United Security Bancshares and Subsidiaries
Consolidated Balance Sheets – (unaudited)
June 30, 2020 and December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands except shares)
|
June 30, 2020
|
|
December 31, 2019
|
|
Assets
|
|
|
|
|
Cash and non-interest-bearing deposits in other banks
|
$
|
34,985
|
|
|
$
|
27,291
|
|
|
Due from Federal Reserve Bank ("FRB")
|
194,556
|
|
|
191,704
|
|
|
Cash and cash equivalents
|
229,541
|
|
|
218,995
|
|
|
|
|
|
|
|
Investment securities (at fair value)
|
|
|
|
|
Available-for-sale ("AFS") securities
|
92,877
|
|
|
76,312
|
|
|
Marketable equity securities
|
3,862
|
|
|
3,776
|
|
|
Total investment securities
|
96,739
|
|
|
80,088
|
|
|
Loans
|
649,654
|
|
|
597,374
|
|
|
Unearned fees and unamortized loan origination costs - net
|
(1,004)
|
|
|
(820)
|
|
|
Allowance for credit losses
|
(8,862)
|
|
|
(7,908)
|
|
|
Net loans
|
639,788
|
|
|
588,646
|
|
|
Premises and equipment - net
|
9,441
|
|
|
9,380
|
|
|
Accrued interest receivable
|
9,146
|
|
|
8,208
|
|
|
Other real estate owned
|
5,018
|
|
|
6,753
|
|
|
Goodwill
|
4,488
|
|
|
4,488
|
|
|
Deferred tax assets - net
|
2,574
|
|
|
3,191
|
|
|
Cash surrender value of life insurance
|
20,279
|
|
|
20,955
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
3,065
|
|
|
3,360
|
|
|
Other assets
|
11,294
|
|
|
12,855
|
|
|
Total assets
|
$
|
1,031,373
|
|
|
$
|
956,919
|
|
|
|
|
|
|
|
Liabilities & Shareholders' Equity
|
|
|
|
|
Liabilities
|
|
|
|
|
Deposits
|
|
|
|
|
Non-interest-bearing
|
$
|
362,010
|
|
|
$
|
311,950
|
|
|
Interest-bearing
|
531,102
|
|
|
506,412
|
|
|
Total deposits
|
893,112
|
|
|
818,362
|
|
|
|
|
|
|
|
Accrued interest payable
|
36
|
|
|
59
|
|
|
Operating lease liabilities
|
3,168
|
|
|
3,463
|
|
|
Other liabilities
|
7,826
|
|
|
8,239
|
|
|
Junior subordinated debentures (at fair value)
|
9,771
|
|
|
10,808
|
|
|
Total liabilities
|
913,913
|
|
|
840,931
|
|
|
Shareholders' Equity
|
|
|
|
|
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 16,977,239 at June 30, 2020 and 16,973,885 at December 31, 2019
|
59,181
|
|
|
58,973
|
|
|
Retained earnings
|
58,680
|
|
|
57,647
|
|
|
Accumulated other comprehensive loss
|
(401)
|
|
|
(632)
|
|
|
Total shareholders' equity
|
117,460
|
|
|
115,988
|
|
|
Total liabilities and shareholders' equity
|
$
|
1,031,373
|
|
|
$
|
956,919
|
|
United Security Bancshares and Subsidiaries
Consolidated Statements of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
(In thousands except shares and EPS)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
$
|
7,713
|
|
|
$
|
8,443
|
|
|
$
|
16,059
|
|
|
$
|
17,085
|
|
|
Interest on investment securities
|
356
|
|
|
444
|
|
|
784
|
|
|
921
|
|
|
Interest on deposits in FRB
|
38
|
|
|
1,424
|
|
|
605
|
|
|
2,722
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
8,107
|
|
|
10,311
|
|
|
17,448
|
|
|
20,728
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
Interest on deposits
|
447
|
|
|
890
|
|
|
1,111
|
|
|
1,724
|
|
|
Interest on other borrowed funds
|
83
|
|
|
118
|
|
|
180
|
|
|
241
|
|
|
Total interest expense
|
530
|
|
|
1,008
|
|
|
1,291
|
|
|
1,965
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
7,577
|
|
|
9,303
|
|
|
16,157
|
|
|
18,763
|
|
|
Provision for Credit Losses
|
428
|
|
|
4
|
|
|
2,134
|
|
|
10
|
|
|
Net Interest Income after Provision for Credit Losses
|
7,149
|
|
|
9,299
|
|
|
14,023
|
|
|
18,753
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income:
|
|
|
|
|
|
|
|
|
Customer service fees
|
618
|
|
|
830
|
|
|
1,346
|
|
|
1,639
|
|
|
Increase in cash surrender value of bank-owned life insurance
|
127
|
|
|
147
|
|
|
258
|
|
|
292
|
|
|
Unrealized gain on fair value of marketable equity securities
|
71
|
|
|
53
|
|
|
85
|
|
|
110
|
|
|
Gain on proceeds from bank-owned life insurance
|
310
|
|
|
—
|
|
|
310
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain on fair value of junior subordinated debentures
|
(30)
|
|
|
497
|
|
|
1,469
|
|
|
911
|
|
|
Loss on dissolution of real estate investment trust
|
—
|
|
|
(5)
|
|
|
—
|
|
|
(114)
|
|
|
Gain on sale of assets
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
|
Other
|
118
|
|
|
201
|
|
|
328
|
|
|
408
|
|
|
Total noninterest income
|
1,214
|
|
|
1,729
|
|
|
3,796
|
|
|
3,252
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense:
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
2,414
|
|
|
2,760
|
|
|
5,409
|
|
|
5,532
|
|
|
Occupancy expense
|
869
|
|
|
808
|
|
|
1,723
|
|
|
1,621
|
|
|
Data processing
|
135
|
|
|
144
|
|
|
247
|
|
|
251
|
|
|
Professional fees
|
555
|
|
|
746
|
|
|
1,257
|
|
|
1,559
|
|
|
Regulatory assessments
|
77
|
|
|
83
|
|
|
162
|
|
|
176
|
|
|
Director fees
|
94
|
|
|
95
|
|
|
188
|
|
|
186
|
|
|
Correspondent bank service charges
|
17
|
|
|
14
|
|
|
33
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
Net cost on operation and sale of OREO
|
780
|
|
|
87
|
|
|
933
|
|
|
152
|
|
|
Other
|
612
|
|
|
525
|
|
|
1,193
|
|
|
1,104
|
|
|
Total noninterest expense
|
5,553
|
|
|
5,262
|
|
|
11,145
|
|
|
10,609
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Provision for Taxes
|
2,810
|
|
|
5,766
|
|
|
6,674
|
|
|
11,396
|
|
|
Provision for Taxes on Income
|
798
|
|
|
1,669
|
|
|
1,906
|
|
|
3,292
|
|
|
Net Income
|
$
|
2,012
|
|
|
$
|
4,097
|
|
|
$
|
4,768
|
|
|
$
|
8,104
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per common share
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.12
|
|
|
$
|
0.24
|
|
|
$
|
0.28
|
|
|
$
|
0.48
|
|
|
Diluted
|
$
|
0.12
|
|
|
$
|
0.24
|
|
|
$
|
0.28
|
|
|
$
|
0.48
|
|
|
Shares on which net income per common shares were based
|
|
|
|
|
|
|
|
|
Basic
|
16,975,588
|
|
|
16,950,564
|
|
|
16,974,845
|
|
|
16,948,810
|
|
|
Diluted
|
16,988,778
|
|
|
16,981,705
|
|
|
16,992,223
|
|
|
16,977,224
|
|
United Security Bancshares and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three Months Ended
June 30, 2020
|
|
Three Months Ended
June 30, 2019
|
|
Six Months Ended
June 30, 2020
|
|
Six Months Ended
June 30, 2019
|
|
Net Income
|
$
|
2,012
|
|
|
$
|
4,097
|
|
|
$
|
4,768
|
|
|
$
|
8,104
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holdings gain on debt securities
|
952
|
|
|
275
|
|
|
827
|
|
|
563
|
|
|
Unrealized gains on unrecognized post-retirement costs
|
20
|
|
|
14
|
|
|
40
|
|
|
28
|
|
|
Unrealized loss on junior subordinated debentures
|
(1,208)
|
|
|
(542)
|
|
|
(453)
|
|
|
(1,247)
|
|
|
Other comprehensive (loss) gain, before tax
|
(236)
|
|
|
(253)
|
|
|
414
|
|
|
(656)
|
|
|
Tax expense related to debt securities
|
(342)
|
|
|
(85)
|
|
|
(305)
|
|
|
(170)
|
|
|
Tax expense related to unrecognized post-retirement costs
|
(5)
|
|
|
(4)
|
|
|
(11)
|
|
|
(8)
|
|
|
Tax benefit related to junior subordinated debentures
|
356
|
|
|
160
|
|
|
133
|
|
|
368
|
|
|
Total other comprehensive (loss) gain
|
(227)
|
|
|
(182)
|
|
|
231
|
|
|
(466)
|
|
|
Comprehensive Income
|
$
|
1,785
|
|
|
$
|
3,915
|
|
|
$
|
4,999
|
|
|
$
|
7,638
|
|
United Security Bancshares and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
(In thousands except shares)
|
Number of Shares
|
|
Amount
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive (Loss) Gain
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2018 (1)
|
16,946,622
|
|
|
$
|
58,624
|
|
|
$
|
49,942
|
|
|
$
|
674
|
|
|
$
|
109,240
|
|
|
(1) Excludes 59,217 unvested restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
(284)
|
|
|
(284)
|
|
|
Dividends payable ($0.11 per share)
|
|
|
|
|
(1,869)
|
|
|
|
|
(1,869)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units released
|
2,500
|
|
|
|
|
|
|
|
|
—
|
|
|
Stock-based compensation expense
|
|
|
99
|
|
|
|
|
|
|
99
|
|
|
Net income
|
|
|
|
|
4,007
|
|
|
|
|
4,007
|
|
|
Balance March 31, 2019 (2)
|
16,949,122
|
|
|
$
|
58,723
|
|
|
$
|
52,080
|
|
|
$
|
390
|
|
|
$
|
111,193
|
|
|
(2) Excludes 58,717 unvested restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
(182)
|
|
|
(182)
|
|
|
Dividends payable ($0.11 per share)
|
|
|
|
|
(1,865)
|
|
|
|
|
(1,865)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units released
|
4,622
|
|
|
|
|
|
|
|
|
—
|
|
|
Stock-based compensation expense
|
|
|
95
|
|
|
|
|
|
|
95
|
|
|
Net income
|
|
|
|
|
4,097
|
|
|
|
|
4,097
|
|
|
Balance June 30, 2019 (3)
|
16,953,744
|
|
|
$
|
58,818
|
|
|
$
|
54,312
|
|
|
$
|
208
|
|
|
$
|
113,338
|
|
|
(3) Excludes 55,713 unvested restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
(513)
|
|
|
(513)
|
|
|
Dividends payable ($0.11 per share)
|
|
|
|
|
(1,865)
|
|
|
|
|
(1,865)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
78
|
|
|
|
|
|
|
78
|
|
|
Net income
|
|
|
|
|
4,173
|
|
|
|
|
4,173
|
|
|
Balance September 30, 2019 (4)
|
16,953,744
|
|
|
$
|
58,896
|
|
|
$
|
56,620
|
|
|
$
|
(305)
|
|
|
$
|
115,211
|
|
|
(4) Excludes 55,713 unvested restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
(327)
|
|
|
(327)
|
|
|
Dividends payable ($0.11 per share)
|
|
|
|
|
(1,868)
|
|
|
|
|
(1,868)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units released
|
20,141
|
|
|
|
|
|
|
|
|
—
|
|
|
Stock-based compensation expense
|
|
|
77
|
|
|
|
|
|
|
77
|
|
|
Net income
|
|
|
|
|
2,895
|
|
|
|
|
2,895
|
|
|
Balance December 31, 2019 (5)
|
16,973,885
|
|
|
$
|
58,973
|
|
|
$
|
57,647
|
|
|
$
|
(632)
|
|
|
$
|
115,988
|
|
|
(5) Excludes 35,572 unvested restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
458
|
|
|
458
|
|
|
Dividends payable ($0.11 per share)
|
|
|
|
|
(1,867)
|
|
|
|
|
(1,867)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units released
|
350
|
|
|
|
|
|
|
|
|
—
|
|
|
Tax benefit from restricted stock units released
|
|
|
(1)
|
|
|
|
|
|
|
(1)
|
|
|
Stock-based compensation expense
|
|
|
78
|
|
|
|
|
|
|
78
|
|
|
Net income
|
|
|
|
|
2,754
|
|
|
|
|
2,754
|
|
|
Balance March 31, 2020 (6)
|
16,974,235
|
|
|
$
|
59,050
|
|
|
$
|
58,534
|
|
|
$
|
(174)
|
|
|
$
|
117,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) Excludes 47,572 unvested restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
(227)
|
|
|
(227)
|
|
|
Dividends payable ($0.11 per share)
|
|
|
|
|
(1,866)
|
|
|
|
|
(1,866)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units released
|
3,004
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
131
|
|
|
|
|
|
|
131
|
|
|
Net income
|
|
|
|
|
2,012
|
|
|
|
|
2,012
|
|
|
Balance June 30, 2020 (7)
|
16,977,239
|
|
|
$
|
59,181
|
|
|
$
|
58,680
|
|
|
$
|
(401)
|
|
|
$
|
117,460
|
|
|
(7) Excludes 44,568 unvested restricted shares
|
|
|
|
|
|
|
|
|
|
United Security Bancshares and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
(In thousands)
|
2020
|
|
2019
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
Net Income
|
$
|
4,768
|
|
|
$
|
8,104
|
|
|
Adjustments to reconcile net income to cash provided by operating activities:
|
|
|
|
|
Provision for credit losses
|
2,134
|
|
|
10
|
|
|
Depreciation and amortization
|
698
|
|
|
694
|
|
|
Amortization of operating lease right-of-use assets
|
(295)
|
|
|
(354)
|
|
|
Amortization of premium/discount on investment securities, net
|
523
|
|
|
298
|
|
|
Increase in accrued interest receivable
|
(937)
|
|
|
(1,972)
|
|
|
(Decrease) increase in accrued interest payable
|
(23)
|
|
|
20
|
|
|
Decrease in accounts payable and accrued liabilities
|
(397)
|
|
|
(2,104)
|
|
|
Decrease in unearned fees and unamortized loan origination costs, net
|
184
|
|
|
492
|
|
|
Decrease (increase) in income taxes receivable
|
1,472
|
|
|
(760)
|
|
|
Unrealized gain on marketable equity securities
|
(85)
|
|
|
(110)
|
|
|
Stock-based compensation expense
|
209
|
|
|
194
|
|
|
Benefit (provision) for deferred income taxes
|
300
|
|
|
(99)
|
|
|
Loss on sale of other real estate owned
|
113
|
|
|
—
|
|
|
Write down on other real estate owned
|
727
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on bank owned life insurance
|
(310)
|
|
|
—
|
|
|
Increase in cash surrender value of bank-owned life insurance
|
(258)
|
|
|
(292)
|
|
|
Gain on fair value option of junior subordinated debentures
|
(1,469)
|
|
|
(911)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on dissolution of real estate investment trust
|
—
|
|
|
114
|
|
|
Gain on sale of premises and equipment
|
—
|
|
|
(6)
|
|
|
Net decrease in other assets
|
762
|
|
|
1,758
|
|
|
Net cash provided by operating activities
|
8,116
|
|
|
5,076
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of correspondent bank stock
|
(39)
|
|
|
(47)
|
|
|
Purchases of available-for-sale securities
|
(27,971)
|
|
|
—
|
|
|
|
|
|
|
|
Principal payments of available-for-sale securities
|
11,709
|
|
|
6,828
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (increase) decrease in loans
|
(53,461)
|
|
|
14,559
|
|
|
Cash proceeds from sales of other real estate owned
|
895
|
|
|
—
|
|
|
|
|
|
|
|
Investment in limited partnership
|
(201)
|
|
|
(320)
|
|
|
|
|
|
|
|
Cash proceeds from sale of premises and equipment
|
—
|
|
|
12
|
|
|
Proceeds from bank owned life insurance
|
1,243
|
|
|
—
|
|
|
Capital expenditures of premises and equipment
|
(759)
|
|
|
(392)
|
|
|
Net cash (used in) provided by investing activities
|
(68,584)
|
|
|
20,640
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
Net increase in demand deposits and savings accounts
|
76,476
|
|
|
77,652
|
|
|
Net decrease in time deposits
|
(1,727)
|
|
|
(12,380)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on common stock
|
(3,735)
|
|
|
(1,869)
|
|
|
Net cash provided by financing activities
|
71,014
|
|
|
63,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
10,546
|
|
|
89,123
|
|
|
Cash and cash equivalents at beginning of period
|
218,995
|
|
|
220,337
|
|
|
Cash and cash equivalents at end of period
|
$
|
229,541
|
|
|
$
|
309,460
|
|
United Security Bancshares and Subsidiaries - Notes to Consolidated Financial Statements - (Unaudited)
1.Organization and Summary of Significant Accounting and Reporting Policies
The consolidated financial statements include the accounts of United Security Bancshares (Company or USB) and its wholly owned subsidiary United Security Bank (Bank). Intercompany accounts and transactions have been eliminated in consolidation.
These unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information on a basis consistent with the accounting policies reflected in the audited consolidated financial statements of the Company included in its 2019 Annual Report on Form 10-K. These interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of a normal, recurring nature) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.
Recent Accounting Standards Not Yet Adopted:
In June 2016, FASB issued ASU 2016-13, Financial Instruments- Credit Losses (Topic 326). The FASB is issuing this Update to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The Update requires enhanced disclosures and judgments in estimating credit losses and also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. This original amendment was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In October 2019 FASB unanimously approved a vote to delay the effective date of this Standard to be effective for fiscal years beginning after December 15, 2022. The Company has formed a project team that is responsible for oversight of the Company’s implementation strategy for compliance with provisions of the new standard. An external provider specializing in community bank loss driver and CECL reserving model design as well as other related consulting services has been retained, and the Company continues to evaluate potential CECL modeling alternatives. As part of this process, the Company has determined potential loan pool segmentation and sub-segmentation under CECL, as well as evaluated the key economic loss drivers for each segment. The Company presently plans to generate and evaluate model scenarios under CECL in tandem with its current reserving processes for interim and annual reporting periods in 2020. While the Company is currently unable to reasonably estimate the impact of adopting this new guidance, management expects the impact of adoption will be significantly influenced by the composition and quality of the Company’s loan portfolio as well as the economic conditions as of the date of adoption. The Company also anticipates significant changes to the processes and procedures for calculating the reserve for credit losses and continues to evaluate the potential impact on the Company's consolidated financial statements. Additionally, in regard to the recently approved delay in implementation, the Company is evaluating it's expected implementation date.
2.Investment Securities
Following is a comparison of the amortized cost and fair value of securities available-for-sale, as of June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value (Carrying Amount)
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
36,451
|
|
|
$
|
161
|
|
|
$
|
(312)
|
|
|
$
|
36,300
|
|
|
U.S. Government sponsored entities & agencies collateralized by mortgage obligations
|
46,988
|
|
|
837
|
|
|
(23)
|
|
|
47,802
|
|
|
Asset-backed securities
|
3,860
|
|
|
—
|
|
|
(102)
|
|
|
3,758
|
|
|
Corporate bonds
|
5,000
|
|
|
17
|
|
|
—
|
|
|
5,017
|
|
|
Total securities available for sale
|
$
|
92,299
|
|
|
$
|
1,015
|
|
|
$
|
(437)
|
|
|
$
|
92,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value (Carrying Amount)
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
28,737
|
|
|
$
|
152
|
|
|
$
|
(190)
|
|
|
$
|
28,699
|
|
|
U.S. Government sponsored entities & agencies collateralized by mortgage obligations
|
47,824
|
|
|
120
|
|
|
(331)
|
|
|
47,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale
|
$
|
76,561
|
|
|
$
|
272
|
|
|
$
|
(521)
|
|
|
$
|
76,312
|
|
The amortized cost and fair value of securities available for sale at June 30, 2020, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties. Contractual maturities on collateralized mortgage obligations cannot be anticipated due to allowed paydowns.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
Amortized Cost
|
|
Fair Value (Carrying Amount)
|
|
(in 000's)
|
|
|
|
|
Due in one year or less
|
$
|
—
|
|
|
$
|
—
|
|
|
Due after one year through five years
|
—
|
|
|
—
|
|
|
Due after five years through ten years
|
18,435
|
|
|
18,348
|
|
|
Due after ten years
|
26,876
|
|
|
26,727
|
|
|
Collateralized mortgage obligations
|
46,988
|
|
|
47,802
|
|
|
|
$
|
92,299
|
|
|
$
|
92,877
|
|
There were no realized gains or losses on sales of available-for-sale securities for the three and six month periods ended June 30, 2020 and June 30, 2019. There were no other-than-temporary impairment losses for the three and six month periods ended June 30, 2020 and June 30, 2019.
At June 30, 2020, available-for-sale securities with an amortized cost of approximately $56,019,000 (fair value of $56,570,000) were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances.
The following summarizes temporarily impaired investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
Less than 12 Months
|
|
|
|
12 Months or More
|
|
|
|
Total
|
|
|
|
June 30, 2020
|
Fair Value (Carrying Amount)
|
|
Unrealized Losses
|
|
Fair Value (Carrying Amount)
|
|
Unrealized Losses
|
|
Fair Value (Carrying Amount)
|
|
Unrealized Losses
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
13,463
|
|
|
$
|
(123)
|
|
|
14,810
|
|
|
(189)
|
|
|
$
|
28,273
|
|
|
$
|
(312)
|
|
|
U.S. Government sponsored entities & agencies collateralized by mortgage obligations
|
4,242
|
|
|
(7)
|
|
|
2,530
|
|
|
(16)
|
|
|
6,772
|
|
|
(23)
|
|
|
Corporate bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Asset-backed securities
|
3,758
|
|
|
(102)
|
|
|
—
|
|
|
—
|
|
|
3,758
|
|
|
(102)
|
|
|
Total impaired securities
|
$
|
21,463
|
|
|
$
|
(232)
|
|
|
$
|
17,340
|
|
|
$
|
(205)
|
|
|
$
|
38,803
|
|
|
$
|
(437)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
3,961
|
|
|
$
|
(12)
|
|
|
$
|
15,989
|
|
|
$
|
(178)
|
|
|
$
|
19,950
|
|
|
$
|
(190)
|
|
|
U.S. Government sponsored entities & agencies collateralized by mortgage obligations
|
25,400
|
|
|
(187)
|
|
|
11,244
|
|
|
(144)
|
|
|
36,644
|
|
|
(331)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired securities
|
$
|
29,361
|
|
|
$
|
(199)
|
|
|
$
|
27,233
|
|
|
$
|
(322)
|
|
|
$
|
56,594
|
|
|
$
|
(521)
|
|
Temporarily impaired securities at June 30, 2020, were comprised of one asset-backed security, twelve U.S. government agency securities, and five U.S. government sponsored entities and agencies collateralized by mortgage obligations securities.
The Company evaluates investment securities for other-than-temporary impairment (OTTI) at least quarterly, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under ASC Topic 320, Investments – Debt and Equity Instruments.
The Company considers many factors in determining OTTI, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to the Company at the time of the evaluation.
Additionally, OTTI occurs when the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If the Company intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary-impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the other-than-temporary-impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary-impairment related to the credit loss is recognized in earnings, and is determined based on the difference between the present value of cash flows expected to be collected and the current amortized cost of the security. The amount of the total other-than-temporary-impairment related to other factors shall be recognized in other comprehensive (loss) income, net of applicable taxes. The previous amortized cost
basis less the other-than-temporary-impairment recognized in earnings shall become the new amortized cost basis of the investment.
Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other-than-temporary.
At June 30, 2020, the decline in fair value of the one asset-backed security, twelve U.S. government agency securities, and the five U.S. government sponsored entities and agencies collateralized by mortgage obligations securities is attributable to changes in interest rates, and not credit quality. Because the Company does not have the intent to sell these impaired securities, and it is not more likely than not that it will be required to sell these securities before its anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2020.
During the six months ended June 30, 2020 and 2019, the Company recognized $85,000 and $110,000 of unrealized holding gains related to equity securities in the consolidated statements of income, respectively. For the quarters ended June 30, 2020 and June 30, 2019, the Company recognized unrealized holding gains of $71,000 and $53,000, respectively.
The Company had no held-to-maturity or trading securities at June 30, 2020 or December 31, 2019.
3.Loans
Loans are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
June 30, 2020
|
|
December 31, 2019
|
|
Commercial and industrial:
|
|
|
|
|
Commercial and business loans
|
$
|
41,525
|
|
|
$
|
44,534
|
|
|
Government program loans
|
26,705
|
|
|
744
|
|
|
Total commercial and industrial
|
68,230
|
|
|
45,278
|
|
|
Real estate mortgage:
|
|
|
|
|
Commercial real estate
|
264,492
|
|
|
245,183
|
|
|
Residential mortgages
|
49,826
|
|
|
45,881
|
|
|
Home improvement and home equity loans
|
120
|
|
|
173
|
|
|
Total real estate mortgage
|
314,438
|
|
|
291,237
|
|
|
Real estate construction and development
|
153,655
|
|
|
138,784
|
|
|
Agricultural
|
48,979
|
|
|
52,197
|
|
|
Installment and student loans
|
64,352
|
|
|
69,878
|
|
|
Total loans
|
$
|
649,654
|
|
|
$
|
597,374
|
|
The Company's loans are predominantly in the San Joaquin Valley and the greater Oakhurst/East Madera County area, as well as the Campbell area of Santa Clara County. Although the Company does participate in loans with other financial institutions, they are primarily in the state of California.
Commercial and industrial loans represent 10.6% of total loans at June 30, 2020 and are generally made to support the ongoing operations of small-to-medium sized commercial businesses. Commercial and industrial loans have a high degree of industry diversification and provide working capital, financing for the purchase of manufacturing plants and equipment, or funding for growth and general expansion of businesses. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases, or other collateral including real estate. The remainder are unsecured; however, extensions of credit are predicated upon the financial capacity of the borrower. Repayment of commercial loans is generally from the cash flow of the borrower. Included within the balance of Commercial and industrial loans is $26,035,000 in Paycheck Protection Program ("PPP") loans administrated by the SBA. PPP loans have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.
Real estate mortgage loans, representing 48.4% of total loans at June 30, 2020, are secured by trust deeds on primarily commercial property, but are also secured by trust deeds on single family residences. Repayment of real estate mortgage loans generally comes from the cash flow of the borrower and or guarantor(s).
•Commercial real estate mortgage loans comprise the largest segment of this loan category and are available on all types of income producing and non-income producing commercial properties, including: office buildings, shopping centers; apartments and motels; owner occupied buildings; manufacturing facilities and more. Commercial real estate mortgage loans can also be used to refinance existing debt. Commercial real estate loans are made under the premise that the loan will be repaid from the borrower's business operations, rental income associated with the real property, or personal assets.
•Residential mortgage loans are provided to individuals to finance or refinance single-family residences. Residential mortgages are not a primary business line offered by the Company, and a majority are conventional mortgages that were purchased as a pool.
•Home Improvement and Home Equity loans comprise a relatively small portion of total real estate mortgage loans. Home equity loans are generally secured by junior trust deeds, but may be secured by 1st trust deeds.
Real estate construction and development loans, representing 23.7% of total loans at June 30, 2020, consist of loans for residential and commercial construction projects, as well as land acquisition and development, or land held for future development. Loans in this category are secured by real estate including improved and unimproved land, as well as single-family residential, multi-family residential, and commercial properties in various stages of completion. All real estate loans have established equity requirements. Repayment on construction loans generally comes from long-term mortgages with other lending institutions obtained at completion of the project or from the sale of the constructed homes to individuals.
Agricultural loans represent 7.5% of total loans at June 30, 2020 and are generally secured by land, equipment, inventory and receivables. Repayment is from the cash flow of the borrower.
Installment loans, including student loans, represent 9.8% of total loans at June 30, 2020 and generally consist of student loans, loans to individuals for household, family and other personal expenditures, automobiles or other consumer items. See "Note 4 - Student Loans" for specific information on the student loan portfolio.
In the normal course of business, the Company is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. At June 30, 2020 and December 31, 2019, these financial instruments include commitments to extend credit of $231,275,000 and $197,559,000, respectively, and standby letters of credit of $3,615,000 and $1,662,000, respectively. These instruments involve elements of credit risk in excess of the amount recognized on the consolidated balance sheet. The contract amounts of these instruments reflect the extent of the involvement the Company has in off-balance sheet financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. A majority of these commitments are at floating interest rates based on the Prime rate. Commitments generally have fixed expiration dates. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate and income-producing properties.
Standby letters of credit are generally unsecured and are issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
The Bank has entered into a Small Business Administration (SBA) 504 Loan Forward Purchase Commitment to buy a one hundred percent (100%) interest in up to $30 million, first mortgage, California SBA 504 loans on a flow basis with servicing released by the Seller.
Past Due Loans
The Company monitors delinquency and potential problem loans on an ongoing basis through weekly reports to the Loan Committee and monthly reports to the Board of Directors.
The following is a summary of delinquent loans at June 30, 2020 (in 000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
Loans
30-60 Days Past Due
|
|
Loans
61-89 Days Past Due
|
|
Loans
90 or More
Days Past Due
|
|
Total Past Due Loans
|
|
Current Loans
|
|
Total Loans
|
|
Accruing
Loans 90 or
More Days Past Due
|
|
Commercial and business loans
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
41,525
|
|
|
$
|
41,525
|
|
|
$
|
—
|
|
|
Government program loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,705
|
|
|
26,705
|
|
|
—
|
|
|
Total commercial and industrial
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
68,230
|
|
|
68,230
|
|
|
—
|
|
|
Commercial real estate loans
|
—
|
|
|
1,009
|
|
|
—
|
|
|
1,009
|
|
|
263,483
|
|
|
264,492
|
|
|
—
|
|
|
Residential mortgages
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49,826
|
|
|
49,826
|
|
|
—
|
|
|
Home improvement and home equity loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
120
|
|
|
120
|
|
|
—
|
|
|
Total real estate mortgage
|
—
|
|
|
1,009
|
|
|
—
|
|
|
1,009
|
|
|
313,429
|
|
|
314,438
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction and development loans
|
—
|
|
|
—
|
|
|
8,573
|
|
|
8,573
|
|
|
145,082
|
|
|
153,655
|
|
|
—
|
|
|
Agricultural loans
|
—
|
|
|
—
|
|
|
514
|
|
|
514
|
|
|
48,465
|
|
|
48,979
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment and student loans
|
209
|
|
|
292
|
|
|
269
|
|
|
770
|
|
|
63,328
|
|
|
64,098
|
|
|
269
|
|
|
Overdraft protection lines
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
30
|
|
|
—
|
|
|
Overdrafts
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
224
|
|
|
224
|
|
|
—
|
|
|
Total installment and student loans
|
209
|
|
|
292
|
|
|
269
|
|
|
770
|
|
|
63,582
|
|
|
64,352
|
|
|
269
|
|
|
Total loans
|
$
|
209
|
|
|
$
|
1,301
|
|
|
$
|
9,356
|
|
|
$
|
10,866
|
|
|
$
|
638,788
|
|
|
$
|
649,654
|
|
|
$
|
269
|
|
The following is a summary of delinquent loans at December 31, 2019 (in 000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Loans
30-60 Days Past Due
|
|
Loans
61-89 Days Past Due
|
|
Loans
90 or More
Days Past Due
|
|
Total Past Due Loans
|
|
Current Loans
|
|
Total Loans
|
|
Accruing
Loans 90 or
More Days Past Due
|
|
Commercial and business loans
|
$
|
568
|
|
|
$
|
—
|
|
|
$
|
75
|
|
|
$
|
643
|
|
|
$
|
43,891
|
|
|
$
|
44,534
|
|
|
$
|
—
|
|
|
Government program loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
744
|
|
|
744
|
|
|
—
|
|
|
Total commercial and industrial
|
568
|
|
|
—
|
|
|
75
|
|
|
643
|
|
|
44,635
|
|
|
45,278
|
|
|
—
|
|
|
Commercial real estate loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
245,183
|
|
|
245,183
|
|
|
—
|
|
|
Residential mortgages
|
28
|
|
|
—
|
|
|
—
|
|
|
28
|
|
|
45,853
|
|
|
45,881
|
|
|
—
|
|
|
Home improvement and home equity loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
173
|
|
|
173
|
|
|
—
|
|
|
Total real estate mortgage
|
28
|
|
|
—
|
|
|
—
|
|
|
28
|
|
|
291,209
|
|
|
291,237
|
|
|
—
|
|
|
Real estate construction and development loans
|
—
|
|
|
—
|
|
|
8,825
|
|
|
8,825
|
|
|
129,959
|
|
|
138,784
|
|
|
—
|
|
|
Agricultural loans
|
957
|
|
|
423
|
|
|
144
|
|
|
1,524
|
|
|
50,673
|
|
|
52,197
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment and student loans
|
292
|
|
|
657
|
|
|
386
|
|
|
1,335
|
|
|
68,280
|
|
|
69,615
|
|
|
386
|
|
|
Overdraft protection lines
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33
|
|
|
33
|
|
|
—
|
|
|
Overdrafts
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
230
|
|
|
230
|
|
|
—
|
|
|
Total installment and student loans
|
292
|
|
|
657
|
|
|
386
|
|
|
1,335
|
|
|
68,543
|
|
|
69,878
|
|
|
386
|
|
|
Total loans
|
$
|
1,845
|
|
|
$
|
1,080
|
|
|
$
|
9,430
|
|
|
$
|
12,355
|
|
|
$
|
585,019
|
|
|
$
|
597,374
|
|
|
$
|
386
|
|
Nonaccrual Loans
Commercial, construction and commercial real estate loans are placed on nonaccrual status under the following circumstances:
- When there is doubt regarding the full repayment of interest and principal.
- When principal and/or interest on the loan has been in default for a period of 90-days or more, unless the asset is both well secured and in the process of collection that will result in repayment in the near future.
- When the loan is identified as having loss elements and/or is risk rated "8" Doubtful.
Other circumstances which jeopardize the ultimate collectability of the loan including certain troubled debt restructurings, identified loan impairment, and certain loans to facilitate the sale of OREO.
All loans, outside of student loans, where principal or interest is due and unpaid for 90 days or more are placed on nonaccrual and the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income. See Note 4 - Student Loans for specific information on the student loan portfolio.
When a loan is placed on nonaccrual status and subsequent payments of interest (and principal) are received, the interest received may be accounted for in two separate ways.
Cost recovery method: If the loan is in doubt as to full collection, the interest received in subsequent payments is diverted from interest income to a valuation reserve and treated as a reduction of principal for financial reporting purposes.
Cash basis: This method is only used if the recorded investment or total contractual amount is expected to be fully collectible, under which circumstances the subsequent payments of interest are credited to interest income as received.
Loans on non-accrual status are usually not returned to accrual status unless all delinquent principal and/or interest has been brought current, there is no identified element of loss, and current and continued satisfactory performance is expected (loss of the contractual amount not the carrying amount of the loan). Return to accrual is generally demonstrated through the timely receipt of at least six monthly payments on a loan with monthly amortization.
There were no remaining undisbursed commitments to extend credit on nonaccrual loans at June 30, 2020 or December 31, 2019.
The following is a summary of nonaccrual loan balances at June 30, 2020 and December 31, 2019 (in 000's).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Commercial and business loans
|
$
|
—
|
|
|
$
|
75
|
|
|
Government program loans
|
—
|
|
|
—
|
|
|
Total commercial and industrial
|
—
|
|
|
75
|
|
|
|
|
|
|
|
Commercial real estate loans
|
—
|
|
|
—
|
|
|
Residential mortgages
|
—
|
|
|
—
|
|
|
Home improvement and home equity loans
|
—
|
|
|
—
|
|
|
Total real estate mortgage
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Real estate construction and development loans
|
11,109
|
|
|
11,478
|
|
|
Agricultural loans
|
514
|
|
|
144
|
|
|
Installment and student loans
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
$
|
11,623
|
|
|
$
|
11,697
|
|
Impaired Loans
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, including principal and interest, according to the contractual terms of the loan agreement.
The Company applies its normal loan review procedures in making judgments regarding probable losses and loan impairment. The Company evaluates for impairment those loans on nonaccrual status, graded doubtful, graded substandard or those that are troubled debt restructures. The primary basis for inclusion in impaired status under generally accepted accounting pronouncements is that it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.
A loan is not considered impaired if there is merely an insignificant delay or shortfall in the amounts of payments and the Company expects to collect all amounts due, including interest accrued, at the contractual interest rate for the period of the delay.
Review for impairment does not include large groups of smaller balance homogeneous loans that are collectively evaluated to estimate the allowance for loan losses. The Company’s present allowance for loan losses methodology, including migration analysis, captures required reserves for these loans in the formula allowance.
For loans determined to be impaired, the Company evaluates impairment based upon either the fair value of underlying collateral, discounted cash flows of expected payments, or observable market price.
- For loans secured by collateral including real estate and equipment, the fair value of the collateral less selling costs will determine the carrying value of the loan. The difference between the recorded investment in the loan and the fair value, less selling costs, determines the amount of impairment. The Company uses the measurement method based on fair value of collateral when the loan is collateral dependent and foreclosure is probable. For loans that are not considered collateral dependent, a discounted cash flow methodology is used.
- The discounted cash flow method of measuring the impairment of a loan is used for impaired loans that are not considered to be collateral dependent. Under this method, the Company assesses both the amount and timing of cash flows expected from impaired loans. The estimated cash flows are discounted using the loan's effective interest rate. The difference between the amount of the loan on the Bank's books and the discounted cash flow amounts determines the amount of impairment to be provided. This method is used for most of the Company’s troubled debt restructurings or other impaired loans where some payment stream is being collected.
- The observable market price method of measuring the impairment of a loan is only used by the Company when the sale of loans or a loan is in process.
The method for recognizing interest income on impaired loans is dependent on whether the loan is on nonaccrual status or is a troubled debt restructure. For income recognition, the existing nonaccrual and troubled debt restructuring policies are applied to impaired loans. Generally, except for certain troubled debt restructurings which are performing under the restructure agreement, the Company does not recognize interest income received on impaired loans, but reduces the carrying amount of the loan for financial reporting purposes.
Loans other than certain homogeneous loan portfolios are reviewed on a quarterly basis for impairment. Impaired loans are written down to estimated realizable values by the establishment of specific reserves for loan utilizing the discounted cash flow method, or charge-offs for collateral-based impaired loans, or those using observable market pricing.
The following is a summary of impaired loans at June 30, 2020 (in 000's).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
Unpaid
Contractual
Principal Balance
|
|
Recorded
Investment
With No Allowance (1)
|
|
Recorded
Investment
With Allowance (1)
|
|
Total
Recorded Investment
|
|
Related Allowance
|
|
Average
Recorded Investment (2)
|
|
Interest Recognized (2)
|
|
Commercial and business loans
|
$
|
316
|
|
|
$
|
318
|
|
|
$
|
—
|
|
|
$
|
318
|
|
|
$
|
—
|
|
|
$
|
744
|
|
|
$
|
14
|
|
|
Government program loans
|
240
|
|
|
241
|
|
|
—
|
|
|
241
|
|
|
—
|
|
|
249
|
|
|
7
|
|
|
Total commercial and industrial
|
556
|
|
|
559
|
|
|
—
|
|
|
559
|
|
|
—
|
|
|
993
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans
|
2,040
|
|
|
1,156
|
|
|
892
|
|
|
2,048
|
|
|
175
|
|
|
2,066
|
|
|
60
|
|
|
Residential mortgages
|
1,037
|
|
|
502
|
|
|
539
|
|
|
1,041
|
|
|
31
|
|
|
1,052
|
|
|
27
|
|
|
Home improvement and home equity loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total real estate mortgage
|
3,077
|
|
|
1,658
|
|
|
1,431
|
|
|
3,089
|
|
|
206
|
|
|
3,118
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction and development loans
|
11,109
|
|
|
11,109
|
|
|
—
|
|
|
11,109
|
|
|
—
|
|
|
11,333
|
|
|
147
|
|
|
Agricultural loans
|
694
|
|
|
325
|
|
|
371
|
|
|
696
|
|
|
243
|
|
|
704
|
|
|
8
|
|
|
Installment and student loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
$
|
15,436
|
|
|
$
|
13,651
|
|
|
$
|
1,802
|
|
|
$
|
15,453
|
|
|
$
|
449
|
|
|
$
|
16,148
|
|
|
$
|
263
|
|
(1) The recorded investment in loans includes accrued interest receivable of $17.
(2) Information is based on six months ended June 30, 2020.
The following is a summary of impaired loans at December 31, 2019 (in 000's).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Unpaid
Contractual
Principal Balance
|
|
Recorded
Investment
With No Allowance (1)
|
|
Recorded
Investment
With Allowance (1)
|
|
Total
Recorded Investment
|
|
Related Allowance
|
|
Average
Recorded Investment (2)
|
|
Interest Recognized (2)
|
|
Commercial and business loans
|
$
|
1,484
|
|
|
$
|
368
|
|
|
$
|
1,128
|
|
|
$
|
1,496
|
|
|
$
|
606
|
|
|
$
|
1,930
|
|
|
$
|
116
|
|
|
Government program loans
|
257
|
|
|
258
|
|
|
—
|
|
|
258
|
|
|
—
|
|
|
275
|
|
|
18
|
|
|
Total commercial and industrial
|
1,741
|
|
|
626
|
|
|
1,128
|
|
|
1,754
|
|
|
606
|
|
|
2,205
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans
|
2,073
|
|
|
1,181
|
|
|
902
|
|
|
2,083
|
|
|
263
|
|
|
2,031
|
|
|
123
|
|
|
Residential mortgages
|
1,060
|
|
|
517
|
|
|
546
|
|
|
1,063
|
|
|
20
|
|
|
1,577
|
|
|
56
|
|
|
Home improvement and home equity loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total real estate mortgage
|
3,133
|
|
|
1,698
|
|
|
1,448
|
|
|
3,146
|
|
|
283
|
|
|
3,608
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction and development loans
|
11,478
|
|
|
11,478
|
|
|
—
|
|
|
11,478
|
|
|
—
|
|
|
11,572
|
|
|
231
|
|
|
Agricultural loans
|
684
|
|
|
262
|
|
|
432
|
|
|
694
|
|
|
256
|
|
|
726
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment and student loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
$
|
17,036
|
|
|
$
|
14,064
|
|
|
$
|
3,008
|
|
|
$
|
17,072
|
|
|
$
|
1,145
|
|
|
$
|
18,125
|
|
|
$
|
601
|
|
(1) The recorded investment in loans includes accrued interest receivable of $36.
(2) Information is based on the year ended December 31, 2019.
In most cases, the Company uses the cash basis method of income recognition for impaired loans. In the case of certain troubled debt restructurings for which the loan is performing under the current contractual terms for a reasonable period of time, income is recognized under the accrual method.
The average recorded investment in impaired loans for the quarters ended June 30, 2020 and 2019 was $15,685,000 and $18,225,000, respectively. Interest income recognized on impaired loans for the quarters ended June 30, 2020 and 2019 was approximately $124,000 and $197,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $67,000 and $87,000 for the quarters ended June 30, 2020 and 2019, respectively.
The average recorded investment in impaired loans for the six months ended June 30, 2020 and 2019 was $16,148,000 and $18,396,000, respectively. Interest income recognized on impaired loans for the six months ended June 30, 2020 and 2019 was approximately $263,000 and $334,000, respectively. For impaired nonaccrual loans, interest income recognized under a cash-basis method of accounting was approximately $148,000 and $129,000 for the six months ended June 30, 2020 and 2019, respectively.
Troubled Debt Restructurings
In certain circumstances, when the Company grants a concession to a borrower as part of a loan restructuring, the restructuring is accounted for as a troubled debt restructuring (TDR). TDRs are reported as a component of impaired loans.
A TDR is a type of restructuring in which the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession (either imposed by court order, law, or agreement between the borrower and the Bank) to the
borrower that it would not otherwise consider. Although the restructuring may take different forms, the Company's objective is to maximize recovery of its investment by granting relief to the borrower.
A TDR may include, but is not limited to, one or more of the following:
- A transfer from the borrower to the Company of receivables from third parties, real estate, other assets, or an equity interest in the borrower is granted to fully or partially satisfy the loan.
- A modification of terms of a debt such as one or a combination of:
◦The reduction (absolute or contingent) of the stated interest rate.
◦The extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.
◦The reduction (absolute or contingent) of the face amount or maturity amount of debt as stated in the instrument or agreement.
◦The reduction (absolute or contingent) of accrued interest.
For a restructured loan to return to accrual status there needs to be, among other factors, at least 6 months successful payment history and continued satisfactory performance is expected. To this end, the Company typically performs a financial analysis of the credit to determine whether the borrower has the ability to continue to meet payments over the remaining life of the loan. This includes, but is not limited to, a review of financial statements and cash flow analysis of the borrower. Only after determination that the borrower has the ability to perform under the terms of the loans, will the restructured credit be considered for accrual status. Although the Company does not have a policy which specifically addresses when a loan may be removed from TDR classification, as a matter of practice, loans classified as TDRs generally remain classified as such until the loan either reaches maturity, a confirming loan is renewed at market terms, or its outstanding balance is paid off.
There were no TDR additions or defaults for the quarters ended June 30, 2020 or June 30, 2019. There was one addition during the six months ended June 30, 2020 and none during the six months ended June 30, 2019
The following tables illustrates TDR additions and defaults for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
($ in 000's)
|
Number of
Contracts
|
|
Pre-
Modification
Outstanding
Recorded
Investment
|
|
Post-
Modification
Outstanding
Recorded
Investment
|
|
Number of Contracts which Defaulted During Period
|
|
Recorded Investment on Defaulted TDRs
|
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
|
Commercial and business loans
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
$
|
—
|
|
|
Government program loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial real estate term loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Single family residential loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Home improvement and home equity loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Real estate construction and development loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Agricultural loans
|
1
|
|
|
179
|
|
|
179
|
|
|
—
|
|
|
—
|
|
|
Installment and student loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Overdraft protection lines
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total loans
|
1
|
|
|
$
|
179
|
|
|
$
|
179
|
|
|
—
|
|
|
$
|
—
|
|
The Company makes various types of concessions when structuring TDRs including rate discounts, payment extensions, and other-than-temporary forbearance. At June 30, 2020, the Company had 13 restructured loans totaling $5,155,000 as compared to 13 restructured loans totaling $5,187,000 at December 31, 2019.
The following tables summarize TDR activity by loan category for the quarters ended June 30, 2020 and June 30, 2019 (in 000's).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2020
|
Commercial and Industrial
|
|
Commercial Real Estate
|
|
Residential Mortgages
|
|
Home Improvement and Home Equity
|
|
Real Estate Construction Development
|
|
Agricultural
|
|
Installment
and Student Loans
|
|
Total
|
|
Beginning balance
|
$
|
4
|
|
|
$
|
893
|
|
|
$
|
1,048
|
|
|
$
|
—
|
|
|
$
|
2,587
|
|
|
$
|
721
|
|
|
$
|
—
|
|
|
$
|
5,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal (reductions) additions
|
(4)
|
|
|
(4)
|
|
|
(10)
|
|
|
—
|
|
|
(51)
|
|
|
(29)
|
|
|
—
|
|
|
(98)
|
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
—
|
|
|
$
|
889
|
|
|
$
|
1,038
|
|
|
$
|
—
|
|
|
$
|
2,536
|
|
|
$
|
692
|
|
|
$
|
—
|
|
|
$
|
5,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss
|
$
|
—
|
|
|
$
|
175
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
243
|
|
|
$
|
—
|
|
|
$
|
449
|
|
|
Defaults
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2019
|
Commercial and Industrial
|
|
Commercial Real Estate
|
|
Residential Mortgages
|
|
Home Improvement and Home Equity
|
|
Real Estate Construction Development
|
|
Agricultural
|
|
Installment
and Student Loans
|
|
Total
|
|
Beginning balance
|
$
|
57
|
|
|
$
|
911
|
|
|
$
|
1,857
|
|
|
$
|
—
|
|
|
$
|
2,804
|
|
|
$
|
711
|
|
|
$
|
—
|
|
|
$
|
6,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal (reductions) additions
|
(19)
|
|
|
(4)
|
|
|
(16)
|
|
|
—
|
|
|
(66)
|
|
|
(52)
|
|
|
—
|
|
|
(157)
|
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
38
|
|
|
$
|
907
|
|
|
$
|
1,841
|
|
|
$
|
—
|
|
|
$
|
2,738
|
|
|
$
|
659
|
|
|
$
|
—
|
|
|
$
|
6,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss
|
$
|
—
|
|
|
$
|
347
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
451
|
|
|
$
|
—
|
|
|
$
|
830
|
|
|
Defaults
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The following tables summarize TDR activity by loan category for the six months ended June 30, 2020 and June 30, 2019 (in 000's).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2020
|
Commercial and Industrial
|
|
Commercial Real Estate
|
|
Residential Mortgages
|
|
Home Improvement and Home Equity
|
|
Real Estate Construction Development
|
|
Agricultural
|
|
Installment
and Student Loans
|
|
Total
|
|
Beginning balance
|
$
|
9
|
|
|
$
|
898
|
|
|
$
|
1,060
|
|
|
$
|
—
|
|
|
$
|
2,654
|
|
|
$
|
566
|
|
|
$
|
—
|
|
|
$
|
5,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
179
|
|
|
—
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal (reductions) additions
|
(9)
|
|
|
(9)
|
|
|
(22)
|
|
|
—
|
|
|
(118)
|
|
|
(53)
|
|
|
—
|
|
|
(211)
|
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
—
|
|
|
$
|
889
|
|
|
$
|
1,038
|
|
|
$
|
—
|
|
|
$
|
2,536
|
|
|
$
|
692
|
|
|
$
|
—
|
|
|
$
|
5,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss
|
$
|
—
|
|
|
$
|
175
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
243
|
|
|
$
|
—
|
|
|
$
|
449
|
|
|
Defaults
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2019
|
Commercial and Industrial
|
|
Commercial Real Estate
|
|
Residential Mortgages
|
|
Home Improvement and Home Equity
|
|
Real Estate Construction Development
|
|
Agricultural
|
|
Installment
and Student Loans
|
|
Total
|
|
Beginning balance
|
$
|
75
|
|
|
$
|
1,305
|
|
|
$
|
2,029
|
|
|
$
|
—
|
|
|
$
|
2,838
|
|
|
$
|
812
|
|
|
$
|
—
|
|
|
$
|
7,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal (reductions) additions
|
(37)
|
|
|
(393)
|
|
|
(188)
|
|
|
—
|
|
|
(100)
|
|
|
(153)
|
|
|
—
|
|
|
(871)
|
|
|
Charge-offs
|
—
|
|
|
(5)
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
38
|
|
|
$
|
907
|
|
|
$
|
1,841
|
|
|
$
|
—
|
|
|
$
|
2,738
|
|
|
$
|
659
|
|
|
$
|
—
|
|
|
$
|
6,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss
|
$
|
—
|
|
|
$
|
347
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
451
|
|
|
$
|
—
|
|
|
$
|
830
|
|
|
Defaults
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company is working with customers directly affected by COVID-19. The Company is prepared to offer short-term assistance in accordance with regulatory guidelines. As of June 30, 2020, the Company had executed 28 payment deferrals or modifications on outstanding loan balances of $69,997,000 in connection with the COVID-19 relief provided by the CARES Act. These deferrals were generally no more than six months in duration and were not considered troubled debt restructurings based on interagency guidance issued in March 2020.
Credit Quality Indicators
As part of its credit monitoring program, the Company utilizes a risk rating system which quantifies the risk the Company estimates it has assumed during the life of a loan. The system rates the strength of the borrower and the facility or transaction, and is designed to provide a program for risk management and early detection of problems.
For each new credit approval, credit extension, renewal, or modification of existing credit facilities, the Company assigns risk ratings utilizing the rating scale identified in this policy. In addition, on an on-going basis, loans and credit facilities are reviewed for internal and external influences impacting the credit facility that would warrant a change in the risk rating. Each credit facility is to be given a risk rating that takes into account factors that materially affect credit quality.
When assigning risk ratings, the Company evaluates two risk rating approaches, a facility rating and a borrower rating as follows:
Facility Rating:
The facility rating is determined by the analysis of positive and negative factors that may indicate that the quality of a particular loan or credit arrangement requires that it be rated differently from the risk rating assigned to the borrower. The Company assesses the risk impact of these factors:
Collateral - The rating may be affected by the type and quality of the collateral, the degree of coverage, the economic life of the collateral, liquidation value and the Company's ability to dispose of the collateral.
Guarantees - The value of third party support arrangements varies widely. Unconditional guaranties from persons with demonstrable ability to perform are more substantial than that of closely related persons to the borrower who offer only modest support.
Unusual Terms - Credit may be extended on terms that subject the Company to a higher level of risk than indicated in the rating of the borrower.
Borrower Rating:
The borrower rating is a measure of loss possibility based on the historical, current and anticipated financial characteristics of the borrower in the current risk environment. To determine the rating, the Company considers at least the following factors:
- Quality of management
- Liquidity
- Leverage/capitalization
- Profit margins/earnings trend
- Adequacy of financial records
- Alternative funding sources
- Geographic risk
- Industry risk
- Cash flow risk
- Accounting practices
- Asset protection
- Extraordinary risks
The Company assigns risk ratings to loans other than consumer loans and other homogeneous loan pools based on the following scale. The risk ratings are used when determining borrower ratings as well as facility ratings. When the borrower rating and the facility ratings differ, the lowest rating applied is:
- Grades 1 and 2 – These grades include loans which are given to high quality borrowers with high credit quality and sound financial strength. Key financial ratios are generally above industry averages and the borrower’s strong earnings history or net worth. These may be secured by deposit accounts or high-grade investment securities.
- Grade 3 – This grade includes loans to borrowers with solid credit quality with minimal risk. The borrower’s balance sheet and financial ratios are generally in line with industry averages, and the borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans assigned this risk rating must have characteristics, which place them well above the minimum underwriting requirements for those departments. Asset-based borrowers assigned this rating must exhibit extremely favorable leverage and cash flow characteristics, and consistently demonstrate a high level of unused borrowing capacity.
- Grades 4 and 5 – These include “pass” grade loans to borrowers of acceptable credit quality and risk. The borrower’s balance sheet and financial ratios may be below industry averages, but above the lowest industry quartile. Leverage is above and liquidity is below industry averages. Inadequacies evident in financial performance and/or management sufficiency are offset by readily available features of support, such as adequate collateral, or good guarantors having the liquid assets and/or cash flow capacity to repay the debt. The borrower may have recognized a loss over three or four years, however recent earnings trends, while perhaps somewhat cyclical, are improving and cash flows are adequate to cover debt service and fixed obligations. Real estate and asset-borrowers fully comply with all underwriting standards and are performing according to projections would be assigned this rating. These also include grade 5 loans which are “leveraged” or on management’s “watch list.” While still considered pass loans (loans given a grade 5), the borrower’s financial condition, cash flow or operations evidence more than average risk and short term
weaknesses, these loans warrant a higher than average level of monitoring, supervision and attention from the Company, but do not reflect credit weakness trends that weaken or inadequately protect the Company’s credit position. Loans with a grade rating of 5 are not normally acceptable as new credits unless they are adequately secured or carry substantial endorser/guarantors.
- Grade 6 – This grade includes “special mention” loans which are loans that are currently protected but are potentially weak. This generally is an interim grade classification and should usually be upgraded to an Acceptable rating or downgraded to Substandard within a reasonable time period. Weaknesses in special mention loans may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. Special mention loans are often loans with weaknesses inherent from the loan origination, loan servicing, and perhaps some technical deficiencies. The main theme in special mention credits is the distinct probability that the classification will deteriorate to a more adverse class if the noted deficiencies are not addressed by the loan officer or loan management.
- Grade 7 – This grade includes “substandard” loans which are inadequately supported by the current sound net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that may impair the regular liquidation of the debt. Substandard loans exhibit a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard loans also include impaired loans.
- Grade 8 – This grade includes “doubtful” loans which exhibit the same characteristics as the Substandard loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include a proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.
- Grade 9 – This grade includes loans classified “loss” which are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off the asset even though partial recovery may be achieved in the future.
The Company did not carry any loans graded as loss at June 30, 2020 or December 31, 2019.
The following tables summarize the credit risk ratings for commercial, construction, and other non-consumer related loans for June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
Commercial and Industrial
|
|
Commercial Real Estate
|
|
Real Estate Construction and Development
|
|
Agricultural
|
|
Total
|
|
(in 000's)
|
|
|
|
|
|
|
|
|
|
|
Grades 1 and 2
|
$
|
26,306
|
|
|
$
|
2,767
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29,073
|
|
|
Grade 3
|
—
|
|
|
751
|
|
|
—
|
|
|
—
|
|
|
751
|
|
|
Grades 4 and 5 – pass
|
40,073
|
|
|
258,108
|
|
|
141,548
|
|
|
45,966
|
|
|
485,695
|
|
|
Grade 6 – special mention
|
1,275
|
|
|
1,715
|
|
|
998
|
|
|
2,320
|
|
|
6,308
|
|
|
Grade 7 – substandard
|
576
|
|
|
1,151
|
|
|
11,109
|
|
|
693
|
|
|
13,529
|
|
|
Grade 8 – doubtful
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
68,230
|
|
|
$
|
264,492
|
|
|
$
|
153,655
|
|
|
$
|
48,979
|
|
|
$
|
535,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Commercial and Industrial
|
|
Commercial Real Estate
|
|
Real Estate Construction and Development
|
|
Agricultural
|
|
Total
|
|
(in 000's)
|
|
|
|
|
|
|
|
|
|
|
Grades 1 and 2
|
$
|
278
|
|
|
$
|
2,806
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,084
|
|
|
Grade 3
|
—
|
|
|
981
|
|
|
—
|
|
|
—
|
|
|
981
|
|
|
Grades 4 and 5 – pass
|
41,757
|
|
|
238,612
|
|
|
126,308
|
|
|
50,234
|
|
|
456,911
|
|
|
Grade 6 – special mention
|
919
|
|
|
1,608
|
|
|
998
|
|
|
1,279
|
|
|
4,804
|
|
|
Grade 7 – substandard
|
2,324
|
|
|
1,176
|
|
|
11,478
|
|
|
684
|
|
|
15,662
|
|
|
Grade 8 – doubtful
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
45,278
|
|
|
$
|
245,183
|
|
|
$
|
138,784
|
|
|
$
|
52,197
|
|
|
$
|
481,442
|
|
The Company follows consistent underwriting standards outlined in its loan policy for consumer and other homogeneous loans but, does not specifically assign a risk rating when these loans are originated. Consumer loans are monitored for credit risk and are considered “pass” loans until some issue or event requires that the credit be downgraded to special mention or worse. Within the student loan portfolio, the Company does not grade these loan individually, but monitors credit quality indicators such as delinquency and program defined status codes such as forbearance.
The following tables summarize the credit risk ratings for consumer related loans and other homogeneous loans for June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Residential Mortgages
|
|
Home
Improvement and Home Equity
|
|
Installment and Student Loans
|
|
Total
|
|
Residential Mortgages
|
|
Home
Improvement and Home Equity
|
|
Installment and Student Loans
|
|
Total
|
|
(in 000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not graded
|
$
|
35,163
|
|
|
$
|
103
|
|
|
$
|
63,427
|
|
|
$
|
98,693
|
|
|
$
|
33,059
|
|
|
$
|
155
|
|
|
$
|
68,752
|
|
|
$
|
101,966
|
|
|
Pass
|
14,123
|
|
|
17
|
|
|
656
|
|
|
14,796
|
|
|
12,542
|
|
|
18
|
|
|
740
|
|
|
13,300
|
|
|
Special mention
|
357
|
|
|
—
|
|
|
269
|
|
|
626
|
|
|
88
|
|
|
—
|
|
|
386
|
|
|
474
|
|
|
Substandard
|
183
|
|
|
—
|
|
|
—
|
|
|
183
|
|
|
192
|
|
|
—
|
|
|
—
|
|
|
192
|
|
|
Doubtful
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
49,826
|
|
|
$
|
120
|
|
|
$
|
64,352
|
|
|
$
|
114,298
|
|
|
$
|
45,881
|
|
|
$
|
173
|
|
|
$
|
69,878
|
|
|
$
|
115,932
|
|
Allowance for Loan Losses
The Company analyzes risk characteristics inherent in each loan portfolio segment as part of the quarterly review of the adequacy of the allowance for loan losses. The following summarizes some of the key risk characteristics for the ten segments of the loan portfolio (Consumer loans include three segments):
Commercial and industrial loans – Commercial loans are subject to the effects of economic cycles and tend to exhibit increased risk as economic conditions deteriorate, or if the economic downturn is prolonged. The Company considers this segment to be one of higher risk given the size of individual loans and the balances in the overall portfolio.
Government program loans – This is a relatively a small part of the Company’s loan portfolio, but has historically had a high percentage of loans that have migrated from pass to substandard given their vulnerability to economic cycles.
Commercial real estate loans – This segment is considered to have more risk in part because of the vulnerability of commercial businesses to economic cycles as well as the exposure to fluctuations in real estate prices because most of these loans are secured by real estate. Losses in this segment have however been historically low because most of the loans are real estate secured, and the bank maintains appropriate loan-to-value ratios.
Residential mortgages – This segment is considered to have low risk factors both from the Company and peer statistics. These loans are secured by first deeds of trust. The losses experienced over the past sixteen quarters are isolated to approximately three loans and are generally the result of short sales.
Home improvement and home equity loans – Because of their junior lien position, these loans have an inherently higher risk level. Because residential real estate has been severely distressed in the recent past, the anticipated risk for this loan segment has increased.
Real estate construction and development loans –This segment of loans is considered to have a higher risk profile due to construction and market value issues in conjunction with normal credit risks.
Agricultural loans – This segment is considered to have risks associated with weather, insects, and marketing issues. In addition, concentrations in certain crops or certain agricultural areas can increase risk.
Installment and student loans (Includes consumer loans, student loans, overdrafts, and overdraft protection lines) – This segment is higher risk because many of the loans are unsecured. Additionally, in the case of student loans, there are increased risks associated with liquidity as there is a significant time lag between funding of a student loan and eventual repayment.
COVID-19 – As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. While the Company has not yet experienced any charge-offs related to COVID-19, the allowance for credit loss calculation and resulting provision for credit losses are significantly impacted by changes in economic conditions resulting from significant increase in unemployment. Given that economic scenarios have darkened significantly since the pandemic was declared in early March, the credit risk in the loan portfolio has increased resulting in the need for an additional reserve for credit loss.
The following summarizes the activity in the allowance for credit losses by loan category for the quarters ended June 30, 2020 and 2019 (in 000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Commercial and Industrial
|
|
Real Estate Mortgage
|
|
Real Estate Construction Development
|
|
Agricultural
|
|
Installment and Student Loans
|
|
Unallocated
|
|
Total
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
914
|
|
|
$
|
910
|
|
|
$
|
3,461
|
|
|
$
|
868
|
|
|
$
|
2,616
|
|
|
$
|
351
|
|
|
$
|
9,120
|
|
|
Provision (recovery of provision) for credit losses
|
(166)
|
|
|
(103)
|
|
|
363
|
|
|
(32)
|
|
|
577
|
|
|
(211)
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
(252)
|
|
|
—
|
|
|
(448)
|
|
|
—
|
|
|
(700)
|
|
|
Recoveries
|
8
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
14
|
|
|
Net recoveries (charge-offs)
|
8
|
|
|
5
|
|
|
(252)
|
|
|
—
|
|
|
(447)
|
|
|
—
|
|
|
(686)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
756
|
|
|
$
|
812
|
|
|
$
|
3,572
|
|
|
$
|
836
|
|
|
$
|
2,746
|
|
|
$
|
140
|
|
|
$
|
8,862
|
|
|
Period-end amount allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
—
|
|
|
206
|
|
|
—
|
|
|
243
|
|
|
—
|
|
|
—
|
|
|
449
|
|
|
Loans collectively evaluated for impairment
|
756
|
|
|
606
|
|
|
3,572
|
|
|
593
|
|
|
2,746
|
|
|
140
|
|
|
8,413
|
|
|
Ending balance
|
$
|
756
|
|
|
$
|
812
|
|
|
$
|
3,572
|
|
|
$
|
836
|
|
|
$
|
2,746
|
|
|
$
|
140
|
|
|
$
|
8,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Commercial and Industrial
|
|
Real Estate Mortgage
|
|
Real Estate Construction Development
|
|
Agricultural
|
|
Installment and Student Loans
|
|
Unallocated
|
|
Total
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
1,614
|
|
|
$
|
995
|
|
|
$
|
2,188
|
|
|
$
|
969
|
|
|
$
|
1,838
|
|
|
$
|
813
|
|
|
$
|
8,417
|
|
|
Provision (recovery of provision) for credit losses
|
(167)
|
|
|
(135)
|
|
|
142
|
|
|
163
|
|
|
136
|
|
|
(135)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5)
|
|
|
—
|
|
|
(5)
|
|
|
Recoveries
|
9
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
—
|
|
|
36
|
|
|
Net recoveries (charge-offs)
|
9
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
1,456
|
|
|
$
|
864
|
|
|
$
|
2,330
|
|
|
$
|
1,132
|
|
|
$
|
1,992
|
|
|
$
|
678
|
|
|
$
|
8,452
|
|
|
Period-end amount allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
609
|
|
|
379
|
|
|
—
|
|
|
451
|
|
|
—
|
|
|
—
|
|
|
1,439
|
|
|
Loans collectively evaluated for impairment
|
847
|
|
|
485
|
|
|
2,330
|
|
|
681
|
|
|
1,992
|
|
|
678
|
|
|
7,013
|
|
|
Ending balance
|
$
|
1,456
|
|
|
$
|
864
|
|
|
$
|
2,330
|
|
|
$
|
1,132
|
|
|
$
|
1,992
|
|
|
$
|
678
|
|
|
$
|
8,452
|
|
The following summarizes the activity in the allowance for credit losses by loan category for the quarters ended June 30, 2020 and 2019 (in 000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
Commercial and Industrial
|
|
Real Estate Mortgage
|
|
Real Estate Construction Development
|
|
Agricultural
|
|
Installment and Student Loans
|
|
Unallocated
|
|
Total
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
1,322
|
|
|
$
|
712
|
|
|
$
|
2,808
|
|
|
$
|
761
|
|
|
$
|
2,132
|
|
|
$
|
173
|
|
|
$
|
7,908
|
|
|
Provision (recovery of provision) for credit losses
|
(579)
|
|
|
91
|
|
|
1,016
|
|
|
75
|
|
|
1,564
|
|
|
(33)
|
|
|
2,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
—
|
|
|
—
|
|
|
(252)
|
|
|
—
|
|
|
(956)
|
|
|
—
|
|
|
(1,208)
|
|
|
Recoveries
|
13
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
28
|
|
|
Net recoveries (charge-offs)
|
13
|
|
|
9
|
|
|
(252)
|
|
|
—
|
|
|
(950)
|
|
|
—
|
|
|
(1,180)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
756
|
|
|
$
|
812
|
|
|
$
|
3,572
|
|
|
$
|
836
|
|
|
$
|
2,746
|
|
|
$
|
140
|
|
|
$
|
8,862
|
|
|
Period-end amount allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
—
|
|
|
206
|
|
|
—
|
|
|
243
|
|
|
—
|
|
|
—
|
|
|
449
|
|
|
Loans collectively evaluated for impairment
|
756
|
|
|
606
|
|
|
3,572
|
|
|
593
|
|
|
2,746
|
|
|
140
|
|
|
8,413
|
|
|
Ending balance
|
$
|
756
|
|
|
$
|
812
|
|
|
$
|
3,572
|
|
|
$
|
836
|
|
|
$
|
2,746
|
|
|
$
|
140
|
|
|
$
|
8,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
Commercial and Industrial
|
|
Real Estate Mortgage
|
|
Real Estate Construction Development
|
|
Agricultural
|
|
Installment and Student Loans
|
|
Unallocated
|
|
Total
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
1,673
|
|
|
$
|
1,015
|
|
|
$
|
2,424
|
|
|
$
|
1,131
|
|
|
$
|
1,559
|
|
|
$
|
593
|
|
|
$
|
8,395
|
|
|
Provision (recovery of provision) for credit losses
|
(274)
|
|
|
(154)
|
|
|
(94)
|
|
|
1
|
|
|
446
|
|
|
85
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
—
|
|
|
(5)
|
|
|
—
|
|
|
—
|
|
|
(114)
|
|
|
—
|
|
|
(119)
|
|
|
Recoveries
|
57
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
101
|
|
|
—
|
|
|
166
|
|
|
Net (charge-offs) recoveries
|
57
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
(13)
|
|
|
—
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
1,456
|
|
|
$
|
864
|
|
|
$
|
2,330
|
|
|
$
|
1,132
|
|
|
$
|
1,992
|
|
|
$
|
678
|
|
|
$
|
8,452
|
|
|
Period-end amount allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
609
|
|
|
379
|
|
|
—
|
|
|
451
|
|
|
—
|
|
|
—
|
|
|
1,439
|
|
|
Loans collectively evaluated for impairment
|
847
|
|
|
485
|
|
|
2,330
|
|
|
681
|
|
|
1,992
|
|
|
678
|
|
|
7,013
|
|
|
Ending balance
|
$
|
1,456
|
|
|
$
|
864
|
|
|
$
|
2,330
|
|
|
$
|
1,132
|
|
|
$
|
1,992
|
|
|
$
|
678
|
|
|
$
|
8,452
|
|
The following summarizes information with respect to the loan balances at June 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
June 30, 2019
|
|
|
|
|
|
|
Loans
Individually
Evaluated for Impairment
|
|
Loans
Collectively
Evaluated for Impairment
|
|
Total Loans
|
|
Loans
Individually
Evaluated for Impairment
|
|
Loans
Collectively
Evaluated for Impairment
|
|
Total Loans
|
|
(in 000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and business loans
|
$
|
318
|
|
|
$
|
41,207
|
|
|
$
|
41,525
|
|
|
$
|
1,878
|
|
|
$
|
52,456
|
|
|
$
|
54,334
|
|
|
Government program loans
|
241
|
|
|
26,464
|
|
|
26,705
|
|
|
275
|
|
|
536
|
|
|
811
|
|
|
Total commercial and industrial
|
559
|
|
|
67,671
|
|
|
68,230
|
|
|
2,153
|
|
|
52,992
|
|
|
55,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans
|
2,048
|
|
|
262,444
|
|
|
264,492
|
|
|
1,824
|
|
|
225,701
|
|
|
227,525
|
|
|
Residential mortgage loans
|
1,041
|
|
|
48,785
|
|
|
49,826
|
|
|
1,848
|
|
|
52,294
|
|
|
54,142
|
|
|
Home improvement and home equity loans
|
—
|
|
|
120
|
|
|
120
|
|
|
—
|
|
|
221
|
|
|
221
|
|
|
Total real estate mortgage
|
3,089
|
|
|
311,349
|
|
|
314,438
|
|
|
3,672
|
|
|
278,216
|
|
|
281,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction and development loans
|
11,109
|
|
|
142,546
|
|
|
153,655
|
|
|
11,562
|
|
|
103,049
|
|
|
114,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural loans
|
696
|
|
|
48,283
|
|
|
48,979
|
|
|
667
|
|
|
51,360
|
|
|
52,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment and student loans
|
—
|
|
|
64,352
|
|
|
64,352
|
|
|
—
|
|
|
69,750
|
|
|
69,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
$
|
15,453
|
|
|
$
|
634,201
|
|
|
$
|
649,654
|
|
|
$
|
18,054
|
|
|
$
|
555,367
|
|
|
$
|
573,421
|
|
4.Student Loans
Included in installment loans are $60,533,000 and $65,800,000 in student loans at June 30, 2020 and December 31, 2019, respectively, made to medical and pharmacy school students. Upon graduation the loan is automatically placed on deferment for 6 months. This may be extended up to 48 months for graduates enrolling in Internship, Medical Residency or Fellowship. As approved, the student may receive additional deferment for hardship or administrative reasons in the form of forbearance for a maximum of 24 months throughout the life of the loan. Accrued interest on loans that had not entered repayment status totaled $3,315,000 at June 30, 2020 and $4,689,000 at December 31, 2019. At June 30, 2020 there were 816 loans within repayment, deferment, and forbearance which represented $19,015,000, $4,368,000, and $13,716,000, respectively. At December 31, 2019, there were 855 loans within repayment, deferment, and forbearance which represented $24,986,000, $4,392,000 and $10,626,000, respectively. As of June 30, 2020 and December 31, 2019, the reserve against the student loan portfolio was $2,692,000 and $2,091,000, respectively. There were no TDRs within the portfolio as of June 30, 2020 or December 31, 2019. At June 30, 2020 and December 31, 2019, student loans totaling $269,000 and $386,000, respectively, were included in the special mention category.
Reunion Student Loan Finance Corporation (RSLFC) is the third-party servicer for the student loan portfolio. RSLFC's services include application administration, processing, approval, documenting, funding, and collection. They also provide borrower file custodial responsibilities. Except in cases where applicants/loans do not meet program requirements, or extreme delinquency, RSLFC is responsible for complete program management. RSLFC is paid a monthly servicing fee based on the outstanding principal balance.
The following tables summarize the credit quality indicators for outstanding student loans as of June 30, 2020 and December 31, 2019 (in 000's, except for number of borrowers):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
Number of Loans
|
|
Amount
|
|
Accrued Interest
|
|
Number of Loans
|
|
Amount
|
|
Accrued Interest
|
|
School
|
386
|
|
$
|
14,495
|
|
|
$
|
3,315
|
|
|
601
|
|
|
$
|
24,198
|
|
|
$
|
4,689
|
|
|
Grace
|
188
|
|
|
8,939
|
|
|
2,106
|
|
|
49
|
|
|
1,598
|
|
|
394
|
|
|
Repayment
|
415
|
|
|
19,015
|
|
|
237
|
|
|
507
|
|
|
24,986
|
|
|
203
|
|
|
Deferment
|
93
|
|
|
4,368
|
|
|
242
|
|
|
124
|
|
|
4,392
|
|
|
204
|
|
|
Forbearance
|
308
|
|
|
13,716
|
|
|
439
|
|
|
224
|
|
|
10,626
|
|
|
188
|
|
|
Total
|
1,390
|
|
|
$
|
60,533
|
|
|
$
|
6,339
|
|
|
1,505
|
|
|
$
|
65,800
|
|
|
$
|
5,678
|
|
School - The time in which the borrower is still actively in school at least half time. No payments are expected during this stage, though the borrower may begin immediate payments.
Grace - A six month period of time granted to the borrower immediately upon graduation, or if deemed no longer an active student. Interest continues to accrue. Upon completion of the six month grace period the loan is transferred to repayment status. Additionally, if applicable, this status may represent a borrower activated to military duty while in their in-school period, they will be allowed to return to that status once their active duty has expired. The borrower must return to an at least half time status within six months of the active duty end date in order to return to an in-school status.
Repayment - The time in which the borrower is no longer actively in school at least half time, and has not received an approved grace, deferment, or forbearance. Regular payment is expected from these borrowers under an allotted payment plan.
Deferment - May be granted up to 48 months for borrowers who have begun the repayment period on their loans but are (1) actively enrolled in an eligible school at least half time, or (2) are actively enrolled in an approved and verifiable medical residency, internship, or fellowship program.
Forbearance - The period of time during which the borrower may postpone making principal and interest payments, which may be granted for either hardship or administrative reasons. Interest will continue to accrue on loans during periods of authorized forbearance. If the borrower is delinquent at the time the forbearance is granted, the delinquency will be covered by the forbearance and all accrued and unpaid interest from the date of delinquency or if none, from the date of beginning of the forbearance period, will be capitalized at the end of each forbearance period. The term of the loan will not change and payments may be increased to allow the loan to pay off in the required time frame. A forbearance that results in only an insignificant delay in payment, is not considered a concessionary change in terms, provided the borrower affirms the obligation. Forbearance is not an uncommon status designation, this designation is standard industry practice, and is consistent with the succession of students migrating to employed medical professionals.
Student Loan Aging
Student loans are generally charged off at the end of the month during which an account becomes 120 days contractually past due. Accrued but unpaid interest related to charged off student loans is reversed and charged against interest income. For the three and six months ended June 30, 2020, $21,000 and $50,000 in accrued interest receivable was reversed, due to charge-offs of $446,000 and $947,000, respectively, within the student loan portfolio. For six months ended June 30, 2019, $4,000 in accrued interest receivable was reversed, due to charge-offs of $103,000 within the student loan portfolio. For the three months ended June 30, 2019 there was no reversal in accrued interest and no charge-offs.
The following tables summarize the student loan aging for loans in repayment and forbearance as of June 30, 2020 and December 31, 2019 (in 000's, except for number of borrowers):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
|
Number of Borrowers
|
|
Amount
|
|
Number of Borrowers
|
|
Amount
|
|
Current or less than 31 days
|
296
|
|
|
$
|
31,961
|
|
|
295
|
|
|
$
|
34,277
|
|
|
31 - 60 days
|
3
|
|
|
209
|
|
|
4
|
|
|
292
|
|
|
61 - 90 days
|
2
|
|
|
292
|
|
|
7
|
|
|
657
|
|
|
91 - 120 days
|
1
|
|
|
174
|
|
|
6
|
|
|
386
|
|
|
Over 120 days
|
1
|
|
|
95
|
|
|
—
|
|
|
—
|
|
|
Total
|
303
|
|
|
$
|
32,731
|
|
|
312
|
|
|
$
|
35,612
|
|
5.Deposits
Deposits include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
June 30, 2020
|
|
December 31, 2019
|
|
Noninterest-bearing deposits
|
$
|
362,010
|
|
|
$
|
311,950
|
|
|
Interest-bearing deposits:
|
|
|
|
|
NOW and money market accounts
|
378,274
|
|
|
360,934
|
|
|
Savings accounts
|
89,153
|
|
|
80,078
|
|
|
Time deposits:
|
|
|
|
|
Under $250,000
|
41,274
|
|
|
44,926
|
|
|
$250,000 and over
|
22,401
|
|
|
20,474
|
|
|
Total interest-bearing deposits
|
531,102
|
|
|
506,412
|
|
|
Total deposits
|
$
|
893,112
|
|
|
$
|
818,362
|
|
|
|
|
|
|
|
|
|
|
|
6.Short-term Borrowings/Other Borrowings
At June 30, 2020, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling $308,717,000, as well as Federal Home Loan Bank (FHLB) lines of credit totaling $5,360,000. At June 30, 2020, the Company had an uncollateralized line of credit with Pacific Coast Bankers Bank (PCBB) totaling $10,000,000, a Fed Funds line of $10,000,000 with Union Bank, and a Fed Funds line of $20,000,000 with Zions First National Bank. All lines of credit are on an “as available” basis and can be revoked by the grantor at any time. These lines of credit have interest rates that are generally tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR. FHLB advances are collateralized by the Company’s stock in the FHLB, investment securities, and certain qualifying mortgage loans.
As of June 30, 2020, $5,881,000 in investment securities at FHLB were pledged as collateral for FHLB advances. Additionally, $492,190,000 in secured and unsecured loans were pledged at June 30, 2020, as collateral for borrowing lines with the Federal Reserve Bank. At June 30, 2020, the Company had no outstanding borrowings.
At December 31, 2019, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling $313,445,000, as well as Federal Home Loan Bank (“FHLB”) lines of credit totaling $5,815,000. At December 31, 2019, the Company had an uncollateralized line of credit with Pacific Coast Bankers Bank ("PCBB") and Union Bank totaling $10,000,000 each, with a Fed Funds line of $20,000,000 at Zions First National Bank. All lines of credit are on an “as available” basis and can be revoked by the grantor at any time. These lines of credit generally have interest rates tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or LIBOR. FHLB advances are collateralized by the Company’s stock in the FHLB, investment securities, and certain qualifying mortgage loans.
As of December 31, 2019, $6,201,000 in investment securities at FHLB were pledged as collateral for FHLB advances. Additionally, $462,937,000 in secured and unsecured loans were pledged at December 31, 2019, as collateral for used and unused borrowing lines with the Federal Reserve Bank. At December 31, 2019, the Company had no outstanding borrowings.
7.Leases
The Company leases land and premises for its branch banking offices, administration facilities, and ATMs. The initial terms of these leases expire at various dates through 2025. Under the provisions of most of these leases, the Company has the option to extend the leases beyond their original terms at rental rates adjusted for changes reported in certain economic indices or as reflected by market conditions. Lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will exercise that option. As of June 30, 2020, the Company had 12 operating leases and no financing leases.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
June 30, 2020
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease expense
|
$
|
380
|
|
$
|
378
|
|
|
Short-term lease expense
|
—
|
|
—
|
|
|
Variable lease expense
|
117
|
|
108
|
|
|
Sublease income
|
—
|
|
—
|
|
|
Total
|
$
|
497
|
|
$
|
486
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
(in 000's)
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
380
|
|
|
|
|
|
ROU assets obtained in exchange for new operating lease liabilities
|
—
|
|
|
|
|
|
Weighted-average remaining lease term in years for operating leases
|
6.02
|
|
|
|
|
Weighted-average discount rate for operating leases
|
5.15
|
%
|
Maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
(in 000's)
|
June 30, 2020
|
|
2021
|
$
|
708
|
|
|
2022
|
658
|
|
|
2023
|
667
|
|
|
2024
|
625
|
|
|
2025
|
406
|
|
|
Thereafter
|
624
|
|
|
Total undiscounted cash flows
|
3,688
|
|
|
Less: present value discount
|
(520)
|
|
|
Present value of net future minimum lease payments
|
$
|
3,168
|
|
8 Supplemental Cash Flow Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
(in 000's)
|
2020
|
|
2019
|
|
Cash paid during the period for:
|
|
|
|
|
Interest
|
$
|
1,314
|
|
|
$
|
1,946
|
|
|
Income taxes
|
—
|
|
|
3,790
|
|
|
Noncash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on unrecognized post retirement costs
|
40
|
|
|
28
|
|
|
Unrealized gain on available for sale securities
|
827
|
|
|
563
|
|
|
Unrealized loss on junior subordinated debentures
|
(453)
|
|
|
(1,247)
|
|
|
|
|
|
|
|
Cash dividend declared
|
1,866
|
|
|
1,865
|
|
|
Adoption of ASU 2016-02: recognition of lease right-of-use (ROU) asset
|
—
|
|
|
3,395
|
|
|
Adoption of ASU 2016-02: recognition of lease liability
|
—
|
|
|
3,486
|
|
9.Dividends on Common Stock
On June 23, 2020, the Company’s Board of Directors declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on July 15, 2020, to shareholders of record as of July 6, 2020. Approximately $1,866,000 was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.
On March 24, 2020, the Company’s Board of Directors declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on April 15, 2020, to shareholders of record as of April 6, 2020. Approximately $1,867,000 was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.
During 2017, the Board of Directors authorized the repurchase of up to $3 million of the outstanding common stock of the Company. The timing of the purchases will depend on certain factors, including but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, or negotiated private transactions. At this time, no shares have been repurchased.
10.Net Income per Common Share
The following table provides a reconciliation of the numerator and the denominator of the basic EPS computation with the numerator and the denominator of the diluted EPS computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net income (000's, except per share amounts)
|
$
|
2,012
|
|
|
$
|
4,097
|
|
|
$
|
4,768
|
|
|
$
|
8,104
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares issued
|
16,975,588
|
|
|
16,950,564
|
|
|
16,974,845
|
|
|
16,948,810
|
|
|
Add: dilutive effect of stock options
|
13,190
|
|
|
31,141
|
|
|
17,378
|
|
|
28,414
|
|
|
Weighted average shares outstanding adjusted for potential dilution
|
16,988,778
|
|
|
16,981,705
|
|
|
16,992,223
|
|
|
16,977,224
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
0.12
|
|
|
$
|
0.24
|
|
|
$
|
0.28
|
|
|
$
|
0.48
|
|
|
Diluted earnings per share
|
$
|
0.12
|
|
|
$
|
0.24
|
|
|
$
|
0.28
|
|
|
$
|
0.48
|
|
|
Anti-dilutive stock options excluded from earnings per share calculation
|
101,000
|
|
|
60,000
|
|
|
101,000
|
|
|
60,000
|
|
11.Taxes on Income
The Company periodically reviews its tax positions under the accounting standards related to uncertainty in income taxes, which defines the criteria that an individual tax position would have to meet for some or all of the income tax benefit to be recognized in a taxable entity’s financial statements. Under the guidelines, an entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination. The term “more likely than not” means a likelihood of more than 50 percent. In assessing whether the more-likely-than-not criterion is met, the entity should assume that the tax position will be reviewed by the applicable taxing authority and all available information is known to the taxing authority.
The Company periodically evaluates its deferred tax assets to determine whether a valuation allowance is required based upon a determination that some or all of the deferred assets may not be ultimately realized. At June 30, 2020 and December 31, 2019, the Company had no recorded valuation allowance. The Company is no longer subject to IRS examination for years before 2015.
The Company's policy is to recognize any interest or penalties related to uncertain tax positions in income tax expense. Interest and penalties recognized during the periods ended June 30, 2020 and 2019 were insignificant.
The Company reported a provision for income taxes of $1,906,000 for the six months ended June 30, 2020 as compared to the $3,292,000 provision reported in the comparable period of 2019. The effective tax rate was 28.56% for the six months ended June 30, 2020 as compared to 28.89% for the comparable period of 2019.
12.Junior Subordinated Debt/Trust Preferred Securities
Effective September 30, 2009 and beginning with the interest payment due October 1, 2009, the Company elected to defer interest payments on the Company's $15.0 million of junior subordinated debentures relating to its trust preferred securities. Subsequently in September 2015, the Company redeemed $3.0 million at par value. The contractual principal balance of the Company's debentures relating to its trust preferred securities is $12.0 million as of June 30, 2020. The Company may redeem the junior subordinated debentures at any time at par.
The Company accounts for its junior subordinated debt issued under USB Capital Trust II at fair value. The Company believes the election of fair value accounting for the junior subordinated debentures better reflects the true economic value of the debt instrument on the balance sheet. As of June 30, 2020, the rate paid on the junior subordinated debt issued under USB Capital Trust II is 3-month LIBOR plus 129 basis points, and is adjusted quarterly.
At June 30, 2020, the Company performed a fair value measurement analysis on its junior subordinated debt using a cash flow model approach to determine the present value of those cash flows. The cash flow model utilizes the forward 3-month LIBOR curve to estimate future quarterly interest payments due over the thirty-year life of the debt instrument. These cash flows were discounted at a rate which incorporates a current market rate for similar-term debt instruments, adjusted for additional credit and liquidity risks associated with the junior subordinated debt. We believe the 4.05% discount rate used represents what a market participant would consider under the circumstances based on current market assumptions. At June 30, 2020, the total cumulative gain recorded on the debt is $2,759,000.
The net fair value calculation performed as of June 30, 2020 resulted in a net pretax gain adjustment of $1,015,000 ($716,000, net of tax) for the six months ended June 30, 2020 compared to a net pretax loss adjustment of $336,000 ($237,000, net of tax) for the six months ended June 30, 2019.
For the six months ended June 30, 2020, the net $1,015,000 ($716,000, net of tax) fair value gain adjustment was separately presented as a $1,469,000 gain ($1,035,000, net of tax) recognized on the consolidated statements of income, and a $453,000 loss ($319,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. For the six months ended June 30, 2019, the net $336,000 ($237,000, net of tax) fair value loss adjustment was separately presented as a $911,000 gain ($642,000, net of tax) recognized on the consolidated statements of income, and a $1,247,000 loss ($878,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods ended.
The net fair value calculation performed as of June 30, 2020 resulted in a net pretax loss adjustment of $1,238,000 ($871,000, net of tax) for the quarter ended June 30, 2020 compared to a net pretax loss adjustment of $45,000 ($32,000, net of tax) for the quarter ended June 30, 2019.
For the quarter ended June 30, 2020, the net $1,238,000 ($871,000, net of tax) fair value loss adjustment was separately presented as a $30,000 loss ($21,000, net of tax) recognized on the consolidated statements of income, and a $1,208,000 loss
($851,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. For the quarter ended June 30, 2019, the net $45,000 ($32,000, net of tax) fair value loss adjustment was separately presented as a $497,000 gain ($350,000, net of tax) recognized on the consolidated statements of income, and a $542,000 loss ($382,000, net of tax) associated with the instrument-specific credit risk recognized in other comprehensive income. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods ended.
13.Fair Value Measurements and Disclosure
The following summary disclosures are made in accordance with the guidance provided by ASC Topic 825, Fair Value Measurements and Disclosures, which requires the disclosure of fair value information about both on- and off-balance sheet financial instruments where it is practicable to estimate that value.
Generally accepted accounting guidance clarifies the definition of fair value, describes methods used to appropriately measure fair value in accordance with generally accepted accounting principles and expands fair value disclosure requirements. This guidance applies whenever other accounting pronouncements require or permit fair value measurements.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (Level 1, Level 2, and Level 3). Level 1 inputs are unadjusted quoted prices in active markets (as defined) for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability, and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized at the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
Carrying Amount
|
|
Estimated Fair Value
|
|
Quoted Prices In Active Markets for Identical Assets Level 1
|
|
Significant Other Observable Inputs Level 2
|
|
Significant Unobservable Inputs Level 3
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
96,739
|
|
|
96,739
|
|
|
3,862
|
|
|
92,877
|
|
|
—
|
|
|
Loans
|
639,788
|
|
|
635,674
|
|
|
—
|
|
|
—
|
|
|
635,674
|
|
|
Accrued interest receivable
|
9,146
|
|
|
9,146
|
|
|
—
|
|
|
9,146
|
|
|
—
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
362,010
|
|
|
362,010
|
|
|
362,010
|
|
|
—
|
|
|
—
|
|
|
NOW and money market
|
378,274
|
|
|
378,274
|
|
|
378,274
|
|
|
—
|
|
|
—
|
|
|
Savings
|
89,153
|
|
|
89,153
|
|
|
89,153
|
|
|
—
|
|
|
—
|
|
|
Time deposits
|
63,675
|
|
|
64,090
|
|
|
—
|
|
|
—
|
|
|
64,090
|
|
|
Total deposits
|
893,112
|
|
|
893,527
|
|
|
829,437
|
|
|
—
|
|
|
64,090
|
|
|
Junior subordinated debt
|
9,771
|
|
|
9,771
|
|
|
—
|
|
|
—
|
|
|
9,771
|
|
|
Accrued interest payable
|
36
|
|
|
36
|
|
|
—
|
|
|
36
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
Carrying Amount
|
|
Estimated Fair Value
|
|
Quoted Prices In Active Markets for Identical Assets Level 1
|
|
Significant Other Observable Inputs Level 2
|
|
Significant Unobservable Inputs Level 3
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
80,088
|
|
|
80,088
|
|
|
3,776
|
|
|
76,312
|
|
|
—
|
|
|
Loans
|
588,646
|
|
|
581,695
|
|
|
—
|
|
|
—
|
|
|
581,695
|
|
|
Accrued interest receivable
|
8,208
|
|
|
8,208
|
|
|
—
|
|
|
8,208
|
|
|
—
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
311,950
|
|
|
311,950
|
|
|
311,950
|
|
|
—
|
|
|
—
|
|
|
NOW and money market
|
360,934
|
|
|
360,934
|
|
|
360,934
|
|
|
—
|
|
|
—
|
|
|
Savings
|
80,078
|
|
|
80,078
|
|
|
80,078
|
|
|
—
|
|
|
—
|
|
|
Time deposits
|
65,400
|
|
|
65,236
|
|
|
—
|
|
|
—
|
|
|
65,236
|
|
|
Total deposits
|
818,362
|
|
|
818,198
|
|
|
752,962
|
|
|
—
|
|
|
65,236
|
|
|
Junior subordinated debt
|
10,808
|
|
|
10,808
|
|
|
—
|
|
|
—
|
|
|
10,808
|
|
|
Accrued interest payable
|
59
|
|
|
59
|
|
|
—
|
|
|
59
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company performs fair value measurements on certain assets and liabilities as the result of the application of current accounting guidelines. Some fair value measurements, such as investment securities and junior subordinated debt are performed on a recurring basis, while others, such as impairment of loans, other real estate owned, goodwill and other intangibles, are performed on a nonrecurring basis.
The Company’s Level 1 financial assets consist of money market funds and highly liquid mutual funds for which fair values are based on quoted market prices. The Company’s Level 2 financial assets include highly liquid debt instruments of U.S. government agencies, collateralized mortgage obligations, and debt obligations of states and political subdivisions, whose fair values are obtained from readily-available pricing sources for the identical or similar underlying security that may, or may not, be actively traded. The Company’s Level 3 financial assets include certain instruments where the assumptions may be made by us or third parties about assumptions that market participants would use in pricing the asset or liability. From time to time, the Company recognizes transfers between Level 1, 2, and 3 when a change in circumstances warrants a transfer. There were no transfers in or out of Level 1 and Level 2 fair value measurements during the six months ended June 30, 2020.
The following methods and assumptions were used in estimating the fair values of financial instruments measured at fair value on a recurring and non-recurring basis:
Investment Securities – Available for sale and marketable equity securities are valued based upon open-market price quotes obtained from reputable third-party brokers that actively make a market in those securities. Market pricing is based upon specific CUSIP identification for each individual security. To the extent there are observable prices in the market, the mid-point of the bid/ask price is used to determine fair value of individual securities. If that data is not available for the last 30 days, a Level 2-type matrix pricing approach based on comparable securities in the market is utilized. Level 2 pricing may include using a forward spread from the last observable trade or may use a proxy bond like a TBA mortgage to come up with a price for the security being valued. Changes in fair market value are recorded through other comprehensive loss as the securities are available for sale.
Impaired Loans - Fair value measurements for collateral dependent impaired loans are performed pursuant to authoritative accounting guidance and are based upon either collateral values supported by third party appraisals and observed market prices. Collateral dependent loans are measured for impairment using the fair value of the collateral. Changes are recorded directly as an adjustment to current earnings.
Other Real Estate Owned - Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Junior Subordinated Debt – The fair value of the junior subordinated debt was determined based upon a discounted cash flows model utilizing observable market rates and credit characteristics for similar debt instruments. In its analysis, the Company used characteristics that market participants generally use, and considered factors specific to (a) the liability, (b) the principal (or most advantageous) market for the liability, and (c) market participants with whom the reporting entity would transact in that market. Cash flows are discounted at a rate which incorporates a current market rate for similar-term debt instruments, adjusted for credit and liquidity risks associated with similar junior subordinated debt and circumstances unique to the Company. The Company believes that the subjective nature of these inputs, and credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of the market spreads, require the junior subordinated debt to be classified as a Level 3 fair value.
The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
December 31, 2019
|
|
|
|
|
Financial Instrument
|
Valuation Technique
|
Unobservable Input
|
Weighted Average
|
|
Financial Instrument
|
Valuation Technique
|
Unobservable Input
|
Weighted Average
|
|
Junior Subordinated Debt
|
Discounted cash flow
|
Market credit risk adjusted spreads
|
4.05%
|
|
Junior Subordinated Debt
|
Discounted cash flow
|
Market credit risk adjusted spreads
|
4.46%
|
Management believes that the credit risk adjusted spread utilized in the fair value measurement of the junior subordinated debentures carried at fair value is indicative of the nonperformance risk premium a willing market participant would require under current market conditions, that is, the inactive market. Management attributes the change in fair value of the junior subordinated debentures during the period to market changes in the nonperformance expectations and pricing of this type of debt. Generally, an increase in the credit risk adjusted spread and/or a decrease in the three month LIBOR swap curve will result in positive fair value adjustments (and decrease the fair value measurement). Conversely, a decrease in the credit risk adjusted spread and/or an increase in the three month LIBOR swap curve will result in negative fair value adjustments (and increase the fair value measurement). The increase in discount rate between the periods ended June 30, 2020 and December 31, 2019 is primarily due to increases in rates for similar debt instruments.
The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of June 30, 2020 (in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Assets
|
June 30, 2020
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
AFS Securities (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
36,300
|
|
|
$
|
—
|
|
|
$
|
36,300
|
|
|
$
|
—
|
|
|
|
|
|
|
U.S. Government collateralized mortgage obligations
|
47,802
|
|
|
—
|
|
|
47,802
|
|
|
—
|
|
|
|
|
|
|
Asset-backed securities
|
3,758
|
|
|
—
|
|
|
3,758
|
|
|
—
|
|
|
|
|
|
|
Corporate Bond
|
5,017
|
|
|
—
|
|
|
5,017
|
|
|
5,017
|
|
|
|
|
|
|
Total AFS securities
|
$
|
92,877
|
|
|
$
|
—
|
|
|
$
|
92,877
|
|
|
$
|
5,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities (2)
|
3,862
|
|
|
3,862
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Impaired loans (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RE construction & development
|
3,332
|
|
|
—
|
|
|
—
|
|
|
3,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
3,332
|
|
|
—
|
|
|
—
|
|
|
3,332
|
|
|
|
|
|
|
Other real estate owned (1)
|
5,018
|
|
|
—
|
|
|
—
|
|
|
5,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
100,071
|
|
|
$
|
3,862
|
|
|
$
|
92,877
|
|
|
$
|
8,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Liabilities
|
June 30, 2020
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Junior subordinated debt (2)
|
$
|
9,771
|
|
|
—
|
|
|
—
|
|
|
$
|
9,771
|
|
|
Total
|
$
|
9,771
|
|
|
—
|
|
|
—
|
|
|
$
|
9,771
|
|
(1)Nonrecurring
(2)Recurring
The following table presents quantitative information about Level 3 fair value measurements for the Company's assets measured at fair value on a non-recurring basis at June 30, 2020 (in 000's).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
Financial Instrument
|
Fair Value
|
Valuation Technique
|
Unobservable Input
|
Adjustment Percentage
|
|
Impaired Loans:
|
|
|
|
|
|
RE construction & development
|
$3,332
|
Fair Value of Collateral Method for Collateral Dependent Loans
|
Adjustment for difference between appraised value and net realizable value
|
7.02%
|
|
Other Real Estate Owned:
|
$5,018
|
Fair Value of Collateral Method for Collateral Dependent Loans
|
Adjustment for difference between appraised value and net realizable value
|
13.69%
|
The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring and non-recurring basis as of December 31, 2019 (in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Assets
|
December 31, 2019
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
AFS Securities (2):
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
$
|
28,699
|
|
|
$
|
—
|
|
|
$
|
28,699
|
|
|
$
|
—
|
|
|
U.S. Government collateralized mortgage obligations
|
47,613
|
|
|
—
|
|
|
47,613
|
|
|
—
|
|
|
Total AFS securities
|
76,312
|
|
|
—
|
|
|
76,312
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities (2)
|
3,776
|
|
|
3,776
|
|
|
—
|
|
|
—
|
|
|
Impaired Loans (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage
|
144
|
|
|
—
|
|
|
—
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
144
|
|
|
—
|
|
|
—
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
80,232
|
|
|
$
|
3,776
|
|
|
$
|
76,312
|
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Liabilities
|
December 31, 2019
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Junior subordinated debt (2)
|
$
|
10,808
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,808
|
|
|
Total
|
$
|
10,808
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,808
|
|
(1)Nonrecurring
(2)Recurring
The following table presents quantitative information about Level 3 fair value measurements for the Company's assets measured at fair value on a non-recurring basis at December 31, 2019 (in 000's).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Financial Instrument
|
Fair Value
|
Valuation Technique
|
Unobservable Input
|
Adjustment Percentage
|
|
Impaired Loans:
|
|
|
|
|
|
Real estate mortgage
|
$144
|
Fair Value of Collateral Method for Collateral Dependent Loans
|
Adjustment for difference between appraised value and net realizable value
|
6.00%
|
The following tables provide a reconciliation of assets and liabilities at fair value using significant unobservable inputs (Level 3) on a recurring basis during the quarters ended June 30, 2020 and 2019 (in 000’s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
Three Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2020
|
|
Six Months Ended June 30, 2019
|
|
Reconciliation of Liabilities:
|
Junior
Subordinated
Debt
|
|
Junior
Subordinated
Debt
|
|
Junior
Subordinated
Debt
|
|
Junior
Subordinated
Debt
|
|
Beginning balance
|
$
|
8,546
|
|
|
$
|
10,454
|
|
|
$
|
10,808
|
|
|
$
|
10,155
|
|
|
Gross loss (gain) included in earnings
|
30
|
|
|
(497)
|
|
|
(1,469)
|
|
|
(911)
|
|
|
Gross loss (gain) related to changes in instrument specific credit risk
|
1,208
|
|
|
542
|
|
|
453
|
|
|
1,247
|
|
|
Change in accrued interest
|
(13)
|
|
|
(3)
|
|
|
(21)
|
|
|
5
|
|
|
Ending balance
|
$
|
9,771
|
|
|
$
|
10,496
|
|
|
$
|
9,771
|
|
|
$
|
10,496
|
|
|
The amount of total gain for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date
|
$
|
30
|
|
|
$
|
(497)
|
|
|
$
|
(1,469)
|
|
|
$
|
(911)
|
|
14.Goodwill and Intangible Assets
At June 30, 2020, the Company had goodwill in the amount of $4,488,000 in connection with various business combinations and purchases. This amount was unchanged from the balance of $4,488,000 at December 31, 2019. While goodwill is not amortized, the Company does conduct periodic impairment analysis on goodwill at least annually or more often as conditions require. The Company performed its analysis of goodwill impairment and concluded goodwill was not impaired at June 30, 2020.
15.Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income, included in shareholders’ equity, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
(in 000's)
|
Net unrealized loss on available for sale securities
|
|
Unfunded status of the supplemental retirement plans
|
|
Net unrealized gain on junior subordinated debentures
|
|
Net unrealized loss on available for sale securities
|
|
Unfunded status of the supplemental retirement plans
|
|
Net unrealized gain on junior subordinated debentures
|
|
Beginning balance
|
$
|
(175)
|
|
|
$
|
(675)
|
|
|
$
|
218
|
|
|
$
|
(372)
|
|
|
$
|
(459)
|
|
|
$
|
1,505
|
|
|
Current period comprehensive income (loss)
|
522
|
|
|
29
|
|
|
(320)
|
|
|
197
|
|
|
(216)
|
|
|
(1,287)
|
|
|
Ending balance
|
$
|
347
|
|
|
$
|
(646)
|
|
|
$
|
(102)
|
|
|
$
|
(175)
|
|
|
$
|
(675)
|
|
|
$
|
218
|
|
|
Accumulated other comprehensive (loss) income
|
|
|
|
|
$
|
(401)
|
|
|
|
|
|
|
$
|
(632)
|
|
16.Investment in York Monterey Properties
In the six months ended June 30, 2020, the Bank wholly-owns an interest in subsidiary York Monterey Properties Inc., organized as a California corporation. The Bank capitalized the subsidiary through a transfer of eight unimproved lots at a historical cost of $5.3 million comprised of approximately 186.97 acres in the York Highlands subdivision of the Monterra Ranch residential development in Monterey County, California ("Properties") together with $250,000 in cash. The Bank transferred the Properties to York Monterey Properties Inc, in order to maintain ownership beyond the ten year regulatory holding period applicable to a national bank. The Bank acquired five of the lots through a non-judicial foreclosure on or about May 29, 2009. In addition, the Bank purchased three of the lots from another bank. The Bank had continuously held the Properties since the date of foreclosure and acquisition. At the time of transfer, the Properties had reached the end of the ten year regulatory holding period limit.
As of June 30, 2020, the Bank's investment in York Monterey Properties Inc. totaled $4,801,000. York Monterey Properties Inc. is included within the consolidated financial statements of the company, with $4,582,000 of the total investment recognized within the balance of other real estate owned on the consolidated balance sheets. During the six months ended June 30, 2020, the Company recognized a $727,000 write-down on other real estate owned related to the properties owned by York Monterey Properties, Inc.
17.Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the consolidated financial statements were issued and have identified no subsequent events requiring disclosure.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Certain matters discussed or incorporated by reference in this Quarterly Report of Form 10-Q are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, but are not limited to, those described in Management’s Discussion and Analysis of Financial Condition and Results of Operations. Such risks and uncertainties include, but are not limited to, the following factors: i) the effects of the COVID-19 pandemic, including the effects of the steps being taken to address the pandemic and their impact on the Company’s market and employees; ii) competitive pressures in the banking industry and changes in the regulatory environment; iii) exposure to changes in the interest rate environment and the resulting impact on the Company’s interest rate sensitive assets and liabilities; iv) decline in the health of the economy nationally or regionally which could reduce the demand for loans or reduce the value of real estate collateral securing most of the Company’s loans; v) credit quality deterioration that could cause an increase in the provision for loan losses; vi) Asset/Liability matching risks and liquidity risks; vii) volatility and devaluation in the securities markets, viii) expected cost savings from recent acquisitions are not realized, ix) potential impairment of goodwill and other intangible assets, and x) technology implementation problems and information security breaches. Therefore, the information set forth therein should be carefully considered when evaluating the business prospects of the Company. For additional information concerning risks and uncertainties related to the Company and its operations, please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
United Security Bancshares (the “Company” or “Holding Company") is a California corporation incorporated during March of 2001 and is registered with the Board of Governors of the Federal Reserve System as a bank holding company under the Bank Holding Company Act of 1956, as amended. United Security Bank (the “Bank”) is a wholly-owned bank subsidiary of the Company and was formed in 1987. References to the Company are references to United Security Bancshares (including the Bank). References to the Bank are to United Security Bank, while references to the Holding Company are to the parent only, United Security Bancshares. The Company currently has eleven banking branches, which provide financial services in Fresno, Madera, Kern, and Santa Clara counties in the state of California.
Trends Affecting Results of Operations and Financial Position
The Company’s overall operations are impacted by a number of factors, including not only interest rates and margin spreads, which impact the results of operations, but also the composition of the Company’s balance sheet. One of the primary strategic goals of the Company is to maintain a mix of assets that will generate a reasonable rate of return without undue risk, and to finance those assets with a low-cost and stable source of funds. Liquidity and capital resources must also be considered in the planning process to mitigate risk and allow for growth.
Since the Bank primarily conducts banking operations in California’s Central Valley, its operations and cash flows are subject to changes in the economic condition of the Central Valley. Our business results are dependent in large part upon the business activity, population, income levels, deposits and real estate activity in the Central Valley, and declines in economic conditions can have adverse material effects upon the Bank. In addition, the Central Valley remains largely dependent on agriculture. A downturn in agriculture and agricultural related business could indirectly and adversely affect the Company as many borrowers and customers are involved in, or are impacted to some extent, by the agricultural industry. While a great number of our borrowers are not directly involved in agriculture, they would likely be impacted by difficulties in the agricultural industry since many jobs in our market areas are ancillary to the regular production, processing, marketing and sale of agricultural commodities. Beginning in 2011, the state of California recently experienced one of the worst droughts in recorded history. While the drought has subsequently been declared over, it is not possible to quantify the drought's impact on businesses and consumers located in the Company's market areas or to predict adverse economic impacts related to future droughts. In response to the prolonged drought, the California state legislature passed the Sustainable Groundwater Management Act with the purpose to ensure better local and regional management of groundwater use and sustainable groundwater management in California by 2042. The local districts will develop, prepare, and begin implementation of the Groundwater Sustainability Plans as early as 2020. The effect of such plans to Central Valley agriculture, if any, is still unknown.
COVID-19
The COVID-19 pandemic has already impacted the local economy in the Central Valley. Federal, State and local shelter-in-place recommendations were enacted in our markets in March 2020 causing many businesses to close and workers to be furloughed or lose jobs. Essential purpose entities such as medical professionals, food and agricultural businesses, and transportation and logistical businesses were exempted from the closures; however, unemployment rates are increasing in our
local market area. As of May 2020, the unemployment rate in Fresno County was 15.7%. Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts may have a material impact on our operations. While it is not possible to know the full universe or extent of these impacts as of the date this filing, we are disclosing potentially material items of which we are aware.
Financial position and results of operations
Pertaining to the Company's June 30, 2020 financial condition and results of operations, COVID-19 has had an impact on the allowance for credit losses. While the Company has not yet experienced any charge-offs related to COVID-19, its allowance for credit loss calculation and resulting provision for credit losses are significantly impacted by changes in economic conditions resulting from significant increase in unemployment. Given that economic scenarios have darkened significantly since the pandemic was declared in early March, the credit risk in the loan portfolio has increased resulting in the need for an additional reserve for credit loss. Refer to the discussion of the allowance for credit loss in Note 3 of the unaudited financial statements as well as further discussion later on in MD&A. Should economic conditions worsen, the Company could experience further increases in its required allowance for credit loss and record additional provision expense.
The Company's interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. Interest and fees will still accrue to income pursuant to normal GAAP accounting policies. Should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.
Capital and liquidity
As of June 30, 2020, the Company and Bank's capital ratios were in excess of all regulatory requirements. The Company's management team believes that while the Company and Bank have sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses. The Company relies on cash on hand as well as dividends from the Bank to service its debt. If the Bank is unable to pay dividends for an extended period of time, the Company may not be able to service its debt.
The Company maintains access to multiple sources of liquidity. If an extended recession caused large numbers of its deposit customers to withdraw their funds, it might become more reliant on volatile or more expensive sources of funding. Wholesale funding markets are available to the Company, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on net interest margin.
Asset valuation
Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on the balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.
The Company's stock closed below book value at the end of the first and second quarter of 2020. Management deemed this to be a triggering event to perform a goodwill impairment test. As of June 30, 2020, goodwill was not impaired. COVID-19 could cause a further and sustained decline in the Company's stock price which could cause the Company to re-perform a goodwill impairment test and that could result in an impairment charge being recorded for that period. In the event that all or a portion of 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 June 30, 2020, the Company had goodwill of $4,488,000, representing approximately 3.8% of equity.
Processes, controls and business continuity plan
The Company maintains a Business Continuity Plan to prepare, and respond to unforeseen circumstances, such as, natural disasters and pandemics. Upon the COVID-19 pandemic declaration, the Company invoked its Business Continuity Plan. Shortly after invoking the plan, the Company implemented protocols for team member safety, provided timely communication to team members and customers, established remote work capabilities to isolate certain personnel essential to critical business continuity operations, and initiated strategies for monitoring and responding to local COVID-19 impacts. Due to the nature of their functions, many team members continue to operate from physical Company locations, while effectively employing social distancing standards. The Company's Management Team continues to meet regularly to anticipate and respond to any future COVID-19 interruptions or developments. As of June 30, 2020, the Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures it has taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of its business continuity plans.
Lending operations and accommodations to borrowers
In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company is executing a payment deferral program for our commercial lending clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for up to six months. As of June 30, 2020, the Company had executed 28 payment deferrals or modifications on outstanding loan balances of $69,997,000. In accordance with interagency guidance issued in March 2020, these short term deferrals are not considered troubled debt restructurings.
With the passage of the Paycheck Protection Program (“PPP”), administered by the SBA, the Company is actively participating in assisting our customers with applications for resources through the program. PPP loans have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of June 30, 2020, there were over 200 approved SBA PPP loans representing $26,035,000 in funding and $1,028,000 in unearned fees. The Company plans to continue processing PPP applications as long as funds remain available in the program.
The Company is working with customers directly affected by COVID-19. The Company is prepared to offer short-term assistance in accordance with regulatory guidelines. As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. The Company is engaging in more frequent communication with the servicer and individual schools participating in the student loan portfolio to better understand the effects of COVID-19 on students in school or in clinical programs. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.
The Company continually evaluates its strategic business plan as economic and market factors change in its market area. The Company may see a short-term slowdown in new loan originations due to COVID-19. Balance sheet management, enhancing revenue sources, and maintaining market share will continue to be of primary importance during 2020 and beyond.
Results of Operations
On a year-to-date basis, the Company reported net income of $4,768,000 or $0.28 per share ($0.28 diluted), for the six months ended June 30, 2020, as compared to $8,104,000, or $0.48 per share ($0.48 diluted), for the same period in 2019. The Company’s return on average assets was 0.98% for the six months ended June 30, 2020, as compared to 1.71% for the six months ended June 30, 2019. The Company’s return on average equity was 8.09% for the six months ended June 30, 2020, as compared to 14.57% for the six months ended June 30, 2019.
Net Interest Income
The following tables present condensed average balance sheet information, together with interest income and yields earned on average interest earning assets, and interest expense and rates paid on average interest-bearing liabilities for the three and six month periods ended June 30, 2020 and 2019.
Table 1. Distribution of Average Assets, Liabilities and Shareholders’ Equity:
Interest rates and Interest Differentials
Three Months Ended June 30, 2020 and 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
(dollars in thousands)
|
Average Balance
|
|
Interest
|
|
Yield/Rate (2)
|
|
Average Balance
|
|
Interest
|
|
Yield/Rate (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
|
$
|
636,840
|
|
|
$
|
7,713
|
|
|
4.87
|
%
|
|
$
|
568,600
|
|
|
$
|
8,443
|
|
|
5.96
|
%
|
|
Investment securities (3)
|
97,209
|
|
|
356
|
|
|
1.47
|
%
|
|
65,268
|
|
|
444
|
|
|
2.73
|
%
|
|
Interest-bearing deposits in FRB
|
182,755
|
|
|
38
|
|
|
0.08
|
%
|
|
238,898
|
|
|
1,424
|
|
|
2.39
|
%
|
|
Total interest-earning assets
|
916,804
|
|
|
$
|
8,107
|
|
|
3.56
|
%
|
|
872,766
|
|
|
$
|
10,311
|
|
|
4.74
|
%
|
|
Allowance for credit losses
|
(9,124)
|
|
|
|
|
|
|
(8,442)
|
|
|
|
|
|
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
28,432
|
|
|
|
|
|
|
29,232
|
|
|
|
|
|
|
Premises and equipment, net
|
9,540
|
|
|
|
|
|
|
9,598
|
|
|
|
|
|
|
Accrued interest receivable
|
8,122
|
|
|
|
|
|
|
9,229
|
|
|
|
|
|
|
Other real estate owned
|
5,969
|
|
|
|
|
|
|
5,745
|
|
|
|
|
|
|
Other assets
|
46,562
|
|
|
|
|
|
|
42,347
|
|
|
|
|
|
|
Total average assets
|
$
|
1,006,305
|
|
|
|
|
|
|
$
|
960,475
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
$
|
117,069
|
|
|
$
|
35
|
|
|
0.12
|
%
|
|
$
|
106,381
|
|
|
$
|
37
|
|
|
0.14
|
%
|
|
Money market accounts
|
250,558
|
|
|
238
|
|
|
0.38
|
%
|
|
250,701
|
|
|
559
|
|
|
0.89
|
%
|
|
Savings accounts
|
86,157
|
|
|
24
|
|
|
0.11
|
%
|
|
92,498
|
|
|
82
|
|
|
0.36
|
%
|
|
Time deposits
|
62,487
|
|
|
150
|
|
|
0.97
|
%
|
|
72,728
|
|
|
212
|
|
|
1.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated debentures
|
8,494
|
|
|
83
|
|
|
3.93
|
%
|
|
10,378
|
|
|
118
|
|
|
4.56
|
%
|
|
Total interest-bearing liabilities
|
524,765
|
|
|
$
|
530
|
|
|
0.41
|
%
|
|
532,686
|
|
|
$
|
1,008
|
|
|
0.76
|
%
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing checking
|
352,309
|
|
|
|
|
|
|
305,211
|
|
|
|
|
|
|
Accrued interest payable
|
101
|
|
|
|
|
|
|
209
|
|
|
|
|
|
|
Other liabilities
|
10,019
|
|
|
|
|
|
|
9,286
|
|
|
|
|
|
|
Total liabilities
|
887,194
|
|
|
|
|
|
|
847,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
119,111
|
|
|
|
|
|
|
113,083
|
|
|
|
|
|
|
Total average liabilities and shareholders' equity
|
$
|
1,006,305
|
|
|
|
|
|
|
$
|
960,475
|
|
|
|
|
|
|
Interest income as a percentage of average earning assets
|
|
|
|
|
3.56
|
%
|
|
|
|
|
|
4.74
|
%
|
|
Interest expense as a percentage of average earning assets
|
|
|
|
|
0.23
|
%
|
|
|
|
|
|
0.46
|
%
|
|
Net interest margin
|
|
|
|
|
3.33
|
%
|
|
|
|
|
|
4.28
|
%
|
(1)Loan amounts include nonaccrual loans, but the related interest income has been included only if collected for the period prior to the loan being placed on a nonaccrual basis. Loan interest costs includes loan fee income of approximately $58,000 for the three months ended June 30, 2020 and loan fee costs of $67,000 for the three months ended June 30, 2019.
(2)Interest income/expense is divided by actual number of days in the period times 365 days in the yield calculation
(3)Yields on investments securities, aside from marketable equity securities, are calculated based on average amortized cost balances rather than fair value, as changes in fair value are reflected as a component of shareholders' equity.
Interest rates and Interest Differentials
Six Months Ended June 30, 2020 and 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
(dollars in thousands)
|
Average Balance
|
|
Interest
|
|
Yield/Rate (2)
|
|
Average Balance
|
|
Interest
|
|
Yield/Rate (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
|
619,950
|
|
|
$
|
16,059
|
|
|
5.21
|
%
|
|
$
|
573,436
|
|
|
$
|
17,085
|
|
|
6.01
|
%
|
|
Investment securities (3)
|
89,655
|
|
|
784
|
|
|
1.76
|
%
|
|
66,772
|
|
|
921
|
|
|
2.78
|
%
|
|
Interest-bearing deposits in FRB
|
180,751
|
|
|
605
|
|
|
0.67
|
%
|
|
227,335
|
|
|
2,722
|
|
|
2.41
|
%
|
|
Total interest-earning assets
|
890,356
|
|
|
$
|
17,448
|
|
|
3.94
|
%
|
|
867,543
|
|
|
$
|
20,728
|
|
|
4.82
|
%
|
|
Allowance for credit losses
|
(8,515)
|
|
|
|
|
|
|
(8,449)
|
|
|
|
|
|
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
28,857
|
|
|
|
|
|
|
28,793
|
|
|
|
|
|
|
Premises and equipment, net
|
9,452
|
|
|
|
|
|
|
9,669
|
|
|
|
|
|
|
Accrued interest receivable
|
7,808
|
|
|
|
|
|
|
8,726
|
|
|
|
|
|
|
Other real estate owned
|
6,452
|
|
|
|
|
|
|
5,745
|
|
|
|
|
|
|
Other assets
|
45,585
|
|
|
|
|
|
|
42,039
|
|
|
|
|
|
|
Total average assets
|
$
|
979,995
|
|
|
|
|
|
|
$
|
954,066
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
$
|
114,264
|
|
|
$
|
75
|
|
|
0.13
|
%
|
|
$
|
108,420
|
|
|
$
|
76
|
|
|
0.14
|
%
|
|
Money market accounts
|
247,992
|
|
|
666
|
|
|
0.54
|
%
|
|
246,774
|
|
|
1,070
|
|
|
0.87
|
%
|
|
Savings accounts
|
83,729
|
|
|
56
|
|
|
0.13
|
%
|
|
92,003
|
|
|
160
|
|
|
0.35
|
%
|
|
Time deposits
|
62,663
|
|
|
314
|
|
|
1.01
|
%
|
|
75,185
|
|
|
418
|
|
|
1.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated debentures
|
9,605
|
|
|
180
|
|
|
3.77
|
%
|
|
10,235
|
|
|
241
|
|
|
4.75
|
%
|
|
Total interest-bearing liabilities
|
518,253
|
|
|
$
|
1,291
|
|
|
0.50
|
%
|
|
532,617
|
|
|
$
|
1,965
|
|
|
0.74
|
%
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing checking
|
333,330
|
|
|
|
|
|
|
300,035
|
|
|
|
|
|
|
Accrued interest payable
|
126
|
|
|
|
|
|
|
195
|
|
|
|
|
|
|
Other liabilities
|
9,773
|
|
|
|
|
|
|
9,067
|
|
|
|
|
|
|
Total liabilities
|
861,482
|
|
|
|
|
|
|
841,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
118,513
|
|
|
|
|
|
|
112,152
|
|
|
|
|
|
|
Total average liabilities and shareholders' equity
|
$
|
979,995
|
|
|
|
|
|
|
$
|
954,066
|
|
|
|
|
|
|
Interest income as a percentage of average earning assets
|
|
|
|
|
3.94
|
%
|
|
|
|
|
|
4.82
|
%
|
|
Interest expense as a percentage of average earning assets
|
|
|
|
|
0.29
|
%
|
|
|
|
|
|
0.46
|
%
|
|
Net interest margin
|
|
|
|
|
3.65
|
%
|
|
|
|
|
|
4.36
|
%
|
(1)Loan amounts include nonaccrual loans, but the related interest income has been included only if collected for the period prior to the loan being placed on a nonaccrual basis. Loan interest income includes loan fee income of approximately $89,000 for the six months ended June 30, 2020 and loan costs of $35,000 for the six months ended June 30, 2019.
(2)Interest income/expense is divided by actual number of days in the period times 365 days in the yield calculation
(3)Yields on investments securities, aside from marketable equity securities, are calculated based on average amortized cost balances rather than fair value, as changes in fair value are reflected as a component of shareholders' equity.
The prime rate decreased from 4.75% at December 31, 2019 to 3.25% during the first quarter of 2020, and remained unchanged through June 30, 2020. Future increases or decreases will affect both interest income and expense and the resultant net interest margin.
Both the Company's net interest income and net interest margin are affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as "volume change." Both are also affected by changes in yields on interest-earning assets and rates paid on interest-bearing liabilities, referred to as "rate change." The following table sets forth the changes in interest income and interest expense for each major category of interest-earning asset and interest-bearing liability, and the amount of change attributable to volume and rate changes for the periods indicated.
Table 2. Rate and Volume Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) for the three months ended June 30, 2020 compared to June 30, 2019
|
|
|
|
|
|
(in 000's)
|
Total
|
|
Rate
|
|
Volume
|
|
Increase (decrease) in interest income:
|
|
|
|
|
|
|
Loans
|
$
|
(730)
|
|
|
$
|
(1,662)
|
|
|
$
|
932
|
|
|
Investment securities available for sale
|
(88)
|
|
|
(253)
|
|
|
165
|
|
|
Interest-bearing deposits in other banks
|
—
|
|
|
—
|
|
|
—
|
|
|
Interest-bearing deposits in FRB
|
(1,386)
|
|
|
(1,438)
|
|
|
52
|
|
|
Total interest income
|
(2,204)
|
|
|
(3,353)
|
|
|
1,149
|
|
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
Interest-bearing demand accounts
|
(323)
|
|
|
(340)
|
|
|
17
|
|
|
Savings and money market accounts
|
(58)
|
|
|
(53)
|
|
|
(5)
|
|
|
Time deposits
|
(62)
|
|
|
(34)
|
|
|
(28)
|
|
|
Other borrowings
|
—
|
|
|
—
|
|
|
—
|
|
|
Subordinated debentures
|
(35)
|
|
|
(15)
|
|
|
(20)
|
|
|
Total interest expense
|
(478)
|
|
|
(442)
|
|
|
(36)
|
|
|
Increase (decrease) in net interest income
|
$
|
(1,726)
|
|
|
$
|
(2,911)
|
|
|
$
|
1,185
|
|
For the three months ended June 30, 2020, total interest income decreased $2,204,000, or 21.38%, as compared to the three months ended June 30, 2019. In comparing the two periods, average interest earning assets increased $44,038,000, with an increase of $68,240,000 in loan balances and an increase of $31,941,000 in investment securities, offset by a $56,143,000 decrease in balances held at the Federal Reserve Bank. Investment securities yields decreased 127 basis points and loan yields decreased 109 basis points. The average yield on total interest-earning assets decreased 118 basis points. The decrease in yields are a result of repricing of variable rate loans, floating rate investment securities, and interest-bearing deposits in FRB at lower rates. Interest-bearing deposits in FRB are the Company's lowest-yielding interest-earning asset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) for the six months ended June 30, 2020 compared to June 30, 2019
|
|
|
|
|
|
(in 000's)
|
Total
|
|
Rate
|
|
Volume
|
|
Increase (decrease) in interest income:
|
|
|
|
|
|
|
Loans
|
$
|
(1,026)
|
|
|
$
|
(2,359)
|
|
|
$
|
1,333
|
|
|
Investment securities available for sale
|
(137)
|
|
|
(398)
|
|
|
261
|
|
|
Interest-bearing deposits in other banks
|
—
|
|
|
—
|
|
|
—
|
|
|
Interest-bearing deposits in FRB
|
(2,117)
|
|
|
(2,051)
|
|
|
(66)
|
|
|
Total interest income
|
(3,280)
|
|
|
(4,808)
|
|
|
1,528
|
|
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
Interest-bearing demand accounts
|
(405)
|
|
|
(427)
|
|
|
22
|
|
|
Savings and money market accounts
|
(104)
|
|
|
(91)
|
|
|
(13)
|
|
|
Time deposits
|
(104)
|
|
|
(39)
|
|
|
(65)
|
|
|
Other borrowings
|
—
|
|
|
—
|
|
|
—
|
|
|
Subordinated debentures
|
(61)
|
|
|
(47)
|
|
|
(14)
|
|
|
Total interest expense
|
(674)
|
|
|
(604)
|
|
|
(70)
|
|
|
Increase (decrease) in net interest income
|
$
|
(2,606)
|
|
|
$
|
(4,204)
|
|
|
$
|
1,598
|
|
For the six months ended June 30, 2020, total interest income decreased $3,280,000, or 15.82%, as compared to the six months ended June 30, 2019. In comparing the two periods, average interest earning assets increased $22,813,000, with an increase of $46,514,000 in loan balances and an increase of $22,883,000 in investment securities, offset by a $46,584,000 decrease in balances held at the Federal Reserve Bank. Investment securities yields decreased 102 basis points and loan yields decreased 80 basis points. The average yield on total interest-earning assets decreased 88 basis points. The decrease in yields are a result of repricing of variable rate loans, floating rate investment securities, and interest-bearing deposits in FRB at lower rates. Interest-bearing deposits in FRB are the Company's lowest-yielding interest-earning asset.
The overall average yield on the loan portfolio decreased to 5.21% for the six months ended June 30, 2020, as compared to 6.01% for the six months ended June 30, 2019. The Company has sought to mitigate the low-interest rate environment with loan floors included in new and renewed loans when practical. At June 30, 2020, 57.0% of the Company's loan portfolio consisted of floating rate instruments, as compared to 54.2% of the portfolio at December 31, 2019, with the majority of those tied to the prime rate. Approximately 24.8%, or $91,759,000, of the floating rate loans had rate floors at June 30, 2020, making them effectively fixed-rate loans for certain decreases in interest rates. None of the loans with floors have floor spreads of 100 basis points or more.
The Company’s net interest margin decreased to 3.65% for the six months ended June 30, 2020, when compared to 4.36% for the six months ended June 30, 2019. The net interest margin decreased primarily as a result of decreases in the yields of average earnings assets.
The Company’s disciplined deposit pricing efforts have helped keep the Company's cost of funds low. The rates paid on interest-bearing liabilities decreased to 0.50% for the six months ended June 30, 2020, as compared to 0.74% for the six months ended June 30, 2019. For the six months ended June 30, 2020, total interest expense decreased approximately $674,000, or 34.30%, as compared to the six months ended June 30, 2019. Between those two periods, average interest-bearing liabilities decreased by $14,364,000 due to decreases in savings accounts and time deposits, partially offset by increases in NOW, money market,. While the Company may utilize brokered deposits as an additional source of funding, the Company held no brokered deposits at June 30, 2020.
Table 3. Interest-Earning Assets and Liabilities
The following table summarizes the year-to-date averages of the components of interest-earning assets as a percentage of total interest-earning assets and the components of interest-bearing liabilities as a percentage of total interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YTD Average
6/30/2020
|
|
YTD Average
12/31/19
|
|
YTD Average
6/30/2019
|
|
Loans
|
69.64%
|
|
66.14%
|
|
66.11%
|
|
Investment securities available for sale
|
10.07%
|
|
8.20%
|
|
7.70%
|
|
Interest-bearing deposits in FRB
|
20.29%
|
|
25.66%
|
|
26.19%
|
|
Total interest-earning assets
|
100.00%
|
|
100.00%
|
|
100.00%
|
|
|
|
|
|
|
|
|
NOW accounts
|
22.05%
|
|
20.50%
|
|
20.36%
|
|
Money market accounts
|
47.85%
|
|
47.69%
|
|
46.33%
|
|
Savings accounts
|
16.16%
|
|
16.31%
|
|
17.27%
|
|
Time deposits
|
12.09%
|
|
13.55%
|
|
14.12%
|
|
|
|
|
|
|
|
|
Subordinated debentures
|
1.85%
|
|
1.95%
|
|
1.92%
|
|
Total interest-bearing liabilities
|
100.00%
|
|
100.00%
|
|
100.00%
|
Noninterest Income
Table 4. Changes in Noninterest Income
The following tables sets forth the amount and percentage changes in the categories presented for the three and six month periods ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
Three Months Ended June 30, 2020
|
|
Three Months Ended June 30, 2019
|
|
Amount of
Change
|
|
Percent
Change
|
|
Customer service fees
|
$
|
618
|
|
|
830
|
|
|
$
|
(212)
|
|
|
(25.54)
|
%
|
|
Increase in cash surrender value of bank-owned life insurance
|
127
|
|
|
147
|
|
|
(20)
|
|
|
(13.61)
|
%
|
|
Unrealized gain on fair value of marketable equity securities
|
71
|
|
|
53
|
|
|
18
|
|
|
33.96
|
%
|
|
Gain on death benefit proceeds from bank-owned life insurance
|
310
|
|
|
—
|
|
|
310
|
|
|
—
|
%
|
|
(Loss) gain on fair value of junior subordinated debentures
|
(30)
|
|
|
497
|
|
|
(527)
|
|
|
(106.04)
|
%
|
|
|
|
|
|
|
|
|
|
|
Loss on dissolution of real estate investment trust
|
—
|
|
|
(5)
|
|
|
5
|
|
|
(100.00)
|
%
|
|
Gain on sale of assets
|
—
|
|
|
6
|
|
|
(6)
|
|
|
(100.00)
|
%
|
|
Other
|
118
|
|
|
201
|
|
|
(83)
|
|
|
(41.29)
|
%
|
|
Total noninterest income
|
$
|
1,214
|
|
|
$
|
1,729
|
|
|
$
|
(515)
|
|
|
(29.79)
|
%
|
Noninterest income for the quarter ended June 30, 2020 decreased $515,000 to $1,214,000, compared to the quarter ended June 30, 2019. The decrease is mostly attributed to a decrease in the recorded fair value of junior subordinated debentures of $527,000 for the quarter ended June 30, 2020. The change in fair value of junior subordinated debentures recorded in non-interest income was caused by fluctuations in the LIBOR yield curve. Also included in noninterest income for the quarter ended June 30, 2020 is a $310,000 gain on proceeds from bank-owned life insurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
Six Months Ended June 30, 2020
|
|
Six Months Ended June 30, 2019
|
|
Amount of
Change
|
|
Percent
Change
|
|
Customer service fees
|
$
|
1,346
|
|
|
1,639
|
|
|
$
|
(293)
|
|
|
(17.88)
|
%
|
|
Increase in cash surrender value of bank-owned life insurance
|
258
|
|
|
292
|
|
|
(34)
|
|
|
(11.64)
|
%
|
|
Unrealized gain on fair value of marketable equity securities
|
85
|
|
|
110
|
|
|
(25)
|
|
|
(22.73)
|
%
|
|
Gain on death benefit proceeds from bank-owned life insurance
|
310
|
|
—
|
|
|
310
|
|
|
—
|
%
|
|
Gain on fair value of junior subordinated debentures
|
1,469
|
|
|
911
|
|
|
558
|
|
|
61.25
|
%
|
|
Loss on dissolution of real estate investment trust
|
—
|
|
|
(114)
|
|
|
114
|
|
|
(100.00)
|
%
|
|
Gain on sale of assets
|
—
|
|
|
6
|
|
|
(6)
|
|
|
(100.00)
|
%
|
|
Other
|
328
|
|
|
408
|
|
|
(80)
|
|
|
(19.61)
|
%
|
|
Total noninterest income
|
$
|
3,796
|
|
|
$
|
3,252
|
|
|
$
|
544
|
|
|
16.73
|
%
|
Noninterest income for the six months ended June 30, 2020 increased $544,000 to $3,796,000, compared to the six months ended June 30, 2019. The increase is mostly attributed to an increase in the recorded fair value of junior subordinated debentures of $558,000 for the six months ended June 30, 2020. The change in fair value of junior subordinated debentures recorded in non-interest income was caused by fluctuations in the LIBOR yield curve.
Noninterest Expense
Table 5. Changes in Noninterest Expense
The following tables sets forth the amount and percentage changes in the categories presented for the three and six month periods ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
Three Months Ended June 30, 2020
|
|
Three Months Ended June 30, 2019
|
|
Amount of
Change
|
|
Percent
Change
|
|
Salaries and employee benefits
|
$
|
2,414
|
|
|
$
|
2,760
|
|
|
$
|
(346)
|
|
|
(12.54)
|
%
|
|
Occupancy expense
|
869
|
|
|
808
|
|
|
61
|
|
|
7.55
|
%
|
|
Data processing
|
135
|
|
|
144
|
|
|
(9)
|
|
|
(6.25)
|
%
|
|
Professional fees
|
555
|
|
|
746
|
|
|
(191)
|
|
|
(25.60)
|
%
|
|
Regulatory assessments
|
77
|
|
|
83
|
|
|
(6)
|
|
|
(7.23)
|
%
|
|
Director fees
|
94
|
|
|
95
|
|
|
(1)
|
|
|
(1.05)
|
%
|
|
Correspondent bank service charges
|
17
|
|
|
14
|
|
|
3
|
|
|
21.43
|
%
|
|
Net cost on operation of OREO
|
780
|
|
|
87
|
|
|
693
|
|
|
796.55
|
%
|
|
Other
|
612
|
|
|
525
|
|
|
87
|
|
|
16.57
|
%
|
|
Total expense
|
$
|
5,553
|
|
|
$
|
5,262
|
|
|
$
|
291
|
|
|
5.53
|
%
|
Noninterest expense for the quarter ended June 30, 2020 increased $291,000 to $5,553,000, compared to the quarter ended June 30, 2019. The increase was attributed to increases in net OREO costs and occupancy expense, partially offset by decreases in salaries and employee benefits and professional fees. The decrease in salary and employee benefits expense is result of reduced hours for various employees throughout the Company as a result of reduced branch hours. Branch hours were reduced in response to the COVID-19 pandemic. The decrease in professional fees or the quarter ended June 30, 2020 was related to decreases in legal fees compared to the quarter ended June 30, 2019. Net cost on operation of OREO for the quarter ended June 30, 2020 includes a $727,000 write-down on OREO based on recent appraisal valuation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
Six Months Ended June 30, 2020
|
|
Six Months Ended June 30, 2019
|
|
Amount of
Change
|
|
Percent
Change
|
|
Salaries and employee benefits
|
$
|
5,409
|
|
|
$
|
5,532
|
|
|
$
|
(123)
|
|
|
(2.22)
|
%
|
|
Occupancy expense
|
1,723
|
|
|
1,621
|
|
|
102
|
|
|
6.29
|
%
|
|
Data processing
|
247
|
|
|
251
|
|
|
(4)
|
|
|
(1.59)
|
%
|
|
Professional fees
|
1,257
|
|
|
1,559
|
|
|
(302)
|
|
|
(19.37)
|
%
|
|
Regulatory assessments
|
162
|
|
|
176
|
|
|
(14)
|
|
|
(7.95)
|
%
|
|
Director fees
|
188
|
|
|
186
|
|
|
2
|
|
|
1.08
|
%
|
|
Correspondent bank service charges
|
33
|
|
|
28
|
|
|
5
|
|
|
17.86
|
%
|
|
Net cost on operation of OREO
|
933
|
|
|
152
|
|
|
781
|
|
|
513.82
|
%
|
|
Other
|
1,193
|
|
|
1,104
|
|
|
89
|
|
|
8.06
|
%
|
|
Total expense
|
$
|
11,145
|
|
|
$
|
10,609
|
|
|
$
|
536
|
|
|
5.05
|
%
|
Noninterest expense for the six months ended June 30, 2020 increased $536,000 to $11,145,000, compared to the six months ended June 30, 2019. The increase was attributed to increases in net OREO costs and occupancy expense, partially offset by decreases in salaries and employee benefits and professional fees. The decrease in professional fees for six months ended June 30, 2020 was related to decreases in legal fees and consulting expense. Net cost on operation of OREO for the six months ended June 30, 2020 includes a $727,000 write-down on OREO.
Income Taxes
The Company’s income tax expense is impacted to some degree by permanent taxable differences between income reported for book purposes and income reported for tax purposes, as well as certain tax credits which are not reflected in the Company’s pretax income or loss shown in the statements of operations and comprehensive income. As pretax income or loss amounts become smaller, the impact of these differences become more significant and are reflected as variances in the Company’s effective tax rate for the periods presented. In general, the permanent differences and tax credits affecting tax expense have a positive impact and tend to reduce the effective tax rates shown in the Company’s statements of income and comprehensive income.
The Company reviews its current tax positions at least quarterly based on the accounting standards related to uncertainty in income taxes which includes the criteria that an individual tax position would have to meet for some or all of the income tax benefit to be recognized in a taxable entity’s financial statements. Under the income tax guidelines, an entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination. The term “more likely than not” means a likelihood of more than 50 percent. In assessing whether the more-likely-than-not criterion is met, the entity should assume that the tax position will be reviewed by the applicable taxing authority.
The Company has reviewed all of its tax positions as of June 30, 2020, and has determined that, there are no material amounts to be recorded under the current income tax accounting guidelines.
The Company's effective tax rate for the six months ended June 30, 2020 was 28.56% compared to 28.89% for the six months ended June 30, 2019.
Financial Condition
Total assets increased $74,454,000, or 7.78%, to a balance of $1,031,373,000 at June 30, 2020, from the balance of $956,919,000 at December 31, 2019, and increased $24,880,000, or 2.47%, from the balance of $1,006,493,000 at June 30, 2019. Total deposits of $893,112,000 at June 30, 2020, increased $74,750,000, or 9.13%, from the balance reported at December 31, 2019, and increased $22,197,000, or 2.55%, from the balance of $870,915,000 reported at June 30, 2019. Cash and cash equivalents increased $10,546,000, or 4.82%, between December 31, 2019 and June 30, 2020. Net loans increased $51,142,000, or 8.69%, to a balance of $639,788,000, and investment securities increased $16,651,000, or 20.79%, during the first six months of 2020.
Earning assets averaged approximately $890,356,000 during the six months ended June 30, 2020, as compared to $867,543,000 for the same period in 2019. Average interest-bearing liabilities decreased to $518,253,000 for the six months ended June 30, 2020, from $532,617,000 reported for the comparative period of 2019.
Loans
The Company's primary business is that of acquiring deposits and making loans, with the loan portfolio representing the largest and most important component of earning assets. Loans totaled $649,654,000 at June 30, 2020, an increase of $52,280,000, or 8.75%, when compared to the balance of $597,374,000 at December 31, 2019, and an increase of $76,233,000, or 11.73%, when compared to the balance of $573,421,000 reported at June 30, 2019. Loans on average increased $46,514,000, or 8.11%, between the six months ended June 30, 2019 and June 30, 2020, with loans averaging $619,950,000 for the six months ended June 30, 2020, as compared to $573,436,000 for the same period of 2019.
Table 6. Loans
The following table sets forth the amounts of loans outstanding by category at June 30, 2020 and December 31, 2019, the category percentages as of those dates, and the net change between the two periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
(in 000's)
|
Dollar Amount
|
|
% of Loans
|
|
Dollar Amount
|
|
% of Loans
|
|
Net Change
|
|
% Change
|
|
Commercial and industrial
|
$
|
68,230
|
|
|
10.6
|
%
|
|
$
|
45,278
|
|
|
7.6
|
%
|
|
$
|
22,952
|
|
|
50.69
|
%
|
|
Real estate – mortgage
|
314,438
|
|
|
48.4
|
%
|
|
291,237
|
|
|
48.8
|
%
|
|
23,201
|
|
|
7.97
|
%
|
|
RE construction & development
|
153,655
|
|
|
23.7
|
%
|
|
138,784
|
|
|
23.2
|
%
|
|
14,871
|
|
|
10.72
|
%
|
|
Agricultural
|
48,979
|
|
|
7.5
|
%
|
|
52,197
|
|
|
8.7
|
%
|
|
(3,218)
|
|
|
(6.17)
|
%
|
|
Installment and student loans
|
64,352
|
|
|
9.8
|
%
|
|
69,878
|
|
|
11.7
|
%
|
|
(5,526)
|
|
|
(7.91)
|
%
|
|
Total gross loans
|
$
|
649,654
|
|
|
100.00
|
%
|
|
$
|
597,374
|
|
|
100.00
|
%
|
|
$
|
52,280
|
|
|
8.75
|
%
|
During the six months ended June 30, 2020, the Company experienced increases in commercial and industrial loans, real estate mortgage loan, and real estate construction & development compared to the same period ended June 30, 2019. Commercial and industrial loans increased $22,952,000 between December 31, 2019 and June 30, 2020 and increased $13,085,000 between June 30, 2019 and June 30, 2020. Included in commercial and industrial loans as of June 30, 2020 are $26,035,000 in SBA PPP loans. Real estate mortgage loans increased $23,201,000 between December 31, 2019 and June 30, 2020 and increased $32,550,000 between June 30, 2019 and June 30, 2020. The real estate mortgage loan balance as of June 30, 2020 includes $22,143,000 in multifamily and $7,613,000 in residential adjustable rate mortgages purchased during 2020. Agricultural loans decreased $3,218,000 between December 31, 2019 and June 30, 2020 and decreased $3,048,000 between June 30, 2019 and June 30, 2020. Installment and student loans decreased $5,526,000 between December 31, 2019 and June 30, 2020 and decreased $5,398,000 between June 30, 2019 and June 30, 2020, mainly due to changes in student loan balances.
Installment and student loans decreased $5,398,000 during the six months ended June 30, 2020 as compared to the same period ended June 30, 2019, due to increases in installment loans offset by decreases in the student loan portfolio. Included in installment loans are $60,533,000 in student loans made to medical and pharmacy school students. The student loan portfolio consists of unsecured loans to medical and pharmacy students currently enrolled in medical and pharmacy schools in the US and the Caribbean. The medical student loans are made to US citizens attending medical schools in the US and Antigua, while the pharmacy student loans are made to pharmacy students attending pharmacy school in the US. Upon graduation the loan is automatically placed on deferment for six months. This may be extended up to 48 months for graduates enrolling in internship, medical residency or fellowship. As approved the student may receive additional deferment for hardship or administrative reasons in the form of forbearance for a maximum of 24 months throughout the life of the loan. The outstanding balance of student loans that have not entered repayment status totaled $23,434,000 at June 30, 2020. Accrued interest on loans that have not entered repayment status totaled $6,102,000 at June 30, 2020. At June 30, 2020 there were 816 loans within repayment, deferment, and forbearance which represented $19,015,000, $4,368,000, and $13,716,000 in outstanding balances, respectively. Underwriting is premised on qualifying credit scores. The weighted average credit score for the portfolio is in the mid-700s. In addition, there are non-student co-borrowers for roughly one-third of the portfolio that provide additional repayment capacity. Graduation and employment placement rates are high for both medical and pharmacy students. The average student loan balance per borrower as of June 30, 2020 is approximately $98,000. Loan interest rates range from 3.875% to 8.875%.
The Company classifies student loans delinquent more than 90 days as special mention. As of June 30, 2020 and December 31, 2019 the reserve against the student loan portfolio was $2,692,000 and $2,091,000, respectively. There were no TDRs within the portfolio as of June 30, 2020 or December 31, 2019. Additionally, for the six months ended June 30, 2020, $50,000 in
accrued interest receivable was reversed, due to charge-offs of $947,000 within the student loan portfolio. The increase in charge-offs is the result of the cumulative interest accrual prior to migration and repayment.
Reunion Student Loan Finance Corporation (RSLFC) is the third-party servicer for the student loan portfolio. RSLFC provides servicing for the student loan portfolio, including application administration, processing, approval, documenting, funding, and collection. They also provide file custodial responsibilities. Except in cases where applicants/loans do not meet program requirements, or extreme delinquency, RSLFC provides complete program management. RSLFC is paid a monthly servicing fee based on the principal balance outstanding.
Commercial real estate loans (a component of real estate mortgage loans) continue to represent a significant portion of the total loan portfolio. Commercial real estate loans amounted to 40.71%, 41.04%, and 39.68%, of the total loan portfolio at June 30, 2020, December 31, 2019, and June 30, 2019, respectively. Real estate mortgage loans increased $23,201,000, or 7.97%, between December 31, 2019 and June 30, 2020, and increased $32,550,000 between June 30, 2019 and June 30, 2020. Residential mortgage loans are not generally originated by the Company, but some residential mortgage loans have been made over the past several years to facilitate take-out loans for construction borrowers when they were not able to obtain permanent financing elsewhere. These loans are generally 30-year amortizing loans with maturities of between three and five years. Residential mortgages totaled $49,826,000, or 7.67%, of the portfolio at June 30, 2020, $45,881,000, or 7.68% of the portfolio at December 31, 2019, and $54,142,000 or 9.44% of the portfolio at June 30, 2019. Loan participations purchased decreased to $5,936,000, or 0.91% of the portfolio, at June 30, 2020. The Company held no loan participation purchases at June 30, 2019. Loan participations sold decreased from $7,140,000, or 1.2%, of the portfolio at June 30, 2019, to $4,866,000, or 0.8%, of the portfolio, at December 31, 2019, and remained the same at $4,866,000, or 0.7%, of the portfolio, at June 30, 2020.
Deposits
Deposit balances totaled $893,112,000 at June 30, 2020, representing an increase of $74,750,000, or 9.13%, from the balance of $818,362,000 reported at December 31, 2019, and an increase of $22,197,000, or 2.55%, from the balance of $870,915,000 reported at June 30, 2019.
Table 7. Deposits
The following table sets forth the amounts of deposits outstanding by category at June 30, 2020 and December 31, 2019, and the net change between the two periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
June 30, 2020
|
|
December 31, 2019
|
|
Net
Change
|
|
Percentage
Change
|
|
Noninterest-bearing deposits
|
$
|
362,010
|
|
|
$
|
311,950
|
|
|
$
|
50,060
|
|
|
16.05
|
%
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
NOW and money market accounts
|
378,274
|
|
|
360,934
|
|
|
17,340
|
|
|
4.80
|
%
|
|
Savings accounts
|
89,153
|
|
|
80,078
|
|
|
9,075
|
|
|
11.33
|
%
|
|
Time deposits:
|
|
|
|
|
|
|
|
|
Under $250,000
|
41,274
|
|
|
44,926
|
|
|
(3,652)
|
|
|
(8.13)
|
%
|
|
$250,000 and over
|
22,401
|
|
|
20,474
|
|
|
1,927
|
|
|
9.41
|
%
|
|
Total interest-bearing deposits
|
531,102
|
|
|
506,412
|
|
|
24,690
|
|
|
4.88
|
%
|
|
Total deposits
|
$
|
893,112
|
|
|
$
|
818,362
|
|
|
$
|
74,750
|
|
|
9.13
|
%
|
The Company's deposit base consists of two major components represented by noninterest-bearing (demand) deposits and interest-bearing deposits, totaling $362,010,000 and $531,102,000 at June 30, 2020, respectively. Interest-bearing deposits consist of time certificates, NOW and money market accounts, and savings deposits. Total interest-bearing deposits increased $24,690,000, or 4.88%, between December 31, 2019 and June 30, 2020, and noninterest-bearing deposits increased $50,060,000, or 16.05%, between the same two periods presented. Included in the increase of $24,690,000 in interest-bearing deposits during the six months ended June 30, 2020, are increases of $9,075,000 in savings accounts and $17,340,000 in NOW and money market accounts, partially offset by decreases of $1,725,000 in time deposits,
Core deposits, as defined by the Company as consisting of all deposits other than time deposits of more than $250,000 and brokered deposits, continue to provide the foundation for the Company's principal sources of funding and liquidity. These core deposits amounted to 97.49% and 97.50% of the total deposit portfolio at June 30, 2020 and December 31, 2019, respectively. The Company held no brokered deposits at June 30, 2020 and December 31, 2019.
On a year-to-date average, the Company experienced an increase of $19,561,000, or 2.38%, in total deposits between the six months ended June 30, 2020 and the six months ended June 30, 2019. Between these two periods, average interest-bearing deposits decreased $13,734,000, or 2.63%, and total noninterest-bearing deposits increased $33,295,000, or 11.10%, on a year-to-date average basis.
Short-Term Borrowings
At June 30, 2020, the Company had collateralized lines of credit with the Federal Reserve Bank of San Francisco totaling $308,717,000, as well as Federal Home Loan Bank (FHLB) lines of credit totaling $5,360,000. At June 30, 2020, the Company had uncollateralized lines of credit with both Pacific Coast Bankers Bank (PCBB), Union Bank, and Zion's Bank, totaling $10,000,000, $10,000,000, and $20,000,000, respectively. These lines of credit generally have interest rates tied to either the Federal Funds rate, short-term U.S. Treasury rates, or LIBOR. All lines of credit are on an “as available” basis and can be revoked by the grantor at any time. At June 30, 2020 and June 30, 2019, the Company had no outstanding borrowings. The Company had collateralized FRB lines of credit of $313,445,000, collateralized FHLB lines of credit totaling $5,815,000, and uncollateralized lines of credit of $10,000,000 with PCBB, $10,000,000 with Union Bank, and $20,000,000 with Zions Bank at December 31, 2019.
Asset Quality and Allowance for Credit Losses
Lending money is the Company's principal business activity, and ensuring appropriate evaluation, diversification, and control of credit risks is a primary management responsibility. Losses are implicit in lending activities and the amount of such losses will vary, depending on the risk characteristics of the loan portfolio as affected by local economic conditions and the financial experience of borrowers.
The allowance for credit losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in existing loans and commitments to extend credit. The adequacy of the allowance for credit losses is based upon management's continuing assessment of various factors affecting the collectability of loans and commitments to extend credit; including current economic conditions, past credit experience, collateral, and concentrations of credit. There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio. The conclusion that a loan may become uncollectible, either in part or in whole is subjective and contingent upon economic, environmental, and other conditions which cannot be predicted with certainty. When determining the adequacy of the allowance for credit losses, the Company follows, in accordance with GAAP, the guidelines set forth in the Revised Interagency Policy Statement on the Allowance for Loan and Lease Losses (Statement) issued by banking regulators in December 2006. The Statement is a revision of the previous guidance released in July 2001, and outlines characteristics that should be used in segmentation of the loan portfolio for purposes of the analysis including risk classification, past due status, type of loan, industry or collateral. It also outlines factors to consider when adjusting the loss factors for various segments of the loan portfolio, and updates previous guidance that describes the responsibilities of the board of directors, management, and bank examiners regarding the allowance for credit losses. Securities and Exchange Commission Staff Accounting Bulletin No. 102 was released during July 2001, and represents the SEC staff’s view relating to the incurred loss methodologies and supporting documentation for the Allowance for Loan and Lease Losses that should be observed by all public companies in complying with the federal securities laws and the Commission’s interpretations. It is also generally consistent with the guidance published by the banking regulators.
The allowance for loan losses includes an asset-specific component, as well as a general or formula-based component. The Company segments the loan and lease portfolio into eleven (11) segments, primarily by loan class and type, that have homogeneity and commonality of purpose and terms for analysis under the formula-based component of the allowance. Those loans which are determined to be impaired under current accounting guidelines are not subject to the formula-based reserve analysis, and evaluated individually for specific impairment under the asset-specific component of the allowance.
The Company’s methodology for assessing the adequacy of the allowance for credit losses consists of several key elements, which include:
•The formula allowance
•Specific allowances for problem graded loans identified as impaired; and
•The unallocated allowance
The formula allowance is calculated by applying loss factors to outstanding loans and certain unfunded loan commitments. Loss factors are based on the Company’s historical loss experience and on the internal risk grade of those loans, and may be
adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. Factors that may affect collectability of the loan portfolio include:
•Levels of, and trends in delinquencies and nonaccrual loans;
•Trends in volumes and term of loans;
•Effects of any changes in lending policies and procedures including those for underwriting, collection, charge-off, and recovery;
•Experience, ability, and depth of lending management and staff;
•National and local economic trends and conditions and;
•Concentrations of credit that might affect loss experience across one or more components of the portfolio, including high-balance loan concentrations and participations.
Management determines the loss factors for problem graded loans (substandard, doubtful, and loss), special mention loans, and pass graded loans, based on a loss migration model. The migration analysis incorporates loan losses over the previous quarters as determined by management (time horizons adjusted as business cycles or environment changes) and loss factors are adjusted to recognize and quantify the loss exposure from changes in market conditions and trends in the Company’s loan portfolio. For purposes of this analysis, loans are grouped by internal risk classifications and categorized as pass, special mention, substandard, doubtful, or loss. Certain loans are homogeneous in nature and are therefore pooled by risk grade. These homogeneous loans include consumer installment and home equity loans. Special mention loans are currently performing but are potentially weak, as the borrower has begun to exhibit deteriorating trends which, if not corrected, could jeopardize repayment of the loan and result in further downgrades. Substandard loans have well-defined weaknesses which, if not corrected, could jeopardize the full satisfaction of the debt. A loan classified as doubtful has critical weaknesses that make full collection of the obligation improbable. Classified loans, as defined by the Company, include impaired loans and loans categorized as substandard, doubtful, and loss which are not considered impaired. At June 30, 2020, impaired and classified loans totaled $15,472,000, or 2.4%, of gross loans as compared to $17,664,000, or 3.1%, of gross loans at December 31, 2019.
The student loan portfolio is reviewed for allowance adequacy under the same guidelines as other loans in the Company's portfolio, with additional emphasis for specific risks associated with the portfolio. In general, the Company provides an additional reserve for a percentage of loans in forbearance and loans rated special mention.
Loan participations are reviewed for allowance adequacy under the same guidelines as other loans in the Company’s portfolio, with an additional participation factor added, if required, for specific risks associated with participations. In general, participations are subject to certain thresholds set by the Company, and are reviewed for geographic location as well as the well-being of the underlying agent bank.
Specific allowances are established based on management’s periodic evaluation of loss exposure inherent in impaired loans. For impaired loans, specific allowances are determined based on the net realizable value of the underlying collateral, the net present value of the anticipated cash flows, or the market value of the underlying assets. Formula allowances for classified loans, excluding impaired loans, are determined on the basis of additional risks involved with individual loans that may be in excess of risk factors associated with the loan portfolio as a whole. The specific allowance is different from the formula allowance in that the specific allowance is determined on a loan-by-loan basis based on risk factors directly related to a particular loan, as opposed to the formula allowance which is determined for a pool of loans with similar risk characteristics, based on past historical trends and other risk factors which may be relevant on an ongoing basis.
The unallocated portion of the allowance is based upon management’s evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions.
Table 8. Allowance for Loan Losses
The following table summarizes the specific allowance, formula allowance, and unallocated allowance at June 30, 2020 and December 31, 2019, as well as classified loans at those period-ends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
June 30, 2020
|
|
December 31, 2019
|
|
Specific allowance – impaired loans
|
$
|
449
|
|
|
$
|
1,145
|
|
|
Formula allowance – classified loans not impaired
|
2
|
|
|
59
|
|
|
Formula allowance – special mention loans
|
441
|
|
|
355
|
|
|
Total allowance for special mention and classified loans
|
892
|
|
|
1,559
|
|
|
|
|
|
|
|
Formula allowance for pass loans
|
7,830
|
|
|
6,176
|
|
|
Unallocated allowance
|
140
|
|
|
173
|
|
|
Total allowance for loan losses
|
$
|
8,862
|
|
|
$
|
7,908
|
|
|
|
|
|
|
|
Impaired loans
|
15,453
|
|
|
17,072
|
|
|
Classified loans not considered impaired
|
19
|
|
|
592
|
|
|
Total classified loans / impaired loans
|
$
|
15,472
|
|
|
$
|
17,664
|
|
|
Special mention loans not considered impaired
|
$
|
6,934
|
|
|
$
|
5,846
|
|
Impaired loans decreased $1,619,000 between December 31, 2019 and June 30, 2020, and the specific allowance related to impaired loans decreased $696,000 between December 31, 2019 and June 30, 2020. The decrease in impaired loans is primarily due to a decrease in non-performing loans. The formula allowance related to classified and special mention unimpaired loans increased by $29,000 between December 31, 2019 and June 30, 2020. The unallocated allowance increased from $173,000 at December 31, 2019 to $140,000 at June 30, 2020. There has been an increase in the required loss reserves as economic conditions have destabilized due to COVID-19. The Company has a concentration in loans to finance CRE, construction and land development activities not secured by real estate. These loans have inherently higher risk characteristics and management believes maintaining additional, unallocated reserves to address the inherent losses in these loans is reasonable and appropriate. The level of “pass” loans increased approximately $52,766,000 between December 31, 2019 and June 30, 2020. The related formula allowance increased $1,654,000 during the same period. The formula allowance for “pass loans” is derived from the loan loss factors under migration analysis.
The Company’s methodology includes features that are intended to reduce the difference between estimated and actual losses. The specific allowance portion of the analysis is designed to be self-correcting by taking into account the current loan loss experience based on that portion of the portfolio. By analyzing the estimated losses inherent in the loan portfolio on a quarterly basis, management is able to adjust specific and inherent loss estimates using the most recent information available. In performing the periodic migration analysis, management believes that historical loss factors used in the computation of the formula allowance need to be adjusted to reflect current changes in market conditions and trends in the Company’s loan portfolio. There are a number of other factors which are reviewed when determining adjustments in the historical loss factors. Those factors include: 1) trends in delinquent and nonaccrual loans, 2) trends in loan volume and terms, 3) effects of changes in lending policies, 4) concentrations of credit, 5) competition, 6) national and local economic trends and conditions, 7) experience of lending staff, 8) loan review and Board of Directors oversight, 9) high balance loan concentrations, and 10) other business conditions.
The general reserve requirements (ASC 450-70) decreased with the continued strengthening of local, state, and national economies and their impact on our local lending base, which has resulted in a lower qualitative component for the general reserve calculation. Our stake-in-the-ground methodology requires the Company to use December 31, 2005 as the starting point of the look back period to capture loss history and better capture an entire economic cycle. Time horizons are subject to Management's assessment of the current period, taking into consideration changes in business cycles and environment changes.
Management and the Company’s lending officers evaluate the loss exposure of classified and impaired loans on a weekly/monthly basis. The Company’s Loan Committee meets weekly and serves as a forum to discuss specific problem assets that pose significant concerns to the Company, and to keep the Board of Directors informed through committee minutes. All special mention and classified loans are reported quarterly on Problem Asset Reports and Impaired Loan Reports and are reviewed by
senior management. Migration analysis and impaired loan analysis are performed on a quarterly basis and adjustments are made to the allowance as deemed necessary. The Board of Directors is kept abreast of any changes or trends in problem assets on a monthly basis, or more often if required.
The specific allowance for impaired loans is measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The amount of impaired loans is not directly comparable to the amount of nonperforming loans disclosed later in this section. The primary differences between impaired loans and nonperforming loans are: i) all loan categories are considered in determining nonperforming loans while impaired loan recognition is limited to commercial and industrial loans, commercial and residential real estate loans, construction loans, and agricultural loans, and ii) impaired loan recognition considers not only loans 90 days or more past due, restructured loans and nonaccrual loans but may also include problem loans other than delinquent loans.
The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include nonaccrual loans, troubled debt restructures, and performing loans in which full payment of principal or interest is not expected. Management bases the measurement of these impaired loans either on the fair value of the loan's collateral or the expected cash flows on the loan discounted at the loan's stated interest rates. Cash receipts on impaired loans not performing to contractual terms and that are on nonaccrual status are used to reduce principal balances. Impairment losses are included in the allowance for credit losses through a charge to the provision, if applicable.
In most cases, the Company uses the cash basis method of income recognition for impaired loans. In the case of certain troubled debt restructuring, for which the loan has been performing for a prescribed period of time under the current contractual terms, income is recognized under the accrual method. At June 30, 2020, included in impaired loans, were troubled debt restructures totaling $5,155,000, of which $3,051,000 were on nonaccrual. The remaining $2,105,000 in troubled debt restructures were considered current with regards to payments, and were performing according to their modified contractual terms.
Commercial and industrial loans and real estate mortgage loans, respectively, comprised approximately 3.62% and 19.99% of total impaired loan balances at June 30, 2020. Of the $559,000 in commercial and industrial impaired loans reported at June 30, 2020, two loans, with a total recorded investment of $538,000, were secured by real estate. Specific collateral related to impaired loans is reviewed for current appraisal information, economic trends within geographic markets, loan-to-value ratios, and other factors that may impact the value of the loan collateral. Adjustments are made to collateral values as needed for these factors. Of total impaired loans at June 30, 2020, approximately $15,092,000, or 97.7%, are secured by real estate. The majority of impaired real estate construction and development loans are for the purpose of residential construction, residential and commercial acquisition and development, and land development. Residential construction loans are made for the purpose of building residential 1-4 single family homes. Residential and commercial acquisition and development loans are made for the purpose of purchasing land, developing that land if required, and developing real estate or commercial construction projects on those properties. Land development loans are made for the purpose of converting raw land into construction-ready building sites.
Table 9. Impaired Loans and Specific Reserves
The following table summarizes the components of impaired loans and their related specific reserves at June 30, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loan Balance
|
|
Reserve
|
|
Impaired Loan Balance
|
|
Reserve
|
|
(in 000’s)
|
June 30, 2020
|
|
June 30, 2020
|
|
December 31, 2019
|
|
December 31, 2019
|
|
Commercial and industrial
|
$
|
559
|
|
|
$
|
—
|
|
|
$
|
1,754
|
|
|
$
|
606
|
|
|
Real estate – mortgage
|
3,089
|
|
|
206
|
|
|
3,146
|
|
|
283
|
|
|
RE construction & development
|
11,109
|
|
|
—
|
|
|
11,478
|
|
|
—
|
|
|
Agricultural
|
696
|
|
|
243
|
|
|
694
|
|
|
256
|
|
|
Installment and student loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total impaired loans
|
$
|
15,453
|
|
|
$
|
449
|
|
|
$
|
17,072
|
|
|
$
|
1,145
|
|
Included in impaired loans are loans modified in troubled debt restructurings (TDRs), where concessions have been granted to borrowers experiencing financial difficulties in an attempt to maximize collection. The Company makes various types of concessions when structuring TDRs including rate reductions, payment extensions, and forbearance. At June 30, 2020, approximately $1,926,000 of the total $5,155,000 in TDRs was comprised of real estate mortgages. An additional $2,536,000 was related to real estate construction and development loans. There were no reserve amounts for real estate construction and development impaired loans at December 31, 2019 and June 30, 2020, due to the value of the collateral securing those loans.
As of June 30, 2020, the Company had executed 28 payment deferrals or modifications on outstanding loan balances of $69,997,000 in connection with the COVID-19 relief provided by the CARES Act. These deferrals were generally no more than six months in duration and were not considered troubled debt restructurings based on interagency guidance issued in March 2020.
Total troubled debt restructurings decreased 0.62% between June 30, 2020 and December 31, 2019. Nonaccrual TDRs increased by 9.01% and accruing TDRs decreased by 11.89% over the same period. Total residential mortgages and real estate construction TDRs decreased $150,000 to a percentage total of 3.25%.
Table 10. TDRs
The following tables summarize TDRs by type, classified separately as nonaccrual or accrual, which are included in impaired loans at June 30, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TDRs
|
|
Nonaccrual TDRs
|
|
Accruing TDRs
|
|
(in 000's)
|
June 30, 2020
|
|
June 30, 2020
|
|
June 30, 2020
|
|
Commercial and industrial
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
Commercial real estate
|
889
|
|
|
—
|
|
|
889
|
|
|
Residential mortgages
|
1,037
|
|
|
—
|
|
|
1,037
|
|
|
|
|
|
|
|
|
|
Total real estate mortgage
|
1,926
|
|
|
—
|
|
|
1,926
|
|
|
RE construction & development
|
2,536
|
|
|
2,536
|
|
|
—
|
|
|
Agricultural
|
693
|
|
|
514
|
|
|
179
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
$
|
5,155
|
|
|
$
|
3,050
|
|
|
$
|
2,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TDRs
|
|
Nonaccrual TDRs
|
|
Accruing TDRs
|
|
(in 000's)
|
December 31, 2019
|
|
December 31, 2019
|
|
December 31, 2019
|
|
Commercial and industrial
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
Real estate mortgage:
|
|
|
|
|
|
|
Commercial real estate
|
898
|
|
|
—
|
|
|
898
|
|
|
Residential mortgages
|
1,060
|
|
|
—
|
|
|
1,060
|
|
|
|
|
|
|
|
|
|
Total real estate mortgage
|
1,958
|
|
|
—
|
|
|
1,958
|
|
|
RE construction & development
|
2,654
|
|
|
2,654
|
|
|
—
|
|
|
Agricultural
|
566
|
|
|
144
|
|
|
422
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
$
|
5,187
|
|
|
$
|
2,798
|
|
|
$
|
2,389
|
|
Of the $5,155,000 in total TDRs at June 30, 2020, $3,050,000 were on nonaccrual status at period-end. Of the $5,187,000 in total TDRs at December 31, 2019, $2,798,000 were on nonaccrual status at period-end. As of June 30, 2020, the Company has no commercial real estate (CRE) workouts whereby an existing loan was restructured into multiple new loans (i.e., A Note/B Note structure).
For a restructured loan to return to accrual status there needs to be at least 6 months successful payment history and continued satisfactory performance is expected. to this end, the Company typically performs a financial analysis of the credit to determine whether the borrower has the ability to continue to meet payments over the remaining life of the loans. This includes, but is not limited to, a review of financial statements and cash flow analysis of the borrower. Only after determination that the borrower has the ability to perform under the terms of the loans, will the restructured credit be considered for accrual status.
Table 11. Credit Quality Indicators for Outstanding Student Loans
The following table summarizes the credit quality indicators for outstanding student loans as of June 30, 2020 and December 31, 2019 (in 000's, except for number of borrowers):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
Number of Loans
|
|
Amount
|
|
Accrued Interest
|
|
Number of Loans
|
|
Amount
|
|
Accrued Interest
|
|
School
|
386
|
|
|
$
|
14,495
|
|
|
$
|
3,315
|
|
|
601
|
|
|
$
|
24,198
|
|
|
$
|
4,689
|
|
|
Grace
|
188
|
|
|
8,939
|
|
|
2,106
|
|
|
49
|
|
|
1,598
|
|
|
394
|
|
|
Repayment
|
415
|
|
|
19,015
|
|
|
237
|
|
|
507
|
|
|
24,986
|
|
|
203
|
|
|
Deferment
|
93
|
|
|
4,368
|
|
|
242
|
|
|
124
|
|
|
4,392
|
|
|
204
|
|
|
Forbearance
|
308
|
|
|
13,716
|
|
|
439
|
|
|
224
|
|
|
10,626
|
|
|
188
|
|
|
Total
|
1,390
|
|
|
$
|
60,533
|
|
|
$
|
6,339
|
|
|
1,505
|
|
|
$
|
65,800
|
|
|
$
|
5,678
|
|
Included in installment loans are $60,533,000 and $65,800,000 in student loans at June 30, 2020 and December 31, 2019, respectively, made to medical and pharmacy school students. Accrued interest on loans that had not entered repayment status totaled $6,102,000 at June 30, 2020 and $5,475,000 at December 31, 2019. At June 30, 2020 there were 816 loans within repayment, deferment, and forbearance which represented $19,015,000, $4,368,000, and $13,716,000, respectively. At December 31, 2019, there were 855 loans within repayment, deferment, and forbearance which represented $24,986,000, $4,392,000 and $10,626,000, respectively. As of June 30, 2020 and December 31, 2019 the reserve against the student loan portfolio was $2,692,000 and $2,091,000, respectively.
Loan interest rates on the student loan portfolio range from 3.875% to 8.875% and 4.75% to 9.75% at June 30, 2020 and December 31, 2019, respectively.
Table 12. Nonperforming Assets
The following table summarizes the components of nonperforming assets as of June 30, 2020 and December 31, 2019 (in 000's), and the percentage of nonperforming assets to total gross loans, total assets, and the allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
June 30, 2020
|
|
December 31, 2019
|
|
Nonaccrual loans (1)
|
$
|
11,623
|
|
|
$
|
11,697
|
|
|
Restructured loans
|
2,105
|
|
|
2,389
|
|
|
Loans past due 90 days or more, still accruing
|
269
|
|
|
386
|
|
|
Total nonperforming loans
|
13,997
|
|
|
14,472
|
|
|
Other real estate owned
|
5,018
|
|
|
6,753
|
|
|
Total nonperforming assets
|
$
|
19,015
|
|
|
$
|
21,225
|
|
|
|
|
|
|
|
Nonperforming loans to total gross loans
|
2.15
|
%
|
|
2.42
|
%
|
|
Nonperforming assets to total assets
|
1.84
|
%
|
|
2.22
|
%
|
|
Allowance for loan losses to nonperforming loans
|
63.31
|
%
|
|
54.64
|
%
|
(1) Included in nonaccrual loans at June 30, 2020 and December 31, 2019 are restructured loans totaling $3,051,000 and $2,797,000, respectively.
Nonperforming assets, which are primarily related to the real estate loan and other real estate owned portfolio, decreased$2,210,000 from a balance of $21,225,000 at December 31, 2019 to a balance of $19,015,000 at June 30, 2020, and remained relatively high compared to peers during the six months ended June 30, 2020. The ratio of the allowance for loan losses to nonperforming loans increased from 54.64% at December 31, 2019 to 63.31% at June 30, 2020.
The following table summarizes the nonaccrual totals by loan category for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
Balance
|
|
Change from
|
|
(in 000's)
|
June 30, 2020
|
|
December 31, 2019
|
|
December 31, 2019
|
|
Nonaccrual Loans:
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
—
|
|
|
$
|
75
|
|
|
$
|
(75)
|
|
|
Real estate - mortgage
|
—
|
|
|
—
|
|
|
—
|
|
|
RE construction & development
|
11,109
|
|
|
11,478
|
|
|
(369)
|
|
|
Agricultural
|
514
|
|
|
144
|
|
|
370
|
|
|
Installment and student loans
|
—
|
|
|
—
|
|
|
—
|
|
|
Total nonaccrual loans
|
$
|
11,623
|
|
|
$
|
11,697
|
|
|
$
|
(74)
|
|
Loans past due more than 30 days receive increased management attention and are monitored for increased risk. The Company continues to move past due loans to nonaccrual status in an ongoing effort to recognize and address loan problems as early and most effectively as possible. As impaired loans, nonaccrual and restructured loans are reviewed for specific reserve allocations, the allowance for credit losses is adjusted accordingly.
Except for the nonaccrual loans included in the above table, or those included in the impaired loan totals, there were no loans at June 30, 2020 where the known credit problems of a borrower caused the Company to have serious doubts as to the ability of such borrower to comply with the present loan repayment terms and which would result in such loan being included as a nonaccrual, past due, or restructured loan at some future date.
Nonaccrual loans, totaling $11,623,000 at June 30, 2020, decreased $74,000 from the balance of $11,697,000 reported at December 31, 2019, with real estate mortgage and real estate construction loans comprising 95.58% of total nonaccrual loans at June 30, 2020. In determining the adequacy of the underlying collateral related to these loans, management monitors trends within specific geographical areas, loan-to-value ratios, appraisals, and other credit issues related to the specific loans. Impaired loans decreased $1,619,000 during the six months ended June 30, 2020 to a balance of $15,453,000 at June 30, 2020. Other real estate owned through foreclosure decreased to $5,018,000 for the period ended June 30, 2020 as compared to the balance of $6,753,000 recorded at December 31, 2019. Nonperforming assets as a percentage of total assets decreased from 2.22% at December 31, 2019 to 1.84% at June 30, 2020.
The following table summarizes various nonperforming components of the loan portfolio, the related allowance for credit losses and provision for credit losses for the periods shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
June 30, 2020
|
|
December 31, 2019
|
|
June 30, 2019
|
|
Provision for credit losses year-to-date
|
$
|
2,134
|
|
|
$
|
20
|
|
|
$
|
10
|
|
|
Allowance as % of nonperforming loans
|
63.31
|
%
|
|
54.64
|
%
|
|
54.80
|
%
|
|
|
|
|
|
|
|
|
Nonperforming loans as % total loans
|
2.15
|
%
|
|
2.42
|
%
|
|
2.69
|
%
|
|
Restructured loans as % total loans
|
0.79
|
%
|
|
0.87
|
%
|
|
1.08
|
%
|
Management continues to monitor economic conditions in the real estate market for signs of deterioration or improvement which may impact the level of the allowance for loan losses required to cover identified losses in the loan portfolio. Focus has been placed on monitoring and reducing the level of problem assets, while working with borrowers to find more options, including loan restructures. Restructured loan balances are comprised of 13 loans totaling $5,155,000 at June 30, 2020, compared to 13 loans totaling $5,187,000 at December 31, 2019.
The following table summarizes special mention loans by type at June 30, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2020
|
|
December 31, 2019
|
|
Commercial and industrial
|
$
|
1,275
|
|
|
$
|
919
|
|
|
Real estate mortgage:
|
|
|
|
|
Commercial real estate
|
1,715
|
|
|
1,608
|
|
|
Residential mortgages
|
357
|
|
|
88
|
|
|
|
|
|
|
|
Total real estate mortgage
|
2,072
|
|
|
1,696
|
|
|
RE construction & development
|
998
|
|
|
998
|
|
|
Agricultural
|
2,320
|
|
|
1,279
|
|
|
Installment and student loans
|
269
|
|
|
386
|
|
|
Total special mention loans
|
$
|
6,934
|
|
|
$
|
5,278
|
|
The Company focuses on competition and other economic conditions within its market area and other geographical areas in which it does business, which may ultimately affect the risk assessment of the portfolio. The Company continues to experience increased competition from major banks, local independents and non-bank institutions which creates pressure on loan pricing. The Company continues to place increased emphasis on reducing both the level of nonperforming assets and the level of losses on the disposition of these assets. It is in the best interest of both the Company and the borrowers to seek alternative options to foreclosure in an effort to reduce the impacts on the real estate market. As part of this strategy, the Company enters into troubled debt restructurings, when it improves collection prospects. While business and consumer spending have shown improvement over the last several years, it is difficult to forecast the magnitude of the impact COVID-19 will have on the economy. Local unemployment rates in the San Joaquin Valley have improved, but are expected to substantially increase due to closure of non-essential business and shelter in place orders. Management recognizes increased risk of loss due to the Company's exposure to local and worldwide economic conditions, as well as potentially volatile real estate markets, and takes these factors into consideration when analyzing the adequacy of the allowance for credit losses.
The following table provides a summary of the Company's allowance for possible credit losses, provisions made to that allowance, and charge-off and recovery activity affecting the allowance for the six months ended June 30, 2020 and June 30, 2019.
Table 13. Allowance for Credit Losses - Summary of Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in 000's)
|
June 30, 2020
|
|
June 30, 2019
|
|
Total loans outstanding at end of period before deducting allowances for credit losses
|
$
|
648,650
|
|
|
$
|
572,810
|
|
|
Average loans outstanding during period
|
619,950
|
|
|
573,436
|
|
|
|
|
|
|
|
Balance of allowance at beginning of period
|
7,908
|
|
|
8,395
|
|
|
Loans charged-off:
|
|
|
|
|
Real estate
|
(252)
|
|
|
(5)
|
|
|
Commercial and industrial
|
—
|
|
|
—
|
|
|
Agricultural
|
—
|
|
|
—
|
|
|
Installment and student loans
|
(956)
|
|
|
(114)
|
|
|
Total loans charged-off
|
(1,208)
|
|
|
(119)
|
|
|
Recoveries of loans previously charged-off:
|
|
|
|
|
Real estate
|
9
|
|
|
8
|
|
|
Commercial and industrial
|
13
|
|
|
57
|
|
|
Installment and student loans
|
6
|
|
|
101
|
|
|
Total loan recoveries
|
28
|
|
|
166
|
|
|
Net loans (charged-off) recovered
|
(1,180)
|
|
|
47
|
|
|
|
|
|
|
|
Provision charged to operating expense
|
2,134
|
|
|
10
|
|
|
Balance of allowance for credit losses at end of period
|
$
|
8,862
|
|
|
$
|
8,452
|
|
|
|
|
|
|
|
Net loan charged-off (recoveries) to total average loans (annualized)
|
0.38
|
%
|
|
(0.02)
|
%
|
|
Net loan charged-off (recoveries) to loans at end of period (annualized)
|
0.05
|
%
|
|
(0.02)
|
%
|
|
Allowance for credit losses to total loans at end of period
|
1.37
|
%
|
|
1.48
|
%
|
|
Net loan charged-off (recoveries) to allowance for credit losses (annualized)
|
3.33
|
%
|
|
(1.11)
|
%
|
|
Provision for credit losses to net (charged-off) recoveries (annualized)
|
(361.69)
|
%
|
|
28.37
|
%
|
Provisions for credit losses are determined on the basis of management's periodic credit review of the loan portfolio, consideration of past loan loss experience, current and future economic conditions, and other pertinent factors. Management believes its estimate of the allowance for credit losses adequately covers estimated losses inherent in the loan portfolio and, based on the condition of the loan portfolio, management believes the allowance is sufficient to cover risk elements in the loan portfolio. For the six months ended June 30, 2020, a $2,134,000 provision was recorded to the allowance for credit losses as compared to a $10,000 provision recorded for the six months ended June 30, 2019.
Net charge-offs during the six months ended June 30, 2020 totaled $1,180,000 as compared to net recoveries of $47,000 for the six months ended June 30, 2019. The Company charged-off, or had partial charge-offs on 26 loans during the six months ended June 30, 2020, as compared to five loans during the same period ended June 30, 2019, and 35 loans during the year ended December 31, 2019. The annualized percentage net charge-offs to average loans were 0.38% for the six months ended June 30, 2020. Annualized percentage net charge-offs were 0.09% for the year ended December 31, 2019. Annualized percentage net recoveries were 0.02% for the six months ended June 30, 2019. The Company's loans net of unearned fees increased from $572,810,000 at June 30, 2019 to $648,650,000 at June 30, 2020.
The allowance at June 30, 2020 was 1.37% of outstanding loan balances at June 30, 2020, as compared to 1.33% at December 31, 2019, and 1.48% at June 30, 2019.
At June 30, 2020 and June 30, 2019, unfunded loan commitment reserves of $584,000 and $567,000, respectively, were reported in other liabilities. Management believes that the 1.37% credit loss allowance at June 30, 2020 is adequate to absorb known and inherent risks in the loan portfolio. No assurance can be given, however, regarding economic conditions or other circumstances which may adversely affect the Company's service areas and result in future losses to the loan portfolio.
Asset/Liability Management – Liquidity and Cash Flow
The primary functions of asset/liability management are to provide adequate liquidity and maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities. In a changing-rate environment, imbalances between interest-sensitive assets and interest-sensitive liabilities will impact earnings. For example, in an increasing-rate environment if interest-sensitive liabilities reprice sooner than interest sensitive assets, net interest income will be negatively impacted.
Liquidity
Liquidity management may be described as the ability to maintain sufficient cash flows to fulfill financial obligations, including loan funding commitments and customer deposit withdrawals, without straining the Company’s equity structure. To maintain an adequate liquidity position, the Bank relies on, in addition to cash and cash equivalents, cash inflows from deposits and short-term borrowings, repayments of principal on loans and investments, and interest income received. The Bank's principal cash outflows are for loan origination, purchases of investment securities, depositor withdrawals and payment of operating expenses.
The Bank continues to emphasize liability management as part of its overall asset/liability strategy. Through the discretionary acquisition of short term borrowings, the Bank has, when needed, been able to provide liquidity to fund asset growth while, at the same time, better utilizing its capital resources, and better controlling interest rate risk. This does not preclude the Bank from selling assets such as investment securities to fund liquidity needs but, with favorable borrowing rates, the Bank has maintained a positive yield spread between borrowed liabilities and the assets which those liabilities fund. If, at some time, rate spreads become unfavorable, the Bank has the ability to utilize an asset management approach and, either control asset growth or fund further growth with maturities or sales of investment securities. At June 30, 2020, the Bank had no borrowings, as its deposit base currently provides funding sufficient to support its asset values.
The Banks liquid asset base which generally consists of cash and due from banks, federal funds sold, securities purchased under agreements to resell (reverse repos) and investment securities, is maintained at a level deemed sufficient to provide the cash outlay necessary to fund loan growth and accommodate any customer deposit runoff that may occur. Additional liquidity requirements may be funded with overnight or term borrowing arrangements with various correspondent banks, FHLB and the Federal Reserve Bank. Within this framework is the objective of maximizing the yield on earning assets. This is generally achieved by maintaining a high percentage of earning assets in loans, which historically have represented the Company's highest yielding asset. At June 30, 2020, the loan portfolio totaled 62.9% of total assets and the loan to deposit ratio was 71.6%, compared to 62.3% and 71.9%, respectively, at December 31, 2019. Liquid assets at June 30, 2020, included cash and cash equivalents totaling $229,541,000 as compared to $218,995,000 at December 31, 2019. Other sources of liquidity include collateralized lines of credit from the Federal Home Loan Bank, and from the Federal Reserve Bank totaling $314,077,000 and uncollateralized lines of credit from Pacific Coast Banker's Bank (PCBB) of $10,000,000, Union Bank of $10,000,000, and Zion's Bank of $20,000,000 at June 30, 2020.
The liquidity of the Holding Company, United Security Bancshares, is primarily dependent on the payment of cash dividends by its subsidiary, the Bank, subject to limitations imposed by the Financial Code of the State of California. During the six months ended June 30, 2020, the Holding Company has received $4,085,000 in cash dividends from the Bank.
Cash Flow
The period-end balances of cash and cash equivalents for the periods shown are as follows (from Consolidated Statements of Cash Flows – in 000’s):
|
|
|
|
|
|
|
|
(in 000's)
|
Balance
|
|
December 31, 2018
|
$
|
220,337
|
|
|
June 30, 2019
|
$
|
309,460
|
|
|
December 31, 2019
|
$
|
218,995
|
|
|
June 30, 2020
|
$
|
229,541
|
|
Cash and cash equivalents increased $10,546,000 during the six months ended June 30, 2020, compared to an increase of $89,123,000 during the six months ended June 30, 2019.
The Company had a net cash inflow from operating activities of $8,116,000 for the six months ended June 30, 2020 and a cash inflow from operations totaling $5,076,000 for the period ended June 30, 2019. The Company experienced net cash outflows from investing activities of $68,584,000 related to a $53,461,000 increase in loan balances and purchases of available-for-sale securities of $27,971,000. For the six months ended June 30, 2019, the Company experienced net cash inflows from investing activities of $20,640,000 related to a $14,559,000 decrease in loan balances and principal payments on available-for-sale securities of $6,828,000.
During the six months ended June 30, 2020, the Company experienced net cash inflows from financing activities totaling $71,014,000, primarily as the result of increases of $76,476,000 in demand deposits and savings accounts, partially offset by decreases of $1,727,000 in time deposits. For the six months ended June 30, 2019, the Company experienced net cash inflows of $63,403,000 primarily as the result of increases of $77,652,000 in demand deposits and savings accounts, offset by decreases of $12,380,000 in time deposits.
The Company has the ability to increase or decrease loan growth, increase or decrease deposits and borrowings, or a combination of both to manage balance sheet liquidity.
Regulatory Matters
Capital Adequacy
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements adopted by the Board of Governors of the Federal Reserve System (the “Board of Governors”). Failure to meet minimum capital requirements can initiate certain mandates and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the consolidated Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by the capital adequacy guidelines require insured institutions to maintain a minimum leverage ratio of Tier 1 capital (the sum of common stockholders' equity, noncumulative perpetual preferred stock and minority interests in consolidated subsidiaries, minus intangible assets, identified losses and investments in certain subsidiaries, plus unrealized losses or minus unrealized gains on available for sale securities) to total assets. Institutions which have received the highest composite regulatory rating and which are not experiencing or anticipating significant growth are required to maintain a minimum leverage capital ratio of 3% of Tier 1 capital to total assets. All other institutions are required to maintain a minimum leverage capital ratio of at least 100 to 200 basis points above the 3% minimum requirement.
The Company has adopted a capital plan that includes guidelines and trigger points to ensure sufficient capital is maintained at the Bank and the Company, and that capital ratios are maintained at a level deemed appropriate under regulatory guidelines given the level of classified assets, concentrations of credit, ALLL, current and projected growth, and projected retained earnings. The capital plan also contains contingency strategies to obtain additional capital as required to fulfill future capital requirements for both the Bank, as a separate legal entity, and the Company on a consolidated basis. The capital plan requires the Bank to maintain a ratio of tangible shareholders' equity to total tangible assets equal to or greater than 9%. The Bank’s ratio of tangible shareholders’ equity to total tangible assets was 12.4% and 12.1% at June 30, 2020 and 2019, respectively.
The following table sets forth the Company’s and the Bank's actual capital positions at June 30, 2020, as well as the minimum capital requirements and requirements to be well capitalized under prompt corrective action provisions (Bank required only) under the regulatory guidelines discussed above:
Table 14. Capital Ratios
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Ratios at June 30, 2020
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Ratios at December 31, 2019
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Minimum for Capital Adequacy (1)
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Minimum requirement for "Well Capitalized" Institution
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Total capital to risk weighted assets
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Company
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17.16%
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17.98%
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10.50%
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N/A
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Bank
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16.97%
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17.78%
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10.50%
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10.00%
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Tier 1 capital to risk-weighted assets
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Company
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15.92%
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16.81%
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8.50%
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N/A
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Bank
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15.74%
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16.61%
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8.50%
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8.00%
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Common equity tier 1 capital to risk-weighted assets
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Company
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14.71%
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15.39%
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7.00%
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N/A
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Bank
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15.74%
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16.61%
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7.00%
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6.50%
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Tier 1 capital to adjusted average assets (leverage)
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Company
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12.25%
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12.82%
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6.00%
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N/A
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Bank
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12.10%
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12.83%
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6.00%
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5.00%
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(1) Includes 2.50% Capital Conservation Buffer
The Federal Reserve and the Federal Deposit Insurance Corporation approved final capital rules in July 2013, that substantially amended the then existing capital rules for banks. These new rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (commonly referred to as “Basel III”) as well as requirements encompassed by the Dodd-Frank Act.
The final rules set a new common equity tier 1 requirement and higher minimum tier 1 requirements for all banking organizations. The final rules also require a Common Equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. The capital buffer requirement is being be phased in over three years beginning in 2016, and will effectively raise the minimum required Common Equity Tier 1 RBC Ratio to 7.0%, the Tier 1 RBC Ratio to 8.5%, and the Total RBC Ratio to 10.5% on a fully phased-in basis. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases, and on the payment of discretionary bonuses to executive management. The rules revise the prompt corrective action framework to incorporate the new regulatory capital minimums. They also enhance risk sensitivity and address weaknesses identified over recent years with the measure of risk-weighted assets.
As of June 30, 2020, the Company and the Bank meet all capital adequacy requirements to which they are subject. Management believes that, under the current regulations, both will continue to meet their minimum capital requirements in the foreseeable future.
Dividends
Dividends paid to shareholders by the Holding Company are subject to restrictions set forth in the California General
Corporation Law. As applicable to the Holding Company, the California General Corporation Law provides that the Holding Company may make a distribution to its shareholders if retained earnings immediately prior to the dividend payout are at least equal to the amount of the proposed distribution or if immediately after the distribution, the value of the Holding Company’s assets would equal or exceed the sum of its total liabilities. The primary source of funds with which dividends will be paid to shareholders will come from cash dividends received by the Company from the Bank.
On April 25, 2017, the Board of Directors announced the authorization of the repurchase of up to $3,000,000 of the outstanding stock of the Holding Company. This amount represents 2.6% of total shareholders' equity of $117,460,000 at June 30, 2020. The timing of the purchases will depend on certain factors including, but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, or negotiated private transactions. During the six months ended June 30, 2020, the Company did not repurchase any of the shares available.
During the six months ended ended June 30, 2020, the Bank paid 4,085,000 in cash dividends to the Holding Company which funded the Holding Company’s operating costs and payments of interest on its junior subordinated debt.
On June 23, 2020, the Company’s Board of Directors declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on July 15, 2020, to shareholders of record as of July 6, 2020. Approximately $1,866,000 was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.
On March 24, 2020, the Company’s Board of Directors declared a cash dividend of $0.11 per share on the Company's common stock. The dividend was payable on April 15, 2020, to shareholders of record as of April 6, 2020. Approximately $1,867,000 was transferred from retained earnings to dividends payable to allow for distribution of the dividend to shareholders.
The Bank, as a state-chartered bank, is subject to dividend restrictions set forth in the California Financial Code, as administered by the Commissioner of the DBO (Commissioner). As applicable to the Bank, the Financial Code provides that the Bank may not pay cash dividends in an amount which exceeds the lesser of the retained earnings of the Bank or the Bank’s net income for the last three fiscal years (less the amount of distributions to the Holding Company during that period of time). If the above test is not met, cash dividends may only be paid with the prior approval of the Commissioner, in an amount not exceeding the Bank’s net income for its last fiscal year or the amount of its net income for the current fiscal year. Such restrictions do not apply to stock dividends, which generally require neither the satisfaction of any tests nor the approval of the Commissioner. Notwithstanding the foregoing, if the Commissioner finds that the shareholder's equity of the Bank is not adequate or that the declaration of a dividend would be unsafe or unsound, the Commissioner may order the Bank not to pay any dividend. The Reserve Bank may also limit dividends paid by the Bank.
Reserve Balances
The Bank is required to maintain average reserve balances with the Federal Reserve Bank. During 2005, the Company implemented a deposit reclassification program which allows the Company to reclassify a portion of transaction accounts to non-transaction accounts for reserve purposes. The deposit reclassification program is provided by a third-party vendor and has been approved by the Federal Reserve Bank. At June 30, 2020, the Bank was not subject to a reserve requirement.