UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

Commission file number:  000-33063

SIERRA BANCORP

(Exact name of Registrant as specified in its charter)

 

 

 

California

33-0937517

(State of Incorporation)

(IRS Employer Identification No)

 

86 North Main Street, Porterville, California 93257

(Address of principal executive offices)                  (Zip Code)

(559) 782-4900

(Registrant’s telephone number, including area code)

Not Applicable

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

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

 

 

 

 

 

 

Title of each class

    

Trading

Symbol(s)

    

Name of each exchange on which registered

Common Stock, no par value

 

BSRR

 

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes      No  

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).   Yes      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

Large Accelerated Filer

 

  

Accelerated Filer:

 

Non-accelerated Filer:

 

  

Smaller Reporting Company:

 

Emerging Growth Company:

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section7(a)(2)(B) of the Securities Act. 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of May 1, 2020, the registrant had 15,190,038 shares of common stock outstanding.

 

 

 

FORM 10-Q

Table of Contents

 

 

 

 

 

 

 

Page

Part I - Financial Information 

1

 

Item 1.  Financial Statements (Unaudited)

1

 

 

Consolidated Balance Sheets

1

 

 

Consolidated Statements of Income

2

 

 

Consolidated Statements of Comprehensive Income

3

 

 

Consolidated Statements of Changes In Stockholder’s Equity

4

 

 

Consolidated Statements of Cash Flows

5

 

 

Notes to Consolidated Financial Statements (Unaudited)

6

 

 

 

 

 

 

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

31

 

 

Forward-Looking Statements

31

 

 

Critical Accounting Policies

31

 

 

Overview of the Results of Operations and Financial Condition

32

 

 

Earnings Performance

35

 

 

 

Net Interest Income and Net Interest Margin

35

 

 

 

Provision for Loan and Lease Losses

38

 

 

 

Noninterest Income and Noninterest Expense

39

 

 

 

Provision for Income Taxes

40

 

 

Balance Sheet Analysis

41

 

 

 

Earning Assets

41

 

 

 

 

Investments

41

 

 

 

 

Loan and Lease Portfolio

42

 

 

 

 

Nonperforming Assets

43

 

 

 

 

Allowance for Loan and Lease Losses

44

 

 

 

 

Off-Balance Sheet Arrangements

47

 

 

 

Other Assets

47

 

 

 

Deposits and Interest-Bearing Liabilities

48

 

 

 

 

Deposits

48

 

 

 

 

Other Interest-Bearing Liabilities

48

 

 

 

Noninterest Bearing Liabilities

49

 

 

Liquidity and Market Risk Management

49

 

 

Capital Resources

52

 

 

 

 

 

 

Item 3.  Qualitative & Quantitative Disclosures about Market Risk

53

 

 

 

 

 

 

Item 4.  Controls and Procedures

54

 

 

Part II - Other Information 

55

 

Item 1.  - Legal Proceedings

55

 

Item 1A.  - Risk Factors

55

 

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

56

 

Item 3.  - Defaults upon Senior Securities

56

 

Item 4.  - Mine Safety Disclosures

56

 

Item 5.  - Other Information

56

 

Item 6.  - Exhibits

57

 

 

Signatures 

58

 

 

 

PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

SIERRA BANCORP

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

ASSETS

 

(unaudited)

 

(audited)

Cash and due from banks

 

$

 78,660

 

$

 65,556

Interest-bearing deposits in banks

 

 

28,332

 

 

14,521

Total cash & cash equivalents

 

 

106,992

 

 

80,077

Securities available-for-sale

 

 

620,154

 

 

600,799

Loans and leases:

 

 

 

 

 

 

Gross loans and leases

 

 

1,798,025

 

 

1,762,565

Allowance for loan and lease losses

 

 

(11,453)

 

 

(9,923)

Deferred loan and lease costs, net

 

 

2,741

 

 

2,896

Net loans and leases

 

 

1,789,313

 

 

1,755,538

Foreclosed assets

 

 

766

 

 

800

Premises and equipment, net

 

 

28,425

 

 

27,435

Goodwill

 

 

27,357

 

 

27,357

Other intangible assets, net

 

 

5,112

 

 

5,381

Bank-owned life insurance

 

 

50,722

 

 

50,517

Other assets

 

 

41,628

 

 

45,915

    Total assets

 

$

 2,670,469

 

$

 2,593,819

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Non-interest bearing

 

$

 704,700

 

$

 690,950

Interest bearing

 

 

1,474,691

 

 

1,477,424

Total deposits

 

 

2,179,391

 

 

2,168,374

Repurchase agreements

 

 

29,361

 

 

25,711

Short-term borrowings

 

 

74,100

 

 

20,000

Subordinated debentures, net

 

 

34,990

 

 

34,945

Other liabilities

 

 

33,168

 

 

35,504

Total liabilities

 

 

2,351,010

 

 

2,284,534

 

 

 

 

 

 

 

Commitments and contingent liabilities (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

Common stock, no par value; 24,000,000 shares authorized; 15,190,038 and 15,284,538 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

112,600

 

 

113,179

Additional paid-in capital

 

 

3,367

 

 

3,307

Retained earnings

 

 

189,882

 

 

186,867

Accumulated other comprehensive income (loss), net

 

 

13,610

 

 

5,932

Total shareholders' equity

 

 

319,459

 

 

309,285

    Total liabilities and shareholder's equity

 

$

 2,670,469

 

$

 2,593,819

 

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

1

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

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

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

    

2020

    

2019

Interest and dividend income

 

 

 

 

 

 

Loans and leases, including fees

 

$

22,112

 

$

23,748

Taxable securities

 

 

2,460

 

 

2,617

Tax-exempt securities

 

 

1,339

 

 

1,045

Federal funds sold and other

 

 

140

 

 

73

Total interest income

 

 

26,051

 

 

27,483

Interest expense

 

 

 

 

 

 

Deposits

 

 

1,834

 

 

2,955

Short-term borrowings

 

 

36

 

 

72

Subordinated debentures

 

 

394

 

 

483

Total interest expense

 

 

2,264

 

 

3,510

Net interest income

 

 

23,787

 

 

23,973

Provision for loan losses

 

 

1,800

 

 

300

Net interest income after provision for loan losses

 

 

21,987

 

 

23,673

Non-interest income

 

 

 

 

 

 

Service charges on deposits

 

 

3,183

 

 

2,943

Other income

 

 

2,923

 

 

2,963

Total non-interest income

 

 

6,106

 

 

5,906

Other operating expense

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,172

 

 

9,243

Occupancy and equipment

 

 

2,327

 

 

2,361

Other

 

 

5,319

 

 

6,248

Total other operating expense

 

 

17,818

 

 

17,852

Income before taxes

 

 

10,275

 

 

11,727

Provision for income taxes

 

 

2,468

 

 

2,832

Net income

 

$

7,807

 

$

8,895

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

Book value

 

$

21.03

 

$

18.53

Cash dividends

 

$

0.20

 

$

0.18

Earnings per share basic

 

$

0.51

 

$

0.58

Earnings per share diluted

 

$

0.51

 

$

0.58

Average shares outstanding, basic

 

 

15,262,252

 

 

15,311,154

Average shares outstanding, diluted

 

 

15,340,017

 

 

15,447,747

 

 

 

 

 

 

 

Total shareholder equity (in thousands)

 

$

319,459

 

$

284,068

Shares outstanding

 

 

15,190,038

 

 

15,328,030

Dividends paid (in thousands)

 

$

3,059

 

$

2,754

 

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

2

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

    

2020

    

2019

Net income

 

$

7,807

 

$

8,895

Other comprehensive income, before tax:

 

 

 

 

 

 

Unrealized gains on securities:

 

 

 

 

 

 

Unrealized holding gain arising during period

 

 

10,902

 

 

6,167

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

 

 

 —

 

 

(6)

Other comprehensive income, before tax

 

 

10,902

 

 

6,161

Income tax expense related to items of other comprehensive income, net of tax

 

 

(3,224)

 

 

(1,821)

Other comprehensive income

 

 

7,678

 

 

4,340

 

 

 

 

 

 

 

Comprehensive income

 

$

15,485

 

$

13,235


(1)

Amounts are included in net gains on investment securities available-for-sale on the Consolidated Statements of Income in noninterest revenue.  Income tax expense associated with the reclassification adjustment for the three months ended March 31, 2020 and 2019 was $0 thousand and $2 thousand respectively. 

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

3

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

 Paid In

 

Retained

 

Comprehensive

 

Shareholders'

 

    

Shares

    

Amount

    

Capital

    

 Earnings

    

(Loss) Income 

    

 Equity

Balance, December 31, 2018

 

15,300,460

 

$

 112,507

 

$

 3,066

 

$

 164,117

 

$

 (6,666)

 

$

 273,024

Net income

 

 

 

 

 

 

 

 

 

 

8,895

 

 

 

 

 

8,895

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

4,340

 

 

4,340

Exercise of stock options

 

27,570

 

 

494

 

 

(82)

 

 

 

 

 

 

 

 

412

Stock compensation costs

 

 

 

 

 

 

 

151

 

 

 

 

 

 

 

 

151

Cash dividends - $0.18 per share

 

 

 

 

 

 

 

 

 

 

(2,754)

 

 

 

 

 

(2,754)

Balance, March 31, 2019

 

15,328,030

 

$

 113,001

 

$

 3,135

 

$

 170,258

 

$

 (2,326)

 

$

 284,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

15,285,118

 

$

 113,179

 

$

 3,307

 

$

 186,867

 

$

 5,932

 

$

 309,285

Net income

 

 

 

 

 

 

 

 

 

 

7,807

 

 

 

 

 

7,807

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

7,678

 

 

7,678

Exercise of stock options

 

16,970

 

 

250

 

 

(69)

 

 

 

 

 

 

 

 

181

Stock compensation costs

 

 

 

 

 

 

 

129

 

 

 

 

 

 

 

 

129

Stock repurchase

 

(112,050)

 

 

(829)

 

 

 

 

 

(1,733)

 

 

 

 

 

(2,562)

Cash dividends - $0.20 per share

 

 

 

 

 

 

 

 

 

 

(3,059)

 

 

 

 

 

(3,059)

Balance, March 31, 2020

 

15,190,038

 

$

 112,600

 

$

 3,367

 

$

 189,882

 

$

 13,610

 

$

 319,459

 

 

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

 

4

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

    

2020

    

2019

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

7,807

 

$

8,895

Gain on sales of securities

 

 

 —

 

 

(6)

Loss on disposal of fixed assets

 

 

 —

 

 

12

Loss (gain) on sale on foreclosed assets

 

 

 2

 

 

(16)

Writedowns on foreclosed assets

 

 

 —

 

 

20

Share-based compensation expense

 

 

129

 

 

151

Provision for loan losses

 

 

1,800

 

 

300

Depreciation and amortization

 

 

771

 

 

754

Net amortization on securities premiums and discounts

 

 

1,050

 

 

1,030

Accretion of discounts for loans acquired and net deferred loan fees

 

 

(225)

 

 

(266)

Increase in cash surrender value of life insurance policies

 

 

(38)

 

 

(900)

Amortization of core deposit intangible

 

 

269

 

 

269

Decrease (increase) in interest receivable and other assets

 

 

1,467

 

 

(203)

(Decrease) increase in other liabilities

 

 

(2,336)

 

 

4,476

Deferred income tax (benefit) provision

 

 

(114)

 

 

 2

Increase in equity securities

 

 

(447)

 

 

 —

Net amortization of partnership investment

 

 

158

 

 

450

Net cash provided by operating activities

 

 

10,293

 

 

14,968

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Maturities and calls of securities available for sale

 

 

2,430

 

 

1,150

Proceeds from sales of securities available for sale

 

 

 —

 

 

15,504

Purchases of securities available for sale

 

 

(33,285)

 

 

(34,469)

Principal pay downs on securities available for sale

 

 

21,351

 

 

19,803

Net purchases of FHLB stock

 

 

 —

 

 

 —

Loan originations and payments, net

 

 

(35,350)

 

 

(19,618)

Purchases of premises and equipment

 

 

(1,716)

 

 

(87)

Proceeds from sale premises and equipment

 

 

 —

 

 

10

Proceeds from sales of foreclosed assets

 

 

32

 

 

7,920

Purchase of bank-owned life insurance

 

 

(167)

 

 

(217)

Net cash used in investing activities

 

 

(46,705)

 

 

(10,004)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Increase in deposits

 

 

11,017

 

 

44,408

Increase (decrease) in borrowed funds

 

 

54,100

 

 

(56,100)

Increase in repurchase agreements

 

 

3,650

 

 

3,001

Cash dividends paid

 

 

(3,059)

 

 

(2,754)

Repurchases of common stock

 

 

(2,562)

 

 

 —

Stock options exercised

 

 

181

 

 

412

Net cash provided by (used in) financing activities

 

 

63,327

 

 

(11,033)

 

 

 

 

 

 

 

Increase (decrease) in cash and due from banks

 

 

26,915

 

 

(6,069)

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

Beginning of period

 

 

80,077

 

 

74,132

End of period

 

$

106,992

 

$

68,063

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Interest paid

 

$

2,359

 

$

3,409

Income taxes paid

 

$

 —

 

$

 —

Supplemental noncash disclosures:

 

 

 

 

 

 

Real estate acquired through foreclosure

 

$

 —

 

$

26

Operating right-of-use asset pursuant to adoption on ASU 2016-02

 

$

 —

 

$

9,712

Operating lease liability pursuant to adoption of ASU 2016-02

 

$

 —

 

$

10,336

 

 

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

5

SIERRA BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(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 March 31, 2020, the Company’s only other subsidiaries were Sierra Statutory Trust II, Sierra Capital Trust III, and Coast Bancorp Statutory Trust II, which were formed solely to facilitate the issuance of capital trust pass-through securities (“TRUPS”).  Pursuant to the Financial Accounting Standards Board (“FASB”) standard on the consolidation of variable interest entities, these trusts are not reflected on a consolidated basis in the Company’s financial statements.  References herein to the “Company” include Sierra Bancorp and its consolidated subsidiary, the Bank, unless the context indicates otherwise.

Bank of the Sierra, a California state-chartered bank headquartered in Porterville, California, offers a wide range of retail and commercial banking services via branch offices located throughout 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 four whole-bank acquisitions:  Sierra National Bank in 2000, Santa Clara Valley Bank in 2014, Coast National Bank in 2016, and Ojai Community Bank in October 2017.  As of the filing date of this report the Bank operates 40 full service branches and an online branch, and maintains ATMs at all but one of our branch locations as well as seven non-branch locations.  Moreover, the Bank has specialized lending units which focus on agricultural borrowers, SBA loans, and mortgage warehouse lending.  The Company had total assets of $2.7 billion at March 31, 2020, and for a number of years we have claimed the distinction of being the largest bank headquartered in the South San Joaquin Valley.  The Bank’s deposit accounts, which totaled $2.2 billion at March 31, 2020, 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 2019 have been reclassified to be consistent with the reporting for 2020.  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, 2019, as filed with the Securities and Exchange Commission (the “SEC”).

Note 3 – Current Accounting Developments

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

6

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.  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 adopted ASU 2016-13 on January 1, 2020, however, the Company elected under Section 4014 of the Coronavirus Aid, Relief and Economic Security (CARES) Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020.   Although this deferral will still require CECL to be implemented as of January 1, 2020, the Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit losses. While the ultimate impact cannot be definitively determined at this time, the provisions of ASU 2016-13 will have a material impact on our consolidated financial statements, particularly the level of our allowance for credit losses and shareholders’ equity.

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 were effective for public business entities for fiscal years beginning after December 15, 2019.  In accordance with ASU 2017-04, the Company performed a qualitative analysis of goodwill during the first quarter of 2020, and determined that a quantitative analysis was not necessary at this time.  Thus, we have not been required to record any goodwill impairment to date.

In August 2018 the FASB issued ASU 2018‑13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, as part of its disclosure framework project.  Pursuant to this guidance, disclosures that will no longer be required include the following:  transfers between Level 1 and Level 2 of the fair value hierarchy; transfers in and out of Level 3 for nonpublic entities, as well as purchases and issuances and the Level 3 roll forward; a company’s policy for determining when transfers between any of the three levels have occurred; the valuation processes used for Level 3 measurements; and, the changes in unrealized gains or losses presented in earnings for Level 3 instruments held at the balance sheet date for nonpublic entities.  The following are additional disclosure requirements:  for public entities, the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 instruments held at the balance sheet date; for public entities, the range and weighted average of significant unobservable inputs used for Level 3 measurements, although for certain unobservable inputs the entity will be allowed to disclose other quantitative information in place of the weighted average to the extent that it would be a more reasonable and rational method to reflect the distribution of unobservable inputs; for nonpublic entities, some form of quantitative information about significant unobservable inputs used in Level 3 fair value measurements; and, for certain investments in entities that calculate the net asset value, disclosures will be required about the timing of liquidation and redemption restrictions lapsing if the latter has been communicated to the reporting entity.  The guidance also clarifies that the Level 3 measurement uncertainty disclosure should communicate

7

information about the uncertainty at the balance sheet date.  ASU 2018‑13 is effective for all entities in fiscal years beginning after December 15, 2019, including interim periods.  Early adoption is permitted.  In addition, an entity may early adopt any of the removed or modified disclosures immediately and delay adoption of the new disclosures until the effective date. The Company adopted ASU 2018-13 effective January 1, 2020 which impacts the disclosure requirements for fair value measurement.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326), which provides transition relief for entities adopting ASU 2016-13.  ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10.  An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach).  A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date, in order to maintain the same amortized cost basis before and after the effective date of this update.  Amounts previously recognized in accumulated other comprehensive income as of the date of adoption that relate to improvements in cash flows expected to be collected should continue to be accreted into income over the remaining life of the asset.  Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption should be recorded in earnings when received.  The fair value option election does not apply to held-to-maturity debt securities.  Entities are required to make this election on an instrument-by-instrument basis.  For public business entities that are SEC filers, including the Company, the amendments in ASU 2019-05 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2019-05 effective January 1, 2020. There was no impact to the financial statements of the Company as we did not elect the fair value option on financial instruments upon adoption of ASU 2016-13.

In March 2020, in an effort to conform with Section 4013 of the CARES Act, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.

 

Note 4 – Share Based Compensation

On March 16, 2017 the Company’s Board of Directors approved and adopted the 2017 Stock Incentive Plan (the “2017 Plan”), which became effective May 24, 2017, the date approved by the Company’s shareholders.  The 2017 Plan replaced the Company’s 2007 Stock Incentive Plan (the “2007 Plan”), which expired by its own terms on March 15, 2017.  Options to purchase 327,610 shares that were granted under the 2007 Plan were still outstanding as of March 31, 2020 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

8

2017 Plan was initially 850,000 shares, and the number remaining available for grant as of March 31, 2020 was 547,000.  The potential dilutive impact of unexercised stock options is discussed below in Note 5, Earnings per Share.

Pursuant to FASB’s standards on stock compensation, the value of each stock option is reflected in our income statement as employee compensation or directors’ expense by amortizing its grant date fair value over the vesting period of the option.  The Company utilizes a Black-Scholes model to determine grant date fair values.  A pre-tax charge of $.1 million was reflected in the Company’s income statement during the first quarter of 2020 and $.2 million was charged during the first quarter of 2019, as expense related to stock options.

Note 5 – 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 15,262,252 weighted average shares outstanding during the first quarter of 2020 and 15,311,154 during the first quarter of 2019. Diluted earnings per share calculations include the effect of the potential issuance of common shares, which for the Company is limited to shares that would be issued on the exercise of “in-the-money” stock options.  For the first quarter of 2020, calculations under the treasury stock method resulted in the equivalent of 77,765 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of 304,763 stock options were excluded from the calculation because they were underwater and thus anti-dilutive.  For the first quarter of 2019 the equivalent of 136,593 shares were added in calculating diluted earnings per share, while 199,120 anti-dilutive stock options were not factored into the computation. 

Note 6 – 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.  Investment gains or losses 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 7 – 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):

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

Commitments to extend credit

 

$

 453,849

 

$

 492,040

Standby letters of credit

 

$

 9,067

 

$

 8,619

 

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 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.

9

At March 31, 2020, the Company was also utilizing a letter of credit in the amount of $105 million issued by the Federal Home Loan Bank on the Company’s behalf as security for certain deposits and to facilitate certain credit arrangements with the Company’s customers.  That letter of credit is backed by loans which are pledged to the FHLB by the Company.

Note 8 – 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 public business entities to disclose in their financial statement footnotes the estimated fair values of financial instruments.  In addition to disclosure requirements, FASB’s standard on investments requires that our debt securities that are classified as available for sale and any equity securities which 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.  Fair value disclosures for deposits include demand deposits, which are by definition equal to the amount payable on demand at the reporting date.  Fair value calculations for loans and leases reflect exit pricing, and incorporate our assumptions with regard to the impact of prepayments on future cash flows and credit quality adjustments based on risk characteristics of various financial instruments, among other things.  Since the estimates are subjective and involve uncertainties and matters of significant judgment they cannot be determined with precision, and changes in assumptions could significantly alter the fair values presented.

 

 

 

 

 

 

10

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

Fair Value Measurements

 

    

Carrying
Amount

    

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

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

Financial assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

106,992

 

$

106,992

 

$

 —

 

$

 —

 

$

 106,992

Investment securities available for sale

 

 

620,154

 

 

 —

 

 

620,154

 

 

 —

 

 

620,154

Loans and leases, net held for investment

 

 

1,787,101

 

 

 —

 

 

 —

 

 

1,834,373

 

 

1,834,373

Collateral dependent impaired loans

 

 

2,212

 

 

 —

 

 

2,212

 

 

 —

 

 

2,212

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,179,391

 

 

704,700

 

 

1,474,482

 

 

 —

 

 

2,179,182

Repurchase agreements

 

 

29,361

 

 

 —

 

 

29,361

 

 

 —

 

 

29,361

Short term borrowings

 

 

74,100

 

 

 —

 

 

74,100

 

 

 —

 

 

74,100

Subordinated debentures

 

 

34,990

 

 

 —

 

 

29,911

 

 

 —

 

 

29,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

Fair Value Measurements

 

    

Carrying
Amount

    

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

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

Financial assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

 80,077

 

$

 80,076

 

$

 —

 

$

 —

 

$

 80,076

Investment securities available for sale

 

 

600,799

 

 

 —

 

 

600,799

 

 

 —

 

 

600,799

Loans and leases, net held for investment

 

 

1,753,846

 

 

 —

 

 

 —

 

 

1,761,461

 

 

1,761,461

Collateral dependent impaired loans

 

 

1,692

 

 

 —

 

 

1,692

 

 

 —

 

 

1,692

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,168,374

 

 

690,950

 

 

1,477,497

 

 

 —

 

 

2,168,447

Repurchase agreements

 

 

25,711

 

 

 —

 

 

25,711

 

 

 —

 

 

25,711

Short term borrowings

 

 

20,000

 

 

 —

 

 

20,000

 

 

 —

 

 

20,000

Subordinated debentures

 

 

34,945

 

 

 —

 

 

30,564

 

 

 —

 

 

30,564

 

For financial asset categories that were carried on our balance sheet at fair value as of March 31, 2020 and December 31, 2019, 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; fair values for any other foreclosed assets are

11

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 March 31, 2020, using

 

 

 

 

    

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

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

    

Realized
Gain/(Loss)
(Level 3)

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

 —

 

$

 11,742

 

$

 —

 

$

 11,742

 

$

 —

Mortgage-backed securities

 

 

 —

 

 

405,246

 

 

 —

 

 

405,246

 

 

 —

State and political subdivisions

 

 

 —

 

 

203,166

 

 

 —

 

 

203,166

 

 

 —

Total available-for-sale securities

 

$

 —

 

$

 620,154

 

$

 —

 

$

 620,154

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2019, using

 

 

 

 

    

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

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

    

Realized
Gain/(Loss)
(Level 3)

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

 —

 

$

 12,145

 

$

 —

 

$

 12,145

 

$

 —

Mortgage-backed securities

 

 

 —

 

 

400,389

 

 

 —

 

 

400,389

 

 

 —

State and political subdivisions

 

 

 —

 

 

188,265

 

 

 —

 

 

188,265

 

 

 —

Total available-for-sale securities

 

$

 —

 

$

 600,799

 

$

 —

 

$

 600,799

 

$

 —

 

12

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

Fair Value Measurements – Nonrecurring

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2020, using

 

    

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

    

Significant
Observable Inputs
(Level 2)

    

Significant
Unobservable Inputs
(Level 3)

    

Total

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

$

 —

 

$

 —

 

$

 —

 

$

 —

Other construction/land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

1-4 family - closed-end

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Equity lines

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Multi-family residential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial real estate - owner occupied

 

 

 —

 

 

86

 

 

 —

 

 

86

Commercial real estate - non-owner occupied

 

 

 —

 

 

2,126

 

 

 —

 

 

2,126

Farmland

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total real estate

 

 

 —

 

 

2,212

 

 

 —

 

 

2,212

Agricultural

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial and industrial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Consumer loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total impaired loans

 

$

 —

 

$

 2,212

 

$

 —

 

$

 2,212

Foreclosed assets

 

$

 —

 

$

 766

 

$

 —

 

$

 766

Total assets measured on a nonrecurring basis

 

$

 —

 

$

 2,978

 

$

 —

 

$

 2,978

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2019, 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

 

 

 —

 

 

88

 

 

 —

 

 

88

Commercial real estate - non-owner occupied

 

 

 —

 

 

1,605

 

 

 —

 

 

1,605

Farmland

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total real estate

 

 

 —

 

 

1,693

 

 

 —

 

 

1,693

Agricultural

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial and industrial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Consumer loans

 

 

 —

 

 

 —

 

 

 —

 

 

 -

Total impaired loans

 

$

 —

 

$

 1,693

 

$

 —

 

$

 1,693

Foreclosed assets

 

$

 —

 

$

 800

 

$

 —

 

$

 800

Total assets measured on a nonrecurring basis

 

$

 —

 

$

 2,493

 

$

 —

 

$

 2,493

 

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.

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 9 – 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.

14

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

Amortized Cost And Estimated Fair Value

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

    

Amortized
Cost

    

Gross
Unrealized
Gains

    

Gross
Unrealized
Losses

    

Estimated Fair
Value

U.S. government agencies

 

$

 11,587

 

$

204

 

$

 (49)

 

$

11,742

Mortgage-backed securities

 

 

393,680

 

 

11,742

 

 

(176)

 

 

405,246

State and political subdivisions

 

 

195,565

 

 

7,623

 

 

(22)

 

 

203,166

Total securities

 

$

 600,832

 

$

19,569

 

$

 (247)

 

$

620,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

    

Amortized
Cost

    

Gross
Unrealized
Gains

    

Gross
Unrealized
Losses

    

Estimated Fair
Value

U.S. government agencies

 

$

 12,125

 

$

 124

 

$

 (104)

 

$

 12,145

Mortgage-backed securities

 

 

398,353

 

 

3,354

 

 

(1,318)

 

 

400,389

State and political subdivisions

 

 

181,900

 

 

6,478

 

 

(113)

 

 

188,265

Total securities

 

$

 592,378

 

$

 9,956

 

$

 (1,535)

 

$

 600,799

 

At March 31, 2020 and December 31, 2019, the Company had 34 securities and 198 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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

Less than twelve months

 

Twelve months or more

 

    

Gross
Unrealized
Losses

    

Fair Value

    

Gross
Unrealized
Losses

    

Fair Value

U.S. government agencies

 

$

 (3)

 

$

 1,199

 

$

(46)

 

$

2,587

Mortgage-backed securities

 

 

(94)

 

 

7,717

 

 

(82)

 

 

8,717

State and political subdivisions

 

 

(22)

 

 

5,791

 

 

 —

 

 

 —

Total

 

$

(119)

 

$

14,707

 

$

(128)

 

$

11,304

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

Less than twelve months

 

Twelve months or more

 

    

Gross
Unrealized
Losses

    

Fair Value

    

Gross
Unrealized
Losses

    

Fair Value

U.S. government agencies

 

$

(32)

 

$

3,240

 

$

(72)

 

$

2,689

Mortgage-backed securities

 

 

(494)

 

 

100,518

 

 

(824)

 

 

78,538

State and political subdivisions

 

 

(113)

 

 

19,762

 

 

 —

 

 

 —

Total

 

$

(639)

 

$

123,520

 

$

(896)

 

$

81,227

 

15

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 March 31,

 

    

2020

    

2019

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

 

$

 2,430

 

$

 16,654

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

 

 

 —

 

 

94

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

 

 

 —

 

 

(88)

Net gains on sale of securities available for sale

 

$

$—

 

$

$6

 

The amortized cost and estimated fair value of investment securities available-for-sale at March 31, 2020 and December 31, 2019 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)

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

    

Amortized Cost

    

Fair Value

Maturing within one year

 

$

 7,037

 

$

 7,158

Maturing after one year through five years

 

 

15,424

 

 

15,631

Maturing after five years through ten years

 

 

35,850

 

 

36,927

Maturing after ten years

 

 

148,842

 

 

155,192

Securities not due at a single maturity date:

 

 

 

 

 

 

    Mortgage-backed securities

 

 

194,774

 

 

199,613

    Collateralized mortgage obligations

 

 

198,905

 

 

205,633

 

 

$

 600,832

 

$

 620,154

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

    

Amortized Cost

    

Fair Value

Maturing within one year

 

$

 7,155

 

$

 7,244

Maturing after one year through five years

 

 

17,008

 

 

17,171

Maturing after five years through ten years

 

 

33,805

 

 

34,881

Maturing after ten years

 

 

136,057

 

 

141,114

Securities not due at a single maturity date:

 

 

 

 

 

 

    Mortgage-backed securities

 

 

189,554

 

 

190,488

    Collateralized mortgage obligations

 

 

208,799

 

 

209,901

 

 

$

 592,378

 

$

 600,799

 

At March 31, 2020, the Company’s investment portfolio included 349 “muni” bonds issued by 280 different government municipalities and agencies located within 31 different states, with an aggregate fair value of $203 million.  The largest exposure to any single municipality or agency was a combined $3.9 million (fair value) in general obligation bonds issued by the Charter Township of Washington County (MI).

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

16

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

December 31, 2019

 

 

Amortized

 

Fair Market

 

Amortized

 

Fair Market

General obligation bonds

    

Cost

    

Value

    

Cost

    

Value

State of issuance

 

 

 

 

 

 

 

 

 

 

 

 

Texas

 

$

 65,619

 

$

 68,182

 

$

 59,439

 

$

 61,519

Washington

 

 

23,445

 

 

24,579

 

 

23,392

 

 

24,313

California

 

 

23,873

 

 

24,996

 

 

23,882

 

 

25,030

Other (24 states)

 

 

54,712

 

 

56,580

 

 

49,326

 

 

50,725

Total general obligation bonds

 

 

167,649

 

 

174,337

 

 

156,039

 

 

161,587

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue bonds

 

 

 

 

 

 

 

 

 

 

 

 

State of issuance

 

 

 

 

 

 

 

 

 

 

 

 

Texas

 

 

7,068

 

 

7,320

 

 

6,035

 

 

6,298

Washington

 

 

2,787

 

 

2,927

 

 

1,737

 

 

1,856

California

 

 

364

 

 

379

 

 

365

 

 

380

Other (13 states)

 

 

17,697

 

 

18,203

 

 

17,724

 

 

18,144

Total revenue bonds

 

 

27,916

 

 

28,829

 

 

25,861

 

 

26,678

Total obligations of states and political subdivisions

 

$

 195,565

 

$

 203,166

 

$

 181,900

 

$

 188,265

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

December 31, 2019

 

 

Amortized

 

Fair Market

 

Amortized

 

Fair Market

Revenue bonds

    

Cost

    

Value

    

Cost

    

Value

Revenue source:

 

 

 

 

 

 

 

 

 

 

 

 

Water

 

$

7,499

 

$

7,774

 

$

7,515

 

$

7,775

Sewer

 

 

4,752

 

 

4,854

 

 

4,760

 

 

4,811

Lease

 

 

4,639

 

 

4,751

 

 

3,596

 

 

3,678

College & university

 

 

1,993

 

 

2,031

 

 

1,997

 

 

2,019

Sales tax

 

 

1,945

 

 

1,988

 

 

1,949

 

 

1,995

Electric & power

 

 

1,419

 

 

1,478

 

 

1,421

 

 

1,521

Other (8 and 7 sources, respectively)

 

 

5,669

 

 

5,953

 

 

4,623

 

 

4,879

Total revenue bonds

 

$

27,916

 

$

28,829

 

$

25,861

 

$

26,678

 

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

The Company has the ability to invest in limited partnerships which own housing projects that qualify for federal and/or California state tax credits, by mandating a specified percentage of low-income tenants for each project.  The primary investment return comes from tax credits that flow through to investors.  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 for tax purposes.

17

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

As of March 31, 2020 our total LIHTC investment book balance was $3.9 million, which includes $1.0 million in remaining commitments for additional capital contributions.  There were $.1 million in tax credits derived from our LIHTC investments that were recognized during the three months ended March 31, 2020, and amortization expense of $.2 million associated with those investments was netted against pre-tax noninterest 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 10 – Credit Quality and Nonperforming Assets

Credit Quality Classifications

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

·

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

·

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

·

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

·

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

18

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

Credit Quality Classifications

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

    

Pass

    

Special
Mention

    

Substandard

    

Impaired

    

Total

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

$

94,114

 

$

464

 

$

 —

 

$

 —

 

$

 94,578

Other construction/land

 

 

87,861

 

 

2,219

 

 

 —

 

 

522

 

 

90,602

1-4 family - closed end

 

 

182,832

 

 

3,523

 

 

169

 

 

3,110

 

 

189,634

Equity lines

 

 

42,010

 

 

2,084

 

 

61

 

 

4,381

 

 

48,536

Multi-family residential

 

 

57,891

 

 

 —

 

 

 —

 

 

347

 

 

58,238

Commercial real estate - owner occupied

 

 

293,360

 

 

3,936

 

 

3,109

 

 

2,529

 

 

302,934

Commercial real estate - non-owner occupied

 

 

471,003

 

 

747

 

 

568

 

 

2,608

 

 

474,926

Farmland

 

 

140,307

 

 

1,047

 

 

130

 

 

256

 

 

141,740

Total real estate

 

 

1,369,378

 

 

14,020

 

 

4,037

 

 

13,753

 

 

1,401,188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

 

49,030

 

 

164

 

 

 —

 

 

 5

 

 

49,199

Commercial and industrial

 

 

97,081

 

 

12,994

 

 

510

 

 

1,405

 

 

111,990

Mortgage warehouse

 

 

228,608

 

 

 —

 

 

 —

 

 

 —

 

 

228,608

Consumer loans

 

 

6,579

 

 

70

 

 

15

 

 

376

 

 

7,040

Total gross loans and leases

 

$

1,750,676

 

$

27,248

 

$

 4,562

 

$

 15,539

 

$

 1,798,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

    

Pass

    

Special
Mention

    

Substandard

    

Impaired

    

Total

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

$

105,979

 

$

 —

 

$

 —

 

$

 —

 

$

 105,979

Other construction/land

 

 

90,761

 

 

98

 

 

 —

 

 

554

 

 

91,413

1-4 family - closed end

 

 

194,572

 

 

2,425

 

 

164

 

 

3,020

 

 

200,181

Equity lines

 

 

43,111

 

 

1,995

 

 

72

 

 

4,421

 

 

49,599

Multi-family residential

 

 

54,104

 

 

 —

 

 

 —

 

 

353

 

 

54,457

Commercial real estate - owner occupied

 

 

334,460

 

 

4,005

 

 

3,384

 

 

2,034

 

 

343,883

Commercial real estate - non-owner occupied

 

 

409,289

 

 

1,164

 

 

11

 

 

2,105

 

 

412,569

Farmland

 

 

142,594

 

 

1,048

 

 

132

 

 

259

 

 

144,033

Total real estate

 

 

1,374,870

 

 

10,735

 

 

3,763

 

 

12,746

 

 

1,402,114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

 

47,814

 

 

217

 

 

 —

 

 

 5

 

 

48,036

Commercial and industrial

 

 

100,584

 

 

13,415

 

 

556

 

 

977

 

 

115,532

Mortgage warehouse

 

 

189,103

 

 

 —

 

 

 —

 

 

 —

 

 

189,103

Consumer loans

 

 

7,245

 

 

85

 

 

25

 

 

425

 

 

7,780

Total gross loans and leases

 

$

1,719,616

 

$

24,452

 

$

 4,344

 

$

 14,153

 

$

 1,762,565

 

Past Due and Nonperforming Assets

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets.  The Company’s foreclosed assets can include mobile homes and/or OREO, which consists of commercial and/or residential real estate properties acquired by foreclosure or similar means that the Company is offering or will offer for sale.  Foreclosed assets totaled $.8 million at March 31, 2020, and December 31, 2019.  Gross nonperforming loans totaled $7.4 million at March 31, 2020 and $5.7 million at December 31, 2019.  Loans and leases are classified as nonperforming when reasonable doubt surfaces with regard to the ability of the Company to collect all principal and interest.  At that point, we stop accruing interest on the loan or lease in question and reverse any previously-recognized

19

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

    

30-59 Days
Past Due

    

60-89 Days
Past Due

    

90 Days Or
More Past Due
(1)

    

Total
Past Due

    

Current

    

Total Financing
Receivables

    

Non-Accrual
Loans
(2)

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

$

 464

 

$

 —

 

$

 —

 

$

 464

 

$

 94,114

 

$

 94,578

 

$

 —

Other construction/land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

90,602

 

 

90,602

 

 

10

1-4 family - closed end

 

 

2,349

 

 

14

 

 

783

 

 

3,146

 

 

186,488

 

 

189,634

 

 

866

Equity lines

 

 

122

 

 

 —

 

 

141

 

 

263

 

 

48,273

 

 

48,536

 

 

535

Multi-family residential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

58,238

 

 

58,238

 

 

 —

Commercial real estate - owner occupied

 

 

196

 

 

 —

 

 

837

 

 

1,033

 

 

301,901

 

 

302,934

 

 

1,941

Commercial real estate - non-owner occupied

 

 

633

 

 

 —

 

 

2,127

 

 

2,760

 

 

472,166

 

 

474,926

 

 

2,608

Farmland

 

 

213

 

 

 —

 

 

 —

 

 

213

 

 

141,527

 

 

141,740

 

 

257

Total real estate

 

 

3,977

 

 

14

 

 

3,888

 

 

7,879

 

 

1,393,309

 

 

1,401,188

 

 

6,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

49,199

 

 

49,199

 

 

 —

Commercial and industrial

 

 

617

 

 

358

 

 

195

 

 

1,170

 

 

110,820

 

 

111,990

 

 

1,116

Mortgage warehouse lines

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

228,608

 

 

228,608

 

 

 —

Consumer

 

 

42

 

 

 8

 

 

 —

 

 

50

 

 

6,990

 

 

7,040

 

 

18

Total gross loans and leases

 

$

 4,636

 

$

 380

 

$

 4,083

 

$

 9,099

 

$

 1,788,926

 

$

 1,798,025

 

$

 7,351


(1)

As of March 31, 2020 there were no loans over 90 days past due and still accruing.

(2)

Included in total financing receivables

20

Loan Portfolio Aging

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

    

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

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 105,979

 

$

 105,979

 

$

 —

Other construction/land

 

 

16

 

 

 —

 

 

 —

 

 

16

 

 

91,397

 

 

91,413

 

 

31

1-4 family - closed end

 

 

485

 

 

380

 

 

659

 

 

1,524

 

 

198,657

 

 

200,181

 

 

741

Equity lines

 

 

177

 

 

10

 

 

78

 

 

265

 

 

49,334

 

 

49,599

 

 

480

Multi-family residential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

54,457

 

 

54,457

 

 

 —

Commercial real estate - owner occupied

 

 

1,552

 

 

 —

 

 

88

 

 

1,640

 

 

342,243

 

 

343,883

 

 

1,440

Commercial real estate - non-owner occupied

 

 

500

 

 

 —

 

 

1,605

 

 

2,105

 

 

410,464

 

 

412,569

 

 

2,105

Farmland

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

144,033

 

 

144,033

 

 

258

Total real estate

 

 

2,730

 

 

390

 

 

2,430

 

 

5,550

 

 

1,396,564

 

 

1,402,114

 

 

5,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

48,036

 

 

48,036

 

 

 —

Commercial and industrial

 

 

160

 

 

215

 

 

 —

 

 

375

 

 

115,157

 

 

115,532

 

 

651

Mortgage warehouse lines

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

189,103

 

 

189,103

 

 

 —

Consumer

 

 

55

 

 

12

 

 

 2

 

 

69

 

 

7,711

 

 

7,780

 

 

31

Total gross loans and leases

 

$

 2,945

 

$

 617

 

$

 2,432

 

$

 5,994

 

$

 1,756,571

 

$

 1,762,565

 

$

 5,737


(1)

As of December 31, 2019 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 (TDR) if the modification constitutes a concession, excluding loan modifications that are COVID-19 related and made in accordance with the interagency guidance and the CARES Act as described in Note 3, above.  At March 31, 2020, the Company had a total of $9.2 million in TDRs, including $1.0 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.

21

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 March 31, 2020

 

    

Rate Modification

    

Term
Modification

    

Interest Only Modification

    

Rate & Term Modification

    

Term & Interest Modification

 

Total

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

1-4 family - closed-end

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Equity lines

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Multi-family residential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial real estate - owner occupied

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

86

 

 

86

Farmland

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total real estate loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

86

 

 

86

Agricultural

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial and industrial

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Consumer loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 86

 

$

 86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2019

 

    

Rate Modification

    

Term
Modification

    

Interest Only
Modification

    

Rate & Term Modification

    

Term & Interest Modification

 

Total

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

1-4 family - closed-end

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Equity lines

 

 

 —

 

 

100

 

 

 —

 

 

 —

 

 

 —

 

 

100

Multi-family residential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial real estate - owner occupied

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Farmland

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total real estate loans

 

 

 —

 

 

100

 

 

 —

 

 

 —

 

 

 —

 

 

100

Agricultural

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial and industrial

 

 

94

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

94

Consumer loans

 

 

 —

 

 

 9

 

 

 —

 

 

 —

 

 

 —

 

 

 9

Total

 

$

 94

 

$

 109

 

$

 —

 

$

 —

 

$

 —

 

 

 203

 

22

Troubled Debt Restructurings

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2020

 

 

 

 

Pre-
Modification

 

Post-
Modification

 

 

 

 

 

    

Number of
Loans

    

Outstanding
Recorded
Investment

    

Outstanding
Recorded
Investment

    

Reserve
Difference⁽¹⁾

    

Reserve

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

0

 

$

 —

 

$

 —

 

$

 —

 

$

 —

1-4 family - closed-end

 

0

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Equity lines

 

0

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Multi-family residential

 

0

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial real estate - owner occupied

 

1

 

 

86

 

 

86

 

 

 —

 

 

 —

Farmland

 

0

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total real estate loans

 

 

 

 

86

 

 

86

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

0

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial and industrial

 

0

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Consumer loans

 

0

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total

 

 

 

$

 86

 

$

 86

 

$

 —

 

$

 —


(1)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2019

 

 

 

 

Pre-
Modification

 

Post-
Modification

 

 

 

 

 

 

 

    

Number of
Loans

    

Outstanding
Recorded
Investment

    

Outstanding
Recorded
Investment

    

Reserve
Difference⁽¹⁾

    

Reserve

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

0

 

$

 —

 

$

 —

 

$

 —

 

$

 —

1-4 family - closed-end

 

0

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Equity lines

 

1

 

 

100

 

 

100

 

 

 —

 

 

 —

Multi-family residential

 

0

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial real estate - owner occupied

 

0

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Farmland

 

0

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total real estate loans

 

 

 

 

100

 

 

100

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

0

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial and industrial

 

2

 

 

94

 

 

94

 

 

(20)

 

 

 1

Consumer loans

 

1

 

 

 9

 

 

 9

 

 

(2)

 

 

 —

   Total

 

 

 

$

 203

 

$

 203

 

$

$(22)

 

$

 1


(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 nine-month periods ended March 31, 2020 and 2019.

23

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 any such loans are recorded as interest income over the remaining life of the loan or pool of loans (accretable yield).  The excess of contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).  Expected cash flows are periodically re-evaluated throughout the life of the loan or pool of loans.  If the present value of the expected cash flows is determined at any time to be less than the carrying amount, a reserve is recorded.  If the present value of the expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Our acquisition of Santa Clara Valley Bank in 2014 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)

 

 

 

 

 

 

 

 

 

March 31, 2020

 

    

Unpaid Principal Balance

    

Carrying Value

Real estate secured

 

$

86

 

$

86

Total purchased credit impaired loans

 

$

86

 

$

$86

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

    

Unpaid Principal Balance

    

Carrying Value

Real estate secured

 

$

 88

 

$

 —

Total purchased credit impaired loans

 

$

 —

 

$

 —

 

There was no allowance for loan losses allocated for PCI loans as of March 31, 2020 and, December 31, 2019.  There was no discount accretion recorded on PCI loans during the three months ended March 31, 2020.

Note 11 – Allowance for Loan and Lease Losses

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

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 $.6 million at March 31, 2020 and  December 31, 2019.

24

Impaired Loans

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

    

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

 

$

641

 

$

522

 

$

154

 

$

527

 

$

12

1-4 family - closed-end

 

 

2,266

 

 

2,266

 

 

62

 

 

2,279

 

 

33

Equity lines

 

 

4,129

 

 

4,076

 

 

252

 

 

4,090

 

 

37

Multi-family residential

 

 

347

 

 

347

 

 

17

 

 

349

 

 

 6

Commercial real estate- owner occupied

 

 

586

 

 

586

 

 

 2

 

 

589

 

 

 9

Commercial real estate- non-owner occupied

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Farmland

 

 

237

 

 

237

 

 

 3

 

 

237

 

 

 —

Total real estate

 

 

8,206

 

 

8,034

 

 

490

 

 

8,071

 

 

97

Agricultural

 

 

 5

 

 

 5

 

 

 —

 

 

 5

 

 

 —

Commercial and industrial

 

 

1,156

 

 

1,137

 

 

520

 

 

1,157

 

 

 6

Consumer loans

 

 

414

 

 

376

 

 

98

 

 

385

 

 

 8

Subtotal

 

 

9,781

 

 

9,552

 

 

1,108

 

 

9,618

 

 

111

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other construction/land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

1-4 family - closed-end

 

 

844

 

 

844

 

 

 —

 

 

845

 

 

 —

Equity lines

 

 

305

 

 

305

 

 

 —

 

 

307

 

 

 1

Commercial real estate- owner occupied

 

 

2,062

 

 

1,942

 

 

 —

 

 

1,950

 

 

 —

Commercial real estate- non-owner occupied

 

 

3,798

 

 

2,608

 

 

 —

 

 

2,440

 

 

 —

Farmland

 

 

20

 

 

20

 

 

 —

 

 

21

 

 

 —

Total real estate

 

 

7,029

 

 

5,719

 

 

 —

 

 

5,563

 

 

 1

Agricultural

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial and industrial

 

 

289

 

 

268

 

 

 —

 

 

271

 

 

 —

Consumer loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Subtotal

 

 

7,318

 

 

5,987

 

 

 —

 

 

5,834

 

 

 1

Total

 

$

17,099

 

$

15,539

 

$

1,108

 

$

15,452

 

$

112


(1)

Contractual principal balance due from customer.

(2)

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

(3)

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

25

Impaired Loans

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

    

Unpaid Principal
Balance
(1)

    

Recorded
Investment
(2)

    

Related
Allowance

    

Average
Recorded
Investment

    

Interest Income
Recognized
(3)

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

           1-4 family residential construction

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

Other construction/land

 

 

656

 

 

537

 

 

157

 

 

563

 

 

32

1-4 family - closed-end

 

 

2,298

 

 

2,298

 

 

58

 

 

2,365

 

 

146

Equity lines

 

 

4,173

 

 

4,120

 

 

252

 

 

4,185

 

 

200

Multi-family residential

 

 

353

 

 

353

 

 

17

 

 

361

 

 

23

Commercial real estate- owner occupied

 

 

593

 

 

593

 

 

 6

 

 

606

 

 

38

Commercial real estate- non-owner occupied

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Farmland

 

 

237

 

 

237

 

 

 3

 

 

256

 

 

 —

Total real estate

 

 

8,310

 

 

8,138

 

 

493

 

 

8,336

 

 

439

Agricultural

 

 

 5

 

 

 5

 

 

 1

 

 

 6

 

 

 —

Commercial and industrial

 

 

915

 

 

896

 

 

219

 

 

1,140

 

 

29

Consumer loans

 

 

464

 

 

425

 

 

114

 

 

469

 

 

35

Subtotal

 

 

9,694

 

 

9,464

 

 

827

 

 

9,951

 

 

503

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

           1-4 family residential construction

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

Other construction/land

 

 

52

 

 

17

 

 

 —

 

 

577

 

 

 4

1-4 family - closed-end

 

 

755

 

 

722

 

 

 —

 

 

726

 

 

 —

Equity lines

 

 

326

 

 

301

 

 

 —

 

 

310

 

 

 5

Multi-family residential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial real estate- owner occupied

 

 

1,560

 

 

1,440

 

 

 —

 

 

1,477

 

 

 —

Commercial real estate- non-owner occupied

 

 

3,295

 

 

2,105

 

 

 —

 

 

3,267

 

 

 —

Farmland

 

 

22

 

 

22

 

 

 —

 

 

25

 

 

 —

Total real estate

 

 

6,010

 

 

4,607

 

 

 —

 

 

6,382

 

 

 9

Agricultural

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Commercial and industrial

 

 

102

 

 

81

 

 

 —

 

 

162

 

 

 —

Consumer loans

 

 

 9

 

 

 —

 

 

 —

 

 

140

 

 

15

Subtotal

 

 

6,121

 

 

4,688

 

 

 —

 

 

6,684

 

 

24

Total

 

$

15,815

 

$

14,152

 

$

827

 

$

16,635

 

$

527


(1)

Contractual principal balance due from customer.

(2)

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

(3)

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

The 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

26

impairment on loans for which it is anticipated that repayment will be provided from cash flows other than those generated solely by the disposition or operation of underlying collateral.  However, historical loss rates may be used by the Company to determine a specific loss allowance if those rates indicate a higher potential reserve need than the discounted cash flow analysis.  Any change in impairment attributable to the passage of time is accommodated by adjusting the loss allowance accordingly.

For loans where repayment is expected to be provided by the disposition or operation of the underlying collateral, impairment is measured using the fair value of the collateral.  If the collateral value, net of the expected costs of disposition, 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, and current appraisals were available or in process for 55% of the Company’s impaired real estate loan balances at March 31, 2020.  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 $10.3 million at March 31, 2020.

There were no material changes to the methodology used to determine our allowance for loan and lease losses during the three months ended March 31, 2020, although as outlined in Note 3 to the consolidated financial statements we will substantially update our methodology upon the implementation of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update ASU 2016‑13 and related amendments, Financial Instruments – Credit Losses (Topic 326)  when the earlier of the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. Moreover, we will continue to enhance our methodology as needed in order to comply with regulatory and accounting requirements, keep pace with the size and complexity of our 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 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 deferring the implementation of “CECL” and continuing with  the current incurred loss methodology is appropriate given the impact of the economic uncertainty surrounding COVID-19 and related governmental and regulatory actions taken in response thereto, such as the stimulus provisions of the CARES Act.

27

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

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2020

 

    

Real Estate

    

Agricultural
Products

    

Commercial and
Industrial
(1)

    

Consumer

    

Unallocated

    

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

    

$

5,635

    

$

193

    

$

2,685

    

$

1,278

    

$

132

    

$

9,923

Charge-offs

 

 

 —

 

 

 —

 

 

(25)

 

 

(617)

 

 

 —

 

 

(642)

Recoveries

 

 

72

 

 

 —

 

 

28

 

 

272

 

 

 —

 

 

372

Provision

 

 

1,608

 

 

42

 

 

66

 

 

204

 

 

(120)

 

 

1,800

Ending balance

 

$

7,315

 

$

235

 

$

2,754

 

$

1,137

 

$

12

 

$

11,453

Reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific

 

$

490

 

$

 —

 

$

520

 

$

98

 

$

 —

 

$

1,108

General

 

 

6,825

 

 

235

 

 

2,234

 

 

1,039

 

 

12

 

 

10,345

Ending balance

 

$

7,315

 

$

235

 

$

2,754

 

$

1,137

 

$

12

 

$

11,453

Loans evaluated for impairment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$

13,753

 

$

 5

 

$

1,405

 

$

376

 

$

 —

 

$

15,539

Collectively

 

 

1,387,435

 

 

49,194

 

 

339,193

 

 

6,664

 

 

 —

 

 

1,782,486

Ending balance

 

$

1,401,188

 

$

49,199

 

$

340,598

 

$

7,040

 

$

 —

 

$

1,798,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2019

 

    

Real Estate

    

Agricultural
Products

    

Commercial and
Industrial
(1)

    

Consumer

    

Unallocated

    

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

5,831

 

$

256

 

$

2,394

 

$

1,239

 

$

30

 

$

9,750

Charge-offs

 

 

(1,190)

 

 

 —

 

 

(1,274)

 

 

(2,409)

 

 

 —

 

 

(4,873)

Recoveries

 

 

647

 

 

 —

 

 

690

 

 

1,159

 

 

 —

 

 

2,496

Provision

 

 

347

 

 

(63)

 

 

875

 

 

1,289

 

 

102

 

 

2,550

Ending balance

 

$

5,635

 

$

193

 

$

2,685

 

$

1,278

 

$

132

 

$

9,923

Reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific

 

$

493

 

$

 1

 

$

219

 

$

114

 

$

 —

 

$

827

General

 

 

5,142

 

 

192

 

 

2,466

 

 

1,164

 

 

132

 

 

9,096

Ending balance

 

$

5,635

 

$

193

 

$

2,685

 

$

1,278

 

$

132

 

$

9,923

Loans evaluated for impairment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$

12,746

 

$

 5

 

$

977

 

$

425

 

$

 —

 

$

14,153

Collectively

 

 

1,389,368

 

 

48,031

 

 

303,658

 

 

7,355

 

 

 —

 

 

1,748,412

Ending balance

 

$

1,402,114

 

$

48,036

 

$

304,635

 

$

7,780

 

$

 —

 

$

1,762,565

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2019

 

    

Real Estate

    

Agricultural
Products

    

Commercial and
Industrial
(1)

    

Consumer

    

Unallocated

    

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

5,831

 

$

256

 

$

2,394

 

$

1,239

 

$

30

 

$

9,750

Charge-offs

 

 

 —

 

 

 —

 

 

(579)

 

 

(551)

 

 

 —

 

 

(1,130)

Recoveries

 

 

175

 

 

 —

 

 

41

 

 

302

 

 

 —

 

 

518

Provision

 

 

88

 

 

(37)

 

 

58

 

 

139

 

 

52

 

 

300

Ending balance

 

$

6,094

 

$

219

 

$

1,914

 

$

1,129

 

$

82

 

$

9,438

Reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific

 

$

915

 

$

 1

 

$

333

 

$

180

 

$

 —

 

$

1,429

General

 

 

5,179

 

 

218

 

 

1,581

 

 

949

 

 

82

 

 

8,009

Ending balance

 

$

6,094

 

$

219

 

$

1,914

 

$

1,129

 

$

82

 

$

9,438

Loans evaluated for impairment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually

 

$

13,348

 

$

 6

 

$

1,099

 

$

789

 

$

 —

 

$

15,242

Collectively

 

 

1,460,502

 

 

52,080

 

 

215,698

 

 

7,467

 

 

 —

 

 

1,735,747

Ending balance

 

$

1,473,850

 

$

52,086

 

$

216,797

 

$

8,256

 

$

 —

 

$

1,750,989


(1)

Includes mortgage warehouse lines.

28

 

Note 12 – Operating Leases

We lease space under non-cancelable operating leases for 21 branch locations, three off-site ATM locations, one administrative building, one loan production office and a warehouse.  Many of our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs).  Payments for taxes and insurance as well as non-lease components are not included in the accounting of the lease component, but are separately accounted for in occupancy expense.  The Company recognized lease expense of $.6 million and $.5 million for the three month periods ended March 31, 2020 and 2019, respectively.  Most leases include one or more renewal options available to exercise.  The exercise of lease renewal options is typically at the Company’s sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right-of-use assets and lease liabilities as they are not reasonably certain of exercise.  We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term.  As most of our leases do not provide an implicit rate, we used our incremental borrowing rate in determining the present value of the lease payments.

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three months ended March 31, 2020.

At March 31, 2020, the Company’s right-of-use assets and operating lease liabilities were $7.9 million and $8.5 million, respectively.  The weighted average remaining lease term for the lease liabilities was 7.1 years, and the weighted average discount rate of remaining payments was 5.5 percent.  There were no lease liabilities from new right-of-use assets obtained during the three months ended  March 31, 2020.  Cash paid on operating leases was $.4 million for the three months ended March 31, 2020.

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

 

 

 

 

 

 

 

 

    

March 31, 2020

2020 (1)

    

$

1,677

2021

 

 

2,020

2022

 

 

1,571

2023

 

 

1,113

2024

 

 

749

Thereafter

 

 

3,196

Total

 

 

10,326

Less: present value discount

 

 

(1,856)

Lease liability (2)

 

$

8,470


(1)

Contractual maturities for the nine months remaining in 2020.

(2)

Lease liability is included in other liabilities.

 

The following table presents the future minimum rental payments under leases with terms in excess of one year as of December 31, 2019 presented in accordance with ASC Topic 840, “Leases”:

 

 

 

 

 

 

December 31, 2019

2020

 

$

2,235

2021

 

 

2,023

2022

 

 

1,574

2023

 

 

1,113

2024

 

 

749

Thereafter

 

 

3,196

Total undiscounted lease payments

 

 

10,890

 

 

 

29

Note 13 – Revenue Recognition.

The Company utilizes the guidance found in ASU 2014‑09, Revenue from Contracts with Customers (ASC 606), when accounting for certain noninterest income.  The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  Sufficient information should be provided to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The Company’s revenue streams that are within the scope of and accounted for under Topic 606 include service charges on deposit accounts, debit card interchange fees, and fees levied for other services the Company provides its customers.  The guidance does not apply to revenue associated with financial instruments such as loans and investments, and other noninterest income such as loan servicing fees and earnings on bank-owned life insurance, which are accounted for on an accrual basis under other provisions of GAAP.  In total, approximately 21% of the Company’s noninterest revenue was outside of the scope of the ASC 606 for the three months ended March 31, 2020.

All of the company’s revenue from contracts within the scope of ASC 606 is recognized as noninterest income.  The following table presents the Company’s sources of noninterest income for the three-month periods ended March 31, 2020 and 2019.  Items outside the scope of ASC 606 are noted as such (dollars in thousands, unaudited).

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

    

2020

    

2019

Non-interest income

 

 

 

 

 

 

Service charges on deposits

 

 

 

 

 

 

Returned item and overdraft fees

    

$

1,663

    

$

1,567

Other service charges on deposits

 

 

1,520

 

 

1,376

Debit card interchange income

 

 

1,632

 

 

1,512

Loss on limited partnerships(1)

 

 

(158)

 

 

(450)

Dividends on equity investments(1)

 

 

194

 

 

231

Unrealized gains recognized on equity investments(1)

 

 

447

 

 

 —

Net gains on sale of securities(1)

 

 

 —

 

 

 6

Other(1)

 

 

808

 

 

1,664

Total non-interest income

 

$

6,106

 

$

5,906

 

 

 

 

 

 

 

Non-interest expense

 

 

 

 

 

 

Salaries and employee benefits (1)

 

$

10,172

 

$

9,243

Occupancy expense (1)

 

 

2,327

 

 

2,361

Gain on sale of OREO

 

 

 2

 

 

 3

Other (1)

 

 

5,317

 

 

6,245

Total non-interest expense

 

$

17,818

 

$

17,852


(1)

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

With regard to noninterest income associated with customer contracts, the Company has determined that transaction prices are fixed and performance obligations are satisfied as services are rendered, thus there is little or no judgment involved in the timing of revenue recognition under contracts that are within the scope of ASC 606.

30

PART I - FINANCIAL INFORMATION

ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

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

A variety of factors could have a material adverse impact on the Company’s financial condition or results of operations, and should be considered when evaluating the Company’s potential future financial performance.  They include, but are not limited to, the risk of unfavorable economic conditions in the Company’s market areas; risks associated with the current national emergency with respect to COVID-19 including the impact that national, state, and local responses, including any stimulus or relief efforts, have on customers’ ability to repay loans; the ability for the Company to serve its customers with modified branch operations as well as social distancing guidelines and mandates under state and local stay-at-home orders; risks associated with fluctuations in interest rates or a sustained low interest rate environment; liquidity risks; increases in nonperforming assets and credit losses that could occur, particularly in times of weak economic conditions or rising interest rates; reductions in the market value of available-for-sale securities that could result if interest rates increase substantially or an issuer has real or perceived financial difficulties; the Company’s ability to attract and retain skilled employees; the Company’s ability to successfully deploy new technology; the 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, 2019 and in Item 1A, herein.

CRITICAL ACCOUNTING POLICIES

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

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

31

OVERVIEW OF THE RESULTS OF OPERATIONS

AND FINANCIAL CONDITION

RESULTS OF OPERATIONS SUMMARY

First Quarter 2020 compared to First Quarter 2019

First Quarter 2020 net income was $7.8 million, or $0.51 per diluted share, compared to $8.9 million, or $0.58 per diluted share in the first quarter of 2019.  The Company’s annualized return on average equity was 9.97% and annualized return on average assets was 1.05% for the quarter ended March 31, 2020, compared to 12.99% and 1.44%, respectively, for the same quarter in 2019. The primary driver behind these unfavorable variances is the provision for loan and leases losses. 

The Company’s provision for loan and lease losses was $1.8 million in the first quarter of 2020 relative to $0.3 million in the same quarter of 2019.   The $1.5 million increase in provision for loan and lease losses is due mostly to the estimated impact that COVID-19 will have on the economy and our loan customers.   Management adjusted its qualitative risk factors under the incurred loss model for worsening economic conditions, changes in credit policy that provide payment deferrals to customers, expected changes in collateral values due to reduced cash flows, and external factors such as government shelter-in-place orders.   The uncertainty regarding our customers’ ability to repay loans could be adversely impacted by COVID-19 given these factors. 

 

FINANCIAL CONDITION SUMMARY

March 31, 2020 relative to December 31, 2019

The Company’s assets totaled $2.7 billion at March 31, 2020 relative to $2.6 billion at December 31, 2019.  The following provides a summary of key balance sheet changes during the first three months of 2020:

·

The Company’s balance of cash and due from banks was up by $13.1 million, or 20%, due to maintaining additional cash in our branches in late March 2020 as a result of lack of assurance from our armored delivery service that cash could be reliably delivered as requested due to COVID-19.

·

Securities available-for-sale were $620.2 million at March 31, 2020, an increase of $19.4 million, or 3%, during the quarter due to purchases of securities in March 2020 primarily to take advantage of temporary lower market pricing in the bond market, principally in the municipal securities market. 

·

Net loans and leases increased $33.8 million, or 2%, during the first quarter of 2020 to $1.8 billion at March 31, 2020, due mostly to a $39.5 million increase in Mortgage Warehouse Lines during the quarter. 

·

Nonperforming assets increased $1.6 million, to $8.1 million during the first quarter of 2020.  This increase was due to $2.0 million in new nonaccrual loans and paydowns of $0.4 million. The new nonaccrual loans were not a result of COVID-19, as they downgrades occurred mostly in the early part of the quarter.  The new nonaccrual loans consisted primarily of a few smaller real-estate loans and one commercial loan for $0.5 million.   

·

Total Deposits increased slightly by $11.0 million, or 1%, during the first quarter 2020.   Total time deposits declined by $34.3 million, while lower-cost transaction and savings accounts increased by $45.4 million.  Noninterest bearing deposits as a percent of total deposits was 32.3% at March 31, 2020, as compared to 31.9% at December 31, 2019. 

·

Short-term borrowings increased by $54.1 million to $74.1 million at March 31, 2020.  This increase was due to additional Federal Home Loan Bank (FHLB) overnight borrowings to fund increases in our assets during the quarter.

·

Total shareholders’ equity of $319.5 million at March 31, 2020 reflects an increase of $10.2 million, or 3%, relative to year-end 2019 due to capital from the addition of net income, a $7.7 million favorable swing in accumulated other comprehensive income/loss, and stock options exercised, net of $3.1 million in dividends paid.  There were share repurchases totaling 112,050 shares at a weighted average cost of $22.86 per share executed by the Company during the first quarter of 2020.

32

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

Overview

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

·

On March 3, 2020, the Federal Open Market Committee (FOMC) of the Federal Reserve Board lowered the federal funds rate by 50 basis points in its first emergency move since October 2008.

·

On March 4, 2020, the Governor of the state of California declared a state of emergency to help make additional resources available and formalize emergency actions to address COVID-19.

·

On March 6, 2020, the Federal Financial Institutions Examination Council (FFIEC) issued guidance to financial institutions reminding them to include pandemic planning in business continuity plans.

·

Starting on March 9, 2020, the Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and Conference of State Bank Supervisors began issuing various Interagency Guidance Statements to encourage financial institutions to meet the financial needs of customers affected by the Coronavirus.

·

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.

·

On March 15, 2020, the FOMC of the Federal Reserve Board lowered the federal funds rate by 100 basis points in its second emergency move in two weeks, this time on a Sunday.   In addition, the FOMC announced that it would let banks borrow from the discount window for up to 90 days, reduced the reserve requirement ratios to zero percent, united with five other central banks to ensure dollars are available via swap lines, and increase bond holdings by at least $700 billion.

·

Effective March 20, 2020, the state of California ordered the closure of all non-essential workplaces, restricting non-essential travel, and ordering a state-wide shelter-in-place order.   This was followed by extensions of these orders in April and many local municipalities in which the Company operates issued orders mandating additional requirements to protect their citizens.

·

On March 22, 2020, the federal financial institution regulatory agencies (the agencies) issued guidance to financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (TDRs).   The guidance was subsequently modified on April 7, 2020 to conform with Section 4013 of the Coronavirus Aid, Relief and Economic Security (CARES) Act.

·

On March 27, 2020, the CARES Act was enacted by Congress and signed into law by the President to address the impact of the COVID-19 on the economy.   Among other things, the CARES Act provided banking institutions with the option of deferring the implementation of the Current Expected Credit Loss (“CECL”) accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326) until later in 2020; confirmed that certain loan modifications would not be treated as a TDR; authorized the Small Business Administration to create the Paycheck Protection Program (PPP) which allows banking institutions to offer a certain amount of forgivable loans to primarily assist with funding payroll for small businesses; and provides a temporary reduction to the minimum ratio under the Community Bank Leverage Ratio framework.

 

33

Impact of COVID-19 on the Company’s Operations

·

The Company has not yet experienced any increase in classified assets or nonperforming assets as a result of COVID-19.  Further, we have not experienced any charge-offs as a result of COVID-19.  However, the Company has taken actions to mitigate the impact on credit losses including permitting short-term payment deferrals to current customers, as well as providing bridge loans and SBA Paycheck Protection Program loans.  For further information on the interest deferrals, please see the “Nonperforming Assets” section below.  However, the change in economic conditions had a material impact on our provision for loan and lease losses.  The Company elected under Section 4014 of the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020.   Although this deferral will still require CECL to be implemented as of January 1, 2020, the Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit losses. The most significant unknown factor is how long economic activity will be impacted by COVID-19.  Therefore, more time is needed to assess the impact of this economic uncertainty and related actions taken such as the stimulus provisions of the CARES Act on the Company’s allowance for loan and lease losses under the CECL methodology.  It is anticipated that if economic conditions do not improve, in future quarters of 2020, the provision for loan and lease losses could be at the same or higher level as that booked in the first quarter of 2020.

·

In addition to the expected increase in provision for loan losses, the Company expects that net interest income will be reduced due to a lower net interest margin as a result of the FOMC’s emergency rate cuts in March 2020.  New loans booked in 2020 will be at lower rates and although deposit costs will also decline, deposit costs were already low or at their floors prior to these interest rate cuts.  Further, it is expected that the stay-at-home and record unemployment resulting from the COVID-19 pandemic will reduce consumer spending which will reduce our fee income, primarily from debit and credit card interchange fees.  It’s also expected that the Company will offer concessions or certain fee waivers to consumers adversely affected by COVID-19.  These actions will likely result in lower deposit service charge income as compared to the first quarter of 2020.

·

The COVID-19 pandemic has not adversely affected our capital or financial resources at this time.  During the first quarter of 2020, total shareholders’ equity increased by $10.2 million, or 3%, to $319.5 million.  The largest component of this was a $7.7 million increase in accumulated other comprehensive income as a result of increases in the value of our investment portfolio due to lower interest rates.  If interest rates rise, this component of equity would be expected to decline.   In addition, the Company earned $7.8 million in net income in the first quarter of 2020 and paid a twenty cent per share dividend of $3.1 million.   The Company also declared a twenty cent per share dividend to be paid on May 13, 2020.   Although presently not expected, if the Company were to incur significant credit losses as a result of COVID-19’s impact on our customers’ ability to repay loans, capital could be adversely impacted.   With respect to liquidity, the Company maintains strong primary and secondary liquidity sources as further described under “Liquidity and Market Risk Management” below.

·

While we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet, this could change in future periods.  Certain valuation assumptions and judgments continue to change to account for pandemic-related circumstances such as widening credit spreads.  However, we do not anticipate any significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.  As of March 31, 2020, our goodwill was not impaired. The Company performed a qualitative assessment of its goodwill during the first quarter of 2020 and concluded that it was not more likely than not that a goodwill impairment exists.  The Company will continue to monitor its goodwill recorded on the balance sheet for potential impairment.  In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings.  Such a charge would have no impact on tangible capital or regulatory capital.  At March 31, 2020, we had goodwill of $27.4 million which represented 9% of total equity at March 31, 2020.  

·

As an essential service under California’s stay-at-home orders, the Company continues to serve its customers. Each of our branches with a drive-up or walk-up facility continues to remain open.  We also continue to accept

34

appointments.  Out of our 40 branch locations, nine of them do not have a drive-up or walk-up facility and are currently closed except by appointment.  Most of our back-office and corporate employees are working remotely and it has not adversely affected our operations.   In addition, none of our internal controls have changed or are expected to change as a result of the remote work arrangements.  The Company is prepared to continue operating in this manner until it is safe to begin bringing those working remotely back to our corporate offices and branches.

·

At this time, the Company did not experience any challenges in implementing its business continuity plans.  The Company’s Risk Management team began preparing in late January and early February with ordering of supplies such as hand sanitizer, masks and cleaning supplies, as well as laptops for those who did not have one.   This enabled the Company to immediately communicate and implement plans to continue operations in our banking facilities while enabling those non-customer facing employees to immediately begin working remotely.  The Company did not face any material resource constraints in implementing these plans.

·

As a financial institution providing essential services, the Company expects continued demand for loans and deposits. As described above, it is expected that certain services may see declines in demand such as debit and credit card interchange given lower consumer spending.  While overall net income is expected to decline, it presently is more a function of the interest rate environment than a change in overall demand for loan and deposit products. 

·

The Company’s primary footprint is in the Central San Joaquin Valley of California. As a result, restrictions on non-essential travel are not expected to adversely affect our ability to service our loan and deposit customers.  The Company also loosened its vacation and sick-time policy to accommodate our employees who were affected by COVID-19.  The Company has not had any temporary or permanent reductions in staff as a result of COVID-19.

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 noninterest 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 noninterest expense is comprised of operating costs that facilitate offering a broad range of banking services to our customers.

NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income was $23.8 million for the first quarter of 2020, a decrease of $0.2 million, or 1%, as compared to the first quarter of 2019.   The slight decrease in net interest income for the first quarter of 2020 as compared to the same period in 2019 is due to lower net interest margin, partially offset by an increase in average earning assets. 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. 

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.

35

Average Balances and Rates

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the three months ended

 

 

March 31, 2020

 

March 31, 2019

Assets

    

Average
Balance 
(1)

    

Income/
Expense

    

Average
Rate/Yield 
(2)

    

Average
Balance 
(1)

    

Income/
Expense

    

Average
Rate/Yield 
(2)

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold/due from time

 

$

37,124

 

$

140

 

1.52%

 

$

11,469

    

$

73

 

2.58%

Taxable

 

 

408,591

 

 

2,460

 

2.42%

    

 

418,901

 

 

2,617

 

2.53%

Non-taxable

 

 

195,690

 

 

1,339

 

3.48%

 

 

142,329

 

 

1,045

 

3.77%

Total investments

 

 

641,405

 

 

3,939

 

2.69%

 

 

572,699

 

 

3,735

 

2.84%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases:(3)

 

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

1,394,911

 

 

18,722

 

5.40%

 

 

1,464,275

 

 

20,100

 

5.57%

Agricultural

 

 

48,532

 

 

583

 

4.83%

 

 

50,550

 

 

780

 

6.26%

Commercial

 

 

107,696

 

 

1,097

 

4.10%

 

 

122,597

 

 

1,577

 

5.22%

Consumer

 

 

7,583

 

 

368

 

19.52%

 

 

8,718

 

 

315

 

14.65%

Mortgage warehouse lines

 

 

144,621

 

 

1,264

 

3.52%

 

 

63,120

 

 

927

 

5.96%

Other

 

 

5,242

 

 

78

 

5.98%

 

 

3,107

 

 

49

 

6.40%

Total loans and leases

 

 

1,708,585

 

 

22,112

 

5.21%

 

 

1,712,367

 

 

23,748

 

5.62%

Total interest earning assets (4)

    

 

2,349,990

 

 

26,051

 

4.52%

 

 

2,285,066

 

 

27,483

 

4.93%

Other earning assets

 

 

12,841

 

 

 

 

 

 

 

11,678

 

 

 

 

 

Non-earning assets

 

 

196,906

 

 

 

 

 

 

 

209,613

 

 

 

 

 

Total assets

 

$

2,559,737

 

 

 

 

 

 

$

2,506,357

 

 

 

 

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

88,731

 

$

62

 

0.28%

 

$

99,252

 

$

72

 

0.29%

NOW

 

 

456,586

 

 

122

 

0.11%

 

 

437,209

 

 

126

 

0.12%

Savings accounts

 

 

297,721

 

 

73

 

0.10%

 

 

287,773

 

 

75

 

0.11%

Money market

 

 

117,249

 

 

43

 

0.15%

 

 

128,686

 

 

41

 

0.13%

Certificates of deposit, under $100,000

 

 

80,852

 

 

134

 

0.67%

 

 

90,346

 

 

278

 

1.25%

Certificates of deposit, $100,000 or more

 

 

379,699

 

 

1,233

 

1.31%

 

 

381,950

 

 

2,038

 

2.16%

Brokered deposits

 

 

40,824

 

 

167

 

1.65%

 

 

50,000

 

 

325

 

2.64%

Total interest bearing deposits

 

 

1,461,662

 

 

1,834

 

0.50%

 

 

1,475,216

 

 

2,955

 

0.81%

Borrowed funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds purchased

 

 

 4

 

 

 —

 

 —

 

 

1,122

 

 

 —

 

 —

Repurchase agreements

 

 

27,482

 

 

27

 

0.40%

 

 

17,278

 

 

17

 

0.40%

Short term borrowings

 

 

5,946

 

 

 9

 

0.61%

 

 

8,121

 

 

55

 

2.75%

TRUPS

 

 

34,962

 

 

394

 

4.53%

 

 

34,784

 

 

483

 

5.63%

Total borrowed funds

 

 

68,394

 

 

430

 

2.53%

 

 

61,305

 

 

555

 

3.67%

Total interest bearing liabilities

 

 

1,530,056

 

 

2,264

 

0.60%

 

 

1,536,521

 

 

3,510

 

0.93%

Demand deposits - non-interest bearing

 

 

678,592

 

 

 

 

 

 

 

652,910

 

 

 

 

 

Other liabilities

 

 

36,220

 

 

 

 

 

 

 

39,150

 

 

 

 

 

Shareholders' equity

 

 

314,869

 

 

 

 

 

 

 

277,776

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

2,559,737

 

 

 

 

 

 

$

2,506,357

 

 

 

 

 

Interest income/interest earning assets

 

 

 

 

 

 

 

4.52%

 

 

 

 

 

 

 

4.93%

Interest expense/interest earning assets

 

 

 

 

 

 

 

0.39%

 

 

 

 

 

 

 

0.63%

Net interest income and margin(5)

 

 

 

 

$

23,787

 

4.13%

 

 

 

 

$

23,973

 

4.30%

(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 21% effective tax rate.

(3)

Loans are gross of the allowance for possible loan losses.  Loan fees have been included in the calculation of interest income.  Net loan fees and loan acquisition FMV amortization were $(140) thousand and $9 thousand for the quarters ended March 31, 2020 and 2019, respectively.

(4)

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

(5)

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

 

36

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

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

2020 over 2019

 

 

Increase (decrease) due to

Assets:

    

Volume

    

Rate

    

Net

Investments:

 

 

 

 

 

 

 

 

 

Federal funds sold/due from time

    

$

163

    

$

(96)

    

$

67

Taxable

 

 

(64)

 

 

(93)

 

 

(157)

Non-taxable

 

 

392

 

 

(98)

 

 

294

Total investments

 

 

491

 

 

(287)

 

 

204

Loans and leases:

 

 

 

 

 

 

 

 

 

Real estate

 

 

(952)

 

 

(426)

 

 

(1,378)

Agricultural

 

 

(31)

 

 

(166)

 

 

(197)

Commercial

 

 

(192)

 

 

(288)

 

 

(480)

Consumer

 

 

(41)

 

 

94

 

 

53

Mortgage warehouse

 

 

1,197

 

 

(860)

 

 

337

Other

 

 

34

 

 

(5)

 

 

29

Total loans and leases

 

 

15

 

 

(1,651)

 

 

(1,636)

Total interest earning assets

 

$

506

 

$

(1,938)

 

$

(1,432)

Liabilities

 

 

 

 

 

 

 

 

 

Interest bearing deposits:

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

(8)

 

 

(2)

 

$

(10)

NOW

 

 

 6

 

 

(10)

 

 

(4)

Savings accounts

 

 

 3

 

 

(5)

 

 

(2)

Money market

 

 

(4)

 

 

 6

 

 

 2

Certificates of deposit, under $100,000

 

 

(29)

 

 

(115)

 

 

(144)

Certificates of deposit, $100,000 or more

 

 

(12)

 

 

(793)

 

 

(805)

Brokered deposits

 

 

(60)

 

 

(98)

 

 

(158)

Total interest bearing deposits

 

 

(104)

 

 

(1,017)

 

 

(1,121)

Borrowed funds:

 

 

 

 

 

 

 

 

 

Repurchase agreements

 

 

10

 

 

 —

 

 

10

Short term borrowings

 

 

(15)

 

 

(31)

 

 

(46)

TRUPS

 

 

 2

 

 

(91)

 

 

(89)

Total borrowed funds

 

 

(3)

 

 

(122)

 

 

(125)

Total interest bearing liabilities

 

 

(107)

 

 

(1,139)

 

 

(1,246)

Net interest income

 

$

613

 

$

(799)

 

$

(186)

 

The volume variance calculated for the first quarter of 2020 relative to the first quarter of 2019 was a favorable $0.6 million due to higher average balances of interest-earning assets, resulting from organic growth in mortgage warehouse loans.  During 2019, the Company changed its pricing strategy with respect to mortgage warehouse lines in order to encourage increased utilization.  This strategy caused line utilization to increase as demonstrated by the $1.2 million favorable volume variance.   There was an unfavorable rate variance of $0.8 million for the comparative quarters, since the weighted average yield on interest-earning assets fell by 41 basis points while the weighted average cost of interest-bearing liabilities decreased by 33 basis points.  The rate variance was negatively impacted by the following factors:  A shift in our earning asset mix into lower-yielding loans and investments; aggressive pricing instituted on mortgage

37

warehouse lines to encourage increased line utilization; partially offset by lower costs of time-deposits and other interest-bearing liabilities. 

As mentioned above, the FOMC lowered rates by a total of 150 basis points in March 2020 in two separate emergency actions. These actions are expected to have an unfavorable impact on our net interest margin and net interest income in future quarters.  At March 31, 2020, approximately 19% of our total portfolio, or $337 million, consists of variable rate loans.  Of these variable rate loans, approximately $119 million have floors that limited the overall reduction in rates in the first quarter. At March 31, 2020, our outstanding fixed rate loans represented 30% of our loan portfolio.   The remaining 51% of our loan portfolio at March 31, 2020 consists of adjustable rate loans.  However, the majority of these loans (approximately $650 million) will not adjust for at least another 3 years.  Approximately $53 million of these adjustable rate loans adjusted in April 2020 and $46 million will reprice in smaller amounts monthly over the remainder of 2020.  Another $18 million of these adjustable rate loans will reprice in the first quarter of 2021. 

In the later part of the first quarter 2020, overall cash balances were increased as a precaution to reduce uncertainty of our cash delivery providers being able to serve us during the stay-at-home order.  It is expected that these balances will return to more normalized levels later in 2020.  Overall average investment securities increased by $68.7 million at March 31, 2020 as compared to March 31, 2019.  The largest increase was to average non-taxable securities of $53.4 million. The overall investment portfolio had a tax-equivalent yield of 2.81% at March 31, 2020, with an average life of 4.3 years.

Interest expense was $2.3 million in the first quarter of 2020, a decline of $1.2 million, or 35%, compared to the first quarter of 2019.   The significant decline in interest expense is attributable to a favorable shift in deposit mix as average total time deposits declined by $20.9 million in the first quarter of 2020 as compared to the same quarter in 2019 and the average cost of interest-bearing deposits declined by 31 basis points, or 38%, to 50 basis points.

 

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 loan loss provision of $1.8 million in the first quarter of 2020 compared to $0.3  million in the first quarter of 2019.  As discussed above, the significant increase in the provision for loan and lease losses is due to management’s estimate of the impact of increased economic uncertainty with respect to COVID-19 on our customers’ ability to repay loans.  Management adjusted its qualitative risk factors under our incurred loss model based on information presently available for economic conditions, changes in payment deferral procedures, expected changes in collateral values due to reduced cash flows, and external factors such as government actions.  In particular, the uncertainty regarding our customers’ ability to repay loans could be adversely impacted by COVID-19 given higher unemployment rates, requests for payment deferrals, temporary business shut-downs, and reduced consumer and business spending. 

The Company was subject to the adoption of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326). However, the Company elected under Section 4014 of the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020.   Although this deferral will still require CECL to be adopted as of January 1, 2020, the Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit losses. There is increased uncertainty on the local, regional, and national economy as a result of local and state stay-at-home orders, as well as relief measures provided at a national, state, and local level.  Further, the Company has taken actions to mitigate the impact on credit losses including permitting short-term payment deferrals to current customers, as well as providing bridge loans and SBA Paycheck Protection Program loans.  More time is needed to assess the impact of this uncertainty and related actions on the Company’s allowance for loan and lease losses under the CECL methodology.  It is anticipated that a one-time adjustment to the allowance will be booked as an adjustment through equity, net of taxes, as previously disclosed in Company’s Form 10-K for the fiscal year ended December 31, 2019, for approximately $12

38

million.   The impact of COVID-19 on the Company’s allowance for loan and leases losses under the CECL methodology in the first quarter 2020 will remain unknown until more information is available with respect to the impact of the economic uncertainty of the impact of COVID-19, net of actions taken to mitigate such impact.

Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance.  The Company recorded net charge-offs of $0.3 million in the first quarter of 2020 as compared to net charge-offs of $0.5 million in the first quarter of 2019.

The allowance for loan and lease losses is at a level that, in Management’s judgment, is adequate to absorb probable loan losses related to specifically-identified impaired loans as well as probable incurred losses in the remaining loan portfolio. 

The Company’s policies for monitoring the adequacy of the allowance, determining loan balances that should be charged off, and other detailed information with regard to changes in the allowance are discussed in Note 11 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.

NONINTEREST INCOME AND NONINTEREST EXPENSE

The following table provides details on the Company’s noninterest income and noninterest expense for the three-month periods ended March 31, 2020 and 2019:

Noninterest Income/Expense

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

NON-INTEREST INCOME:

 

2020

 

% of Total

 

2019

 

% of Total

Service charges on deposit accounts

    

$

3,183

    

52.13%

    

$

2,943

    

49.83%

Other service charges and fees

 

 

2,404

 

39.37%

 

 

2,262

 

38.30%

Net gains on sale of securities available-for-sale

 

 

 —

 

 —

 

 

 6

 

0.10%

Bank-owned life insurance

 

 

38

 

0.62%

 

 

900

 

15.24%

Other

 

 

481

 

7.88%

 

 

(205)

 

-3.47%

Total non-interest income

 

$

6,106

 

100.00%

 

$

5,906

 

100.00%

As a % of average interest-earning assets (1)

 

 

 

 

1.05%

 

 

 

 

1.05%

 

 

 

 

 

 

 

 

 

 

 

OTHER OPERATING EXPENSE:

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

10,172

 

57.08%

 

$

9,243

 

51.78%

Occupancy costs

 

 

 

 

 

 

 

 

 

 

Furniture & equipment

 

 

465

 

2.61%

 

 

524

 

2.94%

Premises

 

 

1,862

 

10.44%

 

 

1,837

 

10.29%

Advertising and marketing costs

 

 

601

 

3.37%

 

 

692

 

3.88%

Data processing costs

 

 

1,142

 

6.41%

 

 

1,251

 

7.01%

Deposit services costs

 

 

1,797

 

10.09%

 

 

1,769

 

9.91%

Loan services costs

 

 

 

 

 

 

 

 

 

 

Loan processing

 

 

171

 

0.96%

 

 

171

 

0.96%

Foreclosed assets

 

 

 6

 

0.03%

 

 

20

 

0.11%

Other operating costs

 

 

 

 

 

 

 

 

 

 

Telephone & data communications

 

 

368

 

2.07%

 

 

307

 

1.72%

Postage & mail

 

 

68

 

0.38%

 

 

195

 

1.09%

Other

 

 

386

 

2.17%

 

 

344

 

1.91%

Professional services costs

 

 

 

 

 

 

 

 

 

 

Legal & accounting

 

 

328

 

1.84%

 

 

411

 

2.30%

Acquisition costs

 

 

 —

 

 —

 

 

23

 

0.13%

Other professional service

 

 

247

 

1.39%

 

 

937

 

5.25%

Stationery & supply costs

 

 

115

 

0.65%

 

 

55

 

0.31%

Sundry & tellers

 

 

90

 

0.51%

 

 

73

 

0.41%

Total non-interest expense

 

$

17,818

 

100.00%

 

$

17,852

 

100.00%

As a % of average interest-earning assets (1)

 

 

 

 

3.05%

 

 

 

 

3.17%

Efficiency ratio (2)(3)

 

 

58.88%

 

 

 

 

58.74%

 

 


(1)

Annualized

39

(2)

Tax equivalent

(3)

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

 

 

Total noninterest income reflects an increase of $0.2 million, or 3%, for the quarter ended March 31, 2020 as compared to the same quarter in 2019.   The largest variances were in bank-owned life insurance (BOLI) and other noninterest income.  BOLI income decreased by $0.9 million as compared to the first quarter of 2019 due mostly to unfavorable fluctuations in underlying values of assets in the specific account BOLI policies that are designed to have similar assets to those in the deferred compensation plans.  Thus, these lower values in BOLI policies are offset by lower deferred compensation expense reflected primarily in director fees expense.   At March 31, 2020, there was $42.8 million in BOLI policies associated with the deferred compensation plans and $8.0 million in separate account BOLI policies.  Mostly offsetting this unfavorable change in BOLI income was a $0.7 million increase in other noninterest income due to two items.  First, there was a $0.5 million increase in the valuation of restricted stock held by the Company recorded under FASB ASU 2016-01.  This stock is related to an equity investment in Pacific Coast Bankers’ Bank and is adjusted when financial information becomes available, generally in the late first quarter of each year.  This stock was revalued in the first quarter of 2020, but was not revalued in 2019 until the second quarter.  In addition, noninterest income includes a valuation adjustment related to investments in low-income housing credit investments.  This valuation adjustment was a reduction of income of $0.2 million in the first quarter of 2020 as compared to a $0.5 million reduction in the first quarter of 2019.  

Both “service charges on deposit accounts” and “other service charges and fees” increased in the first quarter 2020 as compared to the first quarter 2019.  The Company expects that service charges on deposit accounts could decline in future quarters based on reduced customer activity and increased waivers due to COVID-19. 

Total noninterest expense remained relatively flat at $17.8 million for the first quarter of 2020 as compared to $17.9 million for the first quarter of 2019.   The $0.9 million increase in salaries and employee benefit expense for the first quarter of 2020 as compared to the same quarter in 2019, was offset by a decrease in other professional services ($0.7 million decrease) and smaller decreases in postage & mail, and advertising.   The increase in salaries and employee benefits during the comparative period is due mostly to higher base salaries of $0.6 million due to annual merit increases for employees and a change in the mix of the employee base due to more lending officers and senior officers in risk and operations, as well as a $0.2 million impact of salaries deferred as a loan cost and a $0.1 million increase in payroll taxes.  There have not been any permanent or temporary reductions in employees as a result of COVID-19.

The decrease in other professional services is due mostly to directors’ deferred compensation being included in this category.  As described above under noninterest income, BOLI income related to deferred compensation declined during the first quarter of 2020 as compared to the same period in 2019.  Mostly offsetting this decline in noninterest income was a decline in noninterest expense related to deferred compensation related to this BOLI income. 

The Company’s tax-equivalent efficiency ratio was 58.88% in the first quarter 2020 as compared to 58.74% in the same quarter of 2019.  The efficiency ratio represents total noninterest expense divided by the sum of fully tax-equivalent net interest and noninterest income; the provision for loan losses and investment gains/losses are excluded from the equation.   Given the expected decline in net interest income due to the lower rate environment in 2020, it is expected that the efficiency ratio will increase in 2020. 

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.  The Company’s provision for income taxes was 24.0% of pre-tax income in the first quarter of 2020 relative to 24.1% in the first quarter of 2019.  The slight decrease for 2020 is due primarily to an increase in municipal bond interest in 2020, partially offset by lower tax-exempt BOLI income. 

40

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 may 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.  The Company’s investments can serve several purposes, including the following:  1) they can provide liquidity for potential funding needs; 2) they provide a source of pledged assets for securing public deposits, bankruptcy deposits and certain borrowed funds which require collateral; 3) they constitute a large base of assets with structural characteristics that can be changed more readily than loan or deposit portfolios, as might be required for interest rate risk management purposes; 4) they are another interest-earning option for the placement of surplus funds when loan demand is light; and 5) they can provide partially tax exempt income.  Surplus balances in our Federal Reserve Bank (“FRB”) account and fed funds sold to correspondent banks typically represent the temporary investment of excess liquidity.  Aggregate investments totaled $648.5 million, or 24% of total assets at March 31, 2020, and $615.3 million, or 24% of total assets at December 31, 2019.

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 4.3 years and their average effective duration was 3.0 years at March 31, 2020, down from an expected average life of 4.4 years and an average effective duration of 3.2 years at year-end 2019.

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

December 31, 2019

 

 

Amortized

 

Fair Market

 

Amortized

 

Fair Market

 

    

Cost

    

Value

    

Cost

    

Value

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

    

$

11,587

    

$

11,742

    

$

12,125

    

$

12,145

Mortgage-backed securities

 

 

393,680

 

 

405,246

 

 

398,353

 

 

400,389

State and political subdivisions

 

 

195,565

 

 

203,166

 

 

181,900

 

 

188,265

Total securities

 

$

600,832

 

$

620,154

 

$

592,378

 

$

600,799

 

The net unrealized gain on our investment portfolio, or the amount by which aggregate fair market values exceeded amortized cost, was $19.3 million at March 31, 2020, an absolute difference of $10.9 million relative to the net unrealized gain of $8.4 million at December 31, 2019.  The change was caused by declining long-term market interest rates on fixed-rate bond values.  Municipal bond balances comprise 33% of our total securities portfolio at March 31, 2020, as compared to 31% at December 31, 2019. Municipal bonds purchased have strong underlying ratings, and we review all municipal bonds in our portfolio every quarter for potential impairment.

Investment securities that were pledged as collateral for borrowings and/or potential borrowings from the Federal Home Loan Bank and the Federal Reserve Bank, repurchase agreements, and other purposes as required or permitted by law totaled $240.8 million at March 31, 2020 and $234.8 million at December 31, 2019, leaving $379.4 million in unpledged

41

debt securities at March 31, 2020 and $366.0 million at December 31, 2019.  Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled $72.9 million at March 31, 2020 and $71.0 million at December 31, 2019.

LOAN AND LEASE PORTFOLIO

Gross loans and leases reflect a net increase of $35.5 million, or 2%, growing to $1.80 billion at March 31, 2020 from $1.76 billion at December 31, 2019 due to an increase in outstanding balances on mortgage warehouse lines. 

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)

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

Real estate:

 

 

 

 

 

 

1-4 family residential construction

 

$

94,578

 

$

105,979

Other construction/land

 

 

90,602

 

 

91,413

1-4 family - closed-end

 

 

189,634

 

 

200,181

Equity lines

 

 

48,536

 

 

49,599

Multi-family residential

 

 

58,238

 

 

54,457

Commercial real estate - owner occupied

 

 

302,934

 

 

343,883

Commercial real estate - non-owner occupied

 

 

474,926

 

 

412,569

Farmland

 

 

141,740

 

 

144,033

Total real estate

 

 

1,401,188

 

 

1,402,114

Agricultural

 

 

49,199

 

 

48,036

Commercial and industrial

 

 

111,990

 

 

115,532

Mortgage warehouse lines

 

 

228,608

 

 

189,103

Consumer loans

 

 

7,040

 

 

7,780

Total loans and leases

 

$

1,798,025

 

$

1,762,565

Percentage of Total Loans and Leases

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

1-4 family residential construction

 

 

5.26%

    

 

6.01%

Other construction/land

 

 

5.04%

 

 

5.19%

1-4 family - closed-end

 

 

10.55%

 

 

11.36%

Equity lines

 

 

2.70%

 

 

2.81%

Multi-family residential

 

 

3.24%

 

 

3.09%

Commercial real estate - owner occupied

 

 

16.85%

 

 

19.51%

Commercial real estate - non-owner occupied

 

 

26.41%

 

 

23.42%

Farmland

 

 

7.88%

 

 

8.17%

Total real estate

 

 

77.93%

 

 

79.55%

Agricultural

 

 

2.74%

 

 

2.73%

Commercial and industrial

 

 

6.23%

 

 

6.55%

Mortgage warehouse lines

 

 

12.71%

 

 

10.73%

Consumer loans

 

 

0.39%

 

 

0.44%

Total loans and leases

 

 

100.00%

 

 

100.00%

 

Residential real estate loans have been declining since the Company made the deliberate decision to discontinue such lending at the end of 2018, thus maturing balances and prepayments are no longer being replaced.  Total commercial real estate loan balances increased in 2020 by $21.4 million due mostly to an increase in non-owner occupied properties.  In

42

the first quarter of 2020, the Company hired lending teams to focus primarily on commercial real estate loans in our northern and southern markets. 

The $39.5 million, or 21%, increase in warehouse lines in the first quarter 2020 was due to seasonal loan demand during the later part of the first quarter.  Average warehouse line balances were down during the first quarter 2020 as compared to the fourth quarter 2019 due to the seasonality of home buying that slows down in the late fourth quarter to early first quarter of each year.   The Company had a significant increase in warehouse line utilization toward the end of the first quarter 2020.  The increase in utilization is also a result of lower rates in March 2020 impacting home refinancing activity.  Mortgage warehouse utilization was 66.6% at March 31, 2020, as compared to 58.7% at December 31, 2019. Future utilization of the mortgage warehouse lines could be impacted if the economic impacts of the COVID-19 pandemic reduce the demand for mortgages.

The Company has elected to participate in the Small Business Administration’s Paycheck Protection Program (PPP) as authorized by the CARES Act and began accepting and funding loans under this program in April 2020.  As of April 30, 2020, the Company obtained approval from the Small Business Administration to fund PPP loans for approximately 800 customers totaling $94.2 million.   

NONPERFORMING ASSETS

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, in addition to foreclosed assets which can include 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 underlying characteristics and circumstances.  The following table presents comparative data for the Company’s nonperforming assets and performing TDRs as of the dates noted:

Nonperforming assets and performing troubled debt restructurings

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

    

March 31, 2019

NON-ACCRUAL LOANS:

 

 

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

Other construction/land

 

$

10

 

$

31

 

$

75

1-4 family - closed-end

 

 

866

 

 

741

 

 

822

Equity lines

 

 

535

 

 

480

 

 

488

Commercial real estate - owner occupied

 

 

1,941

 

 

1,440

 

 

594

Commercial real estate - non-owner occupied

 

 

2,608

 

 

2,105

 

 

 —

Farmland

 

 

257

 

 

258

 

 

1,642

TOTAL REAL ESTATE

 

 

6,217

 

 

5,055

 

 

3,621

Agriculture

 

 

 —

 

 

 —

 

 

 —

Commercial and industrial

 

 

1,116

 

 

651

 

 

811

Consumer loans

 

 

18

 

 

31

 

 

136

TOTAL NONPERFORMING LOANS

 

 

7,351

 

 

5,737

 

 

4,568

 

 

 

 

 

 

 

 

 

 

Foreclosed assets

 

 

766

 

 

800

 

 

806

Total nonperforming assets

 

$

8,117

 

$

6,537

 

$

5,374

Performing TDRs (1)

 

$

8,188

 

$

8,415

 

$

10,674

Nonperforming loans as a % of total gross loans and leases

 

 

0.41%

 

 

0.33%

 

 

0.26%

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

 

 

0.45%

 

 

0.37%

 

 

0.31%

(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.

 

43

Total nonperforming assets increased by over $1.6 million, or 24%, during the first quarter of 2020.  The increase resulted from $2.0 million in new nonaccrual loans and paydowns of $0.4 million.  The increases consisted of a few smaller real-estate loans totaling $1.5 million being downgraded to nonaccrual status in the early part of the first quarter of 2020, as well as a single commercial loan for $0.5 million moving to nonaccrual status in early March 2020.   None of these increases were due to COVID-19.  As a result of these increases, the Company’s ratio of nonperforming assets to loans increased to 0.41% at March 31, 2020, from 0.33% at December 31, 2019.  All of the Company’s impaired assets are periodically reviewed, and are either well-reserved based on current loss expectations, or are carried at the fair value of the underlying collateral net of expected disposition costs.

As shown in the table, we also had $8.2 million in loans classified as performing TDRs on which we were still accruing interest as of March 31, 2020, a reduction of $0.2 million, or 3%, relative to December 31, 2019.

Foreclosed assets had a carrying value of $0.8 million at March 31, 2020, comprised of 8 properties classified as OREO and two mobile homes relative to year-end 2019 when foreclosed assets consisted of 10 properties classified as OREO and two mobile homes.  Two very-low value properties were sold during the first quarter 2020.  All foreclosed assets are periodically evaluated and written down to their fair value less expected disposition costs, if lower than the then-current carrying value.

An action plan is in place for each of our non-accruing loans and foreclosed assets and they are all being actively managed.  Collection efforts are continuously pursued for all nonperforming loans, but we cannot provide assurance that they will be resolved in a timely manner or that nonperforming balances will not increase.

The Company is providing deferrals to certain customers and taking advantage of Section 4013 of the CARES Act, which provides that such deferrals do not result in treatment of such loan as a TDR.  These deferrals typically provide deferrals of both principal and interest for 180 days.  Interest continues to accrue during the deferral period. At the end of the deferral period, for term loans, payments will be applied to accrued interest first and after the accrued interest is paid in full, the loan will be re-amortized with the maturity extended.  For lines of credit, the borrower must repay the accrued interest at the end of the deferral period or take out a second credit facility to repay the accrued interest.  As of April 15, 2020, we have had 104 commercial customers for a total of $149.1 million who have either executed a loan modification under Section 4013 of the CARES Act or we have approved a modification that is expected to be executed in April 2020.  Approximately $50.8 million of these modifications were in the hospitality industry representing 15 different customers, while $5.8 million of these modifications were in the restaurant industry representing 51 different customers. The remaining modifications were a mix of commercial customers who were current at the time the deferral was requested. While these modified loans are not classified as nonperforming or classified assets, we will continue to monitor these loans during the deferral period. If economic conditions worsen and these customers are not able to resume payments after the deferral period, it likely could result in higher classified and/or nonperforming assets, reversals of interest income, and/or higher charge-offs.

ALLOWANCE FOR LOAN AND LEASE LOSSES

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

As described above, the Company elected under Section 4014 of the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020.  The Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic and related stimulus and relief efforts on the expected lifetime credit losses.

The Company’s allowance for loan and lease losses was $11.5 million at March 31, 2020, an increase of $1.5 million, or 15%, relative to December 31, 2019 resulting from a $1.8 million loan loss provision recorded during the first quarter of 2020, less $0.3 million in net charge-offs during the same period.  As discussed above, the $1.8 million provision for

44

loan and lease losses is primarily a result of the impact of COVID-19 on our qualitative factors.   With respect to exposures related to the COVID-19 pandemic, the Company had fewer than 70 relationships in the hospitality industry totaling $216.0 million at March 31, 2020.  In addition to loans in the hospitality sector, we have approximately $13 million of loans in the energy industry, $86.2 million of loans in retail (which includes $21 million in restaurant loans), and $7 million in consumer loans. In general, we will lend up to a maximum LTV of 75% for owner occupied real estate and up to 65% on investor commercial real estate, which would include hospitality loans.

The allowance for loan and lease losses over total loans increased to 0.64% of total loans at March 31, 2020, as compared to 0.56% at December 31, 2019.  The ratio of the allowance for loan and lease losses to nonperforming loans was 155.80% at March 31, 2020, relative to 172.96% at December 31, 2019.  A separate allowance of $0.3 million for potential losses inherent in unused commitments is included in other liabilities at March 31, 2020.

45

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

Allowance for Loan and Lease Losses

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

For the three
months ended

 

For the three
months ended

 

For the year ended

 

    

March 31,

    

March 31,

    

December 31,

Balances:

 

2020

 

2019

 

2019

Average gross loans and leases outstanding during period (1)

 

$

1,708,585

 

$

1,712,367

 

$

1,753,748

Gross loans and leases outstanding at end of period

 

$

1,798,025

 

$

1,750,989

 

$

1,762,565

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

9,923

 

$

9,750

 

$

9,750

Provision charged to expense

 

 

1,800

 

 

300

 

 

2,550

Charge-offs

 

 

 

 

 

 

 

 

 

Real estate

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

 —

 

 

 —

 

 

 —

Other construction/land

 

 

 —

 

 

 —

 

 

 —

1-4 family - closed-end

 

 

 —

 

 

 —

 

 

 —

Equity lines

 

 

 —

 

 

 —

 

 

 —

Multi-family residential

 

 

 —

 

 

 —

 

 

 —

Commercial real estate- owner occupied

 

 

 —

 

 

 —

 

 

 —

Commercial real estate- non-owner occupied

 

 

 —

 

 

 —

 

 

1,190

Farmland

 

 

 —

 

 

 —

 

 

 —

Total real estate

 

 

 —

 

 

 —

 

 

1,190

Agricultural

 

 

 —

 

 

 —

 

 

 —

Commercial and industrial

 

 

25

 

 

579

 

 

1,274

Consumer loans

 

 

617

 

 

551

 

 

2,409

Total

 

$

642

 

$

1,130

 

$

4,873

Recoveries

 

 

 

 

 

 

 

 

 

Real estate

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

 

 —

 

 

 —

 

 

 —

Other construction/land

 

 

34

 

 

 —

 

 

 2

1-4 family - closed-end

 

 

 4

 

 

 4

 

 

148

Equity lines

 

 

34

 

 

21

 

 

150

Multi-family residential

 

 

 —

 

 

 —

 

 

 —

Commercial real estate- owner occupied

 

 

 —

 

 

 —

 

 

 —

Commercial real estate- non-owner occupied

 

 

 —

 

 

149

 

 

347

Farmland

 

 

 —

 

 

 —

 

 

 —

Total real estate

 

 

72

 

 

174

 

 

647

Agricultural

 

 

 —

 

 

 —

 

 

 —

Commercial and industrial

 

 

28

 

 

42

 

 

690

Consumer loans

 

 

272

 

 

302

 

 

1,159

Total

 

$

372

 

$

518

 

$

2,496

Net loan charge offs

 

$

270

 

$

612

 

$

2,377

Balance at end of period

 

$

11,453

 

$

9,438

 

$

9,923

 

 

 

 

 

 

 

 

 

 

RATIOS

 

 

 

 

 

 

 

 

 

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

 

 

0.06%

 

 

0.14%

 

 

0.14%

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

 

 

0.64%

 

 

0.54%

 

 

0.56%

Allowance for loan losses to nonperforming loans

 

 

155.80%

 

 

206.61%

 

 

172.96%

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

 

 

2.36%

 

 

6.48%

 

 

23.95%

Net loan charge-offs to provision for loan losses

 

 

15.00%

 

 

204.00%

 

 

93.22%

(1)

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

46

The Company’s allowance for loan and lease losses at March 31, 2020 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.  It is unlikely that all unused commitments will ultimately be drawn down.  Unused commitments to extend credit totaled $453.8 million at March 31, 2020 and $492.0 million at December 31, 2019, representing approximately 25% of gross loans outstanding at March 31, 2020 and 28% at December 31, 2019.  The drop in unused commitments is due in large part to the increase in outstanding balances on mortgage warehouse lines.  The Company also had undrawn letters of credit issued to customers totaling $9.1 million at March 31, 2020 and $8.6 million at December 31, 2019.  The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of 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 a $105 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 on the Company’s off-balance sheet arrangements, see Note 7 to the consolidated financial statements located elsewhere herein.

OTHER ASSETS

Interest-earning cash balances were discussed above in the “Investments” section, but the Company also maintains a certain level of cash on hand in the normal course of business as well as non-earning deposits at other financial institutions.  Our balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the amount of cash held at our branches, and our reserve requirement among other things, and it is subject to significant fluctuations 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, we could let brokered deposits or other wholesale borrowings roll off as they mature, or we might invest excess liquidity into longer-term, higher-yielding bonds.  The Company’s balance of non-earning cash and due from banks was $78.7 million at March 31, 2020 relative to $65.6 million at December 31, 2019.   The increase is primarily due to maintaining higher amounts of cash on hand due to lack of certainty from our armored cash delivery vendor during the COVID-19 pandemic due to potential staffing issues and governmental stay-at-home orders.

Foreclosed assets are discussed above in the section titled “Nonperforming Assets.”  Net premises and equipment increased by $1.0 million during the first quarter 2020, due primarily to investments in our ATM network. Goodwill was $27 million at March 31, 2020, unchanged during the first quarter 2020.   As mentioned above, the Company performed a qualitative assessment of goodwill impairment during the first quarter 2020 and determined that a quantitative analysis was not required at this time.  The Company will continue to monitor its Goodwill for potential impairment given the COVID-19 pandemic.  Bank-owned life insurance, with a balance of $50.7 million at March 31, 2020, is discussed in detail above in the “Noninterest Income and Noninterest Expense” section.

47

DEPOSITS AND INTEREST BEARING LIABILITIES

DEPOSITS

Deposits represent another key balance sheet category impacting the Company’s net interest income and 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 accounts such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts.  Information concerning average balances and rates paid by deposit type is included in the Average Balances and Rates tables appearing above, in the section titled “Net Interest Income and Net Interest Margin.”  A distribution of the Company’s deposits by type, showing the period-end balance and percentage of total deposits, is presented as of the dates indicated in the following table.

Deposit Distribution

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

Non-interest bearing demand deposits

 

$

704,700

 

$

690,950

Interest bearing demand deposits

 

 

119,882

 

 

91,212

NOW

 

 

456,132

 

 

458,600

Savings

 

 

304,894

 

 

294,317

Money market

 

 

113,766

 

 

118,933

Time, under $250,000

 

 

207,510

 

 

211,916

Time, $250,000 or more

 

 

242,507

 

 

252,446

Brokered deposits

 

 

30,000

 

 

50,000

Total deposits

 

$

2,179,391

 

$

2,168,374

 

 

 

 

 

 

 

Percentage of Total Deposits

 

 

 

 

 

 

Non-interest bearing demand deposits

 

 

32.33%

 

 

31.86%

Interest bearing demand deposits

 

 

5.50%

 

 

4.21%

NOW

 

 

20.93%

 

 

21.15%

Savings

 

 

13.99%

 

 

13.57%

Money market

 

 

5.22%

 

 

5.48%

Time, under $250,000

 

 

9.52%

 

 

9.77%

Time, $250,000 or more

 

 

11.13%

 

 

11.64%

Brokered deposits

 

 

1.38%

 

 

2.31%

Total

 

 

100.00%

 

 

100.00%

 

Deposit balances reflect net growth of $11.0 million, or 1%, during the first quarter of 2020.  Time deposits were $480.0 million at March 31, 2020 as compared to $514.4 million at December 31, 2019.   The $34.4 million decline in time-deposits was a result of a $20 million reduction in brokered deposits and a $14.4 million in other time-deposits.  The Company chose not to renew brokered deposits given the pricing that existed toward the end of the first quarter 2020.    Non-maturity deposits were up $45.4 million, or 3%, during the first quarter 2020.  All of our non-maturity deposit growth was organic in nature. 

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.  In particular, the Company’s ratio of noninterest-bearing deposits to total deposits was 32.3% at March 31, 2020 as compared to 31.9% at December 31, 2019.  Our promotions targeting transaction accounts 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 given the current highly competitive market for deposits no assurance can be provided with regard to future increases in core deposit balances.

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 agreements to repurchase, and/or junior subordinated debentures.  The Company uses short-term FHLB advances and

48

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 increased by $57.8 million, or 72%, during the first three months of 2020 due to an increase in borrowings from the FHLB.   Repurchase agreements totaled $29.4 million at March 31, 2020 relative to a balance of $25.7 million at year-end 2019.  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 $35.0 million at both March 31, 2020 and December 31, 2019, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities.    

OTHER NONINTEREST BEARING LIABILITIES

Other liabilities are principally comprised of operating lease right-of-use liabilities, accrued interest payable, other accrued but unpaid expenses, and certain clearing amounts.  The Company’s balance of other liabilities was $33.2 million at March 31, 2020 as compared to $35.5 million at December 31, 2019. 

LIQUIDITY AND MARKET RISK MANAGEMENT

LIQUIDITY

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

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

At March 31, 2020 and December 31, 2019, the Company had the following sources of primary and secondary liquidity ($ in thousands):

 

 

 

 

 

 

 

Primary and secondary liquidity sources

 

 

March 31, 2020

 

 

December 31, 2019

Cash and due from banks

 

$

106,992

 

$

80,076

Unpledged investment securities

 

 

379,410

 

 

366,012

Excess pledged securities

 

 

72,912

 

 

70,955

FHLB borrowing availability

 

 

347,348

 

 

443,200

Unsecured lines of credit

 

 

80,000

 

 

80,000

Funds available through Fed discount window

 

 

69,518

 

 

59,198

Totals

 

$

1,056,180

 

$

1,099,441

 

In addition to the above sources, the Company could obtain brokered deposits, obtain deposits via deposit listing services, or offer higher rate time deposits within our market.  After March 31, 2020, the Company applied for and received approval from the Federal Reserve Bank for a Paycheck Protection Program Lending Facility (PPPLF).  The PPPLF provides the Company with the ability to pledge any PPP loan to the Federal Reserve Bank and obtain funding at 35 basis points.  Further, any loans pledged to the PPPLF will be excluded from the regulatory leverage capital ratio. The Company performs regular stress tests on its liquidity and at this time, believes that we have sufficient primary and secondary liquidity sources for operations.

 

49

 

The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since we utilize a letter of credit from the FHLB rather than investment securities for certain pledging requirements.  That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $105 million at March 31, 2020 and December 31, 2019.  Other sources of liquidity included the brokered deposit market, deposit listing services, and the ability to offer local time-deposit campaigns.   Management is of the opinion that available investments and other potentially liquid assets, along with standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs and that its liquidity has not been adversely impacted by COVID-19.

The Company’s net loans to assets and available investments to assets ratios were 67.4% and 18.0%, respectively, at March 31, 2020, 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 all well within policy guidelines at March 31, 2020.  The Company has been able to maintain a robust liquidity position in recent periods, but no assurance can be provided that our liquidity position will continue at current strong 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, 2019 which was filed with the SEC.

INTEREST RATE RISK MANAGEMENT

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

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

In addition to a stable rate scenario, which presumes that there are no changes in interest rates, we typically use at least six other interest rate scenarios in conducting our rolling 12‑month net interest income simulations:  upward shocks of 100, 200, and 300 basis points, and downward shocks of 100, 200, and 300 basis points.  Those scenarios may be supplemented, reduced in number, or otherwise adjusted as determined by Management to provide the most meaningful simulations in light of economic conditions and expectations at the time.  We currently utilize an additional upward rate shock scenario of 400 basis points.  Pursuant to policy guidelines, we generally attempt to limit the projected decline in

50

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 March 31, 2020 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)

-$20,160

-$13,897

-$7,233

+$2,404

+$3,591

+$4,603

+$4,952

% Change

-20.5%

-14.2%

-7.4%

+2.4%

+3.7%

+4.7%

+5.0%

 

Our current simulations indicate that the Company’s net interest income will increase slightly over the next 12 months in a rising rate environment, but a continued drop in interest rates could have a substantial negative impact.  However, given the 150 basis point decrease in the target federal funds rate in March 2020 and the drop in the 5-year and 10-year Treasury yields in the first quarter 2020, it is unlikely to see dramatic rate decreases unless rates go negative.  We have seen a drop in projected net interest income across all scenarios and an exacerbated negative impact in declining rate scenarios in recent periods, resulting from the impact of interest rate reductions and balance sheet changes including an increase in loans with variable rate characteristics (mortgage warehouse loans), the runoff of loans which had rates fixed for periods in excess of a year, and a shift in our deposit mix toward time deposits.  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 $2.4 million, or 2.40%, relative to a stable interest rate scenario, with the favorable variance increasing marginally as interest rates rise higher.  If interest rates were to decline by 100 basis points, however, net interest income would likely be $7.2 million lower than in a stable interest rate scenario, for a negative variance of 7.4%.  The unfavorable variance increases when rates drop are due to the fact that certain deposit rates are already relatively low (on NOW accounts and savings accounts for example), and will hit a natural floor of close to zero while non-floored variable-rate loan yields continue to drop.  This effect is exacerbated by accelerated prepayments on fixed-rate loans and mortgage-backed securities when rates decline, although rate floors on some of our variable-rate loans partially offset other negative pressures.  While we view material interest rate reductions as unlikely in the near term, the potential percentage declines in net interest income in the “down 300 basis points” and “down 200 basis points” interest rate scenarios exceed our internal policy guidelines.

In addition to the net interest income simulations shown above, we run stress scenarios for the unconsolidated Bank modeling the possibility of no balance sheet growth, the potential runoff of “surge” core deposits which flowed into the Bank in the most recent economic cycle, and unfavorable movement in deposit rates relative to yields on earning assets (i.e., higher deposit betas).  When a static balance sheet and a stable interest rate environment are assumed, projected annual net interest income is more than $1 million lower than in our standard simulation.  However, the stressed simulations reveal that the Company’s greatest potential pressure on net interest income would result from excessive non-maturity deposit runoff and/or unfavorable deposit rate changes in rising rate scenarios.

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 anticipated 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 Company’s balance sheet evolves 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

51

and lose value as interest rates decline.  The longer the duration of the financial instrument, the greater the impact a rate change will have on its value.  In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical patterns and Management’s best estimates.  Our EVE had been increasing due to asset growth and rising discount rates, which result in a larger benefit assessed to non-maturity deposits, but that trend reversed in the second quarter of 2019 as loan growth slowed and interest rates started to fall.  The table below shows estimated changes in the Company’s EVE as of March 31, 2020, 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)

$89,447

-$10,069

-$52,569

+$63,135

+$108,427

+$136,480

+$152,966

% Change

17.8%

-2.0%

-10.4%

+12.5%

+21.5%

+27.1%

+30.4%

 

The table shows that our EVE will generally deteriorate in moderate declining rate scenarios, but should benefit from a parallel shift upward in the yield curve.  The decline in EVE reverses as interest rates drop more than 200 basis points, while the rate of increase in EVE begins to taper off the higher interest rates rise.  This phenomenon is caused by the relative durations of our fixed-rate assets and liabilities, combined with optionality inherent in our balance sheet.  We also run stress scenarios for the unconsolidated Bank’s EVE to simulate the possibility of adverse movement in 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, with material unfavorable variances occurring relative to the standard simulations shown above as decay rates are increased.  Furthermore, while not as extreme as the variances produced by increasing non-maturity deposit decay rates, EVE also displays a relatively high level of sensitivity to unfavorable changes in deposit rate betas in rising interest rate scenarios.

CAPITAL RESOURCES

The Company had total shareholders’ equity of $319.5 million at March 31, 2020, comprised of $112.6 million in common stock, $3.4 million in additional paid-in capital, $189.9 million in retained earnings, and accumulated other comprehensive income of $13.6 million.  At the end of 2019, total shareholders’ equity was $309.3 million.  The increase during the first quarter 2020 is due to the addition of capital from net income and stock options exercised as well as a $7.7 million favorable swing in accumulated other comprehensive income, net of the impact of cash dividends paid and share repurchases.  There were repurchases totaling 112,050 shares at a weighted average cost of $22.86 per share executed by the Company during the first quarter of 2020.   The Company has 268,301 shares authorized to repurchase under the current repurchase program. The Company suspended its stock repurchase program on March 16, 2020 and continues to evaluate when we will restart repurchasing shares.

The Company uses a variety of measures to evaluate its capital adequacy, including the leverage ratios which is  calculated separately for the Company and the Bank.  Management reviews these capital measurements on a quarterly basis and takes appropriate action to help ensure that they meet or surpass established internal and external guidelines.  As permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, the Company has elected to opt out of the Basel III requirement to include accumulated other comprehensive income in risk-based capital.  The following table sets forth the consolidated Company’s and the Bank’s regulatory capital ratios as of the dates indicated.

 

 

 

 

 

 

 

 

 

 

 

52

 

Regulatory Capital Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

Minimum

 

 

 

 

 

 

 

Requirement

 

Required

 

 

 

March 31,

 

December 31,

 

to be

 

Community Bank

 

 

    

2020

    

2019

    

 Well Capitalized (3)

 

Leverage Ratio (2) (4)

 

Sierra Bancorp

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 Capital to Risk-Weighted Assets (1)

 

N/A

 

13.27

%

6.50

%

N/A

 

Tier 1 Capital to Risk-weighted Assets (1)

 

N/A

 

14.98

%

8.00

%

N/A

 

Total Capital to Risk-weighted Assets (1)

 

N/A

 

15.48

%

10.00

%

N/A

 

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

 

N/A

 

11.91

%

5.00

%

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank of the Sierra

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 Capital to Risk-Weighted Assets (1)

 

N/A

 

14.75

%

6.50

%

N/A

 

Tier 1 Capital to Risk-weighted Assets (1)

 

N/A

 

14.75

%

8.00

%

N/A

 

Total Capital to Risk-weighted Assets (1)

 

N/A

 

15.25

%

10.00

%

N/A

 

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

 

12.06

%

11.73

%

5.00

%

8.00

%


(1)

Current data is not applicable as the Bank adopted the Community Bank Leverage Ratio Framework as of the first quarter of 2020.

(2)

The minimum required Community Bank Leverage Ratio is 9.00%, but the CARES Act temporarily lowers this to 8% as described below.

(3)

The Company was subject to these minimum requirements under the regulatory framework for Prompt Corrective Action at December 31, 2019.

(4)

If the subsidiary bank’s Leverage Ratio exceeds the minimum ratio under the Community Bank Leverage Ratio Framework, it is deemed to be “well capitalized” under all other regulatory capital requirements.  The Company may revert back to the regulatory framework for Prompt Corrective Action if the subsidiary bank’s Leverage Ratio falls below the minimum under the Community Bank Leverage Ratio Framework.

 

The federal banking agencies published a final rule on November 13, 2019, that provided a simplified measure of capital adequacy for qualifying community banking organizations.  A qualifying community banking organization that opts into the community bank leverage ratio framework and maintains a leverage ratio greater than 9 percent will be considered to have met the minimum capital requirements, the capital ratio requirements for the well capitalized category under the Prompt Corrective Action framework, and any other capital or leverage requirements to which the qualifying banking organization is subject.  A qualifying community banking organization with a leverage ratio of greater than 9 percent may opt into the community bank leverage ratio framework if has average consolidated total assets of less than $10 billion, has off-balance-sheet exposures of 25% or less of total consolidated assets, and has total trading assets and trading liabilities of 5 percent or less of total consolidated assets.   Further, the bank must not be an advance approaches banking organization. 

The final rule became effective January 1, 2020 and banks that meet the qualifying criteria can elect to use the community bank leverage framework starting with the quarter ended March 31, 2020. The CARES Act reduced the required community bank leverage ratio to 8% until the earlier of December 31, 2020, or the national emergency is declared over.  The federal bank regulatory agencies adopted an interim final rule to implement this change from the CARES Act. The Company and the Bank meet the criteria outlined in the final rule and the interim final rule and have adopted the community bank leverage ratio framework in the first quarter 2020.

 

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.”

53

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 first quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

54

PART II - OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

The Company is involved in various legal proceedings in the normal course of business.  In the opinion of Management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial condition or results of operations.

ITEM 1A: RISK FACTORS

The following risk factors supplement the risks described in the Company’s Form 10-K under Item 1A, “Risk Factors” for its year ended December 31, 2019 filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended.  The ongoing COVID-19 pandemic may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent filings with the U.S. Securities and Exchange Commission. 

Our business, results of operations, and financial condition have been, and will likely continue to be, adversely affected by the ongoing COVID-19 pandemic.

The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on recent global economic and market conditions, including significant disruption of, and volatility in, financial markets; global supply chain disruptions; and the institution of social distancing and shelter-in-place requirements that have resulted in temporary closures of many businesses, lost revenues, and increased unemployment throughout the United States, but also specifically in California, where all of our operations and a large majority of our customers are located.

These conditions have impacted and are expected in the future to impact-our business, results of operations, and financial condition negatively, including through lower revenue from certain of our fee-based businesses; lower net interest income resulting from lower interest rates and increased loan delinquencies; increased provisions for credit losses; impairments on the securities we hold; and decreased demand for certain of our products and services. Additionally, our liquidity and regulatory capital could be adversely impacted by volatility and disruptions in the capital and credit markets; deposit flows; and continued client draws on lines of credit as well as our participation in the Small Business Administration Paycheck Protection Program. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. Negative impacts from these conditions also may include:

"

Collateral securing our loans may decline in value, which could increase credit losses in our loan portfolio and increase the allowance for loan losses.

"

Demand for our products and services may decline, and deposit balances may decrease making it difficult to grow assets and income.

"

The decline in the target federal funds rate could decrease yields on our assets that exceed the decline in our cost of interest-bearing liabilities, which may reduce our net interest margin.

"

The impact of the adoption of the CECL standard, which is highly dependent on unemployment rate forecasts over the life of our loans, could significantly increase the allowance for credit losses and decrease net income.

While governmental authorities have taken unprecedented measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth, the success of these measures is unknown and they may not be sufficient to mitigate fully the negative impact of the ongoing pandemic. Further, some measures, such as a suspension of mortgage and other loan payments and foreclosures, may have a negative impact on our business, while our participation in other measures could result in reputational harm, litigation, or regulatory and government actions, proceedings, or penalties.

55

The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume, particularly in California.

Our Traditional Service Delivery Channels may be Impacted by the COVID-19 Pandemic

In light of the external COVID-19 threat, the Board of Directors and senior management are continuously monitoring the situation, providing frequent communications, and making adjustments and accommodations for both external clients and our employees.  All branches remain open to serve our customers and local communities, with modified hours and strict social distancing protocols in place as well as limiting our branches to walk-up, drive-up or appointment only customer visits. Our customers have been encouraged to utilize branch alternatives such as using our ATMs, online banking, and mobile banking application in lieu of in-branch transactions.  In addition, many employees are working remotely and travel as well as face-to-face meeting restrictions are in effect.  Further, given the increase of the risk of cybersecurity incidents during the pandemic, we have enhanced our cybersecurity protocols.  If the pandemic worsens, resurges or lasts for an extended period of time, to protect the health of the Company’s workforce and our customers, we may need to enact further precautionary measures to help minimize the risks to our employees and customers, thus potentially altering our service delivery channels and operations over a prolonged period.  These changes to our traditional service delivery channels may negatively impact our customers’ experience of banking with us, result in loss of service fees, and increase costs through equipment and services needed to support a remote workforce, and therefore negatively impact our financial condition and results of operation.

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

(c)   Stock Repurchases

In September 2016 the Board authorized 500,000 shares of common stock for repurchase, subsequent to the completion of previous stock buyback plans.  The authorization of shares for repurchase does not provide assurance that a specific quantity of shares will be repurchased, and the program can be suspended at any time at Management’s discretion.  After a lengthy deferral of repurchase activity, the Company resumed share repurchases in mid-August 2019.  The following table provides information concerning the Company’s stock repurchase transactions during the first quarter of 2020:

 

 

 

 

 

 

 

 

 

 

 

Stock Repurchases

 

 

 

 

 

 

 

 

 

 

 

 

January 31, 2020

 

 

February 29, 2020

 

 

March 31, 2020

Total shares repurchased

 

 

 —

 

 

35,489

 

 

76,561

Average per share price

 

 

N/A

 

$

26.74

 

$

21.06

Number of shares purchased as part of a publicly announced plan or program

 

 

 —

 

 

35,489

 

 

76,561

Maximum number of shares remaining for purchase under a plan or program

 

 

380,351

 

 

344,862

 

 

268,301

 

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable

ITEM 5: OTHER INFORMATION

Not applicable

56

ITEM 6: EXHIBITS

 

 

 

Exhibit #

    

Description

    3.1

 

Restated Articles of Incorporation of Sierra Bancorp (1)

    3.2

 

Amended and Restated By-laws of Sierra Bancorp (2)

    4.1

 

Description of Securities (3)

  10.1

 

Salary Continuation Agreement for Kenneth R. Taylor (4)

  10.2

 

Salary Continuation Agreement and Split Dollar Agreement for James F. Gardunio (5)

  10.3

 

Split Dollar Agreement for Kenneth R. Taylor (6)

  10.4

 

Director Retirement and Split dollar Agreements Effective October 1, 2002, for Albert Berra, Morris Tharp, and Gordon Woods (6)

  10.5

 

401 Plus Non-Qualified Deferred Compensation Plan (6)

  10.6

 

Indenture dated as of March 17, 2004 between U.S. Bank N.A., as Trustee, and Sierra Bancorp, as Issuer (7)

  10.7

 

Amended and Restated Declaration of Trust of Sierra Statutory Trust II, dated as of March 17, 2004 (7)

  10.8

 

Indenture dated as of June 15, 2006 between Wilmington Trust Co., as Trustee, and Sierra Bancorp, as Issuer (8)

  10.9

 

Amended and Restated Declaration of Trust of Sierra Capital Trust III, dated as of June 15, 2006 (8)

  10.10

 

2007 Stock Incentive Plan (9)

  10.11

 

Sample Retirement Agreement Entered into with Each Non-Employee Director Effective January 1, 2007 (10)

  10.12

 

Salary Continuation Agreement for Kevin J. McPhaill (10)

  10.13

 

First Amendment to the Salary Continuation Agreement for Kenneth R. Taylor (10)

  10.14

 

Second Amendment to the Salary Continuation Agreement for Kenneth R. Taylor (11)

  10.15

 

First Amendment to the Salary Continuation Agreement for Kevin J. McPhaill (12)

  10.16

 

Indenture dated as of September 20, 2007 between Wilmington Trust Co., as Trustee, and Coast Bancorp, as Issuer (13)

  10.17

 

Amended and Restated Declaration of Trust of Coast Bancorp Statutory Trust II, dated as of September 20, 2007 (13)

  10.18

 

First Supplemental Indenture dated as of July 8, 2016, between Wilmington Trust Co.  as Trustee, Sierra Bancorp as the “Successor Company”, and Coast Bancorp (13)

  10.19

 

2017 Stock Incentive Plan (14)

  10.20

 

Employment agreements dated as of December 27, 2018 for Kevin McPhaill, CEO, Kenneth Taylor, CFO, James Gardunio, Chief Credit Officer, and Michael Olague, Chief Banking Officer (15)

  10.21

 

Employment agreement dated as of March 15, 2019 for Matthew Macia, Chief Risk Officer (16)

  31.1

 

Certification of Chief Executive Officer (Section 302 Certification)

  31.2

 

Certification of Chief Financial Officer (Section 302 Certification)

  32

 

Certification of Periodic Financial Report (Section 906 Certification)

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document


(1)

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

(2)

Filed as an Exhibit to the Form 10-K filed with the SEC on March 12, 2020.

(3)

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

(4)

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

(5)

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

(6)

Filed as Exhibits 10.10, 10.18 through 10.20, and 10.22 to the Form 10‑K filed with the SEC on March 15, 2006 and incorporated herein by reference.

(7)

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

(8)

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

(9)

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

(10)

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

(11)

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

(12)

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

(13)

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

(14)

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

(15)

Filed as Exhibits 99.1 through 99.4 to the Form 8‑K filed with the SEC on December 28, 2018 and incorporated by reference.

(16)

Filed as Exhibit 99.2 to the Form 8‑K filed with the SEC on March 18, 2019 and incorporated by reference.

57

SIGNATURES

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

 

 

 

May 7, 2020

    

/s/ Kevin J. McPhaill

Date

 

SIERRA BANCORP

 

 

Kevin J. McPhaill

 

 

President & Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

May 7, 2020

 

/s/ Christopher G. Treece

Date

 

SIERRA BANCORP

 

 

Christopher G. Treece

 

 

Chief Financial Officer

 

 

May 7, 2020

 

/s/ Cindy L. Dabney

Date

 

SIERRA BANCORP

 

 

Cindy L. Dabney

 

 

Principal Accounting Officer

 

58

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