Companies: 10,793     total market cap: $132.707 T
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Sierra Bancorp
BSRR
#7331
Rank
$0.45 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$33.55
Share price
-1.58%
Change (1 day)
22.98%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Sierra Bancorp
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q3

Sierra Bancorp - 10-Q quarterly report FY2020 Q3


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Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

Commission file number: 000-33063

SIERRA BANCORP

(Exact name of Registrant as specified in its charter)

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California

33-0937517

(State of Incorporation)

(IRS Employer Identification No)

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86 North Main Street, Porterville, California 93257

(Address of principal executive offices)                  (Zip Code)

(559) 782-4900

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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Title of each class

    

Trading

Symbol(s)

    

Name of each exchange on which registered

Common Stock, no par value

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BSRR

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The NASDAQ Stock Market LLC

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

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

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

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Large Accelerated Filer

 

☐

  

Accelerated Filer:

 

☒

Non-accelerated Filer:

 

☐

  

Smaller Reporting Company:

 

☐

Emerging Growth Company:

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☐

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

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

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

As of November 1, 2020, the registrant had 15,359,023 shares of common stock outstanding, including 148,885 shares of unvested restricted stock.

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Table of Contents

FORM 10-Q

Table of Contents

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Page

Part I - Financial Information

1

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Item 1. Financial Statements (Unaudited)

1

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Consolidated Balance Sheets

1

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Consolidated Statements of Income

2

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Consolidated Statements of Comprehensive Income

3

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Consolidated Statements of Changes In Shareholders’ Equity

4

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Consolidated Statements of Cash Flows

6

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Notes to Consolidated Financial Statements (Unaudited)

7

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

36

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Forward-Looking Statements

36

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Critical Accounting Policies

36

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Overview of the Results of Operations and Financial Condition

37

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Earnings Performance

41

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Net Interest Income and Net Interest Margin

41

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Provision for Loan and Lease Losses

46

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Noninterest Income and Noninterest Expense

47

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Provision for Income Taxes

49

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Balance Sheet Analysis

49

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Earning Assets

49

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Investments

49

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Loan and Lease Portfolio

50

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Nonperforming Assets

52

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Allowance for Loan and Lease Losses

54

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Off-Balance Sheet Arrangements

57

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Other Assets

57

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Deposits and Interest-Bearing Liabilities

57

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Deposits

57

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Other Interest-Bearing Liabilities

58

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Noninterest Bearing Liabilities

59

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Liquidity and Market Risk Management

59

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Capital Resources

62

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Item 3. Qualitative & Quantitative Disclosures about Market Risk

64

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Item 4. Controls and Procedures

64

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Part II - Other Information

65

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Item 1. - Legal Proceedings

65

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Item 1A. - Risk Factors

65

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

66

​

Item 3. - Defaults upon Senior Securities

66

​

Item 4. - Mine Safety Disclosures

66

​

Item 5. - Other Information

66

​

Item 6. - Exhibits

67

​

​

Signatures

68

​

​

​

PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

SIERRA BANCORP

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

​

​

​

​

​

​

​

​

    

September 30, 2020

    

December 31, 2019

ASSETS

​

(unaudited)

​

(audited)

Cash and due from banks

​

$

84,287

​

$

65,556

Interest-bearing deposits in banks

​

​

4,646

​

​

14,521

Total cash & cash equivalents

​

​

88,933

​

​

80,077

Securities available-for-sale

​

​

577,278

​

​

600,799

Loans and leases:

​

​

​

​

​

​

Gross loans and leases

​

​

2,380,300

​

​

1,762,565

Deferred loan and lease (fees) and costs, net

​

​

(3,078)

​

​

2,896

Allowance for loan and lease losses

​

​

(15,586)

​

​

(9,923)

Net loans and leases

​

​

2,361,636

​

​

1,755,538

Foreclosed assets

​

​

2,970

​

​

800

Premises and equipment, net

​

​

27,216

​

​

27,435

Goodwill

​

​

27,357

​

​

27,357

Other intangible assets, net

​

​

4,575

​

​

5,381

Bank-owned life insurance

​

​

52,110

​

​

50,517

Other assets

​

​

57,543

​

​

45,915

Total assets

​

$

3,199,618

​

$

2,593,819

​

​

​

​

​

​

​

LIABILITIES AND SHAREHOLDERS' EQUITY

​

​

​

​

​

​

Deposits:

​

​

​

​

​

​

Noninterest bearing

​

$

975,750

​

$

690,950

Interest bearing

​

​

1,615,963

​

​

1,477,424

Total deposits

​

​

2,591,713

​

​

2,168,374

Repurchase agreements

​

​

36,657

​

​

25,711

Short-term borrowings

​

​

158,000

​

​

20,000

Subordinated debentures, net

​

​

35,079

​

​

34,945

Other liabilities

​

​

41,922

​

​

35,504

Total liabilities

​

​

2,863,371

​

​

2,284,534

​

​

​

​

​

​

​

Commitments and contingent liabilities (Note 7)

​

​

​

​

​

​

​

​

​

​

​

​

​

Shareholders' equity

​

​

​

​

​

​

Common stock, no par value; 24,000,000 shares authorized; 15,341,723 and 15,284,538 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

​

​

112,645

​

​

113,179

Additional paid-in capital

​

​

3,644

​

​

3,307

Retained earnings

​

​

202,464

​

​

186,867

Accumulated other comprehensive income (loss), net

​

​

17,494

​

​

5,932

Total shareholders' equity

​

​

336,247

​

​

309,285

Total liabilities and shareholders’ equity

​

$

3,199,618

​

$

2,593,819

​

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

​

1

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

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

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Three months ended September 30,

​

​

Nine months ended September 30,

​

    

2020

    

2019

​

2020

​

2019

Interest and dividend income

​

​

​

​

​

​

​

​

​

​

​

​

Loans and leases, including fees

​

$

25,742

​

$

24,118

​

$

69,538

​

$

71,877

Taxable securities

​

​

1,832

​

​

2,484

​

​

6,542

​

​

7,692

Tax-exempt securities

​

​

1,467

​

​

1,160

​

​

4,246

​

​

3,276

Federal funds sold and other

​

​

2

​

​

139

​

​

155

​

​

327

Total interest income

​

​

29,043

​

​

27,901

​

​

80,481

​

​

83,172

Interest expense

​

​

​

​

​

​

​

​

​

​

​

​

Deposits

​

​

641

​

​

2,983

​

​

3,368

​

​

9,031

Short-term borrowings

​

​

70

​

​

90

​

​

145

​

​

188

Subordinated debentures

​

​

258

​

​

453

​

​

965

​

​

1,406

Total interest expense

​

​

969

​

​

3,526

​

​

4,478

​

​

10,625

Net interest income

​

​

28,074

​

​

24,375

​

​

76,003

​

​

72,547

Provision for loan losses

​

​

2,350

​

​

1,350

​

​

6,350

​

​

2,050

Net interest income after provision for loan losses

​

​

25,724

​

​

23,025

​

​

69,653

​

​

70,497

Noninterest income

​

​

​

​

​

​

​

​

​

​

​

​

Service charges on deposits

​

​

2,950

​

​

3,292

​

​

8,752

​

​

9,386

Other income

​

​

4,155

​

​

2,577

​

​

11,360

​

​

8,245

Total noninterest income

​

​

7,105

​

​

5,869

​

​

20,112

​

​

17,631

Other operating expense

​

​

​

​

​

​

​

​

​

​

​

​

Salaries and employee benefits

​

​

9,698

​

​

8,784

​

​

29,136

​

​

27,021

Occupancy and equipment

​

​

2,559

​

​

2,485

​

​

7,390

​

​

7,296

Other

​

​

7,046

​

​

5,819

​

​

18,630

​

​

18,280

Total other operating expense

​

​

19,303

​

​

17,088

​

​

55,156

​

​

52,597

Income before taxes

​

​

13,526

​

​

11,806

​

​

34,609

​

​

35,531

Provision for income taxes

​

​

3,170

​

​

2,854

​

​

8,144

​

​

8,855

Net income

​

$

10,356

​

$

8,952

​

$

26,465

​

$

26,676

​

​

​

​

​

​

​

​

​

​

​

​

​

PER SHARE DATA

​

​

​

​

​

​

​

​

​

​

​

​

Book value

​

$

21.92

​

$

19.85

​

$

21.92

​

$

19.85

Cash dividends

​

$

0.20

​

$

0.19

​

$

0.60

​

$

0.55

Earnings per share basic

​

$

0.68

​

$

0.58

​

$

1.74

​

$

1.74

Earnings per share diluted

​

$

0.68

​

$

0.58

​

$

1.73

​

$

1.73

Average shares outstanding, basic

​

​

15,192,838

​

​

15,318,580

​

​

15,215,167

​

​

15,320,041

Average shares outstanding, diluted

​

​

15,387,309

​

​

15,434,788

​

​

15,422,647

​

​

15,449,340

​

​

​

​

​

​

​

​

​

​

​

​

​

Total shareholders’ equity (in thousands)

​

$

336,247

​

$

303,353

​

$

336,247

​

$

303,353

Shares outstanding

​

​

15,341,723

​

​

15,284,491

​

​

15,341,723

​

​

15,284,491

Dividends paid (in thousands)

​

$

3,039

​

$

2,914

​

$

9,136

​

$

8,427

​

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

​

2

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Three months ended September 30,

​

Nine months ended September 30,

​

    

2020

    

2019

​

2020

​

2019

Net income

​

$

10,356

​

$

8,952

​

$

26,465

​

$

26,676

Other comprehensive income, before tax:

​

​

​

​

​

​

​

​

​

​

​

​

Unrealized gains on securities:

​

​

​

​

​

​

​

​

​

​

​

​

Unrealized holding gain arising during period

​

​

1,867

​

​

2,363

​

​

16,806

​

​

17,855

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

​

​

—

​

​

—

​

​

(390)

​

​

(29)

Other comprehensive income, before tax

​

​

1,867

​

​

2,363

​

​

16,416

​

​

17,826

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

​

​

(552)

​

​

(698)

​

​

(4,854)

​

​

(5,269)

Other comprehensive income

​

​

1,315

​

​

1,665

​

​

11,562

​

​

12,557

Comprehensive income

​

$

11,671

​

$

10,617

​

$

38,027

​

$

39,233

(1)Amounts are included in net gains on investment securities available-for-sale on the Consolidated Statements of Income in noninterest income. Income tax expense associated with the reclassification adjustment for the three months ended September 30, 2020 and 2019 was $0 thousand and $0 thousand respectively. Income tax expense associated with the reclassification adjustment for the nine months ended September 30, 2020 and 2019 was $115 thousand and $8 thousand respectively.

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

​

3

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

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

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Accumulated 

​

​

​

​

​

​

​

​

​

​

Additional

​

​

​

​

Other

​

​

​

​

​

Common Stock

​

 Paid In

​

Retained

​

Comprehensive

​

Shareholders'

​

    

Shares

    

Amount

    

Capital

    

 Earnings

    

(Loss) Income 

    

 Equity

Balance, June 30, 2019

​

15,332,550

​

$

113,061

​

$

3,237

​

$

176,328

​

$

4,226

​

$

296,852

Net income

​

​

​

​

​

​

​

​

​

​

8,952

​

​

​

​

​

8,952

Other comprehensive income, net of tax

​

​

​

​

​

​

​

​

​

​

​

​

​

1,665

​

​

1,665

Exercise of stock options

​

6,520

​

​

76

​

​

(16)

​

​

​

​

​

​

​

​

60

Stock compensation costs

​

​

​

​

​

​

​

112

​

​

​

​

​

​

​

​

112

Stock repurchase

​

(54,579)

​

​

(340)

​

​

​

​

​

(1,034)

​

​

​

​

​

(1,374)

Cash dividends - $0.19 per share

​

​

​

​

​

​

​

​

​

​

(2,914)

​

​

​

​

​

(2,914)

Balance, September 30, 2019

​

15,284,491

​

$

112,797

​

$

3,333

​

$

181,332

​

$

5,891

​

$

303,353

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Balance, June 30, 2020

​

15,192,838

​

$

112,645

​

$

3,462

​

$

195,147

​

$

16,179

​

$

327,433

Net income

​

​

​

​

​

​

​

​

​

​

10,356

​

​

​

​

​

10,356

Other comprehensive income, net of tax

​

​

​

​

​

​

​

​

​

​

​

​

​

1,315

​

​

1,315

Exercise of stock options

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

—

Unvested restricted stock issued

​

148,885

​

​

​

​

​

​

​

​

​

​

​

​

​

​

—

Stock compensation costs

​

​

​

​

​

​

​

182

​

​

​

​

​

​

​

​

182

Cash dividends - $0.20 per share

​

​

​

​

​

​

​

​

​

​

(3,039)

​

​

​

​

​

(3,039)

Balance, September 30, 2020

​

15,341,723

​

$

112,645

​

$

3,644

​

$

202,464

​

$

17,494

​

$

336,247

​

​

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

​

4

Table of Contents

​

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

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

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Accumulated 

​

​

​

​

​

​

​

​

​

​

​

Additional

​

​

​

​

Other

​

​

​

​

​

​

Common Stock

​

 Paid In

​

Retained

​

Comprehensive

​

​

Shareholders'

​

    

Shares

    

Amount

    

Capital

    

 Earnings

    

(Loss) Income 

​

    

 Equity

Balance, December 31, 2018

​

15,300,460

​

$

112,507

​

$

3,066

​

$

164,117

​

$

(6,666)

​

​

$

273,024

Net income

​

—

​

​

—

​

​

—

​

​

26,676

​

​

—

​

​

​

26,676

Other comprehensive income, net of tax

​

—

​

​

—

​

​

—

​

​

—

​

​

12,557

​

​

​

12,557

Exercise of stock options

​

38,610

​

​

630

​

​

(112)

​

​

—

​

​

—

​

​

​

518

Stock based compensation expense

​

—

​

​

—

​

​

379

​

​

—

​

​

—

​

​

​

379

Stock repurchase

​

(54,579)

​

​

(340)

​

​

—

​

​

(1,034)

​

​

—

​

​

​

(1,374)

Cash dividends - $0.55 per share

​

—

​

​

—

​

​

—

​

​

(8,427)

​

​

—

​

​

​

(8,427)

Balance, September 30, 2019

​

15,284,491

​

$

112,797

​

$

3,333

​

$

181,332

​

$

5,891

​

​

$

303,353

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Balance, December 31, 2019

​

15,284,538

​

$

113,179

​

$

3,307

​

$

186,867

​

$

5,932

​

​

$

309,285

Net income

​

—

​

​

—

​

​

—

​

​

26,465

​

​

—

​

​

​

26,465

Other comprehensive income, net of tax

​

—

​

​

—

​

​

—

​

​

—

​

​

11,562

​

​

​

11,562

Exercise of stock options

​

20,350

​

​

295

​

​

(80)

​

​

—

​

​

—

​

​

​

215

Stock based compensation expense

​

148,885

​

​

—

​

​

417

​

​

—

​

​

—

​

​

​

417

Stock repurchase

​

(112,050)

​

​

(829)

​

​

—

​

​

(1,732)

​

​

—

​

​

​

(2,561)

Cash dividends - $0.60 per share

​

—

​

​

—

​

​

—

​

​

(9,136)

​

​

—

​

​

​

(9,136)

Balance, September 30, 2020

​

15,341,723

​

$

112,645

​

$

3,644

​

$

202,464

​

$

17,494

​

​

$

336,247

​

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

​

​

​

​

5

Table of Contents

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

Nine months ended September 30,

​

    

2020

    

2019

Cash flows from operating activities:

​

​

​

​

​

​

Net income

​

$

26,465

​

$

26,676

Gain on sales of securities

​

​

(390)

​

​

(29)

Loss on disposal of fixed assets

​

​

—

​

​

28

Gain on sale on foreclosed assets

​

​

(10)

​

​

(107)

Writedowns on foreclosed assets

​

​

332

​

​

77

Stock based compensation expense

​

​

417

​

​

379

Provision for loan losses

​

​

6,350

​

​

2,050

Depreciation and amortization

​

​

2,276

​

​

2,240

Net amortization on securities premiums and discounts

​

​

3,528

​

​

3,248

Accretion of discounts for loans acquired and net deferred loan fees

​

​

(502)

​

​

(712)

Increase in cash surrender value of life insurance policies

​

​

(1,997)

​

​

(1,617)

Amortization of core deposit intangible

​

​

806

​

​

806

Increase in interest receivable and other assets

​

​

(17,046)

​

​

(7,362)

Increase (decrease) in other liabilities

​

​

6,418

​

​

(1,412)

Deferred income tax benefit

​

​

(275)

​

​

(163)

Increase in value of restricted bank equity securities

​

​

(447)

​

​

(232)

Net amortization of partnership investment

​

​

1,287

​

​

1,648

Net cash provided by operating activities

​

​

27,212

​

​

25,518

​

​

​

​

​

​

​

Cash flows from investing activities:

​

​

​

​

​

​

Maturities and calls of securities available for sale

​

​

9,585

​

​

8,714

Proceeds from sales of securities available for sale

​

​

20,298

​

​

22,181

Purchases of securities available for sale

​

​

(71,065)

​

​

(122,579)

Principal pay downs on securities available for sale

​

​

77,980

​

​

66,864

Net purchases of FHLB stock

​

​

—

​

​

(833)

Loan originations and payments, net

​

​

(614,676)

​

​

(66,017)

Purchases of premises and equipment

​

​

(1,923)

​

​

(632)

Proceeds from sale premises and equipment

​

​

—

​

​

10

Proceeds from sales of foreclosed assets

​

​

238

​

​

7,955

Purchase of bank-owned life insurance

​

​

(196)

​

​

(366)

Liquidation of bank-owned life insurance

​

​

326

​

​

260

Proceeds from BOLI death benefit

​

​

274

​

​

—

Net cash used in investing activities

​

​

(579,159)

​

​

(84,443)

​

​

​

​

​

​

​

Cash flows from financing activities:

​

​

​

​

​

​

Increase in deposits

​

​

423,339

​

​

79,867

Increase (decrease) in borrowed funds

​

​

138,000

​

​

(13,900)

Increase in repurchase agreements

​

​

10,946

​

​

8,798

Cash dividends paid

​

​

(9,136)

​

​

(8,427)

Repurchases of common stock

​

​

(2,561)

​

​

(1,374)

Stock options exercised

​

​

215

​

​

518

Net cash provided by financing activities

​

​

560,803

​

​

65,482

​

​

​

​

​

​

​

Increase in cash and due from banks

​

​

8,856

​

​

6,557

​

​

​

​

​

​

​

Cash and cash equivalents

​

​

​

​

​

​

Beginning of period

​

​

80,077

​

​

74,132

End of period

​

$

88,933

​

$

80,689

​

​

​

​

​

​

​

Supplemental disclosure of cash flow information:

​

​

​

​

​

​

Interest paid

​

$

5,067

​

$

10,671

Income taxes paid

​

$

10,050

​

$

9,000

Supplemental noncash disclosures:

​

​

​

​

​

​

Real estate acquired through foreclosure

​

$

2,563

​

$

27

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

​

$

—

​

$

9,712

Operating lease liability pursuant to adoption of ASU 2016-02

​

$

—

​

$

10,336

​

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

6

Table of Contents

SIERRA BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Note 1 – The Business of Sierra Bancorp

Sierra Bancorp (the “Company”) is a California corporation headquartered in Porterville, California, and is a registered bank holding company under federal banking laws. The Company was formed to serve as the holding company for Bank of the Sierra (the “Bank”), and has been the Bank’s sole shareholder since August 2001. The Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries it may acquire or establish. As of September 30, 2020, the Company’s only other subsidiaries were Sierra Statutory Trust II, Sierra Capital Trust III, and Coast Bancorp Statutory Trust II, which were formed solely to facilitate the issuance of capital trust pass-through securities (“TRUPS”). Pursuant to the Financial Accounting Standards Board (“FASB”) standard on the consolidation of variable interest entities, these trusts are not reflected on a consolidated basis in the Company’s financial statements. References herein to the “Company” include Sierra Bancorp and its consolidated subsidiary, the Bank, unless the context indicates otherwise.

Bank of the Sierra, a California state-chartered bank headquartered in Porterville, California, offers a wide range of retail and commercial banking services via branch offices located throughout California’s South San Joaquin Valley, the Central Coast, Ventura County, the Sacramento area, and neighboring communities. The Bank was incorporated in September 1977, and opened for business in January 1978 as a one-branch bank with $1.5 million in capital. Our growth in the ensuing years has largely been organic in nature, but includes four whole-bank acquisitions: Sierra National Bank in 2000, Santa Clara Valley Bank in 2014, Coast National Bank in 2016, and Ojai Community Bank in October 2017. As of the filing date of this report the Bank operates 40 full service branches and an online branch, and maintains ATMs at all but one of our branch locations as well as seven non-branch locations. Moreover, the Bank has specialized lending units which focus on agricultural borrowers, SBA loans, and mortgage warehouse lending. In addition, the bank opened a loan production office in Rocklin, CA in February 2020. The Company had total assets of $3.2 billion at September 30, 2020, and for a number of years we have claimed the distinction of being the largest bank headquartered in the South San Joaquin Valley. The Bank’s deposit accounts, which totaled $2.6 billion at September 30, 2020, are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to maximum insurable amounts.

Note 2 – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in a condensed format, and therefore do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. The information furnished in these interim statements reflects all adjustments that are, in the opinion of Management, necessary for a fair statement of the results for such periods. Such adjustments can generally be considered as normal and recurring unless otherwise disclosed in this Form 10-Q. In preparing the accompanying financial statements, Management has taken subsequent events into consideration and recognized them where appropriate. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter, or for the full year. Certain amounts reported for 2019 have been reclassified to be consistent with the reporting for 2020. The interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission (the “SEC”).

Note 3 – Current Accounting Developments

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

7

Table of Contents

from existing U.S. GAAP involves the treatment of purchased credit deteriorated assets, which are more broadly defined than purchased credit impaired assets in current accounting standards. When such assets are purchased, institutions will estimate and record an allowance for credit losses that is added to the purchase price rather than being reported as a credit loss expense. Furthermore, ASU 2016-13 updates the measurement of credit losses on available-for-sale debt securities, by mandating that institutions record credit losses on available-for-sale debt securities through an allowance for credit losses rather than the current practice of writing down securities for other-than-temporary impairment. ASU 2016-13 will also require the enhancement of financial statement disclosures regarding estimates used in calculating credit losses. ASU 2016-13 does not change the existing write-off principle in U.S. GAAP or current nonaccrual practices, nor does it change accounting requirements for loans held for sale or certain other financial assets which are measured at the lower of amortized cost or fair value. As a public business entity that is an SEC filer, ASU 2016-13 became effective for the Company on January 1, 2020. On the effective date, institutions will apply the new accounting standard as follows: for financial assets carried at amortized cost, a cumulative-effect adjustment will be recognized on the balance sheet for any change in the related allowance for loan and lease losses generated by the adoption of the new standard; financial assets classified as purchased credit impaired assets prior to the effective date will be reclassified as purchased credit deteriorated assets as of the effective date, and will be grossed up for the related allowance for expected credit losses created as of the effective date; and, debt securities on which other-than-temporary impairment had been recognized prior to the effective date will transition to the new guidance prospectively with no change in their amortized cost basis. The Company adopted ASU 2016-13 on January 1, 2020, however, the Company elected under Section 4014 of the Coronavirus Aid, Relief and Economic Security (CARES) Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. Although this deferral will still require CECL to be implemented as of January 1, 2020, the Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit losses. While the ultimate impact cannot be definitively determined at this time, we believe the provisions of ASU 2016-13 will have a material adverse impact on our consolidated financial statements, particularly the level of our allowance for credit losses and shareholders’ equity.

In January 2017 the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation, and goodwill impairment will simply be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The amendments in this update were effective for public business entities for fiscal years beginning after December 15, 2019. In accordance with ASU 2017-04, the Company performed a qualitative analysis of goodwill during the first nine months of 2020, and determined that a quantitative analysis was not necessary at this time. Thus, we have not been required to record any goodwill impairment to date.

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

8

Table of Contents

reporting entity. The guidance also clarifies that the Level 3 measurement uncertainty disclosure should communicate information about the uncertainty at the balance sheet date. ASU 2018-13 is effective for all entities in fiscal years beginning after December 15, 2019, including interim periods. Early adoption is permitted. In addition, an entity may early adopt any of the removed or modified disclosures immediately and delay adoption of the new disclosures until the effective date. The Company adopted ASU 2018-13 effective January 1, 2020 which impacts the disclosure requirements for fair value measurement.

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

On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act, that passed on March 27, 2020, further provides that a qualified loan modification is exempt by law from classification as a troubled debt restructuring (“TDR”) as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note 10 for further information on non-TDR loan modifications. The Interagency Guidance and Section 4013 are expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.

​

Note 4 – Share Based Compensation

On March 16, 2017 the Company’s Board of Directors approved and adopted the 2017 Stock Incentive Plan (the “2017 Plan”), which became effective May 24, 2017, the date approved by the Company’s shareholders. The 2017 Plan replaced the Company’s 2007 Stock Incentive Plan (the “2007 Plan”), which expired by its own terms on March 15, 2017. Options to purchase 257,789 shares that were granted under the 2007 Plan were still outstanding as of September 30, 2020 and remain unaffected by that plan’s expiration. The 2017 Plan provides for the issuance of both “incentive” and “nonqualified” stock options to officers and employees, and of “nonqualified” stock options to non-employee directors and consultants of the Company. The 2017 Plan also provides for the issuance of restricted stock awards to these same classes of eligible participants. The total number of shares of the Company’s authorized but unissued stock

9

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reserved for issuance pursuant to awards under the 2017 Plan was initially 850,000 shares, and the number remaining available for grant as of September 30, 2020 was 405,915. Options to purchase 290,000 shares granted under the 2017 Plan were outstanding as of September 30, 2020. The potential dilutive impact of unexercised stock options is discussed below in Note 5, Earnings per Share.

Pursuant to FASB’s standards on stock compensation, the value of each stock option and restricted stock award is reflected in our income state­ment as employee compensation or directors’ expense by amortizing its grant date fair value over the vesting period of the option. The Company utilizes a Black-Scholes model to determine grant date fair values, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Forfeitures are recognized as they occur for both types of awards. A pre-tax charge of $0.2 million was reflected in the Company’s income statement during the third quarter of 2020 and $0.1 million was charged during the third quarter of 2019, as expense related to stock options and restricted stock awards. For the first nine months, the charges totaled $0.4 million in 2020 and $0.4 million in 2019.

Restricted Stock Grants

The Company’s Restricted Stock Awards are awards of time-vested, non-transferrable shares of common stock and are available to be granted to the Company’s employees and directors. The vesting period of Restricted Stock Awards is determined at the time the awards are issued, and different awards may have different vesting terms; provided, however, that no installment of any Restricted Stock Award shall become vested less than one year from the grant date. Restricted Stock Awards are valued utilizing the fair value of the Company’s stock at the grant date. During the third quarter of 2020 148,885 shares were granted to employees and directors of the Company. These awards are expensed on a straight-line basis over the vesting period. As of September 30, 2020, there was $2.6 million of unamortized compensation cost related to unvested Restricted Stock Awards granted under the 2017 plan. That cost is expected to be amortized over a weighted average period of 4.3 years.

The Company’s time-vested award activity for the nine months ended September 30, 2020 and 2019 is summarized below:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Nine Months Ended September 30,

​

​

2020

​

2019

​

​

​

​

​

Weighted Averaged

​

​

​

​

Weighted Averaged

​

​

Shares

​

​

Grant-Date Fair Value

​

Shares

​

​

Grant-Date Fair Value

Unnvested shares, January 1,

​

—

​

$

—

​

—

​

$

—

Granted

​

148,885

​

​

18.00

​

—

​

​

—

Vested

​

—

​

​

—

​

—

​

​

—

Forfeited

​

—

​

​

—

​

—

​

​

—

Unvested shares Septermber 30,

​

148,885

​

​

18.00

​

—

​

​

—

​

​

Stock Option Grants

The Company has issued equity instruments in the form of Incentive Stock Options and Nonqualified Stock Options to certain officers and directors and may continue to do so under the 2017 Plan. The exercise price of each stock option is determined at the time of the grant and may be no less than 100% of the fair market value of such stock at the time the option is granted.

​

​

​

​

10

Table of Contents

The Company’s stock option activity during the nine months ended September 30, 2020 and 2019 are summarized below (dollars in thousands, except per share data, unaudited):

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Nine Months Ended September 30,

​

​

2020

​

2019

​

    

Shares

    

Weighted Average
Exercise Price

​

Weighted Average Remaining Contractual Term (in years)

    

Aggregate
Intrinsic
Value (1)

    

Shares

    

Weighted Average
Exercise Price

​

Weighted Average Remaining Contractual Term (in years)

    

Aggregate
Intrinsic
Value (1)

Outstanding at January 1,

​

457,959

​

$

21.08

​

​

​

$

3,684

​

453,020

​

$

18.45

​

​

​

$

3,150

Granted

​

126,000

​

$

27.11

​

​

​

$

—

​

102,000

​

$

26.97

​

​

​

$

—

Exercised

​

(19,770)

​

$

10.87

​

​

​

$

267

​

(38,610)

​

$

13.41

​

​

​

$

498

Canceled

​

(16,400)

​

$

26.93

​

​

​

$

—

​

(8,600)

​

$

26.70

​

​

​

$

6

Outstanding at September 30,

​

547,789

​

$

22.66

​

6.47

​

$

612

​

507,810

​

$

20.40

​

6.15

​

$

3,376

Exercisable at September 30,

​

373,189

​

$

20.68

​

5.31

​

$

612

​

368,010

​

$

18.18

​

5.02

​

$

3,248

(1)The aggregate intrinsic value of stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on September 30, 2020. This amount changes based on changes in the market value of the Company's stock.

​

​

Note 5 – Earnings per Share

The computation of earnings per share, as presented in the Consolidated Statements of Income, is based on the weighted average number of shares outstanding during each period, excluding unvested restricted stock awards. There were 15,192,838 weighted average shares outstanding during the third quarter of 2020 and 15,318,580 during the third quarter of 2019, while there were 15,215,167 weighted average shares outstanding during the first nine months of 2020 and 15,320,041 during the first nine months of 2019.

Diluted earnings per share calculations include the effect of the potential issuance of common shares, which for the Company is limited to shares that would be issued on the exercise of “in-the-money” stock options, and unvested restricted stock awards. For the third quarter of 2020, calculations under the treasury stock method resulted in the equivalent of 45,586 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of 362,407 stock options were excluded from the calculation because they were underwater and thus anti-dilutive. For the third quarter of 2019 the equivalent of 116,208 shares were added in calculating diluted earnings per share, while 261,137 anti-dilutive stock options were not factored into the computation. Likewise, for the first nine months of 2020 the equivalent of 58,595 shares were added to basic weighted average shares outstanding in calculating diluted earnings per share and a weighted average of 344,814 options that were anti-dilutive for the period were not included, compared to the addition of the equivalent of 129,299 shares and non-inclusion of 239,714 anti-dilutive options in calculating diluted earnings per share for first nine months of 2019.

Note 6 – Comprehensive Income

As presented in the Consolidated Statements of Comprehensive Income, comprehensive income includes net income and other comprehensive income. The Company’s only source of other comprehensive income is unrealized gains and losses on available-for-sale investment securities. Investment gains or losses that were realized and reflected in net income of the current period, which had previously been included in other comprehensive income as unrealized holding gains or losses in the period in which they arose, are considered to be reclassification adjustments that are excluded from other comprehensive income in the current period.

Note 7 – Financial Instruments with Off-Balance-Sheet Risk

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business. Those financial instruments currently consist of unused commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by counterparties for commitments to extend credit and letters of

11

Table of Contents

credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and issuing letters of credit as it does for originating loans included on the balance sheet. The following financial instruments represent off-balance-sheet credit risk (dollars in thousands):

​

​

​

​

​

​

​

​

    

September 30, 2020

    

December 31, 2019

Commitments to extend credit

​

$

541,355

​

$

492,040

Standby letters of credit

​

$

8,822

​

$

8,619

​

Commitments to extend credit consist primarily of the unused or unfunded portions of the following: home equity lines of credit; commercial real estate construction loans, where disbursements are made over the course of construction; commercial revolving lines of credit; mortgage warehouse lines of credit; unsecured personal lines of credit; and formalized (disclosed) deposit account overdraft lines. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments are expected to expire without being drawn upon, the unused portions of committed amounts do not necessarily represent future cash requirements. Standby letters of credit are issued by the Company to guarantee the performance of a customer to a third party, and the credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers.

At September 30, 2020, the Company was also utilizing a letter of credit in the amount of $105 million issued by the Federal Home Loan Bank on the Company’s behalf as security for certain deposits and to facilitate certain credit arrangements with the Company’s customers. That letter of credit is backed by loans which are pledged to the FHLB by the Company.

Note 8 – Fair Value Disclosures and Reporting, the Fair Value Option and Fair Value Measurements

FASB’s standards on financial instruments, and on fair value measurements and disclosures, require public business entities to disclose in their financial statement footnotes the estimated fair values of financial instruments. In addition to disclosure requirements, FASB’s standard on investments requires that our debt securities that are classified as available for sale and any equity securities which have readily determinable fair values be measured and reported at fair value in our statement of financial position. Certain impaired loans are also reported at fair value, as explained in greater detail below, and foreclosed assets are carried at the lower of cost or fair value. FASB’s standard on financial instruments permits companies to report certain other financial assets and liabilities at fair value, but we have not elected the fair value option for any of those financial instruments.

Fair value measurement and disclosure standards also establish a framework for measuring fair values. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Further, the standards establish a fair value hierarchy that encourages an entity to maximize the use of observable inputs and limit the use of unobservable inputs when measuring fair values. The standards describe three levels of inputs that may be used to measure fair values:

●Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
●Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
●Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the factors that market participants would likely consider in pricing an asset or liability.

Fair value estimates are made at a specific point in time based on relevant market data and information about the financial instruments. Fair value disclosures for deposits include demand deposits, which are by definition equal to the amount payable on demand at the reporting date. Fair value calculations for loans and leases reflect exit pricing, and incorporate our assumptions with regard to the impact of prepayments on future cash flows and credit quality

12

Table of Contents

adjustments based on risk characteristics of various financial instruments, among other things. Since the estimates are subjective and involve uncertainties and matters of significant judgment they cannot be determined with precision, and changes in assumptions could significantly alter the fair values presented.

Estimated fair values for the Company’s financial instruments are as follows, as of the dates noted:

Fair Value of Financial Instruments

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

September 30, 2020

​

​

​

​

​

Fair Value Measurements

​

    

Carrying
Amount

    

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

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

Financial assets:

​

​

​

​

​

​

Cash and cash equivalents

​

$

88,933

​

$

88,933

​

$

—

​

$

—

​

$

88,933

Investment securities available for sale

​

​

577,278

​

​

—

​

​

577,278

​

​

—

​

​

577,278

Loans and leases, net held for investment

​

​

2,361,557

​

​

—

​

​

—

​

​

2,398,362

​

​

2,398,362

Collateral dependent impaired loans

​

​

79

​

​

—

​

​

79

​

​

—

​

​

79

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Financial liabilities:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Deposits

​

​

2,591,713

​

​

975,750

​

​

1,616,025

​

​

—

​

​

2,591,775

Repurchase agreements

​

​

36,657

​

​

—

​

​

36,657

​

​

—

​

​

36,657

Short term borrowings

​

​

158,000

​

​

—

​

​

157,991

​

​

—

​

​

157,991

Subordinated debentures

​

​

35,079

​

​

—

​

​

24,222

​

​

—

​

​

24,222

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

December 31, 2019

​

​

​

​

​

Fair Value Measurements

​

    

Carrying
Amount

    

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

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

Financial assets:

​

​

​

​

​

​

Cash and cash equivalents

​

$

80,077

​

$

80,076

​

$

—

​

$

—

​

$

80,076

Investment securities available for sale

​

​

600,799

​

​

—

​

​

600,799

​

​

—

​

​

600,799

Loans and leases, net held for investment

​

​

1,753,846

​

​

—

​

​

—

​

​

1,761,461

​

​

1,761,461

Collateral dependent impaired loans

​

​

1,692

​

​

—

​

​

1,692

​

​

—

​

​

1,692

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Financial liabilities:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Deposits

​

​

2,168,374

​

​

690,950

​

​

1,477,497

​

​

—

​

​

2,168,447

Repurchase agreements

​

​

25,711

​

​

—

​

​

25,711

​

​

—

​

​

25,711

Short term borrowings

​

​

20,000

​

​

—

​

​

2,000

​

​

—

​

​

2,000

Subordinated debentures

​

​

34,945

​

​

—

​

​

30,564

​

​

—

​

​

30,564

​

For financial asset categories that were carried on our balance sheet at fair value as of September 30, 2020 and December 31, 2019, the Company used the following methods and significant assumptions:

●Investment securities: Fair values are determined by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities.
●Collateral-dependent impaired loans: Collateral-dependent impaired loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected disposition costs where applicable.

13

Table of Contents

●Foreclosed assets: Repossessed real estate (known as other real estate owned, or “OREO”) and other foreclosed assets are carried at the lower of cost or fair value. Fair value is the appraised value less expected disposition costs for OREO and some other assets such as mobile homes; fair values for any other foreclosed assets are represented by estimated sales proceeds as determined using reasonably available sources. Foreclosed assets for which appraisals can be feasibly obtained are periodically measured for impairment using updated appraisals. Fair values for other foreclosed assets are adjusted as necessary, subsequent to a periodic re-evaluation of expected cash flows and the timing of resolution. If impairment is determined to exist, the book value of a foreclosed asset is immediately written down to its estimated impaired value through the income statement, thus the carrying amount is equal to the fair value and there is no valuation allowance.

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

Fair Value Measurements – Recurring

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Fair Value Measurements at September 30, 2020, using

​

​

​

​

    

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

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

    

Realized
Gain/(Loss)
(Level 3)

Securities:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

U.S. government agencies

​

$

—

​

$

1,856

​

$

—

​

$

1,856

​

$

—

Mortgage-backed securities

​

​

—

​

​

347,207

​

​

—

​

​

347,207

​

​

—

State and political subdivisions

​

​

—

​

​

228,215

​

​

—

​

​

228,215

​

​

—

Total available-for-sale securities

​

$

—

​

$

577,278

​

$

—

​

$

577,278

​

$

—

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Fair Value Measurements at December 31, 2019, using

​

​

​

​

    

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

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

    

Realized
Gain/(Loss)
(Level 3)

Securities:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

U.S. government agencies

​

$

—

​

$

12,145

​

$

—

​

$

12,145

​

$

—

Mortgage-backed securities

​

​

—

​

​

400,389

​

​

—

​

​

400,389

​

​

—

State and political subdivisions

​

​

—

​

​

188,265

​

​

—

​

​

188,265

​

​

—

Total available-for-sale securities

​

$

—

​

$

600,799

​

$

—

​

$

600,799

​

$

—

​

14

Table of Contents

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

Fair Value Measurements – Nonrecurring

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Fair Value Measurements at September 30, 2020, using

​

    

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

    

Significant
Observable Inputs
(Level 2)

    

Significant
Unobservable Inputs
(Level 3)

    

Total

Impaired loans

​

​

​

​

​

​

​

​

​

​

​

​

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

1-4 family residential construction

​

$

—

​

$

—

​

$

—

​

$

—

Other construction/land

​

​

—

​

​

—

​

​

—

​

​

—

1-4 family - closed-end

​

​

—

​

​

—

​

​

—

​

​

—

Equity lines

​

​

—

​

​

—

​

​

—

​

​

—

Multi-family residential

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate - owner occupied

​

​

—

​

​

79

​

​

—

​

​

79

Commercial real estate - non-owner occupied

​

​

—

​

​

—

​

​

—

​

​

—

Farmland

​

​

—

​

​

—

​

​

—

​

​

—

Total real estate

​

​

—

​

​

79

​

​

—

​

​

79

Agricultural

​

​

—

​

​

—

​

​

—

​

​

—

Commercial and industrial

​

​

—

​

​

—

​

​

—

​

​

—

Consumer loans

​

​

—

​

​

—

​

​

—

​

​

—

Total impaired loans

​

$

—

​

$

79

​

$

—

​

$

79

Foreclosed assets

​

$

—

​

$

2,970

​

$

—

​

$

2,970

Total assets measured on a nonrecurring basis

​

$

—

​

$

3,049

​

$

—

​

$

3,049

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Fair Value Measurements at December 31, 2019, using

​

    

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

    

Significant
Observable Inputs
(Level 2)

    

Significant
Unobservable Inputs
(Level 3)

    

Total

Impaired loans

​

​

​

​

​

​

​

​

​

​

​

​

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

1-4 family residential construction

​

$

—

​

$

—

​

$

—

​

$

—

Other construction/land

​

​

—

​

​

—

​

​

—

​

​

—

1-4 family - closed-end

​

​

—

​

​

—

​

​

—

​

​

—

Equity lines

​

​

—

​

​

—

​

​

—

​

​

—

Multi-family residential

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate - owner occupied

​

​

—

​

​

88

​

​

—

​

​

88

Commercial real estate - non-owner occupied

​

​

—

​

​

1,604

​

​

—

​

​

1,604

Farmland

​

​

—

​

​

—

​

​

—

​

​

—

Total real estate

​

​

—

​

​

1,692

​

​

—

​

​

1,692

Agricultural

​

​

—

​

​

—

​

​

—

​

​

—

Commercial and industrial

​

​

—

​

​

—

​

​

—

​

​

—

Consumer loans

​

​

—

​

​

—

​

​

—

​

​

—

Total impaired loans

​

$

—

​

$

1,692

​

$

—

​

$

1,692

Foreclosed assets

​

$

—

​

$

800

​

$

—

​

$

800

Total assets measured on a nonrecurring basis

​

$

—

​

$

2,492

​

$

—

​

$

2,492

​

The table above includes collateral-dependent impaired loan balances for which a specific reserve has been established or on which a write-down has been taken. Information on the Company’s total impaired loan balances and specific loss reserves associated with those balances is included in Note 11 below.

15

Table of Contents

The unobservable inputs are based on Management’s best estimates of appropriate discounts in arriving at fair market value. Adjusting any of those inputs could result in a significantly lower or higher fair value measurement. For example, an increase or decrease in actual loss rates would create a directionally opposite change in the fair value of unsecured impaired loans.

​

Note 9 – Investments

Investment Securities

Although the Company currently has the intent and the ability to hold the securities in its investment portfolio to maturity, the securities are all marketable and are classified as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity management. Pursuant to FASB’s guidance on accounting for debt and equity securities, available for sale securities are carried on the Company’s financial statements at their estimated fair market values, with monthly tax-effected “mark-to-market” adjustments made vis-à-vis accumulated other comprehensive income in shareholders’ equity.

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

Amortized Cost And Estimated Fair Value

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

September 30, 2020

​

    

Amortized
Cost

    

Gross
Unrealized
Gains

    

Gross
Unrealized
Losses

    

Estimated Fair
Value

U.S. government agencies

​

$

1,774

​

$

82

​

$

$—

​

$

1,856

Mortgage-backed securities

​

​

336,248

​

​

11,033

​

​

(74)

​

​

347,207

State and political subdivisions

​

​

214,419

​

​

13,796

​

​

—

​

​

228,215

Total securities

​

$

552,441

​

$

24,911

​

$

(74)

​

$

577,278

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

December 31, 2019

​

    

Amortized
Cost

    

Gross
Unrealized
Gains

    

Gross
Unrealized
Losses

    

Estimated Fair
Value

U.S. government agencies

​

$

12,125

​

$

124

​

$

(104)

​

$

12,145

Mortgage-backed securities

​

​

398,353

​

​

3,354

​

​

(1,318)

​

​

400,389

State and political subdivisions

​

​

181,900

​

​

6,478

​

​

(113)

​

​

188,265

Total securities

​

$

592,378

​

$

9,956

​

$

(1,535)

​

$

600,799

​

16

Table of Contents

At September 30, 2020 and December 31, 2019, the Company had 2 securities and 198 securities, respectively, with gross unrealized losses. Management has evaluated those securities as of the respective dates, and does not believe that any of the unrealized losses are other than temporary. Gross unrealized losses on our investment securities as of the indicated dates are disclosed in the table below, categorized by investment type and by the duration of time that loss positions on individual securities have continuously existed (over or under twelve months).

Investment Portfolio - Unrealized Losses

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

September 30, 2020

​

​

Less than twelve months

​

Twelve months or more

​

    

Gross
Unrealized
Losses

    

Fair Value

    

Gross
Unrealized
Losses

    

Fair Value

U.S. government agencies

​

$

—

​

$

—

​

$

—

​

$

—

Mortgage-backed securities

​

​

(74)

​

​

3,011

​

​

—

​

​

403

State and political subdivisions

​

​

—

​

​

—

​

​

—

​

​

—

Total

​

$

(74)

​

$

3,011

​

$

—

​

$

403

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

December 31, 2019

​

​

Less than twelve months

​

Twelve months or more

​

    

Gross
Unrealized
Losses

    

Fair Value

    

Gross
Unrealized
Losses

    

Fair Value

U.S. government agencies

​

$

(32)

​

$

3,240

​

$

(72)

​

$

2,689

Mortgage-backed securities

​

​

(494)

​

​

100,518

​

​

(824)

​

​

78,538

State and political subdivisions

​

​

(113)

​

​

19,762

​

​

—

​

​

—

Total

​

$

(639)

​

$

123,520

​

$

(896)

​

$

81,227

​

The table below summarizes the Company’s gross realized gains and losses as well as gross proceeds from the sales of securities, for the periods indicated:

Investment Portfolio - Realized Gains/(Losses)

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Three months ended September 30,

​

​

Nine months ended September 30,

​

    

2020

    

2019

​

2020

​

2019

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

​

$

3,390

​

$

4,225

​

$

29,883

​

$

30,895

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

​

​

—

​

​

—

​

​

433

​

​

128

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

​

​

—

​

​

—

​

​

(43)

​

​

(99)

Net gains on sale of securities available for sale

​

$

—

​

$

—

​

$

390

​

$

29

​

17

Table of Contents

The amortized cost and estimated fair value of investment securities available-for-sale at September 30, 2020 and December 31, 2019 are shown below, grouped by the remaining time to contractual maturity dates. The expected life of investment securities may not be consistent with contractual maturity dates, since the issuers of the securities might have the right to call or prepay obligations with or without penalties.

Estimated Fair Value of Contractual Maturities

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

September 30, 2020

​

    

Amortized Cost

    

Fair Value

Maturing within one year

​

$

3,768

​

$

3,806

Maturing after one year through five years

​

​

8,643

​

​

8,918

Maturing after five years through ten years

​

​

28,337

​

​

29,781

Maturing after ten years

​

​

175,445

​

​

187,565

Securities not due at a single maturity date:

​

​

​

​

​

​

Mortgage-backed securities

​

​

170,820

​

​

176,426

Collateralized mortgage obligations

​

​

165,428

​

​

170,782

​

​

$

552,441

​

$

577,278

​

​

​

​

​

​

​

​

​

​

December 31, 2019

​

    

Amortized Cost

    

Fair Value

Maturing within one year

​

$

7,155

​

$

7,244

Maturing after one year through five years

​

​

17,008

​

​

17,171

Maturing after five years through ten years

​

​

33,805

​

​

34,881

Maturing after ten years

​

​

136,057

​

​

141,114

Securities not due at a single maturity date:

​

​

​

​

​

​

Mortgage-backed securities

​

​

189,554

​

​

190,488

Collateralized mortgage obligations

​

​

208,799

​

​

209,901

​

​

$

592,378

​

$

600,799

​

At September 30, 2020, the Company’s investment portfolio included 352 “muni” bonds issued by 298 different government municipalities and agencies located within 29 different states, with an aggregate fair value of $228.2 million. The largest exposure to any single municipality or agency was a combined $4.0 million (fair value) in general obligation bonds issued by the Charter Township of Washington County (MI).

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

18

Table of Contents

The following table summarizes the amortized cost and fair values of general obligation and revenue bonds in the Company’s investment securities portfolio at the indicated dates, identifying the state in which the issuing municipality or agency operates for our largest geographic concentrations:

Revenue and General Obligation Bonds by Location

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

September 30, 2020

​

December 31, 2019

​

​

Amortized

​

Fair Market

​

Amortized

​

Fair Market

General obligation bonds

    

Cost

    

Value

    

Cost

    

Value

State of issuance

​

​

​

​

​

​

​

​

​

​

​

​

Texas

​

$

77,976

​

$

83,305

​

$

59,439

​

$

61,519

California

​

​

30,423

​

​

32,198

​

​

23,882

​

​

25,030

Washington

​

​

23,285

​

​

25,193

​

​

23,392

​

​

24,313

Other (21 & 24 states, respectively)

​

​

52,887

​

​

56,036

​

​

49,326

​

​

50,725

Total general obligation bonds

​

​

184,571

​

​

196,732

​

​

156,039

​

​

161,587

​

​

​

​

​

​

​

​

​

​

​

​

​

Revenue bonds

​

​

​

​

​

​

​

​

​

​

​

​

State of issuance

​

​

​

​

​

​

​

​

​

​

​

​

Texas

​

​

7,038

​

​

7,496

​

​

6,035

​

​

6,298

Washington

​

​

2,252

​

​

2,381

​

​

1,737

​

​

1,856

California

​

​

363

​

​

381

​

​

365

​

​

380

Other (15 & 13 states, respectively)

​

​

20,195

​

​

21,225

​

​

17,724

​

​

18,144

Total revenue bonds

​

​

29,848

​

​

31,483

​

​

25,861

​

​

26,678

Total obligations of states and political subdivisions

​

$

214,419

​

$

228,215

​

$

181,900

​

$

188,265

​

The revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as utilities (water, sewer, and power), educational facilities, and general public and economic improvements. The primary sources of revenue for these bonds are delineated in the table below, which shows the amortized cost and fair market values for the largest revenue concentrations as of the indicated dates.

Revenue Bonds by Type

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

September 30, 2020

​

December 31, 2019

​

​

Amortized

​

Fair Market

​

Amortized

​

Fair Market

Revenue bonds

    

Cost

    

Value

    

Cost

    

Value

Revenue source:

​

​

​

​

​

​

​

​

​

​

​

​

Water

​

$

10,017

​

$

10,536

​

$

7,515

​

$

7,775

Sewer

​

​

4,739

​

​

4,973

​

​

4,760

​

​

4,811

Lease

​

​

4,630

​

​

4,890

​

​

3,596

​

​

3,678

Sales tax

​

​

2,089

​

​

2,179

​

​

1,949

​

​

1,995

College and university

​

​

1,987

​

​

2,054

​

​

1,232

​

​

1,290

Other (8 and 8 sources, respectively)

​

​

6,386

​

​

6,851

​

​

6,809

​

​

7,129

Total revenue bonds

​

$

29,848

​

$

31,483

​

$

25,861

​

$

26,678

​

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

The Company has the ability to invest in limited partnerships which own housing projects that qualify for federal and/or California state tax credits, by mandating a specified percentage of low-income tenants for each project. The primary investment return comes from tax credits that flow through to investors. Because rent levels are lower than standard market rents and the projects are generally highly leveraged, each project also typically generates tax-deductible operating losses that are allocated to the limited partners for tax purposes.

19

Table of Contents

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

As of September 30, 2020, our total LIHTC investment book balance was $3.6 million, which includes $0.2 million in remaining commitments for additional capital contributions. There were $0.4 million in tax credits derived from our LIHTC investments that were recognized during the nine months ended September 30, 2020, and amortization expense of $0.5 million associated with those investments was netted against pre-tax noninterest income for the same time period. The Company also recognized a $0.8 million gain during the same period for the sale of a single fund property that was at the end of its tax credit life. Our LIHTC investments are evaluated annually for potential impairment, and we have concluded that the carrying value of the investments is stated fairly and is not impaired.

Note 10 – Credit Quality and Nonperforming Assets

Credit Quality Classifications

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

●Pass: Larger non-homogeneous loans not meeting the risk rating definitions below, and smaller homogeneous loans that are not assessed on an individual basis.
●Special mention: Loans which have potential issues that deserve the close attention of Management. If left uncorrected, those potential weaknesses could eventually diminish the prospects for full repayment of principal and interest according to the contractual terms of the loan agreement, or could result in deterioration of the Company’s credit position at some future date.
●Substandard: Loans that have at least one clear and well-defined weakness that could jeopardize the ultimate recoverability of all principal and interest, such as a borrower displaying a highly leveraged position, unfavorable financial operating results and/or trends, uncertain repayment sources or an otherwise deteriorated financial condition.
●Impaired: A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include all nonperforming loans and restructured troubled debt (“TDRs”). A TDR may be nonperforming or performing, depending on its accrual status and the demonstrated ability of the borrower to comply with restructured terms (see “Troubled Debt Restructurings” section below for additional information on TDRs).

20

Table of Contents

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

Credit Quality Classifications

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

September 30, 2020

​

    

Pass

    

Special
Mention

    

Substandard

    

Impaired

    

Total

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

1-4 family residential construction

​

$

75,532

​

$

—

​

$

—

​

$

—

​

$

75,532

Other construction/land

​

​

66,032

​

​

17,210

​

​

—

​

​

555

​

​

83,797

1-4 family - closed end

​

​

156,738

​

​

2,055

​

​

414

​

​

2,815

​

​

162,022

Equity lines

​

​

31,615

​

​

2,076

​

​

59

​

​

4,870

​

​

38,620

Multi-family residential

​

​

61,401

​

​

—

​

​

—

​

​

339

​

​

61,740

Commercial real estate - owner occupied

​

​

309,697

​

​

12,753

​

​

2,877

​

​

3,505

​

​

328,832

Commercial real estate - non-owner occupied

​

​

923,469

​

​

14,298

​

​

7,005

​

​

602

​

​

945,374

Farmland

​

​

110,555

​

​

13,771

​

​

3,174

​

​

464

​

​

127,964

Total real estate

​

​

1,735,039

​

​

62,163

​

​

13,529

​

​

13,150

​

​

1,823,881

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Agricultural

​

​

43,529

​

​

409

​

​

1,594

​

​

250

​

​

45,782

Commercial and industrial

​

​

203,120

​

​

11,816

​

​

1,049

​

​

1,239

​

​

217,224

Mortgage warehouse

​

​

287,516

​

​

—

​

​

—

​

​

—

​

​

287,516

Consumer loans

​

​

5,546

​

​

85

​

​

11

​

​

255

​

​

5,897

Total gross loans and leases

​

$

2,274,750

​

$

74,473

​

$

16,183

​

$

14,894

​

$

2,380,300

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

December 31, 2019

​

    

Pass

    

Special
Mention

    

Substandard

    

Impaired

    

Total

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

1-4 family residential construction

​

$

105,979

​

$

—

​

$

—

​

$

—

​

$

105,979

Other construction/land

​

​

90,761

​

​

98

​

​

—

​

​

554

​

​

91,413

1-4 family - closed end

​

​

194,572

​

​

2,425

​

​

164

​

​

3,020

​

​

200,181

Equity lines

​

​

43,111

​

​

1,995

​

​

72

​

​

4,421

​

​

49,599

Multi-family residential

​

​

54,104

​

​

—

​

​

—

​

​

353

​

​

54,457

Commercial real estate - owner occupied

​

​

334,460

​

​

4,005

​

​

3,384

​

​

2,034

​

​

343,883

Commercial real estate - non-owner occupied

​

​

409,289

​

​

1,164

​

​

11

​

​

2,105

​

​

412,569

Farmland

​

​

142,594

​

​

1,048

​

​

132

​

​

259

​

​

144,033

Total real estate

​

​

1,374,870

​

​

10,735

​

​

3,763

​

​

12,746

​

​

1,402,114

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Agricultural

​

​

47,814

​

​

217

​

​

—

​

​

5

​

​

48,036

Commercial and industrial

​

​

100,584

​

​

13,415

​

​

556

​

​

977

​

​

115,532

Mortgage warehouse

​

​

189,103

​

​

—

​

​

—

​

​

—

​

​

189,103

Consumer loans

​

​

7,245

​

​

85

​

​

25

​

​

425

​

​

7,780

Total gross loans and leases

​

$

1,719,616

​

$

24,452

​

$

4,344

​

$

14,153

​

$

1,762,565

​

Past Due and Nonperforming Assets

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets. The Company’s foreclosed assets can include mobile homes and/or OREO, which consists of commercial and/or residential real estate properties acquired by foreclosure or similar means that the Company is offering or will offer for sale. Foreclosed assets totaled $3.0 million at September 30, 2020, and $0.8 million at December 31, 2019. Gross nonperforming loans totaled $7.2 million at September 30, 2020 and $5.7 million at December 31, 2019. Loans and leases are classified as nonperforming when reasonable doubt surfaces with regard to the ability of the Company to collect all principal and interest. At that point, we stop accruing interest on the loan or lease in question and reverse any

21

Table of Contents

previously-recognized interest to the extent that it is uncollected or associated with interest-reserve loans. Any asset for which principal or interest has been in default for 90 days or more is also placed on non-accrual status even if interest is still being received, unless the asset is both well secured and in the process of collection. As of September 30, 2020, there were 314 customers, for a total of $424.0 million, with payment deferrals either under section 4013 of the CARES Act or the April 7, 2020 Interagency Statement. Seven of these loans totaling $2.1 million were downgraded to nonaccrual and are included in nonperforming assets. Approximately $9.0 million in accrued interest has been recognized but not collected on loans with payment deferments at September 30, 2020.

An aging of the Company’s loan balances is presented in the following tables, by number of days past due as of the indicated dates:

Loan Portfolio Aging

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

September 30, 2020

​

    

30-59 Days
Past Due

    

60-89 Days
Past Due

    

90 Days Or
More Past Due(1)

    

Total
Past Due

    

Current

    

Total Financing
Receivables

    

Non-Accrual
Loans(2)

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

1-4 family residential construction

​

$

—

​

$

—

​

$

—

​

$

—

​

$

75,532

​

$

75,532

​

$

—

Other construction/land

​

​

—

​

​

—

​

​

—

​

​

—

​

​

83,797

​

​

83,797

​

​

—

1-4 family - closed end

​

​

—

​

​

—

​

​

150

​

​

150

​

​

161,872

​

​

162,022

​

​

975

Equity lines

​

​

—

​

​

—

​

​

337

​

​

337

​

​

38,283

​

​

38,620

​

​

1,537

Multi-family residential

​

​

241

​

​

—

​

​

—

​

​

241

​

​

61,499

​

​

61,740

​

​

—

Commercial real estate - owner occupied

​

​

—

​

​

—

​

​

—

​

​

—

​

​

328,832

​

​

328,832

​

​

2,364

Commercial real estate - non-owner occupied

​

​

2,736

​

​

—

​

​

152

​

​

2,888

​

​

942,486

​

​

945,374

​

​

602

Farmland

​

​

—

​

​

—

​

​

447

​

​

447

​

​

127,517

​

​

127,964

​

​

464

Total real estate

​

​

2,977

​

​

—

​

​

1,086

​

​

4,063

​

​

1,819,818

​

​

1,823,881

​

​

5,942

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Agricultural

​

​

150

​

​

250

​

​

—

​

​

400

​

​

45,382

​

​

45,782

​

​

250

Commercial and industrial

​

​

4,035

​

​

—

​

​

382

​

​

4,417

​

​

212,807

​

​

217,224

​

​

988

Mortgage warehouse lines

​

​

—

​

​

—

​

​

—

​

​

—

​

​

287,516

​

​

287,516

​

​

—

Consumer

​

​

9

​

​

30

​

​

—

​

​

39

​

​

5,858

​

​

5,897

​

​

6

Total gross loans and leases

​

$

7,171

​

$

280

​

$

1,468

​

$

8,919

​

$

2,371,381

​

$

2,380,300

​

$

7,186

(1)As of September 30, 2020, there were no loans over 90 days past due and still accruing.
(2)Included in total financing receivables

22

Table of Contents

Loan Portfolio Aging

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

December 31, 2019

​

    

30-59 Days
Past Due

    

60-89 Days
Past Due

    

90 Days Or
More Past Due(1)

    

Total
Past Due

    

Current

    

Total Financing
Receivables

    

Non-Accrual
Loans(2)

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

1-4 family residential construction

​

$

—

​

$

—

​

$

—

​

$

—

​

$

105,979

​

$

105,979

​

$

—

Other construction/land

​

​

16

​

​

—

​

​

—

​

​

16

​

​

91,397

​

​

91,413

​

​

31

1-4 family - closed end

​

​

485

​

​

380

​

​

659

​

​

1,524

​

​

198,657

​

​

200,181

​

​

741

Equity lines

​

​

177

​

​

10

​

​

78

​

​

265

​

​

49,334

​

​

49,599

​

​

480

Multi-family residential

​

​

—

​

​

—

​

​

—

​

​

—

​

​

54,457

​

​

54,457

​

​

—

Commercial real estate - owner occupied

​

​

1,552

​

​

—

​

​

88

​

​

1,640

​

​

342,243

​

​

343,883

​

​

1,440

Commercial real estate - non-owner occupied

​

​

500

​

​

—

​

​

1,605

​

​

2,105

​

​

410,464

​

​

412,569

​

​

2,105

Farmland

​

​

—

​

​

—

​

​

—

​

​

—

​

​

144,033

​

​

144,033

​

​

258

Total real estate

​

​

2,730

​

​

390

​

​

2,430

​

​

5,550

​

​

1,396,564

​

​

1,402,114

​

​

5,055

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Agricultural

​

​

—

​

​

—

​

​

—

​

​

—

​

​

48,036

​

​

48,036

​

​

—

Commercial and industrial

​

​

160

​

​

215

​

​

—

​

​

375

​

​

115,157

​

​

115,532

​

​

651

Mortgage warehouse lines

​

​

—

​

​

—

​

​

—

​

​

—

​

​

189,103

​

​

189,103

​

​

—

Consumer

​

​

55

​

​

12

​

​

2

​

​

69

​

​

7,711

​

​

7,780

​

​

31

Total gross loans and leases

​

$

2,945

​

$

617

​

$

2,432

​

$

5,994

​

$

1,756,571

​

$

1,762,565

​

$

5,737

(1)As of December 31, 2019, there were no loans over 90 days past due and still accruing.
(2)Included in total financing receivables

​

Troubled Debt Restructurings

A loan that is modified for a borrower who is experiencing financial difficulty is classified as a troubled debt restructuring (TDR) if the modification constitutes a concession, excluding loan modifications that are COVID-19 related and made in accordance with the interagency guidance and the CARES Act as described in Note 3, above. At September 30, 2020, the Company had a total of $8.6 million in TDRs, including $0.9 million in TDRs that were on non-accrual status. Generally, a non-accrual loan that has been modified as a TDR remains on non-accrual status for a period of at least six months to demonstrate the borrower’s ability to comply with the modified terms. However, performance prior to the modification, or significant events that coincide with the modification, could result in a loan’s return to accrual status after a shorter performance period or even at the time of loan modification. Regardless of the period of time that has elapsed, if the borrower’s ability to meet the revised payment schedule is uncertain then the loan will be kept on non-accrual status.

23

Table of Contents

The Company may agree to different types of concessions when modifying a loan or lease. The tables below summarize TDRs which were modified during the noted periods, by type of concession:

Troubled Debt Restructurings, by Type of Loan Modification

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Three months ended September 30, 2020

​

    

Rate Modification

    

Term
Modification

    

Interest Only Modification

    

Rate & Term Modification

    

Term & Interest Modification

​

Total

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Other construction/land

​

$

—

​

$

—

​

$

—

​

$

—

​

$

—

​

$

—

1-4 family - closed-end

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Equity lines

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Multi-family residential

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate - owner occupied

​

​

—

​

​

569

​

​

—

​

​

—

​

​

—

​

​

569

Farmland

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Total real estate loans

​

​

—

​

​

569

​

​

—

​

​

—

​

​

—

​

​

569

Agricultural

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial and industrial

​

​

—

​

​

17

​

​

—

​

​

—

​

​

—

​

​

17

Consumer loans

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Total

​

$

—

​

$

586

​

$

—

​

$

—

​

$

—

​

$

586

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Three months ended September 30, 2019

​

    

Rate Modification

    

Term
Modification

    

Interest Only
Modification

    

Rate & Term Modification

    

Term & Interest Modification

​

Total

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Other construction/land

​

$

—

​

$

—

​

$

—

​

$

—

​

$

—

​

$

—

1-4 family - closed-end

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Equity lines

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Multi-family residential

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate - owner occupied

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Farmland

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Total real estate loans

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Agricultural

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial and industrial

​

​

—

​

​

233

​

​

—

​

​

—

​

​

—

​

​

233

Consumer loans

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Total

​

$

—

​

$

233

​

$

—

​

$

—

​

$

—

​

$

233

​

​

24

Table of Contents

Troubled Debt Restructurings, by Type of Loan Modification

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Nine months ended September 30, 2020

​

    

Rate Modification

    

Term
Modification

    

Interest Only Modification

    

Rate & Term Modification

    

Term & Interest Modification

​

Total

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

$

​

Other construction/land

​

$

—

​

$

85

​

$

—

​

$

—

​

$

—

​

​

85

1-4 family - closed-end

​

​

—

​

​

1,325

​

​

—

​

​

—

​

​

—

​

​

1,325

Equity lines

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Multi-family residential

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate - owner occupied

​

​

—

​

​

747

​

​

—

​

​

—

​

​

338

​

​

1,085

Farmland

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Total real estate loans

​

​

—

​

​

2,157

​

​

—

​

​

—

​

​

338

​

​

2,495

Agricultural

​

​

—

​

​

—

​

​

—

​

​

—

​

​

​

​

​

—

Commercial and industrial

​

​

—

​

​

45

​

​

—

​

​

—

​

​

—

​

​

45

Consumer loans

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Total

​

$

—

​

$

2,202

​

$

—

​

$

—

​

$

338

​

$

2,540

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Nine months ended September 30, 2019

​

    

Rate Modification

    

Term
Modification

    

Interest Only Modification

    

Rate & Term Modification

    

Term & Interest Modification

​

Total

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Other construction/land

​

$

—

​

$

—

​

$

—

​

$

—

​

$

—

​

$

—

1-4 family - closed-end

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Equity lines

​

​

—

​

​

344

​

​

—

​

​

—

​

​

—

​

​

344

Multi-family residential

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate - owner occupied

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Farmland

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Total real estate loans

​

​

—

​

​

344

​

​

—

​

​

—

​

​

—

​

​

344

Agricultural

​

​

—

​

​

—

​

​

—

​

​

—

​

​

​

​

​

—

Commercial and industrial

​

​

94

​

​

255

​

​

—

​

​

52

​

​

—

​

​

401

Consumer loans

​

​

—

​

​

9

​

​

—

​

​

50

​

​

—

​

​

59

Total

​

$

94

​

$

608

​

$

—

​

$

102

​

$

—

​

$

804

​

25

Table of Contents

Troubled Debt Restructurings

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Three months ended September 30, 2020

​

​

​

​

Pre-
Modification

​

Post-
Modification

​

​

​

​

​

    

Number of
Loans

    

Outstanding
Recorded
Investment

    

Outstanding
Recorded
Investment

    

Reserve
Difference⁽¹⁾

    

Reserve

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Other construction/land

​

0

​

$

—

​

$

—

​

$

—

​

$

—

1-4 family - closed-end

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Equity lines

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Multi-family residential

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate - owner occupied

​

1

​

​

569

​

​

569

​

​

—

​

​

5

Farmland

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Total real estate loans

​

​

​

​

569

​

​

569

​

​

—

​

​

5

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Agricultural

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Commercial and industrial

​

1

​

​

17

​

​

17

​

​

—

​

​

1

Consumer loans

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Total

​

​

​

$

586

​

$

586

​

$

—

​

$

6

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

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Three months ended September 30, 2019

​

​

​

​

Pre-
Modification

​

Post-
Modification

​

​

​

​

​

​

​

    

Number of
Loans

    

Outstanding
Recorded
Investment

    

Outstanding
Recorded
Investment

    

Reserve
Difference⁽¹⁾

    

Reserve

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Other construction/land

​

0

​

$

—

​

$

—

​

$

—

​

$

—

1-4 family - closed-end

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Equity lines

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Multi-family residential

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate - owner occupied

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Farmland

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Total real estate loans

​

​

​

​

—

​

​

—

​

​

—

​

​

—

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Agricultural

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Commercial and industrial

​

3

​

​

233

​

​

233

​

​

(40)

​

​

9

Consumer loans

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Total

​

​

​

$

233

​

$

233

​

$

$(40)

​

$

9

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

​

26

Table of Contents

Troubled Debt Restructurings

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Nine months ended September 30, 2020

​

​

​

​

Pre-
Modification

​

Post-
Modification

​

​

​

​

​

​

​

    

Number of
Loans

    

Outstanding
Recorded
Investment

    

Outstanding
Recorded
Investment

    

Reserve
Difference⁽¹⁾

    

Reserve

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Other construction/land

​

1

​

$

86

​

$

85

​

$

40

​

$

41

1-4 family - closed-end

​

1

​

​

1,325

​

​

1,325

​

​

10

​

​

—

Equity lines

​

0

​

​

`

​

​

—

​

​

—

​

​

—

Multi-family residential

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate - owner occupied

​

3

​

​

1,085

​

​

1,085

​

​

8

​

​

6

Farmland

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Total real estate loans

​

​

​

​

2,496

​

​

2,495

​

​

58

​

​

47

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Agricultural

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Commercial and industrial

​

2

​

​

45

​

​

45

​

​

2

​

​

2

Consumer loans

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Total

​

​

​

$

2,541

​

$

2,540

​

$

60

​

$

49

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

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Nine months ended September 30, 2019

​

​

​

​

Pre-
Modification

​

Post-
Modification

​

​

​

​

​

​

​

    

Number of
Loans

    

Outstanding
Recorded
Investment

    

Outstanding
Recorded
Investment

    

Reserve
Difference⁽¹⁾

    

Reserve

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Other construction/land

​

0

​

$

—

​

$

—

​

$

—

​

$

—

1-4 family - closed-end

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Equity lines

​

2

​

​

344

​

​

344

​

​

—

​

​

1

Multi-family residential

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate - owner occupied

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Farmland

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Total real estate loans

​

​

​

​

344

​

​

344

​

​

—

​

​

1

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Agricultural

​

0

​

​

—

​

​

—

​

​

—

​

​

—

Commercial and industrial

​

7

​

​

401

​

​

401

​

​

(59)

​

​

10

Consumer loans

​

2

​

​

59

​

​

59

​

​

(47)

​

​

2

Total

​

​

​

$

804

​

$

804

​

$

(106)

​

$

13

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

​

The Company had no finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during the nine-month periods ended September 30, 2020 and 2019.

27

Table of Contents

Purchased Credit Impaired Loans

The Company may acquire loans which show evidence of credit deterioration since origination. These purchased credit impaired (“PCI”) loans are recorded at the amount paid, since there is no carryover of the seller’s allowance for loan losses. Potential losses on PCI loans subsequent to acquisition are recognized by an increase in the allowance for loan losses. PCI loans are accounted for individually or are aggregated into pools of loans based on common risk characteristics. The Company projects the amount and timing of expected cash flows, and expected cash receipts in excess of the amount paid for any such loans are recorded as interest income over the remaining life of the loan or pool of loans (accretable yield). The excess of contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Expected cash flows are periodically re-evaluated throughout the life of the loan or pool of loans. If the present value of the expected cash flows is determined at any time to be less than the carrying amount, a reserve is recorded. If the present value of the expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Our acquisition of Santa Clara Valley Bank in 2014 included certain loans which have shown evidence of credit deterioration since origination, and for which it was probable at acquisition that all contractually required payments would not be collected. The carrying amount and unpaid principal balance of those PCI loans was as follows, as of the dates indicated:

Purchased Credit Impaired Loans:

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

September 30, 2020

​

    

Unpaid Principal Balance

    

Carrying Value

Real estate secured

​

$

79

​

$

79

Total purchased credit impaired loans

​

$

79

​

$

79

​

​

​

​

​

​

​

​

​

​

December 31, 2019

​

    

Unpaid Principal Balance

    

Carrying Value

Real estate secured

​

$

88

​

$

—

Total purchased credit impaired loans

​

$

—

​

$

—

​

There was no allowance for loan losses allocated for PCI loans as of September 30, 2020, however, an allowance totaling $0.1 million was allocated for PCI loans as of December 31, 2019. There was no discount accretion recorded on PCI loans during the nine months ended September 30, 2020.

Note 11 – Allowance for Loan and Lease Losses

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

The following tables disclose the unpaid principal balance, recorded investment, average recorded investment, and interest income recognized for impaired loans on our books as of the dates indicated. Balances are shown by loan type, and are further broken out by those that required an allowance and those that did not, with the associated allowance disclosed for those that required such. Included in the valuation allowance for impaired loans shown in the tables below

28

Table of Contents

are specific reserves allocated to TDRs, totaling $0.7 million at September 30, 2020 and $0.6 million at December 31, 2019.

Impaired Loans

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

September 30, 2020

​

    

Unpaid Principal
Balance(1)

    

Recorded
Investment(2)

    

Related
Allowance

    

Average
Recorded
Investment

    

Interest Income
Recognized(3)

With an allowance recorded

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Other construction/land

​

$

555

​

$

555

​

$

170

​

$

571

​

$

32

1-4 family - closed-end

​

​

1,855

​

​

1,855

​

​

50

​

​

1,896

​

​

77

Equity lines

​

​

3,571

​

​

3,518

​

​

307

​

​

3,628

​

​

94

Multi-family residential

​

​

339

​

​

339

​

​

17

​

​

345

​

​

18

Commercial real estate- owner occupied

​

​

1,319

​

​

1,319

​

​

8

​

​

1,333

​

​

27

Commercial real estate- non-owner occupied

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Farmland

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Total real estate

​

​

7,639

​

​

7,586

​

​

552

​

​

7,773

​

​

248

Agricultural

​

​

250

​

​

250

​

​

250

​

​

250

​

​

—

Commercial and industrial

​

​

888

​

​

869

​

​

344

​

​

936

​

​

10

Consumer loans

​

​

294

​

​

255

​

​

88

​

​

280

​

​

17

Subtotal

​

​

9,071

​

​

8,960

​

​

1,234

​

​

9,239

​

​

275

With no related allowance recorded

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Other construction/land

​

​

117

​

​

—

​

​

—

​

​

6

​

​

—

1-4 family - closed-end

​

​

984

​

​

960

​

​

—

​

​

968

​

​

—

Equity lines

​

​

1,377

​

​

1,352

​

​

—

​

​

1,371

​

​

3

Commercial real estate- owner occupied

​

​

2,306

​

​

2,186

​

​

—

​

​

2,261

​

​

—

Commercial real estate- non-owner occupied

​

​

602

​

​

602

​

​

—

​

​

626

​

​

—

Farmland

​

​

464

​

​

464

​

​

—

​

​

466

​

​

—

Total real estate

​

​

5,850

​

​

5,564

​

​

—

​

​

5,698

​

​

3

Agricultural

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial and industrial

​

​

391

​

​

370

​

​

—

​

​

371

​

​

—

Consumer loans

​

​

7

​

​

—

​

​

—

​

​

—

​

​

—

Subtotal

​

​

6,248

​

​

5,934

​

​

—

​

​

6,069

​

​

3

Total

​

$

15,319

​

$

14,894

​

$

1,234

​

$

15,308

​

$

278

(1)Contractual principal balance due from customer.
(2)Principal balance on Company’s books, less any direct charge offs.
(3)Interest income is recognized on performing balances on a regular accrual basis.

29

Table of Contents

Impaired Loans

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

December 31, 2019

​

    

Unpaid Principal
Balance(1)

    

Recorded
Investment(2)

    

Related
Allowance

    

Average
Recorded
Investment

    

Interest Income
Recognized(3)

With an allowance recorded

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Other construction/land

​

$

656

​

$

537

​

$

157

​

$

563

​

$

32

1-4 family - closed-end

​

​

2,298

​

​

2,298

​

​

58

​

​

2,365

​

​

146

Equity lines

​

​

4,173

​

​

4,120

​

​

252

​

​

4,185

​

​

200

Multi-family residential

​

​

353

​

​

353

​

​

17

​

​

361

​

​

23

Commercial real estate- owner occupied

​

​

593

​

​

593

​

​

6

​

​

606

​

​

38

Commercial real estate- non-owner occupied

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Farmland

​

​

237

​

​

237

​

​

3

​

​

256

​

​

—

Total real estate

​

​

8,310

​

​

8,138

​

​

493

​

​

8,336

​

​

439

Agricultural

​

​

5

​

​

5

​

​

1

​

​

6

​

​

—

Commercial and industrial

​

​

915

​

​

896

​

​

219

​

​

1,140

​

​

29

Consumer loans

​

​

464

​

​

425

​

​

114

​

​

469

​

​

35

Subtotal

​

​

9,694

​

​

9,464

​

​

827

​

​

9,951

​

​

503

With no related allowance recorded

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Real estate:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Other construction/land

​

​

52

​

​

17

​

​

—

​

​

577

​

​

4

1-4 family - closed-end

​

​

755

​

​

722

​

​

—

​

​

726

​

​

—

Equity lines

​

​

326

​

​

301

​

​

—

​

​

310

​

​

5

Multi-family residential

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate- owner occupied

​

​

1,560

​

​

1,440

​

​

—

​

​

1,477

​

​

—

Commercial real estate- non-owner occupied

​

​

3,295

​

​

2,105

​

​

—

​

​

3,267

​

​

—

Farmland

​

​

22

​

​

22

​

​

—

​

​

25

​

​

—

Total real estate

​

​

6,010

​

​

4,607

​

​

—

​

​

6,382

​

​

9

Agricultural

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial and industrial

​

​

102

​

​

81

​

​

—

​

​

162

​

​

—

Consumer loans

​

​

9

​

​

—

​

​

—

​

​

140

​

​

15

Subtotal

​

​

6,121

​

​

4,688

​

​

—

​

​

6,684

​

​

24

Total

​

$

15,815

​

$

14,152

​

$

827

​

$

16,635

​

$

527

(1)Contractual principal balance due from customer.
(2)Principal balance on Company’s books, less any direct charge offs.
(3)Interest income is recognized on performing balances on a regular accrual basis.

The specific loss allowance for an impaired loan generally represents the difference between the book value of the loan and either the fair value of underlying collateral less estimated disposition costs, or the loan’s net present value as determined by a discounted cash flow analysis. The discounted cash flow approach is typically used to measure impairment on loans for which it is anticipated that repayment will be provided from cash flows other than those generated solely by the disposition or operation of underlying collateral. However, historical loss rates may be used by the Company to determine a specific loss allowance if those rates indicate a higher potential reserve need than the discounted cash flow analysis. Any change in impairment attributable to the passage of time is accommodated by adjusting the loss allowance accordingly.

For loans where repayment is expected to be provided by the disposition or operation of the underlying collateral, impairment is measured using the fair value of the collateral. If the collateral value, net of the expected costs of disposition, is less than the loan balance, then a specific loss reserve is established for the shortfall in collateral coverage. If the discounted collateral value is greater than or equal to the loan balance, no specific loss reserve is required. At the

30

Table of Contents

time a collateral-dependent loan is designated as nonperforming, a new appraisal is ordered and typically received within 30 to 60 days if a recent appraisal is not already available. We generally use external appraisals to determine the fair value of the underlying collateral for nonperforming real estate loans, although the Company’s licensed staff appraisers may update older appraisals based on current market conditions and property value trends. Until an updated appraisal is received, the Company uses the existing appraisal to determine the amount of the specific loss allowance that may be required. The specific loss allowance is adjusted, as necessary, once a new appraisal is received. Updated appraisals are generally ordered at least annually for collateral-dependent loans that remain impaired, and current appraisals were available or in process for 55% of the Company’s impaired real estate loan balances at September 30, 2020. Furthermore, the Company analyzes collateral-dependent loans on at least a quarterly basis, to determine if any portion of the recorded investment in such loans can be identified as uncollectible and would therefore constitute a confirmed loss. All amounts deemed to be uncollectible are promptly charged off against the Company’s allowance for loan and lease losses, with the loan then carried at the fair value of the collateral, as appraised, less estimated costs of disposition if applicable. Once a charge-off or write-down is recorded, it will not be restored to the loan balance on the Company’s accounting books.

Our methodology also provides for the establishment of a “general” allowance for probable incurred losses inherent in loans and leases that are not impaired. Unimpaired loan balances are segregated by credit quality, and are then evaluated in pools with common characteristics. At the present time, pools are based on the same segmentation of loan types presented in our regulatory filings. While this methodology utilizes historical loss data and other measurable information, the credit classification of loans and the establishment of the allowance for loan and lease losses are both to some extent based on Management’s judgment and experience. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that Management believes is appropriate at each reporting date. Quantitative information includes our historical loss experience, delinquency and charge-off trends, and current collateral values. Qualitative factors include the general economic environment in our markets and, in particular, the condition of the agricultural industry and other key industries. Lending policies and procedures (including underwriting standards), the experience and abilities of lending staff, the quality of loan review, credit concentrations (by geography, loan type, industry and collateral type), the rate of loan portfolio growth, and changes in legal or regulatory requirements are additional factors that are considered. The total general reserve established for probable incurred losses on unimpaired loans was $14.4 million at September 30, 2020.

There were no material changes to the methodology used to determine our allowance for loan and lease losses during the three months ended September 30, 2020, although as outlined in Note 3 to the consolidated financial statements we will substantially update our methodology upon the implementation of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update ASU 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326) when the earlier of the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. Moreover, we will continue to enhance our methodology as needed in order to comply with regulatory and accounting requirements, keep pace with the size and complexity of our loan and lease portfolio, and respond to pressures created by external forces. We engage outside firms on a regular basis to assess our methodology and perform independent credit reviews of our loan and lease portfolio.

31

Table of Contents

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

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Three months ended September 30, 2020

​

​

​

Real Estate

​

​

Agricultural
Products

​

​

Commercial and
Industrial (1)

​

​

Consumer

​

​

Unallocated

​

​

Total

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Allowance for credit losses:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Beginning balance

​

$

8,850

​

$

232

​

$

3,615

​

$

849

​

$

14

​

$

13,560

Charge-offs

​

​

—

​

​

—

​

​

(327)

​

​

(234)

​

​

—

​

​

(561)

Recoveries

​

​

4

​

​

—

​

​

35

​

​

198

​

​

—

​

​

237

Provision

​

​

1,906

​

​

244

​

​

159

​

​

34

​

​

7

​

​

2,350

Ending balance

​

$

10,760

​

$

476

​

$

3,482

​

$

847

​

$

21

​

$

15,586

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Nine months ended September 30, 2020

​

    

Real Estate

    

Agricultural
Products

    

Commercial and
Industrial (1)

    

Consumer

    

Unallocated

    

Total

Allowance for credit losses:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Beginning balance

    

$

5,635

    

$

193

    

$

2,685

    

$

1,278

    

$

132

    

$

9,923

Charge-offs

​

​

—

​

​

—

​

​

(419)

​

​

(1,137)

​

​

—

​

​

(1,556)

Recoveries

​

​

78

​

​

—

​

​

83

​

​

708

​

​

—

​

​

869

Provision

​

​

5,047

​

​

283

​

​

1,133

​

​

(2)

​

​

(111)

​

​

6,350

Ending balance

​

$

10,760

​

$

476

​

$

3,482

​

$

847

​

$

21

​

$

15,586

Reserves:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Specific

​

$

552

​

$

250

​

$

344

​

$

88

​

$

—

​

$

1,234

General

​

​

10,208

​

​

226

​

​

3,138

​

​

759

​

​

21

​

​

14,352

Ending balance

​

$

10,760

​

$

476

​

$

3,482

​

$

847

​

$

21

​

$

15,586

Loans evaluated for impairment:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Individually

​

$

13,150

​

$

250

​

$

1,239

​

$

255

​

$

—

​

$

14,894

Collectively

​

​

1,810,731

​

​

45,532

​

​

503,501

​

​

5,642

​

​

—

​

​

2,365,406

Ending balance

​

$

1,823,881

​

$

45,782

​

$

504,740

​

$

5,897

​

$

—

​

$

2,380,300

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Year ended December 31, 2019

​

    

Real Estate

    

Agricultural
Products

    

Commercial and
Industrial (1)

    

Consumer

    

Unallocated

    

Total

Allowance for credit losses:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Beginning balance

​

$

5,831

​

$

256

​

$

2,394

​

$

1,239

​

$

30

​

$

9,750

Charge-offs

​

​

(1,190)

​

​

—

​

​

(1,274)

​

​

(2,409)

​

​

—

​

​

(4,873)

Recoveries

​

​

647

​

​

—

​

​

690

​

​

1,159

​

​

—

​

​

2,496

Provision

​

​

347

​

​

(63)

​

​

875

​

​

1,289

​

​

102

​

​

2,550

Ending balance

​

$

5,635

​

$

193

​

$

2,685

​

$

1,278

​

$

132

​

$

9,923

Reserves:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Specific

​

$

493

​

$

1

​

$

219

​

$

114

​

$

—

​

$

827

General

​

​

5,142

​

​

192

​

​

2,466

​

​

1,164

​

​

132

​

​

9,096

Ending balance

​

$

5,635

​

$

193

​

$

2,685

​

$

1,278

​

$

132

​

$

9,923

Loans evaluated for impairment:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Individually

​

$

12,746

​

$

5

​

$

977

​

$

425

​

$

—

​

$

14,153

Collectively

​

​

1,389,368

​

​

48,031

​

​

303,658

​

​

7,355

​

​

—

​

​

1,748,412

Ending balance

​

$

1,402,114

​

$

48,036

​

$

304,635

​

$

7,780

​

$

—

​

$

1,762,565

(1)Includes mortgage warehouse lines.

​

32

Table of Contents

Allowance for Credit Losses and Recorded Investment in Financing Receivables

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Three months ended September 30, 2019

​

    

Real Estate

    

Agricultural
Products

    

Commercial and
Industrial (1)

    

Consumer

    

Unallocated

    

Total

Allowance for credit losses:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Beginning balance

​

$

5,969

​

$

201

​

$

2,569

​

$

1,132

​

$

12

​

$

9,883

Charge-offs

​

​

—

​

​

—

​

​

(57)

​

​

(640)

​

​

—

​

​

(697)

Recoveries

​

​

187

​

​

—

​

​

172

​

​

305

​

​

—

​

​

664

Provision

​

​

568

​

​

(10)

​

​

177

​

​

629

​

​

(14)

​

​

1,350

Ending balance

​

$

6,724

​

$

191

​

$

2,861

​

$

1,426

​

$

(2)

​

$

11,200

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Nine months ended September 30, 2019

​

    

Real Estate

    

Agricultural
Products

    

Commercial and
Industrial (1)

    

Consumer

    

Unallocated

    

Total

Allowance for credit losses:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Beginning balance

​

$

5,831

​

$

256

​

$

2,394

​

$

1,239

​

$

30

​

$

9,750

Charge-offs

​

​

—

​

​

—

​

​

(891)

​

​

(1,753)

​

​

—

​

​

(2,644)

Recoveries

​

​

516

​

​

—

​

​

646

​

​

882

​

​

—

​

​

2,044

Provision

​

​

377

​

​

(65)

​

​

712

​

​

1,058

​

​

(32)

​

​

2,050

Ending balance

​

$

6,724

​

$

191

​

$

2,861

​

$

1,426

​

$

(2)

​

$

11,200

Reserves:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Specific

​

$

1,691

​

$

1

​

$

133

​

$

234

​

$

—

​

$

2,059

General

​

​

5,033

​

​

190

​

​

2,728

​

​

1,192

​

​

(2)

​

​

9,141

Ending balance

​

$

6,724

​

$

191

​

$

2,861

​

$

1,426

​

$

(2)

​

$

11,200

Loans evaluated for impairment:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Individually

​

$

14,265

​

$

6

​

$

810

​

$

706

​

$

—

​

$

15,787

Collectively

​

​

1,393,489

​

​

49,099

​

​

331,840

​

​

7,445

​

​

—

​

​

1,781,873

Ending balance

​

$

1,407,754

​

$

49,105

​

$

332,650

​

$

8,151

​

$

—

​

$

1,797,660

(1)Includes mortgage warehouse lines.

​

​

Note 12 – Operating Leases

We lease space under non-cancelable operating leases for 21 branch locations, three off-site ATM locations, one administrative building, one loan production office and a warehouse. Many of our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs). Payments for taxes and insurance as well as non-lease components are not included in the accounting of the lease component, but are separately accounted for in occupancy expense. The Company recognized lease expense of $1.7 million for both nine-month periods ended September 30, 2020 and 2019. Most leases include one or more renewal options available to exercise. The exercise of lease renewal options is typically at the Company’s sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right-of-use assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term. As most of our leases do not provide an implicit rate, we used our incremental borrowing rate in determining the present value of the lease payments.

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the nine months ended September 30, 2020.

At September 30, 2020, the Company’s right-of-use assets and operating lease liabilities were $7.0 million and $7.5 million, respectively. The weighted average remaining lease term for the lease liabilities was 7.0 years, and the weighted average discount rate of remaining payments was 5.5 percent. There were no lease liabilities from new right-of-use assets obtained during the nine months ended September 30, 2020. Cash paid on operating leases was $1.4 million for the nine months ended September 30, 2020.

33

Table of Contents

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

​

​

​

​

​

​

​

​

​

    

September 30, 2020

2020 (1)

    

$

560

2021

​

​

1,983

2022

​

​

1,571

2023

​

​

1,113

2024

​

​

749

Thereafter

​

​

3,196

Total

​

​

9,172

Less: present value discount

​

​

(1,635)

Lease liability (2)

​

$

7,537

(1)Contractual maturities for the three months remaining in 2020.
(2)Lease liability is included in other liabilities.

​

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

​

​

​

​

​

​

​

December 31, 2019

2020

​

$

2,235

2021

​

​

2,023

2022

​

​

1,574

2023

​

​

1,113

2024

​

​

749

Thereafter

​

​

3,196

Total undiscounted lease payments

​

$

10,890

​

​

​

Note 13 – Revenue Recognition.

The Company utilizes the guidance found in ASU 2014-09, Revenue from Contracts with Customers (ASC 606), when accounting for certain noninterest income. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Sufficient information should be provided to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company’s revenue streams that are within the scope of and accounted for under Topic 606 include service charges on deposit accounts, debit card interchange fees, and fees levied for other services the Company provides its customers. The guidance does not apply to revenue associated with financial instruments such as loans and investments, and other noninterest income such as loan servicing fees and earnings on bank-owned life insurance, which are accounted for on an accrual basis under other provisions of GAAP. In total, approximately 32.8% and 30.7% of the Company’s noninterest revenue was outside of the scope of the ASC 606 for the three- and nine-month periods ended September 30, 2020, respectively.

All of the company’s revenue from contracts within the scope of ASC 606 is recognized as noninterest income, except for gains on the sale of OREO which is classified as noninterest expense. The following table presents the Company’s

34

Table of Contents

sources of noninterest income for the three- and nine-month periods ended September 30, 2020 and 2019. Items outside the scope of ASC 606 are noted as such (dollars in thousands, unaudited).

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

For the three months ended September 30,

​

For the nine months ended September 30,

​

    

2020

    

2019

    

2020

    

2019

Noninterest income

​

​

​

​

​

​

​

​

​

​

​

​

Service charges on deposits

​

​

​

​

​

​

​

​

​

​

​

​

Returned item and overdraft fees

    

$

1,160

    

$

1,766

    

$

3,785

    

$

4,990

Other service charges on deposits

​

​

1,790

​

​

1,526

​

​

4,967

​

​

4,396

Debit card interchange income

​

​

1,828

​

​

1,698

​

​

5,183

​

​

4,897

Loss on limited partnerships(1)

​

​

(716)

​

​

(728)

​

​

(1,031)

​

​

(1,628)

Dividends on equity investments(1)

​

​

190

​

​

188

​

​

524

​

​

594

Unrealized gains recognized on equity investments(1)

​

​

—

​

​

—

​

​

447

​

​

232

Net gains on sale of securities(1)

​

​

—

​

​

—

​

​

390

​

​

29

Other(1)

​

​

2,853

​

​

1,419

​

​

5,847

​

​

4,121

Total noninterest income

​

$

7,105

​

$

5,869

​

$

20,112

​

$

17,631

​

​

​

​

​

​

​

​

​

​

​

​

​

Noninterest expense

​

​

​

​

​

​

​

​

​

​

​

​

Salaries and employee benefits (1)

​

$

9,698

​

$

8,784

​

$

29,136

​

$

27,021

Occupancy expense (1)

​

​

2,559

​

​

2,485

​

​

7,390

​

​

7,296

Gain on sale of OREO

​

​

(12)

​

​

(70)

​

​

(10)

​

​

(107)

Other (1)

​

​

7,058

​

​

5,889

​

​

18,640

​

​

18,387

Total noninterest expense

​

$

19,303

​

$

17,088

​

$

55,156

​

$

52,597

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

​

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

​

35

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 2

MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

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

A variety of factors could have a material adverse impact on the Company’s financial condition or results of operations, and should be considered when evaluating the Company’s potential future financial performance. They include, but are not limited to, the risk of unfavorable economic conditions in the Company’s market areas; risks associated with the current national emergency with respect to COVID-19 including the impact that national, state, and local responses, including shelter-at-home orders and limitations on business and personal activity as well as any stimulus or relief efforts, have on customers’ ability to repay loans or to resume normal payments following the end of COVID-19 related deferrals granted by the Bank; the Company’s implementation of CECL; the ability for the Company to serve its customers with modified branch operations as well as social distancing guidelines and mandates under state and local stay-at-home orders; risks associated with fluctuations in interest rates or a sustained low interest rate environment; liquidity risks; increases in nonperforming assets and credit losses that could occur, particularly in times of weak economic conditions or rising interest rates; reductions in the market value of available-for-sale securities that could result if interest rates increase substantially or an issuer has real or perceived financial difficulties; the Company’s ability to attract and retain skilled employees; the Company’s ability to successfully deploy new technology; the success of acquisitions or branch expansion; and risks associated with the multitude of current and prospective laws and regulations to which the Company is and will be subject. Risk factors that could cause actual results to differ materially from results that might be implied by forward-looking statements include the risk factors disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2019 and in Item 1A, herein.

CRITICAL ACCOUNTING POLICIES

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

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

36

Table of Contents

are evaluated on an ongoing basis to ensure that the Company’s financial statements incorporate our most recent expectations with regard to those areas.

OVERVIEW OF THE RESULTS OF OPERATIONS

AND FINANCIAL CONDITION

RESULTS OF OPERATIONS SUMMARY

Third Quarter 2020 compared to Third Quarter 2019

Third quarter 2020 net income was $10.4 million, or $0.68 per diluted share, compared to $9.0 million, or $0.58 per diluted share in the third quarter of 2019. The Company’s annualized return on average equity was 12.34% and annualized return on average assets was 1.34% for the quarter ended September 30, 2020, compared to 11.78% and 1.36%, respectively, for the same quarter in 2019. The primary drivers behind the variance in third quarter net income are as follows:

●The $3.7 million increase in net interest income is due to a $1.1 million increase in interest income due mostly to higher loan volumes partially offset by lower rates and lower interest expense, as well as a $2.6 million decrease in interest expense due to an increase in noninterest bearing deposits and lower rates on the remaining deposits. The provision for loan & lease losses was $1.0 million higher due to the increase in core loan volume and relative uncertainty in the economy.

​

●The $1.2 million favorable increase in noninterest income is due to a $0.8 million gain from the disposal of a low-income housing tax credit fund investment, and a $0.7 million increase in bank-owned life insurance (BOLI) income. These increases were partially offset by a $0.3 million decline in customer service charges.

​

●Noninterest expense increased by $2.2 million, due mostly to a $1.1 million increase in salaries, a $0.4 million increase in foreclosed asset expenses, and a $0.5 million increase in director’s deferred compensation.

​

Nine months ended 2020 compared to nine months ended 2019

Net income for the first nine months of 2020 was $26.5 million, or $1.73 per diluted share, compared to $26.7 million, or $1.73 per diluted share for the first nine months of 2019. The Company’s annualized return on average equity was 10.90% and annualized return on average assets was 1.26% for the nine months ended September 30, 2020, compared to a return on equity of 12.33% and return on assets of 1.40% for the nine months ended September 30, 2019. The primary drivers behind the variance in year-to-date net income are as follows:

●Net interest income was up $3.5 million or 5% due to the increase in volume of interest earning assets and the favorable impact of a 54 basis point decrease in yield on interest bearing liabilities.

​

●The Company’s provision for loan and lease losses was $6.4 million in the first nine months of 2020 relative to $2.1 million for the first nine months of 2019. Organic loan growth specifically non-owner occupied commercial real estate combined with the uncertainties surrounding the economy due to the COVID-19 pandemic, necessitated the $4.3 million increase in the comparative periods,.

​

● Noninterest income increased by $2.5 million, or 14%, due mostly to a $0.4 million increase in BOLI income, a $1.4 million gain from the wrap up of low-income housing tax credit fund investments, a decrease of $0.6 million in low-income housing tax credit fund expenses, an increase of $0.2 million in the valuation gain of restricted equity investments owned by the Company and a $0.4 million gain on the sale of debt securities from the restructuring of the portfolio in the second quarter.

​

●Noninterest expense increased by $2.6 million or 5% due mostly to the same reasons outlined above in the quarterly comparison.

​

​

37

Table of Contents

FINANCIAL CONDITION SUMMARY

September 30, 2020 relative to December 31, 2019

The Company’s assets totaled $3.2 billion at September 30, 2020 relative to $2.6 billion at December 31, 2019. The following provides a summary of key balance sheet changes during the first nine months of 2020:

●The Company’s balance of cash and cash equivalents was up by $8.9 million, or 11% from December 31, 2019, to support fluctuations in month end mortgage warehouse line utilization.
●Securities available-for-sale were $577.3 million at September 30, 2020, a decrease of $23.5 million, or 4% from December 31, 2019. The Company sold approximately $20.3 million in certain debt securities during the first half of 2020 as an effort to restructure the portfolio, selling smaller-balance or variable rate SBA and FNMA bonds, as well as certain municipal securities with potential higher credit risk. Those sales were mostly offset by bond purchases. During the third quarter of 2020 however, regular principal paydowns were generally not replaced to offset organic growth in the commercial real estate loan portfolio.

​

●Year-to-date 2020 loan growth of $611.8 million, or 35%, was highlighted by a $435.7 million increase in non-agricultural real estate loans, as well as a $98.4 million increase in mortgage warehouse lines, and $123.6 million of Paycheck Protection Program (PPP) loans. Foreclosed assets increased $2.2 million, to $3.0 million during the first nine months of 2020. This increase was mostly due to $2.1 million in one commercial real estate credit. The single loan which moved to foreclosed assets during the first nine months of 2020, has a pending sale contract, expected to close in the fourth quarter of 2020.

​

●Deposits increased by $423.3 million, or 20% during 2020. The growth in deposits came primarily from noninterest bearing or low-cost transaction and savings accounts, while higher-cost time deposits decreased.

​

●Short-term borrowings increased by $138.0 million to $158.0 million at September 30, 2020. This increase was due to additional Federal Home Loan Bank (FHLB) overnight borrowings to partially fund loan growth including PPP loans and increased utilization of mortgage warehouse lines at September 30, 2020. Ten million of these FHLB advances were “interest-free”, given to all member banks as part of the FHLB’s “Zero Interest Recovery Advance” program to provide immediate relief to property owners, businesses, and other customers struggling with the financial impacts of the pandemic.

​

●Total shareholders’ equity of $336.2 million at September 30, 2020 reflects an increase of $27.0 million, or 9%, relative to year-end 2019 due to capital from the addition of net income, a $11.6 million favorable swing in accumulated other comprehensive income/loss, stock options exercised, net of $9.1 million in dividends paid and $2.6 million in stock repurchases prior to March 15, 2020.

​

​

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

Overview

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

●On March 3, 2020, the Federal Open Market Committee (FOMC) of the Federal Reserve Board lowered the federal funds rate by 50 basis points in its first emergency move since October 2008.
●On March 4, 2020, the Governor of the state of California declared a state of emergency to help make additional resources available and formalize emergency actions to address COVID-19.

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Table of Contents

●On March 6, 2020, the Federal Financial Institutions Examination Council (FFIEC) issued guidance to financial institutions reminding them to include pandemic planning in business continuity plans.
●Starting on March 9, 2020, the Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and Conference of State Bank Supervisors began issuing various Interagency Guidance Statements to encourage financial institutions to meet the financial needs of customers affected by the Coronavirus.
●On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.
●On March 15, 2020, the FOMC of the Federal Reserve Board lowered the federal funds rate by 100 basis points in its second emergency move in two weeks, this time on a Sunday. In addition, the FOMC announced that it would let banks borrow from the discount window for up to 90 days, reduced the reserve requirement ratios to zero percent, united with five other central banks to ensure dollars are available via swap lines, and increased bond holdings by at least $700 billion.
●Effective March 20, 2020, the state of California ordered the closure of all non-essential workplaces, restricting non-essential travel, and ordering a state-wide shelter-in-place order. This was followed by extensions of these orders in April and many local municipalities in which the Company operates issued orders mandating additional requirements to protect their citizens. Although many counties in California began phased reopening plans, due to recent increases in cases effective July 13, 2020, the Governor ordered that dine-in restaurants, wineries and tasting rooms, movie theaters, family entertainment centers, zoos and museums, and cardrooms immediately close all indoor operations. Effective August 31, 2020, a new simplified, four-tier guideline was implemented for counties to reopen. Counties must remain in a tier for at least three weeks before moving to the next tier.
●On March 22, 2020, the federal financial institution regulatory agencies (the agencies) issued guidance to financial institutions to suspend the requirements to classify certain loan modifications as troubled debt restructurings (TDRs). The guidance was subsequently modified on April 7, 2020 to conform with Section 4013 of the Coronavirus Aid, Relief and Economic Security (CARES) Act. Further interagency guidance for financial institutions was issued in June, August, and September 2020.
●On March 27, 2020, the CARES Act was enacted by Congress and signed into law by the President to address the impact of the COVID-19 on the economy. Among other things, the CARES Act provided banking institutions with the option of deferring the implementation of the Current Expected Credit Loss (“CECL”) accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326) until later in 2020; confirmed that certain loan modifications would not be treated as a TDR; authorized the Small Business Administration to create the Paycheck Protection Program (PPP) which allows banking institutions to offer a certain amount of forgivable loans to primarily assist with funding payroll for small businesses; and provides a temporary reduction to the minimum ratio under the Community Bank Leverage Ratio framework.

Impact of COVID-19 on the Company’s Operations

●The Company has had an $8.4 million increase in classified assets, including $2.1 million in non-accrual loans as a result of COVID-19 due to loans modified under the Interagency Guidance that are either not expected to make all principal and interest payments in a timely manner, or will need further modifications or assistance. Further, we have not experienced any charge-offs as a result of COVID-19. Starting in April 2020, the Company took actions to mitigate the impact on credit losses including permitting short-term payment deferrals to current customers, as well as providing bridge loans and SBA Paycheck Protection Program (PPP) loans. For further information on the principal and interest deferrals, please see the “Nonperforming Assets” section below. However, the uncertainty of national and local economic conditions had a material impact on our

39

Table of Contents

provision for loan and lease losses. The Company elected under Section 4014 of the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. Although this deferral will still require CECL to be implemented as of January 1, 2020, the Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit losses. The most significant unknown factor is how long economic activity will be impacted by COVID-19, and in turn how deeply that will impact the markets in which we operate. Therefore, more time was needed to assess the impact of this economic uncertainty and related actions taken such as the stimulus provisions of the CARES Act on the Company’s allowance for loan and lease losses under the CECL methodology.
●In addition to the expected increase in provision for loan losses, the Company expects that net interest income could be adversely impacted over time given pressure on net interest margin as a result of the FOMC’s emergency rate cuts in March 2020. For example, our net interest margin for the nine months ended September 30, 2020, was 3.97%, compared to a net interest margin of 4.20% for the same period in 2019. New loans booked in 2020 have been at lower rates and although deposit costs have also declined, deposit costs were already low or at their floors prior to these interest rate cuts. Further, the stay-at-home order and record unemployment resulting from the COVID-19 pandemic has reduced consumer spending which has reduced our fee income, primarily from overdraft activity.
●The COVID-19 pandemic has not adversely affected our capital or financial resources as of September 30, 2020. During the first nine months of 2020, total shareholders’ equity increased by $27.0 million, or 9%, to $336.2 million. A large component of this was an $11.6 million increase in accumulated other comprehensive income as a result of increases in the value of our investment portfolio due to lower interest rates. If interest rates rise, this component of equity would be expected to decline. In addition, the Company earned $26.5 million in net income in the first nine months of 2020 and paid dividends of $9.1 million. The Company also declared a twenty cent per share dividend to be paid on November 12, 2020. Although presently not expected, if the Company were to incur significant credit losses as a result of COVID-19’s impact on our customers’ ability to repay loans, capital could be adversely impacted. With respect to liquidity, the Company maintains strong primary and secondary liquidity sources as further described under “Liquidity and Market Risk Management” below.
●While we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet, this could change in future periods. Certain valuation assumptions and judgments continue to change to account for pandemic-related circumstances such as widening credit spreads. However, we do not anticipate any significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP. As of September 30, 2020, our goodwill was not impaired. The Company performed a qualitative assessment of its goodwill at September 30, 2020 and concluded that it was not more likely than not that a goodwill impairment exists. The Company will continue to monitor its goodwill recorded on the balance sheet for potential impairment. In the event that we conclude that all or a portion of our goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. At September 30, 2020, we had goodwill of $27.4 million which represented 8% of total equity.
●The Company continues to serve its customers. Out of our 40 branch locations, four are open with limited lobby hours, while 8 branches have limited lobby hours and a drive-up or walk-up facility. 23 branches are open for drive-up or walk-up only and five branches are currently closed except by appointment. Approximately 75% of our back-office and corporate employees are working remotely and it has not adversely affected our operations. In addition, none of our internal controls have changed or are expected to change as a result of the remote work arrangements other than the use of remote approvals. The Company is prepared to continue operating in this manner until it is safe to begin bringing those working remotely back to our corporate offices and branches.
●To date, the Company did not experience any challenges in implementing its business continuity plans. The Company’s Risk Management team began preparing in late January and early February with ordering of supplies such as hand sanitizer, masks and cleaning supplies, as well as laptops for those who did not have one.

40

Table of Contents

This enabled the Company to immediately communicate and implement plans to continue operations in our banking facilities while enabling those non-customer facing employees to immediately begin working remotely. The Company did not face any material resource constraints in implementing these plans.
●As a financial institution providing essential services, the Company expects continued demand for loans and deposits. As described above, it is expected that certain services may see declines in demand such as debit and credit card interchange given lower consumer spending. While overall net income is expected to decline, it presently is more a function of the interest rate environment than a change in overall demand for loan and deposit products.
●The Company loosened its vacation and sick-time policies to accommodate our employees who were affected by COVID-19. The Company has not had any temporary or permanent reductions in staff as a result of COVID-19.

EARNINGS PERFORMANCE

The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed money. The second is noninterest income, which primarily consists of customer service charges and fees but also comes from non-customer sources such as bank-owned life insurance. The majority of the Company’s noninterest expense is comprised of operating costs that facilitate offering a broad range of banking services to our customers.

NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income increased $3.7 million to $28.1 million, for the third quarter of 2020 over the third quarter of 2019, and increased $3.5 million to $76.0 million for the first nine months of 2020 relative to the same period in 2019. For the third quarter of 2020, growth in average interest-earning assets totaled $452.8 million, or 19%, as compared to the third quarter of 2019. Although the yield on these balances was 56 basis points lower for the same period, the decrease in our cost of interest-bearing liabilities for the same period was 66 basis points resulting in an overall decline in margin of 11 basis points. Net interest income for the comparative year-to-date periods increased $3.5 million as the increase in volume of interest earning assets and favorable change in our deposit mix more than made up for the decrease in margin.

The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities.

The following tables show average balances for significant balance sheet categories and the amount of interest income or interest expense associated with each category for the noted periods. The tables also display calculated yields on each major component of the Company’s investment and loan portfolios, average rates paid on each key segment of the Company’s interest-bearing liabilities, and our net interest margin for the noted periods.

41

Table of Contents

Average Balances and Rates

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

For the three months ended

​

For the three months ended

​

​

September 30, 2020

​

September 30, 2019

Assets

    

Average
Balance (1)

    

Income/
Expense

    

Average
Rate/Yield (2)

    

Average
Balance (1)

    

Income/
Expense

    

Average
Rate/Yield (2)

Investments:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Federal funds sold/due from time

​

$

6,942

​

$

2

​

0.11%

​

$

23,447

    

$

139

​

2.35%

Taxable

​

​

366,046

​

​

1,832

​

1.99%

    

​

426,523

​

​

2,484

​

2.31%

Non-taxable

​

​

227,283

​

​

1,467

​

3.25%

​

​

169,109

​

​

1,160

​

3.44%

Total investments

​

​

600,271

​

​

3,301

​

2.45%

​

​

619,079

​

​

3,783

​

2.62%

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Loans and leases:(3)

​

​

​

    

​

​

​

​

​

​

​

​

​

​

​

​

Real estate

​

​

1,700,241

​

​

20,467

​

4.79%

​

​

1,425,093

​

​

19,858

​

5.53%

Agricultural

​

​

47,733

​

​

435

​

3.63%

​

​

50,394

​

​

753

​

5.93%

Commercial

​

​

226,511

​

​

2,485

​

4.36%

​

​

117,414

​

​

1,461

​

4.94%

Consumer

​

​

6,226

​

​

236

​

15.08%

​

​

8,467

​

​

354

​

16.59%

Mortgage warehouse lines

​

​

262,593

​

​

2,087

​

3.16%

​

​

169,786

​

​

1,646

​

3.85%

Other

​

​

1,868

​

​

32

​

6.82%

​

​

2,458

​

​

46

​

7.42%

Total loans and leases

​

​

2,245,172

​

​

25,742

​

4.56%

​

​

1,773,612

​

​

24,118

​

5.39%

Total interest earning assets (4)

    

​

2,845,443

​

​

29,043

​

4.12%

​

​

2,392,691

​

​

27,901

​

4.68%

Other earning assets

​

​

13,190

​

​

​

​

​

​

​

12,743

​

​

​

​

​

Non-earning assets

​

​

215,819

​

​

​

​

​

​

​

199,447

​

​

​

​

​

Total assets

​

$

3,074,452

​

​

​

​

​

​

$

2,604,881

​

​

​

​

​

Liabilities and shareholders' equity

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Interest bearing deposits:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Demand deposits

​

$

140,634

​

$

75

​

0.21%

​

$

115,971

​

$

87

​

0.30%

NOW

​

​

516,915

​

​

89

​

0.07%

​

​

446,974

​

​

133

​

0.12%

Savings accounts

​

​

354,331

​

​

51

​

0.06%

​

​

290,221

​

​

79

​

0.11%

Money market

​

​

126,567

​

​

28

​

0.09%

​

​

120,196

​

​

53

​

0.17%

Certificates of deposit, under $100,000

​

​

76,000

​

​

65

​

0.34%

​

​

89,711

​

​

276

​

1.22%

Certificates of deposit, $100,000 or more

​

​

352,171

​

​

318

​

0.36%

​

​

409,861

​

​

2,091

​

2.02%

Brokered deposits

​

​

29,696

​

​

15

​

0.20%

​

​

44,946

​

​

264

​

2.33%

Total interest bearing deposits

​

​

1,596,314

​

​

641

​

0.16%

​

​

1,517,880

​

​

2,983

​

0.78%

Borrowed funds:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Federal funds purchased

​

​

1,516

​

​

1

​

0.26%

​

​

79

​

​

—

​

—

Repurchase agreements

​

​

39,268

​

​

40

​

0.41%

​

​

25,104

​

​

26

​

0.41%

Short term borrowings

​

​

66,812

​

​

29

​

0.17%

​

​

11,909

​

​

64

​

2.13%

TRUPS

​

​

35,052

​

​

258

​

2.93%

​

​

34,876

​

​

453

​

5.15%

Total borrowed funds

​

​

142,648

​

​

328

​

0.91%

​

​

71,968

​

​

543

​

2.99%

Total interest bearing liabilities

​

​

1,738,962

​

​

969

​

0.22%

​

​

1,589,848

​

​

3,526

​

0.88%

Demand deposits - noninterest bearing

​

​

958,233

​

​

​

​

​

​

​

668,139

​

​

​

​

​

Other liabilities

​

​

43,521

​

​

​

​

​

​

​

45,488

​

​

​

​

​

Shareholders' equity

​

​

333,736

​

​

​

​

​

​

​

301,406

​

​

​

​

​

Total liabilities and shareholders' equity

​

$

3,074,452

​

​

​

​

​

​

$

2,604,881

​

​

​

​

​

Interest income/interest earning assets

​

​

​

​

​

​

​

4.12%

​

​

​

​

​

​

​

4.68%

Interest expense/interest earning assets

​

​

​

​

​

​

​

0.14%

​

​

​

​

​

​

​

0.59%

Net interest income and margin(5)

​

​

​

​

$

28,074

​

3.98%

​

​

​

​

$

24,375

​

4.09%

(1)Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.
(2)Yields and net interest margin have been computed on a tax equivalent basis utilizing a 21% effective tax rate.
(3)Loans are gross of the allowance for possible loan losses. Loan fees have been included in the calculation of interest income. Net loan fees and loan acquisition FMV amortization were $1,302 thousand and $(137) thousand for the quarters ended September 30, 2020 and 2019, respectively.
(4)Non-accrual loans have been included in total loans for purposes of computing total earning assets.
(5)Net interest margin represents net interest income as a percentage of average interest-earning assets.

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

42

Table of Contents

Average Balances and Rates

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

For the nine months ended

​

​

For the nine months ended

​

​

September 30, 2020

​

​

September 30, 2019

Assets

​

Average
Balance (1)

​

Income/
Expense

​

Average
Rate/Yield (2)

​

Average
Balance (1)

​

Income/
Expense

​

Average
Rate/Yield (2)

Investments:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Federal funds sold/due from time

​

$

32,332

​

$

155

​

0.64%

​

$

17,948

​

$

327

​

2.44%

Taxable

​

​

392,617

​

​

6,542

​

2.22%

​

​

423,668

​

​

7,692

​

2.43%

Non-taxable

​

​

213,294

​

​

4,246

​

3.36%

​

​

153,763

​

​

3,276

​

3.61%

Total investments

​

​

638,243

​

​

10,943

​

2.52%

​

​

595,379

​

​

11,295

​

2.73%

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Loans and leases:(3)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Real estate

​

​

1,524,821

​

​

57,544

​

5.04%

​

​

1,449,603

​

​

60,057

​

5.54%

Agricultural

​

​

48,022

​

​

1,470

​

4.09%

​

​

50,742

​

​

2,326

​

6.13%

Commercial

​

​

168,574

​

​

4,661

​

3.69%

​

​

120,011

​

​

4,575

​

5.10%

Consumer

​

​

6,822

​

​

831

​

16.27%

​

​

8,615

​

​

961

​

14.91%

Mortgage warehouse lines

​

​

204,839

​

​

4,884

​

3.18%

​

​

110,776

​

​

3,812

​

4.60%

Other

​

​

3,302

​

​

148

​

5.99%

​

​

2,995

​

​

146

​

6.52%

Total loans and leases

​

​

1,956,380

​

​

69,538

​

4.75%

​

​

1,742,742

​

​

71,877

​

5.51%

Total interest earning assets (4)

​

​

2,594,623

​

​

80,481

​

4.20%

​

​

2,338,121

​

​

83,172

​

4.81%

Other earning assets

​

​

13,074

​

​

​

​

​

​

​

12,312

​

​

​

​

​

Non-earning assets

​

​

206,816

​

​

​

​

​

​

​

204,480

​

​

​

​

​

Total assets

​

$

2,814,513

​

​

​

​

​

​

$

2,554,913

​

​

​

​

​

Liabilities and shareholders' equity

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Interest bearing deposits:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Demand deposits

​

$

121,246

​

$

209

​

0.23%

​

$

111,808

​

$

248

​

0.30%

NOW

​

​

485,176

​

​

295

​

0.08%

​

​

440,443

​

​

393

​

0.12%

Savings accounts

​

​

326,730

​

​

170

​

0.07%

​

​

289,263

​

​

230

​

0.11%

Money market

​

​

123,149

​

​

101

​

0.11%

​

​

124,090

​

​

136

​

0.15%

Certificates of deposit, under $100,000

​

​

78,239

​

​

270

​

0.46%

​

​

90,103

​

​

843

​

1.25%

Certificates of deposit, $100,000 or more

​

​

365,532

​

​

2,104

​

0.77%

​

​

397,115

​

​

6,308

​

2.12%

Brokered deposits

​

​

30,135

​

​

219

​

0.97%

​

​

47,594

​

​

873

​

2.45%

Total interest bearing deposits

​

​

1,530,207

​

​

3,368

​

0.29%

​

​

1,500,416

​

​

9,031

​

0.80%

Borrowed funds:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Federal funds purchased

​

​

511

​

​

1

​

0

​

​

398

​

​

1

​

0

Repurchase agreements

​

​

33,676

​

​

101

​

0.40%

​

​

21,389

​

​

64

​

0.40%

Short term borrowings

​

​

28,299

​

​

43

​

0.20%

​

​

6,972

​

​

123

​

2.36%

TRUPS

​

​

35,008

​

​

965

​

3.68%

​

​

34,830

​

​

1,406

​

5.40%

Total borrowed funds

​

​

97,494

​

​

1,110

​

1.52%

​

​

63,589

​

​

1,594

​

3.35%

Total interest bearing liabilities

​

​

1,627,701

​

​

4,478

​

0.37%

​

​

1,564,005

​

​

10,625

​

0.91%

Demand deposits - noninterest bearing

​

​

822,882

​

​

​

​

​

​

​

658,784

​

​

​

​

​

Other liabilities

​

​

39,646

​

​

​

​

​

​

​

42,752

​

​

​

​

​

Shareholders' equity

​

​

324,284

​

​

​

​

​

​

​

289,372

​

​

​

​

​

Total liabilities and shareholders' equity

​

$

2,814,513

​

​

​

​

​

​

$

2,554,913

​

​

​

​

​

Interest income/interest earning assets

​

​

​

​

​

​

​

4.20%

​

​

​

​

​

​

​

4.81%

Interest expense/interest earning assets

​

​

​

​

​

​

​

0.23%

​

​

​

​

​

​

​

0.61%

Net interest income and margin(5)

​

​

​

​

$

76,003

​

3.97%

​

​

​

​

$

72,547

​

4.20%

(1)Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.
(2)Yields and net interest margin have been computed on a tax equivalent basis utilizing a 21% effective tax rate.
(3)Loans are gross of the allowance for possible loan losses. Loan fees have been included in the calculation of interest income. Net loan fees and loan acquisition FMV amortization were $942 thousand and $(314) thousand for the nine months ended September 30, 2020 and 2019, respectively.
(4)Non-accrual loans have been included in total loans for purposes of computing total earning assets.
(5)Net interest margin represents net interest income as a percentage of average interest-earning assets.

43

Table of Contents

The Volume and Rate Variances table below sets forth the dollar difference for the comparative periods in interest earned or paid for each major category of interest-earning assets and interest-bearing liabilities, and the amount of such change attributable to fluctuations in average balances (volume) or differences in average interest rates. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates, and rate variances are equal to the change in rates multiplied by prior period average balances. Variances attributable to both rate and volume changes, calculated by multiplying the change in rates by the change in average balances, have been allocated to the rate variance.

Volume & Rate Variances

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Three months ended September 30,

​

Nine months ended September 30,

​

​

2020 over 2019

​

2020 over 2019

​

​

Increase (decrease) due to

​

Increase (decrease) due to

Assets:

    

Volume

    

Rate

    

Net

​

Volume

​

Rate

​

Net

Investments:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Federal funds sold/due from time

    

$

(98)

    

$

(39)

    

$

(137)

​

$

262

​

$

(434)

​

$

(172)

Taxable

​

​

(352)

​

​

(300)

​

​

(652)

​

​

(564)

​

​

(586)

​

​

(1,150)

Non-taxable

​

​

399

​

​

(92)

​

​

307

​

​

1,268

​

​

(298)

​

​

970

Total investments

​

​

(51)

​

​

(431)

​

​

(482)

​

​

966

​

​

(1,318)

​

​

(352)

Loans and leases:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Real estate

​

​

3,834

​

​

(3,225)

​

​

609

​

​

3,116

​

​

(5,629)

​

​

(2,513)

Agricultural

​

​

(40)

​

​

(278)

​

​

(318)

​

​

(125)

​

​

(731)

​

​

(856)

Commercial

​

​

1,358

​

​

(334)

​

​

1,024

​

​

1,851

​

​

(1,765)

​

​

86

Consumer

​

​

(94)

​

​

(24)

​

​

(118)

​

​

(200)

​

​

70

​

​

(130)

Mortgage warehouse

​

​

900

​

​

(459)

​

​

441

​

​

3,237

​

​

(2,165)

​

​

1,072

Other

​

​

(11)

​

​

(3)

​

​

(14)

​

​

15

​

​

(13)

​

​

2

Total loans and leases

​

​

5,947

​

​

(4,323)

​

​

1,624

​

​

7,894

​

​

(10,233)

​

​

(2,339)

Total interest earning assets

​

$

5,896

​

$

(4,754)

​

$

1,142

​

$

8,860

​

$

(11,551)

​

$

(2,691)

Liabilities

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Interest bearing deposits:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Demand deposits

​

$

19

​

​

(31)

​

$

(12)

​

$

21

​

$

(60)

​

$

(39)

NOW

​

​

21

​

​

(65)

​

​

(44)

​

​

40

​

​

(138)

​

​

(98)

Savings accounts

​

​

17

​

​

(45)

​

​

(28)

​

​

30

​

​

(90)

​

​

(60)

Money market

​

​

3

​

​

(28)

​

​

(25)

​

​

(1)

​

​

(34)

​

​

(35)

Certificates of deposit, under $100,000

​

​

(42)

​

​

(169)

​

​

(211)

​

​

(111)

​

​

(462)

​

​

(573)

Certificates of deposit, $100,000 or more

​

​

(294)

​

​

(1,479)

​

​

(1,773)

​

​

(502)

​

​

(3,702)

​

​

(4,204)

Brokered deposits

​

​

(90)

​

​

(159)

​

​

(249)

​

​

(320)

​

​

(334)

​

​

(654)

Total interest bearing deposits

​

​

(366)

​

​

(1,976)

​

​

(2,342)

​

​

(843)

​

​

(4,820)

​

​

(5,663)

Borrowed funds:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Repurchase agreements

​

​

15

​

​

(1)

​

​

14

​

​

37

​

​

—

​

​

37

Short term borrowings

​

​

295

​

​

(330)

​

​

(35)

​

​

376

​

​

(456)

​

​

(80)

TRUPS

​

​

2

​

​

(197)

​

​

(195)

​

​

7

​

​

(448)

​

​

(441)

Total borrowed funds

​

​

312

​

​

(527)

​

​

(215)

​

​

420

​

​

(904)

​

​

(484)

Total interest bearing liabilities

​

​

(54)

​

​

(2,503)

​

​

(2,557)

​

​

(423)

​

​

(5,724)

​

​

(6,147)

Net interest income

​

$

5,950

​

$

(2,251)

​

$

3,699

​

$

9,283

​

$

(5,827)

​

$

3,456

​

The volume variance calculated for the third quarter of 2020 relative to the third quarter of 2019 was a favorable $6.0 million due to higher average balances of interest-earning assets, resulting from organic growth in commercial real estate loans, growth in commercial loans due to our participation in the SBA PPP program and higher utilization of mortgage warehouse lines. Given the low rate environment, loan demand for our mortgage warehouse lines have increased, as demonstrated by the $0.9 million favorable volume variance. There was an unfavorable rate variance of $2.3 million for the comparative quarters, since the weighted average yield on interest-earning assets fell by 56 basis points and the weighted average cost of interest-bearing liabil­ities decreased by 66 basis points. The rate variance was negatively impacted by the following factors: A shift in our earning asset mix into lower-yielding loans and investments; increased

44

Table of Contents

line utilization of mortgage warehouse lines, $123.62 million in low-yielding SBA PPP loans; partially offset by lower costs of time-deposits and other interest-bearing liabilities. The average fees on the SBA PPP loans was approximately 4.0%. These fees, net of loan costs, are being accreted over the stated life of the loan (generally two years), net of loan costs. Our customers with an SBA PPP loan are generally eligible to apply for loan forgiveness after 24 weeks, however there is pending legislation regarding the forgiveness process that could impact loans of less than $150,000. After the 24-week covered period, PPP borrowers have ten months to apply for forgiveness. During this period, payments are not due on the loan. If a loan is forgiven, upon repayment of principal and interest by the SBA, any unaccreted fee income, net of unamortized costs, would be recognized as interest income at such time.

The volume variance calculated for the first nine months of 2020 relative to the first nine months of 2019 reflects a favorable variance of $9.3 million and an unfavorable rate variance of $5.8 million. As with the discussion of the volume and rate variances for the quarter, the same is true for the first nine months. The growth in interest earning assets was offset by the 61 basis point decrease in yield while interest bearing liabilities increased $63.7 million with a 54 basis point drop in cost. The decrease in rate on interest bearing liabilities more than offset the net volume/rate decrease in interest earning assets and resulted in a favorable $3.5 million net volume/rate difference. The Company’s net interest margin for the first nine months of 2020 was 3.97%, as compared to 4.20% in the first nine months of 2019.

The FOMC lowered rates by a total of 150 basis points in March 2020 in two separate emergency actions. These actions have had an unfavorable impact on our net interest margin for the quarter and year to date periods as compared to the same period in 2019, and will most likely have the same unfavorable impact on net interest margin through the end of 2020. At September 30, 2020, approximately 12% of our total portfolio, or $273.7 million, consists of variable rate loans. Of these variable rate loans, approximately $93.9 million have floors that limited the overall reduction in rates in the first nine months. At September 30, 2020, our outstanding fixed rate loans represented 28% of our loan portfolio. The remaining 60% of our loan portfolio at September 30, 2020 consists of adjustable rate loans. However, the majority of these loans (approximately $1.1 billion) will not adjust for at least another 3 years. Approximately $68.8 million of these adjustable rate loans will reprice in the next quarter.

In addition, as described below under Nonperforming Assets, as of September 30, 2020, the Company has modified approximately $405.9 million of loans under either Section 4013 of the CARES Act or the April 7, 2020 Interagency statement that offered some practical expedients for loan modifications. These modifications generally provide for a six-month deferral of both interest and principal. As of September 30, 2020, there is approximately $9.0 million of accrued but uncollected interest related to such modifications. If a portion of this interest is uncollectible, it could be partially or fully written off and could impact interest income recognition in future quarters.

Cash balances were increased on September 30, 2020 in anticipation of mortgage warehouse line utilization. For the quarterly comparisons, average volumes were lower than the same period in 2019 mitigating the unfavorable net volume and rate variance however, for the year to date comparisons the average volume was higher contributing to the unfavorable net volume rate variance since cash balances earned considerably lower yields than other earning assets. It is expected that these balances will return to more normalized levels towards the end 2020 when the normal seasonal volatility reduces the utilization on mortgage warehouse lines.

Overall average investment securities decreased by $2.3 million for the quarter ending September 30, 2020 as compared to September 30, 2019 and by $28.5 million for the first nine months of 2020, as compared to the same period in 2019. Average non-taxable securities increased for both the quarterly and first nine month periods by $58.2 million and $59.5 million respectively. The overall investment portfolio had a tax-equivalent yield of 2.74% at September 30, 2020, with an average life of 4.2 years.

Interest expense was $1.0 million in the third quarter of 2020, a decline of $2.6 million, or 73%, compared to the third quarter of 2019 and was $4.5 million in the first nine months of 2020, a decline of $6.1 million or 58%, compared to the first nine months of 2019. The significant decline in interest expense for both the quarter and the first nine months is attributable to a favorable shift in deposit mix as average total time deposits declined by $86.7 million in the third quarter of 2020 as compared to the same quarter in 2019 and by $60.9 million for the first nine months of 2020 as compared to the same period in 2019. The average cost of interest-bearing deposits declined by 62 basis points, or 79%,

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to 16 basis points for the third quarter of 2020 compared to the third quarter of 2019, and by 51 basis points, or 64% to 29 basis points for the first nine months of 2020 as compared to the same period in 2019.

​

PROVISION FOR LOAN AND LEASE LOSSES

Credit risk is inherent in the business of making loans. The Company sets aside an allowance for loan and lease losses, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for loan and lease losses. The Company recorded a loan loss provision of $2.4 million in the third quarter of 2020 compared to $1.4 million in the third quarter of 2019, and a year-to-date loan loss provision totaling $6.4 million in 2020 as compared to $2.1 million for the comparable period in 2019. As discussed above, the significant increase in the provision for loan and lease losses is primarily due to organic loan growth in non-owner occupied real estate loans and management’s estimate of the impact of increased economic uncertainty with respect to COVID-19 on our customers’ ability to repay loans. There was no increase in the provision for loan and lease losses due to the additional $123.6 million in SBA PPP loans as those loans are guaranteed under a new loan program titled the “Paycheck Protection Program” and carry a full guarantee by the SBA, subject to the financial institution meetings its Bank Secrecy Act obligations and other diligence requirements in making such loans. Management adjusted its qualitative risk factors under our incurred loss model based on information presently available for economic conditions, changes in payment deferral procedures, expected changes in collateral values due to reduced cash flows, and external factors such as government actions. In particular, the uncertainty regarding our customers’ ability to repay loans could be adversely impacted by COVID-19 given higher unemployment rates, requests for payment deferrals, temporary business shut-downs, and reduced consumer and business spending.

The Company was subject to the adoption of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326). However, the Company elected under Section 4014 of the CARES Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020. Although this deferral will still require CECL to be adopted as of January 1, 2020, the Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit losses. There is increased uncertainty on the local, regional, and national economy as a result of local and state stay-at-home orders, as well as relief measures provided at a national, state, and local level. In addition, COVID-19 case rates appear to be increasing throughout the United States, which may trigger a tightening of government restrictions. Further, the Company has taken actions to mitigate the impact on credit losses including permitting short-term payment deferrals to current customers, as well as providing bridge loans and SBA PPP loans. More time is needed to assess the impact of this uncertainty and related actions on the Company’s allowance for loan and lease losses under the CECL methodology. The current estimate is that a one-time adjustment to the allowance will be booked as an adjustment through equity, net of taxes, as previously disclosed in Company’s Form 10-K for the fiscal year ended December 31, 2019, for approximately $12 million. The impact of COVID-19 on the Company’s allowance for loan and leases losses under the CECL methodology in the third quarter and first nine months of 2020 will remain unknown until more information is available with respect to the impact of the economic uncertainty of the impact of COVID-19, net of actions taken to mitigate such impact.

Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance. The Company recorded net charge-offs of $0.3 million in the third quarter of 2020 as compared to net charge-offs of less than $0.1 million in the third quarter of 2019. For the first nine months, net charge-offs were $0.7 million in 2020 and $0.6 million in 2019.

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

The Company’s policies for monitoring the adequacy of the allowance, determining loan balances that should be charged off, and other detailed information with regard to changes in the allowance are discussed in Note 11 to the consolidated financial statements, and below, under “Allowance for Loan and Lease Losses.” The process utilized to establish an

46

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appropriate allowance for loan and lease losses can result in a high degree of variability in the Company’s loan loss provision, and consequently in our net earnings.

NONINTEREST INCOME AND NONINTEREST EXPENSE

The following table provides details on the Company’s noninterest income and noninterest expense for the three and nine month periods ended September 30, 2020 and 2019:

Noninterest Income/Expense

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

For the three months ended September 30,

​

For the nine months ended September 30,

NONINTEREST INCOME:

​

2020

​

% of Total

​

2019

​

% of Total

​

2020

​

% of Total

​

2019

​

% of Total

Service charges on deposit accounts

    

$

2,950

    

41.52%

    

$

3,292

    

56.09%

​

$

8,752

​

43.52%

​

$

9,386

​

53.24%

Other service charges and fees

​

​

2,511

​

35.34%

​

​

2,524

​

43.01%

​

​

7,418

​

36.88%

​

​

7,300

​

41.40%

Net gains on sale of securities available-for-sale

​

​

—

​

—

​

​

—

​

—

​

​

390

​

1.94%

​

​

29

​

0.16%

Bank-owned life insurance

​

​

1,310

​

18.44%

​

​

590

​

10.05%

​

​

1,997

​

9.93%

​

​

1,617

​

9.17%

Other

​

​

334

​

4.70%

​

​

(537)

​

-9.15%

​

​

1,555

​

7.73%

​

​

(701)

​

-3.97%

Total noninterest income

​

$

7,105

​

100.00%

​

$

5,869

​

100.00%

​

$

20,112

​

100.00%

​

$

17,631

​

100.00%

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

​

​

​

​

0.99%

​

​

​

​

0.97%

​

​

​

​

1.04%

​

​

​

​

1.01%

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

OTHER OPERATING EXPENSE:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Salaries and employee benefits

​

$

9,698

​

50.23%

​

$

8,784

​

51.41%

​

$

29,136

​

52.81%

​

$

27,021

​

51.37%

Occupancy costs

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Furniture & equipment

​

​

498

​

2.58%

​

​

472

​

2.76%

​

​

1,581

​

2.87%

​

​

1,687

​

3.21%

Premises

​

​

2,061

​

10.68%

​

​

2,013

​

11.78%

​

​

5,809

​

10.53%

​

​

5,609

​

10.66%

Advertising and marketing costs

​

​

324

​

1.68%

​

​

614

​

3.59%

​

​

1,350

​

2.45%

​

​

1,866

​

3.55%

Data processing costs

​

​

1,177

​

6.10%

​

​

1,092

​

6.39%

​

​

3,365

​

6.10%

​

​

3,450

​

6.56%

Deposit services costs

​

​

2,236

​

11.58%

​

​

2,072

​

12.13%

​

​

6,261

​

11.35%

​

​

5,964

​

11.34%

Loan services costs

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Loan processing

​

​

289

​

1.50%

​

​

122

​

0.71%

​

​

652

​

1.18%

​

​

498

​

0.95%

Foreclosed assets

​

​

355

​

1.84%

​

​

(56)

​

-0.33%

​

​

423

​

0.77%

​

​

5

​

0.01%

Other operating costs

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Telephone & data communications

​

​

485

​

2.51%

​

​

473

​

2.77%

​

​

1,319

​

2.39%

​

​

1,097

​

2.09%

Postage & mail

​

​

90

​

0.47%

​

​

88

​

0.51%

​

​

264

​

0.48%

​

​

364

​

0.69%

Other

​

​

338

​

1.75%

​

​

221

​

1.29%

​

​

1,090

​

1.98%

​

​

1,173

​

2.23%

Professional services costs

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Legal & accounting

​

​

317

​

1.64%

​

​

542

​

3.17%

​

​

1,002

​

1.82%

​

​

1,477

​

2.81%

Acquisition costs

​

​

—

​

—

​

​

—

​

0.00%

​

​

—

​

—

​

​

22

​

0.04%

Other professional service

​

​

1,223

​

6.34%

​

​

545

​

3.19%

​

​

2,171

​

3.94%

​

​

1,920

​

3.65%

Stationery & supply costs

​

​

95

​

0.49%

​

​

82

​

0.48%

​

​

341

​

0.62%

​

​

238

​

0.45%

Sundry & tellers

​

​

117

​

0.61%

​

​

24

​

0.14%

​

​

392

​

0.71%

​

​

206

​

0.39%

Total noninterest expense

​

$

19,303

​

100.00%

​

$

17,088

​

100.00%

​

$

55,156

​

100.00%

​

$

52,597

​

100.00%

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

​

​

​

​

2.70%

​

​

​

​

2.83%

​

​

​

​

2.85%

​

​

​

​

3.01%

Efficiency ratio (2)(3)

​

​

53.74%

​

​

​

​

55.64%

​

​

​

​

56.64%

​

​

​

​

57.51%

​

​

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

​

​

Total noninterest income reflects increases of $1.2 million, or 21%, for the quarterly comparison and $2.5 million, or 14% for the year-to-date comparison. BOLI income increased by $0.7 million as compared to the third quarter of 2019 and increased $0.4 million for the first nine months of 2020 as compared to the same period in 2019. These variances are due mostly to fluctuations in underlying values of assets in the specific account BOLI policies that are designed to have similar assets to those in the deferred compensation plans. Thus, the higher quarterly and year to date values in BOLI policies are offset by higher deferred compensation expense reflected primarily in director fees expense for the first nine months of 2020 compared to 2019. At September 30, 2020, there was $43.0 million in BOLI policies associated with the deferred compensation plans and $9.1 million in separate account BOLI policies. Complementing

47

Table of Contents

the change in BOLI income for the quarterly and year to date comparison was a $0.8 and $1.4 million increase respectively, in other noninterest income due to the wrap up of a low- income housing tax credit fund. We also had a $0.4 million gain in the year to date comparison on the sale of debt securities.

There was a $0.3 million decrease in service charges on deposit accounts mostly from lower returned items and overdraft fees for the quarterly comparison and $0.6 million decrease for the year to date comparison. The Company expects that service charges on deposit accounts could continue to decline for the remainder of the year based on reduced customer activity.

Additionally in the “other” category of noninterest income the Company reflected a $0.2 million increase in the year to date comparison from the valuation of restricted stock held by the Company as required under FASB ASU 2016-01. This stock is related to an equity investment in Pacific Coast Bankers’ Bank and is adjusted when financial information becomes available, generally in the late first quarter of each year. Further, noninterest income includes a valuation adjustment related to investments in low-income housing credit investments. This valuation adjustment was a reduction of income of $0.7 million in the third quarters of 2020 and 2019, and $1.0 million in the first nine months of 2020 compared to $1.6 million in 2019.

Total noninterest expense increased by $2.2 million, or 13%, in the third quarter of 2020 relative to the third quarter of 2019, and by $2.6 million, or 5%, in the first nine months of 2020 as compared to the first nine months of 2019. Noninterest expense dropped to 2.7% of average earning assets in the third quarter of 2020 from 2.83% for the third quarter of 2019 and was 2.85% of average earning assets for the first nine months of 2020 relative to 3.01% for the first nine months of 2019.

Salaries and Benefits were $0.9 million, or 10%, higher in the third quarter of 2020 as compared to the third quarter of 2019 and $2.1 million higher for the first nine months of 2020 compared to the same period in 2019. The reason for this increase is due to several factors, including merit increases for employees due to annual performance evaluations for 2019. These increases were augmented for the quarterly comparison by the impact of deferred salaries related to loan origination costs, which were $0.1 million lower however, they were $0.4 million higher for the first nine months of 2020 as compared to the same period in 2019 offsetting some of the increase. There have not been any permanent or temporary reductions in employees as a result of COVID-19.

Occupancy expenses were roughly the same for the respective comparative periods. Further, other noninterest expense categories as a whole was $1.2 million higher for the third quarter 2020 as compared to the third quarter in 2019 but was $0.4 million higher for the first nine months of 2020 as compared to the same period in 2019.

The variance for the third quarter of 2020 compared to the same period in 2019 was primarily driven by a $0.6 million increase in loan servicing expense, due mostly to write-downs of other real estate owned assets; a $0.5 million increase in professional services; partially offset by a $0.3 million decrease in advertising costs. The $0.5 million change in professional services includes a $0.2 million increase in FDIC assessments due to the Small Bank Assessment credits applied against FDIC deposit insurance costs in the comparative quarter for 2019, a $0.5 million increase in deferred compensation expense for directors, which is linked to the changes in BOLI income, and a $0.2 million reduction in consulting costs. The Company continues to actively consider a variety of operational efficiency opportunities. For the first nine months of 2020, the $0.4 million increase in other noninterest expense was driven by a $0.6 million increase in loan services costs (mostly in foreclosed assets), a $0.3 million increase in deposit services costs, a $0.2 million increase in sundry losses, partially offset by a $0.5 million decrease in advertising costs and a $0.2 million decrease in professional services expense.

The Company’s tax-equivalent efficiency ratio was 53.74% in the third quarter 2020 as compared to 55.64% in the same quarter of 2019, and 56.64% for the first nine months of 2020 and 57.51% for the comparative period in 2019. The efficiency ratio represents total noninterest expense divided by the sum of fully tax-equivalent net interest and noninterest income; the provision for loan losses and investment gains/losses are excluded from the equation. Given the expected decline in net interest income due to the lower rate environment in 2020, it is expected that the efficiency ratio could increase in the remaining months of 2020.

48

Table of Contents

PROVISION FOR INCOME TAXES

The Company sets aside a provision for income taxes on a monthly basis. The amount of that provision is deter­mined by first applying the Company’s statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent dif­ferences, and then subtracting available tax credits. Permanent differences include but are not limited to tax-exempt interest income, BOLI income, and certain book expenses that are not allowed as tax deductions. Our tax credits consist primarily of those generated by investments in low-income housing tax credit funds. The Company’s provision for income taxes was 23.4% of pre-tax income in the third quarter of 2020 relative to 24.2% in the third quarter of 2019, and 23.5% of pre-tax income for the first nine months of 2020 relative to 24.9% for the same period in 2019. The decrease for the 2020 quarterly comparison is due primarily to an increase in partially tax exempt municipal bond interest and tax exempt BOLI income. The comparison for the first nine months of 2020 as compared to the same period in 2019 was positively impacted for the same reasons as the quarterly comparison.

​

BALANCE SHEET ANALYSIS

EARNING ASSETS

The Company’s interest-earning assets are comprised of investments and loans, and the composition, growth characteristics, and credit quality of both of those components are significant determinants of the Company’s financial condition. Investments are analyzed in the section immediately below, while the loan and lease portfolio and other factors affecting earning assets are discussed in the sections following investments.

INVESTMENTS

The Company’s investments may at any given time consist of debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits of other banks, surplus interest-earning balances in our Federal Reserve Bank account, and overnight fed funds sold. The Company’s investments can serve several purposes, including the following: 1) they can provide liquidity for potential funding needs; 2) they provide a source of pledged assets for securing public deposits, bankruptcy deposits and certain borrowed funds which require collateral; 3) they constitute a large base of assets with structural characteristics that can be changed more readily than loan or deposit portfolios, as might be required for interest rate risk management purposes; 4) they are another interest-earning option for the placement of surplus funds when loan demand is light; and 5) they can provide partially tax exempt income. Surplus balances in our Federal Reserve Bank account and fed funds sold to correspondent banks typically represent the temporary investment of excess liquidity. Aggregate investments totaled $581.9 million, or 18% of total assets at September 30, 2020, and $615.3 million, or 24% of total assets at December 31, 2019.

The Company carries investments at their fair market values. We currently have the intent and ability to hold our investment securities to maturity, but the securities are all marketable and are classified as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity management. The expected average life for bonds in our investment portfolio was 4.2 years and their average effective duration was 2.5 years at September 30, 2020, down from an expected average life of 4.4 years and an average effective duration of 3.2 years at year-end 2019.

49

Table of Contents

The following table sets forth the amortized cost and fair market value of Company’s investment portfolio by investment type as of the dates noted:

Investment Portfolio

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

September 30, 2020

​

December 31, 2019

​

​

Amortized

​

Fair Market

​

Amortized

​

Fair Market

​

    

Cost

    

Value

    

Cost

    

Value

Available for Sale

​

​

​

​

​

​

​

​

​

​

​

​

U.S. government agencies

    

$

1,774

    

$

1,856

    

$

12,125

    

$

12,145

Mortgage-backed securities

​

​

336,248

​

​

347,207

​

​

398,353

​

​

400,389

State and political subdivisions

​

​

214,419

​

​

228,215

​

​

181,900

​

​

188,265

Total securities

​

$

552,441

​

$

577,278

​

$

592,378

​

$

600,799

​

The net unrealized gain on our investment portfolio, or the amount by which aggregate fair market values exceeded amortized cost, was $24.8 million at September 30, 2020, a $16.4 million increase relative to the net unrealized gain of $8.4 million at December 31, 2019. The change was caused by declining long-term market interest rates on fixed-rate bond values. Municipal bond balances comprise 40% of our total securities portfolio at September 30, 2020, as compared to 31% at December 31, 2019. Municipal bonds purchased have strong underlying ratings, and we review all municipal bonds in our portfolio every quarter for potential impairment.

Investment securities that were pledged as collateral for borrowings and/or potential borrowings from the Federal Home Loan Bank and the Federal Reserve Bank, repurchase agreements, and other purposes as required or permitted by law totaled $238.2 million at September 30, 2020 and $234.8 million at December 31, 2019, leaving $339.1 million in unpledged debt securities at September 30, 2020 and $366.0 million at December 31, 2019. Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled $61.7 million at September 30, 2020 and $71.0 million at December 31, 2019.

LOAN AND LEASE PORTFOLIO

Gross loans and leases reflect a net increase of $617.7 million, or 35%, growing to $2.380 billion at September 30, 2020 from $1.763 billion at December 31, 2019 due to organic growth in non-owner occupied commercial real estate loans, an increase in commercial and industrial loans from our participation in the SBA PPP program and an increase in outstanding balances on mortgage warehouse lines.

A distribution of the Company’s loans showing the balance and percentage of loans by type is presented for the noted periods in the table below. The balances in the table are before deferred or unamortized loan origination, extension, or commitment fees, and deferred origination costs. While not reflected in the loan totals and not currently comprising a material segment of our lending activities, the Company also occasionally originates and sells, or participates out portions of, loans to non-affiliated investors.

50

Table of Contents

Loan and Lease Distribution

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

    

September 30, 2020

    

December 31, 2019

Real estate:

​

​

​

​

​

​

1-4 family residential construction

​

$

75,532

​

$

105,979

Other construction/land

​

​

83,797

​

​

91,413

1-4 family - closed-end

​

​

162,022

​

​

200,181

Equity lines

​

​

38,620

​

​

49,599

Multi-family residential

​

​

61,740

​

​

54,457

Commercial real estate - owner occupied

​

​

328,832

​

​

343,883

Commercial real estate - non-owner occupied

​

​

945,374

​

​

412,569

Farmland

​

​

127,964

​

​

144,033

Total real estate

​

​

1,823,881

​

​

1,402,114

Agricultural

​

​

45,782

​

​

48,036

Commercial and industrial

​

​

217,224

​

​

115,532

Mortgage warehouse lines

​

​

287,516

​

​

189,103

Consumer loans

​

​

5,897

​

​

7,780

Total loans and leases

​

$

2,380,300

​

$

1,762,565

Percentage of Total Loans and Leases

​

​

​

​

​

​

Real estate:

​

​

​

​

​

​

1-4 family residential construction

​

​

3.17%

    

​

6.01%

Other construction/land

​

​

3.52%

​

​

5.19%

1-4 family - closed-end

​

​

6.81%

​

​

11.36%

Equity lines

​

​

1.62%

​

​

2.81%

Multi-family residential

​

​

2.59%

​

​

3.09%

Commercial real estate - owner occupied

​

​

13.81%

​

​

19.51%

Commercial real estate - non-owner occupied

​

​

39.72%

​

​

23.41%

Farmland

​

​

5.38%

​

​

8.17%

Total real estate

​

​

76.62%

​

​

79.55%

Agricultural

​

​

1.92%

​

​

2.73%

Commercial and industrial

​

​

9.13%

​

​

6.55%

Mortgage warehouse lines

​

​

12.08%

​

​

10.73%

Consumer loans

​

​

0.25%

​

​

0.44%

Total loans and leases

​

​

100.00%

​

​

100.00%

​

For the first nine months of 2020, gross loans were up by $617.7 million, or 35%, including increases of $98.4 million in mortgage warehouse lines, $437.8 million increase in non-agricultural real estate loans, and a $101.7 million increase in commercial and industrial loans. Mortgage warehouse loan balances increased due to market factors favorably impacting line utilization due to both mortgage originations and refinancing activity. Mortgage warehouse utilization was 61.4% at September 30, 2020, as compared to 58.7% at December 31, 2019. Future utilization of the mortgage warehouse lines could be impacted if the economic impacts of the COVID-19 pandemic reduce the demand for mortgages.

Non-agricultural real estate loan balances increased due to deliberate and concentrated efforts of our Northern and Southern market loan production teams. The growth in these markets was mostly due to commercial real estate and was the primary driver of our $532.8 million increase in non-owner occupied commercial real estate loans.

Residential real estate loans have been declining since the Company made the deliberate decision to discontinue such lending at the end of 2018, thus maturing balances and prepayments are no longer being replaced.

At September 30, 2020 the Bank’s regulatory credit concentration of commercial real estate loans (CRE), as defined in the Interagency Guidance dated, December 12, 2006, was 364%. Management employs heightened risk management practices with respect to CRE lending, including board and management oversight, strategic planning, development and

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underwriting standards, risk assessment and monitoring through market analysis, and stress testing. At September 30, 2020 we have concluded that we have an acceptable and well-managed concentration in CRE lending under the foregoing standards, however, given the current level of CRE we are actively monitoring this segment of the loan portfolio.

The 88.0% increase in Commercial and Industrial loans from $115.5 million at December 31, 2019 to $217.2 million was primarily driven by the Company’s participation in the Small Business Administration’s PPP as authorized by the CARES Act. The Company began accepting and funding loans under this program in April 2020. As of September 30, 2020, the Company obtained approval from the Small Business Administration and has funded PPP loans for approximately 1,334 customers totaling $123.6 million.

The recent growth in loans, in particular, non-owner occupied commercial real estate loans was accomplished without relaxing any of the Company’s credit standards that had been tightened after the great recession. Instead, the growth came by diversifying geography with new loan teams announced in the first quarter 2020 in our Northern and Southern California markets. Those loan teams have maintained these enhanced underwriting standards through the pandemic and have not compromised credit quality when sourcing new loans. However, no assurance can be given as to how these loans will perform over their lifetime.

NONPERFORMING ASSETS

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, in addition to foreclosed assets which can include mobile homes and OREO. If the Company grants a concession to a borrower in financial difficulty, the loan falls into the category of a TDR, unless the modification was granted under section 4016 of the CARES Act or the April 7, 2020 Interagency Statement. TDRs may be classified as either nonperforming or performing loans depending on their underlying characteristics and circumstances. The following table presents comparative data for the Company’s nonperforming assets and performing TDRs as of the dates noted:

Nonperforming assets and performing troubled debt restructurings

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

    

September 30, 2020

    

December 31, 2019

    

September 30, 2019

NON-ACCRUAL LOANS:

​

​

​

​

​

​

​

​

​

Real estate:

​

​

​

​

​

​

​

​

​

Other construction/land

​

$

—

​

$

31

​

$

37

1-4 family - closed-end

​

​

975

​

​

741

​

​

1,445

Equity lines

​

​

1,537

​

​

480

​

​

457

Commercial real estate - owner occupied

​

​

2,364

​

​

1,440

​

​

1,449

Commercial real estate - non-owner occupied

​

​

602

​

​

2,105

​

​

2,819

Farmland

​

​

464

​

​

258

​

​

24

TOTAL REAL ESTATE

​

​

5,942

​

​

5,055

​

​

6,231

Agriculture

​

​

250

​

​

—

​

​

—

Commercial and industrial

​

​

988

​

​

651

​

​

405

Consumer loans

​

​

6

​

​

31

​

​

83

TOTAL NONPERFORMING LOANS

​

​

7,186

​

​

5,737

​

​

6,719

​

​

​

​

​

​

​

​

​

​

Foreclosed assets

​

​

2,970

​

​

800

​

​

762

Total nonperforming assets

​

$

10,156

​

$

6,537

​

$

7,481

Performing TDRs (1)

​

$

7,708

​

$

8,415

​

$

9,067

Nonperforming loans as a % of total gross loans and leases

​

​

0.30%

​

​

0.33%

​

​

0.37%

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

​

​

0.43%

​

​

0.37%

​

​

0.42%

(1)Performing TDRs are not included in nonperforming loans above, nor are they included in the numerators used to calculate the ratios disclosed in this table.

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​

Total nonperforming assets increased by $3.6 million, or 55%, during the first nine months of 2020. The increase resulted from $2.2 million in new foreclosed assets due to the impact of one commercial real estate credit that went into foreclosure and the downgrade of certain loans deferred due to COVID-19 for which repayment has become uncertain. The commercial property that went into other real estate owned is under contract and is expected to close escrow in the fourth quarter of 2020. None of these increases were due to COVID-19. As a result of the increase in the gross loan portfolio, the Company’s ratio of nonperforming assets to loans decreased to 0.30% at September 30, 2020, from 0.33% at December 31, 2019. All of the Company’s impaired assets are periodically reviewed, and are either well-reserved based on current loss expectations, or are carried at the fair value of the underlying collateral net of expected disposition costs.

As shown in the table, we also had $7.7 million in loans classified as performing TDRs on which we were still accruing interest as of September 30, 2020, a decrease of $0.7 million, or 8%, relative to December 31, 2019.

Foreclosed assets had a carrying value of $3.0 million at September 30, 2020, comprised of 9 properties classified as OREO and miscellaneous Ag equipment relative to year-end 2019 when foreclosed assets consisted of 10 properties classified as OREO and two mobile homes. One property representing 63% of the OREO balance at September 30, 2020 is under contract and is expected to close escrow in the fourth quarter of 2020. All foreclosed assets are periodically evaluated and written down to their fair value less expected disposition costs, if lower than the then-current carrying value.

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

The Company had $7.2 million in loans past due 30-59 days at September 30, 2020. This is an increase of $4.2 million over the balance at December 31, 2019. All of these past due loans are under management supervision and every effort is being taken to assist the borrowers in this regard. 90% of the 30-59 day past due balance, totaling $6.5 million returned to current status shortly after September 30, 2020.

The Company is providing deferrals to certain customers and taking advantage of either Section 4013 of the CARES Act or the April 7, 2020 Interagency Statement, which provides that such deferrals do not result in treatment of such loan as a TDR.  These deferrals typically provide deferrals of both principal and interest for 180 days.  Interest continues to accrue during the deferral period. At the end of the deferral period, for term loans, payments will be applied to accrued interest first and after the accrued interest is paid in full, the loan will be re-amortized with the maturity extended.  For lines of credit, the borrower must repay the accrued interest at the end of the deferral period or take out a second credit facility to repay the accrued interest. As of September 30, 2020, 314 customers, for a total of $424.0 million, had executed a loan modification under Section 4013 of the CARES Act. Approximately 97% of these loan deferrals were for commercial customers with 39% or $163.8 million of these modifications, in the hospitality industry. In addition, there were $99.0 million, or 23%, that are lessors of real estate, both commercial and residential; $52.3 million, or 12%, in the dairy industry; and $29.5 million, or 7%, related to convenience stores, and $7.0 million, or 2%, in the healthcare industry. Of the commercial deferrals, there were $9.4 million that were unsecured. Consumer deferrals totaled $12.8 million, of which $12.6 million were mortgage related. At September 30, 2020, $15.3 million of these loans were considered classified assets including $2.1 million on non-accrual and $49.0 million considered special mention. We continue to monitor these loans during the deferral period and if circumstances change, we may downgrade the loan to a criticized asset. An additional modification, if necessary, could also result in the loan being treated as a TDR or classified asset. If a portion of the customers are not able to resume payments after the deferral period, it likely could result in higher classified and/or nonperforming assets, reversals of interest income, and/or higher charge-offs.

​

​

​

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Table of Contents

The following table summarizes the loans deferred as September 30, 2020:

​

​

​

​

​

​

​

​

​

​

​

​

As of 9-30-20

​

​

​

​

​

​

Are payments expected to resume upon expiration of deferment?

(dollars in thousands)

​

Deferment Loans

Deferment Balance

​

Deferment Loans as % of Total Loans in Category

​

Yes

​

No/Further Review Required

CRE non-owner occupied

​

​

​

​

​

​

​

​

​

​

​

Office

​

15

$ 25,563

​

8.44%

​

$ 15,152

59.27%

​

$ 10,411

40.73%

Retail

​

24

46,378

​

15.10%

​

45,521

98.15%

​

857

1.85%

Industrial

​

7

6,149

​

7.85%

​

6,149

100.00%

​

-

0.00%

Hotel

​

27

115,828

​

67.29%

​

109,553

94.58%

​

6,275

5.42%

Special purpose

​

9

7,640

​

11.53%

​

7,640

100.00%

​

-

0.00%

CRE owner occupied

​

72

71,332

​

21.69%

​

69,467

97.39%

​

1,865

2.61%

Commercial - secured by SFR 1-4 unit

​

15

11,338

​

19.60%

​

10,593

93.43%

​

745

6.57%

Multi-family residential

​

4

6,337

​

7.73%

​

6,337

100.00%

​

-

0.00%

Commercial construction

​

​

​

​

​

​

-

​

​

​

​

Hotel

​

5

40,045

​

93.23%

​

40,045

100.00%

​

-

0.00%

Lots/land and other

​

8

13,723

​

11.75%

​

13,723

100.00%

​

-

0.00%

Ag farm mortgage and ag production

​

24

57,480

​

33.08%

​

57,480

100.00%

​

-

0.00%

Consumer SFR 1-4 unit mortgage and consumer other

​

46

12,800

​

8.64%

​

7,271

56.80%

​

5,529

43.20%

Commercial and industrial

​

58

9,427

​

4.34%

​

8,918

94.60%

​

509

5.40%

​

​

​

​

​

​

​

​

​

​

​

​

Total Loan Deferments (1)

​

314

$ 424,040

​

​

​

$ 397,849

93.82%

​

$ 26,191

6.18%

(1)Loans with temporary modification agreements remain on deferral status internally until management completes its evaluation of the customer’s potential need for an additional modification. As of October 31, 2020, the Company had approximately $73.9 million in loans remaining on deferral status, including $18.9 million that have matured but still require further evaluation.

​

ALLOWANCE FOR LOAN AND LEASE LOSSES

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

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

The Company’s allowance for loan and lease losses was $15.6 million at September 30, 2020, an increase of $5.7 million, or 57%, relative to December 31, 2019 resulting from a $6.4 million loan loss provision recorded during the first nine months of 2020, less $0.7 million in net charge-offs during the same period. The additional loan loss provision in the first nine months of 2020 was precipitated primarily by the increase in non-owner occupied commercial real estate loan balances as well as the impact of qualitative factors associated with economic uncertainty during these unprecedented times. No additional loan loss was considered necessary for the $123.6 million in SBA PPP loans added during the period ending September 30, 2020, as those loans carry a 100 percent guarantee under the “Paycheck Protection Program”, subject to certain diligence requirements by the issuing financial institution. For further information regarding the Company's decision to defer the implementation of CECL under Section 4014 of the CARES Act, as well as further detail on the increase in provision during the third quarter of 2020, please see the discussion above under Provision for Loan and Lease Losses.

The allowance was 0.65% of total loans at September 30, 2020, 0.56% at December 31, 2019 and 0.62% at September 30, 2019. The ratio of the allowance for loan and lease losses to nonperforming loans was 216.89% at September 30, 2020, relative to 172.96% at December 31, 2019 and 166.69% for September 30, 2019. Management's detailed analysis indicates that the Company's allowance for loan and lease losses should be sufficient to cover credit losses inherent in

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Table of Contents

loan and lease balances outstanding as of September 30, 2020, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the allowance.

A separate allowance of $0.3 million for potential losses inherent in unused commitments is included in other liabilities at September 30, 2020.

​

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Table of Contents

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

Allowance for Loan and Lease Losses

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

For the three
months ended

​

For the three
months ended

​

For the nine
months ended

​

For the nine
months ended

​

For the year ended

​

    

September 30,

    

September 30,

    

September 30,

    

September 30,

    

December 31,

Balances:

​

2020

​

2019

​

2020

​

2019

​

2019

Average gross loans and leases outstanding during period (1)

​

$

2,245,172

​

$

1,773,612

​

$

1,956,380

​

$

1,742,742

​

$

1,753,748

Gross loans and leases outstanding at end of period

​

$

2,380,300

​

$

1,797,660

​

$

2,380,300

​

$

1,797,660

​

$

1,762,565

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Allowance for loan and lease losses:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Balance at beginning of period

​

$

13,560

​

$

9,883

​

$

9,923

​

$

9,750

​

$

9,750

Provision charged to expense

​

​

2,350

​

​

1,350

​

​

6,350

​

​

2,050

​

​

2,550

Charge-offs

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Real estate

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

1-4 family residential construction

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Other construction/land

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

1-4 family - closed-end

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Equity lines

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Multi-family residential

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate- owner occupied

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate- non-owner occupied

​

​

—

​

​

—

​

​

—

​

​

—

​

​

1,190

Farmland

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Total real estate

​

​

—

​

​

—

​

​

—

​

​

—

​

​

1,190

Agricultural

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial and industrial

​

​

327

​

​

57

​

​

419

​

​

891

​

​

1,274

Consumer loans

​

​

234

​

​

640

​

​

1,137

​

​

1,753

​

​

2,409

Total

​

$

561

​

$

697

​

$

1,556

​

$

2,644

​

$

4,873

Recoveries

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Real estate

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

1-4 family residential construction

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Other construction/land

​

​

1

​

​

1

​

​

35

​

​

1

​

​

2

1-4 family - closed-end

​

​

3

​

​

134

​

​

9

​

​

143

​

​

148

Equity lines

​

​

—

​

​

2

​

​

34

​

​

25

​

​

150

Multi-family residential

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate- owner occupied

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial real estate- non-owner occupied

​

​

—

​

​

50

​

​

—

​

​

347

​

​

347

Farmland

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Total real estate

​

​

4

​

​

187

​

​

78

​

​

516

​

​

647

Agricultural

​

​

—

​

​

—

​

​

—

​

​

—

​

​

—

Commercial and industrial

​

​

35

​

​

172

​

​

83

​

​

646

​

​

690

Consumer loans

​

​

198

​

​

305

​

​

708

​

​

882

​

​

1,159

Total

​

$

237

​

$

664

​

$

869

​

$

2,044

​

$

2,496

Net loan charge offs

​

$

324

​

$

33

​

$

687

​

$

600

​

$

2,377

Balance at end of period

​

$

15,586

​

$

11,200

​

$

15,586

​

$

11,200

​

$

9,923

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

RATIOS

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

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

​

​

0.06%

​

​

0.01%

​

​

0.05%

​

​

0.05%

​

​

0.14%

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

​

​

0.65%

​

​

0.62%

​

​

0.65%

​

​

0.62%

​

​

0.56%

Allowance for loan losses to nonperforming loans

​

​

216.89%

​

​

166.69%

​

​

216.89%

​

​

166.69%

​

​

172.96%

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

​

​

2.08%

​

​

0.29%

​

​

4.41%

​

​

5.36%

​

​

23.95%

Net loan charge-offs to provision for loan losses

​

​

13.79%

​

​

2.44%

​

​

10.82%

​

​

29.27%

​

​

93.22%

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

The Company’s allowance for loan and lease losses at September 30, 2020 represents Management’s best estimate of probable losses in the loan portfolio as of that date, but no assurance can be given that the Company will not experience substantial losses relative to the size of the allowance. Furthermore, fluctuations in credit quality, changes in economic

56

Table of Contents

conditions, updated accounting or regulatory requirements, and/or other factors could induce us to augment or reduce the allowance.

OFF-BALANCE SHEET ARRANGEMENTS

The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. It is unlikely that all unused commitments will ultimately be drawn down. Unused commitments to extend credit totaled $541.4 million at September 30, 2020 and $492.0 million at December 31, 2019, representing approximately 23% of gross loans outstanding at September 30, 2020 and 28% at December 31, 2019. The increase in unused commitments is due in large part to the increase in unfunded commitments on mortgage warehouse lines. The Company also had undrawn letters of credit issued to customers totaling $8.8 million at September 30, 2020 and $8.6 million at December 31, 2019. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used. However, the “Liquidity” section in this Form 10-Q outlines resources available to draw upon should we be required to fund a significant portion of unused commitments.

In addition to unused commitments to provide credit, the Company is utilizing a $105 million letter of credit issued by the Federal Home Loan Bank on the Company’s behalf as security for certain deposits and to facilitate certain credit arrangements with the Company’s customers. That letter of credit is backed by loans that are pledged to the FHLB by the Company. For more information on the Company’s off-balance sheet arrangements, see Note 7 to the consolidated financial statements located elsewhere herein.

OTHER ASSETS

Interest-earning cash balances were discussed above in the “Investments” section, but the Company also maintains a certain level of cash on hand in the normal course of business as well as non-earning deposits at other financial institutions. Our balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the amount of cash held at our branches, and our reserve requirement among other things, and it is subject to significant fluctuations in the normal course of business. While cash flows are normally predictable within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight loans to, and borrowings from, correspondent banks, including the Federal Reserve Bank and the Federal Home Loan Bank. Should a large “short” overnight position persist for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits. If a “long” position is prevalent, we could let brokered deposits or other wholesale borrowings roll off as they mature, or we might invest excess liquidity into longer-term, higher-yielding bonds. The Company’s balance of non-earning cash and due from banks was $84.3 million at September 30, 2020 relative to $65.6 million at December 31, 2019. The increase is primarily due to maintaining higher amounts of cash on hand due to lack of certainty from our armored cash delivery vendor during the COVID-19 pandemic due to potential staffing issues and governmental stay-at-home orders.

Foreclosed assets are discussed above in the section titled “Nonperforming Assets.” Net premises and equipment decreased by $0.2 million during the first nine months of 2020. Goodwill was $27 million at September 30, 2020, unchanged during the first nine months of 2020. As mentioned above, the Company performed a qualitative assessment of goodwill impairment during the third quarter 2020 and determined that a quantitative analysis was not required at this time. The Company will continue to monitor its Goodwill for potential impairment given the COVID-19 pandemic. Bank-owned life insurance, with a balance of $52.1 million at September 30, 2020, is discussed in detail above in the “Noninterest Income and Noninterest Expense” section.

DEPOSITS AND INTEREST BEARING LIABILITIES

DEPOSITS

Deposits represent another key balance sheet category impacting the Company’s net interest income and profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved to the extent

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that growth in deposits is concentrated in less volatile and typically less costly non-maturity accounts such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning average balances and rates paid by deposit type is included in the Average Balances and Rates tables appearing above, in the section titled “Net Interest Income and Net Interest Margin.” A distribution of the Company’s deposits by type, showing the period-end balance and percentage of total deposits, is presented as of the dates indicated in the following table.

Deposit Distribution

(dollars in thousands, unaudited)

​

​

​

​

​

​

​

​

​

    

September 30, 2020

    

December 31, 2019

Noninterest bearing demand deposits

​

$

975,750

​

$

690,950

Interest bearing demand deposits

​

​

135,181

​

​

91,212

NOW

​

​

521,741

​

​

458,600

Savings

​

​

361,857

​

​

294,317

Money market

​

​

126,918

​

​

118,933

Time, under $250,000

​

​

192,608

​

​

211,916

Time, $250,000 or more

​

​

227,658

​

​

252,446

Brokered deposits

​

​

50,000

​

​

50,000

Total deposits

​

$

2,591,713

​

$

2,168,374

​

​

​

​

​

​

​

Percentage of Total Deposits

​

​

​

​

​

​

Noninterest bearing demand deposits

​

​

37.65%

​

​

31.86%

Interest bearing demand deposits

​

​

5.22%

​

​

4.21%

NOW

​

​

20.13%

​

​

21.15%

Savings

​

​

13.96%

​

​

13.57%

Money market

​

​

4.90%

​

​

5.48%

Time, under $250,000

​

​

7.43%

​

​

9.77%

Time, $250,000 or more

​

​

8.78%

​

​

11.64%

Brokered deposits

​

​

1.93%

​

​

2.31%

Total

​

​

100.00%

​

​

100.00%

​

Deposit balances reflect net growth of $423.3 million, or 20%, during the first nine months of 2020. Time deposits were $470.3 million at September 30, 2020 as compared to $514.4 million at December 31, 2019. The $44.1 million decline in time-deposits was a result of a reduction in customer time deposits as brokered deposits were flat for the same period. All of our non-maturity deposit growth was organic in nature.

Management is of the opinion that a relatively high level of core customer deposits is one of the Company’s key strengths, and we continue to strive for core deposit retention and growth. In particular, the Company’s ratio of noninterest-bearing deposits to total deposits was 37.7% at September 30, 2020 as compared to 31.9% at December 31, 2019.

OTHER INTEREST-BEARING LIABILITIES

The Company’s non-deposit borrowings may, at any given time, include fed funds purchased from correspondent banks, borrowings from the Federal Home Loan Bank, advances from the Federal Reserve Bank, securities sold under agreements to repurchase, and/or junior subordinated debentures. The Company uses short-term FHLB advances and fed funds purchased on uncommitted lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes. The FHLB line is committed, but the amount of available credit depends on the level of pledged collateral.

Total non-deposit interest-bearing liabilities increased by $149.1 million, or 185%, during the first nine months of 2020 primarily due to an increase in borrowings from the FHLB primarily to support organic growth in non-owner occupied commercial real estate loans, PPP loans, and to fund increased temporary utilization of mortgage warehouse lines. Repurchase agreements totaled $36.7 million at September 30, 2020 relative to a balance of $25.7 million at year-end 2019. Repurchase agreements represent “sweep accounts”, where commercial deposit balances above a specified threshold are transferred at the close of each business day into non-deposit accounts secured by investment securities.

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Table of Contents

The Company had junior subordinated debentures totaling $35.0 million at both September 30, 2020 and December 31, 2019, in the form of long-term borrowings from trust subsidiaries formed specifically to issue trust preferred securities.

OTHER NONINTEREST BEARING LIABILITIES

Other liabilities are principally comprised of operating lease right-of-use liabilities, accrued interest payable, other accrued but unpaid expenses, and certain clearing amounts. The Company’s balance of other liabilities was $41.9 million at September 30, 2020 as compared to $35.5 million at December 31, 2019.

LIQUIDITY AND MARKET RISK MANAGEMENT

LIQUIDITY

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

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

At September 30, 2020 and December 31, 2019, the Company had the following sources of primary and secondary liquidity ($ in thousands):

​

​

​

​

​

​

​

Primary and Secondary Liquidity Sources

​

​

September 30, 2020

​

​

December 31, 2019

Cash and Due From Banks

​

$

88,933

​

$

80,077

Unpledged Investment Securities

​

​

339,125

​

​

366,012

Excess Pledged Securities

​

​

61,655

​

​

70,955

FHLB Borrowing Availability

​

​

380,600

​

​

443,200

Unsecured Lines of Credit

​

​

80,000

​

​

80,000

Funds Available through Fed Discount Window

​

​

65,125

​

​

59,198

Totals

​

$

1,015,438

​

$

1,099,441

​

In addition to the above sources, the Company could obtain brokered deposits, obtain deposits via deposit listing services, or offer higher rate time deposits within our market. At September 30, 2020, the Company had previously applied for and received approval to borrow $126.8 million from the Federal Reserve Bank for a Paycheck Protection Program Lending Facility (PPPLF) through December 31, 2020. The PPPLF provides the Company with the ability to pledge any PPP loan to the Federal Reserve Bank and obtain funding at 35 basis points. Further, any loans pledged to the PPPLF will be excluded from the regulatory leverage capital ratio. Due to the Company’s liquidity throughout the first nine months of 2020 it elected not to utilize the PPPLF during the quarter. The Company will continue to evaluate whether it should utilize the PPPLF in the fourth quarter 2020.

​

The Company performs regular stress tests on its liquidity and at this time, believes that we have sufficient primary and secondary liquidity sources for operations.

​

The Company has a higher level of actual balance sheet liquidity than might otherwise be the case, since we utilize a letter of credit from the FHLB rather than investment securities for certain pledging requirements. That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $105 million at September 30, 2020 and December 31, 2019. Other sources of liquidity included the brokered deposit market, deposit listing services, and the ability to offer local time-deposit campaigns. Management is of the opinion that available investments and other

59

Table of Contents

potentially liquid assets, along with standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs and that its liquidity has not been adversely impacted by COVID-19.

The Company’s net loans to assets and available investments to assets ratios were 74.3% and 12.7%, respectively, at September 30, 2020, as compared to internal policy guidelines of “less than 78%” and “greater than 3%.” Other liquidity ratios reviewed periodically by Management and the Board include net loans to total deposits and wholesale funding to total assets, including ratios and sub-limits for the various components comprising wholesale funding, which were all well within policy guidelines at September 30, 2020. The Company has been able to maintain a robust liquidity position in recent periods, but no assurance can be provided that our liquidity position will continue at current strong levels.

The holding company’s primary uses of funds include operating expenses incurred in the normal course of business, interest on trust preferred securities, shareholder dividends, and stock repurchases. Its primary source of funds is dividends from the Bank, since the holding company does not conduct regular banking operations. As of September 30, 2020, the holding company maintained a cash balance of $11.9 million. Management anticipates that with the available cash and the continued ability for the Bank to provide dividends to the holding company, that the holding company has sufficient liquidity to meet its funding requirements for the foreseeable future. Both the holding company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 5(c) Dividends in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 which was filed with the SEC.

INTEREST RATE RISK MANAGEMENT

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

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

In addition to a stable rate scenario, which presumes that there are no changes in interest rates, we typically use at least six other interest rate scenarios in conducting our rolling 12-month net interest income simulations: upward shocks of 100, 200, and 300 basis points, and downward shocks of 100, 200, and 300 basis points. Those scenarios may be supplemented, reduced in number, or otherwise adjusted as determined by Management to provide the most meaningful simulations considering economic conditions and expectations at the time. Given the current near zero interest rate environment it is unlikely that rates could decline much further beyond the downward shock of 100 basis points, therefore the downward shock scenarios of 200 and 300 basis points are temporarily being suspended after concurrence by the Company’s Board of Directors. We currently utilize an additional upward rate shock scenario of 400 basis points. Pursuant to policy guidelines, we generally attempt to limit the projected decline in net interest income relative to the stable rate scenario to no more than 5% for a 100 basis point (bp) interest rate shock, 10% for a 200 bp shock, 15% for a 300 bp shock, and 20% for a 400 bp shock.

​

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Table of Contents

The Company had the following estimated net interest income sensitivity profiles over one-year, without factoring in any potential negative impact on spreads resulting from competitive pressures or credit quality deterioration:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

September 30, 2020

​

September 30, 2019

Immediate change in Interest Rates (basis points)

​

% Change in Net Interest Income

​

$ Change in Net Interest Income

​

% Change in Net Interest Income

​

$ Change in Net Interest Income

+400

​

​

-0.4%

​

$

(367)

​

​

2.6%

​

$

2,430

+300

​

​

0.1%

​

$

131

​

​

2.4%

​

$

2,278

+200

​

​

0.7%

​

$

677

​

​

1.8%

​

$

1,679

+100

​

​

0.9%

​

$

968

​

​

1.1%

​

$

1,047

Base

​

​

​

​

​

​

​

​

​

​

​

​

(100)

​

​

-5.8%

​

$

(5,948)

​

​

-4.6%

​

$

(4,331)

​

In the stable rate environment, expected net interest income over twelve months increased $8.1 million, or 9%, to $103.3 million for the first nine months of 2020 compared to $95.2 million for the same period in 2019. The primary reason for the increase in expected net interest income despite a lower rate environment was the increase in loan balances, primarily in commercial real estate. Further, the loan-to-deposit ratio increased from 82% at September 30, 2019 to over 91% at September 30, 2020 which demonstrates a greater level of high-earning assets at September 30, 2020. Therefore, even though the rate shocks are not as significant at September 30, 2020 as compared to September 30, 2019, overall projected net interest income remains higher in all scenarios at September 30, 2020.

The simulation for the period ending September 30, 2020 indicates that the Company’s net interest income will increase over the next 12 months in a rising rate environment, however the increase will diminish as rates rise from +100 bps to +300 bps, with a decrease in net interest income in the +400 bps scenario. The decrease in net income in the +400 bps scenario is primarily due to the Company’s current $148.0 million overnight borrowing position which will immediately reprice. The immediately repricing of liabilities in each progressively larger rate positive rate shock is more significant than the corresponding gradual increase in asset repricing over the same period given the growth assumption utilized in the model. A drop in interest rates could have a substantial negative impact as is reflected in the down 100 bps simulation resulting in a decrease of 5.8% in net income.

For the period ended September 30, 2019, the Company was asset sensitive, with net income increasing in a rising rate environment in all scenarios but declining considerably in the down shocks.

Given the 150-basis point decrease in the target federal funds rate in March 2020 and the drop in the 10-year Treasury yields in the first nine months of 2020, it is unlikely to see dramatic rate decreases unless rates go negative. If there were an immediate and sustained upward adjustment of 100 basis points in interest rates, all else being equal, net interest income over the next 12 months is projected to improve by $1.0 million, or 0.9%, for the period ending September 30, 2020 and $1.0 million, or 1.1%, for the period ended September 30, 2019, relative to a stable interest rate scenario, with the favorable variance decreasing as interest rates rise for the September 30, 2020 and increasing as interest rates rise for the period ending September 30, 2019. If interest rates were to decline by 100 basis points, however, net interest income would likely be $5.9 million lower or 5.8% for the period ended September 30, 2020, and $4.3 million lower or 4.6% for the period ended September 30, 2019, than in a stable interest rate scenario. The unfavorable variance increases when rates drop are due to the fact that certain deposit rates are already relatively low (on NOW accounts and savings accounts for example) and will hit a natural floor of close to zero while non-floored variable-rate loan yields continue to drop. This effect is exacerbated by accelerated prepayments on fixed-rate loans and mortgage-backed securities when rates decline, although rate floors on some of our variable-rate loans partially offset other negative pressures. While we view material interest rate reductions as unlikely in the near term, the potential percentage decline in net interest income in the “down 100 basis points” interest rate scenario exceeds our internal policy guidelines for the period ended September 30, 2020, but the risk has been accepted with no immediate plans to address this scenario.

​

​

​

​

​

​

​

​

In addition to the net interest income simulations shown above, we run stress scenarios for the unconsolidated Bank modeling the possibility of no balance sheet growth, the potential runoff of “surge” core deposits which flowed into the Bank in the most recent economic cycle, and unfavorable movement in deposit rates relative to yields on earning assets (i.e., higher deposit betas). When a static balance sheet and a stable interest rate environ­ment are assumed, projected annual net interest income is more than $2 million lower than in our standard simulation. However, the stressed

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Table of Contents

simulations reveal that the Company’s greatest potential pressure on net interest income would result from excessive non-maturity deposit runoff and/or unfavorable deposit rate changes in rising rate scenarios.

The economic value (or “fair value”) of financial instruments on the Company’s balance sheet will also vary under the interest rate scenarios previously discussed. The difference between the projected fair value of the Company’s financial assets and the fair value of its financial liabilities is referred to as the economic value of equity (“EVE”), and changes in EVE under different interest rate scenarios are effectively a gauge of the Company’s longer-term exposure to interest rate fluctuations. Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at anticipated replacement interest rates for each account type, while the fair value of non-financial accounts is assumed to equal their book value for all rate scenarios. An economic value simulation is a static measure utilizing balance sheet accounts at a given point in time, and the measurement can change sub­stantially over time, as is evident in the tables below for the periods ending September 30, 2020 and 2019, respectively, as the Company’s balance sheet evolves and interest rate and yield curve assumptions are updated.

The change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including stated interest rates or spreads relative to current or projected market-level interest rates or spreads, the likelihood of principal prepayments, whether contractual interest rates are fixed or floating, and the average remaining time to maturity. As a general rule, fixed-rate financial assets become more valuable in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical patterns and Management’s best estimates. Our EVE had been increasing due to asset growth and rising discount rates, which result in a larger benefit assessed to non-maturity deposits, but that trend reversed in the second quarter of 2019 as loan growth slowed and interest rates started to fall. The tables below show estimated changes in the Company’s EVE, under different interest rate scenarios relative to a base case of current interest rates:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

September 30, 2020

​

September 30, 2019

Immediate change in Interest Rates (basis points)

​

% Change in Fair Value of Equity

​

$ Change in Fair Value of Equity

​

% Change in Fair Value of Equity

​

$ Change in Fair Value of Equity

+400

​

​

33.5%

​

$

175,998

​

​

18.8%

​

$

109,170

+300

​

​

30.1%

​

$

158,018

​

​

17.0%

​

$

98,620

+200

​

​

24.2%

​

$

127,038

​

​

14.0%

​

$

81,256

+100

​

​

14.4%

​

$

75,619

​

​

8.4%

​

$

48,999

Base

​

​

​

​

​

​

​

​

​

​

​

​

(100)

​

​

-7.9%

​

$

(41,602)

​

​

-15.9%

​

$

(92,357)

​

​

The table shows that our EVE will generally deteriorate in moderate declining rate scenarios but should benefit from a paral­lel shift upward in the yield curve. The rate of increase in EVE accelerates the higher interest rates rise. This increase in sensitivity is caused by the increase in gross deposits, namely, an increase in noninterest bearing deposits. We also run stress scenarios for the unconsolidated Bank’s EVE to simulate the possibility of adverse movement in loan prepay­ment rates, unfavorable changes in deposit rates, and higher deposit decay rates. Model results are highly sensitive to changes in assumed decay rates for non-maturity deposits, in particular, with material unfavorable variances occurring relative to the standard simulations shown above as decay rates are increased. Furthermore, while not as extreme as the variances produced by increasing non-maturity deposit decay rates, EVE also displays a relatively high level of sensitivity to unfavorable changes in deposit rate betas in rising interest rate scenarios.

CAPITAL RESOURCES

The Company had total shareholders’ equity of $336.2 million at September 30, 2020, comprised of $112.6 million in common stock, $3.6 million in additional paid-in capital, $202.5 million in retained earnings, and accumulated other comprehensive income of $17.5 million. At the end of 2019, total shareholders’ equity was $309.3 million. The increase during the first nine months of 2020 is due to the addition of capital from net income and stock options exercised as well as a $11.6 million favorable swing in accumulated other comprehensive income, net of the impact of cash dividends paid and share repurchases. There were repurchases totaling 112,050 shares at a weighted average cost

62

Table of Contents

of $22.86 per share executed by the Company during the first quarter of 2020. The Company has 268,301 shares authorized to repurchase under the current repurchase program. The Company suspended its stock repurchase program on March 16, 2020 and continues to evaluate when or if we will restart repurchasing shares.

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

​

Regulatory Capital Ratios

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Minimum

​

Minimum

​

​

​

​

​

​

​

Requirement

​

Required

​

​

​

September 30,

​

December 31,

​

to be

​

Community Bank

​

​

    

2020

    

2019

    

 Well Capitalized (3)

​

Leverage Ratio (2) (4)

​

Sierra Bancorp

​

​

​

​

​

​

​

​

​

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

​

N/A

​

13.27

%

6.50

%

N/A

​

Tier 1 Capital to Risk-weighted Assets (1)

​

N/A

​

14.98

%

8.00

%

N/A

​

Total Capital to Risk-weighted Assets (1)

​

N/A

​

15.48

%

10.00

%

N/A

​

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

​

N/A

​

11.91

%

5.00

%

N/A

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Bank of the Sierra

​

​

​

​

​

​

​

​

​

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

​

N/A

​

14.75

%

6.50

%

N/A

​

Tier 1 Capital to Risk-weighted Assets (1)

​

N/A

​

14.75

%

8.00

%

N/A

​

Total Capital to Risk-weighted Assets (1)

​

N/A

​

15.25

%

10.00

%

N/A

​

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

​

10.29

%

11.73

%

5.00

%

8.00

%

(1)Current data is not applicable as the Bank adopted the Community Bank Leverage Ratio Framework as of the first quarter of 2020.
(2)The minimum required Community Bank Leverage Ratio is 9.00%, but the CARES Act temporarily lowers this to 8% as described below.
(3)The Company was subject to these minimum requirements under the regulatory framework for Prompt Corrective Action at December 31, 2019.
(4)If the subsidiary bank’s Leverage Ratio exceeds the minimum ratio under the Community Bank Leverage Ratio Framework, it is deemed to be “well capitalized” under all other regulatory capital requirements. The Company may revert back to the regulatory framework for Prompt Corrective Action if the subsidiary bank’s Leverage Ratio falls below the minimum under the Community Bank Leverage Ratio Framework.

​

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

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

​

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Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 3

QUALITATIVE & QUANTITATIVE DISCLOSURES

ABOUT MARKET RISK

The information concerning quantitative and qualitative disclosures about market risk is included in Part I, Item 2 above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Market Risk Management.”

PART I – FINANCIAL INFORMATION

Item 4

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”) have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this quarterly report was being prepared.

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our Management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized, and reported within the time periods specified by the SEC.

Changes in Internal Controls

There were no significant changes in the Company’s internal controls over financial reporting that occurred in the first nine months of 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

​

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Table of Contents

PART II - OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

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

ITEM 1A: RISK FACTORS

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

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

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

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

•Collateral securing our loans may decline in value, which could increase credit losses in our loan portfolio and increase the allowance for loan losses.
•Demand for our products and services may decline, and deposit balances may decrease making it difficult to grow assets and income.
•The decline in the target federal funds rate could decrease yields on our assets that exceed the decline in our cost of interest-bearing liabilities, which may reduce our net interest margin.
•The impact of the adoption of the CECL standard, which is highly dependent on unemployment rate forecasts over the life of our loans, could significantly increase the allowance for credit losses and decrease net income.
•Our borrowers’ actual payment performance may be worse than anticipated as loan deferrals related to the COVID-19 pandemic expire, and we may experience potential adverse impact from loan modifications and payment deferrals despite their implementation consistent with recent regulatory guidance.

While governmental authorities have taken unprecedented measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth, the success of these measures is

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unknown, and they may not be sufficient to mitigate fully the negative impact of the ongoing pandemic. Further, some measures, such as a suspension of mortgage and other loan payments and foreclosures, may have a negative impact on our business, while our participation in other measures could result in reputational harm, litigation, or regulatory and government actions, proceedings, or penalties.

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

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

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

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

(c)   Stock Repurchases

In September 2016 the Board authorized 500,000 shares of common stock for repurchase, subsequent to the completion of previous stock buyback plans. The authorization of shares for repurchase does not provide assurance that a specific quantity of shares will be repurchased, and the program can be suspended at any time at Management’s discretion. After a lengthy deferral of repurchase activity, the Company resumed share repurchases in mid-August 2019 through March 2020. There were no stock repurchase transactions during the third quarter of 2020. The balance of shares remaining for purchase under the plan was 268,301 at September 30, 2020.

​

​

​

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable

ITEM 5: OTHER INFORMATION

Not applicable

​

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ITEM 6: EXHIBITS

​

​

​

Exhibit #

    

Description

    3.1

​

Restated Articles of Incorporation of Sierra Bancorp (1)

    3.2

​

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

    4.1

​

Description of Securities (3)

  10.1

​

Salary Continuation Agreement for Kenneth R. Taylor (4)*

  10.2

​

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

  10.3

​

Split Dollar Agreement for Kenneth R. Taylor (6)*

  10.4

​

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

  10.5

​

401 Plus Non-Qualified Deferred Compensation Plan (6)*

  10.6

​

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

  10.7

​

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

  10.8

​

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

  10.9

​

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

  10.10

​

2007 Stock Incentive Plan (9)

  10.11

​

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

  10.12

​

Salary Continuation Agreement for Kevin J. McPhaill (10)*

  10.13

​

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

  10.14

​

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

  10.15

​

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

  10.16

​

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

  10.17

​

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

  10.18

​

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

  10.19

​

2017 Stock Incentive Plan (14)*

  10.20

​

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

  10.21

​

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

  10.22

​

Employment agreement dated as of November 15, 2019 for Christopher Treece, Chief Financial Officer (17)*

  10.23

​

Employment agreement dated as of January 17, 2020 for Jennifer Johnson, Chief Administrative Officer (18)*

  31.1

​

Certification of Chief Executive Officer (Section 302 Certification)

  31.2

​

Certification of Chief Financial Officer (Section 302 Certification)

  32

​

Certification of Periodic Financial Report (Section 906 Certification)

101.INS

​

XBRL Instance Document

101.SCH

​

XBRL Taxonomy Extension Schema Document

101.CAL

​

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

​

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

​

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

​

XBRL Taxonomy Extension Presentation Linkbase Document

(1)Filed as Exhibit 3.1 to the Form 10-Q filed with the SEC on August 7, 2009 and incorporated herein by reference.
(2)Filed as an Exhibit to the Form 10-K filed with the SEC on March 12, 2020.
(3)Filed as an Exhibit to the Form 8-K filed with the SEC on February 21, 2007 and incorporated herein by reference.
(4)Filed as Exhibit 10.5 to the Form 10-Q filed with the SEC on May 15, 2003 and incorporated herein by reference.
(5)Filed as an Exhibit to the Form 8-K filed with the SEC on August 11, 2005 and incorporated herein by reference.
(6)Filed as Exhibits 10.10, 10.18 through 10.20, and 10.22 to the Form 10-K filed with the SEC on March 15, 2006 and incorporated herein by reference.
(7)Filed as Exhibits 10.9 and 10.10 to the Form 10-Q filed with the SEC on May 14, 2004 and incorporated herein by reference.
(8)Filed as Exhibits 10.26 and 10.27 to the Form 10-Q filed with the SEC on August 9, 2006 and incorporated herein by reference.
(9)Filed as Exhibit 10.20 to the Form 10-K filed with the SEC on March 15, 2007 and incorporated herein by reference.
(10)Filed as Exhibits 10.1 through 10.3 to the Form 8-K filed with the SEC on January 8, 2007 and incorporated herein by reference.
(11)Filed as Exhibit 10.23 to the Form 10-K filed with the SEC on March 13, 2014 and incorporated herein by reference.
(12)Filed as Exhibit 10.24 to the Form 10-Q filed with the SEC on May 7, 2015 and incorporated herein by reference.
(13)Filed as Exhibits 10.1 through 10.3 to the Form 8-K filed with the SEC on July 11, 2016 and incorporated herein by reference.
(14)Filed as Exhibit 10.1 to the Form 8-K filed with the SEC on March 17, 2017 and incorporated herein by reference.
(15)Filed as Exhibits 99.1 through 99.4 to the Form 8-K filed with the SEC on December 28, 2018 and incorporated by reference.
(16)Filed as Exhibit 99.2 to the Form 8-K filed with the SEC on March 18, 2019 and incorporated by reference.
(17)Filed as Exhibit 99.1 to the Form 8-K filed with the SEC on November 11, 2019 and incorporated by reference.
(18)Filed as Exhibit 99.1 to the Form 8-K filed with the SEC on January 21, 2020 and incorporated by reference.

​

*Indicates management contract or compensatory plan or arrangement.

67

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SIGNATURES

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

​

​

​

November 5, 2020

    

/s/ Kevin J. McPhaill

Date

​

SIERRA BANCORP

​

​

Kevin J. McPhaill

​

​

President & Chief Executive Officer

​

​

(Principal Executive Officer)

​

​

​

November 5, 2020

​

/s/ Christopher G. Treece

Date

​

SIERRA BANCORP

​

​

Christopher G. Treece

​

​

Chief Financial Officer

​

​

November 5, 2020

​

/s/ Cindy L. Dabney

Date

​

SIERRA BANCORP

​

​

Cindy L. Dabney

​

​

Principal Accounting Officer

​

​

​

68

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