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 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 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. The Company does 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 the Company has 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 its most recent expectations regarding those areas.
OVERVIEW OF THE RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS SUMMARY
Third Quarter 2024 Compared to Third Quarter 2023
Third quarter 2024 net income was $10.6 million, and $0.74 per diluted share in the third quarter of 2024 as compared to $0.68 per diluted share in the third quarter of 2023. The Company’s annualized return on average equity was 11.95% and annualized return on average assets was 1.14% for the quarter ended September 30, 2024, compared to 12.62% and 1.04%,
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respectively, for the same quarter in 2023. The primary drivers behind the increase in third quarter net income are as follows:
● Net income increased 7%, or $0.7 million, to $10.6 million due to higher net interest income, partially offset by an increase in the provision for credit losses.
● The $2.7 million increase in net interest income was driven by a 36 basis point increase in net interest margin. This is primarily a result of a balance sheet restructuring, including a bond sale, in the first quarter of 2024, along with higher loan yields. Noninterest income was mostly flat for the quarter, with increases in service charge income offset by decreases in other noninterest income, primarily from life insurance proceeds received in 2023 that did not reoccur in 2024.
● Noninterest expense was $0.2 million higher in the third quarter over the same quarter last year. While salary and benefit costs decreased due to a strategic internal reorganization in the fourth quarter of 2023, this was offset by an increase in occupancy costs, due to the sale leaseback of certain branches in the fourth quarter of 2023.
First Nine Months of 2024 Compared to First Nine Months of 2023
● Net income increased $1.6 million, or 6%. This was primarily driven by an increase of $5.1 million or 6% in net interest income, due mostly to an overall increase in interest rates on earning assets. While the Company experienced higher yields and balances on loans, this was complemented by a decrease in borrowed funds and a decrease in the rate paid on the remaining balance of borrowed funds. Partially offsetting these positive variances was an increase in the provision for credit losses, and an increase in occupancy expenses from the sale/leaseback of branch buildings in late 2023.
● The provision for credit losses was $2.4 million, an increase of $2.2 million, primarily due to an increase in net charge-offs in the second quarter of 2024, due to a foreclosure of a single property.
● Noninterest income increased by $1.7 million, or 7%. Service charges on deposit accounts were $1.0 million higher, due mostly to higher interchange income, an increase in analysis fees, and other transaction-based fees, combined with a net $0.6 million gain, from the balance sheet restructuring earlier in the year.
● Noninterest expense increased $1.5 million, or 2%, due mostly to increases in rent expense from the sale/ leaseback of branch buildings at the end of 2023.
FINANCIAL CONDITION SUMMARY
September 30, 2024 Relative to December 31, 2023
The Company’s assets totaled $3.7 billion at September 30, 2024, a decrease of $33.6 million, or 1.0% from December 31, 2023. The following provides a summary of key balance sheet changes during the first nine months of 2024:
● Investment securities decreased $324.0million, or 24.0%, to $1.0 billion primarily due to the sale of bonds from the strategic securities transaction and balance sheet restructuring.
● Gross loans increased $230.6 million, due to a $219.8 million increase in mortgage warehouse line utilization, a $10.6 million increase in commercial real estate loans, a $13.3 million increase in farmland loans, and a $12.0 million increase in commercial loans. This favorable growth was partially offset by a $23.9 million decrease in residential real estate loans, due to payoffs and paydowns, and smaller declines in construction and consumer loans.
● Deposits totaled $3.0 billion at September 30, 2024, representing a year-to-date increase of $200.9 million, or 7%. The growth in deposits came mostly from a $175.0 million increase in brokered deposits to fund mortgage
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warehouse lines, and a $40.6 million increase in transaction accounts offset by smaller declines in customer non-transaction accounts.
● Other interest-bearing liabilities decreased $262.1 million, from a decrease in overnight borrowings facilitated by the strategic balance sheet restructuring in the first quarter of 2024, and a decrease in FHLB advances, as the Company utilized brokered deposits not only to fund mortgage lines, but to pay down more costly FHLB lines of credit.
Total capital of $358.7 million at September 30, 2024, reflects an increase of $20.6 million, or 6%, compared to December 31, 2023. The increase in capital was due to the addition of $30.2 million in net income, a $7.4 million favorable swing in accumulated other comprehensive income/loss, due principally to changes in investment securities’ fair value, offset by $8.3 million in share repurchases, and $10.2 million in dividends paid. The remaining difference is related to the impact of equity compensation recognized during the first nine months 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 its customers.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income was $30.8 million, for the third quarter of 2024, a $2.7 million increase, or 10% over the third quarter of 2023. This increase in interest income for the quarterly comparison was due primarily to an increase in interest income on loans of $5.1 million, augmented by a $0.3 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 $2.7 million due to the sale of low yielding investments.
For the third quarter of 2024, although the balance of average interest-earning assets was $74.0 million lower due mostly to lower investment securities, the yield was 37 basis points higher as compared to the same period in 2023. There was a 4 basis point increase in the cost of the Company’s interest-bearing liabilities for the same period, which partially offset some of the higher yields on the asset side.
Net interest income for the comparative year-to-date periods increased $5.1 million, or 6%, due to a strategic change in mix of average interest-earning assets in the fourth quarter of 2023 and the first quarter of 2024. Although the Company realized a $6.7 million increase in income on interest-earning assets due to an increase in interest rates, this change was moderated by a$3.3 million increase in interest expense for rates paid on interest bearing liabilities. There was a $136.1 million, or 7%, increase in average loan and lease balances yielding 45 basis points higher for the same period, while average investment balances decreased $238.5 million, yielding 52 basis points higher for the same period. Average interest-bearing liabilities decreased $82.2 million, mostly in borrowed funds. The cost of interest-bearing liabilities was 28 basis points higher for the comparative periods.
The favorable net impact of the mix and rate change was a 27 basis point increase in the Company’s net interest margin for the nine-months ending September 30, 2024, as compared to the same period in 2023.
Interest expense was $14.0 million for the third quarter of 2024, a decrease of $0.3 million, relative to the third quarter of 2023. For the first nine months of 2024, compared to the same period in 2023, interest expense increased $3.4 million to $39.6 million. The increase in interest expense was attributable to an increase in higher cost brokered deposits to fund mortgage warehouse lines, along with a net overall interest rate increases in customer deposit account balances.
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Compounding the effect of interest rate increases, there was a shift in the mix of average deposits with increase in higher yielding money market and time deposit account types. These increases were partially offset by decreases in other borrowed funds. For the first nine months of 2024 compared to the same period in 2023, the average balance of higher cost customer time deposits, interest bearing demand and money market deposits increased $51.4 million, while wholesale brokered deposits increased $112.5 million. Borrowed funds decreased $126.1 million, and lower cost or no cost deposits decreased $194.0 million.
The Company had $1.3 billion in adjustable and variable rate loans and $539.1million in floating rate bonds, as compared to $269.4 million in floating rate CDs and $35.8 million in floating rate trust preferred securities at September 30, 2024. The adjustable-rate loans have repricing frequencies ranging from 30-days to 10-years. Of the $1.3 billion in adjustable and variable rate loans, $719.2 million of such adjustable and variable rate loans reprice or mature in the next twelve months. Based on current rates, of the $719.2 million in adjustable and variable rate loans that reprice or mature over the next twelve months, $153.1 million, or 21%, are expected to reprice higher, while $157.1 million, or 22%, are expected to reprice lower. The remaining balance of $409.0 million is neutral to any repricing adjustment due to maturity or other factors.
The Company’s net interest margin was 3.66% for the third quarter of 2024, and 3.30% for the third quarter of 2023, an increase of 36 basis points, and 3.66% for the first nine months of 2024, as compared to 3.39% for the first nine months of 2023, an increase of 27 basis points. While the yield on interest-earning assets increased 37 basis points for the third quarter of 2024, the cost of interest-bearing liabilities increased four basis points for the same period of comparison. The average balance of interest-earning assets decreased $74.0 million, while the decrease in interest-bearing liabilities was $79.1 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 third quarter of 2024 over the same period in 2023.
For the year-to-date comparison the increase in net interest margin of 27 basis points comes from an increase in yield on interest-earning assets of 45 basis points partially offset by an increase in interest rates paid on interest-bearing liabilities of 28 basis points. The average balance of interest-earning assets decreased $102.4 million, while the decrease in interest-bearing liabilities was $82.2 million for the same period. 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 nine months of 2024.
The level of net interest income recognized 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 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
September 30, 2024
September 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
$
88,509
$
1,225
5.51%
$
23,760
$
415
6.93%
Taxable
830,054
11,991
5.75%
1,005,372
14,375
5.67%
Non-taxable
199,261
1,584
4.00%
345,645
2,679
3.89%
Total investments
1,117,824
14,800
5.42%
1,374,777
17,469
5.25%
Loans: (3)
Real estate
1,804,099
21,054
4.64%
1,854,055
20,764
4.44%
Agricultural
81,501
1,520
7.42%
37,096
649
6.94%
Commercial
76,633
1,101
5.72%
90,348
1,392
6.11%
Consumer
3,558
78
8.72%
4,303
87
8.02%
Mortgage warehouse lines
303,463
6,227
8.16%
100,549
2,004
7.91%
Other
2,438
18
2.94%
2,381
19
3.17%
Total loans
2,271,692
29,998
5.25%
2,088,732
24,915
4.73%
Total interest-earning assets (4)
3,389,516
44,798
5.31%
3,463,509
42,384
4.94%
Other earning assets
17,062
17,355
Non-earning assets
288,975
275,883
Total assets
$
3,695,553
$
3,756,747
Liabilities and shareholders' equity
Interest-bearing deposits:
Demand deposits
$
169,602
$
1,170
2.74%
$
141,745
$
413
1.16%
NOW
393,328
161
0.16%
427,278
68
0.06%
Savings accounts
359,921
93
0.10%
408,158
69
0.07%
Money market
132,804
542
1.62%
127,649
194
0.60%
Time deposits
562,251
6,010
4.25%
557,504
6,514
4.64%
Brokered deposits
327,141
4,004
4.87%
162,065
1,509
3.69%
Total interest-bearing deposits
1,945,047
11,980
2.45%
1,824,399
8,767
1.91%
Borrowed funds:
Repurchase agreements
133,280
60
0.18%
83,222
53
0.25%
Other borrowings
80,169
788
3.91%
330,221
4,286
5.15%
Long-term debt
49,357
429
3.46%
49,268
429
3.45%
Subordinated debentures
35,767
751
8.35%
35,590
762
8.49%
Total borrowed funds
298,573
2,028
2.70%
498,301
5,530
4.40%
Total interest-bearing liabilities
2,243,620
14,008
2.48%
2,322,700
14,297
2.44%
Demand deposits - noninterest-bearing
995,326
1,064,962
Other liabilities
103,571
58,340
Shareholders' equity
353,036
310,745
Total liabilities and shareholders' equity
$
3,695,553
$
3,756,747
Interest income/interest-earning assets
5.31%
4.94%
Interest expense/interest-earning assets
1.65%
1.64%
Net interest income and margin (5)
$
30,790
3.66%
$
28,087
3.30%
(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 $(0.4) million and $(0.3) million for the quarters ended September 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 nine months ended
For the nine months ended
September 30, 2024
September 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
$
49,779
$
2,065
5.53%
$
21,504
$
861
5.35%
Taxable
863,044
38,081
5.88%
991,302
39,848
5.37%
Non-taxable
214,677
5,164
4.06%
353,173
8,233
3.95%
Total investments
1,127,500
45,310
5.52%
1,365,979
48,942
5.00%
Loans: (3)
Real estate
1,804,159
61,706
4.57%
1,860,504
61,491
4.42%
Agricultural
72,946
4,064
7.44%
31,232
1,578
6.76%
Commercial
77,684
3,458
5.95%
81,397
3,564
5.85%
Consumer
3,739
238
8.50%
4,260
263
8.25%
Mortgage warehouse lines
234,470
14,431
8.22%
79,438
4,779
8.04%
Other
2,354
46
2.61%
2,443
61
3.34%
Total Loans
2,195,352
83,943
5.11%
2,059,274
71,736
4.66%
Total interest-earning assets (4)
3,322,852
129,253
5.25%
3,425,253
120,678
4.80%
Other earning assets
17,155
16,680
Non-earning assets
281,952
271,949
Total assets
$
3,621,959
$
3,713,882
Liabilities and shareholders' equity
Interest-bearing deposits:
Demand deposits
$
146,443
$
2,601
2.37%
$
145,316
$
731
0.67%
NOW
396,644
393
0.13%
454,900
214
0.06%
Savings accounts
369,371
246
0.09%
431,143
196
0.06%
Money market
136,652
1,428
1.40%
128,856
291
0.30%
Time Deposits
562,571
18,251
4.33%
520,105
17,043
4.38%
Brokered deposits
280,248
9,737
4.64%
167,782
4,235
3.37%
Total interest-bearing deposits
1,891,929
32,656
2.31%
1,848,102
22,710
1.64%
Borrowed funds:
Repurchase agreements
125,742
166
0.18%
88,707
199
0.30%
Other borrowings
99,388
3,203
4.30%
262,755
9,828
5.00%
Long-term debt
49,335
1,291
3.50%
49,246
1,286
3.49%
Subordinated debentures
35,722
2,261
8.45%
35,545
2,120
7.97%
Total borrowed funds
310,187
6,921
2.98%
436,253
13,433
4.12%
Total interest-bearing liabilities
2,202,116
39,577
2.40%
2,284,355
36,143
2.12%
Demand deposits - noninterest-bearing
988,128
1,062,114
Other liabilities
86,061
59,674
Shareholders' equity
345,654
307,739
Total liabilities and shareholders' equity
$
3,621,959
$
3,713,882
Interest income/interest-earning assets
5.25%
4.80%
Interest expense/interest-earning assets
1.59%
1.41%
Net interest income and margin (5)
$
89,676
3.66%
$
84,535
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 possible loan losses. Loan fees have been included in the calculation of interest income. Net loan fees and loan acquisition FMV amortization were $(1.1) million and $(0.7) million for the nine months ended September 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 September 30,
Nine months ended September 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
$
1,131
$
(86)
$
(235)
$
810
$
1,132
$
31
$
41
$
1,204
Taxable
(2,507)
149
(26)
(2,384)
(5,157)
3,892
(502)
(1,767)
Non-taxable
(1,135)
69
(29)
(1,095)
(3,228)
262
(103)
(3,069)
Total investments (1)
(2,511)
132
(290)
(2,669)
(7,253)
4,185
(564)
(3,632)
Loans:
Real estate
(559)
873
(24)
290
(1,862)
2,142
(65)
215
Agricultural
777
43
51
871
2,107
163
216
2,486
Commercial
(212)
(93)
14
(291)
(162)
59
(3)
(106)
Consumer
(15)
7
(1)
(9)
(32)
9
(2)
(25)
Mortgage warehouse
4,044
59
120
4,223
9,326
111
215
9,652
Other
—
(1)
—
(1)
(2)
(13)
—
(15)
Total loans (1)
4,035
888
160
5,083
9,375
2,471
361
12,207
Total interest-earning assets (1)
$
1,524
$
1,020
$
(130)
$
2,414
$
2,122
$
6,656
$
(203)
$
8,575
Liabilities:
Interest-bearing deposits:
Demand deposits
$
81
564
112
$
757
$
6
$
1,850
14
$
1,870
NOW
(6)
107
(8)
93
(28)
237
(30)
179
Savings accounts
(8)
36
(4)
24
(28)
91
(13)
50
Money market
8
327
13
348
18
1,055
64
1,137
Time deposits
56
(555)
(5)
(504)
1,392
(170)
(14)
1,208
Brokered deposits
1,537
475
483
2,495
2,839
1,594
1,069
5,502
Total interest-bearing deposits (1)
1,668
954
591
3,213
4,199
4,657
1,090
9,946
Borrowed funds:
Repurchase agreements
32
(16)
(9)
7
83
(82)
(34)
(33)
Other Borrowings
(3,246)
(1,040)
788
(3,498)
(6,111)
(1,360)
846
(6,625)
Long-term debt
1
(1)
—
—
1
4
—
5
Subordinated debt
4
(15)
—
(11)
11
129
1
141
Total borrowed funds (1)
(3,209)
(1,072)
779
(3,502)
(6,016)
(1,309)
813
(6,512)
Total interest-bearing liabilities (1)
(1,541)
(118)
1,370
(289)
(1,817)
3,348
1,903
3,434
Net interest income (1)
$
3,065
$
1,138
$
(1,500)
$
2,703
$
3,939
$
3,308
$
(2,106)
$
5,141
(1) Subtotals are a sum of the categories above and are not recalculated on the portfolio totals.
The volume variance calculated for the third quarter of 2024 relative to the third quarter of 2023 was a favorable $3.1 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 $1.1 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 $1.5 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 third quarter of 2024 was 3.66%, as compared to 3.30% for the third quarter of 2023.
The volume variance calculated for the first nine months of 2024 relative to the first nine months of 2023 reflects a favorable variance of $3.9 million, a favorable rate variance of $3.3 million, and an unfavorable mix variance of $2.1 million. There were increases in loan balances for a favorable volume variance of $9.4 million which was mostly offset by a $7.3 million decrease in investments, due to the balance sheet restructure in 2023. There was a $6.0 million decrease in borrowed funds, partially offset by a $4.2 million increase in interest-bearing deposits. There was a positive rate variance on interest earning assets of $6.7 million for the first nine months of 2024 partially offset by a $3.3 million rate increase in interest earning liabilities. The Company’s net interest margin for the first nine months of 2024 was 3.66%, as compared to 3.39% in the first nine months of 2023.
At September 30, 2024, approximately 17% of the Company’s total portfolio, or $403.8 million, consists of variable rate loans. At September 30, 2024, outstanding fixed rate loans represented 31% of the loan portfolio. The remaining 52% of the loan portfolio at September 30, 2024, consists of adjustable-rate loans; 59% of these loans (approximately $713.7 million) will not have the ability to reprice for at least another 3 years. 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 $162.6 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.
Average interest earning cash balances for the quarter and year-to-date comparisons have increased and have a positive impact on the net interest margin since cash balances have been earning approximately 5.5%. Average cash and due from banks was $88.5 million, an increase of $64.7 million for the third quarter of 2024 as compared to the same period last year, and was $28.3 million higher for the first nine months of 2024 as compared to the same period in 2023.
Overall average investment securities decreased by $321.7 million for the third quarter of 2024, as compared to the same period in 2023, and decreased by $266.8 million for the first nine months 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 5.27% at September 30, 2024, with an average life of 4.44 years and average effective duration of 1.0 years for available-for-sale securities. Approximately $464.8 million of the investment securities reprice every 90 days and $65.4 million are subordinated debt with an initial fixed rate period of 5 years and floating thereafter.
Variances in interest expense were the result of changes discussed under the “Net Interest Income and Net Interest Margin” heading. In addition, average noninterest-bearing demand deposits decreased $69.6 million or 7% for the third quarter of 2024 as compared to the third quarter of 2023 and decreased $74.0 million or 7% for the first nine months of 2024 as compared to the first nine months 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 $1.2 million for the third quarter of 2024, as compared to a $0.1 million in the third quarter of 2023. There was a year-to-date provision for credit losses on loans of $2.3 million in 2024, as compared to $0.4 million for the same period in 2023. The Company's $1.1 million increase in the provision for credit losses on loans in the third quarter of 2024, as compared to the third quarter of 2023, and the $1.8 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 $3.0 million in net charge-offs in the first nine months of 2024, with only $0.4 million in net charge-offs for the first nine months of 2023. The increase in net charge-offs 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.
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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 net earnings.
NONINTEREST INCOME AND NONINTEREST EXPENSE
Noninterest Income/Expense
(dollars in thousands, unaudited)
For the three months ended September 30,
For the nine months ended September 30,
Noninterest income:
2024
2023
2024
2023
Service charges and fees on deposit accounts
$
6,205
$
6,055
$
18,114
$
17,127
Net gain (loss) on sale of securities available-for-sale
73
—
(2,810)
396
Gain on sale of fixed assets
—
—
3,799
—
Bank-owned life insurance
540
558
2,278
1,388
Other
971
1,149
2,628
3,444
Total noninterest income
$
7,789
$
7,762
$
24,009
$
22,355
As a % of average interest-earning assets (1)
0.91%
0.89%
0.97%
0.87%
Noninterest expense:
Salaries and employee benefits
$
12,363
$
12,623
$
37,589
$
37,567
Occupancy and equipment costs
2,995
2,482
9,173
7,251
Advertising and marketing costs
381
723
1,061
1,646
Data processing costs
1,555
1,369
4,744
4,433
Deposit services costs
2,150
2,048
6,302
6,603
Loan services costs
Loan processing
184
174
424
452
Foreclosed assets
—
(60)
—
665
Other operating costs
959
765
2,980
3,244
Professional services costs
.
Legal & accounting services
547
493
1,976
1,623
Director's costs
501
732
2,401
1,733
Other professional service
775
707
2,167
2,053
Stationery & supply costs
120
148
382
414
Sundry & tellers
280
358
829
838
Total noninterest expense
$
22,810
$
22,562
$
70,028
$
68,522
As a % of average interest-earning assets (1)
2.68%
2.58%
2.82%
2.67%
(1) Annualized
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Noninterest Income:
Total noninterest income was unchanged for the quarter ended September 30, 2024, as compared to the same quarter in 2023, and increased $1.7 million, or 7% for the year-to-date period ended September 30, 2024, as compared to the same period in 2023. The year-to-date comparison was impacted by an increase in service charge income on deposit accounts, favorable fluctuations in income on Bank-Owned Life Insurance (BOLI) with underlying investments mapped directly to the Company’s deferred compensation plan and a net gain on the balance sheet restructure earlier in the year. Offsetting these positive variances was a decrease in other income which is related to life insurance proceeds received in 2023 with no like proceeds in 2024.
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 BOLI which is funded based on deferral elections from the participants. Although the BOLI is not directly tied to the deferred compensation plan, the BOLI is invested in similar fund types as those selected by the participants. There is some inefficiency in net earnings of the BOLI 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 third quarter, and first nine months of 2024, earnings from the BOLI was $0.3 million, and $1.5 million, respectively, while additional expense from the related deferred compensation liability was $0.3 million, and $1.7 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, $0.2 million for the quarterly comparison, and $1.4 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 third quarter of 2024, and $1.0 million for the first nine-months of 2024.
Service charges on customer deposit account income increased by $0.2 million, or 2%, to $6.2 million in the third quarter of 2024 as compared to the third quarter of 2023 and by $1.0 million, or 6%, in the first nine months of 2024, as compared to the same period in 2023. These increases in the quarterly comparison are primarily from overdraft fees while the 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 $0.2 million decrease in the third quarter of 2024 as compared to the third quarter of 2023, and a $0.8 million decrease in the first nine months of 2024 as compared to the same period in 2023. Both the quarterly and year-to-date comparisons were negatively impacted by a decrease in life insurance proceeds.
Noninterest Expense:
Total noninterest expense increased by $0.2 million, or 1%, in the third quarter of 2024, relative to the third quarter of 2023, and by $1.5 million, or 2%, for the first nine months of 2024, as compared to the same period in 2023.
Salaries and Benefits were $0.3 million, or 2%, lower in the third quarter of 2024 as compared to the third quarter of 2023, and unchanged for the first nine months of 2024, compared to the same period in 2023. The Company made strategic decisions in 2023, that created operational efficiencies and reduced costs. While the number of full-time equivalent employees did not change for the first nine months of 2024, compared to the year ending December 31, 2023, the composition of the workforce changed resulting in reduced salaries and benefits costs, during the third quarter of 2024. There were 489 full-time equivalent employees at September 30, 2024 as compared to 489 at December 31, 2023, and 487 at September 30, 2023.
Occupancy expenses increased by $0.5 million, and $1.9 million for the third quarter, and the first nine months 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 was unchanged for the third quarter 2024, as compared to the third quarter in 2023, and decreased $0.4 million, or 2% for the first nine months of 2024, as compared to the same period in 2023. While the variances for the third quarter of 2024, compared to the same period in 2023 offset each other, the primary differences were decreases in marketing costs, which is timing related, and a favorable variance in directors deferred compensation expense, linked to the changes in BOLI income. These favorable variances were offset by higher communications costs, audit and review costs and loan management software costs. The Company implemented new loan origination and management software to better serve its customers, and to create operational efficiencies. For the year-over-year comparison, the categories of variance were the same as with the quarterly comparison, except for an unfavorable variance in directors deferred compensation expense, offset by favorable variances in debit card processing and ATM network costs, from a branding change to VISA from Mastercard last year, and the subsequent costs in 2023 related to that change. Additionally, there was a decrease in foreclosed asset costs, due to a foreclosure and subsequent sale of one large credit relationship in early 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. Tax credits consist primarily of those generated by investments in low-income housing tax credit funds. The Company's provision for income taxes was 26.4% of pre-tax income in the third quarter of 2024, relative to 25.8% in the third quarter of 2023, and 26.8% of pre-tax income for the first nine months of 2024, relative to 25.3% 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 its 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 its 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 27% of total assets at September 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. The Company currently has the intent and ability to hold investment securities to maturity, but the securities are all marketable. The expected effective duration was 1.0 years for available-
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for-sale investments and 5.6 years for held-to-maturity investments at September 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)
September 30, 2024
December 31, 2023
Carrying Amount
Percent
Carrying Amount
Percent
Available-for-sale
U.S. government agencies
$
61,031
6.01%
$
102,749
7.67%
Mortgage-backed securities
80,504
7.93%
99,544
7.43%
State and political subdivisions
42,376
4.17%
194,206
14.50%
Corporate bonds
56,357
5.55%
52,040
3.89%
Collateralized loan obligations
466,042
45.91%
570,662
42.61%
Total available-for-sale
706,310
69.57%
1,019,201
76.10%
Held-to-maturity
U.S. government agencies
4,845
0.48%
5,522
0.41%
Mortgage-backed securities
132,324
13.03%
142,295
10.62%
State and political subdivisions
171,802
16.92%
172,240
12.86%
Total held-to-maturity
308,971
30.43%
320,057
23.90%
Total securities
$
1,015,281
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 $463.9 million at September 30, 2024, and $551.5 million at December 31, 2023, leaving $551.4 million in unpledged debt securities at September 30, 2024, and $787.8 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 $286.4 million at September 30, 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 September 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 September 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 September 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 September 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. 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 September 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 September 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 September 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 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)
September 30, 2024
December 31, 2023
Amount
Percent
Amount
Percent
Real estate:
Residential real estate
$
389,294
16.77%
$
413,262
19.77%
Commercial real estate
1,336,266
57.56%
1,325,494
63.41%
Other construction/land
5,629
0.24%
6,268
0.30%
Farmland
80,753
3.48%
67,510
3.23%
Total real estate
1,811,942
78.06%
1,812,534
86.71%
Other commercial
169,770
7.31%
157,760
7.54%
Mortgage warehouse lines
335,776
14.48%
116,000
5.55%
Consumer loans
3,537
0.15%
4,090
0.20%
Total loans
$
2,321,025
100.00%
$
2,090,384
100.00%
Gross loans at $2.3 billion, increased $230.6 million or 11% during the first nine months of 2024. There was a $219.8 million favorable change in mortgage warehouse lines, a $13.2 million increase in farmland loans, a $10.7 million increase
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in commercial real estate loans, and a $12.0 million increase in other commercial loans. Counterbalancing these positive loan variances were loan paydowns and maturities resulting in net declines in residential real estate loans.
As indicated in the loan roll forward below, new credit extended for the third quarter of 2024, increased on a linked-quarter basis, but decreased $7.7 million over the same period in 2023, and decreased $22.1 million for the year-to-date comparisons. The Company also had $48.4 million in loan paydowns and maturities; however, increases in mortgage warehouse and credit line utilization of $73.3 million had a positive impact in the third quarter. The year-to-date decline in new credit extended compared to the same period in 2023, is attributable to competitive pressures in the Company’s market for strong credit relationships, combined with a lower loan demand overall due to the current high interest rate environment.
LOAN ROLLFORWARD
(Dollars in Thousands, Unaudited)
For the three months ended:
For the nine months ended:
September 30, 2024
June 30, 2024
September 30, 2023
September 30, 2024
September 30, 2023
Gross loans beginning balance
$
2,234,528
$
2,156,864
$
2,094,391
$
2,090,075
$
2,052,940
New credit extended
61,239
40,313
68,980
136,518
158,619
Changes in line of credit utilization (1)
11,572
(10,412)
(22,517)
(23,768)
(41,685)
Change in mortgage warehouse
61,718
70,498
(3,032)
219,778
42,146
Pay-downs, maturities, charge-offs and amortization
(48,428)
(22,735)
(37,012)
(101,974)
(111,210)
Gross loans ending balance
$
2,320,629
$
2,234,528
$
2,100,810
2,320,629
2,100,810
(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 September 30, 2024, the total regulatory CRE concentration ratio of total CRE over Tier 1 Capital plus allowance was 236.43% as compared to 242.88% at December 31, 2023, and 243.07% at September 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 September 30, 2024. At September 30, 2024, non-owner occupied commercial real estate includes $304.7 million of retail; $142.1 million of warehouse/industrial; $172.9 million of office; and $200.9 million of hospitality. Approximately $172.9 million, or 5% of the office real estate matures in less than two years.
Unused commitments, excluding mortgage warehouse and overdraft lines, were $237.7 million at September 30, 2024, compared to $203.6 million at December 31, 2023. Total line utilization, excluding mortgage warehouse and overdraft lines, was 59.2% at September 30, 2024, and 62.3% at December 31, 2023. Mortgage warehouse utilization increased to 54.6% at September 30, 2024, as compared to 36.2% at December 31, 2023.The increase in mortgage warehouse utilization during the first nine months of 2024 was due to $297.6 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)
September 30, 2024
December 31, 2023
September 30, 2023
Nonperforming Loans:
Real estate:
Residential real estate
$
42
$
414
$
446
Commercial real estate
2,655
7,457
—
Farmland
7,528
—
—
Total Real Estate nonperforming loans
10,225
7,871
446
Other commercial
123
114
335
Total Nonperforming Loans
10,348
7,985
781
Total Nonperforming Assets
$
10,348
$
7,985
$
781
Nonperforming loans as a % of total gross loans
0.45%
0.38%
0.04%
Nonperforming assets as a % of total gross loans and foreclosed assets
0.45%
0.38%
0.04%
Total nonperforming assets, comprised of nonaccrual loans, increased by $2.4 million to $10.3 million for the first nine months of 2024. The Company's ratio of nonperforming loans to gross loans increased to 0.45% at September 30, 2024, from 0.38% at December 31, 2023. The increase in nonperforming loans resulted from a loan collateralized by agricultural property specifically related to dairy farming and an office commercial real estate loan. This increase was offset by the foreclosure, and subsequent first quarter 2024 sale of an office commercial real estate property which was nonperforming at December 31, 2023. All 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 September 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 non-accruing loan and they are all being actively managed. Collection efforts are continuously pursued for all nonperforming loans, but the Company cannot provide assurance that they will be resolved in a timely manner or that nonperforming balances will not increase.
The Company had $0.4 million in loans past due 30-89 days at September 30, 2024. This is a decrease of $1.7 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.
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The Company's allowance for credit losses on loans was $22.7 million at September 30, 2024, and $23.5 million at December 31, 2023. The allowance was 0.98% of gross loans at September 30, 2024, and 1.12% of total loans at December 31, 2023. The decrease in the allowance resulted from a reduction in specific individual reserves on individually evaluated loans due to the charge-off associated with one commercial real estate loan. 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 September 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. Furthermore, fluctuations in credit quality, changes in economic conditions, updated accounting or regulatory requirements, and/or other factors could induce the Company to augment or reduce the allowance. The Company calculates the allowance for credit losses using a combination of quantitative and qualitative factors applied to loans segmented by call report category. The largest increase in loan balances was from mortgage warehouse lines which has the lowest reserve rate in the allowance for credit losses at 0.14%. Therefore, at September 30, 2024, approximately $0.5 million of the allowance for credit losses is attributable to mortgage warehouse lines. A separate allowance of $0.06 million for potential credit losses inherent in unused commitments is included in other liabilities at September 30, 2024, an increase of $0.1 million, from December 31, 2023.
Allowance for Credit Losses on Loans
(dollars in thousands, unaudited)
For the three
months ended
For the three
months ended
For the nine
months ended
For the nine
months ended
For the year ended
September 30,
September 30,
September 30,
September 30,
December 31,
Balances:
2024
2023
2024
2023
2023
Average gross loans outstanding during period (1)
$
2,271,692
$
2,088,732
$
2,195,352
$
2,059,274
$
2,006,283
Gross Loans outstanding at end of period
$
2,320,629
$
2,100,810
$
2,320,629
$
2,100,810
$
2,090,075
Allowance for credit losses on loans:
Balance at beginning of period
$
21,640
$
23,010
$
23,500
$
23,060
$
23,060
Provision charged to expense
1,240
117
2,258
444
4,058
Charge-offs
Real estate
Residential real estate
—
—
—
—
30
Commercial real estate
(30)
—
2,438
—
2,266
Farmland
—
—
410
1,248
1,248
Total real estate
(30)
—
2,848
1,248
3,544
Other commercial
39
115
365
505
1,349
Consumer loans
388
426
1,126
1,292
1,728
Total
$
397
$
541
$
4,339
$
3,045
$
6,621
Recoveries
Real estate
Residential real estate
$
—
$
—
$
60
$
205
$
206
Commercial real estate
—
—
—
17
274
Farmland
—
—
—
257
—
Total real estate
—
—
60
479
480
Other commercial
16
224
559
1,352
1,538
Consumer loans
211
250
672
770
985
Total
$
227
$
474
$
1,291
$
2,601
$
3,003
Net loan charge-offs
$
170
$
67
$
3,048
$
444
$
3,618
Balance at end of period
$
22,710
$
23,060
$
22,710
$
23,060
$
23,500
RATIOS
Net charge-offs to average Loans (annualized)
0.03%
0.01%
0.18%
0.03%
0.18%
Allowance for credit losses on Loans to gross Loans at end of period
0.98%
1.10%
0.98%
1.10%
1.12%
Net loan charge-offs to allowance for credit losses on Loans at end of period
0.75%
0.29%
13.42%
1.93%
15.40%
Net loan charge-offs to provision for credit losses on Loans
13.71%
57.26%
134.99%
100.00%
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.
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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 $589.7 million at September 30, 2024, and $487.1 million at December 31, 2023, representing approximately 25% of gross loans outstanding at September 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 $279.2 million at September 30, 2024, and $204.5 million at December 31, 2023, while utilization was 55% and 36%, respectively.
The increase in utilization during the first nine months 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 $34.1 million or 17% for the first nine 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 September 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 the Company 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 $77.7 million at September 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. The Company’s balance of cash and due from banks depends on the timing of collection of outstanding cash items (checks), the amount of cash held in the branches, and the 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, the Company could let brokered deposits or other wholesale borrowings roll off as they mature, or 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 $97.6 million at September 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 $1.3 million during the first nine months of 2024, to $15.6 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 September 30, 2024, unchanged during the first nine months 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.
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Bank-owned life insurance, with a balance of $54.0 million at September 30, 2024, is discussed in detail above in the “Noninterest Income and Noninterest Expense” section.
DEPOSITS AND INTEREST-BEARING LIABILITIES
DEPOSITS
Deposits represent another key balance sheet category impacting the Company’s net interest income and profitability metrics. Deposits provide liquidity to fund growth in earning assets, and the Company’s net interest margin is improved to the extent that growth in deposits is concentrated in less volatile and typically less costly non-maturity accounts such as demand deposit accounts, NOW accounts, savings accounts, and money market demand accounts. Information concerning average balances and rates paid by deposit type is included in the Average Balances and Rates tables appearing above, in the section titled “Net Interest Income and Net Interest Margin.” A distribution of the Company’s deposits by type, showing the period-end balance and percentage of total deposits, is presented as of the dates indicated in the following table.
Deposit Distribution
(dollars in thousands, unaudited)
September 30, 2024
December 31, 2023
Amount
Percent
Amount
Percent
Noninterest-bearing demand deposits
$
1,013,743
34.23%
$
1,020,772
36.98%
Interest-bearing demand deposits
206,094
6.96%
128,784
4.66%
NOW
389,578
13.15%
405,163
14.67%
Savings
356,725
12.04%
370,806
13.43%
Money market
135,948
4.59%
145,591
5.27%
Time
550,121
18.57%
555,107
20.10%
Brokered deposits
309,950
10.46%
135,000
4.89%
Total deposits
$
2,962,159
100.00%
$
2,761,223
100.00%
Deposit balances grew by $200.9 million, or 7%, during the first nine months of 2024 to $3.0 billion at September 30, 2024. Core non-maturity deposits increased by $31.0 million, or 6%, for the first nine months of 2024, while customer time deposits decreased by $5.0 million, or 1%. Wholesale brokered deposits increased $175.0 million during the first nine months of 2024, or 130%. 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 34.2%, at September 30, 2024, compared to 37.0% at December 31, 2023.
Overall uninsured deposits are estimated to be approximately $816.2 million, or 28% 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 Bank’s customers are eligible for FDIC pass-through insurance if the customer opens an IntraFi Insured Cash Sweep (ICS) account or a reciprocal time deposit through the Certificate of Deposit Account Registry System (CDARS). IntraFi allows for up to $265 million per customer of pass-through FDIC insurance, which would more than cover each of the Bank’s deposit customers if such customer desired to have such pass-through insurance. The Bank maintains a diversified deposit base with no significant customer concentrations and does not bank any cryptocurrency companies. At September 30, 2024, the Company had approximately 120,000 accounts and the 25 largest deposit balance customers had balances of approximately 15% 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
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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.
Total non-deposit interest-bearing liabilities decreased by $262.1 million, during the first nine months 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 $125.5 million at September 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 million and were paid in full at September 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 September 30, 2024, consisted of $49.4 million of subordinated debt. This remained relatively unchanged from December 31, 2023. Subordinated debentures related to $35.8 million of trust preferred securities at both September 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 $84.0 million at September 30, 2024, as compared to $77.4 million at December 31, 2023, an increase of $6.6 million or 8%. The increase was primarily driven by accrued payables that as of September 30, 2024, had not settled .
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 78% at September 30, 2024, and 76% at 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 assessthe Company’s 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, the Company is 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, the Company 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 September 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
September 30, 2024
December 31, 2023
Cash and cash equivalents
$
132,797
$
78,602
Unpledged investment securities
556,231
792,965
Excess pledged securities
286,355
382,965
FHLB borrowing availability
618,142
586,726
Unsecured lines of credit
504,785
374,785
Funds available through fed discount window
342,711
392,034
Totals
$
2,441,021
$
2,608,077
Available funding sources detailed above of $2.4 billion represented 82% of total deposits and 299% of estimated uninsured and/or uncollateralized deposits as of September 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, Management believes that it has 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 the Company utilizes 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 September 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 22.59% and 78.34%, respectively, at September 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 September 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 the 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 September 30, 2024, the holding company maintained a cash balance of $11.0 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. The Company’s market risk exposure is primarily that of interest rate risk, and has established policies and procedures to monitor and limit 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, the Company utilizes 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
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incorporates Management’s assumptions on pricing, duration, and optionality for anticipated new volumes. Assumptions regarding 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, the Company typically uses at least eight other interest rate scenarios in conducting 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, the Company generally attempts 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:
September 30, 2024
September 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
9.0%
$
12,006
(2.2)%
$
(2,606)
+300
6.9%
$
9,153
(1.6)%
$
(1,880)
+200
4.7%
$
6,295
(0.9)%
$
(1,132)
+100
2.5%
$
3,385
(0.4)%
$
(520)
Base
-100
(5.2)%
$
(6,954)
(3.2)%
$
(3,872)
-200
(10.4)%
$
(13,795)
(5.0)%
$
(6,062)
-300
(15.4)%
$
(20,469)
(9.1)%
$
(11,051)
-400
(18.4)%
$
(24,467)
(13.4)%
$
(16,227)
The above table is for parallel interest rate shocks for all rate curves and represents an extreme scenario. Management utilizes this as a starting point for determining its overall interest rate risk strategy. Based on the interest rate shocks, for the period ending September 30, 2024, management believes that the Company is more asset sensitive than is was a year ago.
This shift 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 $3.4 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 for all rate curves, net interest income would drop $7.0 million, or a negative variance of 5.2% over 12 months. The change in net interest income in the down 200 basis point scenario is a decrease of $13.8 million or 10.4%. 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 parallel 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 interest rate scenarios that do not assume a simultaneous shock of all rate curves including short-term and long-term curves. One of
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these scenarios uses rate forecasts from a known economist over the next twenty-four months. Using this forecast of rates, net interest income models close to the base case scenario which indicates less sensitivity to expected interest rate changes. Management believes these alternative scenarios are an important part of interest rate risk management given the current inverted rate curve, In an inverted rate curve, shocking all rate curves tends to overstate the sensitivity to a change in rate. Thus, management has isolated the parts of the rate curve its balance sheet is most sensitive to r and is strategically focused on those parts.
In addition to the net interest income simulations shown above, the Company runs stress scenarios for the unconsolidated Bank where it models 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 $358.7 million at September 30, 2024, comprised of $108.4 million in common stock, $5.3 million in additional paid-in capital, $273.6 million in retained earnings, and accumulated other comprehensive loss of $28.6 million. At the end of 2023, total shareholders’ equity was $338.1 million. The increase in equity during the first nine months of 2024 is due to net income of $30.2 million, offset by $10.2 million in dividends paid to shareholders, $8.3 million in share repurchases and a $7.4 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 nine months of 2024.
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 406,809 shares repurchased in the first nine months of 2024 under a Rule 10b5-1 Plan. A new Share Repurchase Program was approved in October 2024 authorizing 1,000,000 shares of common stock for repurchase beginning at the end of the expiration of the share repurchase program on October 31, 2024, and expiring on October 31, 2025.
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
September 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)
11.70
%
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
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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.
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.