
|
Maturing after ten years
|
|
|
74,654
|
|
|
|
75,778
|
|
|
|
|
|
|
|
|
|
|
Securities not due at a single maturity
date:
|
|
|
|
|
|
|
|
|
US Government
agencies collateralized by mortgage obligations
|
|
|
194,026
|
|
|
|
192,737
|
|
Other
securities
|
|
|
494
|
|
|
|
1,487
|
|
|
|
$
|
576,906
|
|
|
$
|
579,581
|
|
|
|
December
31, 2016
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Maturing within one year
|
|
$
|
8,488
|
|
|
$
|
8,573
|
|
Maturing after one year through five
years
|
|
|
260,387
|
|
|
|
259,535
|
|
Maturing after five years through ten
years
|
|
|
50,823
|
|
|
|
50,687
|
|
Maturing after ten years
|
|
|
47,132
|
|
|
|
46,190
|
|
|
|
|
|
|
|
|
|
|
Securities not due at a single maturity
date:
|
|
|
|
|
|
|
|
|
US Government
agencies collateralized by mortgage obligations
|
|
|
165,791
|
|
|
|
163,552
|
|
Other
securities
|
|
|
500
|
|
|
|
1,546
|
|
|
|
$
|
533,121
|
|
|
$
|
530,083
|
|
At
June 30, 2017, the Company’s investment portfolio was comprised of 337 bonds issued by government municipalities and agencies
located within 32 states, with an aggregate fair value of $139.6 million. The largest exposure to any single municipality or agency
was a combined $2.585 million (fair value) in general obligation bonds issued by the Lindsay (CA) Unified School District.
The
Company’s investments in bonds issued by states, municipalities and political subdivisions are evaluated in accordance with
Supervision and Regulation Letter 12-15 issued by the Board of Governors of the Federal Reserve System, “Investing in Securities
without Reliance on Nationally Recognized Statistical Rating Organization Ratings,” and other regulatory guidance. Credit
ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds. There
have been no significant differences in our internal analyses compared with the ratings assigned by the third party credit rating
agencies.
The
following table summarizes the amortized cost and fair values of general obligation and revenue bonds in the Company’s investment
securities portfolio at the indicated dates, identifying the state in which the issuing municipality or agency operates for our
largest geographic concentrations:
Revenue and General Obligation
Bonds by Location
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair Market
|
|
|
Amortized
|
|
|
Fair Market
|
|
General obligation
bonds
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
State of issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
$
|
29,104
|
|
|
$
|
29,570
|
|
|
$
|
20,170
|
|
|
$
|
19,875
|
|
California
|
|
|
28,399
|
|
|
|
29,354
|
|
|
|
25,457
|
|
|
|
25,799
|
|
Washington
|
|
|
12,524
|
|
|
|
12,803
|
|
|
|
5,928
|
|
|
|
5,970
|
|
Ohio
|
|
|
9,374
|
|
|
|
9,502
|
|
|
|
9,412
|
|
|
|
9,324
|
|
Illinois
|
|
|
8,398
|
|
|
|
8,589
|
|
|
|
9,873
|
|
|
|
9,871
|
|
Utah
|
|
|
948
|
|
|
|
981
|
|
|
|
949
|
|
|
|
957
|
|
Other ( 20 states)
|
|
|
24,310
|
|
|
|
24,845
|
|
|
|
21,688
|
|
|
|
21,741
|
|
Total General Obligation Bonds
|
|
|
113,057
|
|
|
|
115,644
|
|
|
|
93,477
|
|
|
|
93,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State of issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
|
6,718
|
|
|
|
6,825
|
|
|
|
5,727
|
|
|
|
5,702
|
|
Utah
|
|
|
5,413
|
|
|
|
5,510
|
|
|
|
5,286
|
|
|
|
5,236
|
|
Washington
|
|
|
2,112
|
|
|
|
2,184
|
|
|
|
1,302
|
|
|
|
1,299
|
|
California
|
|
|
1,029
|
|
|
|
1,044
|
|
|
|
1,283
|
|
|
|
1,298
|
|
Ohio
|
|
|
260
|
|
|
|
261
|
|
|
|
261
|
|
|
|
261
|
|
Other states (12
states)
|
|
|
7,965
|
|
|
|
8,164
|
|
|
|
6,804
|
|
|
|
6,860
|
|
Total Revenue Bonds
|
|
|
23,497
|
|
|
|
23,988
|
|
|
|
20,663
|
|
|
|
20,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Obligations of States and Political Subdivisions
|
|
$
|
136,554
|
|
|
$
|
139,632
|
|
|
$
|
114,140
|
|
|
$
|
114,193
|
|
The
revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to
fund public services such as utilities (water, sewer, and power), educational facilities, and general public and economic improvements.
The primary sources of revenue for these bonds are delineated in the table below, which shows the amortized cost and fair market
values for the largest revenue concentrations as of the indicated dates.
Revenue Bonds by Type
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair Market
|
|
|
Amortized
|
|
|
Fair Market
|
|
Revenue bonds
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Revenue source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water
|
|
$
|
7,409
|
|
|
$
|
7,483
|
|
|
$
|
4,788
|
|
|
$
|
4,722
|
|
Sales Tax
|
|
|
2,969
|
|
|
|
3,013
|
|
|
|
2,981
|
|
|
|
2,927
|
|
College & University
|
|
|
2,626
|
|
|
|
2,729
|
|
|
|
3,401
|
|
|
|
3,472
|
|
Lease
|
|
|
2,324
|
|
|
|
2,400
|
|
|
|
3,119
|
|
|
|
3,123
|
|
Local or GTD Housing
|
|
|
1,541
|
|
|
|
1,558
|
|
|
|
167
|
|
|
|
167
|
|
Other (15 sources)
|
|
|
6,628
|
|
|
|
6,805
|
|
|
|
9,326
|
|
|
|
9,368
|
|
Total Revenue
Bonds
|
|
$
|
23,497
|
|
|
$
|
23,988
|
|
|
$
|
20,663
|
|
|
$
|
20,656
|
|
Low-Income
Housing Tax Credit (“LIHTC”) Fund Investments
The
Company has the ability to invest in limited partnerships which own housing projects that qualify for federal and/or California
state tax credits, by mandating a specified percentage of low-income tenants for each project. The tax credits flow through to
investors, supplementing any returns that might be derived from an increase in property values. Because rent levels are lower
than standard market rents and the projects are generally highly leveraged, each project also typically generates tax-deductible
operating losses that are allocated to the limited partners.
The
Company invested in nine different LIHTC fund limited partnerships from 2001 through 2017, all of which were California-focused
funds that help the Company meet its obligations under the Community Reinvestment Act. We utilize the cost method of accounting
for our LIHTC fund investments, under which we initially record on our balance sheet an asset that represents the total cash expected
to be invested over the life of the partnership. Any commitments or contingent commitments for future investment are reflected
as a liability. The income statement reflects tax credits and any other tax benefits from these investments “below the line”
within our income tax provision, while the initial book value of the investment is amortized on a straight-line basis as an offset
to non-interest income, over the time period in which the tax credits and tax benefits are expected to be received.
As
of June 30, 2017 our total LIHTC investment book balance was $9.3 million, which includes $4.2 million in remaining commitments
for additional capital contributions. There were $343,000 in tax credits derived from our LIHTC investments that were recognized
during the six months ended June 30, 2017, and amortization expense of $475,000 associated with those investments was included
in pre-tax income for the same time period. Our LIHTC investments are evaluated annually for potential impairment, and we have
concluded that the carrying value of the investments is stated fairly and is not impaired.
Note
11 – Credit Quality and Nonperforming Assets
Credit
Quality Classifications
The
Company monitors the credit quality of loans on a continuous basis using the regulatory and accounting classifications of pass,
special mention, substandard and impaired to characterize the associated credit risk. Balances classified as “loss”
are immediately charged off. The Company conforms to the following definitions for its risk classifications:
|
·
|
Pass
:
Larger non-homogeneous loans not meeting the risk rating definitions below, and smaller
homogeneous loans that are not assessed on an individual basis.
|
|
·
|
Special
mention
: Loans which have potential issues that deserve the close attention of Management.
If left uncorrected, those potential weaknesses could eventually diminish the prospects
for full repayment of principal and interest according to the contractual terms of the
loan agreement, or could result in deterioration of the Company’s credit position
at some future date.
|
|
·
|
Substandard
:
Loans that have at least one clear and well-defined weakness that could jeopardize the
ultimate recoverability of all principal and interest, such as a borrower displaying
a highly leveraged position, unfavorable financial operating results and/or trends, uncertain
repayment sources or a deteriorated financial condition.
|
|
·
|
Impaired
:
A loan is considered impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Impaired loans include all nonperforming loans and restructured
troubled debt (“TDRs”). A TDR may be nonperforming or performing, depending
on its accrual status and the demonstrated ability of the borrower to comply with restructured
terms (see “Troubled Debt Restructurings” section below for additional information
on TDRs).
|
Credit
quality classifications for the Company’s loan balances were as follows, as of the dates indicated:
Credit Quality Classifications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2017
|
|
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Impaired
|
|
|
Total
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
residential construction
|
|
$
|
44,248
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
44,248
|
|
Other construction/land
|
|
|
46,401
|
|
|
|
328
|
|
|
|
56
|
|
|
|
580
|
|
|
|
47,365
|
|
1-4 family - closed
end
|
|
|
143,814
|
|
|
|
605
|
|
|
|
324
|
|
|
|
5,449
|
|
|
|
150,192
|
|
Equity lines
|
|
|
33,169
|
|
|
|
3,370
|
|
|
|
488
|
|
|
|
4,680
|
|
|
|
41,707
|
|
Multi-family residential
|
|
|
30,501
|
|
|
|
-
|
|
|
|
-
|
|
|
|
562
|
|
|
|
31,063
|
|
Commercial real estate
- owner occupied
|
|
|
248,053
|
|
|
|
4,508
|
|
|
|
2,812
|
|
|
|
2,012
|
|
|
|
257,385
|
|
Commercial real estate
- non-owner occupied
|
|
|
270,076
|
|
|
|
4,531
|
|
|
|
3,176
|
|
|
|
1,688
|
|
|
|
279,471
|
|
Farmland
|
|
|
134,717
|
|
|
|
1,003
|
|
|
|
897
|
|
|
|
310
|
|
|
|
136,927
|
|
Total real estate
|
|
|
950,979
|
|
|
|
14,345
|
|
|
|
7,753
|
|
|
|
15,281
|
|
|
|
988,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
|
|
53,277
|
|
|
|
759
|
|
|
|
400
|
|
|
|
-
|
|
|
|
54,436
|
|
Commercial and industrial
|
|
|
104,571
|
|
|
|
10,951
|
|
|
|
708
|
|
|
|
2,668
|
|
|
|
118,898
|
|
Mortgage Warehouse
|
|
|
126,633
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
126,633
|
|
Consumer loans
|
|
|
9,280
|
|
|
|
225
|
|
|
|
21
|
|
|
|
1,388
|
|
|
|
10,914
|
|
Total gross loans
and leases
|
|
$
|
1,244,740
|
|
|
$
|
26,280
|
|
|
$
|
8,882
|
|
|
$
|
19,337
|
|
|
$
|
1,299,239
|
|
|
|
December
31, 2016
|
|
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Impaired
|
|
|
Total
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
residential construction
|
|
$
|
32,417
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
32,417
|
|
Other construction/land
|
|
|
38,699
|
|
|
|
888
|
|
|
|
-
|
|
|
|
1,063
|
|
|
|
40,650
|
|
1-4 family - closed
end
|
|
|
129,726
|
|
|
|
624
|
|
|
|
403
|
|
|
|
6,390
|
|
|
|
137,143
|
|
Equity lines
|
|
|
35,159
|
|
|
|
3,165
|
|
|
|
698
|
|
|
|
4,421
|
|
|
|
43,443
|
|
Multi-family residential
|
|
|
31,058
|
|
|
|
-
|
|
|
|
-
|
|
|
|
573
|
|
|
|
31,631
|
|
Commercial real estate
- owner occupied
|
|
|
243,366
|
|
|
|
4,991
|
|
|
|
2,892
|
|
|
|
2,286
|
|
|
|
253,535
|
|
Commercial real estate
- non-owner occupied
|
|
|
233,584
|
|
|
|
5,597
|
|
|
|
3,220
|
|
|
|
1,797
|
|
|
|
244,198
|
|
Farmland
|
|
|
132,613
|
|
|
|
1,020
|
|
|
|
808
|
|
|
|
39
|
|
|
|
134,480
|
|
Total real estate
|
|
|
876,622
|
|
|
|
16,285
|
|
|
|
8,021
|
|
|
|
16,569
|
|
|
|
917,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
|
|
45,249
|
|
|
|
891
|
|
|
|
-
|
|
|
|
89
|
|
|
|
46,229
|
|
Commercial and industrial
|
|
|
107,404
|
|
|
|
13,186
|
|
|
|
732
|
|
|
|
2,273
|
|
|
|
123,595
|
|
Mortgage Warehouse
|
|
|
163,045
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
163,045
|
|
Consumer loans
|
|
|
10,303
|
|
|
|
191
|
|
|
|
9
|
|
|
|
1,662
|
|
|
|
12,165
|
|
Total gross loans
and leases
|
|
$
|
1,202,623
|
|
|
$
|
30,553
|
|
|
$
|
8,762
|
|
|
$
|
20,593
|
|
|
$
|
1,262,531
|
|
Past
Due and Nonperforming Assets
Nonperforming
assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets, including mobile homes
and OREO. OREO consists of real properties acquired by foreclosure or similar means, which the Company is offering or will offer
for sale. Nonperforming loans and leases result when reasonable doubt surfaces with regard to the ability of the Company to collect
all principal and interest. At that point, we stop accruing interest on the loan or lease in question and reverse any previously-recognized
interest to the extent that it is uncollected or associated with interest-reserve loans. Any asset for which principal or interest
has been in default for 90 days or more is also placed on non-accrual status even if interest is still being received, unless
the asset is both well secured and in the process of collection. An aging of the Company’s loan balances is presented in
the following tables, by number of days past due as of the indicated dates:
Loan Portfolio
Aging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2017
|
|
|
|
30-59
Days Past
Due
|
|
|
60-89
Days Past
Due
|
|
|
90
Days Or More
Past Due
(1)
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Financing
Receivables
|
|
|
Non-Accrual
Loans
(2)
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4
family residential construction
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
44,248
|
|
|
$
|
44,248
|
|
|
$
|
-
|
|
Other
construction/land
|
|
|
56
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
|
|
47,309
|
|
|
|
47,365
|
|
|
|
140
|
|
1-4
family - closed end
|
|
|
-
|
|
|
|
13
|
|
|
|
540
|
|
|
|
553
|
|
|
|
149,639
|
|
|
|
150,192
|
|
|
|
869
|
|
Equity
lines
|
|
|
625
|
|
|
|
-
|
|
|
|
69
|
|
|
|
694
|
|
|
|
41,013
|
|
|
|
41,707
|
|
|
|
1,715
|
|
Multi-family
residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,063
|
|
|
|
31,063
|
|
|
|
-
|
|
Commercial
real estate - owner occupied
|
|
|
944
|
|
|
|
-
|
|
|
|
233
|
|
|
|
1,177
|
|
|
|
256,208
|
|
|
|
257,385
|
|
|
|
1,310
|
|
Commercial
real estate - non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
279,471
|
|
|
|
279,471
|
|
|
|
-
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
136,927
|
|
|
|
136,927
|
|
|
|
310
|
|
Total
real estate
|
|
|
1,625
|
|
|
|
13
|
|
|
|
842
|
|
|
|
2,480
|
|
|
|
985,878
|
|
|
|
988,358
|
|
|
|
4,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54,436
|
|
|
|
54,436
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
13
|
|
|
|
-
|
|
|
|
686
|
|
|
|
699
|
|
|
|
118,199
|
|
|
|
118,898
|
|
|
|
988
|
|
Mortgage warehouse lines
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
126,633
|
|
|
|
126,633
|
|
|
|
-
|
|
Consumer
|
|
|
90
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90
|
|
|
|
10,824
|
|
|
|
10,914
|
|
|
|
320
|
|
Total
gross loans and leases
|
|
$
|
1,728
|
|
|
$
|
13
|
|
|
$
|
1,528
|
|
|
$
|
3,269
|
|
|
$
|
1,295,970
|
|
|
$
|
1,299,239
|
|
|
$
|
5,652
|
|
(1)
As of June 30, 2017 there were no loans over 90 days past due and still accruing.
(2)
Included in total financing receivables
|
|
December
31, 2016
|
|
|
|
30-59
Days Past
Due
|
|
|
60-89
Days Past
Due
|
|
|
90
Days Or More
Past Due
(1)
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Financing
Receivables
|
|
|
Non-Accrual
Loans
(2)
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4
family residential construction
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
32,417
|
|
|
$
|
32,417
|
|
|
$
|
-
|
|
Other
construction/land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,650
|
|
|
|
40,650
|
|
|
|
558
|
|
1-4
family - closed end
|
|
|
99
|
|
|
|
23
|
|
|
|
575
|
|
|
|
697
|
|
|
|
136,446
|
|
|
|
137,143
|
|
|
|
963
|
|
Equity
lines
|
|
|
397
|
|
|
|
-
|
|
|
|
320
|
|
|
|
717
|
|
|
|
42,726
|
|
|
|
43,443
|
|
|
|
1,926
|
|
Multi-family
residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,631
|
|
|
|
31,631
|
|
|
|
-
|
|
Commercial
real estate - owner occupied
|
|
|
338
|
|
|
|
-
|
|
|
|
28
|
|
|
|
366
|
|
|
|
253,169
|
|
|
|
253,535
|
|
|
|
1,572
|
|
Commercial
real estate - non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
244,198
|
|
|
|
244,198
|
|
|
|
67
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
134,480
|
|
|
|
134,480
|
|
|
|
39
|
|
Total
real estate
|
|
|
834
|
|
|
|
23
|
|
|
|
923
|
|
|
|
1,780
|
|
|
|
915,717
|
|
|
|
917,497
|
|
|
|
5,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
89
|
|
|
|
89
|
|
|
|
46,140
|
|
|
|
46,229
|
|
|
|
89
|
|
Commercial and industrial
|
|
|
168
|
|
|
|
3
|
|
|
|
292
|
|
|
|
463
|
|
|
|
123,132
|
|
|
|
123,595
|
|
|
|
692
|
|
Mortgage warehouse lines
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
163,045
|
|
|
|
163,045
|
|
|
|
-
|
|
Consumer
|
|
|
94
|
|
|
|
9
|
|
|
|
52
|
|
|
|
155
|
|
|
|
12,010
|
|
|
|
12,165
|
|
|
|
459
|
|
Total
gross loans and leases
|
|
$
|
1,096
|
|
|
$
|
35
|
|
|
$
|
1,356
|
|
|
$
|
2,487
|
|
|
$
|
1,260,044
|
|
|
$
|
1,262,531
|
|
|
$
|
6,365
|
|
(1)
As of December 31, 2016 there were no loans over 90 days past due and still accruing.
(2)
Included in total financing receivables
Troubled
Debt Restructurings
A
loan that is modified for a borrower who is experiencing financial difficulty is classified as a troubled debt restructuring if
the modification constitutes a concession. At June 30, 2017, the Company had a total of $16.1 million in TDRs, including $2.4
million in TDRs that were on non-accrual status. Generally, a non-accrual loan that has been modified as a TDR remains on non-accrual
status for a period of at least six months to demonstrate the borrower’s ability to comply with the modified terms. However,
performance prior to the modification, or significant events that coincide with the modification, could result in a loan’s
return to accrual status after a shorter performance period or even at the time of loan modification. Regardless of the period
of time that has elapsed, if the borrower’s ability to meet the revised payment schedule is uncertain then the loan will
be kept on non-accrual status. Moreover, a TDR is generally considered to be in default when it appears that the customer will
not likely be able to repay all principal and interest pursuant to restructured terms.
The
Company may agree to different types of concessions when modifying a loan or lease. The tables below summarize TDRs which were
modified during the noted periods, by type of concession:
Troubled Debt
Restructurings, by Type of Loan Modification
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30, 2017
|
|
|
|
Term
Modification
|
|
|
Interest
Only
Modification
|
|
|
Rate
& Term
Modification
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other construction/land
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
1-4 family
- closed-end
|
|
|
-
|
|
|
|
-
|
|
|
|
43
|
|
|
|
43
|
|
Equity lines
|
|
|
322
|
|
|
|
-
|
|
|
|
-
|
|
|
|
322
|
|
Multi-family residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
real estate - owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total real estate
loans
|
|
|
322
|
|
|
|
-
|
|
|
|
43
|
|
|
|
365
|
|
Commercial and industrial
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
337
|
|
|
$
|
-
|
|
|
$
|
43
|
|
|
$
|
380
|
|
|
|
Three
months ended June 30, 2016
|
|
|
|
Term
Modification
|
|
|
Interest
Only
Modification
|
|
|
Rate
& Term
Modification
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other construction/land
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
1-4 family
- closed-end
|
|
|
-
|
|
|
|
547
|
|
|
|
259
|
|
|
|
806
|
|
Equity lines
|
|
|
1,051
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,051
|
|
Multi-family residential
|
|
|
-
|
|
|
|
-
|
|
|
|
132
|
|
|
|
132
|
|
Commercial real estate
- owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total real estate
loans
|
|
|
1,051
|
|
|
|
547
|
|
|
|
391
|
|
|
|
1,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
10
|
|
|
|
$
|
1,051
|
|
|
$
|
547
|
|
|
$
|
401
|
|
|
$
|
1,999
|
|
Troubled Debt
Restructurings, by Type of Loan Modification
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2017
|
|
|
|
|
|
|
|
Term
Modification
|
|
|
Interest
Only
Modification
|
|
|
Rate
& Term
Modification
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other construction/land
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
1-4 family
- closed-end
|
|
|
-
|
|
|
|
-
|
|
|
|
90
|
|
|
|
90
|
|
Equity lines
|
|
|
603
|
|
|
|
-
|
|
|
|
-
|
|
|
|
603
|
|
Multi-family residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
real estate - owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total real estate
loans
|
|
|
603
|
|
|
|
-
|
|
|
|
90
|
|
|
|
693
|
|
Commercial and industrial
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
618
|
|
|
$
|
-
|
|
|
$
|
90
|
|
|
$
|
708
|
|
|
|
Six
months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
Modification
|
|
|
Interest
Only
Modification
|
|
|
Rate
& Term
Modification
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
construction/land
|
|
$
|
17
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17
|
|
1-4 family - closed-end
|
|
|
-
|
|
|
|
547
|
|
|
|
259
|
|
|
|
806
|
|
Equity lines
|
|
|
1,280
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,280
|
|
Multi-family residential
|
|
|
-
|
|
|
|
-
|
|
|
|
132
|
|
|
|
132
|
|
Commercial
real estate - owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
266
|
|
|
|
266
|
|
Total real estate
loans
|
|
|
1,297
|
|
|
|
547
|
|
|
|
657
|
|
|
|
2,501
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
20
|
|
|
|
-
|
|
|
|
60
|
|
|
|
80
|
|
|
|
$
|
1,317
|
|
|
$
|
547
|
|
|
$
|
717
|
|
|
$
|
2,581
|
|
The
following tables present, by class, additional details related to loans classified as TDRs during the referenced periods, including
the recorded investment in the loan both before and after modification and balances that were modified during the period:
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Loans
|
|
|
Pre-
Modification
Outstanding
Recorded
Investment
|
|
|
Post-
Modification
Outstanding
Recorded
Investment
|
|
|
Reserve
Difference
(1)
|
|
|
Reserve
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
- closed-end
|
|
|
2
|
|
|
$
|
43
|
|
|
$
|
43
|
|
|
$
|
30
|
|
|
$
|
30
|
|
Equity Lines
|
|
|
3
|
|
|
|
322
|
|
|
|
322
|
|
|
|
78
|
|
|
|
6
|
|
Multi-family
residential
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total real estate
loans
|
|
|
|
|
|
|
365
|
|
|
|
365
|
|
|
|
108
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1
|
|
|
|
15
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
380
|
|
|
$
|
380
|
|
|
$
|
108
|
|
|
$
|
36
|
|
(1)
This represents the change in the ALLL reserve for these credits measured as the difference between the specific post-modification
impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology.
|
|
Three
months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Loans
|
|
|
Pre-
Modification
Outstanding
Recorded
Investment
|
|
|
Post-
Modification
Outstanding
Recorded
Investment
|
|
|
Reserve
Difference
(1)
|
|
|
Reserve
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family
- closed-end
|
|
|
5
|
|
|
$
|
806
|
|
|
$
|
806
|
|
|
$
|
75
|
|
|
$
|
139
|
|
Equity Lines
|
|
|
8
|
|
|
|
1,051
|
|
|
|
1,051
|
|
|
|
1
|
|
|
|
22
|
|
Multi-family
residential
|
|
|
1
|
|
|
|
132
|
|
|
|
132
|
|
|
|
-
|
|
|
|
7
|
|
Total real estate
loans
|
|
|
|
|
|
|
1,989
|
|
|
|
1,989
|
|
|
|
76
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
1
|
|
|
|
10
|
|
|
|
10
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
$
|
1,999
|
|
|
$
|
1,999
|
|
|
$
|
76
|
|
|
$
|
169
|
|
(1)
This represents the change in the ALLL reserve for these credits measured as the difference between the specific post-modification
impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology.
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Loans
|
|
|
Pre-
Modification
Outstanding
Recorded
Investment
|
|
|
Post-
Modification
Outstanding
Recorded
Investment
|
|
|
Reserve
Difference
(1)
|
|
|
Reserve
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Construction/Land
|
|
|
0
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
1-4 family - closed-end
|
|
|
3
|
|
|
|
90
|
|
|
|
90
|
|
|
|
32
|
|
|
|
32
|
|
Equity Lines
|
|
|
5
|
|
|
|
603
|
|
|
|
603
|
|
|
|
82
|
|
|
|
27
|
|
Multi-family residential
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial
real estate
owner occupied
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total real estate
loans
|
|
|
|
|
|
|
693
|
|
|
|
693
|
|
|
|
114
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1
|
|
|
|
15
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
708
|
|
|
$
|
708
|
|
|
$
|
114
|
|
|
$
|
59
|
|
(1)
This represents the change in the ALLL reserve for these credits measured as the difference between the specific post-modification
impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology.
|
|
Six
months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Loans
|
|
|
Pre-
Modification
Outstanding
Recorded
Investment
|
|
|
Post-
Modification
Outstanding
Recorded
Investment
|
|
|
Reserve
Difference
(1)
|
|
|
Reserve
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Construction/Land
|
|
|
1
|
|
|
$
|
17
|
|
|
$
|
17
|
|
|
$
|
-
|
|
|
$
|
2
|
|
1-4 family - closed-end
|
|
|
5
|
|
|
|
806
|
|
|
|
806
|
|
|
|
75
|
|
|
|
139
|
|
Equity Lines
|
|
|
10
|
|
|
|
1,280
|
|
|
|
1,280
|
|
|
|
-
|
|
|
|
30
|
|
Multi-family residential
|
|
|
1
|
|
|
|
132
|
|
|
|
132
|
|
|
|
-
|
|
|
|
7
|
|
Commercial
real estate
owner occupied
|
|
|
1
|
|
|
|
266
|
|
|
|
266
|
|
|
|
-
|
|
|
|
4
|
|
Total real estate
loans
|
|
|
|
|
|
|
2,501
|
|
|
|
2,501
|
|
|
|
75
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
3
|
|
|
|
80
|
|
|
|
80
|
|
|
|
-
|
|
|
|
6
|
|
|
|
|
|
|
|
$
|
2,581
|
|
|
$
|
2,581
|
|
|
$
|
75
|
|
|
$
|
188
|
|
(1)
This represents the change in the ALLL reserve for these credits measured as the difference between the specific post-modification
impairment reserve and the pre-modification reserve calculated under our general allowance for loan loss methodology.
The
company had no finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during
the three month or six month periods ended June 30, 2017 and 2016, respectively.
Purchased
Credit Impaired Loans
The
Company may acquire loans which show evidence of credit deterioration since origination. These purchased credit impaired (“PCI”)
loans are recorded at the amount paid, since there is no carryover of the seller’s allowance for loan losses. Potential
losses on PCI loans subsequent to acquisition are recognized by an increase in the allowance for loan losses. PCI loans are accounted
for individually or are aggregated into pools of loans based on common risk characteristics. The Company projects the amount and
timing of expected cash flows, and expected cash receipts in excess of the amount paid for the loan(s) are recorded as interest
income over the remaining life of the loan or pool of loans (accretable yield). The excess of contractual principal and interest
over expected cash flows is not recorded (nonaccretable difference). Expected cash flows are periodically re-evaluated throughout
the life of the loan or pool of loans. If the present value of the expected cash flows is determined at any time to be less than
the carrying amount, a reserve is recorded. If the present value of the expected cash flows is greater than the carrying amount,
it is recognized as part of future interest income.
Our
acquisitions of Santa Clara Valley Bank in the fourth quarter of 2014 and Coast Bancorp in the third quarter of 2016 included
certain loans which have shown evidence of credit deterioration since origination, and for which it was probable at acquisition
that all contractually required payments would not be collected. The carrying amount and unpaid principal balance of those PCI
loans was as follows, as of the dates indicated:
Purchased Credit Impaired
Loans:
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
|
|
|
|
|
|
|
June
30, 2017
|
|
|
|
|
|
|
|
|
|
|
Unpaid
Principal Balance
|
|
|
Carrying
Value
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
165
|
|
|
$
|
53
|
|
Commercial and
industrial
|
|
|
-
|
|
|
|
-
|
|
Total purchased
credit impaired loans
|
|
$
|
165
|
|
|
$
|
53
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
Unpaid
Principal Balance
|
|
|
Carrying
Value
|
|
|
|
|
|
|
|
|
Real estate secured
|
|
$
|
712
|
|
|
$
|
47
|
|
Commercial and
industrial
|
|
|
23
|
|
|
|
-
|
|
Total purchased
credit impaired loans
|
|
$
|
735
|
|
|
$
|
47
|
|
An
allowance for loan losses totaling $14,000 was allocated for PCI loans as of June 30, 2017, as compared to $58,000 at December
31, 2016. We also recorded approximately $4,000 in discount accretion on PCI loans during the six months ended June 30, 2017.
Note
12 – Allowance for Loan and Lease Losses
The
Company’s allowance for loan and lease losses, a contra-asset, is established through a provision for loan and lease losses.
The allowance is maintained at a level that is considered adequate to absorb probable losses on certain specifically identified
loans, as well as probable incurred losses inherent in the remaining loan portfolio. Specifically identifiable and quantifiable
losses are immediately charged off against the allowance; recoveries are generally recorded only when cash payments are received
subsequent to the charge off. We employ a systematic methodology, consistent with FASB guidelines on loss contingencies and impaired
loans, for determining the appropriate level of the allowance for loan and lease losses and adjusting it at least quarterly. Pursuant
to that methodology, impaired loans and leases are individually analyzed and a criticized asset action plan is completed specifying
the financial status of the borrower and, if applicable, the characteristics and condition of collateral and any associated liquidation
plan. A specific loss allowance is created for each impaired loan, if necessary.
The
following tables disclose the unpaid principal balance, recorded investment, average recorded investment, and interest income
recognized for impaired loans on our books as of the dates indicated. Balances are shown by loan type, and are further broken
out by those that required an allowance and those that did not, with the associated allowance disclosed for those that required
such. Included in the valuation allowance for impaired loans shown in the tables below are specific reserves allocated to TDRs,
totaling $1.172 million at June 30, 2017 and $1.048 million at December 31, 2016.
Impaired Loans
|
|
June
30, 2017
|
|
(dollars in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal
Balance
(1)
|
|
|
Recorded
Investment
(2)
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest Income
Recognized
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With
an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other construction/land
|
|
$
|
378
|
|
|
$
|
223
|
|
|
$
|
12
|
|
|
$
|
446
|
|
|
$
|
5
|
|
1-4 family - closed-end
|
|
|
6,814
|
|
|
|
4,867
|
|
|
|
144
|
|
|
|
7,442
|
|
|
|
221
|
|
Equity lines
|
|
|
4,521
|
|
|
|
4,436
|
|
|
|
353
|
|
|
|
4,657
|
|
|
|
57
|
|
Multi-family residential
|
|
|
562
|
|
|
|
562
|
|
|
|
42
|
|
|
|
580
|
|
|
|
18
|
|
Commercial real estate-
owner occupied
|
|
|
956
|
|
|
|
888
|
|
|
|
22
|
|
|
|
1,223
|
|
|
|
10
|
|
Commercial real estate-
non-owner occupied
|
|
|
1,836
|
|
|
|
1,688
|
|
|
|
34
|
|
|
|
1,916
|
|
|
|
64
|
|
Total real estate
|
|
|
15,067
|
|
|
|
12,664
|
|
|
|
607
|
|
|
|
16,264
|
|
|
|
375
|
|
Commercial and industrial
|
|
|
2,636
|
|
|
|
2,636
|
|
|
|
534
|
|
|
|
2,767
|
|
|
|
48
|
|
Consumer loans
|
|
|
1,370
|
|
|
|
1,370
|
|
|
|
264
|
|
|
|
1,535
|
|
|
|
43
|
|
|
|
|
19,073
|
|
|
|
16,670
|
|
|
|
1,405
|
|
|
|
20,566
|
|
|
|
466
|
|
With
no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other construction/land
|
|
|
357
|
|
|
|
357
|
|
|
|
-
|
|
|
|
364
|
|
|
|
12
|
|
1-4 family - closed-end
|
|
|
644
|
|
|
|
582
|
|
|
|
-
|
|
|
|
659
|
|
|
|
1
|
|
Equity lines
|
|
|
273
|
|
|
|
244
|
|
|
|
-
|
|
|
|
309
|
|
|
|
-
|
|
Multi-family residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate-
owner occupied
|
|
|
1,212
|
|
|
|
1,124
|
|
|
|
-
|
|
|
|
1,450
|
|
|
|
3
|
|
Commercial real estate-
non-owner occupied
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
Farmland
|
|
|
310
|
|
|
|
310
|
|
|
|
-
|
|
|
|
330
|
|
|
|
-
|
|
Total real estate
|
|
|
2,806
|
|
|
|
2,617
|
|
|
|
-
|
|
|
|
3,145
|
|
|
|
16
|
|
Commercial and industrial
|
|
|
47
|
|
|
|
32
|
|
|
|
-
|
|
|
|
143
|
|
|
|
-
|
|
Consumer loans
|
|
|
150
|
|
|
|
18
|
|
|
|
-
|
|
|
|
244
|
|
|
|
-
|
|
|
|
|
3,003
|
|
|
|
2,667
|
|
|
|
-
|
|
|
|
3,532
|
|
|
|
16
|
|
Total
|
|
$
|
22,076
|
|
|
$
|
19,337
|
|
|
$
|
1,405
|
|
|
$
|
24,098
|
|
|
$
|
482
|
|
(1)
Contractual
principal balance due from customer.
(2)
Principal
balance on Company’s books, less any direct charge offs, including interest applied to principal and unaccreted discount or premium.
(3)
Interest
income is recognized on performing balances on a regular accrual basis.
Impaired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands, unaudited)
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Unpaid Principal
Balance
(1)
|
|
|
Recorded
Investment
(2)
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest Income
Recognized
(3)
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other construction/land
|
|
$
|
854
|
|
|
$
|
699
|
|
|
$
|
20
|
|
|
$
|
624
|
|
|
$
|
14
|
|
1-4 family - closed-end
|
|
|
7,730
|
|
|
|
5,783
|
|
|
|
163
|
|
|
|
8,008
|
|
|
|
462
|
|
Equity lines
|
|
|
3,991
|
|
|
|
3,906
|
|
|
|
214
|
|
|
|
4,110
|
|
|
|
49
|
|
Multifamily residential
|
|
|
573
|
|
|
|
573
|
|
|
|
7
|
|
|
|
588
|
|
|
|
50
|
|
Commercial real estate- owner occupied
|
|
|
1,287
|
|
|
|
1,287
|
|
|
|
49
|
|
|
|
1,641
|
|
|
|
14
|
|
Commercial real estate- non-owner occupied
|
|
|
1,877
|
|
|
|
1,730
|
|
|
|
35
|
|
|
|
1,969
|
|
|
|
131
|
|
Total real estate
|
|
|
16,312
|
|
|
|
13,978
|
|
|
|
488
|
|
|
|
16,940
|
|
|
|
720
|
|
Agriculture
|
|
|
24
|
|
|
|
24
|
|
|
|
24
|
|
|
|
24
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
2,211
|
|
|
|
2,211
|
|
|
|
608
|
|
|
|
2,652
|
|
|
|
99
|
|
Consumer loans
|
|
|
1,633
|
|
|
|
1,633
|
|
|
|
287
|
|
|
|
1,847
|
|
|
|
94
|
|
|
|
|
20,180
|
|
|
|
17,846
|
|
|
|
1,407
|
|
|
|
21,463
|
|
|
|
913
|
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other construction/land
|
|
|
364
|
|
|
|
364
|
|
|
|
-
|
|
|
|
374
|
|
|
|
27
|
|
1-4 family - closed-end
|
|
|
666
|
|
|
|
607
|
|
|
|
-
|
|
|
|
685
|
|
|
|
3
|
|
Equity lines
|
|
|
544
|
|
|
|
515
|
|
|
|
-
|
|
|
|
550
|
|
|
|
-
|
|
Commercial real estate- owner occupied
|
|
|
999
|
|
|
|
999
|
|
|
|
-
|
|
|
|
1,773
|
|
|
|
98
|
|
Commercial real estate- non-owner occupied
|
|
|
77
|
|
|
|
67
|
|
|
|
-
|
|
|
|
85
|
|
|
|
-
|
|
Farmland
|
|
|
39
|
|
|
|
39
|
|
|
|
-
|
|
|
|
50
|
|
|
|
-
|
|
Total real estate
|
|
|
2,689
|
|
|
|
2,591
|
|
|
|
-
|
|
|
|
3,517
|
|
|
|
128
|
|
Agriculture
|
|
|
65
|
|
|
|
65
|
|
|
|
-
|
|
|
|
65
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
62
|
|
|
|
62
|
|
|
|
-
|
|
|
|
277
|
|
|
|
-
|
|
Consumer loans
|
|
|
148
|
|
|
|
29
|
|
|
|
-
|
|
|
|
238
|
|
|
|
-
|
|
|
|
|
2,964
|
|
|
|
2,747
|
|
|
|
-
|
|
|
|
4,097
|
|
|
|
128
|
|
Total
|
|
$
|
23,144
|
|
|
$
|
20,593
|
|
|
$
|
1,407
|
|
|
$
|
25,560
|
|
|
$
|
1,041
|
|
(1)
Contractual principal balance due from customer.
(2)
Principal balance on Company’s books, less any
direct charge offs, including interest applied to principal and unaccreted discount or premium.
(3)
Interest income is recognized on performing balances
on a regular accrual basis.
The specific loss allowance for an impaired loan generally represents
the difference between the book value of the loan and either the fair value of underlying collateral less estimated disposition
costs, or the loan’s net present value as determined by a discounted cash flow analysis. The discounted cash flow approach
is typically used to measure impairment on loans for which it is anticipated that repayment will be provided from cash flows other
than those generated solely by the disposition or operation of underlying collateral. However, historical loss rates may be used
to determine a specific loss allowance if they indicate a higher potential reserve need than the discounted cash flow analysis.
Any change in impairment attributable to the passage of time is accommodated by adjusting the loss allowance accordingly.
For loans where repayment is expected to be provided by the
disposition or operation of the underlying collateral, impairment is measured using the fair value of the collateral. If the collateral
value, net of the expected costs of disposition where applicable, is less than the loan balance, then a specific loss reserve is
established for the shortfall in collateral coverage. If the discounted collateral value is greater than or equal to the loan balance,
no specific loss reserve is required. At the time a collateral-dependent loan is designated as nonperforming, a new appraisal is
ordered and typically received within 30 to 60 days if a recent appraisal is not already available. We generally use external appraisals
to determine the fair value of the underlying collateral for nonperforming real estate loans, although the Company’s licensed
staff appraisers may update older appraisals based on current market conditions and property value trends. Until an updated appraisal
is received, the Company uses the existing appraisal to determine the amount of the specific loss allowance that may be required.
The specific loss allowance is adjusted, as necessary, once a new appraisal is received. Updated appraisals are generally ordered
at least annually for collateral-dependent loans that remain impaired. Current appraisals were available or in process for 99%
of the Company’s impaired real estate loan balances at June 30, 2017. Furthermore, the Company analyzes collateral-dependent
loans on at least a quarterly basis, to determine if any portion of the recorded investment in such loans can be identified as
uncollectible and would therefore constitute a confirmed loss. All amounts deemed to be uncollectible are promptly charged off
against the Company’s allowance for loan and lease losses, with the loan then carried at the fair value of the collateral,
as appraised, less estimated costs of disposition if applicable. Once a charge-off or write-down is recorded, it will not be restored
to the loan balance on the Company’s accounting books.
Our methodology also provides for the establishment of a “general”
allowance for probable incurred losses inherent in loans and leases that are not impaired. Unimpaired loan balances are segregated
by credit quality, and are then evaluated in pools with common characteristics. At the present time, pools are based on the same
segmentation of loan types presented in our regulatory filings. While this methodology utilizes historical loss data and other
measurable information, the credit classification of loans and the establishment of the allowance for loan and lease losses are
both to some extent based on Management’s judgment and experience. Our methodology incorporates a variety of risk considerations,
both quantitative and qualitative, in establishing an allowance for loan and lease losses that Management believes is appropriate
at each reporting date. Quantitative information includes our historical loss experience, delinquency and charge-off trends, and
current collateral values. Qualitative factors include the general economic environment in our markets and, in particular, the
condition of the agricultural industry and other key industries. Lending policies and procedures (including underwriting standards),
the experience and abilities of lending staff, the quality of loan review, credit concentrations (by geography, loan type, industry
and collateral type), the rate of loan portfolio growth, and changes in legal or regulatory requirements are additional factors
that are considered. The total general reserve established for probable incurred losses on unimpaired loans was $7.825 million
at June 30, 2017.
There were no material changes to the methodology used to determine
our allowance for loan and lease losses during the three months ended June 30, 2017, although in recognition of relatively low
loan loss rates in recent periods, upward adjustments were made to qualitative factor multipliers earlier in 2017. As we add new
products and expand our geographic coverage, and as the economic environment changes, we expect to enhance our methodology to keep
pace with the size and complexity of the loan and lease portfolio and respond to pressures created by external forces. We engage
outside firms on a regular basis to assess our methodology and perform independent credit reviews of our loan and lease portfolio.
In addition, the Company’s external auditors, the FDIC, and the California DBO review the allowance for loan and lease losses
as an integral part of their audit and examination processes. Management believes that the current methodology is appropriate given
our size and level of complexity.
The tables that follow detail the activity in the allowance
for loan and lease losses for the periods noted:
Allowance for Credit Losses and Recorded Investment in
Financing Receivables
(dollars in thousands, unaudited)
|
|
Three months ended June 30, 2017
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Agricultural
Production
|
|
|
Commercial and
Industrial
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
4,112
|
|
|
$
|
242
|
|
|
$
|
3,507
|
|
|
$
|
1,211
|
|
|
$
|
516
|
|
|
$
|
9,588
|
|
Charge-offs
|
|
|
(58
|
)
|
|
|
(22
|
)
|
|
|
(354
|
)
|
|
|
(531
|
)
|
|
|
-
|
|
|
|
(965
|
)
|
Recoveries
|
|
|
42
|
|
|
|
2
|
|
|
|
34
|
|
|
|
229
|
|
|
|
-
|
|
|
|
307
|
|
Provision
|
|
|
8
|
|
|
|
21
|
|
|
|
265
|
|
|
|
240
|
|
|
|
(234
|
)
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
4,104
|
|
|
$
|
243
|
|
|
$
|
3,452
|
|
|
$
|
1,149
|
|
|
$
|
282
|
|
|
$
|
9,230
|
|
|
|
Six months ended June 30, 2017
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Agricultural
Production
|
|
|
Commercial and
Industrial
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
3,548
|
|
|
$
|
209
|
|
|
$
|
4,279
|
|
|
$
|
1,208
|
|
|
$
|
457
|
|
|
$
|
9,701
|
|
Charge-offs
|
|
|
(144
|
)
|
|
|
(22
|
)
|
|
|
(384
|
)
|
|
|
(1,046
|
)
|
|
|
-
|
|
|
|
(1,596
|
)
|
Recoveries
|
|
|
145
|
|
|
|
5
|
|
|
|
195
|
|
|
|
480
|
|
|
|
-
|
|
|
|
825
|
|
Provision
|
|
|
555
|
|
|
|
51
|
|
|
|
(638
|
)
|
|
|
507
|
|
|
|
(175
|
)
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
4,104
|
|
|
$
|
243
|
|
|
$
|
3,452
|
|
|
$
|
1,149
|
|
|
$
|
282
|
|
|
$
|
9,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific
|
|
$
|
607
|
|
|
$
|
-
|
|
|
$
|
534
|
|
|
$
|
264
|
|
|
$
|
-
|
|
|
$
|
1,405
|
|
General
|
|
|
3,497
|
|
|
|
243
|
|
|
|
2,918
|
|
|
|
885
|
|
|
|
282
|
|
|
|
7,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
4,104
|
|
|
$
|
243
|
|
|
$
|
3,452
|
|
|
$
|
1,149
|
|
|
$
|
282
|
|
|
$
|
9,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
|
|
$
|
15,281
|
|
|
$
|
-
|
|
|
$
|
2,668
|
|
|
$
|
1,388
|
|
|
$
|
-
|
|
|
$
|
19,337
|
|
Collectively
|
|
|
973,077
|
|
|
|
54,436
|
|
|
|
242,863
|
|
|
|
9,526
|
|
|
|
-
|
|
|
|
1,279,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
988,358
|
|
|
$
|
54,436
|
|
|
$
|
245,531
|
|
|
$
|
10,914
|
|
|
$
|
-
|
|
|
$
|
1,299,239
|
|
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
Real Estate
|
|
|
Agricultural
Production
|
|
|
Commercial and
Industrial
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
4,783
|
|
|
$
|
722
|
|
|
$
|
2,533
|
|
|
$
|
1,263
|
|
|
$
|
1,122
|
|
|
$
|
10,423
|
|
Charge-offs
|
|
|
(962
|
)
|
|
|
-
|
|
|
|
(344
|
)
|
|
|
(1,905
|
)
|
|
|
-
|
|
|
|
(3,211
|
)
|
Recoveries
|
|
|
983
|
|
|
|
14
|
|
|
|
477
|
|
|
|
1,015
|
|
|
|
-
|
|
|
|
2,489
|
|
Provision
|
|
|
(1,256
|
)
|
|
|
(527
|
)
|
|
|
1,613
|
|
|
|
835
|
|
|
|
(665
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
3,548
|
|
|
$
|
209
|
|
|
$
|
4,279
|
|
|
$
|
1,208
|
|
|
$
|
457
|
|
|
$
|
9,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific
|
|
$
|
488
|
|
|
$
|
24
|
|
|
$
|
608
|
|
|
$
|
287
|
|
|
$
|
-
|
|
|
$
|
1,407
|
|
General
|
|
|
3,060
|
|
|
|
185
|
|
|
|
3,671
|
|
|
|
921
|
|
|
|
457
|
|
|
|
8,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
3,548
|
|
|
$
|
209
|
|
|
$
|
4,279
|
|
|
$
|
1,208
|
|
|
$
|
457
|
|
|
$
|
9,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
|
|
$
|
16,569
|
|
|
$
|
89
|
|
|
$
|
2,273
|
|
|
$
|
1,662
|
|
|
$
|
-
|
|
|
$
|
20,593
|
|
Collectively
|
|
|
900,928
|
|
|
|
46,140
|
|
|
|
284,367
|
|
|
|
10,503
|
|
|
|
-
|
|
|
|
1,241,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
917,497
|
|
|
$
|
46,229
|
|
|
$
|
286,640
|
|
|
$
|
12,165
|
|
|
$
|
-
|
|
|
$
|
1,262,531
|
|
Note 13 – Recent Developments
On July 5, 2017, Bank of the Sierra, the banking subsidiary
of Sierra Bancorp, entered into an agreement with Citizens Business Bank, the banking subsidiary of CVB Financial Corp., to acquire
the Citizens branch located in Woodlake, California. The transaction is expected to close in the fourth quarter of 2017, subject
to the receipt of all required regulatory approvals. Subsequent to the acquisition, it is anticipated that the Woodlake branch
will continue to operate as a full-service branch of Bank of the Sierra. At May 31, 2017 Woodlake branch deposits totaled approximately
$27 million, consisting largely of non-maturity deposits. Bank of the Sierra already has a number of deposits in the Woodlake zip
code that are domiciled at nearby branches, thus this branch purchase is intended to enhance the level of service for current customers
as well as provide additional core deposits for the Bank. The acquisition agreement also contemplates that Bank of the Sierra will
purchase the Woodlake branch building, the real property on which the building is located, and certain other equipment and fixed
assets at their aggregate fair value of $500,000.
On April 24, 2017, the Company announced the signing of a definitive
agreement to acquire OCB Bancorp (“Ojai”), the holding company for Ojai Community Bank. We expect the transaction to
be completed in October 2017, subject to customary closing conditions including the receipt of required regulatory approvals and
the consent of OCB Bancorp shareholders. Immediately following the acquisition, Ojai Community Bank will be merged with and into
Bank of the Sierra. Ojai Community Bank has its main office in Ojai, California, and also maintains branch offices in Ventura,
Santa Paula, and Santa Barbara, conducting business in those communities as Ventura Community Bank, Santa Paula Community Bank,
and Santa Barbara Community Bank, respectively.
The Company acquired Coast Bancorp (“Coast”), the
holding company for Coast National Bank, on July 8, 2016, and immediately following the acquisition Coast National Bank was merged
with and into Bank of the Sierra. Coast National Bank was a community bank with branch offices in San Luis Obispo, Paso Robles,
and Arroyo Grande, and a loan production office in Atascadero, California. Shortly after transaction closing, the Atascadero location
was converted into a full-service branch office. At the acquisition date, the fair value of Coast’s loans totaled $94 million
and deposits totaled $129 million. The acquisition also involved $7 million in trust preferred securities, which were booked by
the Company at their fair value of $3.4 million. This acquisition had, and will continue to have, a material impact on comparative
2017 and 2016 average balances and associated income and expense. Furthermore, one-time acquisition costs added over $2.4 million
to the Company’s pre-tax non-interest expense in the latter half of 2016.
PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
This Form 10-Q includes forward-looking statements that involve
inherent risks and uncertainties. Words such as “expects”, “anticipates”, “believes”, “projects”,
and “estimates” or variations of such words and similar expressions are intended to identify forward-looking statements.
These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual outcomes and results may differ materially from what is expressed, forecast in, or implied by such
forward-looking statements.
A variety of factors could have a material adverse impact on
the Company’s financial condition or results of operations, and should be considered when evaluating the Company’s
potential future financial performance. They include, but are not limited to, the risk of unfavorable economic conditions in the
Company’s market areas; risks associated with fluctuations in interest rates; liquidity risks; increases in nonperforming
assets and credit losses that could occur, particularly in times of weak economic conditions or rising interest rates; reductions
in the market value of available-for-sale securities that could result if interest rates increase substantially or an issuer has
real or perceived financial difficulties; the Company’s ability to attract and retain skilled employees; the Company’s
ability to successfully deploy new technology; the success of acquisitions or branch expansion; and risks associated with the multitude
of current and prospective laws and regulations to which the Company is and will be subject. Risk factors that could cause actual
results to differ materially from results that might be implied by forward-looking statements include the risk factors disclosed
in the Company’s Form 10-K for the fiscal year ended December 31, 2016.
CRITICAL ACCOUNTING POLICIES
The Company’s financial statements are prepared in accordance
with accounting principles generally accepted in the United States. The financial information and disclosures contained within
those statements are significantly impacted by Management’s estimates and judgments, which are based on historical experience
and incorporate various assumptions that are believed to be reasonable under current circumstances. Actual results may differ from
those estimates under divergent conditions.
Critical accounting policies are those that involve the most
complex and subjective decisions and assessments, and have the greatest potential impact on the Company’s stated results
of operations. In Management’s opinion, the Company’s critical accounting policies deal with the following areas: the
establishment of the allowance for loan and lease losses, as explained in detail in Note 12 to the consolidated financial statements
and in the “Provision for Loan and Lease Losses” and “Allowance for Loan and Lease Losses” sections of
this discussion and analysis; the valuation of impaired loans and foreclosed assets, as discussed in Note 11 to the consolidated
financial statements; income taxes and deferred tax assets and liabilities, especially with regard to the ability of the Company
to recover deferred tax assets as discussed in the “Provision for Income Taxes” and “Other Assets” sections
of this discussion and analysis; and goodwill and other intangible assets, which are evaluated annually for impairment and for
which we have determined that no impairment exists, as discussed in the “Other Assets” section of this discussion and
analysis. Critical accounting areas are evaluated on an ongoing basis to ensure that the Company’s financial statements incorporate
our most recent expectations with regard to those areas.
OVERVIEW OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
results of operations
Summary
Second Quarter 2017 compared to Second Quarter 2016
Net income for the quarter ended June 30, 2017 was $5.202 million,
representing an increase of $1.116 million, or 27%, relative to net income of $4.086 million for the quarter ended June 30, 2016.
Basic and diluted earnings per share for the second quarter of 2017 were $0.38 and $0.37, respectively, compared to $0.31 basic
and diluted earnings per share for the second quarter of 2016. The Company’s annualized return on average equity was 9.75%
and annualized return on average assets was 1.02% for the quarter ended June 30, 2017, compared to 8.38% and 0.93%, respectively,
for the quarter ended June 30, 2016. The primary drivers behind the variance in second quarter net income are as follows:
|
·
|
Net interest income was up by $2.645 million, or 17%, due to growth in average interest-earning assets totaling $260 million,
or 16%, as well as improvement of four basis points in our net interest margin.
|
|
·
|
The Company recorded a provision for loan losses in the second quarter of 2017, for the first time since the second quarter
of 2014. The $300,000 provision became necessary due to loan growth, and to replenish reserves subsequent to an unanticipated charge-off.
|
|
·
|
Total non-interest income increased by $790,000, or 17%, due to a $298,000 increase in service charges on deposits, a $129,000
increase in bank-owned life insurance (BOLI) income resulting primarily from higher income on BOLI associated with deferred compensation
plans, and a $363,000 increase in other non-interest income that includes a $141,000 prepayment penalty on a large loan that paid
off in the second quarter of 2017 and a rising level of non-deposit service charges and fees, particularly debit card interchange
income.
|
|
·
|
Total non-interest expense reflects an increase of $1.376 million, or 10%, due in large part to ongoing costs stemming from
our acquisition of Coast Bancorp (“Coast”) in July of 2016 and recent de novo branch openings. There were other large
variances within non-interest expense, including certain nonrecurring items, which are discussed in greater detail in the “Non-Interest
Income and Non-Interest Expense” section of this Management Discussion and Analysis.
|
|
·
|
The Company’s provision for income taxes was 33%
of pre-tax income in the second quarters of both 2017 and 2016.
|
First Half 2017 compared to First Half 2016
Net income for the first half of 2017 was $9.754 million, representing
an increase of $1.632 million, or 20%, relative to net income of $8.122 million for the first half of 2016. Basic and diluted earnings
per share for the first half of 2017 were $0.71 and $0.70, respectively, compared to $0.61 basic and diluted earnings per share
for the first half of 2016. The Company’s annualized return on average equity was 9.31% and annualized return on average
assets was 0.98% for the six months ended June 30, 2017, compared to a return on equity of 8.39% and return on assets of 0.93%
for the six months ended June 30, 2016. The primary drivers behind the variance in year-to-date net income are as follows:
|
·
|
Net interest income increased $4.213 million, or 14%, due to the positive impact of a $232 million increase in average interest-earning
assets.
|
|
·
|
As noted above, the Company recorded a $300,000 provision for loan losses in the first half of 2017, relative to no provision
in 2016.
|
|
·
|
Total non-interest income was up $1.630 million, or 18%, due to a $500,000 increase in service charges on deposits, a $372,000
increase in bank-owned life insurance (BOLI) income, and a $758,000 increase in other non-interest income that includes the aforementioned
loan prepayment penalty in the second quarter of 2017 and a higher level of non-deposit service charges and fees, including debit
card interchange income.
|
|
·
|
Total non-interest expense increased by $3.598 million, or 13%, due in large part to the Coast acquisition and recent branch
openings; other significant variances are detailed below.
|
|
·
|
The Company’s provision for income taxes was 31% of pre-tax income for the first half of 2017, relative to 33% for the
first half of 2016. The lower tax accrual rate in 2017 is primarily the result of our adoption of FASB’s Accounting Standards
Update 2016-09 effective January 1, 2017, and the subsequent change in accounting methodology associated with the disqualifying
disposition of Company shares issued pursuant to the exercise of incentive stock options (ISOs).
|
Financial Condition
Summary
June 30, 2017 relative to December 31, 2016
The Company’s assets totaled $2.078 billion at June 30,
2017, relative to total assets of $2.033 billion at December 31, 2016. Total liabilities were $1.862 billion at June 30, 2017 compared
to $1.827 billion at the end of 2016, and shareholders’ equity totaled $216 million at June 30, 2017 compared to $206 million
at December 31, 2016. The following provides a summary of key balance sheet changes during the first six months of 2017:
|
·
|
Cash balances were down $43 million, or 36%, including a $15 million reduction in non-earning balances.
|
|
·
|
Investment securities were up $49 million, or 9%,
due in part to the longer-term investment of cash balances.
|
|
·
|
Gross loans increased by $37 million, or 3%, due to strong organic growth in real estate loans and agricultural production
loans. Loan growth would have been greater if not for the payoff of a $7 million dairy loan in the second quarter of 2017, and a drop of $36 million in mortgage warehouse loans.
|
|
·
|
Total nonperforming assets, namely non-accrual loans and foreclosed assets, were reduced by $797,000, or 9%. The Company’s
ratio of nonperforming assets to total loans plus foreclosed assets was 0.60% at June 30, 2017, compared to 0.68% at December 31,
2016 and 0.76% at June 30, 2016.
|
|
·
|
Deposit balances reflect net growth of $96 million, or 6%, due in large part to continued organic growth in core non-maturity
deposits.
|
|
·
|
Junior subordinated debentures increased slightly from the accretion of the discount on trust-preferred securities acquired
from Coast, but other borrowings were reduced by $62 million, or 85%, due to exceptional deposit growth.
|
|
·
|
Total capital reflects an increase of slightly over $10 million, or 5%, due to the addition of income, the impact of
stock options exercised, and a $3 million absolute increase in accumulated other comprehensive income, net of dividends paid.
Our consolidated total risk-based capital ratio was 17.18% at June 30, 2017 as compared to 17.25% at year-end 2016, and our
regulatory capital ratios remain very strong relative to peer banks.
|
EARNINGS PERFORMANCE
The Company earns income from two primary sources. The first
is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed
money. The second is non-interest income, which primarily consists of customer service charges and fees but also comes from non-customer
sources such as bank-owned life insurance. The majority of the Company’s non-interest expense is comprised of operating costs
that facilitate offering a full range of banking services to our customers.
Net
interest income AND NET INTEREST MARGIN
Net interest income increased by $2.645 million, or 17%, for
the second quarter of 2017 relative to the second quarter of 2016 and by $4.213 million, or 14%, for the first half of 2017 compared
to the first half of 2016. The level of net interest income we recognize in any given period depends on a combination of factors
including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities,
and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. Net
interest income is also impacted by the reversal of interest for loans placed on non-accrual status during the reporting period,
and the recovery of interest on loans that had been on non-accrual and were paid off, sold or returned to accrual status.
The following tables show average balances for significant balance
sheet categories and the amount of interest income or interest expense associated with each category for the noted periods. The
tables also display calculated yields on each major component of the Company’s investment and loan portfolios, average rates
paid on each key segment of the Company’s interest-bearing liabilities, and our net interest margin for the noted periods.
Average Balances and Rates
|
|
For the three months ended
|
|
|
For the three months ended
|
|
(dollars in thousands, unaudited)
|
|
Ended June 30, 2017
|
|
|
Ended June 30, 2016
|
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
|
Balance
(1)
|
|
|
Expense
|
|
|
Rate/Yield
(2)
|
|
|
Balance
(1)
|
|
|
Expense
|
|
|
Rate/Yield
(2)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold/due from time
|
|
$
|
53,965
|
|
|
$
|
139
|
|
|
|
1.02
|
%
|
|
$
|
4,830
|
|
|
$
|
5
|
|
|
|
0.41
|
%
|
Taxable
|
|
|
435,935
|
|
|
|
2,141
|
|
|
|
1.94
|
%
|
|
|
417,881
|
|
|
|
2,052
|
|
|
|
1.94
|
%
|
Non-taxable
|
|
|
131,972
|
|
|
|
932
|
|
|
|
4.30
|
%
|
|
|
104,548
|
|
|
|
730
|
|
|
|
4.25
|
%
|
Equity
|
|
|
1,535
|
|
|
|
6
|
|
|
|
1.55
|
%
|
|
|
1,177
|
|
|
|
-
|
|
|
|
-
|
|
Total investments
|
|
|
623,407
|
|
|
|
3,218
|
|
|
|
2.36
|
%
|
|
|
528,436
|
|
|
|
2,787
|
|
|
|
2.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and Leases:
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
969,925
|
|
|
|
12,207
|
|
|
|
5.05
|
%
|
|
|
776,172
|
|
|
|
9,567
|
|
|
|
4.96
|
%
|
Agricultural
|
|
|
50,942
|
|
|
|
620
|
|
|
|
4.88
|
%
|
|
|
47,184
|
|
|
|
520
|
|
|
|
4.43
|
%
|
Commercial
|
|
|
116,719
|
|
|
|
1,577
|
|
|
|
5.42
|
%
|
|
|
107,342
|
|
|
|
1,257
|
|
|
|
4.71
|
%
|
Consumer
|
|
|
11,577
|
|
|
|
307
|
|
|
|
10.64
|
%
|
|
|
14,152
|
|
|
|
421
|
|
|
|
11.97
|
%
|
Mortgage warehouse lines
|
|
|
97,191
|
|
|
|
1,077
|
|
|
|
4.44
|
%
|
|
|
137,937
|
|
|
|
1,353
|
|
|
|
3.95
|
%
|
Other
|
|
|
3,309
|
|
|
|
49
|
|
|
|
5.94
|
%
|
|
|
1,951
|
|
|
|
29
|
|
|
|
5.98
|
%
|
Total loans and leases
|
|
|
1,249,663
|
|
|
|
15,837
|
|
|
|
5.08
|
%
|
|
|
1,084,738
|
|
|
|
13,147
|
|
|
|
4.87
|
%
|
Total interest earning assets
(4)
|
|
|
1,873,070
|
|
|
|
19,055
|
|
|
|
4.19
|
%
|
|
|
1,613,174
|
|
|
|
15,934
|
|
|
|
4.07
|
%
|
Other earning assets
|
|
|
8,689
|
|
|
|
|
|
|
|
|
|
|
|
7,853
|
|
|
|
|
|
|
|
|
|
Non-earning assets
|
|
|
156,643
|
|
|
|
|
|
|
|
|
|
|
|
137,025
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,038,402
|
|
|
|
|
|
|
|
|
|
|
$
|
1,758,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
157,482
|
|
|
$
|
122
|
|
|
|
0.31
|
%
|
|
$
|
146,686
|
|
|
$
|
110
|
|
|
|
0.30
|
%
|
NOW
|
|
|
374,304
|
|
|
|
104
|
|
|
|
0.11
|
%
|
|
|
314,556
|
|
|
|
78
|
|
|
|
0.10
|
%
|
Savings accounts
|
|
|
228,859
|
|
|
|
58
|
|
|
|
0.10
|
%
|
|
|
202,011
|
|
|
|
56
|
|
|
|
0.11
|
%
|
Money market
|
|
|
118,172
|
|
|
|
23
|
|
|
|
0.08
|
%
|
|
|
97,971
|
|
|
|
16
|
|
|
|
0.07
|
%
|
CDAR’s
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,074
|
|
|
|
-
|
|
|
|
-
|
|
Certificates of deposit, under $100,000
|
|
|
72,736
|
|
|
|
67
|
|
|
|
0.37
|
%
|
|
|
73,913
|
|
|
|
57
|
|
|
|
0.31
|
%
|
Certificates of deposit, $100,000 or more
|
|
|
268,706
|
|
|
|
494
|
|
|
|
0.74
|
%
|
|
|
222,547
|
|
|
|
191
|
|
|
|
0.35
|
%
|
Total interest bearing deposits
|
|
|
1,220,259
|
|
|
|
868
|
|
|
|
0.29
|
%
|
|
|
1,059,758
|
|
|
|
508
|
|
|
|
0.19
|
%
|
Borrowed Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,399
|
|
|
|
3
|
|
|
|
0.86
|
%
|
Repurchase agreements
|
|
|
10,229
|
|
|
|
10
|
|
|
|
0.39
|
%
|
|
|
9,989
|
|
|
|
10
|
|
|
|
0.40
|
%
|
Short term borrowings
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,273
|
|
|
|
18
|
|
|
|
0.42
|
%
|
TRUPS
|
|
|
34,475
|
|
|
|
337
|
|
|
|
3.92
|
%
|
|
|
30,928
|
|
|
|
200
|
|
|
|
2.60
|
%
|
Total borrowed funds
|
|
|
44,708
|
|
|
|
347
|
|
|
|
3.11
|
%
|
|
|
59,589
|
|
|
|
231
|
|
|
|
1.56
|
%
|
Total interest bearing liabilities
|
|
|
1,264,967
|
|
|
|
1,215
|
|
|
|
0.39
|
%
|
|
|
1,119,347
|
|
|
|
739
|
|
|
|
0.27
|
%
|
Demand deposits - non-interest bearing
|
|
|
533,570
|
|
|
|
|
|
|
|
|
|
|
|
427,581
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
25,945
|
|
|
|
|
|
|
|
|
|
|
|
14,918
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
213,920
|
|
|
|
|
|
|
|
|
|
|
|
196,206
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
2,038,402
|
|
|
|
|
|
|
|
|
|
|
$
|
1,758,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/interest earning assets
|
|
|
|
|
|
|
|
|
|
|
4.19
|
%
|
|
|
|
|
|
|
|
|
|
|
4.07
|
%
|
Interest expense/interest earning assets
|
|
|
|
|
|
|
|
|
|
|
0.26
|
%
|
|
|
|
|
|
|
|
|
|
|
0.18
|
%
|
Net interest income and margin
(5)
|
|
|
|
|
|
$
|
17,840
|
|
|
|
3.93
|
%
|
|
|
|
|
|
$
|
15,195
|
|
|
|
3.89
|
%
|
|
(1)
|
Average balances are obtained from the best available
daily or monthly data and are net of deferred fees and related direct costs.
|
|
(2)
|
Yields and net interest margin have been computed on
a tax equivalent basis utilizing a 35% effective tax rate.
|
|
(3)
|
Loans are gross the allowance for possible loan losses.
Net loan fees have been been included in the calculation of interest income. Net loan fees and loan acquisition FMV amortization
were $(67) thousand and $109 thousand for the quarters ended June 30, 2017 and 2016.
|
|
(4)
|
Non-accrual loans are slotted by loan type and have been
included in total loans for purposes of total earning assets.
|
|
(5)
|
Net interest margin represents net interest income as
a percentage of average interest-earning assets.
|
Average Balances and Rates
|
|
For the six months ended
|
|
|
For the six months ended
|
|
(dollars in thousands, unaudited)
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
|
Balance
(1)
|
|
|
Expense
|
|
|
Rate/Yield
(2)
|
|
|
Balance
(1)
|
|
|
Expense
|
|
|
Rate/Yield
(2)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold/due from time
|
|
$
|
55,304
|
|
|
$
|
255
|
|
|
|
0.92
|
%
|
|
$
|
12,389
|
|
|
$
|
32
|
|
|
|
0.51
|
%
|
Taxable
|
|
|
430,380
|
|
|
|
4,149
|
|
|
|
1.92
|
%
|
|
|
413,424
|
|
|
|
4,199
|
|
|
|
2.01
|
%
|
Non-taxable
|
|
|
124,055
|
|
|
|
1,737
|
|
|
|
4.28
|
%
|
|
|
103,261
|
|
|
|
1,460
|
|
|
|
4.30
|
%
|
Equity
|
|
|
1,569
|
|
|
|
11
|
|
|
|
1.39
|
%
|
|
|
1,215
|
|
|
|
36
|
|
|
|
5.86
|
%
|
Total Investments
|
|
|
611,308
|
|
|
|
6,152
|
|
|
|
2.31
|
%
|
|
|
530,289
|
|
|
|
5,727
|
|
|
|
2.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and Leases
:
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
948,845
|
|
|
|
23,814
|
|
|
|
5.06
|
%
|
|
|
775,248
|
|
|
|
19,356
|
|
|
|
5.02
|
%
|
Agricultural
|
|
|
49,235
|
|
|
|
1,176
|
|
|
|
4.82
|
%
|
|
|
46,504
|
|
|
|
1,022
|
|
|
|
4.42
|
%
|
Commercial
|
|
|
118,388
|
|
|
|
3,076
|
|
|
|
5.24
|
%
|
|
|
107,898
|
|
|
|
2,504
|
|
|
|
4.67
|
%
|
Consumer
|
|
|
11,835
|
|
|
|
654
|
|
|
|
11.14
|
%
|
|
|
14,486
|
|
|
|
823
|
|
|
|
11.43
|
%
|
Mortgage Warehouse Lines
|
|
|
93,630
|
|
|
|
1,995
|
|
|
|
4.30
|
%
|
|
|
127,502
|
|
|
|
2,471
|
|
|
|
3.90
|
%
|
Other
|
|
|
3,145
|
|
|
|
91
|
|
|
|
5.83
|
%
|
|
|
1,989
|
|
|
|
64
|
|
|
|
6.47
|
%
|
Total Loans and Leases
|
|
|
1,225,078
|
|
|
|
30,806
|
|
|
|
5.07
|
%
|
|
|
1,073,627
|
|
|
|
26,240
|
|
|
|
4.91
|
%
|
Total Interest Earning Assets
(4)
|
|
|
1,836,386
|
|
|
|
36,958
|
|
|
|
4.16
|
%
|
|
|
1,603,916
|
|
|
|
31,967
|
|
|
|
4.11
|
%
|
Other Earning Assets
|
|
|
8,598
|
|
|
|
|
|
|
|
|
|
|
|
7,700
|
|
|
|
|
|
|
|
|
|
Non-Earning Assets
|
|
|
155,948
|
|
|
|
|
|
|
|
|
|
|
|
135,831
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,000,932
|
|
|
|
|
|
|
|
|
|
|
$
|
1,747,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Deposits
|
|
$
|
146,162
|
|
|
$
|
223
|
|
|
|
0.31
|
%
|
|
$
|
136,829
|
|
|
$
|
205
|
|
|
|
0.30
|
%
|
NOW
|
|
|
371,474
|
|
|
|
206
|
|
|
|
0.11
|
%
|
|
|
311,085
|
|
|
|
166
|
|
|
|
0.11
|
%
|
Savings Accounts
|
|
|
225,174
|
|
|
|
121
|
|
|
|
0.11
|
%
|
|
|
199,463
|
|
|
|
109
|
|
|
|
0.11
|
%
|
Money Market
|
|
|
119,264
|
|
|
|
45
|
|
|
|
0.08
|
%
|
|
|
98,600
|
|
|
|
32
|
|
|
|
0.07
|
%
|
CDAR’s
|
|
|
64
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,072
|
|
|
|
2
|
|
|
|
0.06
|
%
|
Certificates of Deposit, under $100,000
|
|
|
73,714
|
|
|
|
124
|
|
|
|
0.34
|
%
|
|
|
74,246
|
|
|
|
114
|
|
|
|
0.31
|
%
|
Certificates of Deposit, $100,000 or more
|
|
|
268,298
|
|
|
|
838
|
|
|
|
0.63
|
%
|
|
|
220,985
|
|
|
|
371
|
|
|
|
0.34
|
%
|
Total Interest Bearing Deposits
|
|
|
1,204,150
|
|
|
|
1,557
|
|
|
|
0.26
|
%
|
|
|
1,048,280
|
|
|
|
999
|
|
|
|
0.19
|
%
|
Borrowed Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Funds Purchased
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
700
|
|
|
|
3
|
|
|
|
0.86
|
%
|
Repurchase Agreements
|
|
|
9,199
|
|
|
|
18
|
|
|
|
0.39
|
%
|
|
|
9,463
|
|
|
|
19
|
|
|
|
0.40
|
%
|
Short Term Borrowings
|
|
|
820
|
|
|
|
3
|
|
|
|
0.74
|
%
|
|
|
16,640
|
|
|
|
34
|
|
|
|
0.41
|
%
|
Long Term Borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
615
|
|
|
|
-
|
|
|
|
-
|
|
TRUPS
|
|
|
34,451
|
|
|
|
657
|
|
|
|
3.85
|
%
|
|
|
30,928
|
|
|
|
402
|
|
|
|
2.61
|
%
|
Total Borrowed Funds
|
|
|
44,473
|
|
|
|
678
|
|
|
|
3.07
|
%
|
|
|
58,346
|
|
|
|
458
|
|
|
|
1.58
|
%
|
Total Interest Bearing Liabilities
|
|
|
1,248,623
|
|
|
|
2,235
|
|
|
|
0.36
|
%
|
|
|
1,106,626
|
|
|
|
1,457
|
|
|
|
0.26
|
%
|
Demand deposits- non interest bearing
|
|
|
514,718
|
|
|
|
|
|
|
|
|
|
|
|
431,572
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
26,379
|
|
|
|
|
|
|
|
|
|
|
|
14,659
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
211,212
|
|
|
|
|
|
|
|
|
|
|
|
194,590
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
2,000,932
|
|
|
|
|
|
|
|
|
|
|
$
|
1,747,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income/Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
4.16
|
%
|
|
|
|
|
|
|
|
|
|
|
4.11
|
%
|
Interest Expense/Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
0.24
|
%
|
|
|
|
|
|
|
|
|
|
|
0.19
|
%
|
Net Interest Income and Margin
(5)
|
|
|
|
|
|
$
|
34,723
|
|
|
|
3.92
|
%
|
|
|
|
|
|
$
|
30,510
|
|
|
|
3.92
|
%
|
(1)
Average balances are obtained from the best available
daily or monthly data and are net of deferred fees and related direct costs.
(2)
Yields and net interest margin have been computed
on a tax equivalent basis utilizing a 35% effective tax rate.
(3)
Loans are gross of the allowance for possible
loan losses. Net loan fees have been included in the calculation of interest income. Net loan fees and loan acquistion FMV amortization
were $(80) thousand and $164 thousand for the six months ended June 30, 2017 and 2016.
(4)
Non-accrual loans are slotted by loan type and
have been included in total loans for purposes of total earning assets.
(5)
Net interest margin represents net interest income
as a percentage of average interest-earning assets.
The Volume and Rate Variances table below sets forth the dollar
difference for the comparative periods in interest earned or paid for each major category of interest-earning assets and interest-bearing
liabilities, and the amount of such change attributable to fluctuations in average balances (volume) or differences in average
interest rates. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates, and
rate variances are equal to the change in rates multiplied by prior period average balances. Variances attributable to both rate
and volume changes, calculated by multiplying the change in rates by the change in average balances, have been allocated to the
rate variance.
Volume & Rate Variances
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
(dollars in thousands, unaudited)
|
|
2017 over 2016
|
|
|
2017 over 2016
|
|
|
|
Increase(decrease) due to
|
|
|
Increase(decrease) due to
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold / Due from time
|
|
$
|
51
|
|
|
$
|
83
|
|
|
$
|
134
|
|
|
$
|
111
|
|
|
$
|
112
|
|
|
$
|
223
|
|
Taxable
|
|
|
89
|
|
|
|
-
|
|
|
|
89
|
|
|
|
172
|
|
|
|
(222
|
)
|
|
|
(50
|
)
|
Non-taxable
(1)
|
|
|
191
|
|
|
|
11
|
|
|
|
202
|
|
|
|
294
|
|
|
|
(17
|
)
|
|
|
277
|
|
Equity
|
|
|
-
|
|
|
|
6
|
|
|
|
6
|
|
|
|
10
|
|
|
|
(35
|
)
|
|
|
(25
|
)
|
Total Investments
|
|
|
331
|
|
|
|
100
|
|
|
|
431
|
|
|
|
587
|
|
|
|
(162
|
)
|
|
|
425
|
|
Loans and Leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
2,388
|
|
|
|
252
|
|
|
|
2,640
|
|
|
|
4,334
|
|
|
|
124
|
|
|
|
4,458
|
|
Agricultural
|
|
|
41
|
|
|
|
59
|
|
|
|
100
|
|
|
|
60
|
|
|
|
94
|
|
|
|
154
|
|
Commercial
|
|
|
110
|
|
|
|
210
|
|
|
|
320
|
|
|
|
243
|
|
|
|
329
|
|
|
|
572
|
|
Consumer
|
|
|
(77
|
)
|
|
|
(37
|
)
|
|
|
(114
|
)
|
|
|
(151
|
)
|
|
|
(18
|
)
|
|
|
(169
|
)
|
Mortgage Warehouse
|
|
|
(400
|
)
|
|
|
124
|
|
|
|
(276
|
)
|
|
|
(656
|
)
|
|
|
180
|
|
|
|
(476
|
)
|
Other
|
|
|
20
|
|
|
|
-
|
|
|
|
20
|
|
|
|
37
|
|
|
|
(10
|
)
|
|
|
27
|
|
Total Loans and Leases
|
|
|
2,082
|
|
|
|
608
|
|
|
|
2,690
|
|
|
|
3,867
|
|
|
|
699
|
|
|
|
4,566
|
|
Total Interest Earning Assets
|
|
$
|
2,413
|
|
|
$
|
708
|
|
|
$
|
3,121
|
|
|
$
|
4,454
|
|
|
$
|
537
|
|
|
$
|
4,991
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Deposits
|
|
$
|
8
|
|
|
$
|
4
|
|
|
$
|
12
|
|
|
$
|
14
|
|
|
$
|
4
|
|
|
$
|
18
|
|
NOW
|
|
|
15
|
|
|
|
11
|
|
|
|
26
|
|
|
|
32
|
|
|
|
8
|
|
|
|
40
|
|
Savings Accounts
|
|
|
7
|
|
|
|
(5
|
)
|
|
|
2
|
|
|
|
14
|
|
|
|
(2
|
)
|
|
|
12
|
|
Money Market
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
|
|
7
|
|
|
|
6
|
|
|
|
13
|
|
CDAR’s
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
Certificates of Deposit < $100,000
|
|
|
(1
|
)
|
|
|
11
|
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
11
|
|
|
|
10
|
|
Certificates of Deposit
>
$100,000
|
|
|
40
|
|
|
|
263
|
|
|
|
303
|
|
|
|
79
|
|
|
|
388
|
|
|
|
467
|
|
Total Interest Bearing Deposits
|
|
|
72
|
|
|
|
288
|
|
|
|
360
|
|
|
|
143
|
|
|
|
415
|
|
|
|
558
|
|
Borrowed Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Funds Purchased
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
Repurchase Agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
Short Term Borrowings
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
(18
|
)
|
|
|
(32
|
)
|
|
|
1
|
|
|
|
(31
|
)
|
TRUPS
|
|
|
23
|
|
|
|
114
|
|
|
|
137
|
|
|
|
46
|
|
|
|
209
|
|
|
|
255
|
|
Total Borrowed Funds
|
|
|
2
|
|
|
|
114
|
|
|
|
116
|
|
|
|
10
|
|
|
|
210
|
|
|
|
220
|
|
Total Interest Bearing Liabilities
|
|
|
74
|
|
|
|
402
|
|
|
|
476
|
|
|
|
153
|
|
|
|
625
|
|
|
|
778
|
|
Net Interest Income
|
|
$
|
2,339
|
|
|
$
|
306
|
|
|
$
|
2,645
|
|
|
$
|
4,301
|
|
|
$
|
(88
|
)
|
|
$
|
4,213
|
|
(1)
Yields on tax exempt income have not been computed
on a tax equivalent basis.
The volume variance calculated for the second quarter of 2017
relative to the second quarter of 2016 was a favorable $2.339 million, due to an increase of $260 million, or 16%, in the average
balance of interest-earning assets resulting from growth in loans and investments, including the impact of the Coast acquisition.
There was also a favorable rate variance of $306,000 for the second quarter comparison. Our weighted average yield on interest-earning
assets and weighted average cost of interest-bearing liabilities were both up by 12 basis points, but there was a net benefit to
the Company because the yield increase on earning assets was applied to a much higher balance than the rate change for interest-bearing
liabilities. Loan yields have risen in response to the impact of higher short-term interest rates on our variable-rate loans, discount
accretion on loans from the Coast acquisition, and an increase in non-recurring interest income. Nonrecurring interest income,
primarily in the form of interest recovered on non-accrual loans net of interest reversed on loans placed on non-accrual status,
totaled $83,000 in the second quarter of 2017 relative to $22,000 in the second quarter of 2016. Our weighted average cost of interest-bearing
liabilities increased primarily because of higher rates paid on adjustable-rate trust-preferred securities (“TRUPS”),
short-term borrowings and large time deposits.
The Company’s net interest margin, which is tax-equivalent
net interest income as a percentage of average interest-earning assets, was affected by the same factors discussed above relative
to rate and volume variances. Our net interest margin was 3.93% in the second quarter of 2017, up four basis points relative to
the second quarter of 2016 primarily as the result of higher loan yields.
Net interest income in the first half of 2017 relative to the
first half of 2016 reflects a favorable variance of $4.301 million attributable to volume changes, and an unfavorable rate variance
of $88,000. The volume variance for the half was due primarily to an increase of $232 million, or 14%, in average interest-earning
assets. The negative rate variance for the half is the result of a 10 basis point increase in our average cost of interest-bearing
liabilities, relative to only a five basis point increase in our average yield on earning assets. As with the quarterly comparison,
the year-to-date rate variance was favorably impacted by nonrecurring interest income, with totaled $219,000 for the first six
months of 2017 but added just $65,000 to interest income for the first six months of 2016. The Company’s net interest margin
for the first half of 2017 was 3.92%, the same as our net interest margin in the first half of 2016.
Provision
for loan and LEASE losses
Credit risk is inherent in the business of making loans. The
Company sets aside an allowance for loan and lease losses, a contra-asset account, through periodic charges to earnings which are
reflected in the income statement as the provision for loan and lease losses. The Company recorded a provision for loan losses
in the second quarter of 2017, for the first time since the second quarter of 2014. The $300,000 provision became necessary due
to loan growth, and to replenish reserves subsequent to the unanticipated charge-off of a $224,000 overdraft on a business account.
Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance. The Company recorded
$658,000 in net loan balances charged off in the second quarter of 2017 relative to $12,000 in net recoveries in the second quarter
of 2016, and net charge-offs were $771,000 in the first six months of 2017 relative to $381,000 in the first six months of 2016.
With the loan loss provision recorded in the second quarter
of 2017, we were able to maintain our allowance for loan and lease losses at a level that, in Management’s judgment, is adequate
to absorb probable loan losses related to specifically-identified impaired loans as well as probable incurred losses in the remaining
loan portfolio. The need for reserve replenishment via a loan loss provision has been minimized in recent periods due to the following
factors: all of our acquired loans were booked at their fair values on the acquisition date, and thus did not initially require
a loan loss allowance; with the notable exception of the overdraft charge-off noted in the previous paragraph, charge-offs have
primarily been recorded against pre-established reserves which alleviated what otherwise might have been a need for reserve replenishment;
organic growth in our performing loan portfolio has been concentrated in loan types with low historical loss rates, and loss rates
for most loan types have been declining, thus having a positive impact on general reserves for performing loans; and, new loans
booked during and since the great recession have been underwritten using tighter credit standards than was the case for many legacy
loans.
The Company’s policies for monitoring the adequacy of
the allowance and determining loan amounts that should be charged off, and other detailed information with regard to changes in
the allowance, are discussed in Note 12 to the consolidated financial statements and below under “Allowance for Loan and
Lease Losses.” The process utilized to establish an appropriate allowance for loan and lease losses can result in a high
degree of variability in the Company’s loan loss provision, and consequently in our net earnings.
NON-INTEREST
INCOME and NON-INTEREST expense
The following table provides details on the Company’s non-interest
income and non-interest expense for the three- and
six-month periods
ended June 30, 2017 and 2016:
Non-Interest Income/Expense
(dollars
in thousands, unaudited)
|
|
For
the three months ended June 30,
|
|
|
For
the six months ended June 30,
|
|
|
|
2017
|
|
|
%
of Total
|
|
|
2016
|
|
|
%
of Total
|
|
|
2017
|
|
|
%
of Total
|
|
|
2016
|
|
|
%
of Total
|
|
NON-INTEREST
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
$
|
2,776
|
|
|
|
51.75
|
%
|
|
$
|
2,478
|
|
|
|
54.18
|
%
|
|
$
|
5,348
|
|
|
|
50.94
|
%
|
|
$
|
4,848
|
|
|
|
54.66
|
%
|
Other service charges, commissions & fees
|
|
|
2,212
|
|
|
|
41.24
|
%
|
|
|
1,783
|
|
|
|
38.98
|
%
|
|
|
4,245
|
|
|
|
40.44
|
%
|
|
|
3,593
|
|
|
|
40.52
|
%
|
Gains on securities
|
|
|
58
|
|
|
|
1.08
|
%
|
|
|
146
|
|
|
|
3.19
|
%
|
|
|
66
|
|
|
|
0.63
|
%
|
|
|
122
|
|
|
|
1.38
|
%
|
Bank owned life insurance
|
|
|
358
|
|
|
|
6.67
|
%
|
|
|
229
|
|
|
|
5.01
|
%
|
|
|
811
|
|
|
|
7.73
|
%
|
|
|
439
|
|
|
|
4.95
|
%
|
Other
|
|
|
(40
|
)
|
|
|
-0.74
|
%
|
|
|
(62
|
)
|
|
|
-1.36
|
%
|
|
|
28
|
|
|
|
0.26
|
%
|
|
|
(134
|
)
|
|
|
-1.51
|
%
|
Total
non-interest income
|
|
$
|
5,364
|
|
|
|
100.00
|
%
|
|
$
|
4,574
|
|
|
|
100.00
|
%
|
|
$
|
10,498
|
|
|
|
100.00
|
%
|
|
$
|
8,868
|
|
|
|
100.00
|
%
|
As
a % of average interest-earning assets
(1)
|
|
|
|
|
|
|
1.15
|
%
|
|
|
|
|
|
|
1.14
|
%
|
|
|
|
|
|
|
1.15
|
%
|
|
|
|
|
|
|
1.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER OPERATING EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
7,253
|
|
|
|
48.06
|
%
|
|
$
|
6,624
|
|
|
|
48.28
|
%
|
|
$
|
15,138
|
|
|
|
49.16
|
%
|
|
$
|
13,490
|
|
|
|
49.61
|
%
|
Occupancy costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture & equipment
|
|
|
562
|
|
|
|
3.72
|
%
|
|
|
596
|
|
|
|
4.35
|
%
|
|
|
1,247
|
|
|
|
4.05
|
%
|
|
|
1,163
|
|
|
|
4.28
|
%
|
Premises
|
|
|
1,673
|
|
|
|
11.09
|
%
|
|
|
1,270
|
|
|
|
9.26
|
%
|
|
|
3,308
|
|
|
|
10.74
|
%
|
|
|
2,454
|
|
|
|
9.02
|
%
|
Advertising and marketing costs
|
|
|
605
|
|
|
|
4.01
|
%
|
|
|
695
|
|
|
|
5.07
|
%
|
|
|
1,123
|
|
|
|
3.65
|
%
|
|
|
1,184
|
|
|
|
4.35
|
%
|
Data processing costs
|
|
|
1,071
|
|
|
|
7.10
|
%
|
|
|
861
|
|
|
|
6.28
|
%
|
|
|
2,009
|
|
|
|
6.52
|
%
|
|
|
1,627
|
|
|
|
5.98
|
%
|
Deposit services costs
|
|
|
1,178
|
|
|
|
7.81
|
%
|
|
|
861
|
|
|
|
6.28
|
%
|
|
|
2,111
|
|
|
|
6.86
|
%
|
|
|
1,722
|
|
|
|
6.33
|
%
|
Loan services costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan processing
|
|
|
189
|
|
|
|
1.25
|
%
|
|
|
192
|
|
|
|
1.40
|
%
|
|
|
439
|
|
|
|
1.43
|
%
|
|
|
359
|
|
|
|
1.32
|
%
|
Foreclosed assets
|
|
|
23
|
|
|
|
0.15
|
%
|
|
|
319
|
|
|
|
2.33
|
%
|
|
|
164
|
|
|
|
0.53
|
%
|
|
|
450
|
|
|
|
1.65
|
%
|
Other operating costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telephone & data communications
|
|
|
450
|
|
|
|
2.98
|
%
|
|
|
366
|
|
|
|
2.67
|
%
|
|
|
873
|
|
|
|
2.84
|
%
|
|
|
749
|
|
|
|
2.75
|
%
|
Postage & mail
|
|
|
221
|
|
|
|
1.46
|
%
|
|
|
226
|
|
|
|
1.65
|
%
|
|
|
479
|
|
|
|
1.56
|
%
|
|
|
453
|
|
|
|
1.67
|
%
|
Other
|
|
|
283
|
|
|
|
1.88
|
%
|
|
|
230
|
|
|
|
1.68
|
%
|
|
|
532
|
|
|
|
1.71
|
%
|
|
|
386
|
|
|
|
1.42
|
%
|
Professional services costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal & accounting
|
|
|
511
|
|
|
|
3.39
|
%
|
|
|
425
|
|
|
|
3.10
|
%
|
|
|
933
|
|
|
|
3.03
|
%
|
|
|
850
|
|
|
|
3.13
|
%
|
Acquistion Cost
|
|
|
166
|
|
|
|
1.10
|
%
|
|
|
128
|
|
|
|
0.93
|
%
|
|
|
161
|
|
|
|
0.52
|
%
|
|
|
342
|
|
|
|
1.26
|
%
|
Other professional service
|
|
|
442
|
|
|
|
2.93
|
%
|
|
|
487
|
|
|
|
3.55
|
%
|
|
|
1,326
|
|
|
|
4.31
|
%
|
|
|
868
|
|
|
|
3.19
|
%
|
Stationery & supply costs
|
|
|
305
|
|
|
|
2.02
|
%
|
|
|
231
|
|
|
|
1.68
|
%
|
|
|
633
|
|
|
|
2.06
|
%
|
|
|
650
|
|
|
|
2.39
|
%
|
Sundry & tellers
|
|
|
159
|
|
|
|
1.05
|
%
|
|
|
204
|
|
|
|
1.49
|
%
|
|
|
316
|
|
|
|
1.03
|
%
|
|
|
447
|
|
|
|
1.65
|
%
|
Total
non-interest expense
|
|
$
|
15,091
|
|
|
|
100.00
|
%
|
|
$
|
13,715
|
|
|
|
100.00
|
%
|
|
$
|
30,792
|
|
|
|
100.00
|
%
|
|
$
|
27,194
|
|
|
|
100.00
|
%
|
As
a % of average interest-earning assets
(1)
|
|
|
|
|
|
|
3.23
|
%
|
|
|
|
|
|
|
3.42
|
%
|
|
|
|
|
|
|
3.36
|
%
|
|
|
|
|
|
|
3.43
|
%
|
Efficiency
Ratio
(2)
|
|
|
63.30
|
%
|
|
|
|
|
|
|
68.10
|
%
|
|
|
|
|
|
|
66.18
|
%
|
|
|
|
|
|
|
67.51
|
%
|
|
|
|
|
(1)
Annualized
(2)
Tax Equivalent
Total non-interest income increased by $790,000, or 17%, for the
second quarter of 2017 over the second quarter of 2016, and by $1.630 million, or 18%, for the first half of 2017 relative to the
first half of 2016. Both the second quarter and first six months of 2017 saw a higher level of service charges on deposits, an
increase in bank-owned life insurance (BOLI) income, and additional non-deposit service charges and fees, including a $141,000
prepayment penalty on a large dairy loan that paid off in the second quarter of 2017. The year-to-date comparison also reflects
higher dividends on restricted stock. Total non-interest income was an annualized 1.15% of average interest-earning assets in the
second quarter of 2017 relative to 1.14% in the second quarter of 2016, and was 1.15% for the first half of 2017 relative to 1.12%
in the first half of 2016.
Service charge income on deposits increased by $298,000, or 12%,
for the second quarter comparison and $500,000, or 10%, for the first six months due primarily to fees earned from accounts added
over the past year, including from the Coast acquisition. The increase also includes higher revenue-generating activity on certain
commercial accounts, and additional fees on higher-risk commercial accounts. Other service charges, commissions, and fees increased
by $429,000, or 24%, for the second quarter and $652,000, or 18%, for the first half. This category includes the aforementioned
$141,000 prepayment penalty recorded in the second quarter of 2017, as well as higher levels of debit card interchange fees and
an increase in fees related to commercial customer activities. Gains realized on the sale of investment securities totaled $58,000
in the second quarter of 2017 relative to $146,000 in the second quarter of 2016, and $66,000 in the first half of 2017 relative
to $122,000 in the first half of 2016.
BOLI income is derived from two types of policies owned by the Company:
“separate account” life insurance policies associated with deferred compensation plans, and “general account”
life insurance. BOLI income increased by $129,000, or 56%, in the second quarter of 2017 over the second quarter of 2016, and by
$372,000, or 85%, for the first six months due in large part to higher income on separate account BOLI. The Company had $6.0 million
invested in separate account BOLI at June 30, 2017, which produces income that helps offset expense accruals for deferred compensation
accounts the Company maintains on behalf of certain directors and senior officers. Those accounts have returns pegged to participant-directed
investment allocations that can include equity, bond, or real estate indices, and are thus subject to gains or losses which often
contribute to significant fluctuations in income (and associated expense accruals). Gains on separate account BOLI totaled $116,000
in the second quarter of 2017 relative to $36,000 in the second quarter of 2016, for an increase of $80,000, and $321,000 in the
first half of 2017 relative to $11,000 in the first half of 2016, for an increase of $310,000. As noted, gains and losses on separate
account BOLI are related to expense accruals or reversals associated with participant gains and losses on deferred compensation
balances, thus their net impact on taxable income tends to be minimal. At June 30, 2017, the Company’s books also reflect
a net cash surrender value of $38.8 million for general account BOLI. General account BOLI generates income that is used to help
offset expenses associated with executive salary continuation plans, director retirement plans and other employee benefits. Interest
credit rates on general account BOLI do not change frequently so the income has typically been fairly consistent. While rate reductions
and an increase in the cost of insurance for certain policies contributed to an overall downward trend in general account BOLI
income over the past few years, the average income crediting rate increased in 2017 due to the termination of a high-cost policy
in late 2016. Income on general account BOLI thus increased by $49,000 for the second quarter, and $62,000 for the first six months
of 2017.
The “Other” category under non-interest income reflects
a favorable swing of $22,000 for the second quarter and $162,000 for the first six months of 2017. This line item includes gains
and losses on the disposition of assets other than OREO, rent on bank-owned property other than OREO, dividends on restricted stock
(including dividends on our equity investment in the Federal Home Loan Bank), and other miscellaneous income. Amortization expense
associated with our investments in low-income housing tax credit funds and other limited partnership investments is netted against
this category. The favorable variance in “Other” non-interest income includes lower expense on low-income housing tax
credit funds for both the quarter and year-to-date comparisons, and higher dividends on restricted stock for the first six months
of 2017.
Total non-interest expense was up by $1.376 million, or 10%, for
the second quarter of 2017 relative to the second quarter of 2016, and $3.598 million, or 13%, for the comparative six-month periods.
As detailed below there were several significant fluctuations within non-interest expense, including items of a non-recurring nature.
Despite the increase in total non-interest expense, it fell to an annualized 3.23% of average interest-earning assets in the second
quarter of 2017 from 3.42% in the second quarter of 2016, and to 3.36% for the first six months of 2017 relative to 3.43% for the
first six months of 2016. The reduction is the result of a sizeable increase in average earning assets.
The largest component of non-interest expense, salaries and benefits,
increased by $629,000, or 9%, for the second quarter and $1.648 million, or 12%, for the first half, largely because salaries and
benefits in 2017 include expenses for former Coast employees retained subsequent to the Coast acquisition in July of 2016, as well
as staffing costs for our Sanger branch which opened in May of 2016 and our newest Bakersfield branch that commenced operations
in March of 2017. The increase also reflects salary adjustments in the normal course of business, a relatively large increase in
group health insurance costs, and, for the year-to-date comparison, higher stock option expense stemming from options granted in
February of 2017. Those increases were partially offset by lower overtime and temporary staffing costs, which were down $60,000
for the quarter and $72,000 for the first six months due to costs incurred in preparation for the Coast acquisition and related
systems conversion in 2016. Compensation costs also benefited from stronger loan origination activity, since salaries directly
related to successful loan originations, which are deferred and amortized as loan costs and thus reduce current period compensation
expense, increased by $399,000 for the second quarter and $634,000 for the first six months. Total salaries and benefits dropped
slightly as a percentage of total non-interest expense for the comparative periods.
Occupancy expense increased by $369,000, or 20%, in the second quarter
of 2017 over the second quarter of 2016, and by $938,000, or 26%, for the comparative year-to-date periods, due to occupancy costs
associated with the former Coast National Bank branches and our newer de-novo branches, higher rent and depreciation expense in
other locations, and, for the year-to-date comparison, roughly $100,000 in non-recurring expenses associated with opening our newest
Bakersfield branch in the first quarter of 2017. Despite an increase in marketing efforts targeting our expanded geography, marketing
costs were down $90,000, or 13%, for the second quarter and also fell by $61,000, or 5%, for the first six months of 2017 due largely
to the timing of payments. Data processing costs increased by $210,000, or 24%, for the second quarter and $382,000, or 23%, for
the first half of 2017, primarily from ongoing expenses related to the Coast acquisition and our new branches but also due to costs
associated with an online lending platform that was implemented at the beginning of 2017. Deposit services costs increased by $317,000,
or 37%, for the quarterly comparison and $389,000, or 23% for the year-to-date period due primarily to higher mobile banking costs
as we seek to upgrade that access channel, higher debit card processing costs, and amortization expense on the core deposit intangible
created via the Coast acquisition.
Loan processing costs were about the same for the comparative quarters,
but increased by $80,000, or 22%, for the first six months of 2017 as the result of certain non-recurring adjustments in the first
quarter of 2017. Net expenses associated with foreclosed assets dropped by $296,000, or 93%, in the second quarter of 2017 relative
to the second quarter of 2016, and by $286,000, or 64%, for the first half of 2017, primarily due to a reduced level of OREO write-downs
and operating costs.
Telecommunications expense increased by $84,000, or 23%, in the
second quarter of 2017 relative to the second quarter of 2016 and $124,000, or 17%, in the first half of 2017 due to the Coast
acquisition and branch expansion, and well as certain circuit enhancements. Postage costs were about the same for the quarterly
comparison, but increased by $26,000, or 6%, for the year-to-date comparison, primarily from increased mailings associated with
growth in our customer base. The “Other” category under other operating costs increased by $53,000, or 23%, for the
second quarter and $146,000, or 38%, for the first six months due to an increase in corporate travel expenses.
Under professional services costs, legal and accounting expenses
increased by $86,000, or 20%, for the second quarter and $83,000, or 10%, for the comparative year-to-date periods due primarily
to a negotiated settlement that added $85,000 to legal expense in the second quarter of 2017. Acquisition costs, which include
nonrecurring acquisition expenses for the planned Ojai acquisition in 2017 and the Coast acquisition in 2016, reflect an increase
of $38,000 for the second quarter but a reduction of $181,000 for the first six months of 2017. The cost of other professional
services fell by $45,000, or 9% for the second quarter, but increased by $458,000, or 53%, for the first six months of 2017 primarily
for the following reasons: FDIC assessment costs were down $157,000 for the second quarter and $244,000 for the first six months;
directors’ deferred compensation expense rose by $67,000 for the second quarter and $266,000 for the first half in conjunction
with the aforementioned increase in separate account BOLI income; equity incentive compensation costs for stock options issued
to our directors was $177,000 higher for the year-to-date comparison, due to three additional directors as well as a higher stock
option grant date fair value for stock options issued in February 2017; director retirement plan expense accruals were also higher
for the year-to-date comparison due to a non-recurring expense reversal of $173,000 in director retirement plan accruals in the
second quarter of 2016, subsequent to the death of a former director; and, directors fees increased for both the quarter and the
first six months of 2017 due to the expansion of our Board in September 2016.
Stationery and supply costs increased by $74,000 for the second
quarter due to higher forms and supplies costs, but were reduced by $17,000, or 3%, for the first half of 2017 due to prior-year
costs associated with the issuance of new debit cards incorporating EMV technology. Sundry and teller losses were also reduced
by $45,000, or 22%, for the second quarter of 2017 due to reduced debit card losses, and were down $131,000, or 29% for the first
half of 2017 due to lower operations-related losses within our branch system.
The Company’s tax-equivalent overhead efficiency ratio declined
to 63.30% in the second quarter of 2017 from 68.10% in the second quarter of 2016, and to 66.18% for the first half of 2017 from
67.51% in the first half of 2016. The overhead efficiency ratio represents total non-interest expense divided by the sum of fully
tax-equivalent net interest and non-interest income, with the provision for loan losses and investment gains/losses excluded from
the equation.
PROVISION FOR
INCOME TAXES
The
Company sets aside a provision for income taxes on a monthly basis. The amount of that provision is determined by first applying
the Company’s statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent
differences, and then subtracting available tax credits. Permanent differences include but are not limited to tax-exempt interest
income, BOLI income, and certain book expenses that are not allowed as tax deductions. Our tax credits consist primarily of those
generated by investments in low-income housing tax credit funds, and California state employment tax credits.
The
Company’s provision for income taxes was 33% of pre-tax income in the second quarters of 2017 and 2016, and was 31% of
pre-tax income in the first half of 2017 relative to 33% in the first half of 2016. While a higher level of tax-exempt muni
income and non-taxable BOLI income had an impact, the lower tax accrual rate for the first half of 2017 also resulted from
our adoption of ASU 2016-09 effective January 1, 2017, and the subsequent change in accounting methodology associated with
the disqualifying disposition of Company shares issued pursuant to the exercise of incentive stock options (ISOs). A
disqualifying disposition is an employee’s sale, transfer, or exchange of ISO shares within two years of the date of
grant or within one year of the option exercise leading to the issuance of such shares. Prior to January 1, 2017, the
favorable tax impact of disqualifying dispositions was recorded directly to equity, whereas it now runs through the income
statement as an adjustment to our income tax provision. The adoption of ASU 2016-09 will lead to volatility in our tax
provision as the level of disqualifying dispositions fluctuates from quarter to quarter, as witnessed in the first and second
quarters of 2017. There were a relatively large number of disqualifying dispositions in the first quarter of 2017, which
lowered our tax accrual by $284 thousand but only by $5 thousand in the second quarter of 2017.
balance
sheet analysis
EARNING ASSETS
The Company’s interest-earning assets are comprised of investments
and loans, and the composition, growth characteristics, and credit quality of both of those components are significant determinants
of the Company’s financial condition. Investments are analyzed in the section immediately below, while the loan and lease
portfolio and other factors affecting earning assets are discussed in the sections following investments.
INVESTMENTS
The Company’s investments can at any given time consist of
debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits
of other banks, surplus interest-earning balances in our Federal Reserve Bank (“FRB”) account, and overnight fed funds
sold. Surplus FRB balances and fed funds sold to correspondent banks represent the temporary investment of excess liquidity. The
Company’s investments serve several purposes: 1) they provide liquidity to even out cash flows from the loan and deposit
activities of customers; 2) they provide a source of pledged assets for securing public deposits, bankruptcy deposits and certain
borrowed funds which require collateral; 3) they constitute a large base of assets with maturity and interest rate characteristics
that can be changed more readily than the loan portfolio, to better match changes in the deposit base and other funding sources
of the Company; 4) they are another interest-earning option for surplus funds when loan demand is light; and 5) they can provide
partially tax exempt income. Aggregate investments totaled $592 million, or 29% of total assets at June 30, 2017, compared to $571
million, or 28% of total assets at December 31, 2016.
We had no fed funds sold at the end of the reporting periods, and
interest-bearing balances at other banks declined to $13 million at June 30, 2017 from $41 million at December 31, 2016 as excess
liquidity was repositioned into longer-term investment securities. The Company’s investment portfolio had a book balance
of $580 million at June 30, 2017, reflecting an increase of $49 million, or 9%, for the first six months of 2017. The Company carries
investments at their fair market values. We currently have the intent and ability to hold our investment securities to maturity,
but the securities are all marketable and are classified as “available for sale” to allow maximum flexibility with
regard to interest rate risk and liquidity management. The expected average life for bonds in our investment portfolio was 3.9
years and their average effective duration was 2.9 years at June 30, 2017, with the duration up slightly from 2.6 years at year-end
2016 due to the addition of longer-term municipal bonds.
The following table sets forth the amortized cost and fair market
value of Company’s investment portfolio by investment type as of the dates noted:
Investment Portfolio
(dollars in thousands, unaudited)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair Market
|
|
|
Amortized
|
|
|
Fair Market
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agencies
|
|
$
|
25,793
|
|
|
$
|
25,717
|
|
|
$
|
26,926
|
|
|
$
|
26,468
|
|
Mortgage-backed securities
|
|
|
414,065
|
|
|
|
412,745
|
|
|
|
391,555
|
|
|
|
387,876
|
|
State & political subdivisions
|
|
|
136,554
|
|
|
|
139,632
|
|
|
|
114,140
|
|
|
|
114,193
|
|
Equity securities
|
|
|
494
|
|
|
|
1,487
|
|
|
|
500
|
|
|
|
1,546
|
|
Total securities
|
|
$
|
576,906
|
|
|
$
|
579,581
|
|
|
$
|
533,121
|
|
|
$
|
530,083
|
|
The net unrealized gain on our investment portfolio, or the difference
between the fair market value and amortized cost, was $2.7 million at June 30, 2017, an absolute difference of $5.7 million relative
to the net unrealized loss of $3.0 million at December 31, 2016 due primarily to lower long-term interest rates. The balance of
US Government agency securities declined by close $1 million, or 3%, during the first six months of 2017 due primarily to bond
maturities. Mortgage-backed securities increased by $25 million, or 6%, due to bond purchases and higher market valuations, net
of prepayments in the portfolio. Municipal bond balances were also up by over $25 million, or 22%, due to bond purchases and increases
in market valuations. All municipal bonds purchased in recent periods have strong underlying ratings, and all municipal bonds in
our portfolio undergo a detailed quarterly analysis for potential impairment. The balance of other securities declined by $59,000,
or 4%, due to a lower market value for our marketable equity securities.
Investment securities that were pledged as collateral for Federal
Home Loan Bank borrowings, repurchase agreements, public deposits and other purposes as required or permitted by law totaled $193
million at June 30, 2017 and $194 million at December 31, 2016, leaving $385 million in unpledged debt securities at June 30, 2017
and $335 million at December 31, 2016. Securities that were pledged in excess of actual pledging needs and were thus available
for liquidity purposes, if needed, totaled $46 million at June 30, 2017 and $51 million at December 31, 2016.
Loan AND LEASE Portfolio
Despite a drop of $36 million in mortgage warehouse balances, total
loans and leases, gross of the associated allowance for losses and deferred fees and origination costs, reflect a net increase
of $37 million, or 3%, to $1.299 billion at June 30, 2017 from $1.263 billion at December 31, 2016. A distribution of the Company’s
loans showing the balance and percentage of loans by type is presented for the noted periods in the table below. The balances in
the table are before deferred or unamortized loan origination, extension, or commitment fees, and deferred origination costs. While
not reflected in the loan totals and not currently comprising a material segment of our lending activities, the Company also occasionally
originates and sells, or participates out portions of, loans to non-affiliated investors.
Loan and Lease Distribution
(dollars in thousands, unaudited)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
|
$
|
44,248
|
|
|
$
|
32,417
|
|
Other construction/land
|
|
|
47,365
|
|
|
|
40,650
|
|
1-4 family - closed-end
|
|
|
150,192
|
|
|
|
137,143
|
|
Equity lines
|
|
|
41,707
|
|
|
|
43,443
|
|
Multi-family residential
|
|
|
31,063
|
|
|
|
31,631
|
|
Commercial real estate- owner occupied
|
|
|
257,385
|
|
|
|
253,535
|
|
Commercial real estate- non-owner occupied
|
|
|
279,471
|
|
|
|
244,198
|
|
Farmland
|
|
|
136,927
|
|
|
|
134,480
|
|
Total real estate
|
|
|
988,358
|
|
|
|
917,497
|
|
Agricultural
|
|
|
54,436
|
|
|
|
46,229
|
|
Commercial and industrial
|
|
|
118,898
|
|
|
|
123,595
|
|
Mortgage warehouse lines
|
|
|
126,633
|
|
|
|
163,045
|
|
Consumer loans
|
|
|
10,914
|
|
|
|
12,165
|
|
Total loans and leases
|
|
$
|
1,299,239
|
|
|
$
|
1,262,531
|
|
Percentage of Total Loans and Leases
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
|
|
3.41
|
%
|
|
|
2.57
|
%
|
Other construction/land
|
|
|
3.65
|
%
|
|
|
3.22
|
%
|
1-4 family - closed-end
|
|
|
11.56
|
%
|
|
|
10.86
|
%
|
Equity lines
|
|
|
3.21
|
%
|
|
|
3.44
|
%
|
Multi-family residential
|
|
|
2.39
|
%
|
|
|
2.51
|
%
|
Commercial real estate- owner occupied
|
|
|
19.81
|
%
|
|
|
20.08
|
%
|
Commercial real estate- non-owner occupied
|
|
|
21.51
|
%
|
|
|
19.34
|
%
|
Farmland
|
|
|
10.54
|
%
|
|
|
10.65
|
%
|
Total real estate
|
|
|
76.08
|
%
|
|
|
72.67
|
%
|
Agricultural
|
|
|
4.19
|
%
|
|
|
3.66
|
%
|
Commercial and industrial
|
|
|
9.15
|
%
|
|
|
9.79
|
%
|
Mortgage warehouse lines
|
|
|
9.75
|
%
|
|
|
12.92
|
%
|
Consumer loans
|
|
|
0.83
|
%
|
|
|
0.96
|
%
|
Total loans and leases
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
For the first six months of 2017, total real estate loans
increased by $71 million, or 8%, due primarily to growth in loans secured by commercial real estate and residential
properties, and agricultural production loans were also up by over $8 million, or 18%. Net growth in agricultural loans,
especially those secured by farmland, was negatively impacted by the prepayment of a $7 million dairy loan subsequent to the
borrower’s sale of land adjacent to the business in the second quarter of 2017. As noted, outstanding balances on
mortgage warehouse lines were down $36 million, or 22%, due to a drop in utilization on those lines to 35% at June 30, 2017
from 48% at December 31, 2016. Commercial loan and lease balances reflect a net decline of $5 million, or 4%, due to paydowns
in the portfolio, although we are hopeful that our implementation of an online lending platform in the first quarter of 2017
will have a positive impact on commercial loan volume going forward. Consumer loans declined by $1 million, or 10%, but
this segment of the portfolio could also eventually be favorably affected by our new online lending solution. The
Company’s balance of loan participations purchased was down during the first six months of 2017, to $37 million at June
30, 2017 from $41 million at December 31, 2016, although we continue to actively seek quality loan participations to
supplement organic growth.
Management remains focused on loan growth, which combined with stronger
economic activity in some of our markets has led to a steady increase in our pipeline of loans in process of approval in recent
periods. However, we are still experiencing a relatively high level of prepayments and mortgage warehouse lending is subject to
significant fluctuations, thus no assurance can be provided with regard to future growth in aggregate loan balances.
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans for which the Company
is no longer accruing interest, and foreclosed assets including mobile homes and OREO. If the Company grants a concession to a
borrower in financial difficulty, the loan falls into the category of a troubled debt restructuring (“TDR”). TDRs may
be classified as either nonperforming or performing loans depending on their accrual status. The following table presents comparative
data for the Company’s nonperforming assets and performing TDRs as of the dates noted:
Nonperforming Assets and Performing Troubled Debt Restructurings
(dollars in thousands, unaudited)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
June 30, 2016
|
|
NON-ACCRUAL LOANS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other construction/land
|
|
$
|
140
|
|
|
$
|
558
|
|
|
$
|
257
|
|
1-4 family - closed-end
|
|
|
869
|
|
|
|
963
|
|
|
|
446
|
|
Equity lines
|
|
|
1,715
|
|
|
|
1,926
|
|
|
|
1,630
|
|
Commercial real estate- owner occupied
|
|
|
1,310
|
|
|
|
1,572
|
|
|
|
2,276
|
|
Commercial real estate- non-owner occupied
|
|
|
-
|
|
|
|
67
|
|
|
|
235
|
|
Farmland
|
|
|
310
|
|
|
|
39
|
|
|
|
43
|
|
TOTAL REAL ESTATE
|
|
|
4,344
|
|
|
|
5,125
|
|
|
|
4,887
|
|
Agriculture
|
|
|
-
|
|
|
|
89
|
|
|
|
65
|
|
Commercial and industrial
|
|
|
988
|
|
|
|
692
|
|
|
|
529
|
|
Consumer loans
|
|
|
320
|
|
|
|
459
|
|
|
|
463
|
|
TOTAL NONPERFORMING LOANS
|
|
|
5,652
|
|
|
|
6,365
|
|
|
|
5,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets
|
|
|
2,141
|
|
|
|
2,225
|
|
|
|
2,897
|
|
Total nonperforming assets
|
|
$
|
7,793
|
|
|
$
|
8,590
|
|
|
$
|
8,841
|
|
Performing TDR’s
(1)
|
|
$
|
13,640
|
|
|
$
|
14,182
|
|
|
$
|
14,716
|
|
Nonperforming loans as a % of total gross loans and leases
|
|
|
0.44
|
%
|
|
|
0.50
|
%
|
|
|
0.51
|
%
|
Nonperforming assets as a % of total gross loans and leases and foreclosed assets
|
|
|
0.60
|
%
|
|
|
0.68
|
%
|
|
|
0.76
|
%
|
(1)
Performing TDRs are not included in nonperforming
loans above, nor are they included in the numerators used to calculate the ratios disclosed in this table.
Total nonperforming assets were reduced by $797,000, or 9%, during
the first six months of 2017. Nonperforming loans declined by $713,000, or 11%, while foreclosed assets were down $84,000, or 4%.
Non-accruing loan balances secured by real estate comprised $4.3 million, or 77%, of total nonperforming loans at June 30, 2017,
and reflect a decline of $781,000 since December 31, 2016 due primarily to principal pay-downs and balances returned to accrual
status. The balance of nonperforming loans at June 30, 2017 includes $3.9 million in TDRs and other loans that were paying as agreed,
but which met the technical definition of nonperforming loans and were classified as such. As shown in the table, we also had $13.6
million in loans classified as performing TDRs for which we were still accruing interest as of June 30, 2017, a reduction of $542,000,
or 4%, relative to December 31, 2016.
As noted above, foreclosed assets were reduced by $84,000, or 4%,
during the first six months of 2017 due to the sale of certain properties and $75,000 in write-downs on OREO, partially offset
by additions totaling $115,000. The balance of foreclosed assets had a carrying value of $2.1 million at June 30, 2017, and was
comprised of 11 properties classified as OREO and two mobile homes. At the end of 2016 foreclosed assets totaled just over $2.2
million, also consisting of 11 properties classified as OREO and two mobile homes. All foreclosed assets are periodically evaluated
and written down to their fair value less expected disposition costs, if lower than the then-current carrying value.
Total nonperforming assets were 0.60% of gross loans and leases
plus foreclosed assets at June 30, 2017, down from 0.68% at December 31, 2016 and 0.76% at June 30, 2016. An action plan is in
place for each of our non-accruing loans and foreclosed assets and they are all being actively managed. Collection efforts are
continuously pursued for all nonperforming loans, but we cannot provide assurance that they will be resolved in a timely manner
or that nonperforming balances will not increase.
Allowance for loan
and lease Losses
The allowance for loan and lease losses, a contra-asset, is established
through a provision for loan and lease losses. It is maintained at a level that is considered adequate to absorb probable losses
on specifically identified impaired loans, as well as probable incurred losses inherent in the remaining loan portfolio. Specifically
identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only
when sufficient cash payments are received subsequent to the charge off.
The Company’s allowance for loan and lease losses was $9.2
million, or 0.71% of gross loans at June 30, 2017, relative to $9.7 million, or 0.77% of gross loans at December 31, 2016. The
decline resulted from the charge-off of certain impaired loan balances against previously-established reserves, partially offset
by reserves provided for losses inherent in incremental loan balances and unanticipated charge-offs. Moreover, our need for loss
reserves has been favorably impacted in recent periods by loan growth in portfolio segments with relatively low historical loss
rates, by continued credit quality improvement in the performing loan portfolio in general as loans booked or renewed during or
since the great recession have been underwritten using tighter credit criteria, and by acquired loans that were booked at their
fair values and thus initially did not necessarily require loss reserves. The ratio of the allowance to nonperforming loans was
163.31% at June 30, 2017, relative to 152.41% at December 31, 2016 and 168.94% at June 30, 2016. A separate allowance of $344,000
for potential losses inherent in unused commitments is included in other liabilities at June 30, 2017.
The table that follows summarizes the activity in the allowance
for loan and lease losses for the noted periods:
Allowance
for Loan and Lease Losses
(dollars in thousands, unaudited)
|
|
For the three months
|
|
|
For the three months
|
|
|
For the six months
|
|
|
For the six months
|
|
|
For the year
|
|
|
|
ended June 30,
|
|
|
ended June 30,
|
|
|
ended June 30,
|
|
|
ended June 30,
|
|
|
ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average gross
loans and leases outstanding during period
|
|
$
|
1,249,663
|
|
|
$
|
1,084,738
|
|
|
$
|
1,225,078
|
|
|
$
|
1,073,627
|
|
|
$
|
1,153,240
|
|
Gross loans and leases
outstanding at end of period
|
|
$
|
1,299,239
|
|
|
$
|
1,155,262
|
|
|
$
|
1,299,239
|
|
|
$
|
1,155,262
|
|
|
$
|
1,262,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan and Lease Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
9,588
|
|
|
$
|
10,030
|
|
|
$
|
9,701
|
|
|
$
|
10,423
|
|
|
$
|
10,423
|
|
Provision charged to expense
|
|
|
300
|
|
|
|
-
|
|
|
|
300
|
|
|
|
-
|
|
|
|
-
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other Construction/Land
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
144
|
|
1-4 family - closed-end
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
97
|
|
|
|
97
|
|
Equity Lines
|
|
|
50
|
|
|
|
14
|
|
|
|
50
|
|
|
|
94
|
|
|
|
94
|
|
Multi-family residential
|
|
|
-
|
|
|
|
50
|
|
|
|
-
|
|
|
|
50
|
|
|
|
50
|
|
Commercial real estate-
owner occupied
|
|
|
8
|
|
|
|
1
|
|
|
|
87
|
|
|
|
23
|
|
|
|
108
|
|
Commercial real estate-
non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
469
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
TOTAL REAL ESTATE
|
|
|
58
|
|
|
|
71
|
|
|
|
144
|
|
|
|
280
|
|
|
|
962
|
|
Agricultural
|
|
|
22
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
Commercial & industrial
loans
|
|
|
354
|
|
|
|
66
|
|
|
|
384
|
|
|
|
174
|
|
|
|
344
|
|
Consumer
Loans
|
|
|
531
|
|
|
|
494
|
|
|
|
1,046
|
|
|
|
985
|
|
|
|
1,905
|
|
Total
|
|
$
|
965
|
|
|
$
|
631
|
|
|
$
|
1,596
|
|
|
$
|
1,439
|
|
|
$
|
3,211
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential
construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other Construction/Land
|
|
|
-
|
|
|
|
329
|
|
|
|
5
|
|
|
|
329
|
|
|
|
467
|
|
1-4 family - closed-end
|
|
|
2
|
|
|
|
3
|
|
|
|
5
|
|
|
|
4
|
|
|
|
15
|
|
Equity Lines
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
|
|
7
|
|
|
|
17
|
|
Multi-family residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate-
owner occupied
|
|
|
38
|
|
|
|
-
|
|
|
|
38
|
|
|
|
34
|
|
|
|
35
|
|
Commercial real estate-
non-owner occupied
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
|
|
23
|
|
|
|
449
|
|
Farmland
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
TOTAL REAL ESTATE
|
|
|
42
|
|
|
|
336
|
|
|
|
145
|
|
|
|
397
|
|
|
|
983
|
|
Agricultural
|
|
|
2
|
|
|
|
2
|
|
|
|
5
|
|
|
|
4
|
|
|
|
14
|
|
Commercial and Industrial
|
|
|
34
|
|
|
|
39
|
|
|
|
195
|
|
|
|
160
|
|
|
|
477
|
|
Consumer
Loans
|
|
|
229
|
|
|
|
266
|
|
|
|
480
|
|
|
|
497
|
|
|
|
1,015
|
|
Total
|
|
$
|
307
|
|
|
$
|
643
|
|
|
$
|
825
|
|
|
$
|
1,058
|
|
|
$
|
2,489
|
|
Net loan charge offs (recoveries)
|
|
$
|
658
|
|
|
$
|
(12
|
)
|
|
$
|
771
|
|
|
$
|
381
|
|
|
$
|
722
|
|
Balance at end of period
|
|
$
|
9,230
|
|
|
$
|
10,042
|
|
|
$
|
9,230
|
|
|
$
|
10,042
|
|
|
$
|
9,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Charge-offs to Average Loans and Leases (annualized)
|
|
|
0.21
|
%
|
|
|
-
|
|
|
|
0.13
|
%
|
|
|
0.07
|
%
|
|
|
0.06
|
%
|
Allowance
for Loan Losses to Gross Loans and Leases at End of Period
|
|
|
0.71
|
%
|
|
|
0.87
|
%
|
|
|
0.71
|
%
|
|
|
0.87
|
%
|
|
|
0.77
|
%
|
Allowance
for Loan Losses to NonPerforming Loans
|
|
|
163.31
|
%
|
|
|
168.94
|
%
|
|
|
163.31
|
%
|
|
|
168.94
|
%
|
|
|
152.41
|
%
|
Net
Loan Charge-offs to Allowance for Loan Losses at End of Period
|
|
|
7.13
|
%
|
|
|
-0.12
|
%
|
|
|
8.35
|
%
|
|
|
3.79
|
%
|
|
|
7.44
|
%
|
Net
Loan Charge-offs to
Provision
for Loan Losses
|
|
|
219.33
|
%
|
|
|
-
|
|
|
|
257.00
|
%
|
|
|
-
|
|
|
|
-
|
|
(1)
Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.
As reflected in the table above, the Company did not record a provision
for loan and lease losses during 2016, but a $300,000 provision was required in the second quarter of 2017 to cover net loan growth
and to replenish reserves subsequent to unanticipated charge-offs. Net loans charged off against the allowance totaled $771,000
in the first six months of 2017, including a $224,000 overdraft on a business account that did not previously have specifically
allocated reserves, compared to $381,000 in the first six months of 2016. Any shortfall in the allowance identified pursuant to
our analysis of remaining probable losses is covered by quarter-end. Our allowance for probable losses on specifically identified
impaired loans was increased by $43,000, or 3%, during the six months ended June 30, 2017, due to reserves required for certain
loans that were downgraded to non-performing status during that period net of the charge-off of losses against the allowance. The
allowance for probable losses inherent in non-impaired loans was reduced by $514,000, or 6%, during the first six months of 2017,
primarily from the impact of improved credit quality on required reserves, net of reserves provided to accommodate loan growth.
The “Provision for Loan and Lease Losses” section above includes additional details on our provision and its relationship
to actual charge-offs.
The Company’s allowance for loan and lease losses at June
30, 2017 represents Management’s best estimate of probable losses in the loan portfolio as of that date, but no assurance
can be given that the Company will not experience substantial losses relative to the size of the allowance. Furthermore, fluctuations
in credit quality, changes in economic conditions, updated accounting or regulatory requirements, and/or other factors could induce
us to augment or reduce the allowance.
OFF-BALANCE
SHEET ARRANGEMENTS
The Company maintains commitments to extend credit in the normal
course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. Unused
commitments to extend credit totaled $584 million at June 30, 2017 and $464 million at December 31, 2016, although it is not likely
that all of those commitments will ultimately be drawn down. Unused commitments represented approximately 45% of gross loans outstanding
at June 30, 2017 and 37% at December 31, 2016, with the increase due primarily to lower utilization on mortgage warehouse lines
and an increase in commercial construction loan commitments. The Company also had undrawn letters of credit issued to customers
totaling $8 million at June 30, 2017 and $9 million at December 31, 2016. The effect on the Company’s revenues, expenses,
cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there
is no guarantee that the lines of credit will ever be used. However, the “Liquidity” section in this Form 10-Q outlines
resources available to draw upon should we be required to fund a significant portion of unused commitments.
In addition to unused commitments to provide credit, the Company
is utilizing an $87 million letter of credit issued by the Federal Home Loan Bank on the Company’s behalf as security for
certain deposits and to facilitate certain credit arrangements with the Company’s customers. That letter of credit is backed
by loans that are pledged to the FHLB by the Company. For more information regarding the Company’s off-balance sheet arrangements,
see Note 8 to the financial statements located elsewhere herein.
OTHER
ASSETS
The balance of cash and due from banks depends on the timing of
collection of outstanding cash items (checks), the level of cash maintained on hand at our branches, and our reserve requirement
among other things, and is subject to significant fluctuation in the normal course of business. While cash flows are normally predictable
within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight
loans to, and borrowings from, correspondent banks, including the Federal Reserve Bank and the Federal Home Loan Bank. Should a
large “short” overnight position persist for any length of time, the Company typically raises money through focused
retail deposit gathering efforts or by adding brokered time deposits. If a “long” position is prevalent, the Company
will let brokered deposits or other wholesale borrowings roll off as they mature, or might invest excess liquidity in higher-yielding,
longer-term bonds. The Company’s balance of non-interest earning cash and due from banks was $64 million at June 30, 2017
and $79 million at December 31, 2016, with the drop due primarily to a lower level of cash items in process of collection. The
average balance for the first six months of 2017 was $48 million, relative to an average balance of $43 million for the first six
months of 2016. The increase in the average balance in 2017 is largely a function of cash required for the former Coast branches,
and for our newer de novo branches.
Foreclosed assets are discussed above, in the section titled “Nonperforming
Assets.” Net premises and equipment was down $455,000, or 2%, during the first six months of 2017, as the result of depreciation.
Goodwill was $8 million at June 30, 2017, unchanged for the first half. Other intangible assets were down $214,000, or 8%, during
the first six months, due to amortization on core deposit intangibles. The Company’s goodwill and other intangible assets
are evaluated annually for potential impairment, and pursuant to that analysis Management has concluded that no impairment exists
as of June 30, 2017. Company owned life insurance, with a balance of $45 million at June 30, 2017, is discussed above in the “Non-Interest
Income and Non-Interest Expense” section.
The aggregate balance of “Other assets” was $42.2 million
at June 30, 2017, up by $1.5 million, or 4%, for the first six months of 2017. The increase is due to the net addition of $2.5
million to our investment in low-income housing tax credit funds and a $1.9 million increase in our capital commitment to a small
business investment corporation, offset in part by a $2.3 million reduction in our net deferred tax asset. At June 30, 2017, the
balance of other assets included as its largest components a $9.3 million investment in low-income housing tax credit funds, an
$8.7 million investment in restricted stock, a net deferred tax asset of $7.2 million, accrued interest receivable totaling $6.5
million, a $3.2 million investment in a small business investment corporation, and $2.5 million in prepaid current income taxes.
Restricted stock is comprised primarily of Federal Home Loan Bank of San Francisco stock held in conjunction with our FHLB borrowings,
and is not deemed to be marketable or liquid. Our net deferred tax asset is evaluated as of every reporting date pursuant to FASB
guidance, and we have determined that no impairment exists.
DEPOSITS
AND INTEREST BEARING LIABILITIES
DEPOSITS
Deposits are another key balance sheet component impacting the Company’s
net interest margin and other profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company’s
net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly
non-maturity deposits such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information
concerning average balances and rates paid by deposit type for the three- and six-month periods ended June 30, 2017 and 2016 is
included in the Average Balances and Rates table appearing above, in the section titled “Net Interest Income and Net Interest
Margin.” A distribution of the Company’s deposits showing the balance and percentage of total deposits by type is presented
as of the dates indicated in the following table.
Deposit
Distribution
(dollars
in thousands, unaudited)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Non-interest bearing demand deposits
|
|
$
|
557,617
|
|
|
$
|
524,552
|
|
Interest bearing demand deposits
|
|
|
161,979
|
|
|
|
132,586
|
|
NOW
|
|
|
379,197
|
|
|
|
366,238
|
|
Savings
|
|
|
232,456
|
|
|
|
215,693
|
|
Money market
|
|
|
119,714
|
|
|
|
119,417
|
|
CDAR’s, under $250,000
|
|
|
-
|
|
|
|
251
|
|
Time, under $250,000
|
|
|
151,773
|
|
|
|
152,561
|
|
Time, $250,000 or more
|
|
|
189,121
|
|
|
|
184,173
|
|
Total deposits
|
|
$
|
1,791,857
|
|
|
$
|
1,695,471
|
|
|
|
|
|
|
|
|
|
|
Percentage
of Total Deposits
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
|
|
31.12
|
%
|
|
|
30.94
|
%
|
Interest bearing demand deposits
|
|
|
9.04
|
%
|
|
|
7.82
|
%
|
NOW
|
|
|
21.16
|
%
|
|
|
21.60
|
%
|
Savings
|
|
|
12.97
|
%
|
|
|
12.72
|
%
|
Money market
|
|
|
6.68
|
%
|
|
|
7.04
|
%
|
CDAR’s, under $250,000
|
|
|
-
|
|
|
|
0.01
|
%
|
Time, under $250,000
|
|
|
8.47
|
%
|
|
|
9.01
|
%
|
Time, $250,000 or more
|
|
|
10.56
|
%
|
|
|
10.86
|
%
|
Total
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Total deposit balances reflect net organic growth of $96 million,
or 6%, during the first six months of 2017, due primarily to an increase of $92 million, or 7%, in core non-maturity deposits.
Despite a drop in in the first quarter, non-interest bearing transaction account balances rebounded in the second quarter due in
part to the addition of a few large-balance business accounts, and they reflect net growth of $33 million, or 6%, for the first
six months of 2017. In addition, interest-bearing demand deposits were up $29 million, or 22%, NOW accounts increased by $13 million,
or 4%, and savings deposits rose by $17 million, or 8%. Total time deposits were up by $4 million, or 1%, as growth in larger time
deposits more than offset a slight decline in deposits under $250,000. Management is of the opinion that a relatively high level
of core customer deposits is one of the Company’s key strengths, and we continue to strive for core deposit retention and
growth. Our deposit-targeted promotions are still favorably impacting growth in the number of accounts and it is expected that
balances in these accounts will grow over time consistent with our past experience, although no assurance can be provided with
regard to future core deposit increases.
OTHER INTEREST-BEARING LIABILITIES
The Company’s non-deposit borrowings may, at any given time,
include fed funds purchased from correspondent banks, borrowings from the Federal Home Loan Bank, advances from the Federal Reserve
Bank, securities sold under agreement to repurchase, and/or junior subordinated debentures. The Company uses short-term FHLB advances
and fed funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy
funding needs from increased loan demand, and for other short-term purposes. The FHLB line is committed, but the amount of available
credit depends on the level of pledged collateral.
Total non-deposit interest-bearing liabilities were reduced by $62
million, or 57%, in the first six months of 2017, due to a drop in FHLB borrowings facilitated by the increase in deposits. There
were no overnight borrowings from the FHLB at June 30, 2017 as compared to $65 million at December 31, 2016, and there were no
overnight fed funds purchased or advances from the FRB on our books at June 30, 2017 or December 31, 2016. Repurchase agreements
totaled $11 million at June 30, 2017, an increase of $3 million relative to their balance at year-end 2016. Repurchase agreements
represent “sweep accounts”, where commercial deposit balances above a specified threshold are transferred at the close
of each business day into non-deposit accounts secured by investment securities. The Company had junior subordinated debentures
totaling $34 million at June 30, 2017 and December 31, 2016, in the form of long-term borrowings from trust subsidiaries formed
specifically to issue trust preferred securities.
OTHER NON-INTEREST BEARING LIABILITIES
Other liabilities are principally comprised of accrued interest
payable, other accrued but unpaid expenses, and certain clearing amounts. Other liabilities increased by only $185,000, or 1%,
during the first six months of 2017. There were sizeable increases in accruals for capital commitments to low-income housing tax
credit funds and a small business investment corporation, but those were largely offset by a lower reserve for income taxes, a
seasonal reduction in expense accruals, and lower balances in clearing accounts.
liquidity
and market RisK MANAGEMENT
LIQUIDITY
Liquidity management refers to the Company’s ability to maintain
cash flows that are adequate to fund operations and meet other obligations and commitments in a timely and cost-effective manner.
Detailed cash flow projections are reviewed by Management on a monthly basis, with various stress scenarios applied to assess our
ability to meet liquidity needs under unusual or adverse conditions. Liquidity ratios are also calculated and reviewed on a regular
basis. While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored and we are
focused on maintaining adequate liquidity resources to draw upon should unexpected needs arise.
The Company, on occasion, experiences cash needs as the result of
loan growth, deposit outflows, asset purchases or liability repayments. To meet short-term needs, the Company can borrow overnight
funds from other financial institutions, draw advances via Federal Home Loan Bank lines of credit, or solicit brokered deposits
if deposits are not immediately obtainable from local sources. Availability on lines of credit from correspondent banks and the
FHLB totaled $398 million at June 30, 2017. An additional $96 million in credit is available from the FHLB if the Company pledges
sufficient additional collateral and maintains the required amount of FHLB stock. The Company is also eligible to borrow approximately
$79 million at the Federal Reserve Discount Window, if necessary, based on pledged assets at June 30, 2017. Furthermore, funds
can be obtained by drawing down the Company’s correspondent bank deposit accounts, or by liquidating unpledged investments
or other readily saleable assets. In addition, the Company can raise immediate cash for temporary needs by selling under agreement
to repurchase those investments in its portfolio which are not pledged as collateral. As of June 30, 2017, unpledged debt securities
plus pledged securities in excess of current pledging requirements comprised $431 million of the Company’s investment balances,
compared to $386 million at December 31, 2016. Other forms of balance sheet liquidity include but are not necessarily limited to
any outstanding fed funds sold and vault cash. The Company has a higher level of actual balance sheet liquidity than might otherwise
be the case, since we utilize a letter of credit from the FHLB rather than investment securities for certain pledging requirements.
That letter of credit, which is backed by loans that are pledged to the FHLB by the Company, totaled $87 million at June 30, 2017.
Management is of the opinion that available investments and other potentially liquid assets, along with the standby funding sources
it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs.
The Company’s net loans
to assets and available investments to assets ratios were 63% and 21%, respectively, at June 30, 2017, as compared to internal
policy guidelines of “less than 78%” and “greater than 3%.” Other liquidity ratios reviewed periodically
by Management and the Board include net loans to total deposits and wholesale funding to total assets (including ratios and sub-limits
for the various components comprising wholesale funding), which were well within policy guidelines at June 30, 2017. Favorable
trends in core deposits and relatively high levels of liquid investments have had a positive impact on our liquidity position in
recent periods, but no assurance can be provided that our liquidity will continue at current robust levels.
The holding company’s
primary uses of funds include operating expenses incurred in the normal course of business, shareholder dividends, and stock repurchases.
Its primary source of funds is dividends from the Bank, since the holding company does not conduct regular banking operations.
Management anticipates that the Bank will have sufficient earnings to provide dividends to the holding company to meet its funding
requirements for the foreseeable future. Both the holding company and the Bank are subject to legal and regulatory limitations
on dividend payments, as outlined in Item 5(c) Dividends in the Company’s Annual Report on Form 10-K for the year ended December
31, 2016 which was filed with the SEC.
INTEREST RATE RISK MANAGEMENT
Market risk arises from changes in interest rates, exchange rates,
commodity prices and equity prices. The Company does not engage in the trading of financial instruments, nor does it have exposure
to currency exchange rates. Our market risk exposure is primarily that of interest rate risk, and we have established policies
and procedures to monitor and limit our earnings and balance sheet exposure to changes in interest rates. The principal objective
of interest rate risk management is to manage the financial components of the Company’s balance sheet in a manner that will
optimize the risk/reward equation for earnings and capital under a variety of interest rate scenarios.
To identify areas of potential exposure to interest rate changes,
we utilize commercially available modeling software to perform earnings simulations and calculate the Company’s market value
of portfolio equity under varying interest rate scenarios every month. The model imports relevant information for the Company’s
financial instruments and incorporates Management’s assumptions on pricing, duration, and optionality for anticipated new
volumes. Various rate scenarios consisting of key rate and yield curve projections are then applied in order to calculate the expected
effect of a given interest rate change on interest income, interest expense, and the value of the Company’s financial instruments.
The rate projections can be shocked (an immediate and parallel change in all base rates, up or down), ramped (an incremental increase
or decrease in rates over a specified time period), economic (based on current trends and econometric models) or stable (unchanged
from current actual levels).
We use eight standard interest rate scenarios in conducting our
rolling 12-month net interest income simulations: “stable,” upward shocks of 100, 200, 300 and 400 basis points, and
downward shocks of 100, 200, and 300 basis points. Pursuant to policy guidelines, we typically attempt to limit the projected decline
in net interest income relative to the stable rate scenario to no more than 5% for a 100 basis point (bp) interest rate shock,
10% for a 200 bp shock, 15% for a 300 bp shock, and 20% for a 400 bp shock. As of June 30, 2017 the Company had the following estimated
net interest income sensitivity profile, without factoring in any potential negative impact on spreads resulting from competitive
pressures or credit quality deterioration:
Immediate Change in Rate
|
|
-300 bp
|
|
|
-200 bp
|
|
|
-100 bp
|
|
|
+100 bp
|
|
|
+200 bp
|
|
|
+300 bp
|
|
|
+400 bp
|
|
Change in Net Int. Inc. (in $000’s)
|
|
|
-$19,489
|
|
|
|
-$13,391
|
|
|
|
-$6,278
|
|
|
|
+$896
|
|
|
|
+$1,545
|
|
|
|
+$2,133
|
|
|
|
+$2,532
|
|
% Change
|
|
|
-25.60
|
%
|
|
|
-17.59
|
%
|
|
|
-8.25
|
%
|
|
|
+1.18
|
%
|
|
|
+2.03
|
%
|
|
|
+2.80
|
%
|
|
|
+3.33
|
%
|
Our current simulations indicate that the Company has an asset-sensitive
profile, meaning that net interest income increases with a parallel shift up in the yield curve but a drop in interest rates could
have a negative impact. This profile is consistent with the Company’s relatively large balance of less rate-sensitive non-maturity
deposits and large volume of variable-rate loans, which contribute to higher net interest income in rising rate scenarios and compression
in net interest income in declining rate scenarios.
If there were an immediate and sustained upward adjustment of 100
basis points in interest rates, all else being equal, net interest income over the next 12 months is projected to improve by $896,000,
or 1.18%, relative to a stable interest rate scenario, with the favorable variance expanding the higher interest rates rise. If
interest rates were to decline by 100 basis points, however, net interest income would likely be around $6.278 million lower than
in a stable interest rate scenario, for a negative variance of 8.25%. The unfavorable variance increases when rates drop 200 or
300 basis points, due to the fact that certain deposit rates are already relatively low (on NOW accounts and savings accounts,
for example), and will hit a natural floor of close to zero while non-floored variable-rate loan yields continue to drop. This
effect is exacerbated by accelerated prepayments on fixed-rate loans and mortgage-backed securities when rates decline, although
rate floors on some of our variable-rate loans partially offset other negative pressures. While we view material interest rate
reductions as unlikely, the potential percentage drop in net interest income exceeds our internal policy guidelines in declining
interest rate scenarios and we will continue to monitor our interest rate risk profile and take corrective action as deemed appropriate.
In addition to the net interest income simulations shown above,
we run stress scenarios on the Bank’s balance sheet modeling the possibility of no balance sheet growth, the potential runoff
of “surge” core deposits which flowed into the Company in the most recent economic cycle, and potential unfavorable
movement in deposit rates relative to yields on earning assets. Projected net interest income is roughly $2 million lower in the
stable rate scenario if no balance sheet growth is assumed, but the rate-driven variances predicted for net interest income in
a static growth environment are similar to the changes noted above for our standard projections. When a greater level of non-maturity
deposit runoff is assumed or unfavorable deposit rate changes are factored into the model, projected net interest income in declining
and flat rate scenarios does not change materially relative to standard rate projections, but the benefit we would otherwise experience
in rising rate scenarios is diminished and net interest income remains relatively flat or declines slightly.
The economic value (or “fair value”) of financial instruments
on the Company’s balance sheet will also vary under the interest rate scenarios previously discussed. The difference between
the projected fair value of the Company’s financial assets and the fair value of its financial liabilities is referred to
as the economic value of equity (“EVE”), and changes in EVE under different interest rate scenarios are effectively
a gauge of the Company’s longer-term exposure to interest rate fluctuations. Fair values for financial instruments are estimated
by discounting projected cash flows (principal and interest) at projected replacement interest rates for each account type, while
the fair value of non-financial accounts is assumed to equal their book value for all rate scenarios. An economic value simulation
is a static measure utilizing balance sheet accounts at a given point in time, and the measurement can change substantially over
time as the characteristics of the Company’s balance sheet evolve and interest rate and yield curve assumptions are updated.
The change in economic value under different interest rate scenarios
depends on the characteristics of each class of financial instrument, including stated interest rates or spreads relative to current
or projected market-level interest rates or spreads, the likelihood of principal prepayments, whether contractual interest rates
are fixed or floating, and the average remaining time to maturity. As a general rule, fixed-rate financial assets become more valuable
in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as
interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater
the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial
instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical patterns and
Management’s best estimates. The table below shows estimated changes in the Company’s EVE as of June 30, 2017, under
different interest rate scenarios relative to a base case of current interest rates:
Immediate Change
in Rate
|
|
-300 bp
|
|
|
-200 bp
|
|
|
-100 bp
|
|
|
+100 bp
|
|
|
+200 bp
|
|
|
+300 bp
|
|
|
+400 bp
|
|
Change in EVE (in $000’s)
|
|
|
-$104,667
|
|
|
|
-$121,769
|
|
|
|
-$74,555
|
|
|
|
+$45,787
|
|
|
|
+$70,729
|
|
|
|
+$85,699
|
|
|
|
+$92,989
|
|
% Change
|
|
|
-24.25
|
%
|
|
|
-28.21
|
%
|
|
|
-17.27
|
%
|
|
|
+10.61
|
%
|
|
|
+16.38
|
%
|
|
|
+19.85
|
%
|
|
|
+21.54
|
%
|
The table shows that our EVE will generally deteriorate in declining
rate scenarios, but should benefit from a parallel shift upward in the yield curve. While still negative relative to the base case,
we see a favorable swing in EVE as interest rates drop more than 200 basis points. This is due to the relative durations of our
fixed-rate assets and liabilities, combined with the optionality inherent in our balance sheet. As noted previously, however, Management
is of the opinion that the potential for a significant rate decline is low. We also run stress scenarios for the Bank’s EVE
to simulate the possibility of higher loan prepayment rates, unfavorable changes in deposit rates, and higher deposit decay rates.
Model results are highly sensitive to changes in assumed decay rates for non-maturity deposits, in particular.
CAPITAL
RESOURCES
The Company had total shareholders’ equity of $216.1 million
at June 30, 2017, comprised of $73.6 million in common stock, $3.0 million in additional paid-in capital, $138.1 million in retained
earnings, and accumulated other comprehensive income of $1.6 million. At the end of 2016, total shareholders’ equity was
$205.9 million. The increase of $10.2 million, or 5%, in shareholders’ equity during the first six months of 2017 is from
the addition of income, the impact of stock options exercised, and a $3 million absolute increase in accumulated other comprehensive
income, net of dividends paid. There were no share repurchases executed by the Company during the quarter.
The Company uses a variety of measures to evaluate its capital adequacy,
including risk-based capital and leverage ratios that are calculated separately for the Company and the Bank. Management reviews
these capital measurements on a quarterly basis and takes appropriate action to help ensure that they meet or surpass established
internal and external guidelines. As permitted by the regulators for financial institutions that are not deemed to be “advanced
approaches” institutions, the Company has elected to opt out of the Basel III requirement to include accumulated other comprehensive
income in risk-based capital. The following table sets forth the consolidated Company’s and the Bank’s regulatory capital
ratios as of the dates indicated.
Regulatory Capital Ratios
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
Minimum Requirement to be Well Capitalized
|
Sierra Bancorp
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital to Risk-weighted Assets
|
|
|
14.14%
|
|
|
14.09%
|
|
|
6.50%
|
Tier 1 Capital to Risk-weighted Assets
|
|
|
16.52%
|
|
|
16.53%
|
|
|
8.00%
|
Total Capital to Risk-weighted Assets
|
|
|
17.18%
|
|
|
17.25%
|
|
|
10.00%
|
Tier 1 Capital to Adjusted Average Assets (“Leverage Ratio”)
|
|
|
11.81%
|
|
|
11.92%
|
|
|
5.00%
|
|
|
|
|
|
|
|
|
|
|
Bank of the Sierra
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital to Risk-weighted Assets
|
|
|
16.32%
|
|
|
16.26%
|
|
|
6.50%
|
Tier 1 Capital to Risk-weighted Assets
|
|
|
16.32%
|
|
|
16.26%
|
|
|
8.00%
|
Total Capital to Risk-weighted Assets
|
|
|
16.98%
|
|
|
16.97%
|
|
|
10.00%
|
Tier 1 Capital to Adjusted Average Assets (“Leverage Ratio”)
|
|
|
11.67%
|
|
|
11.73%
|
|
|
5.00%
|
We experienced minimal change in regulatory capital ratios during
the first six months of 2017, since the growth rate for risk-based capital was similar to growth in risk-adjusted assets. Our capital
ratios remain very strong relative to the median for peer financial institutions, and at June 30, 2017 were well above the threshold
for the Company and the Bank to be classified as “well capitalized,” the highest rating of the categories defined under
the Bank Holding Company Act and the Federal Deposit Insurance Corporation Improvement Act of 1991. We do not foresee any circumstances
that would cause the Company or the Bank to be less than well capitalized, although no assurance can be given that this will not
occur.
PART I – FINANCIAL INFORMATION
Item 3
QUALITATIVE & QUANTITATIVE DISCLOSURES
ABOUT MARKET RISK
The
information concerning quantitative and qualitative disclosures about market risk is included in Part I, Item 2 above. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Market Risk Management.”
PART I – FINANCIAL INFORMATION
Item 4
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and its Chief Financial
Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”) have concluded
that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that
material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those
entities, particularly during the period in which this quarterly report was being prepared.
Disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to
our Management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure, and that such information is recorded, processed, summarized, and reported within the time periods specified
by the SEC.
Changes in Internal Controls
There were no significant changes in the Company’s internal
controls over financial reporting that occurred in the second quarter of 2017 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.