Item 2. Management’s Discussion and Analysis
ITEM 2
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-Q includes forward-looking statements that involve inherent risks and uncertainties. These forward-looking statements are within the meaning of Section 27A of the Securities Act of 1933 (“1933 Act”), as amended and Section 21E of the Securities Exchange Act of 1934 (“1934 Act”), as amended. Those sections of the 1933 Act and 1934 Act provide a “safe harbor” for forward-looking statements in order to encourage companies to provide prospective information about their financial performance as long as important factors that could cause actual results to differ significantly from projected results are identified with meaningful cautionary statements. Words such as “expects,” “anticipates,” “believes,” “projects,” “intends,” and “estimates” or variations of such words and similar expressions, as well as future or conditional verbs preceded by “will,” “would,” “should,” “could” or “may” are intended to identify forward-looking statements. These forward-looking statements are based on certain underlying assumptions and are not guarantees of future performance, as they could be impacted by several potential risks and developments that cannot be predicted with any degree of certainty.
These statements are based on management’s current expectations regarding economic, legislative, regulatory and other environmental issues that may affect our earnings in future periods. Therefore, actual outcomes and results may differ materially from what is expressed, forecast in, or implied by such forward-looking statements.
A variety of factors could have a material adverse impact on the Company’s financial condition or results of operations and should be considered when evaluating the Company’s potential future financial performance. They include, but are not limited to:
● risks associated with fluctuations in interest rates, including the impact on other comprehensive income, the ability for customers to repay on floating or adjustable rates loans, and the impact on costs and demand of deposits and funding, the impact on interest income on earning assets, the impact on valuations of collateral on our loans, and the impact on fair value of longer-term assets;
● risks associated with inflation (including efforts by the FOMC of the FRB to control the same);
● the risk of unfavorable economic conditions in the Company’s market areas, or the impact on the Company’s market areas of national or international economic conditions;
● liquidity risks, including the ability to effectively manage the potential loss of deposits, the ability to maintain funding lines of credit, and the loss of value of unencumbered investment securities;
● increases in nonperforming assets and credit losses that could occur, particularly in times of weak economic conditions or rising interest rates;
● the impact of adverse developments at other banks, including bank failures, that impact general sentiment regarding the stability and liquidity of banks;
● risks associated with the multitude of or changes to current and prospective banking laws and regulations, and related interpretations, to which the Company is and will be subject;
● operational risks including the ability to detect and prevent financial reporting errors, operations errors, and fraud;
● the Company’s ability to diversify and grow its loan portfolio;
● the Company’s ability to attract and retain skilled employees;
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● the Company’s ability to successfully deploy new technology and manage cyber security risks;
● the risk to the Company’s operations and ability to serve customers due to the inability of a vendor to meet its service level agreements;
● the outcome of any existing or future legal action for which the Company or Bank is a defendant;
● the effects of severe weather events, pandemics, other public health crises, acts of war or terrorism, and other external events; and
● the success of acquisitions or branch expansions, closures or consolidations.
Risk factors that could cause actual results to differ materially from results that might be implied by forward-looking statements include the risk factors detailed in the Company’s Form 10-K for the fiscal year ended December 31, 2023, and in Item 1A, herein. We do not update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.
CRITICAL ACCOUNTING POLICIES
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. The financial information and disclosures contained within those statements are significantly impacted by Management’s estimates and judgments, which are based on historical experience and incorporate various assumptions that are believed to be reasonable under current circumstances. Actual results may differ from those estimates under divergent conditions.
Critical accounting policies are those that involve the most complex and subjective decisions and assessments which have the greatest potential impact on the Company’s stated results of operations. In Management’s opinion, the Company’s critical accounting policies deal with the following areas:
● the establishment of the allowance for credit losses, as explained in detail in Note 10 to the consolidated financial statements and in the “Provision for Credit Losses” and “Allowance for Credit Losses” sections of this discussion and analysis;
● the valuation of individually evaluated loans and foreclosed assets, as discussed in Notes 8 and 10 to the consolidated financial statements;
● income taxes and related deferred tax assets and liabilities, regarding the ability of the Company to recover deferred tax assets as discussed in the “Provision for Income Taxes” and “Other Assets” sections of this discussion and analysis; and
● goodwill and other intangible assets, which are evaluated annually for impairment and for which we have determined that no impairment exists, as discussed in the “Other Assets” section of this discussion and analysis.
Critical accounting areas are evaluated on an ongoing basis to ensure that the Company’s financial statements incorporate our most recent expectations regarding those areas.
OVERVIEW OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS SUMMARY
Second Quarter 2024 compared to Second Quarter 2023
Second quarter 2024 net income was $10.3 million, a $0.3 million increase or 3%, from the second quarter of 2023 and $0.71 per diluted share in the second quarter of 2024 as compared to $0.67 per diluted share in the second quarter of 2023. The Company’s annualized return on average equity was 11.95% and annualized return on average assets was 1.14% for
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the quarter ended June 30, 2024, compared to 13.06% and 1.07%, respectively, for the same quarter in 2023. The primary drivers behind the increase in second quarter net income are as follows:
● Net income increased by $0.3 million, or 3%, to $10.3 million due to higher net interest income and lower noninterest expenses partially offset by an increase in the provision for credit losses, and lower noninterest income.
● The $1.9 million, or 7%, increase in net interest income was driven by a 30 basis points increase in net interest margin. A $180.9 million decrease in other borrowed funds due to the strategic securities transaction and balance sheet restructuring in early 2024 along with higher loan yields were the primary drivers of the net interest margin increase.
● Noninterest income decreased $0.4 million, primarily from nonrecurring gains on the sale of investments in the second quarter of 2023.
● Noninterest expense improved due to a strategic internal reorganization in the fourth quarter of 2023 which optimized our team structure, and better aligned our resources and processes.
First Half 2024 compared to First Half 2023
Net income for the first half of 2024 was $19.6 million, or $1.35 per diluted share, compared to $18.7 million, or $1.26 per diluted share for the same period in 2023. The Company’s annualized return on average equity was 11.52% and annualized return on average assets was 1.10% for the six months ended June 30, 2024, compared to a return on equity of 12.30% and return on assets of 1.02% for the six months ended June 30, 2023. The primary drivers behind the variance in year-to-date net income are as follows:
● The provision for credit losses on loans was $1.0 million, an increase of $0.7 million, due to higher net charge-offs.
● Net interest income increased by $2.4 million, or 4%, due mostly to the strategic decision to sell off lower yielding bonds in the fourth quarter of 2023 and the first quarter of 2024, which generated cash used partially to pay off higher cost borrowed funds.
● Noninterest income increased $1.6 million, or 11%, primarily from an increase in service charges on deposit accounts, and a $0.9 million positive variance in Bank Owned Life Insurance (BOLI) income tied to our nonqualified deferred compensation plan.
● Noninterest expense increased $1.3 million, or 3% primarily due to increased rent expense from the sale/leaseback transactions in fourth quarter of 2023 and first quarter of 2024.
FINANCIAL CONDITION SUMMARY
June 30, 2024 relative to December 31, 2023
The Company’s assets totaled $3.7 billion at June 30, 2024, a decrease of $48.6 million, or 1.0% from December 31, 2023. The following provides a summary of key balance sheet changes during the first six months of 2024:
● Investment securities decreased $309.6 million, or 23.0%, to $1.0 billion primarily due to the sale of bonds from the strategic securities transaction and balance sheet restructuring.
● Gross loans increased $144.5 million, or 7%, due to a $158.1 million increase in mortgage warehouse loans, and a $13.5 million increase in farmland loans, partially offset by smaller declines in other categories. Specifically, there was a $27.0 million decrease in non-agricultural real estate loans, a $0.4 million decline in other commercial loans and a $0.5 million reduction in consumer loans. In addition to strong favorable growth in mortgage
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warehouse, new credit extended, including new fundings on non-mortgage warehouse lines of credit, was $75.3 million YTD 2024 vs $89.6 million YTD 2023.
● Deposits increased by $181.2 million, or 7%. The growth in deposits came primarily from brokered deposits, as overall customer deposits decreased $30.4 million. Brokered deposits added in 2024 had a term of one year or less and were used to fund increases in mortgage warehouse balances in 2024.
● Other interest-bearing liabilities decreased $239.6 million mostly from a decrease in overnight borrowings facilitated by the strategic balance sheet restructuring in the first quarter of 2024.
● Total capital of $350.0 million at June 30, 2024, reflects an increase of $11.9 million, or 4%, compared to December 31, 2023. The increase in equity during the first half of 2024, is due to net income of $19.6 million, offset by a $6.7 million dividend paid to shareholders, $7.1 million in share repurchases and a $5.3 million favorable swing in other comprehensive income due principally to changes in investment securities’ fair value. The remaining difference is related to equity compensation recognized during the first half of 2024.
EARNINGS PERFORMANCE
The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on deposits and other borrowed money. The second is noninterest income, which primarily consists of customer service charges and fees but also comes from non-customer sources such as BOLI, equity investments, and investment gains. The majority of the Company’s noninterest expense is comprised of operating costs that facilitate offering a full range of banking services to our customers.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income was $30.2 million for the second quarter of 2024, a $1.9 million increase, or 7% over the second quarter of 2023, and increased $2.4 million, or 4%, to $58.9 million for the first six months of 2024 relative to the same period in 2023. This increase in interest income for the quarterly comparison was due primarily to an increase in interest income on loans of $4.2 million, augmented by a $0.8 million decrease in interest expense due to the reduction in borrowed funds facilitated by a balance sheet restructuring, partially offset by a related decline in interest income on investments of $1.6 million, or 10%, due to the sale of low yielding investments.
For the second quarter of 2024, although the balance of average interest-earning assets was $106.2 million lower, the yield was 71 basis points higher as compared to the same period in 2023. There was a 23 basis point increase in the cost of our interest-bearing liabilities for the same period, which offset some of the higher yields on the asset side.
Net interest income for the comparative year-to-date periods increased $2.4 million, due to the strategic decision to change the mix on interest earning assets, selling off lower yielding bonds in the fourth quarter of 2023 and first quarter of 2024, moderated by an increase in interest rates paid on interest-bearing liabilities. There was a $112.5 million, or 6%, increase in average loan balances yielding 41 basis points higher for the same period, while average investment balances decreased $229.1 million, yielding 69 basis points higher for the same period. Average interest-bearing liabilities decreased $83.7 million, mostly in borrowed funds. The cost of interest-bearing liabilities was 41 basis points higher for the comparative periods. The favorable net impact of the mix and rate change was a 23 basis point increase in our net interest margin for the six-months ending June 30, 2024 as compared to the same period in 2023.
Interest expense was $13.3 million for the second quarter of 2024, an increase of $0.8 million, relative to the second quarter of 2023. For the first six months of 2024, compared to the first six months of 2023, interest expense increased $3.7 million, to $25.6 million. The increase in interest expense is primarily attributable to an increase in interest rates paid on certain time deposits, and a shift in deposits to higher interest rate accounts partially offset by lower balances on other borrowings. There was an unfavorable shift in the deposit mix in the second quarter of 2024 as compared to the same period in 2023
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due to increased demand from customers for higher rates. Higher cost customer time deposits increased by $23.0 million, and wholesale brokered deposits increased by $129.3 million, while lower cost and noninterest bearing deposits decreased by $181.4 million. A $128.9 million decrease in borrowed funds mitigated some of the unfavorable shift for the quarterly comparison. For the first half of 2024, as compared to the same period in 2023, customer time deposits increased $61.6 million, and wholesale brokered deposits increased $85.9 million, while borrowed funds decreased $88.7 million, and other deposits decreased $218.7 million.
The Company had $1.5 billion in adjustable and variable rate loans and $519.9 million in floating rate bonds, as compared to $316.6 million in floating rate CDs and $35.7 million in floating rate trust preferred securities at June 30, 2024. The adjustable-rate loans have repricing frequencies ranging from 30-days to 10-years. Of the $1.5 billion in adjustable and variable rate loans, $610.7 million of such adjustable and variable rate loans reprice in the next twelve months.
Our net interest margin was 3.69% for the second quarter of 2024, and 3.39% for the second quarter of 2023, an increase of 30 basis points, and 3.66% for the first half of 2024, as compared to 3.43% for the first half of 2023, an increase of 23 basis points. While the yield of interest-earning assets increased 71 basis points for the second quarter of 2024, the cost of interest-bearing liabilities increased 23 basis points for the same period of comparison. The average balance of interest-earning assets decreased $106.2 million, while the decrease in interest-bearing liabilities was $86.0 million for the same period. The decrease in higher cost borrowed funds over the increase in yield on interest-earning assets improved the net interest margin in the second quarter of 2024 over the same period in 2023.
For the year-to-date comparison the increase in net interest margin of 23 basis points comes from an increase in yield on interest-earning assets of 50 basis points partially offset by an increase in interest rates paid on interest-bearing liabilities of 41 basis points. The increase in yield on interest earning assets is over a much larger volume base than of interest-bearing liabilities reflecting the positive change in the net interest margin for the first half of 2024.
The level of net interest income we recognize in any given period depends on a combination of factors including the average volume and yield for interest-earning assets, the average volume and cost of interest-bearing liabilities, and the mix of products which comprise the Company’s earning assets, deposits, and other interest-bearing liabilities.
The following tables show average balances for significant balance sheet categories and the amount of interest income or interest expense associated with each category for the noted periods. The tables also display calculated yields on each major component of the Company’s investment and loan portfolios, average rates paid on each key segment of the Company’s interest-bearing liabilities, and our net interest margin for the noted periods .
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Average Balances and Rates
(dollars in thousands, unaudited)
For the three months ended
For the three months ended
June 30, 2024
June 30, 2023
Assets
Average
Balance (1)
Income/
Expense
Average
Rate/Yield (2)
Average
Balance (1)
Income/
Expense
Average
Rate/Yield (2)
Investments:
Interest-earning due from banks
$
43,407
$
598
5.54%
$
35,236
$
376
4.28%
Taxable
866,270
12,787
5.94%
996,117
13,488
5.43%
Non-taxable
199,942
1,592
4.05%
352,718
2,741
3.95%
Total investments
1,109,619
14,977
5.58%
1,384,071
16,605
5.02%
Loans: (3)
Real estate
1,802,190
20,463
4.57%
1,858,512
20,827
4.49%
Agricultural
75,825
1,406
7.46%
28,472
496
6.99%
Commercial
77,224
1,174
6.11%
82,743
1,179
5.72%
Consumer
3,698
79
8.59%
4,339
88
8.13%
Mortgage warehouse lines
261,768
5,382
8.27%
78,187
1,658
8.51%
Other
2,291
14
2.46%
2,483
22
3.55%
Total loans
2,222,996
28,518
5.16%
2,054,736
24,270
4.74%
Total interest-earning assets (4)
3,332,615
43,495
5.30%
3,438,807
40,875
4.85%
Other earning assets
17,058
16,952
Non-earning assets
286,020
267,433
Total assets
$
3,635,693
$
3,723,192
Liabilities and shareholders' equity
Interest-bearing deposits:
Demand deposits
$
131,510
$
733
2.24%
$
144,156
$
190
0.53%
NOW
398,001
148
0.15%
454,395
76
0.07%
Savings accounts
371,961
80
0.09%
428,222
62
0.06%
Money market
139,507
476
1.37%
123,571
72
0.23%
Time deposits
563,526
6,051
4.32%
540,540
6,022
4.47%
Brokered deposits
307,995
3,544
4.63%
178,728
1,521
3.41%
Total interest-bearing deposits
1,912,500
11,032
2.32%
1,869,612
7,943
1.70%
Borrowed funds:
Repurchase agreements
131,478
66
0.20%
79,694
65
0.33%
Other borrowings
98,731
1,042
4.24%
279,633
3,430
4.92%
Long-term debt
49,335
430
3.51%
49,247
429
3.49%
Subordinated debentures
35,723
755
8.50%
35,547
691
7.80%
Total borrowed funds
315,267
2,293
2.93%
444,121
4,615
4.17%
Total interest-bearing liabilities
2,227,767
13,325
2.41%
2,313,733
12,558
2.18%
Demand deposits - noninterest-bearing
978,602
1,050,668
Other liabilities
83,886
54,139
Shareholders' equity
345,438
304,652
Total liabilities and shareholders' equity
$
3,635,693
$
3,723,192
Interest income/interest-earning assets
5.30%
4.85%
Interest expense/interest-earning assets
1.61%
1.46%
Net interest income and margin (5)
$
30,170
3.69%
$
28,317
3.39%
(1) Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.
(2) Yields and net interest margin have been computed on a tax equivalent basis utilizing a 21% effective federal tax rate.
(3) Loans are gross of the allowance for expected credit losses. Loan fees have been included in the calculation of interest income. Net loan (costs) fees and loan acquisition FMV amortization were $(0.3) million and $(0.3) million for the quarters ended June 30, 2024 and 2023, respectively.
(4) Nonaccrual loans have been included in total loans for purposes of computing total earning assets.
(5) Net interest margin represents net interest income as a percentage of average interest-earning assets.
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Average Balances and Rates
(Dollars in Thousands, Unaudited)
For the six months ended
For the six months ended
June 30, 2024
June 30, 2023
Assets
Average
Balance (1)
Income/
Expense
Average
Rate/Yield (2)
Average
Balance (1)
Income/
Expense
Average
Rate/Yield (2)
Investments:
Interest-earning due from banks
$
30,202
$
839
5.57%
$
20,357
$
446
4.42%
Taxable
879,720
26,090
5.95%
984,150
25,472
5.22%
Non-taxable
222,469
3,581
4.09%
356,999
5,555
3.97%
Total investments
1,132,391
30,510
5.57%
1,361,506
31,473
4.88%
Loans: (3)
Real estate
1,804,187
40,653
4.53%
1,863,783
40,726
4.41%
Agricultural
68,622
2,544
7.46%
28,251
929
6.63%
Commercial
78,216
2,357
6.06%
76,848
2,172
5.70%
Consumer
3,830
160
8.40%
4,239
176
8.37%
Mortgage warehouse lines
199,595
8,203
8.26%
68,707
2,776
8.15%
Other
2,312
28
2.44%
2,474
42
3.42%
Total Loans
2,156,762
53,945
5.03%
2,044,302
46,821
4.62%
Total interest-earning assets (4)
3,289,153
84,455
5.22%
3,405,808
78,294
4.72%
Other earning assets
17,202
16,336
Non-earning assets
278,403
269,950
Total assets
$
3,584,758
$
3,692,094
Liabilities and shareholders' equity
Interest-bearing deposits:
Demand deposits
$
134,736
$
1,431
2.14%
$
147,131
$
319
0.44%
NOW
398,320
232
0.12%
468,939
147
0.06%
Savings accounts
374,148
153
0.08%
442,826
127
0.06%
Money market
138,597
886
1.29%
129,470
96
0.15%
Time Deposits
562,733
12,241
4.37%
501,096
10,528
4.24%
Brokered deposits
256,543
5,733
4.49%
170,688
2,726
3.22%
Total interest-bearing deposits
1,865,077
20,676
2.23%
1,860,150
13,943
1.51%
Borrowed funds:
Repurchase agreements
121,932
106
0.17%
91,495
146
0.32%
Other borrowings
109,103
2,415
4.45%
228,463
5,541
4.89%
Long-term debt
49,324
861
3.51%
49,235
857
3.51%
Subordinated debentures
35,700
1,510
8.51%
35,523
1,358
7.71%
Total borrowed funds
316,059
4,892
3.11%
404,716
7,902
3.94%
Total interest-bearing liabilities
2,181,136
25,568
2.36%
2,264,866
21,845
1.95%
Demand deposits - noninterest-bearing
984,489
1,060,666
Other liabilities
77,210
60,351
Shareholders' equity
341,923
306,211
Total liabilities and shareholders' equity
$
3,584,758
$
3,692,094
Interest income/interest-earning assets
5.22%
4.72%
Interest expense/interest-earning assets
1.56%
1.29%
Net interest income and margin (5)
$
58,887
3.66%
$
56,449
3.43%
(1) Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.
(2) Yields and net interest margin have been computed on a tax equivalent basis utilizing a 21% effective federal tax rate.
(3) Loans are gross of the allowance for possible loan losses. Loan fees have been included in the calculation of interest income. Net loan fees and loan acquisition FMV amortization were $(0.7) million and $(0.4) million for the six months ended June 30, 2024 and 2023, respectively.
(4) Nonaccrual loans have been included in total loans for purposes of computing total earning assets.
(5) Net interest margin represents net interest income as a percentage of average interest-earning assets.
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The Volume and Rate Variances table below sets forth the dollar difference for the comparative periods in interest earned or paid for each major category of interest-earning assets and interest-bearing liabilities, and the amount of such change attributable to fluctuations in average balances (volume) or differences in average interest rates. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates, and rate variances are equal to the change in rates multiplied by prior period average balances. Variances attributable to both rate and volume changes, calculated by multiplying the change in rates by the change in average balances, have been allocated to the rate variance.
Volume & Rate Variances
(dollars in thousands, unaudited)
Three months ended June 30,
Six months ended June 30,
2024 over 2023
2024 over 2023
Increase (decrease) due to
Increase (decrease) due to
Assets:
Volume
Rate
Mix
Net
Volume
Rate
Mix
Net
Investments:
Federal funds sold/due from time
$
88
$
109
$
25
$
222
$
216
$
119
$
58
$
393
Taxable
(1,759)
1,216
(158)
(701)
(2,704)
3,715
(393)
618
Non-taxable
(1,187)
67
(29)
(1,149)
(2,093)
191
(72)
(1,974)
Total investments (1)
(2,858)
1,392
(162)
(1,628)
(4,581)
4,025
(407)
(963)
Loans:
Real estate
(632)
276
(8)
(364)
(1,302)
1,270
(41)
(73)
Agricultural
825
32
53
910
1,327
119
169
1,615
Commercial
(80)
80
(5)
(5)
39
143
3
185
Consumer
(13)
5
(1)
(9)
(17)
2
(1)
(16)
Mortgage warehouse
3,892
(50)
(118)
3,724
5,287
49
91
5,427
Other
(2)
(7)
1
(8)
(3)
(12)
1
(14)
Total loans (1)
3,990
336
(78)
4,248
5,331
1,571
222
7,124
Total interest-earning assets (1)
$
1,132
$
1,728
$
(240)
$
2,620
$
750
$
5,596
$
(185)
$
6,161
Liabilities:
Interest-bearing deposits:
Demand deposits
$
(16)
612
(53)
$
543
$
(27)
$
1,244
(105)
$
1,112
NOW
(9)
93
(12)
72
(22)
126
(19)
85
Savings accounts
(8)
30
(4)
18
(20)
54
(8)
26
Money market
9
350
45
404
7
731
52
790
Time deposits
256
(218)
(9)
29
1,295
372
46
1,713
Brokered deposits
1,100
536
387
2,023
1,372
1,088
547
3,007
Total interest-bearing deposits (1)
1,332
1,403
354
3,089
2,605
3,615
513
6,733
Borrowed funds:
Repurchase agreements
42
(25)
(16)
1
49
(67)
(22)
(40)
Other Borrowings
(2,219)
(479)
310
(2,388)
(2,895)
(484)
253
(3,126)
Long-term debt
1
—
—
1
1
3
—
4
Subordinated debt
3
61
—
64
7
144
1
152
Total borrowed funds (1)
(2,173)
(443)
294
(2,322)
(2,838)
(404)
232
(3,010)
Total interest-bearing liabilities (1)
(841)
960
648
767
(233)
3,211
745
3,723
Net interest income (1)
$
1,973
$
768
$
(888)
$
1,853
$
983
$
2,385
$
(930)
$
2,438
(1) Subtotals are a sum of the categories above and are not recalculated on the portfolio totals.
The volume variance calculated for the second quarter of 2024 relative to the second quarter of 2023 was a favorable $2.0 million; this is primarily from a favorable loan volume variance of $4.0 million augmented by a favorable reduction in other borrowed funds. There was a favorable rate variance of $0.8 million from the comparative quarter since the weighted average yield on interest-earning assets more than offset the increase in the average yield unfavorable variance on interest-bearing liabilities. There was an unfavorable mix variance of $0.9 million primarily from the sale of bonds with lower yields that has yet to be deployed into higher yielding assets combined with higher interest rates paid on customer time
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and brokered deposits. The Company’s net interest margin for the second quarter of 2024 was 3.69%, as compared to 3.39% for the second quarter of 2023.
The volume variance calculated for the first six months of 2024 relative to the first six months of 2023 reflects a favorable variance of $1.0 million, a favorable rate variance of $2.4 million, and an unfavorable mix variance of $0.9 million. There were increases in loan balances for a favorable volume variance of $5.3 million which was mostly offset by a $4.6 million decrease in investments, due to the balance sheet restructure in 2023. There was a $2.8 million decrease in borrowed funds, partially offset by a $2.6 million increase in interest-bearing deposits. There was a positive rate variance on interest earning assets of $5.6 million for the first six months of 2024 partially offset by a $3.2 million rate increase in interest earning liabilities. The Company’s net interest margin for the first half of 2024 was 3.66%, as compared to 3.43% in the first half of 2023.
At June 30, 2024, approximately 15% of our total portfolio, or $342.7 million, consists of variable rate loans. At June 30, 2024, our outstanding fixed rate loans represented 31% of our loan portfolio. The remaining 54% of our loan portfolio at June 30, 2024, consists of adjustable-rate loans; 30% of these loans (approximately $355.0 million) will not have the ability to reprice for at least another 3 years. Our adjustable-rate loans have maturities up to 25 years and are generally adjustable every five years after the initial adjustment, which can vary from 5 to 10 years to initial adjustment. Approximately $170.9 million of these adjustable-rate loans have the ability to reprice in 2024, which is expected to have a positive impact on earnings as most of these adjustable-rate loans were made when rates were lower.
Interest earning cash balances for the quarter and year-to-date comparisons have increased and have a positive impact on our net interest margin since cash balances have been earning approximately 5.5%. Average cash and due from banks was $43.4 million, an increase of $26.4 million for the second quarter of 2024 as compared to the same period last year, and was $9.8 million higher for the first half of 2024 as compared to the same period in 2023.
Overall average investment securities decreased by $282.6 million for the second quarter of June 30, 2024, as compared to June 30, 2023, and decreased by $239.0 million for the first half of 2024, from the sale of lower yielding bonds from a strategic securities transaction, the proceeds of which were used to paydown higher cost borrowings. The overall investment portfolio had a tax-equivalent yield of 5.43% at June 30, 2024, with an average life of 6.08 years and average effective duration of 0.8 years for available-for-sale securities. Approximately $519.9 million of the investment securities reprice every 90 days and $49.3 million are subordinated debt with an initial fixed rate period of 5 years and floating thereafter.
Interest expense was $13.3 million for the second quarter of 2024, an increase of $0.8 million, relative to the second quarter of 2023. For the first six months of 2024, compared to the first six months of 2023, interest expense increased $3.7 million, to $25.6 million. The increase in interest expense is primarily attributable to an increase in interest rates paid on certain time deposits, and a shift in deposits to higher interest rate accounts partially offset by lower balances on other borrowings. There was an unfavorable shift in the deposit mix in the second quarter of 2024 as compared to the same period in 2023 due to increased demand from customers for higher rates. Higher cost customer time deposits increased by $23.0 million, and wholesale brokered deposits increased by $129.3 million, while lower cost and noninterest bearing deposits decreased by $181.4 million. Mitigating some of the unfavorable shift there was also a $128.9 million decrease in borrowed funds for the quarterly comparison. For the first half of 2024, as compared to the same period in 2023, customer time deposits increased $61.6 million, and wholesale brokered deposits increased $85.9 million, while borrowed funds decreased $88.7 million, and other deposits decreased $218.7 million. Average noninterest-bearing demand deposits decreased $72.1 million or 7% for the second quarter of 2024 as compared to the second quarter of 2023 and decreased $76.2 million or 7% for the first half of 2024 as compared to the first half of 2023.
PROVISION FOR CREDIT LOSSES ON LOANS
Credit risk is inherent in the business of making loans. The Company sets aside an allowance for credit losses on loans, a contra-asset account, through periodic charges to earnings which are reflected in the income statement as the provision for credit losses on loans. Specifically identifiable and quantifiable loan losses are immediately charged off against the allowance, with subsequent recoveries reflected as an increase to the allowance. The Company recorded a provision for credit losses of $0.9 million in the second quarter of 2024, as compared to $0.1 million in the second quarter of 2023, and
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a year-to-date provision for credit losses on loans of $1.0 million in 2024, as compared to $0.3 million in the same period for 2023. The Company's $0.8 million increase in the provision for credit losses on loans in the second quarter of 2024, as compared to the second quarter of 2023, and the $0.7 million year to date increase in the provision for credit losses on loans, compared to the same period in 2023, was primarily due to the impact of $2.9 million in net charge-offs in the first six months of 2024, with only $0.4 million in net charge-offs for the first six months of 2023. The increase in net charge-offs in the second quarter of 2024 was primarily related to a single office building which was subsequently foreclosed upon and sold.
The allowance for credit losses on loans is at a level that, in Management’s judgment, is adequate to absorb probable credit losses on loans related to individually identified loans as well as probable credit losses in the remaining loan portfolio.
The Company’s policies for monitoring the adequacy of the allowance, determining loan balances that should be charged off, and other detailed information with regard to changes in the allowance are discussed in Note 10 to the consolidated financial statements, and below, under “Allowance for Credit Losses.” The process utilized to establish an appropriate credit allowance for losses on loans can result in a high degree of variability in the Company’s credit loss provision, and consequently in our net earnings.
NONINTEREST INCOME AND NONINTEREST EXPENSE
The following table provides details on the Company’s noninterest income and noninterest expense for the three and six-month periods ended June 30, 2024, and 2023:
Noninterest Income/Expense
(dollars in thousands, unaudited)
For the three months ended June 30,
For the six months ended June 30,
Noninterest income:
2024
2023
2024
2023
Service charges and fees on deposit accounts
$
6,184
$
5,691
$
11,909
$
11,071
Net gain (loss) on sale of securities available-for-sale
—
351
(2,883)
396
Gain on sale of fixed assets
—
—
3,799
—
Bank-owned life insurance
523
658
1,738
830
Other
923
1,313
1,656
2,296
Total noninterest income
$
7,630
$
8,013
$
16,219
$
14,593
As a % of average interest-earning assets (1)
0.92%
0.93%
0.99%
0.86%
Noninterest expense:
Salaries and employee benefits
$
12,029
$
12,129
$
25,226
$
24,944
Occupancy and equipment costs
3,152
2,438
6,177
4,769
Advertising and marketing costs
338
410
680
923
Data processing costs
1,680
1,536
3,189
3,064
Deposit services costs
2,019
2,532
4,152
4,555
Loan services costs
Loan processing
89
151
240
279
Foreclosed assets
—
(33)
—
725
Other operating costs
1,094
1,490
2,021
2,479
Professional services costs
Legal & accounting services
714
483
1,240
1,129
Director's costs
646
725
1,899
308
Other professional service
582
832
1,582
2,039
Stationery & supply costs
115
125
263
265
Sundry & tellers
234
150
549
481
Total noninterest expense
$
22,692
$
22,968
$
47,218
$
45,960
As a % of average interest-earning assets (1)
2.74%
2.68%
2.89%
2.72%
(1) Annualized
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Noninterest Income:
Total noninterest income decreased by $0.4 million, or 5%, for the quarter ended June 30, 2024, as compared to the same quarter in 2023 and increased $1.6 million, or 11% for the comparable year-to-date periods. The quarterly comparison decrease primarily resulted from a $0.4 million non-recurring bond sale gain in 2023. The year-to-date increase reflects a $2.9 million loss on the sale of investment securities in 2024, offset by a $3.8 million gain on the sale/leaseback of bank owned branch locations. There were $0.5 million in life insurance proceeds in 2023, with no like amount in 2024. These favorable variances to the year-to-date comparisons were augmented by a $1.2 million increase in the value of separate account corporate-owned life insurance assets tied to non-qualified deferred compensation plans.
The Company maintains a non-qualified deferred compensation plan for officers and directors, which allows the participant to defer a portion of their earnings tax-free. Participants are allowed to choose different hypothetical investment alternatives to determine their individualized return on their deferred compensation. The Company has chosen to offset the cost of this liability with a Corporate Owned Life Insurance Policy (“COLI”) which is funded based on deferral elections from the participants. Although the COLI is not directly tied to the deferred compensation plan, the COLI is invested in similar fund types as those selected by the participants. There is some inefficiency in net earnings of the COLI asset as compared to the deferred compensation liability created by the cost of insurance, differences in balances, and differences in individual fund performance. During the second quarter, and first six-months of 2024, earnings from the COLI was $0.3 million, and $1.3 million, respectively while additional expense from the related deferred compensation liability was $0.3 million, and $1.4 million, respectively. Most of such expense is reported as Professional Fees under Directors Fees as such expense is related to deferral of past directors’ fees. Specifically, $0.3 million for the quarterly comparison, and $1.2 million for the year-to-date comparison, respectively, is reflected as directors’ fees as part of the overall Professional Fees expense line item. The tax benefit of having tax-free earnings with tax-deductible expense was $0.2 million during the second quarter of 2024, and $0.8 million for the first six-months of 2024.
Service charges on customer deposit account income decreased by $0.5 million, or 9%, to $6.2 million in the second quarter of 2024 as compared to the second quarter of 2023 and $0.8 million higher, or 8%, in the first six months of 2024, as compared to the same period in 2023. These increases in the quarterly and year-to-date comparisons are primarily a result of higher interchange and ATM fees, along with increased service charges on analysis accounts.
In the “other” category of noninterest income there was a $0.4 million decrease in the second quarter of 2024 as compared to the second quarter of 2023, and a $0.7 million decrease in the first six months of 2024 as compared to the same period in 2023. The quarterly comparison was negatively impacted by a decrease in life insurance proceeds and a decrease in limited partnership income. The year-to-date comparison was also negatively impacted by a decrease in life insurance proceeds as well as a decrease in OREO rental income, as all OREO properties were sold.
Noninterest Expense:
Total noninterest expense favorably declined by $0.3 million, or 1%, in the second quarter of 2024 relative to the second quarter of 2023, but increased by $1.3 million, or 3%, in the first six months of 2024 as compared to the first six months of 2023.
Salaries and benefits were $0.1 million, or 1%, lower in the second quarter of 2024 as compared to the second quarter of 2023 and were $0.3 million, or 1% higher for the first six months of 2024, compared to the same period in 2023. The reason for the decrease in the quarterly comparison is due to a strategic decision to improve operational efficiencies. The increase in the year-over-year comparison is primarily due to increases related to annual performance evaluations. Overall full-time equivalent employees were 501 at June 30, 2024, as compared to 489 at December 31, 2023, and 502 at June 30, 2023. Included in full-time equivalent employees at June 30, 2024 were 18 summer interns and temporary employees.
Occupancy expenses increased by $0.7 million, and $1.4 million for the second quarter, and the first half of 2024 as compared to the same periods in 2023. The reason for the increases in both comparisons is due to increased rent expense from the sale/leaseback transactions in the fourth quarter of 2023, and first quarter of 2024.
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Other noninterest expense decreased $0.9 million, or 11%, for the second quarter 2024, as compared to the second quarter in 2023, and decreased $0.4 million, or 3% for the first half of 2024 as compared to the same period in 2023. FDIC assessment costs decreased $0.2 million for the quarterly comparisons, but were flat for the year-to-date comparison. Deferred compensation expense for directors decreased $0.1 million for the quarterly comparison but increased $0.9 million for the year-to-date comparison, which is linked to the changes in life insurance income as described in detail above. There were decreases in debit card processing and ATM network costs of $0.6 million for both the quarterly and year-to-date comparisons due to a branding change from Mastercard to Visa and the subsequent conversion costs related to that change. Additionally, we incurred a $0.3 million loss that is reflected in noninterest expense during the second quarter of 2023 with no such like event in 2024. For the year-to-date comparison there was also elevated foreclosed assets costs for the first half of 2023, as compared to the same period in 2024, due to the foreclosure and subsequent sale of one large credit in the first quarter of 2023.
PROVISION FOR INCOME TAXES
The Company sets aside a provision for income taxes on a monthly basis. The amount of that provision is determined by first applying the Company’s statutory income tax rates to estimated taxable income, which is pre-tax book income adjusted for permanent differences, and then subtracting available tax credits. Permanent differences include but are not limited to tax-exempt interest income, BOLI income, and certain book expenses that are not allowed as tax deductions. Our tax credits consist primarily of those generated by investments in low-income housing tax credit funds. The Company's provision for income taxes was 27.8% of pre-tax income in the second quarter of 2024 relative to 26.2% in the second quarter of 2023, and 27.1% of pre-tax income for the first half of 2024 relative to 25.0% for the same period in 2023. The increase in effective tax rate for both the quarterly and year-to-date comparisons is due to the tax credits and tax-exempt income representing a smaller percentage of total taxable income.
BALANCE SHEET ANALYSIS
EARNING ASSETS
The Company’s interest-earning assets are comprised of loans and investments, including overnight investments and surplus balances held in interest-earning accounts in our FRB account. The composition, growth characteristics, and credit quality of both of those components are significant determinants of the Company’s financial condition. Investments are analyzed in the section immediately below, while the loan portfolio and other factors affecting earning assets are discussed in the sections following investments.
INVESTMENTS
The Company’s investments may at any given time consist of debt securities and marketable equity securities (together, the “investment portfolio”), investments in the time deposits of other banks, surplus interest-earning balances in our FRB account, and overnight fed funds sold. The Company’s investments can serve several purposes, including the following: 1) they can provide liquidity for potential funding needs; 2) they provide a source of pledged assets for securing public deposits, bankruptcy deposits and certain borrowed funds which require collateral; 3) they constitute a large base of assets with structural characteristics that can be changed more readily than loan or deposit portfolios, as might be required for interest rate risk management purposes; 4) they are another interest-earning option for the placement of surplus funds when loan demand is light; and 5) they can provide partially tax exempt income.
The investment portfolio is reflected on the balance sheet as investment securities and totaled $1.0 billion, or 28% of total assets at June 30, 2024, and $1.3 billion, or 36% of total assets at December 31, 2023. The decrease was due to the sale of bonds from the strategic securities transaction. The bonds sold had an average book yield of 2.61% and were used to paydown borrowed funds at an average rate of 5.52%.
The Company carries “available for sale” investments at their fair market values and “held to maturity” investments at amortized cost, net of allowance for credit losses. We currently have the intent and ability to hold our investment securities to maturity, but the securities are all marketable. The expected effective duration was 0.8 years for available-for-sale
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investments and 6.0 years for held-to-maturity investments at June 30, 2024, as compared to 1.4 years for available-for-sale investments and 5.9 years for held-to-maturity investments at December 31, 2023.
The following table sets forth the carrying amount for available-for-sale securities, at fair value, and held-to-maturity securities, at amortized cost, net of the allowance for credit losses of the Company’s investment portfolio by investment type as of the dates noted:
Investment Portfolio
(dollars in thousands, unaudited)
June 30, 2024
December 31, 2023
Carrying Amount
Percent
Carrying Amount
Percent
Available for sale
U.S. government agencies
$
75,415
7.32%
$
102,749
7.67%
Mortgage-backed securities
31,415
3.05%
99,544
7.43%
State and political subdivisions
41,887
4.07%
194,206
14.50%
Corporate bonds
55,605
5.40%
52,040
3.89%
Collateralized loan obligations
512,465
49.77%
570,662
42.61%
Total available for sale
716,787
69.61%
1,019,201
76.10%
Held to maturity
U.S. government agencies
5,005
0.49%
5,522
0.41%
Mortgage-backed securities
135,815
13.20%
142,295
10.62%
State and political subdivisions
172,059
16.70%
172,240
12.86%
Total held to maturity
312,879
30.39%
320,057
23.90%
Total securities
$
1,029,666
100.00%
$
1,339,258
100.00%
Investment securities that were pledged as collateral for borrowings and/or potential borrowings from the FHLB and the FRB, customer repurchase agreements, and other purposes as required or permitted by law totaled $495.9 million at June 30, 2024, and $543.9 million at December 31, 2023, leaving $533.8 million in unpledged debt securities at June 30, 2024, and $793.0 million at December 31, 2023. Securities that were pledged in excess of actual pledging needs and were thus available for liquidity purposes, if needed, totaled $272.9 million at June, 2024, and $383.0 million at December 31, 2023.
ALLOWANCE FOR CREDIT LOSSES – AFS INVESTMENT SECURITIES
The allowance for credit losses on AFS investment securities, a contra-asset, is established through periodic provisions for credit losses on AFS investment securities. It is maintained at a level that is considered adequate to measure expected losses across the classes of major investment security types related to fluctuations in market conditions, primarily interest rates, and not reflective of a deterioration in credit value. The Company maintains that it has intent and ability to hold these securities until the amortized cost basis of each security is recovered and likewise concluded as of both June 30, 2024 and December 31, 2023 that it was not more likely than not that any of the securities in an unrealized loss position would be required to be sold. The following bullets outline additional support for management’s conclusion that no amount of the unrealized loss of the securities in an unrealized loss position as of June 30, 2024 and December 31, 2023, was attributable to credit deterioration and a risk of loss, requiring an allowance for credit losses.
● US Government Agencies are supported by the full faith and creditworthiness of the U.S. Federal Government and the management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either June 30, 2024, or December 31, 2023.
● Mortgage-backed securities issued by government sponsored entities (“GSEs”) carry an implicit guarantee by the U.S. Federal Government, as the GSEs can draw funds from the U.S. Federal Government up to a limit, with an implied ability to draw funds beyond the limit. Management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either June 30, 2024, or December 31, 2023.
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● Management routinely monitors third party credit grades of the municipal issuers in the Company’s state and political subdivisions portfolio and as of both June 30, 2024, or December 31, 2023 noted that all municipal securities in an unrealized loss position were either investment grade rated or guaranteed. On a quarterly basis management receives financial information from a third-party service in order to monitor the underlying issuer’s financial stability. In addition, management performs annual reviews of the underlying municipal issuers financial statements in order to evaluate stability and repayment capacity and has noted no concerns with any of the bonds in the Company’s State and Local portfolio. As of both June 30, 2024 or December 31, 2023 management concluded that no allowance for credit losses was warranted on any of the Company’s municipal securities and the unrealized loss position of each of the securities reflected fluctuations in market conditions, primarily interest rates, since the time of purchase.
● The Company has invested in corporate debt issuances of other financial institutions. Various financial metrics of each of the issuing financial institutions are reviewed by management quarterly, these metrics include credit quality, reserve adequacy, profitability and capital. Following review of the financial metrics available for each of the underlying institutions as of June 30, 2024 or December 31, 2023 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest rates, from the date of purchase, and were not reflective of any credit concerns with the issuing financial institution. These bonds were subject to a credit review by the credit administration department prior to their purchase and are subject to ongoing quarterly reviews.
● The Company has invested exclusively in AA and AAA tranches of various collateralized loan obligations, which are securitizations of commercial loans. Each purchase is subject to a credit, concentration, and structure review by the credit administration department prior to their purchase and are subject to ongoing quarterly reviews. Management monitors the credit rating of these investments on a quarterly basis in addition to various performance metrics available through a third-party informational service. Following review of financial metrics as of both June 30, 2024 or December 31, 2023 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest rate spreads due to changes in supply or demand, from the date of purchase, and were not reflective of any credit concerns with the tranches comprising the Company’s investments.
LOAN PORTFOLIO
A distribution of the Company’s loans showing the balance and percentage of loans by type is presented for the noted periods in the table below. The balances in the table are after deferred or unamortized loan origination, extension, or commitment fees, and deferred origination costs. While not reflected in the loan totals and not currently comprising a material segment of our lending activities, the Company also occasionally originates and sells, or participates out portions of loans to non-affiliated investors.
Loan Distribution
(dollars in thousands, unaudited)
June 30, 2024
December 31, 2023
Amount
Percent
Amount
Percent
Real estate:
Residential real estate
$
397,964
17.81%
$
413,262
19.77%
Commercial real estate
1,314,128
58.80%
1,325,494
63.41%
Other construction/land
5,990
0.27%
6,268
0.30%
Farmland
80,992
3.62%
67,510
3.23%
Total real estate
1,799,074
80.50%
1,812,534
86.71%
Other commercial
158,123
7.08%
157,760
7.54%
Mortgage warehouse lines
274,058
12.26%
116,000
5.55%
Consumer loans
3,561
0.16%
4,090
0.20%
Total loans
$
2,234,816
100.00%
$
2,090,384
100.00%
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Gross loans at $2.2 billion, increased $144.4 million or 7% during the first six months of 2024. There was a $158.1 million favorable change in mortgage warehouse lines, a $13.5 million increase in agricultural real estate loans, offset by unfavorable loan variances in all other loan categories, the largest of which was a $27.0 million decrease in other non-agricultural real estate loans.
As indicated in the loan roll forward table below, new credit extended for the second quarter of 2024, increased $5.3 million, and increased $3.3 million year-to-date 2024, over the same period in 2023. Loan growth, excluding mortgage warehouse lines, has been slower in 2024 due to competitive pressures in our market and lower loan demand in the current interest rate environment. The increase of $70.5 million in mortgage warehouse line utilization, was due in part to a $186.0 million increase in mortgage warehouse commitments for the first half of 2024, and subsequent utilization of those lines.
LOAN ROLLFORWARD
(Dollars in Thousands, Unaudited)
For the three months ended:
For the six months ended:
June 30, 2024
March 31, 2024
June 30, 2023
June 30, 2024
June 30, 2023
Gross loans beginning balance
$
2,156,864
$
2,090,075
$
2,033,968
$
2,090,075
$
2,052,940
New credit extended
40,313
34,966
37,030
75,279
89,639
Changes in line of credit utilization (1)
(10,412)
(24,928)
6,622
(35,340)
(19,168)
Change in mortgage warehouse
70,498
87,562
42,145
158,060
45,178
Pay-downs, maturities, charge-offs and amortization
(22,735)
(30,811)
(25,374)
(53,546)
(74,198)
Gross loans ending balance
$
2,234,528
$
2,156,864
$
2,094,391
2,234,528
2,094,391
(1) Change does not include new balances on lines of credit extended during the respective periods as such balances are included as part of “New credit extended” line above.
Over the past several years, the Company has strategically focused on reducing concentrations in commercial real estate, especially amongst areas management deemed to be higher risk such as construction, office real estate, and hospitality. At June 30, 2024, the total regulatory CRE concentration ratio of total CRE over Tier 1 Capital plus allowance was 241% as compared to 243% at December 31, 2023 and 243% at June 30, 2023. Further, the overall level of construction and land development lending had declined to 1% of regulatory capital plus allowance for credit losses at June 30, 2024. At June 30, 2024, our non-owner occupied commercial real estate includes $303 million of retail; $152 million of warehouse/industrial; $177 million of office; and $181 million of hospitality. Approximately 5% of the office real estate matures in less than two years.
Unused commitments, excluding mortgage warehouse and overdraft lines, were $247.1 million at June 30, 2024, compared to $203.6 million at December 31, 2023. Total utilization excluding mortgage warehouse and overdraft lines was 57% at June 30, 2024, compared to 62% at December 31, 2023. Mortgage warehouse utilization increased to 54% at June 30, 2024, compared to 36% at December 31, 2023. The increase in mortgage warehouse utilization during the first half of 2024 was due to $186.0 million in new mortgage warehouse lines and subsequent utilization of those lines.
It should be noted that the mortgage warehouse lines were moved to repurchase agreement lines in 2022 and 2023. The repurchase agreement structure provides stronger credit protection to the Company, as well as more favorable regulatory capital treatment as these repurchase lines are not considered off-balance sheet commitments as they are unconditionally cancellable.
.
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NONPERFORMING ASSETS
Nonperforming assets currently is comprised of loans for which the Company is no longer accruing interest, but can include OREO and other foreclosed assets.
Nonperforming assets
(dollars in thousands, unaudited)
June 30, 2024
December 31, 2023
June 30, 2023
Nonperforming Loans:
Real estate:
Residential real estate
$
67
$
414
$
470
Commercial real estate
—
7,457
125
Farmland
6,370
—
73
Total Real Estate nonperforming loans
6,437
7,871
668
Other commercial
36
114
473
Total Nonperforming Loans
6,473
7,985
1,141
Foreclosed assets
—
—
—
Total Nonperforming Assets
$
6,473
$
7,985
$
1,141
Nonperforming loans as a % of total gross loans
0.29%
0.38%
0.05%
Nonperforming assets as a % of total gross loans and foreclosed assets
0.29%
0.38%
0.05%
Total nonperforming assets, comprised of non-accrual loans, decreased by $1.5 million, or 19%, during the first half of 2024, due to the foreclosure and subsequent sale of one commercial real estate loan. The balance of nonaccrual loans at June 30, 2024 is primarily one nonperforming dairy loan classified as farmland. The Company's ratio of nonperforming assets to loans plus foreclosed assets decreased to 0.29% at June 30, 2024, from 0.38% at December 31, 2023. All of the Company's nonperforming assets are individually evaluated for credit loss quarterly and management believes the established allowance for credit loss on such loans is appropriate.
There were no foreclosed assets at June 30, 2024, and December 31, 2023, however, when the Company does own foreclosed assets, they are periodically evaluated and written down to their fair value less expected disposition costs, if lower than the then-current carrying value.
An action plan is in place for each of our non-accruing loans and they are all being actively managed. Collection efforts are continuously pursued for all nonperforming loans, but we cannot provide assurance that they will be resolved in a timely manner or that nonperforming balances will not increase.
The Company had $3.2 million in loans past due 30-89 days at June 30, 2024. This is an increase of $2.9 million over the balance at December 31, 2023. All of these past due loans are under management supervision and every effort is being taken to assist the borrowers and manage credit risk in this regard.
ALLOWANCE FOR CREDIT LOSSES – LOANS
The allowance for credit losses on loans, a contra-asset, is established through periodic provisions for credit losses on loans. It is maintained at a level that is considered adequate to measure expected losses on individually identified loans, as well as expected losses inherent in the remaining loan portfolio. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when sufficient cash payments are received subsequent to the charge-off.
The Company's allowance for credit losses on loans was $21.6 million at June 30, 2024, and $23.5 million at December 31, 2023. The allowance was 0.97% of total loans at June 30, 2024, and 1.12% of total loans at December 31, 2023. The decreased allowance for credit losses on loans was primarily due to a $1.6 million reduction in the allowance on loans
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individually evaluated for expected credit losses. Management's detailed analysis indicates that the Company's allowance for credit losses on loans should be sufficient to cover credit losses for the life of the loans outstanding as of June 30, 2024, but no assurance can be given that the Company will not experience substantial future losses relative to the size of the credit loss allowance for loans. A separate allowance of $0.5 million for potential credit losses inherent in unused commitments is included in other liabilities at June 30, 2024, unchanged from December 31, 2023.
The following table summarizes activity in the credit allowance for losses on loans for the noted periods:
Allowance for Credit Losses on Loans
(dollars in thousands, unaudited)
For the three
months ended
For the three
months ended
For the six
months ended
For the six
months ended
For the year ended
June 30,
June 30,
June 30,
June 30,
December 31,
Balances:
2024
2023
2024
2023
2023
Average gross loans outstanding during period (1)
$
2,222,996
$
2,054,736
$
2,156,762
$
2,044,302
$
2,006,283
Gross Loans outstanding at end of period
$
2,234,528
$
2,094,391
$
2,234,528
$
2,094,391
$
2,090,075
Allowance for credit losses on loans:
Balance at beginning of period
$
23,140
$
23,090
$
23,500
$
23,060
$
23,060
Provision charged to expense
921
77
1,018
327
4,058
Charge-offs
Real estate
Residential real estate
—
—
—
—
30
Commercial real estate
2,448
—
2,468
—
2,266
Farmland
—
—
410
1,248
1,248
Total real estate
2,448
—
2,878
1,248
3,544
Other commercial
40
52
326
390
1,349
Consumer loans
326
472
738
866
1,728
Total
$
2,814
$
524
$
3,942
$
2,504
$
6,621
Recoveries
Real estate
Residential real estate
$
60
$
—
$
60
$
205
$
206
Commercial real estate
—
17
—
17
274
Farmland
—
—
—
257
—
Total real estate
60
17
60
479
480
Other commercial
103
80
544
1,128
1,538
Consumer loans
230
270
460
520
985
Total
$
393
$
367
$
1,064
$
2,127
$
3,003
Net loan charge-offs
$
2,421
$
157
$
2,878
$
377
$
3,618
Balance at end of period
$
21,640
$
23,010
$
21,640
$
23,010
$
23,500
RATIOS
Net charge-offs to average Loans (annualized)
0.44%
0.03%
0.27%
0.04%
0.18%
Allowance for credit losses on Loans to gross Loans at end of period
0.97%
1.10%
0.97%
1.10%
1.12%
Net loan charge-offs to allowance for credit losses on Loans at end of period
11.19%
0.68%
13.30%
1.64%
15.40%
Net loan charge-offs to provision for credit losses on Loans
262.87%
203.90%
282.71%
115.29%
89.16%
(1) Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.
The Company’s allowance for credit losses on loans at June 30, 2024 represents Management’s best estimate of expected losses in the loan portfolio as of that date, but no assurance can be given that the Company will not experience substantial losses relative to the size of the allowance. Furthermore, fluctuations in credit quality, changes in economic conditions, updated accounting or regulatory requirements, and/or other factors could induce us to augment or reduce the allowance.
OFF-BALANCE SHEET ARRANGEMENTS
The Company maintains commitments to extend credit in the normal course of business, as long as there are no violations of conditions established in the outstanding contractual arrangements. It is unlikely that all unused commitments will ultimately be drawn down. Unused commitments to extend credit, which included standby letters of credit, totaled $554.2
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million at June 30, 2024, and $487.1 million at December 31, 2023, representing approximately 25% of gross loans outstanding at June 30, 2024, and 23% at December 31, 2023. Included in unused commitments are mortgage warehouse lines which are mostly in the form of repurchase lines and are unconditionally cancellable. Unused commitments on mortgage warehouse lines were $232.4 million at June 30, 2024, and $204.5 million at December 31, 2023, while utilization was 54% and 36% respectively.
The increase in utilization during the first half of 2024 was due to new customers in the mortgage warehouse product that ramped up their utilization. Unused commitments exclusive of mortgage warehouse lines and overdraft lines of credit, have increased $43.6 million or 21% for the first six months of 2024 and are due to an increase in new lines of credit and higher utilization on existing lines of credit. The Company also had undrawn letters of credit issued to customers totaling $5.3 million at June 30, 2024, and $5.0 million at December 31, 2023. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will ever be used. However, the “Liquidity” section in this Form 10-Q outlines resources available to draw upon should we be required to fund a significant portion of unused commitments.
In addition to unused commitments to provide credit, the Company is utilizing a $125 million letter of credit issued by the FHLB on the Company’s behalf as security for certain local agency deposits which totaled $95.0 million at June 30, 2024. That letter of credit is backed by loans that are pledged to the FHLB by the Company. For more information on the Company’s off-balance sheet arrangements, see Note 7 to the consolidated financial statements located elsewhere herein.
OTHER ASSETS
Interest-earning cash balances were discussed above in the “Investments” section, but the Company also maintains a certain level of cash on hand in the normal course of business as well as non-earning deposits at other financial institutions. Our balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the amount of cash held at our branches, and our reserve requirement among other things, and it is subject to significant fluctuations in the normal course of business. While cash flows are normally predictable within limits, those limits are fairly broad and the Company manages its short-term cash position through the utilization of overnight loans to, and borrowings from, correspondent banks, including the FRB and the FHLB. Should a large “short” overnight position persist for any length of time, the Company typically raises money through focused retail deposit gathering efforts or by adding brokered time deposits. If a “long” position is prevalent, we could let brokered deposits or other wholesale borrowings roll off as they mature, or we might invest excess liquidity into investments or loans, subject to the Company’s risk tolerances. The Company’s balance of non-earning cash and due from banks was $96.0 million at June 30, 2024, relative to $73.7 million at December 31, 2023.
Foreclosed assets are discussed above in the section titled “Nonperforming Assets.”
Net premises and equipment decreased by $0.9 million during the first half of 2024, to $16.0 million. This decline was a result of the sale/leaseback of two bank-owned branch locations in the first quarter of 2024.
Goodwill was $27.4 million at June 30, 2024, unchanged during the first half of 2024. Goodwill is tested for impairment annually, unless events and circumstances exist which indicate that an impairment test should be performed. The annual goodwill impairment test was last performed on October 1, 2023, and it was determined that no impairment existed. Management continues to evaluate whether or not a triggering event occurs, or circumstances change that would more likely than not reduce the fair value of the Company below its carrying amount before the next annual test in 2024.
Bank-owned life insurance, with a balance of $53.4 million at June 30, 2024, is discussed in detail above in the “Noninterest Income and Noninterest Expense” section.
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DEPOSITS AND INTEREST-BEARING LIABILITIES
DEPOSITS
Deposits represent another key balance sheet category impacting the Company’s net interest income and profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity accounts such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning average balances and rates paid by deposit type is included in the Average Balances and Rates tables appearing above, in the section titled “Net Interest Income and Net Interest Margin.” A distribution of the Company’s deposits by type, showing the period-end balance and percentage of total deposits, is presented as of the dates indicated in the following table.
Deposit Distribution
(dollars in thousands, unaudited)
June 30, 2024
December 31, 2023
Amount
Percent
Amount
Percent
Noninterest-bearing demand deposits
$
986,927
33.54%
$
1,020,772
36.98%
Interest-bearing demand deposits
134,114
4.56%
128,784
4.66%
NOW
403,617
13.72%
405,163
14.67%
Savings
368,169
12.51%
370,806
13.43%
Money market
136,853
4.65%
145,591
5.27%
Time
566,132
19.24%
555,107
20.10%
Brokered deposits
346,598
11.78%
135,000
4.89%
Total deposits
$
2,942,410
100.00%
$
2,761,223
100.00%
Deposit balances grew by $181.2 million, or 7%, during the first half of 2024 to $2.9 billion at June 30, 2024. Core non-maturity deposits decreased $41.4 million, or 2%, for the first half of 2024, while customer time deposits increased by $11.0 million, or 2% due mostly to an increase in variable rate CD accounts by existing customers seeking higher interest rates on their deposits. Brokered deposits increased $211.6 million during the first half of 2024, or 157%. This was a strategic decision to fund increased usage on mortgage warehouse lines. Overall noninterest-bearing deposits as a percent of total deposits decreased to 33.5% at June, 2024, compared to 37.0% at December 31, 2023.
Overall uninsured deposits are estimated to be approximately $805.4 million, or 27% of total deposit balances, excluding public agency deposits that are subject to collateralization through a letter of credit issued by the FHLB. In addition, uninsured deposits of the Company’s customers are eligible for FDIC pass-through insurance if the customer opens an IntraFi Insured Cash Sweep account or a reciprocal time deposit through the Certificate of Deposit Account Registry System (CDARS). IntraFi allows for up to $250 million of combined pass-through FDIC insurance which would more than cover each of the Company’s deposit customers if such customer desired to have such pass-through insurance. The Company maintains a diversified deposit base with no significant customer concentrations and does not bank any cryptocurrency companies. At June 30, 2024, the Company had approximately 121,000 accounts and the 25 largest deposit balance customers had balances of less than 14% of overall deposits .
OTHER INTEREST-BEARING LIABILITIES
The Company’s non-deposit borrowings may, at any given time, include fed funds purchased from correspondent banks, borrowings from the FHLB, advances from the FRB, securities sold under agreements to repurchase, subordinated notes and/or junior subordinated debentures. The Company uses short-term FHLB advances and fed funds purchased on unsecured lines to support liquidity needs created by seasonal deposit flows, to temporarily satisfy funding needs from increased loan demand, and for other short-term purposes. The FHLB line consists of both a secured and unsecured component. The secured component depends on the level of pledged collateral.
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Total non-deposit interest-bearing liabilities decreased by $239.5 million, during the first half of 2024 primarily due to a decrease in overnight fed funds and short term FHLB borrowings. This was a result of a balance sheet restructure in which bonds with a book yield of 2.61% were sold to pay off higher cost borrowed funds at an average rate of 5.52%.
Customer repurchase agreements increased from $107.1 million at December 31, 2023, to $148.0 million at June 30, 2024. Customer repurchase agreements provide collateral for customers that sweep excess deposit balances each day into a separate repurchase agreement account where the Company effectively sells certain government bonds to customers daily and then repurchases the same bonds on the next business day. Although these accounts are not deposits and are not FDIC insured, they provide customers with larger account balances the ability to have their account secured with collateral.
Overnight and short-term borrowings decreased $280.5.0 million and were paid in full at June 30, 2024, from $280.5 million at December 31, 2023, as mentioned previously as a result of a balance sheet restructure.
Long-term debt at June 30, 2024, consisted of $49.3 million of subordinated debt. This remained relatively unchanged from December 31, 2023. Subordinated debentures related to $35.7 million of trust preferred securities at both June 30, 2024, and December 31, 2023. Trust preferred securities are variable rate instruments benchmarked against the Secured Overnight Financing Rate (SOFR).
OTHER NONINTEREST-BEARING LIABILITIES
Other liabilities are principally comprised of operating lease right-of-use liabilities, accrued interest payable, other accrued but unpaid expenses, and certain clearing amounts. The Company’s balance of other liabilities was $75.2 million at June 30, 2024, as compared to $77.4 million at December 31, 2023, a decrease of $2.2 million or 3%. The decrease was primarily driven by accrued payables that settled as of June 30, 2024, that were accrued for at December 31, 2023.
LIQUIDITY AND MARKET RISK MANAGEMENT
LIQUIDITY
The Company continues to have substantial liquidity though unencumbered assets and available borrowings. In addition, the Company’s loan-to-deposit ratio was 76% at both June 30, 2024, and December 31, 2023.
Liquidity management refers to the Company’s ability to maintain cash flows that are adequate to fund operations and meet other obligations and commitments in a timely and cost-effective manner. Detailed cash flow projections are reviewed by Management on a monthly basis, with various stress scenarios applied to assess our ability to meet liquidity needs under unusual or adverse conditions. Liquidity ratios are also calculated and reviewed on a regular basis. While those ratios are merely indicators and are not measures of actual liquidity, they are closely monitored, and we are committed to maintaining adequate liquidity resources to draw upon should unexpected needs arise.
The Company, on occasion, experiences cash needs as the result of loan growth, deposit outflows, asset purchases or liability repayments. To meet these short-term needs, we can borrow overnight funds from other financial institutions, draw advances via FHLB lines of credit, or solicit brokered deposits if customer deposits are not immediately obtainable from local sources.
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At June 30, 2024, and December 31, 2023, the Company had the following sources of primary and secondary liquidity (dollars in thousands):
Primary and secondary liquidity sources
June 30, 2024
December 31, 2023
Cash and cash equivalents
$
183,990
$
78,602
Unpledged investment securities
533,799
792,965
Excess pledged securities
272,869
382,965
FHLB borrowing availability
672,300
586,726
Unsecured lines of credit
504,785
374,785
Funds available through fed discount window
348,444
392,034
Totals
$
2,516,187
$
2,608,077
Available funding sources detailed above of $2.5 billion represented 86% of total deposits and 312% of estimated uninsured and/or uncollateralized deposits as of June 30, 2024. Unpledged investment securities include $266.4 million of CLOs. As CLO’s have a rate that resets every 90 days to current rates, the volatility of pricing of these securities is limited and the Company could sell such securities for liquidity at a significantly lower loss than selling lower rate fixed term securities such as US government bonds or municipal bonds.
The Company performs regular stress tests on its liquidity and at this time, believes that we have sufficient primary and secondary liquidity sources for operations.
The Company has a higher level of actual balance sheet liquidity than might otherwise be the case since we utilize a letter of credit from the FHLB rather than investment securities for certain pledging requirements. That letter of credit, which is backed by loans pledged to the FHLB by the Company, totaled $125 million at June 30, 2024, and December 31, 2023. Other sources of liquidity include the brokered deposit market, deposit listing services, Intrafi, and the ability to offer local time-deposit campaigns. Management is of the opinion that available investments and other potentially liquid assets, along with standby funding sources it has arranged, are more than sufficient to meet the Company’s current and anticipated short-term liquidity needs.
The Company’s primary liquidity ratio and gross loans to deposits were 23.45% and 75.95%, respectively, at June 30, 2024, as compared to internal policy guidelines of “greater than 15%” and “less than 95%.” Ratios and sub-limits for the various components comprising wholesale funding, which were all well within policy guidelines at June 30, 2024, are also periodically reviewed by Management and the Board. The Company has been able to maintain a robust liquidity position in recent periods, but no assurance can be provided that our liquidity position will continue at current strong levels.
The holding company’s primary uses of funds include operating expenses incurred in the normal course of business, interest on trust preferred securities and subordinated debt, shareholder dividends, and share repurchases. Its primary source of funds is dividends from the Bank since the holding company does not conduct regular banking operations. As of June 30, 2024, the holding company maintained a cash balance of $15.8 million. Management anticipates that the holding company has sufficient liquidity to meet its funding requirements for the foreseeable future. Both the holding company and the Bank are subject to legal and regulatory limitations on dividend payments, as outlined in Item 5(c) Dividends in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC.
INTEREST RATE RISK MANAGEMENT
Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company does not engage in the trading of financial instruments, nor does it have exposure to currency exchange rates. Our market risk exposure is primarily that of interest rate risk, and we have established policies and procedures to monitor and limit our earnings and balance sheet exposure to changes in interest rates. The principal objective of interest rate risk management is to manage the financial components of the Company’s balance sheet in a manner that will optimize the risk/reward equation for earnings and capital under a variety of interest rate scenarios.
To identify areas of potential exposure to interest rate changes, we utilize commercially available modeling software to perform monthly earnings simulations and calculate the Company’s market value of portfolio equity under varying interest rate scenarios. The model imports relevant information for the Company’s financial instruments and incorporates Management’s assumptions on pricing, duration, and optionality for anticipated new volumes. Assumptions regarding
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deposit betas in the up cycles can range from 25 to 100% and from 0 to 50% in the down cycles depending on the deposit type. Deposit decay rate assumptions range from 5 to 10% and are based on historical averages. Prepayment speeds are based on three-year historical averages. Various rate scenarios consisting of key rate and yield curve projections are then applied in order to calculate the expected effect of a given interest rate change on interest income, interest expense, and the value of the Company’s financial instruments. The rate projections can be shocked (an immediate and parallel change in all base rates, up or down), ramped (an incremental increase or decrease in rates over a specified time period), economic (based on current trends and econometric models) or stable (unchanged from current actual levels).
In addition to a stable rate scenario, which presumes that there are no changes in interest rates, we typically use at least eight other interest rate scenarios in conducting our rolling 12-month net interest income simulations: upward shocks of 100, 200, 300, and 400 basis points, and downward shocks of 100, 200, and 300 basis points. Those scenarios may be supplemented, reduced in number, or otherwise adjusted as determined by Management to provide the most meaningful simulations considering economic conditions and expectations at the time. Pursuant to policy guidelines, we generally attempt to limit the projected decline in net interest income relative to the stable rate scenario to no more than 5% for a 100 basis point interest rate shock, 10% for a 200 basis point shock, 15% for a 300 basis point shock, and 20% for a 400 basis point shock.
The Company had the following estimated net interest income sensitivity profiles over one-year, without factoring in any potential negative impact on spreads resulting from competitive pressures or credit quality deterioration:
June 30, 2024
June 30, 2023
Immediate change in Interest Rates (basis points)
% Change in Net Interest Income
$ Change in Net Interest Income
% Change in Net Interest Income
$ Change in Net Interest Income
+400
10.0%
$
13,133
(6.1)%
$
(7,322)
+300
7.5%
$
9,865
(4.4)%
$
(5,297)
+200
5.0%
$
6,616
(2.0)%
$
(2,428)
+100
2.5%
$
3,349
(0.4)%
$
(448)
Base
-100
(5.8)%
$
(7,612)
(2.1)%
$
(2,493)
-200
(11.8)%
$
(15,512)
(2.9)%
$
(3,542)
-300
(17.4)%
$
(22,922)
(5.6)%
(6,762)
-400
(21.9)%
$
(28,798)
(8.2)%
(9,866)
For the period ending June 30, 2024, management believes that the Company was asset sensitive, with net income increasing in a rising rate scenario and decreasing in declining rate scenarios.
The shift from being liability sensitive at June 30, 2023 to asset sensitive at June 30, 2024, is due mostly to the decrease in the level of overnight borrowings both in Fed Funds purchased and overnight FHLB borrowings, a decrease in fixed rate bonds (which were sold to payoff higher cost borrowings that reprice daily), combined with an increase in mortgage warehouse line utilization which is very short-term.
The change in net interest income is similar for the up 100, 200, 300, and 400 basis point scenarios. If there were an immediate and sustained upward adjustment of 100 basis points in interest rates, all else being equal, net interest income over the next 12 months is projected to increase by $3.3 million, or 2.5%, relative to a stable interest rate scenario, with the favorable variance increasing as interest rates rise higher.
If there was an immediate downward adjustment of 100 basis points in interest rates, net interest income would drop $7.6 million or a negative variance of 5.8%. The change in net interest income in the down 200 basis point scenario is a decrease of $15.5 million or 11.8%. As a significant portion of the Company’s deposits remain in noninterest-bearing accounts or low-cost deposit accounts, in a down rate scenario, these rates would not change or only change slightly. However, floating rate earning assets (loans and deposits) would reprice downward more than the decline in floating rate liabilities. All interest rate downward shock scenarios are outside of internal policy guidelines, and all upward rate shock scenarios are within internal policy guidelines. Although interest rate downward shock scenarios are outside of internal policy guidelines, the starting point has also increased as a result of the aforementioned balance sheet restructuring. Management also models other down rate scenarios that do not assume a simultaneous shock of all rate curves including short-term and long-term curves. Given the current inverted rate curve, shocking all curves tends to overstate the sensitivity to a change in rate. Management evaluates the part of the curve that is most sensitive to rate declines and is currently looking at various balance sheet management strategies to manage the highest risks.
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In addition to the net interest income simulations shown above, we run stress scenarios for the unconsolidated Bank where we model the possibility of no balance sheet growth, the potential runoff of “surge” core deposits which flowed into the Bank in the most recent economic cycle, and unfavorable movement in deposit rates relative to yields on earning assets (i.e., higher deposit betas). The most significant impact to net interest income in the net interest income simulations is the reduction or migration of low-cost deposits.
CAPITAL RESOURCES
The Company had total shareholders’ equity of $350.0 million at June 30, 2024, comprised of $107.9 million in common stock, $5.3 million in additional paid-in capital, $247.8 million in retained earnings, and accumulated other comprehensive loss of $30.7 million. At the end of 2023, total shareholders’ equity was $338.1 million. The increase in equity during the first half of 2024 is due to net income of $19.6 million, offset by a $6.7 million dividend paid to shareholders, $7.0 million in share repurchases and a $5.3 million favorable swing in other comprehensive income/loss due principally to changes in investment securities’ fair value. The remaining difference is related to equity compensation recognized during the quarter.
The Company approved a new share repurchase program in October 2023 that authorized 1,000,000 shares of common stock for repurchase beginning at the end of the expiration of the share repurchase program on October 31, 2023, and expiring on October 31, 2024. Under the 2023 Share Repurchase Program, there were 357,105 shares repurchased in the first half of 2024 under a Rule 10b5-1 Plan.
The Company uses a variety of measures to evaluate its capital adequacy, including the leverage ratio which is calculated separately for the Company and the Bank. Management reviews these capital measurements on a quarterly basis and takes appropriate action to help ensure that they meet or surpass established internal and external guidelines. As permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, the Company has elected to opt out of the Basel III requirement to include accumulated other comprehensive income in risk-based capital. The following table sets forth the Company’s regulatory capital ratios as of the dates indicated.
Regulatory Capital Ratios
Minimum
Minimum
Requirement
Required
June 30,
December 31,
to be
Community Bank
2024
2023
Well Capitalized (1)
Leverage Ratio (2)
Bank of the Sierra
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio") (3)
11.60
%
11.29
%
9.00
%
9.00
%
Sierra Bancorp
Tier 1 Capital to Adjusted Average Assets ("Leverage Ratio") (3)
10.78
%
10.32
%
9.00
%
N/A
(1) The Company was subject to these minimum requirements under the regulatory framework for Prompt Corrective Action at December 31, 2019.
(2) If the subsidiary bank’s leverage ratio exceeds the minimum ratio under the community bank leverage ratio framework, it is deemed to be “well capitalized” under all other regulatory capital requirements. The Company may revert back to the regulatory framework for Prompt Corrective Action if the subsidiary bank’s leverage ratio falls below the minimum under the community bank leverage ratio framework.
(3) The Company has elected to phase in the impact of implementing CECL on regulatory capital over a three-year period.
The federal banking agencies provide a simplified measure of capital adequacy for qualifying community banking organizations by allowing such banking organizations to opt into the community bank leverage ratio framework. The Company’s subsidiary has opted into the community bank leverage ratio framework. This means that if the Company’s subsidiary maintains a leverage ratio greater than 9% , it will be considered to have met the minimum capital requirements, the capital ratio requirements for the well capitalized category under the Prompt Corrective Action framework, and any other capital or leverage requirements to which the qualifying banking organization is subject. A qualifying community banking organization with a leverage ratio of greater than 9% may opt into the community bank leverage ratio framework if has average consolidated total assets of less than $10 billion, has off-balance-sheet exposures of 25% or less of total consolidated assets, and has total trading assets and trading liabilities of 5% or less of total consolidated assets. Further, the bank must not be an advance approaches banking organization.
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PART I – FINANCIAL INFORMATION
ITEM 3
QUANTITATIVE & QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information concerning quantitative and qualitative disclosures about market risk is included in Part I, Item 2 above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Market Risk Management.”
PART I – FINANCIAL INFORMATION
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.