Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022
Commission file number: 000-33063
SIERRA BANCORP
(Exact name of Registrant as specified in its charter)
California
33-0937517
(State of Incorporation)
(IRS Employer Identification No)
86 North Main Street, Porterville, California 93257
(Address of principal executive offices) (Zip Code)
(559) 782-4900
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, no par value
BSRR
The NASDAQ Stock Market LLC
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☐
Accelerated Filer:
☒
Non-accelerated Filer:
Smaller Reporting Company:
Emerging Growth Company:
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of May 1, 2022, the registrant had 15,086,012 shares of common stock outstanding, including 161,529 shares of unvested restricted stock.
Page
Part I - Financial Information
1
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
Consolidated Statements of Income
2
Consolidated Statements of Comprehensive Income (Loss)
3
Consolidated Statements of Changes In Shareholders’ Equity
4
Consolidated Statements of Cash Flows
5
Notes to Consolidated Financial Statements (Unaudited)
6
Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations
35
Forward-Looking Statements
Critical Accounting Policies
36
Overview of the Results of Operations and Financial Condition
Earnings Performance
39
Net Interest Income and Net Interest Margin
Provision for Credit Losses on Loans and Leases
42
Noninterest Income and Noninterest Expense
44
Provision for Income Taxes
46
Balance Sheet Analysis
Earning Assets
Investments
Loan and Lease Portfolio
47
Nonperforming Assets
49
Allowance for Credit Losses on Loans and Leases
50
Off-Balance Sheet Arrangements
52
Other Assets
Deposits and Interest Bearing Liabilities
53
Deposits
Other Interest Bearing Liabilities
Noninterest Bearing Liabilities
54
Liquidity and Market Risk Management
Capital Resources
57
Item 3. Qualitative & Quantitative Disclosures about Market Risk
59
Item 4. Controls and Procedures
Part II - Other Information
60
Item 1. - Legal Proceedings
Item 1A. - Risk Factors
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. - Defaults upon Senior Securities
61
Item 4. - Mine Safety Disclosures
Item 5. - Other Information
Item 6. - Exhibits
62
Signatures
63
PART I - FINANCIAL INFORMATION
Item 1 – Financial Statements
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, 2022
December 31, 2021
ASSETS
(unaudited)
(audited)
Cash and due from banks
$
66,039
63,147
Interest bearing deposits in banks
187,495
194,381
Total cash & cash equivalents
253,534
257,528
Investment securities available-for-sale, at fair value (net of zero allowance for credit losses at March 31, 2022 and December 31, 2021)
1,025,032
973,314
Loans and leases:
Gross loans and leases
1,983,331
1,989,726
Deferred loan and lease fees, net
(1,200)
(1,865)
Allowance for credit losses on loans and leases
(22,530)
(14,256)
Net loans and leases
1,959,601
1,973,605
Foreclosed assets
93
Premises and equipment, net
23,239
23,571
Goodwill
27,357
Other intangible assets, net
3,022
3,275
Bank-owned life insurance
53,594
54,242
Other assets
73,382
58,029
Total assets
3,418,854
3,371,014
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing
1,104,691
1,084,544
Interest bearing
1,760,252
1,697,028
Total deposits
2,864,943
2,781,572
Repurchase agreements
107,760
106,937
Long-term debt
49,151
49,141
Subordinated debentures
35,347
35,302
Allowance for credit losses on unfunded loan commitments
1,040
203
Other liabilities
34,922
35,365
Total liabilities
3,093,163
3,008,520
Commitments and contingent liabilities (Note 7)
Shareholders' equity
Common stock, no par value; 24,000,000 shares authorized; 15,086,032 and 15,270,010 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively
111,673
113,007
Additional paid-in capital
4,281
3,910
Retained earnings
227,445
234,410
Accumulated other comprehensive (loss) income, net
(17,708)
11,167
Total shareholders' equity
325,691
362,494
Total liabilities and shareholders' equity
The accompanying notes are an integral part of these consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(dollars in thousands, except per share data, unaudited)
Three months ended March 31,
2022
2021
Interest and dividend income
Loans and leases, including fees
20,772
26,412
Taxable securities
3,490
1,578
Tax-exempt securities
1,726
1,449
Federal funds sold and other
19
Total interest income
26,081
29,458
Interest expense
560
608
Short-term borrowings
82
48
683
247
Total interest expense
1,325
903
Net interest income
24,756
28,555
Provision for credit losses on loans and leases
600
250
Benefit for credit losses on unfunded loan commitments
(94)
—
Net interest income after provision for credit losses
24,250
28,305
Noninterest income
Service charges on deposits
3,040
2,767
Other income
3,023
4,063
Total noninterest income
6,063
6,830
Noninterest expense
Salaries and employee benefits
11,805
11,151
Occupancy
2,294
2,486
Other
6,074
6,634
Total noninterest expense
20,173
20,271
Income before taxes
10,140
14,864
Provision for income taxes
2,733
3,786
Net income
7,407
11,078
PER SHARE DATA
Book value
21.59
22.58
Cash dividends
0.23
0.21
Earnings per share basic
0.49
0.73
Earnings per share diluted
0.72
Average shares outstanding, basic
15,021,138
15,241,190
Average shares outstanding, diluted
15,120,990
15,355,890
Total shareholders' equity (in thousands)
347,981
Shares outstanding
15,086,032
15,410,763
Dividends paid (in thousands)
3,508
3,231
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, unaudited)
Other comprehensive loss, before tax:
Unrealized gains on securities:
Unrealized holding loss arising during period
(39,962)
(5,759)
Less: reclassification adjustment for gains included in net income (1)
(1,032)
Other comprehensive loss, before tax
(40,994)
Income tax benefit related to items of other comprehensive loss, net of tax
12,119
1,703
Other comprehensive loss
(28,875)
(4,056)
Comprehensive (loss) income
(21,468)
7,022
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Accumulated
Additional
Common Stock
Paid In
Retained
Comprehensive
Shareholders'
Shares
Amount
Capital
Earnings
Income (Loss)
Equity
Balance, December 31 2020
15,388,423
113,384
3,736
208,371
18,405
343,896
Other comprehensive loss, net of tax
Stock options exercised, net of shares surrendered for cashless exercises
4,160
69
(15)
Stock compensation costs
18,180
240
Cash dividends - $0.21 per share
(3,231)
Balance, March 31, 2021
113,453
3,961
216,218
14,349
Balance, December 31, 2021
15,270,010
Cumulative effect of change in accounting principle (Note 3)
(7,315)
Restricted stock surrendered due to employee tax liability
(1,196)
(9)
(23)
(32)
Restricted stock forfeited / cancelled
(220)
Stock based compensation - stock options
30
Stock based compensation - restricted stock
341
Stock repurchase
(182,562)
(1,325)
(3,526)
(4,851)
Cash dividends - $0.23 per share
(3,508)
Balance, March 31, 2022
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sales of securities
Loss on disposal of fixed assets
Gain on sale on foreclosed assets
(5)
Writedowns on foreclosed assets
98
Stock based compensation expense
371
Depreciation and amortization
636
819
Net amortization on securities premiums and discounts
1,177
1,152
Amortization (accretion) of premiums (discounts) for loans acquired
(98)
Decrease (increase) in cash surrender value of life insurance policies
645
(583)
Amortization of core deposit intangible
253
269
(Increase) decrease in interest receivable and other assets
(1,419)
5,690
Decrease in other liabilities
(537)
(1,499)
Deferred income tax benefit (provision)
811
(2,002)
Decrease (increase) in value of restricted bank equity securities
332
(857)
Net amortization of partnership investment
113
133
Net cash provided by operating activities
9,394
14,679
Cash flows from investing activities:
Maturities and calls of securities available for sale
2,373
1,705
Proceeds from sales of securities available for sale
26,408
Purchases of securities available for sale
(145,327)
(45,713)
Principal pay downs on securities available for sale
23,688
28,141
Loan originations and payments, net
3,914
175,550
Purchases of premises and equipment
(265)
(68)
Proceeds from sales of foreclosed assets
Purchase of bank-owned life insurance
(8)
(133)
Liquidation of bank-owned life insurance
11
Amortization of debt issuance costs
10
Net cash (used in) provided by investing activities
(89,191)
159,517
Cash flows from financing activities:
Increase in deposits
83,371
229,286
Decrease in borrowed funds
(137,900)
Increase in repurchase agreements
823
12,389
Cash dividends paid
Repurchases of common stock
(4,883)
Stock options exercised
Net cash provided by financing activities
75,803
100,598
(Decrease) increase in cash and cash equivalents
(3,994)
274,794
Cash and cash equivalents
Beginning of period
71,417
End of period
346,211
Supplemental disclosure of cash flow information:
Interest paid
1,730
879
Supplemental noncash disclosures:
Real estate acquired through foreclosure
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – The Business of Sierra Bancorp
Sierra Bancorp (the “Company”) is a California corporation headquartered in Porterville, California, and is a registered bank holding company under federal banking laws. The Company was formed to serve as the holding company for Bank of the Sierra (the “Bank”), and has been the Bank’s sole shareholder since August 2001. The Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries it may acquire or establish. As of March 31, 2022, 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 35 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, in February 2020 the bank opened a loan production office which is currently located in Roseville, CA. To support organic growth in the agricultural lending sector the bank also opened a loan production office in Templeton, CA in April 2022. The Company had total assets of $3.4 billion at March 31, 2022, 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 $2.9 billion at March 31, 2022, 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 2020 have been reclassified to be consistent with the reporting for 2021. 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, 2021, 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 (generally loans and held-to-maturity investment securities) in addition to certain off balance-sheet credit exposure. Under the current expected credit losses (“CECL”)
methodology expected credit losses for financial assets are estimated over the contractual life of the financial asset, adjusted for expected prepayments, considering historical experience, current conditions, and reasonable and supportable forecasts. Additionally, under CECL the accounting for credit losses on available-for-sale debt securities is addressed through an allowance for credit losses which is a change from legacy GAAP which previously required the direct write-down of securities through the other-than-temporary impairment approach. The Company implemented CECL on January 1, 2022, using the modified retrospective approach to estimate lifetime expected losses on financial assets measured at amortized cost in addition to certain off balance sheet credit exposures. The January 1, 2022, increase in the Company’s allowance for credit losses, of $9.5 million on loans and leases and $0.9 million in off balance sheet credit exposures, net of the impact of deferred taxes, was reflected in a transition adjustment of $7.3 million to retained earnings. There was no cumulative effect adjustment related to our available-for-sale investment portfolio upon adoption. Results for reporting periods beginning after December 31, 2021, are presented under CECL whereas prior comparative periods are presented under legacy GAAP.
The following table illustrates the impact of the adoption of CECL, and the transition away from the incurred loss method, on January 1, 2022. The impact to the Allowance for Credit losses (“ACL”) on the Loan Portfolio is broken out at the class level (dollars in thousands, unaudited):
Transition Impact on Allowance for Credit Losses
January 1, 2022
Reserves Under Incurred Loss
Reserves Under CECL
Transition Impact Gross
Impact of Deferred Taxes
Impact to Retained Earnings
Real estate:
1-4 family residential construction
135
28
(107)
32
(75)
Other construction/land
228
254
26
18
1-4 family - closed-end
1,618
2,310
692
(205)
487
Equity lines
290
210
(80)
25
(55)
Multi-family residential
274
574
300
(89)
211
Commercial real estate - owner occupied
2,217
3,444
1,227
(363)
864
Commercial real estate - non-owner occupied
6,199
14,380
8,181
(2,419)
5,762
Farmland
737
340
(397)
117
(280)
Total real estate
11,698
21,540
9,842
(2,910)
6,932
Agricultural
465
382
(83)
(58)
Commercial and industrial
1,060
1,418
358
(106)
252
Mortgage warehouse lines
512
91
(421)
124
(297)
Consumer loans
521
279
(242)
72
(170)
Total allowance for credit losses - loans
14,256
23,710
9,454
(2,795)
6,659
Allowance for credit losses - unfunded loan commitments
1,134
931
(275)
656
The Company currently categorizes all of its loans and leases as held-for-investment and following CECL implementation, reports loans and leases on the amortized cost basis. The Company’s amortized cost basis is comprised of the principal balance outstanding, net of remaining purchase discount or premium and any deferred fees or costs. Notably, the Company elected the practical expedient available under CECL to exclude accrued interest receivable from the amortized cost basis of all categorizations of loans and investment securities, and resultingly did not estimate reserves on accrued interest receivable balances, as any past due interest income is reversed on a timely basis. Accrued interest receivable continues to be included in other assets on the Company’s balance sheet and as of March 31, 2022, measured at $4.8 million and $6.7 million for available-for-sale securities and loans, respectively. During 2022 no accrued interest receivable on loans or available for sale investment securities was reversed against interest income.
7
For available-for-sale debt securities in an unrealized loss position for which management has an intent to sell the security, or considers it more likely-than-not that the security in question will be sold prior to a recovery of its amortized cost basis, the security will be written down to fair value through a direct charge to income. For the remainder of available sale debt securities in an unrealized loss position, which don’t meet the previously outlined criteria, management evaluates whether the decline in fair value is a reflection of credit deterioration or other factors. In performing this evaluation, management considers the extent which fair value has fallen below amortized cost, changes in rating by rating agencies, and other information indicating a deterioration in repayment capacity of either the underlying issuer or the borrowers providing repayment capacity in a securitization. If management’s evaluation indicates that a credit loss exists then a present value of the expected cash flows is calculated and compared to the amortized cost basis of the security in question and to the degree that the amortized cost basis exceeds the present value an allowance for credit loss (“ACL”) is established, with the caveat that the maximum amount of the reserve on any individual security is the difference between the fair value and amortized cost balance of the security in question. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income.
Similar to practice under legacy GAAP, the Company generally continues to place loans and leases on nonaccrual status when management has determined that the full repayment of principal and collection of contractually agreed upon interest is unlikely or when the loan in question has become delinquent more than 90 days. The Company may decide that it is appropriate to continue to accrue interest on certain loans and leases more than 90 days delinquent if they are well-secured by collateral and collection is in process. When a loan is placed on nonaccrual status, any accrued but uncollected interest for the loan and lease is reversed out of interest income in the period in which the loan’s status changed. For loans and leases with an interest reserve, i.e., where loan and lease proceeds are advanced to the borrower to make interest payments, all interest recognized from the inception of the loan and lease is reversed when the loan and lease is placed on non-accrual. Once a loan and lease is on non-accrual status subsequent payments received from the customer are applied to principal, and no further interest income is recognized until the principal has been paid in full or until circumstances have changed such that payments are again consistently received as contractually required. Generally, loans and leases are not restored to accrual status until the obligation is brought current and has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Similar to practice under legacy GAAP, the ACL on the loan portfolio is a valuation allowance deducted from the recorded balance in loans and leases. However, under CECL the ACL represents principal which is not expected to be collected over the contractual life of the loans and leases, adjusted for expected prepayment, whereas under legacy GAAP the allowance represented only losses already incurred as of the balance sheet date. The ACL is increased by a provision for credit losses charged to expense, and by principal recovered on charged-off balances. It is reduced by principal charge-offs. The amount of the allowance is based on management’s evaluation of the collectability of the loan and lease portfolio, using information from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Adjustments are also made for changes in risk profile, credit concentrations, historical trends, and other economic conditions.
The ACL for loans and leases is separated between a collective reserve evaluation, for loans where similar risk characteristics exist and an individual reserve evaluation for loans without similar risk characteristics. The collective evaluation of loans is performed at the portfolio segment level, using call code as the primary segmentation key but also considering similarity in quantitative reserve methodology. The Company’s ACL is categorized according to the following portfolio segments: 1-4 Family Real Estate, Commercial Real Estate, Farmland & Agricultural Production, Commercial & Industrial, Mortgage Warehouse, and Consumer. Management utilizes a discounted cash flow methodology to estimate the quantitative portion of collectively evaluated reserves for the 1-4 Family Real Estate, Commercial Real Estate, Commercial & Industrial and Mortgage Warehouse portfolio segments. Management utilizes a Remaining Life Quantitative Reserve Methodology for the Farmland & Agricultural Production, and Consumer portfolio segments. Within the portfolio segments utilizing the DCF quantitative reserve methodology, management has made the election to adjust the effective interest rate to consider the impact of expected prepayments.
Loans and leases where similar risk characteristics exist are evaluated for the ACL in the collective reserve evaluation. The Company’s policy is that loans designated as nonaccrual no longer share risk characteristics similar to other loans and leases evaluated collectively and as such, all nonaccrual loans and leases are individually evaluated for reserves. As
8
of March 31, 2022 the Bank’s nonaccrual loans and leases comprised the entire population of loans and leases individually evaluated. The Company’s policy is that nonaccrual loans also represent the subset of loans and leases where borrowers are experiencing financial difficulty where an evaluation of the source of repayment is required to determine if the nonaccrual loan and lease should be categorized as collateral dependent. It is the Company’s policy that the only loans and leases where the credit quality has deteriorated to the point where foreclosure is probable are the Company’s nonaccrual loans and leases.
The implementation of CECL also impacted the Company’s ACL on unfunded loan commitments, as this ACL now represents expected credit losses over the contractual life of commitments not identified as unconditionally cancellable by the Company. The Reserve for Unfunded Commitments is estimated using the same reserve or coverage rates calculated on collectively evaluated loans following the application of a funding rate to the amount of the unfunded commitment. The funding rate represents management’s estimate of the amount of the current unfunded commitment that will be funded over the remaining contractual life of the commitment and is based on historical data. Under CECL the ACL on unfunded loan commitments remains in Other Liabilities while any related provision expense has been moved to provision for credit loss expense from its prior presentation in noninterest expense. Prior period expense has been reclassified for comparative purposes.
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 172,689 shares that were granted under the 2007 Plan were still outstanding as of March 31, 2022 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 reserved for issuance pursuant to awards under the 2017 Plan was initially 850,000 shares, and the number remaining available for grant as of March 31, 2022 was 417,320. Options to purchase 436,418 shares granted under the 2017 Plan were outstanding as of March 31, 2022. 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 or award. The Company utilizes a Black-Scholes model to determine grant date fair values for options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Forfeitures are reflected in compensation costs as they occur for both types of awards. A pre-tax charge of $0.4 million was reflected in the Company’s income statement during the first quarter of 2022 and $0.2 million was charged during the first quarter of 2021, as expense related to stock options and restricted stock awards.
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. There were no shares granted to employees and directors of the Company during the first three months of 2022. These awards are expensed on a straight-line basis over the vesting period. As of March 31, 2022, 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 3.0 years.
9
The Company’s time-vested award activity for the three months ended March 31, 2022 and 2021 is summarized below (unaudited):
Weighted Average Grant-Date Fair Value
Unvested shares, January 1,
165,131
21.72
148,885
18.00
Granted
25.30
Vested
(3,162)
Forfeited
27.16
Unvested shares March 31,
161,749
21.65
167,065
18.79
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.
The Company’s stock option activity during the three months ended March 31, 2022 and 2021 are summarized below (dollars in thousands, except per share data, unaudited):
Weighted AverageExercise Price
Weighted Average Remaining Contractual Term (in years)
AggregateIntrinsicValue (1)
Outstanding at January 1,
415,870
24.15
1,338
495,489
23.67
1,340
Exercised
(4,160)
12.95
Canceled
(3,081)
27.30
(10,600)
27.64
Outstanding at March 31,
412,789
24.12
5.66
1,092
480,729
23.68
6.47
1,701
Exercisable at March 31,
370,789
23.78
5.43
393,129
22.96
6.05
1,684
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 15,021,138 weighted average shares outstanding during the first quarter of 2022 and 15,241,190 during the first quarter of 2021.
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 first quarter of 2022, calculations under the treasury stock method resulted in the equivalent of 51,609 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of 301,714 stock options were excluded from the calculation because they were underwater and thus anti-dilutive. For the first quarter of 2021 the equivalent of 114,700 shares were added in calculating diluted earnings per share, while 351,827 anti-dilutive stock options were not factored into the computation.
Note 6 – Comprehensive Income (Loss)
As presented in the Consolidated Statements of Comprehensive Income (Loss), comprehensive income (loss) includes net income and other comprehensive income (loss). The Company’s only source of other comprehensive income (loss) 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 (loss) 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 (loss) in the current period.
Note 7 – Commitments and Contingent Liabilities
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business. Those financial instruments currently consist of unused commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by counterparties for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and issuing letters of credit as it does for originating loans included on the balance sheet. The following financial instruments represent off-balance-sheet credit risk (dollars in thousands):
Commitments to extend credit
574,625
554,028
Standby letters of credit
7,037
6,651
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 March 31, 2022, the Company was also utilizing a letter of credit in the amount of $128.6 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.
The Company is subject to loss contingencies, including claims and legal actions arising in the ordinary course of business, which are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.
As noted under footnote 3 the adoption of CECL on January 1, 2022 impacted the Company’s ACL on unfunded loan commitments. Additional information is included in footnote 3.
Note 8 – Fair Value Disclosures and Reporting 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 individually identified 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 the Company has 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:
Fair value estimates are made at a specific point in time based on relevant market data and information about the financial instruments. Fair value disclosures for deposits include demand deposits, which are, by definition, equal to the amount payable on demand at the reporting date. Fair value calculations for loans and leases reflect exit pricing, and incorporate our assumptions with regard to the impact of prepayments on future cash flows and credit quality adjustments based on risk characteristics of various financial instruments, among other things. Since the estimates are subjective and involve uncertainties and matters of significant judgment they cannot be determined with precision, and changes in assumptions could significantly alter the fair values presented.
Estimated fair values for the Company’s financial instruments are as follows, as of the dates noted:
Fair Value of Financial Instruments
Fair Value Measurements
CarryingAmount
Quoted Prices inActive Markets forIdentical Assets(Level 1)
SignificantObservableInputs(Level 2)
SignificantUnobservableInputs(Level 3)
Total
Financial assets:
Investment securities available for sale
984,148
40,884
Loans and leases, net held for investment
1,940,933
1,938,933
Collateral dependent loans
18,668
Financial liabilities:
1,757,812
2,862,503
46,585
31,404
12
750,077
223,237
1,973,207
1,960,966
398
221
177
1,696,124
2,780,668
Short term borrowings
49,118
33,281
For financial asset categories that were carried on our balance sheet at fair value as of March 31, 2022 and December 31, 2021, the Company used the following methods and significant assumptions:
13
Assets reported at fair value on a recurring basis are summarized below:
Fair Value Measurements – Recurring
Fair Value Measurements at March 31, 2022, using
RealizedGain/(Loss)(Level 3)
Securities:
U.S. government agencies
9,437
Mortgage-backed securities
293,418
State and political subdivisions
286,380
Corporate bonds
2,475
43,359
Collateralized loan obligations
392,438
Total available-for-sale securities
Fair Value Measurements at December 31, 2021, using
1,574
306,727
304,268
999
27,530
28,529
136,509
195,707
332,216
Fair Value Measurements - Level 3 Recurring
Collateralized Loan Obligations
Corporate Bonds
Balance of recurring Level 3 assets at January 1,
Purchases
13,354
Transfers out of Level 3
(195,707)
Balance of recurring Level 3 assets at March 31,
All of the Company’s collateralized loan obligations with a fair value of $195.7 million as of January 1, 2022 were transferred from Level 3 to Level 2 because observable market data became available due to a significant increase in trading volume for these securities in the first quarter of 2022.
14
Assets reported at fair value on a nonrecurring basis are summarized below:
Fair Value Measurements – Nonrecurring
SignificantObservable Inputs(Level 2)
SignificantUnobservable Inputs(Level 3)
219
18,449
Total collateral dependent loans
Total assets measured on a nonrecurring basis
18,761
161
314
491
The table above includes collateral-dependent 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 collateral dependent loan balances and specific loss reserves associated with those balances is included in Note 10 below.
15
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 individually identified 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 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
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
Allowance for Credit Losses - AFS Securities
Estimated FairValue
9,695
(258)
304,904
395
(11,881)
294,077
2,356
(10,053)
44,755
(1,396)
396,741
(4,303)
Total securities
1,050,172
2,751
(27,891)
1,546
303,912
4,772
(1,957)
290,729
13,807
(268)
28,436
(1)
332,836
68
(688)
957,459
18,769
(2,914)
The Company did not record an ACL on the AFS portfolio at March 31, 2022 or upon implementation on January 1, 2022. As of both dates the Company considers the unrealized loss across the classes of major security-type to be related to fluctuations in market conditions, primarily interest rates, and not reflective of a deterioration in credit value in any case. The Company maintains that it has intent and ability to hold these securities until the amortized cost basis of each security is recovered and likewise concluded as of both January 1, 2022 and March 31, 2022 that it was not more likely than not that any of the securities in an unrealized loss position would be required to be sold. The following bullets outline additional support for management’s conclusion that no amount of the unrealized loss of the securities in an unrealized loss position as of January 1, 2022 and March 31, 2022 was attributable to credit deterioration and a risk of loss, requiring a reserve.
16
17
At March 31, 2022 and December 31, 2021, the Company had 568 securities and 98 securities, respectively, with gross unrealized losses. Since the declines in market values were primarily attributable to changes in interest rates and volatility in the financial markets and not a result of an expected credit loss, no allowance for credit losses was recorded as of March 31, 2022. 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
Less than twelve months
Twelve months or more
Fair Value
7,837
(10,795)
245,781
(1,086)
9,535
172,561
40,360
(26,805)
858,977
(1,797)
107,026
(160)
2,808
30,170
499
175,581
(2,754)
313,276
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)
Proceeds from sales, calls and maturities of securities available for sale
28,781
Gross gains on sales, calls and maturities of securities available for sale
1,032
Gross losses on sales, calls and maturities of securities available for sale
Net gains on sale of securities available for sale
The amortized cost and estimated fair value of investment securities available-for-sale at March 31, 2022 and December 31, 2021 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
Amortized Cost
Maturing within one year
1,627
1,640
Maturing after one year through five years
11,874
11,807
Maturing after five years through ten years
79,707
78,347
Maturing after ten years
256,330
248,302
Securities not due at a single maturity date:
303,893
292,498
3,513
3,547
26,422
26,718
36,840
38,314
253,936
265,792
At March 31, 2022, the Company’s investment portfolio included 400 “muni” bonds issued by 334 different government municipalities and agencies located within 33 different states, with an aggregate fair value of $286.4 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 Alvin Independent School District of Brazoria County (TX). In addition, the Company owned 36 subordinated debentures issued by bank holding companies totaling $43.4 million (fair value).
The Company’s investments in bonds issued by corporations, states, municipalities and political subdivisions are evaluated in accordance with Financial Institution Letter 48-2012, issued by the FDIC, “Revised Standards of Creditworthiness for Investment Securities,” and other regulatory guidance. Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third-party credit rating agencies.
The following table summarizes the amortized cost and fair values of general obligation and revenue bonds in the Company’s investment securities portfolio at the indicated dates, identifying the state in which the issuing municipality or agency operates for our largest geographic concentrations:
Revenue and General Obligation Bonds by Location
Amortized
Fair Market
General obligation bonds
Cost
Value
State of issuance
Texas
100,358
98,135
85,045
89,225
61,033
58,612
64,092
67,066
Washington
20,407
20,614
23,858
24,812
Other (26 & 26 states, respectively)
74,020
72,156
75,037
78,579
Total general obligation bonds
255,818
249,517
248,032
259,682
Revenue bonds
5,752
5,626
7,038
7,377
4,113
3,973
1,349
1,392
2,823
2,659
4,334
4,602
Other (15 & 15 states, respectively)
25,571
24,605
29,976
31,215
Total revenue bonds
38,259
36,863
42,697
44,586
Total obligations of states and political subdivisions
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
Revenue source:
Water
14,145
13,581
15,534
16,220
Sewer
5,037
4,922
3,932
4,165
Lease
3,321
3,263
6,556
6,718
Tax revenue
2,205
1,986
Special Tax
2,106
2,035
5,514
5,842
Other (9 and 9 sources, respectively)
13,649
13,062
11,161
11,641
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.
20
The Company currently has investments in two different LIHTC fund limited partnerships made in 2014 and 2015, both of which were California-focused funds that help the Company meet its obligations under the Community Reinvestment Act. We utilize the cost method of accounting for our LIHTC fund investments, under which we initially record on our balance sheet an asset that represents the total cash expected to be invested over the life of the partnership. Any commitments or contingent commitments for future investment are reflected as a liability. The income statement reflects tax credits and any other tax benefits from these investments “below the line” within our income tax provision, while the initial book value of the investment is amortized on a straight-line basis as an offset to noninterest income, over the time period in which the tax credits and tax benefits are expected to be received.
As of March 31, 2022, our total LIHTC investment book balance was $2.8 million, which includes $0.1 million in remaining commitments for additional capital contributions. There were $0.1 million in tax credits derived from our LIHTC investments that were recognized during the three months ended March 31, 2022, and amortization expense of $0.1 million associated with those investments was netted against pre-tax noninterest income for the same time period. Our LIHTC investments are evaluated annually for potential impairment, and we have concluded that the carrying value of the investments is stated fairly and is not impaired.
Note 10 – Loans and Leases and Allowance for Credit Losses
We adopted the new current expected credit loss accounting guidance, CECL, and all related amendments as of January 1, 2022. Certain prior period credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the current guidance and have not been included below as of March 31, 2022. Under CECL, disclosures are required on the amortized cost basis, whereas legacy GAAP required presentation on the recorded investment basis, with the primary difference being net deferred fees and costs. Unless specifically noted otherwise, March 31, 2022 disclosures are prepared on the amortized cost basis and December 31, 2021 disclosures present information according to the recorded investment basis.
The following table presents loans by class as of March 31, 2022 and December 31, 2021. Accrued interest receivable on loans of $6.7 million and $6.8 million at March 31, 2022 and December 31, 2021 respectively is not included in the loans included in the table below but is included in other assets on the Company’s balance sheet. The March 31, 2022, balance in 1-4 family closed end loans reflects first quarter 2022 purchase of $125.2 million. The majority of the disclosures in this footnote are prepared at the class level which is equivalent to the call report classification or call code classification. The final table in this section separates a rollforward of the Allowance for Credit Losses at the portfolio segment level.
21
Loan And Lease Distribution
8,800
21,369
24,633
25,299
398,871
289,457
23,389
26,588
59,711
53,458
331,764
334,446
857,051
882,888
98,865
106,706
1,803,084
1,740,211
31,663
33,990
87,173
109,791
57,178
101,184
4,233
4,550
Subtotal
Less net deferred loan fees and costs
Loans and leases, amortized cost basis
1,982,131
1,987,861
Allowance for credit losses
The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without individually evaluated reserves as of March 31, 2022:
Nonaccrual Loans and Leases
Nonaccrual Loans
With no allowance for credit loss
With an allowance for credit loss
Loans Past Due 90+ Accruing
1,713
845
399
21,406
7,868
242
8,110
627
285
912
29,919
527
30,446
22
The following table presents the impaired loans as of December 31, 2021, according to loan class, with and without an individually evaluated reserve according to the recorded investment basis. Impaired loans as of December 31, 2021 included both nonaccrual loans and performing TDRs. A separate breakout of nonaccrual loans by class as of December 31, 2021 is included in the past due loans table as of December 31, 2021, later in this footnote.
Unpaid Principal
Recorded
Average Recorded
Interest Income
Balance(1)
Investment(2)
Related Allowance
Investment
Recognized(3)
With an Allowance Recorded
64
352
55
1,048
37
1,096
104
2,005
1,993
182
2,056
138
1,249
1,248
1,278
144
367
126
393
5,010
4,997
428
5,175
473
244
246
757
127
873
41
164
180
6,175
6,162
818
6,474
542
With no Related Allowance Recorded
788
869
648
690
1,353
1,234
1,282
2,789
2,670
2,841
134
186
466
550
3,389
3,270
3,577
9,564
9,432
10,051
548
The Company recognized $0 in interest on nonaccrual loans during the first quarter 2022 and would have recognized an additional $0.1 million on nonaccrual loans had those loans not been designated as nonaccrual.
23
The following table presents the amortized cost basis of collateral-dependent loans by class as of March 31, 2022:
Collateral Dependent Loans
Individual Reserves
1,487
712
562
21,210
613
Total loans and leases
29,691
Absent the significant deterioration of the collateral value of Farmland securing several loans to a single borrower, which were downgraded to non-accrual and collateral dependent during the first quarter of 2022 there were no significant changes in the population of collateral dependent loans, or in the valuations of the related collateral. All of the Company’s collateral dependent loans had appraised collateral values which exceed the amortized cost basis of the related loan as of March 31, 2022, which the company has applied discounts against. The weighted-average loan to value of the Company’s collateral-dependent loans as of March 31, 2022, was 18%. No collateral-dependent loans were in the process of foreclosure as of March 31, 2022.
24
The following table presents the aging of the amortized cost basis in past-due loans, according to class, as of March 31, 2022:
Past Due Loans and Leases
30-59 Days Past Due
60-89 Days Past Due
Loans Past Due 90+ Days
Total Past Due
Loans not Past Due
Total Loans
24,532
179
399,673
399,852
23,690
59,632
2,543
329,257
331,800
189
854,315
854,504
98,881
98,925
2,955
1,798,780
1,801,735
259
31,502
31,761
320
344
86,788
87,132
4,308
4,325
2,977
579
3,575
1,978,556
The following table presents the aging of the recorded investment in past-due and nonaccrual loans, according to class, as of December 31, 2021:
30-59 Days
60-89 Days
90 Days Or More Past
Total Financing
Non-Accrual
Past Due
Due(2)
Current
Receivables
Loans(1)
Real Estate:
1,532
132
1,664
287,793
1,023
26,558
892
Commercial real estate owner occupied
698
822
333,624
Commercial real estate non-owner occupied
Total real estate loans
1,686
2,516
1,737,695
3,149
284
33,706
378
283
756
109,035
973
4,541
Total gross loans and leases
2,165
1,265
3,565
1,986,161
4,522
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. At March 31, 2022, the Company had a total of $5.6 million in TDRs, including $1.0 million in TDRs that were on non-accrual status. Generally, a non-accrual loan that has been modified as a TDR remains on non-accrual status for a period of at least six months to demonstrate the borrower’s ability to comply with the modified terms. However, performance prior to the modification, or significant events that coincide with the modification, could result in a loan’s return to accrual status after a shorter performance period or even
at the time of loan modification. Regardless of the period of time that has elapsed, if the borrower’s ability to meet the revised payment schedule is uncertain, then the loan will be kept on non-accrual status.
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
Three months ended March 31, 2022
Rate Modification
Term Modification
Interest Only Modification
Rate & Term Modification
Term & Interest Modification
Three months ended March 31, 2021
Interest OnlyModification
83
118
185
427
Pre-Modification
Post-Modification
Number ofLoans
OutstandingRecordedInvestment
ReserveDifference⁽¹⁾
Reserve
0
Outstanding RecordedInvestment
Outstanding Recorded Investment
Reserve Difference⁽¹⁾
116
111
115
160
27
The Company had no finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during the three-month period ending March 31, 2022 and 2021.
The Company monitors the credit quality of loans on a continuous basis using the regulatory and accounting classifications of pass, special mention and substandard to characterize and qualify the associated credit risk. Loans classified as “loss” are immediately charged-off. The Company uses the following definitions of risk classifications:
Pass – Loans listed as pass include larger non-homogeneous loans not meeting the risk rating definitions below and smaller, homogeneous loans not assessed on an individual basis.
Special Mention – Loans classified as special mention have the potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard – Loans classified as substandard are those loans with clear and well-defined weaknesses such as a highly leveraged position, unfavorable financial operating results and/or trends, or uncertain repayment sources or poor financial condition, which may jeopardize ultimate recoverability of the debt.
The following tables present the amortized cost of loans and leases by credit quality classification in addition to loan and lease vintage as of March 31, 2022:
Loan and Lease Credit Quality by Vintage
Term Loans and Loans Amortized Cost Basis by Origination Year
2020
2019
2018
Prior
Revolving Loans Amortized Cost
1-4 family construction
Pass
Special Mention
Substandard
3,617
4,395
798
1,087
1,306
13,253
24,456
76
4,471
66,654
253,394
8,104
2,112
12,057
52,248
394,569
1,022
2,116
3,138
33
1,243
2,145
254,263
13,112
55,607
587
376
81
20,990
22,125
468
122
975
1,097
213
22,433
6,589
525
12,099
5,014
13,297
12,919
5,754
56,197
3,435
16,354
Commercial real estate - OO
5,305
26,484
75,109
38,895
39,813
128,482
8,230
322,318
2,057
2,790
4,847
343
80
3,450
762
4,635
5,648
40,952
39,893
134,722
8,992
Commercial real estate - NOO
9,456
19,831
488,558
27,003
58,415
173,452
33,369
810,084
16,432
7,277
3,652
2,710
30,071
852
13,175
322
504,990
66,544
190,279
36,401
1,386
5,042
2,060
8,318
31,618
17,364
65,788
7,150
3,857
11,555
4,722
16,860
21,582
20,190
52,335
17,912
273
3,180
481
34
6,990
9,585
21,635
939
8,607
564
9,187
11,787
7,006
11,088
1,414
18,261
8,686
7,372
6,129
11,558
23,261
76,681
3,245
142
1,760
3,952
9,341
102
721
78
1,110
18,503
11,979
7,675
6,231
14,039
27,291
604
212
337
2,250
4,260
349
255
494
2,258
90,638
336,958
623,117
86,361
161,555
472,142
211,360
29
The following table presents the Company’s loan portfolio on the recorded investment basis, according to loan class and credit grade as of December 31, 2021:
SpecialMention
Impaired
19,669
1,700
24,958
282,717
4,703
201
1,836
23,277
615
2,641
49,986
3,472
321,996
6,108
3,860
2,482
841,728
26,364
14,429
92,479
10,266
1,656,810
53,228
22,506
7,667
32,513
1,099
98,367
9,989
1,223
4,349
31
1,893,223
63,248
23,823
CECL replaces the legacy accounting for loans designated as purchased credit impaired (“PCI”) with loans designated as purchased credit deteriorated (“PCD”). PCD loans are loans acquired or purchased, which as of acquisition, had evidence of more than insignificant credit deterioration since origination. Due to the immaterial balance in the Company’s PCI loans as of December 31, 2021 management elected not to transition these loans into the PCD designation. As of March 31, 2022 the Company had no loans categorized as PCD.
As noted in footnote 3, on January 1, 2022 the Company implemented CECL and increased our ACL, previously the allowance for loan and lease losses, with a $9.5 million cumulative adjustment. The Company’s ACL is calculated quarterly, with any difference in the calculated ACL and the recorded ACL trued-up through an entry to the provision for credit losses. Management calculates the quantitative portion of collectively evaluated reserves for all loan categories, with the exception of Farmland, Agricultural Production and Consumer loans, using a discounted cash flow (“DCF”) methodology. For purposes of calculating the quantitative portion of collectively evaluated reserves on Farmland, Agricultural Production, and Consumer categories a Remaining Life methodology is utilized. For purposes of estimating the Company’s ACL, Management generally evaluates collectively evaluated loans by Federal Call code in order to group loans with similar risk characteristics together, however management has grouped loans in selected call codes together in determining portfolio segments, due to similar risk characteristics and reserve methodologies used for certain call code classifications.
The DCF quantitative reserve methodology incorporates the consideration of probability of default (“PD”) and loss given default (“LGD”) estimates to estimate periodic losses. The PD estimates are derived through the application of reasonable and supportable economic forecasts to call code specific regression models, derived from the consideration of historical bank-specific and peer loss-rate data. The loss rate data has been regressed against benchmark economic indicators, for which reasonable and supportable forecasts exist, in the development of the call-code specific regression models. Regression models are refreshed on an annual basis, in order to pull in more recent loss rate data. Reasonable and supportable forecasts of the selected economic metric are then input into the regression model to calculate an expected default rate. The expected default rates are then applied to expected monthly loan balances estimated through the consideration of contractual repayment terms and expected prepayments. The Company utilizes a four-quarter forecast period, after which the expected default rates revert to the historical average for each call code, over a four-quarter reversion period, on a straight-line basis. The prepayment assumptions applied to expected cash flows over the contractual life of the loans, are based on Bank specific prepayment history, specific to each call code, and subject to update on an annual basis. LGD utilized in the DCF is derived from the application of the Frye-Jacobs theory which
relates LGD to PD based on historical peer data, as calculated by a third-party. Economic forecasts are considered over a four-quarter forecast period, with reversion to mean occurring on a straight-line basis over four quarters. The call code regression models utilized upon implementation of CECL on January 1, 2022, and as of March 31, 2022, were identical, and relied upon reasonable and supportable forecasts of the National Unemployment Rate. Management selected the National Unemployment Rate as the driver of quantitative portion of collectively reserves on loan classes reliant upon the DCF methodology, primarily as a result of high correlation coefficients identified in regression modeling, the availability of forecasts including the quarterly FOMC forecast, and given the widespread familiarity of stakeholders with this economic metric.
The quantitative reserves for Farmland, Agricultural Production and Consumer loans are calculated using a Remaining Life methodology where average historical bank specific and peer loss rates are applied to expected loan balances over an estimated remaining life of loans in calculation of the quantitative portion of collectively evaluated loans in these classes. The estimated remaining life is calculated using historical bank-specific loan attrition data. For the Farmland, Agricultural Production and Consumer classes of loans, reasonable and supportable forecasts of the National Unemployment rate, real GDP and the housing price index are considered through estimation of qualitative reserves.
Management recognizes that there are additional factors impacting risk of loss in the loan portfolio beyond what is captured in the quantitative portion of reserves on collectively evaluated loans. As current and expected conditions, may vary compared with conditions over the historical lookback period, which is utilized in the calculation of quantitative reserves, management considers whether additional or reduced reserve levels on collectively evaluated loans may be warranted given the consideration of a variety of qualitative factors. Several of the following qualitative factors (“Q-factors”) considered by management reflect the legacy regulatory guidance on Q-factors, whereas several others represent factors unique to the Company or unique to the current time period.
The qualitative portion of the Company’s reserves on collectively evaluated loans are calculated using a combination of numeric frameworks and management judgement, to determine risk categorizations in each of the Q-factors presented above. The amount of qualitative reserves is also contingent upon the historical peer, life-of-loan-equivalent, loss rate ranges and the relative weighting of Q-factors according to management’s judgement.
Although collectively evaluated reserves are generally calculated separately at the call code or loan class level, management has grouped loan classes with similar risk characteristics into the following portfolio segments: 1-4 Family Real Estate, Commercial Real Estate, Farmland & Agricultural Production, Commercial & Industrial, Mortgage Warehouse and Consumer loans. Loans secured by 1-4 family residences have a different profile from loans secured by Commercial Real Estate. Generally, the borrowers for 1-4 Family loans are consumers whereas borrowers for Commercial Real Estate are often businesses. The COVID-19 pandemic illustrated how these different categories of real estate loans were subject to different risks, which was exacerbated by the widespread work-from-home model adopted by many companies during and since the pandemic. Farmland and Agricultural Production loans are included in a single
segment as these loans are often times to the same borrowers, facing the same risks relating to commodity prices, water supply and drought conditions in addition to other environmental concerns. Commercial & Industrial loans are separated into a unique segment given the uniqueness of these loans, which are often revolving and secured by other business assets as opposed to real estate. Mortgage warehouse loans are also unique in the Company’s portfolio and warrant separate presentation as an individual portfolio segment, given the specific nature of these constantly revolving lines to mortgage originators and also attributable to a very limited loss history, even after consideration of peer data. Finally, the Company splits out Consumer loans as a separate segment as a result of the small balance, homogeneous terms that characterize these loans.
Management individually evaluates loans that do not share risk characteristics with other loans when estimating reserves. As of March 31, 2022, the only loans that Management considered to have different risk characteristics from other loans sharing the same Federal Call Report code were loans designated nonaccrual.
The following table presents the activity in the allowance for credit losses by portfolio segment for the quarter ended March 31, 2022:
Allowance for Credit Losses and Recorded Investment in Financing Receivables
1-4 Family Real Estate
Commercial Real Estate
Farmland & Agricultural Production
Commercial & Industrial
Mortgage Warehouse
Consumer
Allowance for credit losses:
1,909
9,052
1,202
Impact of adopting ASC 326
611
9,628
(480)
Charge-offs
(1,958)
(74)
(299)
(2,331)
Recoveries
87
260
184
551
Provision for credit losses
722
(1,897)
1,842
(40)
106
Ending allowance balance:
3,329
17,043
606
1,231
51
270
22,530
The $1.2 million reduction in the Company’s Loan Portfolio ACL in the first quarter, from $23.7 million upon implementation on January 1, 2022 and $22.5 million as of March 31, 2022 primarily reflects a narrowing of the gap between the current and expected California unemployment rate and the National unemployment rate as of March 31, 2022 compared with December 31, 2021. The charge-offs of $2.0 million in the Farmland & Agricultural Production segment during the first quarter 2022 reflects a change in the expected valuation of collateral on a single loan relationship. Management considers this charge-off to be a unique circumstance and not indicative of an increased level of risk in the Farmland & Agricultural Production segment.
The following table presents the activity in the allowance for loan losses by portfolio segment for the quarter ended March 31, 2021:
Real Estate
Agricultural Products
Commercial and Industrial (1)
Unallocated
Beginning balance
11,766
482
4,721
720
17,738
(233)
(52)
(163)
(448)
453
110
216
779
Provision
820
190
(574)
(180)
(6)
Ending balance
12,806
672
4,205
593
43
18,319
Reserves:
Specific
361
409
1,185
General
12,408
311
3,796
576
17,134
Loans evaluated for impairment:
Individually
16,611
467
1,898
19,195
Collectively
1,849,655
45,009
369,804
4,805
2,269,273
1,866,266
45,476
371,702
5,024
2,288,468
Note 11 – Long-Term Debt
Long-Term Debt
Unamortized
Debt Issuance
Principal
Costs
Fixed - floating rate subordinated debentures, due 2031 (1)
50,000
(849)
(859)
Total long-term debt
Note 12 – 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.
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 sources of noninterest income for the three-month periods ended March 31, 2022 and 2021. Items outside the scope of ASC 606 are noted as such (dollars in thousands, unaudited).
For the three months ended March 31,
Returned item and overdraft fees
1,328
1,105
Other service charges on deposits
1,712
1,662
Debit card interchange income
1,894
Loss on limited partnerships(1)
(113)
Dividends on equity investments(1)
192
Unrealized gains recognized on equity investments(1)
(332)
857
Net gains on sale of securities(1)
Other(1)
1,253
Salaries and employee benefits (1)
Occupancy expense (1)
(Gain) loss on sale of OREO
Other (1)
6,079
6,649
Percentage of noninterest revenue not within scope of ASC 606.
15.95%
31.76%
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.
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. These forward-looking statements are within the meaning of Section 27A of the Securities Act of 1933 (“1933 Act”), as amended and Section 21E of the Securities Exchange Act of 1934 (“1934 Act”), as amended. Those sections of the 1933 Act and 1934 Act provide a “safe harbor” for forward-looking statements in order to encourage companies to provide prospective information about their financial performance as long as important factors that could cause actual results to differ significantly from projected results are identified with meaningful cautionary statements. Words such as “expects”, “anticipates”, “believes”, “projects”, “intends”, and “estimates” or variations of such words and similar expressions, as well as future or conditional verbs preceded by “will”, “would”, “should”, “could” or “may” are intended to identify forward-looking statements. These forward-looking statements are based on certain underlying assumptions and are not guarantees of future performance, as they could be impacted by several potential risks and developments that cannot be predicted with any degree of certainty.
These statements are based on management’s current expectations regarding economic, legislative, regulatory and other environmental issues that may affect our earnings in future periods. 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:
Risk factors that could cause actual results to differ materially from results that might be implied by forward-looking statements include the risk factors detailed in the Company’s Form 10-K for the fiscal year ended December 31, 2021 and in Item 1A, herein. We do not update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.
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:
Critical accounting areas are evaluated on an ongoing basis to ensure that the Company’s financial statements incorporate our most recent expectations regarding those areas.
OVERVIEW OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS SUMMARY
First Quarter 2022 compared to First Quarter 2021
First quarter 2022 net income was $7.4 million, or $0.49 per diluted share, compared to $11.1 million, or $0.72 per diluted share in the first quarter of 2021. The Company’s annualized return on average equity was 8.64% and annualized return on average assets was 0.88% for the quarter ended March 31, 2022, compared to 12.94% and 1.40%, respectively, for the same quarter in 2021. The primary drivers behind the variance in first quarter net income are as follows:
FINANCIAL CONDITION SUMMARY
March 31, 2022 relative to December 31, 2021
The Company’s assets totaled $3.4 billion at March 31, 2022 unchanged from December 31, 2021. The following provides a summary of key balance sheet changes during the first three months of 2022:
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 many actions impacting the Company.
These actions included, among other things, the Federal Open Market Committee (FOMC) reducing the federal funds rate; California issuing a state-wide shelter-in-place order and various other orders at the state and local levels restricting business operations, closing schools, and thereafter prescribing requirements for reopening; and various pieces of federal legislation were passed to attempt to address the impact of COVID-19 on the economy.
Impact of COVID-19 on the Company’s Operations
38
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 BOLI and investment gains. The majority of the Company’s noninterest expense is comprised of operating costs that facilitate offering a full range of banking services to our customers.
.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income decreased $3.8 million to $24.8 million, for the first quarter of 2022 over the first quarter of 2021.
For the first quarter of 2022 as compared to the same quarter in 2021, average loan balances decreased $415.3 million, or 18%, primarily due to $181.6 million, or a 75% decrease in the utilization of mortgage warehouse lines, a $126.0 million, or 7% decrease in real estate secured loans, and a $94.5 million, or 49% decrease in commercial loans, mostly from the forgiveness of SBA PPP loans. Ag production loans were also down $12.2 million or 26%. The average yield on the overall loan portfolio decreased 21 basis points, while there was a 8 bps unfavorable increase in the cost of interest-bearing liabilities for the first quarter of 2022 as compared to the same quarter in 2021.
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.
Average Balances and Rates
For the three months ended
March 31, 2021
Assets
Average Balance (1)
Income/Expense
AverageRate/Yield (2)
AverageBalance (1)
Investments:
Interest-earning due from banks
194,846
0.19%
76,504
0.10%
Taxable
744,599
1.90%
317,254
2.02%
Non-taxable
294,409
3.01%
226,838
3.28%
Total investments
1,233,854
5,309
620,596
3,046
2.24%
Loans and leases:(3)
Real estate
1,753,394
18,326
4.24%
1,879,359
21,391
4.62%
33,986
302
3.60%
46,153
419
3.68%
Commercial
97,127
1,398
5.84%
191,656
2,451
5.19%
4,448
206
18.78%
5,422
196
14.66%
61,255
510
3.38%
242,865
1,928
3.22%
1,485
8.19%
1,588
6.90%
1,951,695
4.32%
2,367,043
4.53%
Total interest earning assets (4)
3,185,549
2,987,639
4.05%
Other earning assets
15,679
13,275
Non-earning assets
210,724
201,114
3,411,952
3,202,028
Liabilities and shareholders' equity
Interest bearing deposits:
Demand deposits
202,962
0.21%
130,763
73
0.23%
NOW
546,280
0.06%
569,171
101
0.07%
Savings accounts
467,700
67
391,091
0.05%
Money market
151,339
136,422
0.09%
Time Deposits
293,684
234
0.32%
412,416
289
0.28%
Brokered deposits
60,000
100,000
0.25%
Total interest bearing deposits
1,721,965
0.13%
1,739,863
0.14%
Borrowed funds:
Federal funds purchased
170
5,822
105,067
46,097
45
0.40%
11,530
49,143
3.53%
35,320
2.93%
35,141
2.85%
Total borrowed funds
189,701
765
1.64%
98,590
295
1.21%
Total interest bearing liabilities
1,911,666
1,838,453
0.20%
Demand deposits - noninterest bearing
1,093,709
977,137
59,026
39,199
347,551
347,239
Interest income/interest earning assets
Interest expense/interest earning assets
0.17%
0.12%
Net interest income and margin(5)
3.21%
3.93%
40
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
2022 over 2021
Increase (decrease) due to
Assets:
Volume
Rate
Mix
Net
Federal funds sold/due from time
74
2,125
(91)
(123)
1,912
(119)
277
Total investments (1)
2,260
(192)
194
2,263
(1,434)
(1,748)
(3,065)
(110)
(117)
(1,209)
308
(152)
(1,053)
(35)
(10)
Mortgage warehouse
(1,442)
(70)
(1,418)
(2)
Total loans and leases (1)
(4,232)
(1,295)
(5,640)
Total interest earning assets (1)
(1,972)
(1,487)
(3,377)
Liabilities
(3)
(4)
(16)
(19)
(7)
(84)
(11)
(25)
(14)
Total interest bearing deposits (1)
(59)
(20)
(48)
58
(12)
Subordinated debt
Total borrowed funds (1)
56
470
Total interest bearing liabilities (1)
422
Net interest income (1)
(1,969)
(1,513)
(318)
(3,799)
The volume variance calculated for the first three months of 2022 relative to the first three months of 2021 was an unfavorable $2.0 million due to lower average balances of interest earning assets, resulting from a decrease in all categories of loans, partially offset by an increase in investment balances. There was an unfavorable rate variance of $1.5 million for the comparative quarters since the weighted average yield on interest earning assets decreased by 67 basis points and the weighted average cost of interest-bearing liabilities increased by 8 basis points. There was also an
unfavorable mix variance of $0.3 million primarily from the issuance of subordinated debentures issued at 3.25% in September of 2021. The rate variance was negatively impacted by the following factors: high average balances of cash and due from banks earning on average 19 bps, new loans and investments having lower yields overall, including low-yielding purchased 1-4 SFD mortgage loans. Increased costs on interest bearing liabilities also had a negative impact on the variance primarily from the issuance of subordinated debt mentioned above. The Company’s net interest margin for the first quarter of 2022 was 3.21%, as compared to 3.93% for the first quarter of 2021.
At March 31, 2022, approximately 7% of our total portfolio, or $142.6 million, consists of variable rate loans. Of these variable rate loans, approximately $22.0 million have floors. At March 31, 2022, our outstanding fixed rate loans represented 28% of our loan portfolio. The remaining 65% of our loan portfolio at March 31, 2022 consists of adjustable-rate loans; 78% of these loans (approximately $1.0 billion) will not begin adjusting for at least another 3 years, but up to 10 years. These loans are typically adjustable every five years after the initial adjustment. Approximately $47.8 million of these adjustable-rate loans have the ability to reprice next quarter.
Cash balances for the quarterly comparisons have increased and have a negative impact on our net interest margin since cash balances earn considerably lower yields than other earning assets. Average cash and due from banks was $194.8 million, an increase of $118.3 million for the first quarter of 2021.
Overall average investment securities increased by $494.9 million for the first quarter of March 31, 2022 as compared to March 31, 2021. For the quarter ending March 31, 2022 over the same period for 2021, average non-taxable securities increased $67.6 million and taxable securities increased $427.3 million. The overall investment portfolio had a tax-equivalent yield of 2.22% at March 31, 2022, with an average life of 6.21 years.
Interest expense was $1.3 million in the first quarter of 2022, an increase of $0.4 million, or 47%, compared to the first quarter of 2021. The increase in interest expense for the quarter is primarily attributable to the issuance of subordinated debentures in September of 2021 at 3.25%. The average cost of interest-bearing deposits decreased by 1 basis point to 13 basis points for the first quarter of 2022 compared to the first quarter of 2021, while the average cost of borrowed funds increased 43 basis points for the first quarter of 2022 as compared to the same period in 2021. Non-interest bearing demand deposits increased $116.6 million or 12% for the first quarter of 2022 as compared to the first quarter of 2021.
PROVISION FOR CREDIT LOSSES ON LOANS AND LEASES
The Company implemented the Current Expected Credit Loss ("CECL") accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) on January 1, 2022. Upon implementation the Company recorded a $10.4 million increase in the allowance for credit losses, which included a $0.9 million reserve for unfunded commitments as an adjustment to equity, net of deferred taxes.
Credit risk is inherent in the business of making loans. The Company sets aside an allowance for credit losses on loans and leases, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for credit losses on loans and leases. The Company recorded an expense related to a credit loss provision for loans and leases of $0.6 million in the first quarter of 2022 relative to a provision for loan and lease losses of $0.3 million in the first quarter of 2021. The higher provision for credit losses in the first quarter of 2022 over the same quarter in 2021, was primarily due to the impact of a $1.8 million in net charge-offs in the first quarter of 2022, partially offset by a decrease in the allowance for credit losses for loans evaluated on a pool basis. The increase in net charge-offs in the first quarter of 2022 was primarily related to a single loan relationship that defaulted in late March 2022 upon the discovery of new information. No additional allowance was booked for this loan individually evaluated for expected losses. The first quarter of 2022 decrease in the allowance for credit losses evaluated on a pooled basis was primarily due to a decline in the qualitative factors resulting from improvements in regional economic factors.
Specifically identifiable and quantifiable credit losses are immediately charged off against the allowance, with subsequent recoveries reflected as an increase to the allowance. The Company recorded net charge-offs of $1.8 million in the first quarter of 2022 as compared to net recoveries of $0.3 million for the comparative period of 2021.
The allowance for credit losses on loans and leases is at a level that, in Management’s judgment, is adequate to absorb probable credit losses on loans related to individually identified loans as well as probable incurred credit 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 10 to the consolidated financial statements, and below, under “Allowance for Credit Losses.” The process utilized to establish an appropriate credit allowance for losses on loans and leases can result in a high degree of variability in the Company’s credit 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 March 31, 2022 and 2021:
Noninterest Income/Expense
Noninterest income:
Service charges on deposit accounts
Other service charges and fees
2,787
2,560
Net gains on sale of securities available-for-sale
(645)
583
(151)
920
As a % of average interest earning assets (1)
0.77%
0.93%
Noninterest expense:
Occupancy costs
Furniture & equipment
454
452
Premises
1,840
2,034
Advertising and marketing costs
406
321
Data processing costs
1,426
Deposit services costs
2,245
2,068
Loan services costs
Loan processing
169
107
Other operating costs
Telephone & data communications
444
380
Postage & mail
84
462
Professional services costs
Legal & accounting
546
442
Other professional service
143
897
Stationery & supply costs
85
Sundry & tellers
139
200
2.57%
2.75%
Efficiency ratio (2)(3)
67.08%
56.43%
Noninterest Income:
Total noninterest income reflected a decrease of $0.8 million, or 11%, for the quarter ended March 31, 2022 as compared to the same quarter in 2021 due mostly to lower BOLI income and a decrease in the fair market value adjustment for an equity investment, partially offset by a gain on the sale of investment securities.
Service charges on deposit accounts increased by $0.3 million or 10%, for the quarterly comparison. The variance was primarily due to increases in overdraft fees and analysis fees on treasury management customers.
Other service charges and fees increased $0.2 million or 9% for the first quarter of 2022 as compared to the same period in 2021 mainly due to an increase in debit card interchange fees from higher usage.
Gains of the sales of securities were $1.0 million for the first quarter of 2022. There were no sales in the comparable quarter of 2021. The sale in the first quarter of 2022 was a strategic effort to rebalance the portfolio by selling longer duration and higher price volatility securities as a hedge against rising interest rates, due to likely persistent inflationary pressures in the near-intermediate term environment.
BOLI income decreased by $1.2 million for the first quarter of 2022 as compared to the first quarter of 2021. The variance is 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 lower quarterly values in BOLI policies are offset by lower deferred compensation expense reflected primarily in director fees expense. At March 31, 2022, there was $43.5 million in BOLI policies and $10.1 million in separate account BOLI policies associated with the deferred compensation plans.
In the “other” category of noninterest income the Company reflected a $1.1 million decrease in the first quarter of 2022 as compared to the first quarter of 2021. The quarterly comparison includes a $1.2 million change in the valuation adjustment of the Company’s equity investment in Pacific Coast Bankers’ Bank. The valuation of restricted stock held by the Company is 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 and an updated valuation report becomes available, generally in the late first quarter of each year.
Noninterest Expense:
Total noninterest expense had a favorable decline of $0.1 million in the first quarter of 2022 as compared to the first quarter of 2021.
The tax-equivalent efficiency ratio was 67.08% in the first quarter of 2022 as compared to 56.43% in the same quarter of 2021. The efficiency ratio represents total noninterest expense divided by the sum of fully tax-equivalent net interest and noninterest income; the provision for credit losses on loans and leases and investment gains/losses are excluded from the equation. The ratio spiked higher in the first three months of 2022 despite lower noninterest expense because the denominator of the equation, net interest income and noninterest income was lower during the same period, mainly due to lower interest earning assets.
Salaries and benefits were $0.7 million higher in the first quarter of 2022 as compared to the first quarter of 2021. The increase in the year-over-year quarterly comparison is due to several factors, including merit increases for employees due to annual performance evaluations during the period, higher payroll taxes in the first quarter, and the strategic hiring of lending and management staff. Overall full-time equivalent employees were 484 at March 31, 2022 as compared to 508 at March 31, 2021.
Occupancy expense was $0.2 million lower for the first quarter of 2022 as compared to the same quarter last year. We closed five branch facilities in the second quarter of 2021 which impacted the decrease for the year over year quarterly comparison.
Further, other noninterest expense categories were $0.7 million lower for the first quarter 2022 as compared to the first quarter in 2021. The principal decreases were in loan services costs mostly from the write up of the provision for credit losses on unfunded commitments for $0.1 million, a favorable variance in foreclosed asset costs for $0.1 million as all but one OREO property was sold in 2021, thus our carrying costs have decreased and a $0.8 million decrease in professional services costs. The positive variance in professional services costs came mostly from a decrease in directors deferred compensation expense which is linked to the fluctuations in BOLI income.
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 27.0% of pre-tax income in the first quarter of 2022 relative to 25.5% in the first quarter of 2021. The increase in effective tax rate in the first quarter of 2022 is due to tax credits and tax-exempt income representing a smaller percentage of total taxable income.
BALANCE SHEET ANALYSIS
EARNING ASSETS
The Company’s interest earning assets are comprised of loans and investments, including overnight investments and surplus balances held in interest earning accounts in our Federal Reserve Bank account. 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.
The investment portfolio is reflected on the balance sheet as investment securities and totaled $1.03 billion, or 30% of total assets at March 31, 2022, and $973.3 million, or 29% of total assets at December 31, 2021. In addition, within the Cash and Due from Banks account on the balance sheet was $186.4 million of surplus interest earning balances in our Federal Reserve Bank account at March 31, 2022, as compared to $193.2 million at December 31, 2021. Surplus balances in our Federal Reserve Bank account and fed funds sold to correspondent banks typically represent the temporary investment of excess liquidity.
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 duration was 3.0 years at March 31, 2022, as compared to an average effective duration of 3.2 years at year-end 2021.
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
Available for Sale
The net unrealized loss on our investment portfolio, or the amount by which amortized cost exceeded aggregate fair market values, was $25.1 million at March 31, 2022, a $41.0 million swing relative to the net unrealized gain of $15.9 million at December 31, 2021. The change was caused by increased long-term market interest rates on fixed-rate bond values. Since the declines in market values were primarily attributable to changes in interest rates and volatility in the financial markets and not a result of an expected credit loss, no allowance for credit losses was recorded as of March 31, 2022.
Municipal bond balances comprise 28% of our total securities portfolio (fair value) at March 31, 2022, and 31% at December 31, 2021. Municipal bonds purchased have strong underlying ratings, and we review all municipal bonds in our portfolio every quarter for potential impairment.
The corporate bonds purchased in the first three months 2022 and throughout 2021 are exclusively subordinated debentures of bank holding companies. These bonds were subject to a credit review by the credit administration department prior to their purchase and are subject to quarterly potential impairment reviews.
The purchases of collateralized loan obligations (“CLOs”) are exclusively AAA and AA rated tranches. Each purchase is subject to a credit, concentration, and structure review by the credit administration department prior to their purchase and are subject to quarterly potential impairment reviews. The AAA and AA-rated CLO purchases were primarily a balance sheet diversification strategy to utilize available liquidity without adding duration. In addition to providing asset class diversification given the high level of real estate backed earning assets on the balance sheet, these floating rate CLOs are more asset sensitive which complements the longer-term fixed-rate earning assets.
Investment securities that were pledged as collateral for borrowings and/or potential borrowings from the Federal Home Loan Bank and the Federal Reserve Bank, customer repurchase agreements, and other purposes as required or permitted by law totaled $160.7 million at March 31, 2022 and $167.2 million at December 31, 2021, leaving $864.3 million in unpledged debt securities at March 31, 2022 and $806.1 million at December 31, 2021. Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled $40.4 million at March 31, 2022 and $47.0 million at December 31, 2021.
LOAN AND LEASE PORTFOLIO
A distribution of the Company’s loans showing the balance and percentage of loans by type is presented for the noted periods in the table below. The balances in the table are before deferred or unamortized loan origination, extension, or commitment fees, and deferred origination costs. While not reflected in the loan totals and not currently comprising a
material segment of our lending activities, the Company also occasionally originates and sells, or participates out portions of, loans to non-affiliated investors.
Loan and Lease Distribution
Percent
0.45%
1.08%
1.25%
1.28%
20.40%
14.65%
1.35%
3.04%
2.71%
16.93%
43.61%
44.69%
5.05%
5.40%
91.94%
88.09%
1.62%
1.72%
4.45%
5.56%
2.92%
5.12%
0.22%
101.15%
100.72%
Allowance for credit losses on loans
(1.15)%
(0.72)%
Total loans and leases, net
100.00%
1,975,470
Gross loans and leases at $2.0 billion, remained relatively flat during the first quarter of 2022 with an overall 0.3% change. The net change did have some offsetting components with the larger fluctuations being a $44.0 million decline on mortgage warehouse line utilization. There was also a $25.8 million decrease in non-owner occupied commercial real estate, and a $16.8 million of decrease in Small Business Administration’s Paycheck Protection Program (“PPP”) loans. These declines were mostly offset by a $109.4 million increase in 1-4 family mortgage loans due to purchases of high-quality jumbo mortgage loans designed as a bridge to organic loan growth as the Bank’s core pipeline continues to improve with the recent hiring of loan teams which will further diversify the loan portfolio by specializing in various categories of agricultural real estate and agricultural production loans.
The Company’s regulatory commercial real estate concentration ratio decreased to 234% at March 31, 2022 as compared to 248% at December 31, 2021.
Regarding line utilization, unused commitments, excluding mortgage warehouse and consumer overdraft lines, were $224.4 million at March 31, 2022, compared to $242.3 million at December 31, 2021. Total utilization excluding mortgage warehouse and consumer overdraft lines was 61% at March 31, 2022, compared to 61% at December 31, 2021. Mortgage warehouse utilization was 16% at March 31, 2022, as compared to 28% at December 31, 2021. Utilization of mortgage warehouse lines in the future could be impacted by fluctuations in interest rates, seasonality, and other factors affecting home purchasing or refinancing demand including economic uncertainty.
As expected, PPP loans continue to decline as borrowers receive forgiveness on these loans. There were 160 loans for $15.0 million outstanding at March 31, 2022, compared to 438 loans for $31.8 million at December 31, 2021.
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, in addition to foreclosed assets which is primarily OREO, but can include other foreclosed assets.
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 4013 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
NON-ACCRUAL LOANS:
1,530
2,176
563
434
TOTAL REAL ESTATE
6,277
Agriculture
1,835
TOTAL NONPERFORMING LOANS
8,599
945
Total nonperforming assets
30,539
4,615
9,544
Performing TDRs (1)
4,568
4,910
10,596
Nonperforming loans as a % of total gross loans and leases
1.54%
0.38%
Nonperforming assets as a % of total gross loans and leases and foreclosed assets
0.42%
Total nonperforming assets increased by $25.9 million, to $30.6 million during the first three months of 2022, primarily as a result of one relationship in the dairy industry consisting of four separate loans. These loans were written down by $1.96 million in the first quarter of 2022 and no further allowance for credit losses was deemed necessary on these loans. The Company's ratio of nonperforming loans to gross loans increased to 1.54% at March 31, 2022 from 0.23% at December 31, 2021; due primarily to the loan relationship downgrade previously mentioned. All of the Company's nonperforming 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 $4.6 million in loans classified as performing TDRs on which we were still accruing interest as of March 31, 2022, a decrease of $0.3 million, or 7%, relative to December 31, 2021.
Foreclosed assets had a carrying value of $0.1 million at March 31, 2022 and December 31, 2021 comprised of one property classified as OREO. 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 $3.0 million in loans past due 30-59 days at March 31, 2022. This is an increase of $0.8 million over the balance at December 31, 2021. All of these past due loans are under management supervision and every effort is being taken to assist the borrowers and manage credit risk in this regard.
As described above, the Company provided loan modifications to certain customers and took advantage of either Section 4013 of the CARES Act or the April 7, 2020 Interagency Statement, which provides that such modifications do not result in treatment of such loan as a TDR. Since April 2020, the Company modified approximately $426 million of its loans under this guidance. For the Company, these modifications typically provided a deferral 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 March 31, 2022, there were no loans remaining on deferral with the Company.
ALLOWANCE FOR CREDIT LOSSES – LOANS AND LEASES RECEIVABLE
The allowance for credit losses on loans and leases, a contra-asset, is established through periodic provisions for credit losses on loans and leases. It is maintained at a level that is considered adequate to measure expected losses on individually identified loans, as well as expected 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.
After deferring implementation of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update 2016-03 and related amendments, Financial Instruments – Credit Losses (Topic 326) under section 4014 of the CARES Act, the Company implemented CECL on January 1, 2022. Upon implementation the Company recorded a $10.4 million increase in the allowance for credit losses, which included a $0.9 million reserve for unfunded commitments as an adjustment to equity, net of deferred taxes.
The Company's allowance for credit losses on loans and leases was $22.5 million at March 31, 2022, as compared to $14.3 million at December 31, 2021, and $18.3 million at March 31, 2021. The $8.3 million increase in the allowance for credit losses on loan and leases during the first quarter of 2022 is due to a $9.5 million one-time adjustment from the implementation of CECL on January 1, 2022, a $0.6 million provision for credit losses on loan and leases, and net loan charge-offs of $1.8 million.
The allowance was 1.14% of total loans at March 31, 2022, 0.72% of total loans at December 31, 2021, and 0.80% of total loans at March 31, 2021. Management's detailed analysis indicates that the Company's allowance for credit losses on loan and leases should be sufficient to cover credit losses for the life of the loan and leases outstanding as of March 31, 2022, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the loan and lease loss allowance.
A separate allowance of $1.0 million for potential credit losses inherent in unused commitments is included in other liabilities at March 31, 2022, as compared to $0.2 million at December 31, 2021. As mentioned previously a $0.9 million one-time adjustment was recorded to the reserve for unfunded commitments on January 1, 2022 upon the implementation of CECL.
The following table summarizes activity in the credit allowance for losses on loans and leases for the noted periods:
For the threemonths ended
For the year ended
March 31,
December 31,
Balances:
Average gross loans and leases outstanding during period (1)
2,169,582
Gross loans and leases outstanding at end of period
Allowance for credit losses on loans and leases:
Balance at beginning of period
Adoption of ASC 326
Provision charged to expense
(3,650)
Commercial real estate- owner occupied
233
Commercial real estate- non-owner occupied
1,958
245
159
299
163
946
2,331
448
1,400
218
328
(67)
347
601
223
215
744
1,568
Net loan charge offs (recoveries)
1,780
(331)
(168)
Balance at end of period
RATIOS
Net charge-offs (recoveries) to average loans and leases (annualized)
0.37%
(0.06)%
(0.01)%
Allowance for credit losses on loans and leases to gross loans and leases at end of period
1.14%
0.80%
0.72%
Allowance for credit losses on loans and leases to nonperforming loans
74.00%
213.04%
315.26%
Net loan charge-offs (recoveries) to allowance for credit losses on loans and leases at end of period
7.90%
(1.81)%
(1.18)%
Net loan charge-offs (recoveries) to provision for credit losses on loans and leases
296.67%
(132.40)%
4.60%
The Company’s credit allowance for losses on loans and leases at March 31, 2022 represents Management’s best estimate of expected losses in the loan portfolio as of that date, but no assurance can be given that the Company will not experience substantial losses relative to the size of the allowance. Furthermore, fluctuations in credit quality, changes in economic conditions, updated accounting or regulatory requirements, and/or other factors could induce us to augment or reduce the allowance.
OFF-BALANCE SHEET ARRANGEMENTS
The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. It is unlikely that all unused commitments will ultimately be drawn down. Unused commitments to extend credit, which included standby letters of credit, totaled $582 million at March 31, 2022 and $561 million at December 31, 2021, representing approximately 29% of gross loans outstanding at March 31, 2022 and 28% at December 31, 2021. The decrease in unused commitments is due in large part to the decrease in loan balances with unfunded commitments. The Company also had undrawn letters of credit issued to customers totaling $3.6 million at March 31, 2022 and December 31, 2021. 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 $125 million letter of credit issued by the Federal Home Loan Bank on the Company’s behalf as security for certain local agency deposits which totaled $78.3 million at March 31, 2022. 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 investments or loans, subject to the bank’s risk tolerances. The Company’s balance of non-earning cash and due from banks was $66.0 million at March 31, 2022 relative to $63.1 million at December 31, 2021.
Foreclosed assets are discussed above in the section titled “Nonperforming Assets.”
Net premises and equipment decreased by $0.3 million during the first three months of 2022, to $23.2 million. This decline was primarily a result of normal depreciation during the quarter net of new purchases.
Goodwill was $27.4 million at March 31, 2022, unchanged during the first three months of 2022. Goodwill is tested for impairment annually, unless events and circumstances exist which indicate that an impairment test should be performed. A Goodwill impairment test was last performed during the fourth quarter 2021 and determined that no impairment existed. There have been no triggering events in the first three months of 2022 that would require the Company to perform a Goodwill impairment test, however the Company will continue to monitor its Goodwill for potential impairment.
Bank-owned life insurance, with a balance of $53.6 million at March 31, 2022, 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 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
Noninterest bearing demand deposits
Interest bearing demand deposits
228,885
129,783
547,572
614,770
Savings
480,178
450,785
149,918
147,793
Time
293,699
293,897
Percentage of Total Deposits
38.57%
38.99%
7.99%
4.67%
19.11%
22.10%
16.76%
16.21%
5.23%
5.31%
10.25%
10.57%
2.09%
2.16%
Deposit balances reflect net growth of $83.4 million, or 3%, during the first three months of 2022. Time deposits were $293.7 million at March 31, 2022 as compared to $293.9 million at December 31, 2021. Brokered deposits were unchanged at $60.0 million at March 31, 2022 from December 31, 2021. Non-maturity deposit growth of $83.6 million for the first three months of 2022 was primarily the result of increases in balances of existing customers as the total number of customers was relatively unchanged.
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 38.6% at March 31, 2022 as compared to 39.0% at December 31, 2021.
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 $0.9 million, during the first three months of 2022 primarily due to an increase in customer repurchase agreements. Repurchase agreements totaled $107.8 million at March 31,2022 relative to a balance of $106.9 million at year-end 2021. Repurchase agreements represent “sweep accounts”, where certain customers have elected to have their commercial deposit balances above a specified threshold transferred at the close of each business day into non-deposit investments accounts. The balance in the investment account is used to have the customer purchase securities or a perfected interest in specifically identified pledged securities from the bank, which are then repurchased by the bank from the customer the next business day.
The Company had Long term debt totaling $49.2 million and $49.1 million at March 31, 2022 and December 31, 2021, respectively, in the form of 3.25% fixed – floating subordinated debt with a ten-year maturity and junior subordinated debentures totaling $35.3 million at both March 31, 2022 and December 31, 2021, 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 $36.0 million at March 31, 2022 as compared to $35.6 million at December 31, 2021.
LIQUIDITY AND MARKET RISK MANAGEMENT
LIQUIDITY
Liquidity management refers to the Company’s ability to maintain cash flows that are adequate to fund operations and meet other obligations and commitments in a timely and cost-effective manner. Detailed cash flow projections are reviewed by Management on a monthly basis, with various stress scenarios applied to assess our ability to meet liquidity needs under unusual or adverse conditions. Liquidity ratios are also calculated and reviewed on a regular basis. While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored, and we are committed to maintaining adequate liquidity resources to draw upon should unexpected needs arise.
The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases or liability repayments. To meet these short-term needs, we can borrow overnight funds from other financial institutions, draw advances via Federal Home Loan Bank lines of credit, or solicit brokered deposits if customer deposits are not immediately obtainable from local sources.
At March 31, 2022 and December 31, 2021, the Company had the following sources of primary and secondary liquidity (dollars in thousands):
Primary and secondary liquidity sources
Unpledged investment securities
861,857
806,132
Excess pledged securities
40,403
47,024
FHLB borrowing availability
748,101
787,519
Unsecured lines of credit
305,000
Funds available through fed discount window
44,587
50,608
Totals
2,253,482
2,253,811
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.
Cash and cash equivalents during the first three months of 2022, declined $4.0 million due to increases in investment securities. Utilization of remaining excess liquidity is expected to come from a combination of new loans, including loan purchases, and new investment purchases. In addition, it is possible that a portion of the deposits built-up during the COVID-19 pandemic could be withdrawn by customers. When looking to reduce these low-yielding cash balances with earning assets, management considers interest rate risk, including duration and extension risk; credit risk; and the liquidity risk of such alternative assets.
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 $125 million at March 31, 2022 and December 31, 2021. Other sources of liquidity include the brokered deposit market, deposit listing services, and the ability to offer local time-deposit campaigns. Management is of the opinion that available investments and other potentially liquid assets, along with standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs and that its liquidity has not been adversely impacted by COVID-19.
The Company’s primary liquidity ratio and net loans to deposits were 40.43% and 69.19%, respectively, at March 31, 2022, as compared to internal policy guidelines of “greater than 15%” and “less than 95%.” Ratios and sub-limits for the various components comprising wholesale funding, which were all well within policy guidelines at March 31, 2022, are also periodically reviewed by Management and the Board. 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 and subordinated debt, shareholder dividends, and share repurchases. Its primary source of funds is dividends from the Bank since the holding company does not conduct regular banking operations. As of March 31, 2022, the holding company maintained a cash balance of $11.6 million. Management anticipates 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, 2021 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 eight other interest rate scenarios in conducting our rolling 12-month net interest income simulations: upward shocks of 100, 200, 300, and 400 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, 300, and 400 basis points are temporarily being suspended after concurrence by the Company’s Board of Directors. 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.
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:
Immediate change in Interest Rates (basis points)
% Change in Net Interest Income
$ Change in Net Interest Income
+400
13.3%
14,321
7.2%
7,726
+300
10.9%
11,684
5.7%
6,137
+200
8.1%
8,712
4.4%
4,741
+100
4.3%
4,624
2.8%
2,991
Base
-100
(9.2)%
(9,892)
(7.6)%
(8,181)
For the periods ending March 31, 2022 and March 31, 2021, management believes that the Company was asset sensitive, with net income increasing in a rising rate environment in all scenarios but declining considerably in the down shocks. The change in the magnitude of the Company’s asset sensitivity based on its interest rate risk model at March 31, 2022 as compared to March 31, 2021, is due primarily to the change in the structure of the balance sheet with the addition of $392.4 million in variable rate collateralized loan obligations and cash on hand of $253.5 million. In the up 400 basis point shock scenario, expected net interest income over the next twelve months increases $14.3 million, or 13%, to $122.05 million at March 31, 2022 compared to a 7.2% increase or $7.7 million for the same period in 2021.
Over the next twelve months, $253.5 million in surplus cash is projected to decline due to expected core loan growth as our pipelines begin to increase with the addition of several loan teams and the opening of the Templeton LPO mentioned earlier. Further, a portion of the significant increase in deposits during the COVID-19 pandemic could be withdrawn by customers. These expected changes in earnings assets, including overnight cash, are not modeled in the immediate rate shock model described above. Although the cost of interest-bearing liabilities will also increase in a rate shock, the deposit betas utilized in the interest rate model mitigate the magnitude of a deposit rate increase.
If there was an immediate downward adjustment, it is anticipated that interest income would decline. The reason for the drop in net interest income is because many deposit products are at or below their modeled floors of 0.15% or 0.20 % and cannot be re-priced lower, while non-floored interest earning assets such as loans and securities can theoretically still be re-priced lower in a falling rate environment. Due to the historically low current rate environment, we view any material interest rate reductions as unlikely in the near term.
If there was an immediate downward adjustment of 100 basis points in interest rates, net interest income would drop $8.3 million or a negative variance of 8%. The reason for the drop in net interest income is, most deposit products are at their floors of 0.10% and cannot be re-priced lower, while non-floored interest earning assets such as loans and securities can theoretically still be re-priced lower in a falling rate environment. Due to the historically low current rate environment, we view any material interest rate reductions as unlikely in the near term. However, the potential percentage drop in net interest income in the “down 100 basis points” interest rate scenario exceeds our internal policy guidelines and we will continue to monitor our interest rate risk profile and implement remedial changes if deemed appropriate.
In addition to the net interest income simulations shown above, we run stress scenarios for the unconsolidated Bank where we model 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 $8.1 million lower than in our standard simulation.
The modeled 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 March 31, 2022 and 2021, 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 decreased in the past twelve months due to asset composition changes. The tables below show estimated changes in the Company’s EVE as modeled under different interest rate scenarios relative to a base case of current interest rates:
% Change in Fair Value of Equity
$ Change in Fair Value of Equity
25.8%
171,796
31.5%
174,274
22.8%
151,682
28.0%
155,182
18.4%
122,257
126,402
11.0%
72,882
13.7%
76,032
(20.2)%
(134,598)
(20.1)%
(111,586)
The table shows that our EVE is modeled to 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 which become more valuable as interest rates rise. 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 $325.7 million at March 31, 2022, comprised of $111.7 million in common stock, $4.3 million in additional paid-in capital, $227.4 million in retained earnings, and accumulated other comprehensive loss of $17.7 million. At the end of 2021, total shareholders’ equity was $362.5 million. The decrease in equity during the first quarter of 2022 is due to net income of $7.4 million, offset by a $3.5 million dividend paid to shareholders, $4.9 million in share repurchases, a $28.9 million unfavorable swing in other comprehensive income/loss due principally to changes in investment securities' fair value and a $7.3 million decrease in retained earnings due to the cumulative effect of a change in accounting principal from the implementation of CECL, topic 326. The remaining difference is related to stock options exercised and restricted stock compensation recognized during the quarter. The Company approved a new share repurchase program (the 2021 Share Repurchase Plan) on October 21, 2021 and authorized one million shares to be repurchased under this plan. The previous 2003 Share Repurchase Plan was cancelled and the 268,301 shares remaining in that plan were incorporated into the 2021 Share Repurchase Plan. There
were 182,562 shares repurchased in the first quarter of 2022, with 630,000 shares remaining to be repurchased under the 2021 Share Repurchase Plan.
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 Bank’s regulatory capital ratios as of the dates indicated.
Regulatory Capital Ratios
Minimum
Requirement
Required
to be
Community Bank
Well Capitalized (1)
Leverage Ratio (2)
Bank of the Sierra
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio") (3)
11.65
%
11.31
5.00
9.00
Sierra Bancorp
10.48
10.43
N/A
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. Beginning in 2021 the CBLR was increased to 8.5% for the calendar year with the CBLR increasing to 9% on January 1, 2022. The federal bank regulatory agencies adopted an interim final rule to implement this change from the CARES Act. At September 30, 2021, the Company and the Bank met the criteria outlined in the final rule and the interim final rule and elected to measure capital adequacy under the CBLR framework.
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.”
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 three months of 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company and the Bank are defendants, from time to time, in legal proceedings in various points of the legal process arising from transactions conducted in the ordinary course of business. In the opinion of Management, in consultation with legal counsel, it is not probable that current legal actions will results in an unfavorable outcome that has a material adverse effect on the Company’s consolidated financial condition, results of operations. Comprehensive income, or cash flows. In the event that such legal action results in an unfavorable outcome, the resulting liability could have a material adverse effect on the Company’s consolidated financial position, results of operations, comprehensive income, or cash flows.
ITEM 1A: RISK FACTORS
There were no material changes from the risk factors disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2021.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Stock Repurchases
In October 2021 the Board approved the 2021 Share Repurchase Plan by authorizing 1,000,000 shares of common stock for repurchase. In conjunction with this action, the Board terminated the current Share Repurchase Plan which authorized 500,000 shares of common stock for repurchase. There are 630,000 shares remaining for repurchase under the current Share Repurchase Plan.
The following table provides information concerning the Company’s stock repurchase transactions during the third quarter of 2021:
Stock Repurchases
Period
Total Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of a Publicly Announced Plan
Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plan at the End of the Period
January 1, 2022 - January 31, 2022
15,543
26.85
797,019
February 1, 2021 - February 31, 2022
118,677
26.69
678,342
March 1, 2021 - March 31, 2022
48,342
26.51
630,000
182,562
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4: MINE SAFETY DISCLOSURES
ITEM 5: OTHER INFORMATION
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)
4.2
3.25% Fixed to Floating Subordinated Debt issued September 24, 2021 (4)
10.3
Director Retirement and Split dollar Agreements Effective October 1, 2002, for Albert Berra, Morris Tharp, and Gordon Woods (5)*
10.4
401 Plus Non-Qualified Deferred Compensation Plan (5)*
10.5
Indenture dated as of March 17, 2004 between U.S. Bank N.A., as Trustee, and Sierra Bancorp, as Issuer (6)
10.6
Amended and Restated Declaration of Trust of Sierra Statutory Trust II, dated as of March 17, 2004 (6)
10.7
Indenture dated as of June 15, 2006 between Wilmington Trust Co., as Trustee, and Sierra Bancorp, as Issuer (7)
10.8
Amended and Restated Declaration of Trust of Sierra Capital Trust III, dated as of June 15, 2006 (7)
10.9
2007 Stock Incentive Plan (8)
10.10
Sample Retirement Agreement Entered into with Each Non-Employee Director Effective January 1, 2007 (9)*
10.11
Salary Continuation Agreement for Kevin J. McPhaill (9)*
10.14
First Amendment to the Salary Continuation Agreement for Kevin J. McPhaill (10)*
10.15
Indenture dated as of September 20, 2007 between Wilmington Trust Co., as Trustee, and Coast Bancorp, as Issuer (11)
10.16
Amended and Restated Declaration of Trust of Coast Bancorp Statutory Trust II, dated as of September 20, 2007 (11)
10.17
First Supplemental Indenture dated as of July 8, 2016, between Wilmington Trust Co. as Trustee, Sierra Bancorp as the “Successor Company”, and Coast Bancorp (11)
10.18
2017 Stock Incentive Plan (12)*
10.19
Employment agreements dated as of December 27, 2018 for Kevin McPhaill, CEO and Michael Olague, Chief Banking Officer (13)*
10.21
Employment agreement dated as of November 15, 2019 for Christopher Treece, Chief Financial Officer (14)*
10.22
Employment agreement dated as of January 17, 2020 for Jennifer Johnson, Chief Administrative Officer (15)*
10.23
Employment agreement dated as of December 14, 2020 for Hugh Boyle, Chief Credit Officer (16)*
10.24
Form Indemnification Agreement dated as of January 28, 2021 for Directors and Executive Officers (17)*
31.1
Certification of Chief Executive Officer (Section 302 Certification)
31.2
Certification of Chief Financial Officer (Section 302 Certification)
Certification of Periodic Financial Report (Section 906 Certification)
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
*Indicates management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
May 5, 2022
/s/ Kevin J. McPhaill
Date
Kevin J. McPhaill
President & Chief Executive Officer
(Principal Executive Officer)
/s/ Christopher G. Treece
Christopher G. Treece
Chief Financial Officer
/s/ Cindy L. Dabney
Cindy L. Dabney
Principal Accounting Officer