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EX-32 - EX-32 - SIERRA BANCORPbsrr-20200331xex32.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

Commission file number:  000-33063

SIERRA BANCORP

(Exact name of Registrant as specified in its charter)

 

 

 

California

33-0937517

(State of Incorporation)

(IRS Employer Identification No)

 

86 North Main Street, Porterville, California 93257

(Address of principal executive offices)                  (Zip Code)

(559) 782-4900

(Registrant’s telephone number, including area code)

Not Applicable

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

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

 

 

 

 

 

 

Title of each class

    

Trading

Symbol(s)

    

Name of each exchange on which registered

Common Stock, no par value

 

BSRR

 

The NASDAQ Stock Market LLC

 

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

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

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

 

 

 

 

 

 

 

 

Large Accelerated Filer

 

  

Accelerated Filer:

 

Non-accelerated Filer:

 

  

Smaller Reporting Company:

 

Emerging Growth Company:

 

 

 

 

 

 

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

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

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

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

 

 

 

FORM 10-Q

Table of Contents

 

 

 

 

 

 

 

Page

Part I - Financial Information 

1

 

Item 1.  Financial Statements (Unaudited)

1

 

 

Consolidated Balance Sheets

1

 

 

Consolidated Statements of Income

2

 

 

Consolidated Statements of Comprehensive Income

3

 

 

Consolidated Statements of Changes In Stockholder’s Equity

4

 

 

Consolidated Statements of Cash Flows

5

 

 

Notes to Consolidated Financial Statements (Unaudited)

6

 

 

 

 

 

 

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

31

 

 

Forward-Looking Statements

31

 

 

Critical Accounting Policies

31

 

 

Overview of the Results of Operations and Financial Condition

32

 

 

Earnings Performance

35

 

 

 

Net Interest Income and Net Interest Margin

35

 

 

 

Provision for Loan and Lease Losses

38

 

 

 

Noninterest Income and Noninterest Expense

39

 

 

 

Provision for Income Taxes

40

 

 

Balance Sheet Analysis

41

 

 

 

Earning Assets

41

 

 

 

 

Investments

41

 

 

 

 

Loan and Lease Portfolio

42

 

 

 

 

Nonperforming Assets

43

 

 

 

 

Allowance for Loan and Lease Losses

44

 

 

 

 

Off-Balance Sheet Arrangements

47

 

 

 

Other Assets

47

 

 

 

Deposits and Interest-Bearing Liabilities

48

 

 

 

 

Deposits

48

 

 

 

 

Other Interest-Bearing Liabilities

48

 

 

 

Noninterest Bearing Liabilities

49

 

 

Liquidity and Market Risk Management

49

 

 

Capital Resources

52

 

 

 

 

 

 

Item 3.  Qualitative & Quantitative Disclosures about Market Risk

53

 

 

 

 

 

 

Item 4.  Controls and Procedures

54

 

 

Part II - Other Information 

55

 

Item 1.  - Legal Proceedings

55

 

Item 1A.  - Risk Factors

55

 

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

56

 

Item 3.  - Defaults upon Senior Securities

56

 

Item 4.  - Mine Safety Disclosures

56

 

Item 5.  - Other Information

56

 

Item 6.  - Exhibits

57

 

 

Signatures 

58

 

 

 

PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

SIERRA BANCORP

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

ASSETS

 

(unaudited)

 

(audited)

Cash and due from banks

 

$

 78,660

 

$

 65,556

Interest-bearing deposits in banks

 

 

28,332

 

 

14,521

Total cash & cash equivalents

 

 

106,992

 

 

80,077

Securities available-for-sale

 

 

620,154

 

 

600,799

Loans and leases:

 

 

 

 

 

 

Gross loans and leases

 

 

1,798,025

 

 

1,762,565

Allowance for loan and lease losses

 

 

(11,453)

 

 

(9,923)

Deferred loan and lease costs, net

 

 

2,741

 

 

2,896

Net loans and leases

 

 

1,789,313

 

 

1,755,538

Foreclosed assets

 

 

766

 

 

800

Premises and equipment, net

 

 

28,425

 

 

27,435

Goodwill

 

 

27,357

 

 

27,357

Other intangible assets, net

 

 

5,112

 

 

5,381

Bank-owned life insurance

 

 

50,722

 

 

50,517

Other assets

 

 

41,628

 

 

45,915

    Total assets

 

$

 2,670,469

 

$

 2,593,819

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Non-interest bearing

 

$

 704,700

 

$

 690,950

Interest bearing

 

 

1,474,691

 

 

1,477,424

Total deposits

 

 

2,179,391

 

 

2,168,374

Repurchase agreements

 

 

29,361

 

 

25,711

Short-term borrowings

 

 

74,100

 

 

20,000

Subordinated debentures, net

 

 

34,990

 

 

34,945

Other liabilities

 

 

33,168

 

 

35,504

Total liabilities

 

 

2,351,010

 

 

2,284,534

 

 

 

 

 

 

 

Commitments and contingent liabilities (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

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

 

 

112,600

 

 

113,179

Additional paid-in capital

 

 

3,367

 

 

3,307

Retained earnings

 

 

189,882

 

 

186,867

Accumulated other comprehensive income (loss), net

 

 

13,610

 

 

5,932

Total shareholders' equity

 

 

319,459

 

 

309,285

    Total liabilities and shareholder's equity

 

$

 2,670,469

 

$

 2,593,819

 

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

1

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

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

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

    

2020

    

2019

Interest and dividend income

 

 

 

 

 

 

Loans and leases, including fees

 

$

22,112

 

$

23,748

Taxable securities

 

 

2,460

 

 

2,617

Tax-exempt securities

 

 

1,339

 

 

1,045

Federal funds sold and other

 

 

140

 

 

73

Total interest income

 

 

26,051

 

 

27,483

Interest expense

 

 

 

 

 

 

Deposits

 

 

1,834

 

 

2,955

Short-term borrowings

 

 

36

 

 

72

Subordinated debentures

 

 

394

 

 

483

Total interest expense

 

 

2,264

 

 

3,510

Net interest income

 

 

23,787

 

 

23,973

Provision for loan losses

 

 

1,800

 

 

300

Net interest income after provision for loan losses

 

 

21,987

 

 

23,673

Non-interest income

 

 

 

 

 

 

Service charges on deposits

 

 

3,183

 

 

2,943

Other income

 

 

2,923

 

 

2,963

Total non-interest income

 

 

6,106

 

 

5,906

Other operating expense

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,172

 

 

9,243

Occupancy and equipment

 

 

2,327

 

 

2,361

Other

 

 

5,319

 

 

6,248

Total other operating expense

 

 

17,818

 

 

17,852

Income before taxes

 

 

10,275

 

 

11,727

Provision for income taxes

 

 

2,468

 

 

2,832

Net income

 

$

7,807

 

$

8,895

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

Book value

 

$

21.03

 

$

18.53

Cash dividends

 

$

0.20

 

$

0.18

Earnings per share basic

 

$

0.51

 

$

0.58

Earnings per share diluted

 

$

0.51

 

$

0.58

Average shares outstanding, basic

 

 

15,262,252

 

 

15,311,154

Average shares outstanding, diluted

 

 

15,340,017

 

 

15,447,747

 

 

 

 

 

 

 

Total shareholder equity (in thousands)

 

$

319,459

 

$

284,068

Shares outstanding

 

 

15,190,038

 

 

15,328,030

Dividends paid (in thousands)

 

$

3,059

 

$

2,754

 

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

2

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

    

2020

    

2019

Net income

 

$

7,807

 

$

8,895

Other comprehensive income, before tax:

 

 

 

 

 

 

Unrealized gains on securities:

 

 

 

 

 

 

Unrealized holding gain arising during period

 

 

10,902

 

 

6,167

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

 

 

 —

 

 

(6)

Other comprehensive income, before tax

 

 

10,902

 

 

6,161

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

 

 

(3,224)

 

 

(1,821)

Other comprehensive income

 

 

7,678

 

 

4,340

 

 

 

 

 

 

 

Comprehensive income

 

$

15,485

 

$

13,235


(1)

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

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

3

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

 Paid In

 

Retained

 

Comprehensive

 

Shareholders'

 

    

Shares

    

Amount

    

Capital

    

 Earnings

    

(Loss) Income 

    

 Equity

Balance, December 31, 2018

 

15,300,460

 

$

 112,507

 

$

 3,066

 

$

 164,117

 

$

 (6,666)

 

$

 273,024

Net income

 

 

 

 

 

 

 

 

 

 

8,895

 

 

 

 

 

8,895

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

4,340

 

 

4,340

Exercise of stock options

 

27,570

 

 

494

 

 

(82)

 

 

 

 

 

 

 

 

412

Stock compensation costs

 

 

 

 

 

 

 

151

 

 

 

 

 

 

 

 

151

Cash dividends - $0.18 per share

 

 

 

 

 

 

 

 

 

 

(2,754)

 

 

 

 

 

(2,754)

Balance, March 31, 2019

 

15,328,030

 

$

 113,001

 

$

 3,135

 

$

 170,258

 

$

 (2,326)

 

$

 284,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

15,285,118

 

$

 113,179

 

$

 3,307

 

$

 186,867

 

$

 5,932

 

$

 309,285

Net income

 

 

 

 

 

 

 

 

 

 

7,807

 

 

 

 

 

7,807

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

7,678

 

 

7,678

Exercise of stock options

 

16,970

 

 

250

 

 

(69)

 

 

 

 

 

 

 

 

181

Stock compensation costs

 

 

 

 

 

 

 

129

 

 

 

 

 

 

 

 

129

Stock repurchase

 

(112,050)

 

 

(829)

 

 

 

 

 

(1,733)

 

 

 

 

 

(2,562)

Cash dividends - $0.20 per share

 

 

 

 

 

 

 

 

 

 

(3,059)

 

 

 

 

 

(3,059)

Balance, March 31, 2020

 

15,190,038

 

$

 112,600

 

$

 3,367

 

$

 189,882

 

$

 13,610

 

$

 319,459

 

 

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

 

4

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

    

2020

    

2019

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

7,807

 

$

8,895

Gain on sales of securities

 

 

 —

 

 

(6)

Loss on disposal of fixed assets

 

 

 —

 

 

12

Loss (gain) on sale on foreclosed assets

 

 

 2

 

 

(16)

Writedowns on foreclosed assets

 

 

 —

 

 

20

Share-based compensation expense

 

 

129

 

 

151

Provision for loan losses

 

 

1,800

 

 

300

Depreciation and amortization

 

 

771

 

 

754

Net amortization on securities premiums and discounts

 

 

1,050

 

 

1,030

Accretion of discounts for loans acquired and net deferred loan fees

 

 

(225)

 

 

(266)

Increase in cash surrender value of life insurance policies

 

 

(38)

 

 

(900)

Amortization of core deposit intangible

 

 

269

 

 

269

Decrease (increase) in interest receivable and other assets

 

 

1,467

 

 

(203)

(Decrease) increase in other liabilities

 

 

(2,336)

 

 

4,476

Deferred income tax (benefit) provision

 

 

(114)

 

 

 2

Increase in equity securities

 

 

(447)

 

 

 —

Net amortization of partnership investment

 

 

158

 

 

450

Net cash provided by operating activities

 

 

10,293

 

 

14,968

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Maturities and calls of securities available for sale

 

 

2,430

 

 

1,150

Proceeds from sales of securities available for sale

 

 

 —

 

 

15,504

Purchases of securities available for sale

 

 

(33,285)

 

 

(34,469)

Principal pay downs on securities available for sale

 

 

21,351

 

 

19,803

Net purchases of FHLB stock

 

 

 —

 

 

 —

Loan originations and payments, net

 

 

(35,350)

 

 

(19,618)

Purchases of premises and equipment

 

 

(1,716)

 

 

(87)

Proceeds from sale premises and equipment

 

 

 —

 

 

10

Proceeds from sales of foreclosed assets

 

 

32

 

 

7,920

Purchase of bank-owned life insurance

 

 

(167)

 

 

(217)

Net cash used in investing activities

 

 

(46,705)

 

 

(10,004)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Increase in deposits

 

 

11,017

 

 

44,408

Increase (decrease) in borrowed funds

 

 

54,100

 

 

(56,100)

Increase in repurchase agreements

 

 

3,650

 

 

3,001

Cash dividends paid

 

 

(3,059)

 

 

(2,754)

Repurchases of common stock

 

 

(2,562)

 

 

 —

Stock options exercised

 

 

181

 

 

412

Net cash provided by (used in) financing activities

 

 

63,327

 

 

(11,033)

 

 

 

 

 

 

 

Increase (decrease) in cash and due from banks

 

 

26,915

 

 

(6,069)

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

Beginning of period

 

 

80,077

 

 

74,132

End of period

 

$

106,992

 

$

68,063

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Interest paid

 

$

2,359

 

$

3,409

Income taxes paid

 

$

 —

 

$

 —

Supplemental noncash disclosures:

 

 

 

 

 

 

Real estate acquired through foreclosure

 

$

 —

 

$

26

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

 

$

 —

 

$

9,712

Operating lease liability pursuant to adoption of ASU 2016-02

 

$

 —

 

$

10,336

 

 

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

5

SIERRA BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

Note 1 – The Business of Sierra Bancorp

Sierra Bancorp (the “Company”) is a California corporation headquartered in Porterville, California, and is a registered bank holding company under federal banking laws.  The Company was formed to serve as the holding company for Bank of the Sierra (the “Bank”), and has been the Bank’s sole shareholder since August 2001.  The Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries it may acquire or establish.  As of March 31, 2020, the Company’s only other subsidiaries were Sierra Statutory Trust II, Sierra Capital Trust III, and Coast Bancorp Statutory Trust II, which were formed solely to facilitate the issuance of capital trust pass-through securities (“TRUPS”).  Pursuant to the Financial Accounting Standards Board (“FASB”) standard on the consolidation of variable interest entities, these trusts are not reflected on a consolidated basis in the Company’s financial statements.  References herein to the “Company” include Sierra Bancorp and its consolidated subsidiary, the Bank, unless the context indicates otherwise.

Bank of the Sierra, a California state-chartered bank headquartered in Porterville, California, offers a wide range of retail and commercial banking services via branch offices located throughout California’s South San Joaquin Valley, the Central Coast, Ventura County, and neighboring communities.  The Bank was incorporated in September 1977, and opened for business in January 1978 as a one-branch bank with $1.5 million in capital.  Our growth in the ensuing years has largely been organic in nature, but includes four whole-bank acquisitions:  Sierra National Bank in 2000, Santa Clara Valley Bank in 2014, Coast National Bank in 2016, and Ojai Community Bank in October 2017.  As of the filing date of this report the Bank operates 40 full service branches and an online branch, and maintains ATMs at all but one of our branch locations as well as seven non-branch locations.  Moreover, the Bank has specialized lending units which focus on agricultural borrowers, SBA loans, and mortgage warehouse lending.  The Company had total assets of $2.7 billion at March 31, 2020, and for a number of years we have claimed the distinction of being the largest bank headquartered in the South San Joaquin Valley.  The Bank’s deposit accounts, which totaled $2.2 billion at March 31, 2020, are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to maximum insurable amounts.

Note 2 – Basis of Presentation

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

Note 3 – Current Accounting Developments

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

6

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

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

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

7

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

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

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

 

Note 4 – Share Based Compensation

On March 16, 2017 the Company’s Board of Directors approved and adopted the 2017 Stock Incentive Plan (the “2017 Plan”), which became effective May 24, 2017, the date approved by the Company’s shareholders.  The 2017 Plan replaced the Company’s 2007 Stock Incentive Plan (the “2007 Plan”), which expired by its own terms on March 15, 2017.  Options to purchase 327,610 shares that were granted under the 2007 Plan were still outstanding as of March 31, 2020 and remain unaffected by that plan’s expiration.  The 2017 Plan provides for the issuance of both “incentive” and “nonqualified” stock options to officers and employees, and of “nonqualified” stock options to non-employee directors and consultants of the Company.  The 2017 Plan also provides for the issuance of restricted stock awards to these same classes of eligible participants, although no restricted stock awards have ever been issued by the Company.  The total number of shares of the Company’s authorized but unissued stock reserved for issuance pursuant to awards under the

8

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

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

Note 5 – Earnings per Share

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

Note 6 – Comprehensive Income

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

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

The Company is a party to financial instruments with off‑balance‑sheet risk in the normal course of business.  Those financial instruments currently consist of unused commitments to extend credit and standby letters of credit.  They involve, to varying degrees, elements of risk in excess of the amount recognized in the balance sheet.  The Company’s exposure to credit loss in the event of nonperformance by counterparties for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments.  The Company uses the same credit policies in making commitments and issuing letters of credit as it does for originating loans included on the balance sheet.  The following financial instruments represent off‑balance‑sheet credit risk (dollars in thousands):

 

 

 

 

 

 

 

 

    

March 31, 2020

    

December 31, 2019

Commitments to extend credit

 

$

 453,849

 

$

 492,040

Standby letters of credit

 

$

 9,067

 

$

 8,619

 

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

9

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

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

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

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

·

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

·

Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

·

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the factors that market participants would likely consider in pricing an asset or liability.

Fair value estimates are made at a specific point in time based on relevant market data and information about the financial instruments.  Fair value disclosures for deposits include demand deposits, which are by definition equal to the amount payable on demand at the reporting date.  Fair value calculations for loans and leases reflect exit pricing, and incorporate our assumptions with regard to the impact of prepayments on future cash flows and credit quality adjustments based on risk characteristics of various financial instruments, among other things.  Since the estimates are subjective and involve uncertainties and matters of significant judgment they cannot be determined with precision, and changes in assumptions could significantly alter the fair values presented.

 

 

 

 

 

 

10

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

Fair Value of Financial Instruments

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

Fair Value Measurements

 

    

Carrying
Amount

    

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

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

Financial assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

106,992

 

$

106,992

 

$

 —

 

$

 —

 

$

 106,992

Investment securities available for sale

 

 

620,154

 

 

 —

 

 

620,154

 

 

 —

 

 

620,154

Loans and leases, net held for investment

 

 

1,787,101

 

 

 —

 

 

 —

 

 

1,834,373

 

 

1,834,373

Collateral dependent impaired loans

 

 

2,212

 

 

 —

 

 

2,212

 

 

 —

 

 

2,212

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,179,391

 

 

704,700

 

 

1,474,482

 

 

 —

 

 

2,179,182

Repurchase agreements

 

 

29,361

 

 

 —

 

 

29,361

 

 

 —

 

 

29,361

Short term borrowings

 

 

74,100

 

 

 —

 

 

74,100

 

 

 —

 

 

74,100

Subordinated debentures

 

 

34,990

 

 

 —

 

 

29,911

 

 

 —

 

 

29,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

Fair Value Measurements

 

    

Carrying
Amount

    

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

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

Financial assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

 80,077

 

$

 80,076

 

$

 —

 

$

 —

 

$

 80,076

Investment securities available for sale

 

 

600,799

 

 

 —

 

 

600,799

 

 

 —

 

 

600,799

Loans and leases, net held for investment

 

 

1,753,846

 

 

 —

 

 

 —

 

 

1,761,461

 

 

1,761,461

Collateral dependent impaired loans

 

 

1,692

 

 

 —

 

 

1,692

 

 

 —

 

 

1,692

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,168,374

 

 

690,950

 

 

1,477,497

 

 

 —

 

 

2,168,447

Repurchase agreements

 

 

25,711

 

 

 —

 

 

25,711

 

 

 —

 

 

25,711

Short term borrowings

 

 

20,000

 

 

 —

 

 

20,000

 

 

 —

 

 

20,000

Subordinated debentures

 

 

34,945

 

 

 —

 

 

30,564

 

 

 —

 

 

30,564

 

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

·

Investment securities:  Fair values are determined by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities.

·

Collateral-dependent impaired loans:  Collateral-dependent impaired loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected disposition costs where applicable.

·

Foreclosed assets:  Repossessed real estate (known as other real estate owned, or “OREO”) and other foreclosed assets are carried at the lower of cost or fair value.  Fair value is the appraised value less expected selling costs for OREO and some other assets such as mobile homes; fair values for any other foreclosed assets are

11

represented by estimated sales proceeds as determined using reasonably available sources.  Foreclosed assets for which appraisals can be feasibly obtained are periodically measured for impairment using updated appraisals.  Fair values for other foreclosed assets are adjusted as necessary, subsequent to a periodic re-evaluation of expected cash flows and the timing of resolution.  If impairment is determined to exist, the book value of a foreclosed asset is immediately written down to its estimated impaired value through the income statement, thus the carrying amount is equal to the fair value and there is no valuation allowance.

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

Fair Value Measurements – Recurring

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2020, using

 

 

 

 

    

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

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

    

Realized
Gain/(Loss)
(Level 3)

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

 —

 

$

 11,742

 

$

 —

 

$

 11,742

 

$

 —

Mortgage-backed securities

 

 

 —

 

 

405,246

 

 

 —

 

 

405,246

 

 

 —

State and political subdivisions

 

 

 —

 

 

203,166

 

 

 —

 

 

203,166

 

 

 —

Total available-for-sale securities

 

$

 —

 

$

 620,154

 

$

 —

 

$

 620,154

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2019, using

 

 

 

 

    

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

    

Significant
Observable
Inputs
(Level 2)

    

Significant
Unobservable
Inputs
(Level 3)

    

Total

    

Realized
Gain/(Loss)
(Level 3)

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

 —

 

$

 12,145

 

$

 —

 

$

 12,145

 

$

 —

Mortgage-backed securities

 

 

 —

 

 

400,389

 

 

 —

 

 

400,389

 

 

 —

State and political subdivisions

 

 

 —

 

 

188,265

 

 

 —

 

 

188,265

 

 

 —

Total available-for-sale securities

 

$

 —

 

$

 600,799

 

$

 —

 

$

 600,799

 

$

 —

 

12

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

Fair Value Measurements – Nonrecurring

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2020, using

 

    

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

    

Significant
Observable Inputs
(Level 2)

    

Significant
Unobservable Inputs
(Level 3)

    

Total

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential construction

 

$

 —

 

$

 —

 

$

 —

 

$

 —

Other construction/land

 

 

 —

 

 

 —

 

 

 —

 

 

 —

1-4 family - closed-end

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Equity lines