What changed in this filing

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Item 1. Financial Statements

2021-05-06 compared with 2020-11-05 · 126 added, 273 removed, 754 unchanged (35% of the section changed)

3 unchanged sentences

(dollars in thousands)

September 30, 2020

March 31, 2021

December 31, 2020

5 unchanged sentences

Gross loans and leases

Deferred loan and lease (fees) and costs, net

Deferred loan and lease fees, net

Allowance for loan and lease losses

17 unchanged sentences

24,000,000 shares authorized;

15,341,723 and 15,284,538 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

15,410,763 and 15,388,423 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

Additional paid-in capital

Retained earnings

Accumulated other comprehensive income (loss), net

Accumulated other comprehensive income, net

Total shareholders' equity

3 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

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

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

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

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

Interest and dividend income

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Net interest income after provision for loan losses

Noninterest income

Non-interest income

Service charges on deposits

Total noninterest income

Other operating expense

Noninterest expense

Salaries and employee benefits

Occupancy and equipment

Total other operating expense

Total noninterest expense

Income before taxes

12 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(dollars in thousands, unaudited)

Three months ended September 30,

Nine months ended September 30,

Other comprehensive income, before tax:

Three months ended March 31,

Other comprehensive (loss) income, before tax:

Unrealized gains on securities:

Unrealized holding gain arising during period

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

Other comprehensive income, before tax

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

Other comprehensive income

Unrealized holding (loss) gain arising during period

Other comprehensive (loss) income, before tax

Income tax benefit (expense) related to items of other comprehensive (loss) income, net of tax

Other comprehensive (loss) income

Comprehensive income

(1) Amounts are included in net gains on investment securities available-for-sale on the Consolidated Statements of Income in noninterest income.

Income tax expense associated with the reclassification adjustment for the three months ended September 30, 2020 and 2019 was $ 0 thousand and $ 0 thousand respectively.

Income tax expense associated with the reclassification adjustment for the nine months ended September 30, 2020 and 2019 was $ 115 thousand and $ 8 thousand respectively.

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

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

Comprehensive

Shareholders'

(Loss) Income

Balance, June 30, 2019

Other comprehensive income, net of tax

Exercise of stock options

Stock compensation costs

Stock repurchase

Cash dividends - $ 0.19 per share

Balance, September 30, 2019

Balance, June 30, 2020

Other comprehensive income, net of tax

Exercise of stock options

Unvested restricted stock issued

Stock compensation costs

Cash dividends - $ 0.20 per share

Balance, September 30, 2020

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

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

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

1 unchanged sentence

Shareholders'

(Loss) Income

Balance, December 31, 2019

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Cash dividends - $ 0.20 per share

Balance, September 30, 2019

Balance, March 31, 2020

Balance, December 31, 2020

Other comprehensive income, net of tax

Other comprehensive loss, net of tax

Exercise of stock options

Stock based compensation expense

Stock repurchase

Cash dividends - $ 0.21 per share

Balance, September 30, 2020

Balance, March 31, 2021

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(dollars in thousands, unaudited)

Nine months ended September 30,

Three months ended March 31,

Cash flows from operating activities:

Gain on sales of securities

Loss on disposal of fixed assets

Gain on sale on foreclosed assets

(Gain) loss on sale on foreclosed assets

Writedowns on foreclosed assets

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Amortization of core deposit intangible

Increase in interest receivable and other assets

Increase (decrease) in other liabilities

Decrease in interest receivable and other assets

Decrease in other liabilities

Deferred income tax benefit

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Maturities and calls of securities available for sale

Proceeds from sales of securities available for sale

Purchases of securities available for sale

Principal pay downs on securities available for sale

Net purchases of FHLB stock

Loan originations and payments, net

Purchases of premises and equipment

Proceeds from sale premises and equipment

Proceeds from sales of foreclosed assets

Purchase of bank-owned life insurance

Liquidation of bank-owned life insurance

Proceeds from BOLI death benefit

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Increase in deposits

Increase (decrease) in borrowed funds

(Decrease) increase in borrowed funds

Increase in repurchase agreements

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Net cash provided by financing activities

Increase in cash and due from banks

Increase in cash and cash equivalents

Cash and cash equivalents

3 unchanged sentences

Interest paid

Income taxes paid

Supplemental noncash disclosures:

Real estate acquired through foreclosure

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

Operating lease liability pursuant to adoption of ASU 2016-02

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

March 31, 2021

Note 1 – The Business of Sierra Bancorp

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The Company exists primarily for the purpose of holding the stock of the Bank and of such other subsidiaries it may acquire or establish.

As of September 30, 2020, the Company’s only other subsidiaries were Sierra Statutory Trust II, Sierra Capital Trust III, and Coast Bancorp Statutory Trust II, which were formed solely to facilitate the issuance of capital trust pass-through securities (“TRUPS”).

As of March 31, 2021, 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.

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In addition, the bank opened a loan production office in Rocklin, CA in February 2020.

The Company had total assets of $ 3.2 billion at September 30, 2020, and for a number of years we have claimed the distinction of being the largest bank headquartered in the South San Joaquin Valley.

The Bank’s deposit accounts, which totaled $ 2.6 billion at September 30, 2020, are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to maximum insurable amounts.

The Company had total assets of $ 3.3 billion at March 31, 2021, 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, 2021, are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to maximum insurable amounts.

Note 2 – Basis of Presentation

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GAAP or current nonaccrual practices, nor does it change accounting requirements for loans held for sale or certain other financial assets which are measured at the lower of amortized cost or fair value.

As a public business entity that is an SEC filer, ASU 2016-13 became effective for the Company on January 1, 2020 .

As a public business entity that is an SEC filer, ASU 2016-13 was originally scheduled to become effective for the Company on January 1, 2020 .

In March 2020, 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.

In December 2020, the Consolidated Appropriations Act 2021, extended the deferral of implementation of CECL from December 31, 2020, to the earlier of the first day of the fiscal year, beginning after the national emergency terminates or January 1, 2022.

The Company will now continue to postpone implementation in order to provide additional time to assess better the impact of the COVID-19 pandemic on the expected lifetime credit losses.

On the effective date, institutions will apply the new accounting standard as follows:

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and, debt securities on which other-than-temporary impairment had been recognized prior to the effective date will transition to the new guidance prospectively with no change in their amortized cost basis.

The Company adopted ASU 2016-13 on January 1, 2020 , however, the Company elected under Section 4014 of the Coronavirus Aid, Relief and Economic Security (CARES) Act to defer the implementation of CECL until the earlier of when the national emergency related to the outbreak of COVID-19 ends or December 31, 2020.

Although this deferral will still require CECL to be implemented as of January 1, 2020, the Company believes that the deferral will provide time to better assess the impact of the COVID-19 pandemic on the expected lifetime credit losses.

While the ultimate impact cannot be definitively determined at this time, we believe the provisions of ASU 2016-13 will have a material adverse impact on our consolidated financial statements, particularly the level of our allowance for credit losses and shareholders’ equity.

In January 2017 the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350):

Simplifying the Accounting for Goodwill Impairment .

This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation, and goodwill impairment will simply be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

All other goodwill impairment guidance will remain largely unchanged.

Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary.

The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts.

Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts.

The amendments in this update were effective for public business entities for fiscal years beginning after December 15, 2019 .

In accordance with ASU 2017-04, the Company performed a qualitative analysis of goodwill during the first nine months of 2020 , and determined that a quantitative analysis was not necessary at this time.

Thus, we have not been required to record any goodwill impairment to date.

In August 2018 the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, as part of its disclosure framework project.

Pursuant to this guidance, disclosures that will no longer be required include the following:

transfers between Level 1 and Level 2 of the fair value hierarchy;

transfers in and out of Level 3 for nonpublic entities, as well as purchases and issuances and the Level 3 roll forward;

a company’s policy for determining when transfers between any of the three levels have occurred;

the valuation processes used for Level 3 measurements;

and, the changes in unrealized gains or losses presented in earnings for Level 3 instruments held at the balance sheet date for nonpublic entities.

The following are additional disclosure requirements:

for public entities, the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 instruments held at the balance sheet date;

for public entities, the range and weighted average of significant unobservable inputs used for Level 3 measurements, although for certain unobservable inputs the entity will be allowed to disclose other quantitative information in place of the weighted average to the extent that it would be a more reasonable and rational method to reflect the distribution of unobservable inputs;

for nonpublic entities, some form of quantitative information about significant unobservable inputs used in Level 3 fair value measurements;

and, for certain investments in entities that calculate the net asset value, disclosures will be required about the timing of liquidation and redemption restrictions lapsing if the latter has been communicated to the

reporting entity.

The guidance also clarifies that the Level 3 measurement uncertainty disclosure should communicate information about the uncertainty at the balance sheet date.

ASU 2018-13 is effective for all entities in fiscal years beginning after December 15, 2019, including interim periods.

Early adoption is permitted.

In addition, an entity may early adopt any of the removed or modified disclosures immediately and delay adoption of the new disclosures until the effective date.

The Company adopted ASU 2018-13 effective January 1, 2020 which impacts the disclosure requirements for fair value measurement.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326) , which provides transition relief for entities adopting ASU 2016-13.

ASU 2019-05 amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10.

An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach).

A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date, in order to maintain the same amortized cost basis before and after the effective date of this update.

Amounts previously recognized in accumulated other comprehensive income as of the date of adoption that relate to improvements in cash flows expected to be collected should continue to be accreted into income over the remaining life of the asset.

Recoveries of amounts previously written off relating to improvements in cash flows after the date of adoption should be recorded in earnings when received.

The fair value option election does not apply to held-to-maturity debt securities.

Entities are required to make this election on an instrument-by-instrument basis.

For public business entities that are SEC filers, including the Company, the amendments in ASU 2019-05 are effective for fiscal years beginning after December 15, 2019 , including interim periods within those fiscal years.

The Company adopted ASU 2019-05 effective January 1, 2020 .

There was no impact to the financial statements of the Company as we did not elect the fair value option on financial instruments upon adoption of ASU 2016-13.

The Company plans to implement CECL on January 1, 2022 and while the exact extent of the impact has not yet been definitively determined, the Company’s calculation as of March 31, 2021 indicates that our allowance for loan and lease losses will increase by approximately 50 % relative to current levels, under CECL.

The Company plans to continue to sensitize inputs, assumptions, and methodologies within its CECL estimation process during 2021 as we prepare for implementation on January 1, 2022.

Changes in economic forecasts, or other key assumptions, prior to the implementation of CECL on January 1, 2022, could impact the magnitude of the implementation adjustment.

On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.

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The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations.

In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due.

In late December 2020, Section 4013 of the CARES Act was extended through January 1, 2022 by the 2021 Consolidated Appropriations Act.

In accordance with such guidance, we offered and continue to offer on a limited-based, short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due.

These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

See Note 10 for further information on non-TDR loan modifications.

The Interagency Guidance and Section 4013 are expected to have a material impact on the Company’s financial statements;

however, this impact cannot be quantified at this time.

The impact of the Interagency Guidance and Section 4013, as amended, on the Company’s financial statements has not been material through March 31, 2021, but the ultimate impact of the relief provided by these government loan modification provisions cannot be determined at this time.

Note 4 – Share Based Compensation

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The 2017 Plan replaced the Company’s 2007 Stock Incentive Plan (the “2007 Plan”), which expired by its own terms on March 15, 2017.

Options to purchase 257,789 shares that were granted under the 2007 Plan were still outstanding as of September 30, 2020 and remain unaffected by that plan’s expiration.

Options to purchase 198,929 shares that were granted under the 2007 Plan were still outstanding as of March 31, 2021 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 September 30, 2020 was 405,915 .

Options to purchase 290,000 shares granted under the 2017 Plan were outstanding as of September 30, 2020.

The 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, 2021 was 395,935 .

Options to purchase 448,865 shares granted under the 2017 Plan were outstanding as of March 31, 2021.

The potential dilutive impact of unexercised stock options is discussed below in Note 5, Earnings per Share.

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Forfeitures are recognized as they occur for both types of awards.

A pre-tax charge of $ 0.2 million was reflected in the Company’s income statement during the third quarter of 2020 and $ 0.1 million was charged during the third quarter of 2019, as expense related to stock options and restricted stock awards.

For the first nine months, the charges totaled $ 0.4 million in 2020 and $ 0.4 million in 2019.

A pre-tax charge of $ 0.2 million was reflected in the Company’s income statement during the first quarter of 2021 and $ 0.1 million was charged during the first quarter of 2020, as expense related to stock options and restricted stock awards.

Restricted Stock Grants

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Restricted Stock Awards are valued utilizing the fair value of the Company’s stock at the grant date.

During the third quarter of 2020 148,885 shares were granted to employees and directors of the Company.

During the first quarter of 2021 18,180 shares were granted to employees and directors of the Company.

These awards are expensed on a straight-line basis over the vesting period.

As of September 30, 2020, there was $ 2.6 million of unamortized compensation cost related to unvested Restricted Stock Awards granted under the 2017 plan.

As of March 31, 2021, there was $ 2.7 million of unamortized compensation cost related to unvested Restricted Stock Awards granted under the 2017 plan.

That cost is expected to be amortized over a weighted average period of 4.0 years.

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

Nine Months Ended September 30,

Weighted Averaged

Grant-Date Fair Value

Unnvested shares, January 1,

Unvested shares Septermber 30,

The Company’s time-vested award activity for the three months ended March 31, 2021 and 2020 is summarized below:

Three Months Ended March 31,

Weighted Average Grant-Date Fair Value

Unvested shares, January 1,

Unvested shares March 31,

Stock Option Grants

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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 nine months ended September 30, 2020 and 2019 are summarized below (dollars in thousands, except per share data, unaudited):

Nine Months Ended September 30,

The Company’s stock option activity during the three months ended March 31, 2021 and 2020 are summarized below (dollars in thousands, except per share data, unaudited):

Three Months Ended March 31,

Weighted Average

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Outstanding at January 1,

Outstanding at September 30,

Exercisable at September 30,

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

Outstanding at March 31,

Exercisable at March 31,

This amount changes based on changes in the market value of the Company's stock.

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The computation of earnings per share, as presented in the Consolidated Statements of Income, is based on the weighted average number of shares outstanding during each period, excluding unvested restricted stock awards.

There were 15,192,838 weighted average shares outstanding during the third quarter of 2020 and 15,318,580 during the third quarter of 2019, while there were 15,215,167 weighted average shares outstanding during the first nine months of 2020 and 15,320,041 during the first nine months of 2019.

There were 15,223,010 weighted average shares outstanding during the first quarter of 2021 and 15,262,252 during the first quarter of 2020.

Diluted earnings per share calculations include the effect of the potential issuance of common shares, which for the Company is limited to shares that would be issued on the exercise of “in-the-money” stock options, and unvested restricted stock awards.

For the third quarter of 2020, calculations under the treasury stock method resulted in the equivalent of 45,586 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of 362,407 stock options were excluded from the calculation because they were underwater and thus anti-dilutive.

For the third quarter of 2019 the equivalent of 116,208 shares were added in calculating diluted earnings per share, while 261,137 anti-dilutive stock options were not factored into the computation.

Likewise, for the first nine months of 2020 the equivalent of 58,595 shares were added to basic weighted average shares outstanding in calculating diluted earnings per share and a weighted average of 344,814 options that were anti-dilutive for the period were not included, compared to the addition of the equivalent of 129,299 shares and non-inclusion of 239,714 anti-dilutive options in calculating diluted earnings per share for first nine months of 2019.

For the first quarter of 2021, calculations under the treasury stock method resulted in the equivalent of 114,700 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of 351,827 stock options were excluded from the calculation because they were underwater and thus anti-dilutive.

For the first quarter of 2020 the equivalent of 77,765 shares were added in calculating diluted earnings per share, while 304,763 anti-dilutive stock options were not factored into the computation.

Note 6 – Comprehensive Income

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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

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.

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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’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):

September 30, 2020

March 31, 2021

December 31, 2020

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Standby letters of credit are issued by the Company to guarantee the performance of a customer to a third party, and the credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers.

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

At March 31, 2021, 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

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.

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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.

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.

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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.

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.

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(dollars in thousands, unaudited)

September 30, 2020

March 31, 2021

Fair Value Measurements

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Subordinated debentures

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

For financial asset categories that were carried on our balance sheet at fair value as of March 31, 2021 and December 31, 2020, the Company used the following methods and significant assumptions:

● Investment securities :

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(dollars in thousands, unaudited)

Fair Value Measurements at September 30, 2020, using

Fair Value Measurements at March 31, 2021, using

Quoted Prices in

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(dollars in thousands, unaudited)

Fair Value Measurements at September 30, 2020, using

Fair Value Measurements at March 31, 2021, using

Quoted Prices in

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(dollars in thousands, unaudited)

September 30, 2020

March 31, 2021

Estimated Fair

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Total securities

At September 30, 2020 and December 31, 2019, the Company had 2 securities and 198 securities, respectively, with gross unrealized losses.

At March 31, 2021 and December 31, 2020, the Company had 22 securities and 2 securities, respectively, with gross unrealized losses.

Management has evaluated those securities as of the respective dates, and does not believe that any of the unrealized losses are other than temporary.

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(dollars in thousands, unaudited)

September 30, 2020

March 31, 2021

Less than twelve months

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(dollars in thousands, unaudited)

Three months ended September 30,

Nine months ended September 30,

Three months ended March 31,

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

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Net gains on sale of securities available for sale

The amortized cost and estimated fair value of investment securities available-for-sale at September 30, 2020 and December 31, 2019 are shown below, grouped by the remaining time to contractual maturity dates.

The amortized cost and estimated fair value of investment securities available-for-sale at March 31, 2021 and December 31, 2020 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.

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(dollars in thousands, unaudited)

September 30, 2020

March 31, 2021

Amortized Cost

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Collateralized mortgage obligations

At September 30, 2020, the Company’s investment portfolio included 352 “muni” bonds issued by 298 different government municipalities and agencies located within 29 different states, with an aggregate fair value of $ 228.2 million.

At March 31, 2021, the Company’s investment portfolio included 356 “muni” bonds issued by 295 different government municipalities and agencies located within 31 different states, with an aggregate fair value of $ 234.3 million.

The largest exposure to any single municipality or agency was a combined $ 3.9 million (fair value) in general obligation bonds issued by the Charter Township of Washington County (MI).

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(dollars in thousands, unaudited)

September 30, 2020

March 31, 2021

December 31, 2020

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(dollars in thousands, unaudited)

September 30, 2020

March 31, 2021

December 31, 2020

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Revenue source:

College and university

Other (8 and 8 sources, respectively)

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The income statement reflects tax credits and any other tax benefits from these investments “below the line” within our income tax provision, while the initial book value of the investment is amortized on a straight-line basis as an offset to noninterest income, over the time period in which the tax credits and tax benefits are expected to be received.

As of September 30, 2020, our total LIHTC investment book balance was $ 3.6 million, which includes $ 0.2 million in remaining commitments for additional capital contributions.

There were $ 0.4 million in tax credits derived from our LIHTC investments that were recognized during the nine months ended September 30, 2020, and amortization expense of $ 0.5 million associated with those investments was netted against pre-tax noninterest income for the same time period.

The Company also recognized a $ 0.8 million gain during the same period for the sale of a single fund property that was at the end of its tax credit life.

As of March 31, 2021, our total LIHTC investment book balance was $ 3.3 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, 2021, 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.

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(dollars in thousands, unaudited)

September 30, 2020

March 31, 2021

1-4 family residential construction

24 unchanged sentences

The Company’s foreclosed assets can include mobile homes and/or OREO, which consists of commercial and/or residential real estate properties acquired by foreclosure or similar means that the Company is offering or will offer for sale.

Foreclosed assets totaled $ 3.0 million at September 30, 2020, and $ 0.8 million at December 31, 2019.

Gross nonperforming loans totaled $ 7.2 million at September 30, 2020 and $ 5.7 million at December 31, 2019.

Foreclosed assets totaled $ 0.9 million at March 31, 2021, and $ 1.0 million at December 31, 2020.

Gross nonperforming loans totaled $ 8.6 million at March 31, 2021 and $ 7.6 million at December 31, 2020.

Loans and leases are classified as nonperforming when reasonable doubt surfaces with regard to the ability of the Company to collect all principal and interest.

At that point, we stop accruing interest on the loan or lease in question and reverse any

previously-recognized interest to the extent that it is uncollected or associated with interest-reserve loans.

At that point, we stop accruing interest on the loan or lease in question and reverse any previously-

recognized interest to the extent that it is uncollected or associated with interest-reserve loans.

Any asset for which principal or interest has been in default for 90 days or more is also placed on non-accrual status even if interest is still being received, unless the asset is both well secured and in the process of collection.

As of September 30, 2020, there were 314 customers, for a total of $ 424.0 million, with payment deferrals either under section 4013 of the CARES Act or the April 7, 2020 Interagency Statement.

Seven of these loans totaling $ 2.1 million were downgraded to nonaccrual and are included in nonperforming assets.

Approximately $ 9.0 million in accrued interest has been recognized but not collected on loans with payment deferments at September 30, 2020.

As of March 31, 2021, the Company had $ 22.4 million in loans with payment deferrals either under section 4013 of the CARES Act or the April 7, 2020 Interagency Statement.

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

1 unchanged sentence

(dollars in thousands, unaudited)

September 30, 2020

March 31, 2021

More Past Due (1)

10 unchanged sentences

Total gross loans and leases

(1) As of September 30, 2020, there were no loans over 90 days past due and still accruing.

(1) As of March 31, 2021, there were no loans over 90 days past due and still accruing.

(2) Included in total financing receivables

18 unchanged sentences

A loan that is modified for a borrower who is experiencing financial difficulty is classified as a troubled debt restructuring (TDR) if the modification constitutes a concession, excluding loan modifications that are COVID-19 related and made in accordance with the interagency guidance and the CARES Act as described in Note 3, above.

At September 30, 2020, the Company had a total of $ 8.6 million in TDRs, including $ 0.9 million in TDRs that were on non-accrual status.

At March 31, 2021, the Company had a total of $ 13.0 million in TDRs, including $ 2.3 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.

5 unchanged sentences

(dollars in thousands, unaudited)

Three months ended September 30, 2020

Three months ended March 31, 2021

Rate Modification

9 unchanged sentences

Consumer loans

Three months ended September 30, 2019

Three months ended March 31, 2020

Rate Modification

9 unchanged sentences

Consumer loans

Troubled Debt Restructurings, by Type of Loan Modification

(dollars in thousands, unaudited)

Nine months ended September 30, 2020

Rate Modification

Interest Only Modification

Rate & Term Modification

Term & Interest Modification

Other construction/land

1-4 family - closed-end

Multi-family residential

Commercial real estate - owner occupied

Total real estate loans

Commercial and industrial

Consumer loans

Nine months ended September 30, 2019

Rate Modification

Interest Only Modification

Rate & Term Modification

Term & Interest Modification

Other construction/land

1-4 family - closed-end

Multi-family residential

Commercial real estate - owner occupied

Total real estate loans

Commercial and industrial

Consumer loans

Troubled Debt Restructurings

(dollars in thousands, unaudited)

Three months ended September 30, 2020

Difference ⁽ ¹ ⁾

Other construction/land

1-4 family - closed-end

Multi-family residential

Commercial real estate - owner occupied

Total real estate loans

Commercial and industrial

Consumer loans

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

Three months ended September 30, 2019

Difference ⁽ ¹ ⁾

Other construction/land

1-4 family - closed-end

Multi-family residential

Commercial real estate - owner occupied

Total real estate loans

Commercial and industrial

Consumer loans

Troubled Debt Restructurings

(dollars in thousands, unaudited)

Nine months ended September 30, 2020

Three months ended March 31, 2021

Difference ⁽ ¹ ⁾

7 unchanged sentences

Nine months ended September 30, 2019

Three months ended March 31, 2020

Difference ⁽ ¹ ⁾

7 unchanged sentences

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

The Company had no finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during the three-month periods ended March 31, 2021 and 2020.

Purchased Credit Impaired Loans

12 unchanged sentences

(dollars in thousands, unaudited)

September 30, 2020

March 31, 2021

Unpaid Principal Balance

7 unchanged sentences

Total purchased credit impaired loans

There was no allowance for loan losses allocated for PCI loans as of September 30, 2020, however, an allowance totaling $ 0.1 million was allocated for PCI loans as of December 31, 2019.

There was no discount accretion recorded on PCI loans during the nine months ended September 30, 2020.

There was no allowance for loan losses allocated for PCI loans as of March 31, 2021 or December 31, 2020.

There was no discount accretion recorded on PCI loans during the three months ended March 31, 2021.

Note 11 – Allowance for Loan and Lease Losses

8 unchanged sentences

Balances are shown by loan type, and are further broken out by those that required an allowance and those that did not, with the associated allowance disclosed for those that required such.

Included in the valuation allowance for impaired loans shown in the tables below

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

Included in the valuation allowance for impaired loans shown in the tables below are specific reserves allocated to TDRs, totaling $ 0.6 million at both March 31, 2021 and December 31, 2020.

Impaired Loans

(dollars in thousands, unaudited)

September 30, 2020

March 31, 2021

Unpaid Principal

14 unchanged sentences

1-4 family - closed-end

Multi-family residential

Commercial real estate- owner occupied

14 unchanged sentences

With an allowance recorded

1-4 family residential construction

Other construction/land

7 unchanged sentences

With no related allowance recorded

1-4 family residential construction

Other construction/land

14 unchanged sentences

For loans where repayment is expected to be provided by the disposition or operation of the underlying collateral, impairment is measured using the fair value of the collateral.

If the collateral value, net of the expected costs of disposition, is less than the loan balance, then a specific loss reserve is established for the shortfall in collateral coverage.

If the collateral value, net of the expected costs of

disposition, is less than the loan balance, then a specific loss reserve is established for the shortfall in collateral coverage.

If the discounted collateral value is greater than or equal to the loan balance, no specific loss reserve is required.

time a collateral-dependent loan is designated as nonperforming, a new appraisal is ordered and typically received within 30 to 60 days if a recent appraisal is not already available.

We generally use external appraisals to determine the fair value of the underlying collateral for nonperforming real estate loans, although the Company’s licensed staff appraisers may update older appraisals based on current market conditions and property value trends.

At the time a collateral-dependent loan is designated as nonperforming, a new appraisal is ordered and typically received within 30 to 60 days if a recent appraisal is not already available.

We use external appraisals to determine the fair value of the underlying collateral for nonperforming real estate loans.

Until an updated appraisal is received, the Company uses the existing appraisal to determine the amount of the specific loss allowance that may be required.

The specific loss allowance is adjusted, as necessary, once a new appraisal is received.

Updated appraisals are generally ordered at least annually for collateral-dependent loans that remain impaired, and current appraisals were available or in process for 55 % of the Company’s impaired real estate loan balances at September 30, 2020.

Updated appraisals are generally ordered at least annually for collateral-dependent loans that remain impaired, and current appraisals were available or in process for 56 % of the Company’s impaired real estate loan balances at March 31, 2021.

Furthermore, the Company analyzes collateral-dependent loans on at least a quarterly basis, to determine if any portion of the recorded investment in such loans can be identified as uncollectible and would therefore constitute a confirmed loss.

9 unchanged sentences

Lending policies and procedures (including underwriting standards), the experience and abilities of lending staff, the quality of loan review, credit concentrations (by geography, loan type, industry and collateral type), the rate of loan portfolio growth, and changes in legal or regulatory requirements are additional factors that are considered.

The total general reserve established for probable incurred losses on unimpaired loans was $ 14.4 million at September 30, 2020.

There were no material changes to the methodology used to determine our allowance for loan and lease losses during the three months ended September 30, 2020, although as outlined in Note 3 to the consolidated financial statements we will substantially update our methodology upon the implementation of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update ASU 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326) when the earlier of the national emergency related to the outbreak of COVID-19 ends or December 31, 2020.

The total general reserve established for probable incurred losses on unimpaired loans was $ 17.1 million at March 31, 2021.

There were no material changes to the methodology used to determine our allowance for loan and lease losses during the three months ended March 31, 2021, although as outlined in Note 3 to the consolidated financial statements we will substantially update our methodology upon the implementation of the CECL accounting method under Financial Accounting Standards Board (FASB) Accounting Standards Update ASU 2016-13 and related amendments, Financial Instruments – Credit Losses (Topic 326) when the earlier of the national emergency related to the outbreak of COVID-19 ends or December 31, 2020.

Moreover, we will continue to enhance our methodology as needed in order to comply with regulatory and accounting requirements, keep pace with the size and complexity of our loan and lease portfolio, and respond to pressures created by external forces.

3 unchanged sentences

(dollars in thousands, unaudited)

Three months ended September 30, 2020

Commercial and

Industrial (1)

Allowance for credit losses:

Beginning balance

Ending balance

Nine months ended September 30, 2020

Three months ended March 31, 2021

Commercial and

18 unchanged sentences

(dollars in thousands, unaudited)

Three months ended September 30, 2019

Commercial and

Industrial (1)

Allowance for credit losses:

Beginning balance

Ending balance

Nine months ended September 30, 2019

Three months ended March 31, 2020

Commercial and

11 unchanged sentences

Payments for taxes and insurance as well as non-lease components are not included in the accounting of the lease component, but are separately accounted for in occupancy expense.

The Company recognized lease expense of $ 1.7 million for both nine-month periods ended September 30, 2020 and 2019.

The Company recognized lease expense of $ 0.5 million and $ 0.6 million for the three-month periods ended March 31, 2021 and March 31, 2020, respectively.

Most leases include one or more renewal options available to exercise.

3 unchanged sentences

As most of our leases do not provide an implicit rate, we used our incremental borrowing rate in determining the present value of the lease payments.

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

At September 30, 2020, the Company’s right-of-use assets and operating lease liabilities were $ 7.0 million and $ 7.5 million, respectively.

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three months ended March 31, 2021.

At March 31, 2021, the Company’s right-of-use assets and operating lease liabilities were $ 6.3 million and $ 6.8 million, respectively.

The weighted average remaining lease term for the lease liabilities was 6.4 years, and the weighted average discount rate of remaining payments was 5.5 percent.

There were no lease liabilities from new right-of-use assets obtained during the nine months ended September 30, 2020.

Cash paid on operating leases was $ 1.4 million for the nine months ended September 30, 2020.

There were no lease liabilities from new right-of-use assets obtained during the three months ended March 31, 2021.

Cash paid on operating leases was $ 0.6 million for the three months ended March 31, 2021.

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

September 30, 2020

March 31, 2021

present value discount

Lease liability (2)

(1) Contractual maturities for the three months remaining in 2020.

(1) Contractual maturities for the nine months remaining in 2021.

(2) Lease liability is included in other liabilities.

8 unchanged sentences

The guidance does not apply to revenue associated with financial instruments such as loans and investments, and other noninterest income such as loan servicing fees and earnings on bank-owned life insurance, which are accounted for on an accrual basis under other provisions of GAAP.

In total, approximately 32.8 % and 30.7 % of the Company’s noninterest revenue was outside of the scope of the ASC 606 for the three- and nine-month periods ended September 30, 2020, respectively.

In total, approximately 31.8 % and 21.1 % of the Company’s noninterest revenue was outside of the scope of the ASC 606 for the three-month periods ended March 31, 2020, respectively.

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

The following table presents the Company’s

sources of noninterest income for the three- and nine-month periods ended September 30, 2020 and 2019.

sources of noninterest income for the three-month periods ended March 31, 2021 and 2020.

Items outside the scope of ASC 606 are noted as such (dollars in thousands, unaudited).

For the three months ended September 30,

For the nine months ended September 30,

For the three months ended March 31,

Noninterest income

6 unchanged sentences

Unrealized gains recognized on equity investments (1)

Net gains on sale of securities (1)

Total noninterest income

2 unchanged sentences

Occupancy expense (1)

Gain on sale of OREO

(Gain) loss on sale of OREO

Total noninterest expense

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements