What changed in this filing

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Item 1. Financial Statements

2021-08-05 compared with 2021-05-06 · 200 added, 131 removed, 749 unchanged (31% of the section changed)

3 unchanged sentences

(dollars in thousands)

March 31, 2021

June 30, 2021

December 31, 2020

25 unchanged sentences

24,000,000 shares authorized;

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

15,410,763 and 15,388,423 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively

Additional paid-in capital

6 unchanged sentences

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

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

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

Interest and dividend income

9 unchanged sentences

Net interest income

Provision for loan losses

(Benefit) provision for loan losses

Net interest income after provision for loan losses

Non-interest income

Noninterest income

Service charges on deposits

18 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(dollars in thousands, unaudited)

Three months ended March 31,

Other comprehensive (loss) income, before tax:

Three months ended June 30,

Six months ended June 30,

Other comprehensive income (loss), before tax:

Unrealized gains on securities:

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

reclassification adjustment for gains included in net income (1)

Other comprehensive income (loss), before tax

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

Other comprehensive income (loss)

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 June 30, 2021 and 2020 was $ 0 and $ 0.1 million respectively.

Income tax expense associated with the reclassification adjustment for the six months ended June 30, 2021 and 2020 was $ 0 and $ 0.1 million 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 MARCH 31, 2021 AND 2020

FOR THE THREE MONTHS ENDED JUNE 30, 2021 AND 2020

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

1 unchanged sentence

Shareholders'

Balance, March 31, 2020

Other comprehensive income, net of tax

Exercise of stock options

Stock based compensation expense

Cash dividends - $ 0.20 per share

Balance, June 30, 2020

Balance, March 31, 2021

Other comprehensive loss, net of tax

Stock based compensation expense

Cash dividends - $ 0.21 per share

Balance, June 30, 2021

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

SIERRA BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020

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

Comprehensive

Shareholders'

Income (Loss)

Balance, December 31, 2019

4 unchanged sentences

Cash dividends - $ 0.40 per share

Balance, March 31, 2020

Balance, June 30, 2020

Balance, December 31, 2020

3 unchanged sentences

Cash dividends - $ 0.42 per share

Balance, March 31, 2021

Balance, June 30, 2021

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(dollars in thousands, unaudited)

Three months ended March 31,

Six months ended June 30,

Cash flows from operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Gain on sales of securities

Loss on disposal of fixed assets

2 unchanged sentences

Stock based compensation expense

Provision for loan losses

(Benefit) provision for loan losses

Depreciation and amortization

3 unchanged sentences

Amortization of core deposit intangible

Decrease in interest receivable and other assets

Decrease in other liabilities

Decrease (increase) in interest receivable and other assets

(Decrease) increase in other liabilities

Deferred income tax benefit

4 unchanged sentences

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

2 unchanged sentences

Purchase of bank-owned life insurance

Liquidation of bank-owned life insurance

Net cash provided by (used in) investing activities

13 unchanged sentences

Interest paid

Income taxes paid

Supplemental noncash disclosures:

8 unchanged sentences

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, 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”).

As of June 30, 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.

6 unchanged sentences

Moreover, the Bank has specialized lending units which focus on agricultural borrowers, SBA loans, and mortgage warehouse lending.

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

The Company had total assets of $ 3.3 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.

In addition, in February 2020 the bank opened a loan production office which is currently located in Roseville, CA.

The Company had total assets of $ 3.3 billion at June 30, 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 $ 2.8 billion at June 30, 2021, are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to maximum insurable amounts.

Note 2 – Basis of Presentation

29 unchanged sentences

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 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 implement CECL on January 1, 2022 and the impact of adoption has not yet been definitively determined, due in part to changing economic forecasts and the sensitization of various inputs into the Company’s calculation.

The Company plans to continue to closely monitor economic forecasts and further evaluate model inputs in advance of our planned implementation on January 1, 2022.

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.

5 unchanged sentences

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.

In accordance with such guidance, we offered and continue to offer on a limited-basis, 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 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.

The impact of the Interagency Guidance and Section 4013, as amended, on the Company’s financial statements has not been material through June 30, 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

1 unchanged sentence

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 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.

Options to purchase 197,929 shares that were granted under the 2007 Plan were still outstanding as of June 30, 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 March 31, 2021 was 395,935 .

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

Options to purchase 438,746 shares granted under the 2017 Plan were outstanding as of June 30, 2021.

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

Pursuant to FASB’s standards on stock compensation, the value of each stock option and restricted stock award is reflected in our income statement as employee compensation or directors’ expense by amortizing its grant date fair value over the vesting period of the option.

The Company utilizes a Black-Scholes model to determine grant date fair values, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.

The Company utilizes a Black-Scholes model to determine grant date fair values for options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.

Forfeitures are 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 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.

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

For the first half, the charges totaled $ 0.5 million in 2021 and $ 0.2 million in 2020.

Restricted Stock Grants

3 unchanged sentences

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

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

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

As of June 30, 2021, there was $ 2.5 million of unamortized compensation cost related to unvested Restricted Stock Awards granted under the 2017 plan.

That cost is expected to be amortized over a weighted average period of 3.8 years.

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,

The Company’s time-vested award activity for the six months ended June 30, 2021 and 2020 is summarized below (unaudited):

Six months ended June 30,

Weighted Average Grant-Date Fair Value

1 unchanged sentence

Unvested shares, January 1,

Unvested shares March 31,

Unvested shares June 30,

Stock Option Grants

The Company has issued equity instruments in the form of Incentive Stock Options and Nonqualified Stock Options to certain officers and directors and may continue to do so under the 2017 Plan.

The exercise price of each stock option is determined at the time of the grant and may be no less than 100% of the fair market value of such stock at the time the option is granted.

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

Three Months Ended March 31,

The exercise price of each stock option is

determined at the time of the grant and may be no less than 100% of the fair market value of such stock at the time the option is granted.

The Company’s stock option activity during the three months ended June 30, 2021 and 2020 are summarized below (dollars in thousands, except per share data, unaudited):

Six months ended June 30,

Weighted Average

5 unchanged sentences

Outstanding at January 1,

Outstanding at March 31,

Exercisable at March 31,

(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 March 31, 2021.

Outstanding at June 30,

Exercisable at June 30,

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

1 unchanged sentence

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

There were 15,243,698 weighted average shares outstanding during the second quarter of 2021 and 15,191,823 during the second quarter of 2020, while there were 15,242,451 weighted average shares outstanding during the first six months of 2021 and 15,226,748 during the first six months 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 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.

For the second quarter of 2021, calculations under the treasury stock method resulted in the equivalent of 132,127 shares being added to basic weighted average shares outstanding for purposes of determining diluted earnings per share, while a weighted average of 335,481 stock options were excluded from the calculation because they were underwater and thus anti-dilutive.

For the second quarter of 2020 the equivalent of 45,832 shares were added in calculating diluted earnings per share, while 367,884 anti-dilutive stock options were not factored into the computation.

Likewise, for the first half of 2021 the equivalent of 123,515 shares were added to basic weighted average shares outstanding in calculating diluted earnings per share and a weighted average of 345,748 options that were anti-dilutive for the period were not included, compared to the addition of the equivalent of 61,261 shares and non-inclusion of 336,123 anti-dilutive options in calculating diluted earnings per share for first half of 2020.

Note 6 – Comprehensive Income

9 unchanged sentences

The following financial instruments represent off-balance-sheet credit risk (dollars in thousands):

March 31, 2021

June 30, 2021

December 31, 2020

11 unchanged sentences

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

At March 31, 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.

At June 30, 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.

18 unchanged sentences

(dollars in thousands, unaudited)

March 31, 2021

June 30, 2021

Fair Value Measurements

25 unchanged sentences

Subordinated debentures

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:

For financial asset categories that were carried on our balance sheet at fair value as of June 30, 2021 and December 31, 2020, the Company used the following methods and significant assumptions:

● Investment securities :

4 unchanged sentences

Repossessed real estate (known as other real estate owned, or “OREO”) and other foreclosed assets are carried at the lower of cost or fair value.

Fair value is the appraised value less expected disposition costs for OREO and some other assets such as mobile homes;

Fair value is the appraised value less expected disposition costs for OREO;

fair values for any other foreclosed assets are represented by estimated sales proceeds as determined using reasonably available sources.

Foreclosed assets for which appraisals can be feasibly obtained are periodically measured for impairment using updated appraisals.

Fair values for other foreclosed assets are adjusted as necessary, subsequent to a periodic re-evaluation of expected cash flows and the timing of resolution.

Fair values for other foreclosed assets are adjusted as necessary, subsequent to a periodic reevaluation 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.

2 unchanged sentences

(dollars in thousands, unaudited)

Fair Value Measurements at March 31, 2021, using

Fair Value Measurements at June 30, 2021, using

Quoted Prices in

16 unchanged sentences

(dollars in thousands, unaudited)

Fair Value Measurements at March 31, 2021, using

Fair Value Measurements at June 30, 2021, using

Quoted Prices in

43 unchanged sentences

Although the Company currently has the intent and the ability to hold the securities in its investment portfolio to maturity, the securities are all marketable and are classified as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity management.

Pursuant to FASB’s guidance on accounting for debt and equity securities, available for sale securities are carried on the Company’s financial statements at their estimated fair market values, with monthly tax-effected “mark-to-market” adjustments made vis-à-vis accumulated other comprehensive income in shareholders’ equity.

Pursuant to FASB’s guidance on accounting for debt securities, available for sale securities are carried on the Company’s financial statements at their estimated fair market values, with monthly tax-effected “mark-to-market” adjustments made vis-à-vis accumulated other comprehensive income in shareholders’ equity.

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

1 unchanged sentence

(dollars in thousands, unaudited)

March 31, 2021

June 30, 2021

Estimated Fair

2 unchanged sentences

State and political subdivisions

Corporate bonds

Total securities

4 unchanged sentences

State and political subdivisions

Corporate bonds

Total securities

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

At June 30, 2021 and December 31, 2020, the Company had 31 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.

2 unchanged sentences

(dollars in thousands, unaudited)

March 31, 2021

June 30, 2021

Less than twelve months

3 unchanged sentences

State and political subdivisions

Corporate bonds

December 31, 2020

4 unchanged sentences

State and political subdivisions

Corporate bonds

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

1 unchanged sentence

(dollars in thousands, unaudited)

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

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

2 unchanged sentences

Net gains on sale of securities available for sale

The amortized cost and estimated fair value of investment securities available-for-sale at March 31, 2021 and December 31, 2020 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 June 30, 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.

1 unchanged sentence

(dollars in thousands, unaudited)

March 31, 2021

June 30, 2021

Amortized Cost

15 unchanged sentences

Collateralized mortgage obligations

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.

At June 30, 2021, the Company’s investment portfolio included 369 “muni” bonds issued by 302 different government municipalities and agencies located within 31 different states, with an aggregate fair value of $ 257.3 million.

The largest exposure to any single municipality or agency was a combined $ 4.0 million (fair value) in general obligation bonds issued by the Charter Township of Washington County (MI).

The Company’s investments in bonds issued by states, municipalities and political subdivisions are evaluated in accordance with Supervision and Regulation Letter 12-15 issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Organization Ratings,” and other regulatory guidance.

In addition, the Company owned 9 subordinated debentures issues by bank holding companies totaling $ 10.7 million (fair value).

The Company’s investments in bonds issued by corporations, states, municipalities and political subdivisions are evaluated in accordance with Financial Institution Letter 48-2012, issued by the FDIC, “Revised Standards of Creditworthiness for Investment Securities,” and other regulatory guidance.

Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds.

3 unchanged sentences

(dollars in thousands, unaudited)

March 31, 2021

June 30, 2021

December 31, 2020

12 unchanged sentences

(dollars in thousands, unaudited)

March 31, 2021

June 30, 2021

December 31, 2020

11 unchanged sentences

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

As of March 31, 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.

As of June 30, 2021, our total LIHTC investment book balance was $ 3.2 million, which includes $ 0.1 million in remaining commitments for additional capital contributions.

There were $ 0.3 million in tax credits derived from our LIHTC investments that were recognized during the six months ended June 30, 2021, and amortization expense of $ 0.2 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.

16 unchanged sentences

(dollars in thousands, unaudited)

March 31, 2021

June 30, 2021

1-4 family residential construction

23 unchanged sentences

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets.

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

Foreclosed assets totaled $ 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.

The Company’s foreclosed assets include 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 $ 0.8 million at June 30, 2021, and $ 1.0 million at December 31, 2020.

Gross nonperforming loans totaled $ 7.3 million at June 30, 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 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.

As of June 30, 2021, the Company had $ 10.4 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)

March 31, 2021

June 30, 2021

More Past Due (1)

10 unchanged sentences

Total gross loans and leases

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

(1) As of June 30, 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 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.

At June 30, 2021, the Company had a total of $ 12.4 million in TDRs, including $ 1.7 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 March 31, 2021

Three months ended June 30, 2021

Rate Modification

9 unchanged sentences

Consumer loans

Three months ended March 31, 2020

Three months ended June 30, 2020

Rate Modification

9 unchanged sentences

Consumer loans

Troubled Debt Restructurings, by Type of Loan Modification

(dollars in thousands, unaudited)

Six months ended June 30, 2021

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

Six months ended June 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

Troubled Debt Restructurings

(dollars in thousands, unaudited)

Three months ended March 31, 2021

Three months ended June 30, 2021

Difference ⁽ ¹ ⁾

7 unchanged sentences

(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 March 31, 2020

Three months ended June 30, 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 three-month periods ended March 31, 2021 and 2020.

Troubled Debt Restructurings

(dollars in thousands, unaudited)

Six months ended June 30, 2021

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

Six months ended June 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

The Company had no finance receivables modified as TDRs within the previous twelve months that defaulted or were charged off during the three- or six-month periods ended June 30, 2021 and 2020.

Purchased Credit Impaired Loans

12 unchanged sentences

(dollars in thousands, unaudited)

March 31, 2021

June 30, 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 March 31, 2021 or December 31, 2020.

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

There was no allowance for loan losses allocated for PCI loans as of June 30, 2021 or December 31, 2020.

There was no discount accretion recorded on PCI loans during the six months ended June 30, 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 $ 0.6 million at both March 31, 2021 and December 31, 2020.

Included in the valuation allowance for impaired loans shown in the tables below are specific reserves allocated to TDRs, totaling $ 0.7 million at June 30, 2021 and $ 0.6 million at December 31, 2020.

Impaired Loans

(dollars in thousands, unaudited)

March 31, 2021

June 30, 2021

Unpaid Principal

5 unchanged sentences

1-4 family - closed-end

Multi-family residential

Commercial real estate- owner occupied

4 unchanged sentences

With no related allowance recorded

Other construction/land

1-4 family - closed-end

Multi-family residential

Commercial real estate- owner occupied

Commercial real estate- non-owner occupied

Total real estate

12 unchanged sentences

With an allowance recorded

1-4 family residential construction

Other construction/land

2 unchanged sentences

Commercial real estate- owner occupied

Commercial real estate- non-owner occupied

Total real estate

2 unchanged sentences

With no related allowance recorded

1-4 family residential construction

Other construction/land

1-4 family - closed-end

Multi-family residential

Commercial real estate- owner occupied

11 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.

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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 56 % of the Company’s impaired real estate loan balances at March 31, 2021.

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 68 % of the Company’s impaired real estate loan balances at June 30, 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.

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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 $ 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.

The total general reserve established for probable incurred losses on unimpaired loans was $ 15.1 million at June 30, 2021.

There were no material changes to the methodology used to determine our allowance for loan and lease losses during the three months ended June 30, 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) to the earlier of the first day of the fiscal year, beginning after the national emergency related to the outbreak of COVID-19 terminates or January 1, 2022.

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 March 31, 2021

Three months ended June 30, 2021

Commercial and

2 unchanged sentences

Beginning balance

(Benefit) provision

Ending balance

Six months ended June 30, 2021

Commercial and

Industrial (1)

Allowance for credit losses:

Beginning balance

(Benefit) provision

Ending balance

Loans evaluated for impairment:

5 unchanged sentences

Beginning balance

Provision (benefit)

Ending balance

5 unchanged sentences

(dollars in thousands, unaudited)

Three months ended March 31, 2020

Six months ended June 30, 2020

Commercial and

2 unchanged sentences

Beginning balance

Provision (benefit)

Ending balance

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(1) Includes mortgage warehouse lines.

Note 12 – Operating Leases

We lease space under non-cancelable operating leases for 21 branch locations, three off-site ATM locations, one administrative building, one loan production office and a warehouse.

Many of our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs).

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

The Company recognized lease expense of $ 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.

The exercise of lease renewal options is typically at the Company’s sole discretion;

therefore, the majority of renewals to extend the lease terms are not included in our right-of-use assets and lease liabilities as they are not reasonably certain of exercise.

We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term.

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

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the 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 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):

March 31, 2021

present value discount

Lease liability (2)

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

(2) Lease liability is included in other liabilities.

The following table presents the future minimum rental payments under leases with terms in excess of one year as of December 31, 2020 presented in accordance with ASC Topic 840, “Leases”:

December 31, 2020

Total undiscounted lease payments

Note 12 – Revenue Recognition

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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 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.

In total, approximately 25.0 % and 28.4 % of the Company’s noninterest revenue was outside of the scope of the ASC 606 for the three- and six- month periods ended June 30, 2021, 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-month periods ended March 31, 2021 and 2020.

sources of noninterest income for the three-month periods ended June 30, 2021 and 2020.

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

For the three months ended March 31,

For the three months ended June 30,

For the six months ended June 30,

Noninterest income

6 unchanged sentences

Unrealized gains recognized on equity investments (1)

Net gains on sale of securities (1)

Total noninterest income

9 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