See accompanying notes to unaudited consolidated financial statements.
See accompanying notes to unaudited consolidated financial statements.
See accompanying notes to unaudited consolidated financial statements.
See accompanying notes to unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and follow general practices within the banking industry. The results of operations reflect interim adjustments, all of which are of a normal recurring nature and which, in the opinion of Management, are necessary for a fair presentation of the results for the interim periods presented. The interim results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results expected for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as well as other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Note 2: Accounting Policies
The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, it is reasonably possible conditions could change materially affecting results of operations and financial conditions. Certain risks, uncertainties and other factors, including those discussed in “Risk Factors” in Part I – Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 may cause actual future results to differ materially from the results discussed in this report on Form 10-Q. Management continues to evaluate the impacts of the COVID-19 pandemic, inflation and the Federal Reserve’s monetary policy, climate changes and the war in Ukraine on the Company’s business. The extent of the impact on the Company’s results of operations, cash flow liquidity, and financial performance, as well as the Company’s ability to execute near- and long-term business strategies and initiatives, will depend on numerous evolving factors and future developments, which are highly uncertain and cannot be reasonably predicted. However, the effects could have a material impact on the Company’s results of operations and heighten many of the risk factors discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Any one or a combination of such risk factors, or other factors, could materially adversely affect the Company's business, financial condition, results of operations and prospects.
Application of accounting principles requires the Company to make certain estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain accounting policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants a writedown or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. Certain amounts in previous periods have been reclassified to conform to current presentation.
Debt Securities. Debt securities consist of the U.S. Treasury, securities of government sponsored entities, states, counties, municipalities, corporations, agency and non-agency mortgage-backed securities, collateralized loan obligations and commercial paper. Securities transactions are recorded on a trade date basis. The Company classifies its debt securities in one of three categories: trading, available for sale or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Trading securities are recorded at fair value with unrealized gains and losses included in net income. Held to maturity debt securities are those securities which the Company has the ability and intent to hold until maturity. Held to maturity debt securities are recorded at cost, adjusted for the amortization of premiums or accretion of discounts. Securities not included in trading or held to maturity are classified as available for sale debt securities. Available for sale debt securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available for sale debt securities are included in accumulated other comprehensive income. Accrued interest is recorded within other assets and reversed against interest income if it is not received.
The Company utilizes third-party sources to value its investment securities; securities individually valued using quoted prices in active markets are classified as Level 1 assets in the fair value hierarchy, and securities valued using quoted prices in active markets for similar securities (commonly referred to as “matrix” pricing) are classified as Level 2 assets in the fair value hierarchy. The Company validates the reliability of third-party provided values by comparing individual security pricing for securities between more than one third-party source. When third-party information is not available, valuation adjustments are estimated in good faith by Management and classified as Level 3 in the fair value hierarchy.
The Company follows the guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance when performing investment security pre-purchase analysis or evaluating investment securities for credit loss. Credit ratings issued by recognized rating agencies are considered in the Company’s analysis only as a guide to the historical default rate associated with similarly-rated bonds.
To the extent that debt securities in the held-to-maturity portfolio share common risk characteristics, estimated expected credit losses are calculated in a manner like that used for loans held for investment. That is, for pools of such securities with common risk characteristics, the historical lifetime probability of default and severity of loss in the event of default is derived or obtained from external sources and adjusted for the expected effects of reasonable and supportable forecasts over the expected lives of the securities on those historical credit losses. Expected credit loss on each security in the held-to-maturity portfolio that do not share common risk characteristics with any of the pools of debt securities is individually evaluated and a reserve for credit losses is established based on the Company’s consideration of the history of credit losses, current conditions and reasonable and supportable forecasts, which may indicate that the expectation that nonpayment of the amortized cost basis is or continues to be zero. Therefore, for those securities, the Company does not record expected credit losses.
Available for sale debt securities in unrealized loss positions are evaluated for credit related loss at least quarterly. For available for sale debt securities, a decline in fair value due to credit loss results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally considered to not be related to credit when the fair value of the security is below the carrying value primarily due to changes in risk-free interest rates, there has not been significant deterioration in the financial condition of the issuer, and the Company does not intend to sell nor does it believe it will be required to sell the security before the recovery of its cost basis.
If the Company intends to sell a debt security or more likely than not will be required to sell the security before recovery of its amortized cost basis, the debt security is written down to its fair value and the write down is charged against the allowance for credit losses with any incremental loss reported in earnings.
Purchase premiums are amortized to the earliest call date and purchase discounts are amortized to maturity as an adjustment to yield using the effective interest method. Unamortized premiums, unaccreted discounts, and early payment premiums are recognized as a component of gain or loss on sale upon disposition of the related security. Interest and dividend income are recognized when earned. Realized gains and losses from the sale of available for sale debt securities are included in earnings using the specific identification method.
Nonmarketable Equity Securities. Nonmarketable equity securities include securities that are not publicly traded, such as Visa Class B common stock, and securities acquired to meet regulatory requirements, such as Federal Reserve Bank stock, which are restricted. These restricted securities are accounted for under the cost method and are included in other assets. The Company reviews those assets accounted for under the cost method at least quarterly. The Company’s review typically includes an analysis of the facts and circumstances of each investment, the expectations for the investment’s cash flows and capital needs, the viability of its business model and any exit strategy. When the review indicates that impairment exists the asset value is reduced to fair value. The Company recognizes the estimated loss in noninterest income.
Loans. Loans are stated at the principal amount outstanding, net of unearned discount and unamortized deferred fees and costs. Interest is accrued daily on the outstanding principal balances and included in other assets. Loans which are more than 90 days delinquent with respect to interest or principal, unless they are well secured and in the process of collection, and other loans on which full recovery of principal or interest is in doubt, are placed on nonaccrual status. Interest previously accrued on loans placed on nonaccrual status is charged against interest income. In addition, some loans secured by real estate and commercial loans to borrowers experiencing financial difficulties are placed on nonaccrual status even though the borrowers continue to repay the loans as scheduled. When the ability to fully collect nonaccrual loan principal is in doubt, payments received are applied against the principal balance of the loans on a cost-recovery method until such time as full collection of the remaining recorded balance is expected. Any additional interest payments received after that time are recorded as interest income on a cash basis. Nonaccrual loans are reinstated to accrual status when none of the loan’s principal and interest is past due and improvements in credit quality eliminate doubt as to the full collectability of both principal and interest, or the loan otherwise becomes well secured and in the process of collection. Certain consumer loans or auto receivables are charged off against the allowance for credit losses when they become 120 days past due.
A troubled debt restructuring (“TDR”) occurs when the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower it would not otherwise consider. The Company follows its general nonaccrual policy for TDRs. Performing TDRs are reinstated to accrual status when improvements in credit quality eliminate the doubt as to full collectability of both principal and interest. Under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), banks may elect to deem that loan modifications do not result in TDRs if they are (1) related to the novel coronavirus disease; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020.The Consolidated Appropriations Act, 2021, extended the period during which banks may elect to deem that qualified loan modifications do not result in TDR classification through January 1, 2022.
Allowance for Credit Losses. The Company extends loans to commercial and consumer customers primarily in Northern and Central California. These lending activities expose the Company to the risk borrowers will default, causing loan losses. The Company’s lending activities are exposed to various qualitative risks. All loan segments are exposed to risks inherent in the economy and market conditions. Significant risk characteristics related to the commercial loan segment include the borrowers’ business performance and financial condition, and the value of collateral for secured loans. Significant risk characteristics related to the commercial real estate segment include the borrowers’ business performance and the value of properties collateralizing the loans. Significant risk characteristics related to the construction loan segment include the borrowers’ performance in successfully developing the real estate into the intended purpose and the value of the property collateralizing the loans. Significant risk characteristics related to the residential real estate segment include the borrowers’ financial wherewithal to service the mortgages and the value of the property collateralizing the loans. Significant risk characteristics related to the consumer loan segment include the financial condition of the borrowers and the value of collateral securing the loans.
The preparation of these financial statements requires Management to estimate the amount of expected losses over the expected contractual life of the Bank’s existing loan portfolio and establish an allowance for credit losses. Loan agreements generally include a maturity date, and the Company considers the contractual life of a loan agreement to extend from the date of origination to the contractual maturity date. In estimating credit losses, Management must exercise significant judgment in evaluating information deemed relevant. The amount of ultimate losses on the loan portfolio can vary from the estimated amounts. Management follows a systematic methodology to estimate loss potential in an effort to reduce the differences between estimated and actual losses.
The allowance for credit losses is established through provisions for credit losses charged to income. Losses on loans are charged to the allowance for credit losses when all or a portion of the recorded amount of a loan is deemed to be uncollectible. Recoveries of loans previously charged off are credited to the allowance when realized. The Company’s allowance for credit losses is maintained at a level considered adequate to provide for expected losses based on historical loss rates adjusted for current and expected conditions over a forecast period. These include conditions unique to individual borrowers, as well as overall credit loss experience, the amount of past due, nonperforming and classified loans, recommendations of regulatory authorities, prevailing economic conditions, or credit protection agreements and other factors.
Loans that share common risk characteristics are segregated into pools based on common characteristics, which is primarily determined by loan, borrower, or collateral type. Historical loss rates are determined for each pool. For consumer installment loans, primarily secured by automobiles, historical loss rates are determined using a vintage methodology, which tracks losses based on period of origination. For commercial, construction, and commercial real estate, historical loss rates are determined using an open pool methodology where losses are tracked over time for all loans included in the pool at the historical measurement date. Historical loss rates are adjusted for factors that are not reflected in the historical loss rates that are attributable to national or local economic or industry trends which have occurred but have not yet been recognized in past loan charge-off history, estimated losses based on management’s reasonable and supportable expectation of economic trends over a forecast horizon of up to two years, and other factors that impact credit loss expectations that are not reflected in the historical loss rates. Other factors include, but are not limited to, the effectiveness of the Company’s loan review system, adequacy of lending Management and staff, loan policies and procedures, problem loan trends, and concentrations of credit. At the end of the two-year forecast period loss rates revert immediately to the historical loss rates. The results of this analysis are applied to the amortized cost of the loans included within each pool.
Loans that do not share risk characteristics with other loans in the pools are evaluated individually. A loan is considered ‘collateral-dependent’ when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. A credit loss reserve for collateral-dependent loans is established at the difference between the amortized cost basis in the loan and the fair value of the underlying collateral adjusted for costs to sell. For other individually evaluated loans that are not collateral dependent, a credit loss reserve is established at the difference between the amortized cost basis in the loan and the present value of expected future cash flows discounted at the loan’s effective interest rate. The impact of an expected TDR modification is included in the allowance for credit losses when management determines a TDR modification is likely.
Accrued interest is recorded in other assets and is excluded from the estimation of expected credit loss. Accrued interest is reversed through interest income when amounts are determined to be uncollectible, which generally occurs when the underlying receivable is placed on nonaccrual status or charged off.
Liability for Off-Balance Sheet Credit Exposures. Off-balance sheet credit exposures relate to letters of credit and unfunded loan commitments for commercial, construction and consumer loans. The Company maintains a separate allowance for credit losses from off-balance-sheet credit exposures, which is included within other liabilities on the consolidated statements of financial condition. Increases or reductions to the Company’s allowance for credit losses from off-balance sheet credit exposures are recorded in other expenses. Management estimates the amount of expected losses by estimating expected usage exposures that are not unconditionally cancellable by the Company and applying the loss factors used in the allowance for credit loss methodology to estimate the liability for credit losses related to unfunded commitments. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company or for undrawn amounts under such arrangements that may be drawn prior to the cancellation of the arrangement.
Recently Issued Accounting Standards
FASB ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, was issued March 2022. The ASU eliminates the accounting guidance for Troubled Debt Restructurings (“TDR”) Loans by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty. Upon adoption of this ASU, an entity is required to disclose current period gross chargeoffs by year of origination for loans. The ASU is to be applied prospectively, with the exception of the guidance related to the recognition and measurement of TDR loans that may be applied by recording a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This guidance is effective for reporting periods beginning after December 15, 2022, with early adoption permitted, for public entities that have adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The Company adopted ASU 2016-13 effective January 1, 2020. FASB ASU 2022-02 is applicable to the Company’s fiscal year beginning January 1, 2023. The Company is currently evaluating the impact of adopting this standard.
FASB ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, was issued March 2020. The ASU provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The Company does not expect any material impact on its consolidated financial statements since the Company has an insignificant number of financial instruments applicable to this ASU.
Note 3: Investment Securities
An analysis of the amortized cost and fair value by major categories of debt securities available for sale, which are carried at fair value with net unrealized gains (losses) reported on an after-tax basis as a component of accumulated other comprehensive income, and debt securities held to maturity, which are carried at amortized cost, before allowance for credit losses of $7 thousand at September 30, 2022 and December 31, 2021, follows:
| | At September 30, 2022 | |
| | | | | | Gross | | | Gross | | | | | |
| | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| | Cost | | | Gains | | | Losses | | | Value | |
| | (In thousands) | |
Debt securities available for sale | | | | | | | | | | | | | | | | |
Agency residential mortgage-backed securities ("MBS") | | $ | 326,577 | | | $ | 3 | | | $ | (29,891 | ) | | $ | 296,689 | |
Securities of U.S. Government sponsored entities | | | 289,105 | | | | - | | | | (16,580 | ) | | | 272,525 | |
Obligations of states and political subdivisions | | | 85,178 | | | | 50 | | | | (4,241 | ) | | | 80,987 | |
Corporate securities | | | 2,491,591 | | | | 1,085 | | | | (354,168 | ) | | | 2,138,508 | |
Collateralized loan obligations | | | 1,596,730 | | | | 497 | | | | (9,605 | ) | | | 1,587,622 | |
Total debt securities available for sale | | | 4,789,181 | | | | 1,635 | | | | (414,485 | ) | | | 4,376,331 | |
Debt securities held to maturity | | | | | | | | | | | | | | | | |
Agency residential MBS | | | 112,371 | | | | 20 | | | | (8,278 | ) | | | 104,113 | |
Obligations of states and political subdivisions | | | 103,749 | | | | 29 | | | | (1,654 | ) | | | 102,124 | |
Corporate securities | | | 720,154 | | | | - | | | | (47,929 | ) | | | 672,225 | |
Total debt securities held to maturity | | | 936,274 | | | | 49 | | | | (57,861 | ) | | | 878,462 | |
Total | | $ | 5,725,455 | | | $ | 1,684 | | | $ | (472,346 | ) | | $ | 5,254,793 | |
| | At December 31, 2021 | |
| | | | | | Gross | | | Gross | | | | | |
| | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| | Cost | | | Gains | | | Losses | | | Value | |
| | (In thousands) | |
Debt securities available for sale | | | | | | | | | | | | | | | | |
Agency residential MBS | | $ | 399,997 | | | $ | 11,766 | | | $ | (37 | ) | | $ | 411,726 | |
Securities of U.S. Government entities | | | 119 | | | | - | | | | - | | | | 119 | |
Obligations of states and political subdivisions | | | 90,107 | | | | 3,842 | | | | (29 | ) | | | 93,920 | |
Corporate securities | | | 2,692,792 | | | | 63,573 | | | | (9,630 | ) | | | 2,746,735 | |
Collateralized loan obligations | | | 1,385,331 | | | | 1,743 | | | | (719 | ) | | | 1,386,355 | |
Total debt securities available for sale | | | 4,568,346 | | | | 80,924 | | | | (10,415 | ) | | | 4,638,855 | |
Debt securities held to maturity | | | | | | | | | | | | | | | | |
Agency residential MBS | | | 148,390 | | | | 3,114 | | | | (37 | ) | | | 151,467 | |
Obligations of states and political subdivisions | | | 158,013 | | | | 3,082 | | | | - | | | | 161,095 | |
Total debt securities held to maturity | | | 306,403 | | | | 6,196 | | | | (37 | ) | | | 312,562 | |
Total | | $ | 4,874,749 | | | $ | 87,120 | | | $ | (10,452 | ) | | $ | 4,951,417 | |
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The amortized cost and fair value of debt securities by contractual maturity are shown in the following tables at the dates indicated:
| | At September 30, 2022 | |
| | Debt Securities Available | | | Debt Securities Held | |
| | for Sale | | | to Maturity | |
| | Amortized | | | Fair | | | Amortized | | | Fair | |
| | Cost | | | Value | | | Cost | | | Value | |
| | (In thousands) | |
Maturity in years: | | | | | | | | | | | | | | | | |
1 year or less | | $ | 331,756 | | | $ | 329,956 | | | $ | 14,686 | | | $ | 14,634 | |
Over 1 to 5 years | | | 557,420 | | | | 523,563 | | | | 170,979 | | | | 165,738 | |
Over 5 to 10 years | | | 2,823,019 | | | | 2,482,869 | | | | 638,238 | | | | 593,977 | |
Over 10 years | | | 750,409 | | | | 743,254 | | | | - | | | | - | |
Subtotal | | | 4,462,604 | | | | 4,079,642 | | | | 823,903 | | | | 774,349 | |
MBS | | | 326,577 | | | | 296,689 | | | | 112,371 | | | | 104,113 | |
Total | | $ | 4,789,181 | | | $ | 4,376,331 | | | $ | 936,274 | | | $ | 878,462 | |
| | At December 31, 2021 | |
| | Debt Securities Available | | | Debt Securities Held | |
| | for Sale | | | to Maturity | |
| | Amortized | | | Fair | | | Amortized | | | Fair | |
| | Cost | | | Value | | | Cost | | | Value | |
| | (In thousands) | |
Maturity in years: | | | | | | | | | | | | | | | | |
1 year or less | | $ | 306,333 | | | $ | 309,257 | | | $ | 15,836 | | | $ | 15,941 | |
Over 1 to 5 years | | | 707,062 | | | | 738,057 | | | | 125,001 | | | | 127,539 | |
Over 5 to 10 years | | | 2,320,559 | | | | 2,347,242 | | | | 17,176 | | | | 17,615 | |
Over 10 years | | | 834,395 | | | | 832,573 | | | | - | | | | - | |
Subtotal | | | 4,168,349 | | | | 4,227,129 | | | | 158,013 | | | | 161,095 | |
MBS | | | 399,997 | | | | 411,726 | | | | 148,390 | | | | 151,467 | |
Total | | $ | 4,568,346 | | | $ | 4,638,855 | | | $ | 306,403 | | | $ | 312,562 | |
Expected maturities of mortgage-related securities can differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. In addition, such factors as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities.
An analysis of the gross unrealized losses of the debt securities available for sale portfolio follows:
| | Debt Securities Available for Sale | |
| | At September 30, 2022 | |
| | No. of | | | Less than 12 months | | | No. of | | | 12 months or longer | | | No. of | | | Total | |
| | Investment | | | | | | | Unrealized | | | Investment | | | | | | | Unrealized | | | Investment | | | | | | | Unrealized | |
| | Positions | | | Fair Value | | | Losses | | | Positions | | | Fair Value | | | Losses | | | Positions | | | Fair Value | | | Losses | |
| | ($ in thousands) | |
Agency residential MBS | | | 114 | | | $ | 295,984 | | | $ | (29,890 | ) | | | 2 | | | $ | 39 | | | $ | (1 | ) | | | 116 | | | $ | 296,023 | | | $ | (29,891 | ) |
Securities of U.S. Government sponsored entities | | | 19 | | | | 272,525 | | | | (16,580 | ) | | | - | | | | - | | | | - | | | | 19 | | | | 272,525 | | | | (16,580 | ) |
Obligations of states and political subdivisions | | | 63 | | | | 66,998 | | | | (4,148 | ) | | | 3 | | | | 1,309 | | | | (93 | ) | | | 66 | | | | 68,307 | | | | (4,241 | ) |
Corporate securities | | | 156 | | | | 1,787,045 | | | | (256,786 | ) | | | 36 | | | | 323,597 | | | | (97,382 | ) | | | 192 | | | | 2,110,642 | | | | (354,168 | ) |
Collateralized loan obligations | | | 58 | | | | 535,175 | | | | (8,768 | ) | | | 16 | | | | 151,448 | | | | (837 | ) | | | 74 | | | | 686,623 | | | | (9,605 | ) |
Total | | | 410 | | | $ | 2,957,727 | | | $ | (316,172 | ) | | | 57 | | | $ | 476,393 | | | $ | (98,313 | ) | | | 467 | | | $ | 3,434,120 | | | $ | (414,485 | ) |
An analysis of gross unrecognized losses of the debt securities held to maturity portfolio follows:
| | Debt Securities Held to Maturity | |
| | At September 30, 2022 | |
| | No. of | | | Less than 12 months | | | No. of | | | 12 months or longer | | | No. of | | | Total | |
| | Investment | | | | | | | Unrecognized | | | Investment | | | | | | | Unrecognized | | | Investment | | | | | | | Unrecognized | |
| | Positions | | | Fair Value | | | Losses | | | Positions | | | Fair Value | | | Losses | | | Positions | | | Fair Value | | | Losses | |
| | ($ in thousands) | |
Agency residential MBS | | | 93 | | | $ | 102,485 | | | $ | (8,183 | ) | | | 3 | | | $ | 710 | | | $ | (95 | ) | | | 96 | | | $ | 103,195 | | | $ | (8,278 | ) |
Obligations of states and political subdivisions | | | 99 | | | | 82,394 | | | | (1,654 | ) | | | - | | | | - | | | | - | | | | 99 | | | | 82,394 | | | | (1,654 | ) |
Corporate securities | | | 49 | | | | 657,226 | | | | (47,929 | ) | | | - | | | | - | | | | - | | | | 49 | | | | 657,226 | | | | (47,929 | ) |
Total | | | 241 | | | $ | 842,105 | | | $ | (57,766 | ) | | | 3 | | | $ | 710 | | | $ | (95 | ) | | | 244 | | | $ | 842,815 | | | $ | (57,861 | ) |
Based upon the Company’s September 30, 2022 evaluation, the unrealized losses on debt securities were caused by market conditions for these types of securities. In the nine months ended September 30, 2022, the market yields on five-year and ten-year Treasury notes have increased 2.83% and 2.32%, respectively; these increasing risk-free interest rates have caused large declines in bond values generally. Additionally, market rates for non-Treasury bonds are determined by the risk-free interest rate plus a risk premium spread; such spreads for investment grade, fixed rate, taxable corporate bonds have increased 0.67% in the nine months ended September 30, 2022, also broadly reducing corporate bond values. The Company continually monitors interest rate changes, risk premium spread changes, credit rating changes for issuers of bonds owned, collateralized loan obligations’ collateral levels, and, corporate bond issuers’ common stock price changes. All collateralized loan obligations and corporate bonds were investment grade rated at September 30, 2022.
The Company does not intend to sell any debt securities available for sale with an unrealized loss and has concluded that it is more likely than not that it will not be required to sell the debt securities prior to recovery of the amortized cost basis.
The Company evaluates held to maturity corporate securities individually, monitoring each issuer’s financial condition, profitability, cash flows and credit rating agency conclusions. The Company has an expectation that nonpayment of the amortized cost basis continues to be zero.
The fair values of debt securities could decline in the future if the general economy deteriorates, inflation increases, credit ratings decline, the issuers’ financial condition deteriorates, or the liquidity for debt securities declines. As a result, significant credit losses on debt securities may occur in the future.
As of September 30, 2022 and December 31, 2021, the Company had debt securities pledged to secure public deposits and short-term borrowed funds of $1,023,398 thousand and $1,021,566 thousand, respectively.
An analysis of the gross unrealized losses of the debt securities available for sale portfolio follows:
| | Debt Securities Available for Sale | |
| | At December 31, 2021 | |
| | No. of | | | Less than 12 months | | | No. of | | | 12 months or longer | | | No. of | | | Total | |
| | Investment | | | | | | | Unrealized | | | Investment | | | | | | | Unrealized | | | Investment | | | | | | | Unrealized | |
| | Positions | | | Fair Value | | | Losses | | | Positions | | | Fair Value | | | Losses | | | Positions | | | Fair Value | | | Losses | |
| | ($ in thousands) | |
Agency residential MBS | | | 7 | | | $ | 8,900 | | | $ | (37 | ) | | | 2 | | | $ | 47 | | | $ | - | | | | 9 | | | $ | 8,947 | | | $ | (37 | ) |
Securities of U.S. Government entities | | | - | | | | - | | | | - | | | | 1 | | | | 119 | | | | - | | | | 1 | | | | 119 | | | | - | |
Obligations of states and political subdivisions | | | 6 | | | | 2,859 | | | | (27 | ) | | | 2 | | | | 669 | | | | (2 | ) | | | 8 | | | | 3,528 | | | | (29 | ) |
Corporate securities | | | 56 | | | | 691,555 | | | | (9,630 | ) | | | - | | | | - | | | | - | | | | 56 | | | | 691,555 | | | | (9,630 | ) |
Collateralized loan obligations | | | 19 | | | | 208,199 | | | | (521 | ) | | | 8 | | | | 51,523 | | | | (198 | ) | | | 27 | | | | 259,722 | | | | (719 | ) |
Total | | | 88 | | | $ | 911,513 | | | $ | (10,215 | ) | | | 13 | | | $ | 52,358 | | | $ | (200 | ) | | | 101 | | | $ | 963,871 | | | $ | (10,415 | ) |
An analysis of gross unrecognized losses of the debt securities held to maturity portfolio follows:
| | Debt Securities Held to Maturity | |
| | At December 31, 2021 | |
| | No. of | | | Less than 12 months | | | No. of | | | 12 months or longer | | | No. of | | | Total | |
| | Investment | | | | | | | Unrecognized | | | Investment | | | | | | | Unrecognized | | | Investment | | | | | | | Unrecognized | |
| | Positions | | | Fair Value | | | Losses | | | Positions | | | Fair Value | | | Losses | | | Positions | | | Fair Value | | | Losses | |
| | ($ in thousands) | |
Agency residential MBS | | | 1 | | | $ | 542 | | | $ | (19 | ) | | | 3 | | | $ | 530 | | | $ | (18 | ) | | | 4 | | | $ | 1,072 | | | $ | (37 | ) |
Total | | | 1 | | | $ | 542 | | | $ | (19 | ) | | | 3 | | | $ | 530 | | | $ | (18 | ) | | | 4 | | | $ | 1,072 | | | $ | (37 | ) |
The Company evaluates debt securities on a quarterly basis including changes in security ratings issued by rating agencies, changes in the financial condition of the issuer, and, for mortgage-backed and asset-backed securities, collateral levels, delinquency and loss information with respect to the underlying collateral, changes in the levels of subordination for the Company’s particular position within the repayment structure and remaining credit enhancement as compared to expected credit losses of the security. In addition to monitoring credit rating agency evaluations, Management performs its own evaluations regarding the credit worthiness of the issuer or the securitized assets underlying asset backed securities.
The following table presents the activity in the allowance for credit losses for debt securities held to maturity:
| | For the Nine Months Ended September 30, | |
| | 2022 | | | 2021 | |
| | (In thousands) | |
Allowance for credit losses: | | | | | | | | |
Beginning balance | | $ | 7 | | | $ | 9 | |
Provision (Reversal) | | | - | | | | (2 | ) |
Chargeoffs | | | - | | | | - | |
Recoveries | | | - | | | | - | |
Total ending balance | | $ | 7 | | | $ | 7 | |
Agency mortgage-backed securities were assigned no credit loss allowance due to the perceived backing of government sponsored entities. Municipal securities were evaluated for risk of default based on credit rating and remaining term to maturity using Moody’s risk of default factors; Moody’s loss upon default factors were applied to the assumed defaulted principal amounts to estimate the amount for credit loss allowance. Corporate securities held to maturity were individually evaluated for expected credit loss by evaluating the issuer’s financial condition, profitability, cash flows, and credit ratings. At September 30, 2022, no credit loss allowance was assigned to corporate securities held to maturity.
The following table summarizes the amortized cost of debt securities held to maturity at September 30, 2022, aggregated by credit rating:
| | Credit Risk Profile by Credit Rating | |
| | At September 30, 2022 | |
| | AAA/AA/A | | | BBB+ | | | B- | | | Not Rated | | | Total | |
| | (In thousands) | | | | | |
Agency residential MBS | | $ | 111,837 | | | $ | - | | | $ | 487 | | | $ | 47 | | | $ | 112,371 | |
Obligations of states and political subdivisions | | | 103,484 | | | | - | | | | - | | | | 265 | | | | 103,749 | |
Corporate securities | | | 466,906 | | | | 253,248 | | | | - | | | | - | | | | 720,154 | |
Total | | $ | 682,227 | | | $ | 253,248 | | | $ | 487 | | | $ | 312 | | | $ | 936,274 | |
There were no debt securities held to maturity on nonaccrual status or past due 30 days or more as of September 30, 2022.
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The following table provides information about the amount of interest income earned on investment securities which is fully taxable and which is exempt from federal income tax:
| | For the Three Months | | | For the Nine Months | |
| | Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (In thousands) | |
| | | | | | | | | | | | | | | | |
Taxable | | $ | 44,461 | | | $ | 26,674 | | | $ | 105,286 | | | $ | 78,564 | |
Tax-exempt from federal income tax | | | 1,391 | | | | 1,978 | | | | 4,568 | | | | 6,638 | |
Total interest income from investment securities | | $ | 45,852 | | | $ | 28,652 | | | $ | 109,854 | | | $ | 85,202 | |
Note 4: Loans, Allowance for Credit Losses and Other Real Estate Owned
A summary of the major categories of loans outstanding is shown in the following tables at the dates indicated.
| | At September 30, | | | At December 31, | |
| | 2022 | | | 2021 | |
| | (In thousands) | |
Commercial: | | | | | | | | |
Paycheck Protection Program ("PPP") loans | | $ | 6,095 | | | $ | 45,888 | |
Other | | | 174,321 | | | | 187,202 | |
Total Commercial | | | 180,416 | | | | 233,090 | |
Commercial Real Estate | | | 492,749 | | | | 535,261 | |
Construction | | | 2,635 | | | | 48 | |
Residential Real Estate | | | 14,719 | | | | 18,133 | |
Consumer Installment & Other | | | 288,514 | | | | 281,594 | |
Total | | $ | 979,033 | | | $ | 1,068,126 | |
PPP loans are guaranteed by the Small Business Administration (“SBA”). PPP loan proceeds used for eligible payroll and certain other operating costs are eligible for forgiveness, with repayment of loan principal and accrued interest made by the SBA. Management does not expect credit losses on PPP loans. Therefore, there is no allowance for such loans. The following summarizes activity in the allowance for credit losses.
| | Allowance for Credit Losses | |
| | For the Three Months Ended September 30, 2022 | |
| | | | | | | | | | | | | | | | | | Consumer | | | | | |
| | | | | | Commercial | | | | | | | Residential | | | Installment | | | | | |
| | Commercial | | | Real Estate | | | Construction | | | Real Estate | | | and Other | | | Total | |
| | (In thousands) | |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at beginning of period | | $ | 6,536 | | | $ | 5,916 | | | $ | 96 | | | $ | 35 | | | $ | 9,730 | | | $ | 22,313 | |
(Reversal) provision | | | (164 | ) | | | 14 | | | | 32 | | | | - | | | | 118 | | | | - | |
Chargeoffs | | | - | | | | - | | | | - | | | | - | | | | (1,917 | ) | | | (1,917 | ) |
Recoveries | | | 72 | | | | 14 | | | | - | | | | - | | | | 736 | | | | 822 | |
Total allowance for credit losses | | $ | 6,444 | | | $ | 5,944 | | | $ | 128 | | | $ | 35 | | | $ | 8,667 | | | $ | 21,218 | |
| | Allowance for Credit Losses | |
| | For the Nine Months Ended September 30, 2022 | |
| | | | | | | | | | | | | | | | | | Consumer | | | | | |
| | | | | | Commercial | | | | | | | Residential | | | Installment | | | | | |
| | Commercial | | | Real Estate | | | Construction | | | Real Estate | | | and Other | | | Total | |
| | (In thousands) | |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at beginning of period | | $ | 6,966 | | | $ | 6,529 | | | $ | 2 | | | $ | 45 | | | $ | 9,972 | | | $ | 23,514 | |
(Reversal) provision | | | (837 | ) | | | (631 | ) | | | 126 | | | | (10 | ) | | | 1,352 | | | | - | |
Chargeoffs | | | (20 | ) | | | - | | | | - | | | | - | | | | (4,522 | ) | | | (4,542 | ) |
Recoveries | | | 335 | | | | 46 | | | | - | | | | - | | | | 1,865 | | | | 2,246 | |
Total allowance for credit losses | | $ | 6,444 | | | $ | 5,944 | | | $ | 128 | | | $ | 35 | | | $ | 8,667 | | | $ | 21,218 | |
| | Allowance for Credit Losses | |
| | For the Three Months Ended September 30, 2021 | |
| | | | | | | | | | | | | | | | | | Consumer | | | | | |
| | | | | | Commercial | | | | | | | Residential | | | Installment | | | | | |
| | Commercial | | | Real Estate | | | Construction | | | Real Estate | | | and Other | | | Total | |
| | (In thousands) | |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at beginning of period | | $ | 6,858 | | | $ | 6,752 | | | $ | 5 | | | $ | 57 | | | $ | 10,065 | | | $ | 23,737 | |
Provision (reversal) | | | 10 | | | | (754 | ) | | | (3 | ) | | | (7 | ) | | | 756 | | | | 2 | |
Chargeoffs | | | (56 | ) | | | - | | | | - | | | | - | | | | (916 | ) | | | (972 | ) |
Recoveries | | | 80 | | | | 705 | | | | - | | | | - | | | | 330 | | | | 1,115 | |
Total allowance for credit losses | | $ | 6,892 | | | $ | 6,703 | | | $ | 2 | | | $ | 50 | | | $ | 10,235 | | | $ | 23,882 | |
| | Allowance for Credit Losses | |
| | For the Nine Months Ended September 30, 2021 | |
| | | | | | | | | | | | | | | | | | Consumer | | | | | |
| | | | | | Commercial | | | | | | | Residential | | | Installment | | | | | |
| | Commercial | | | Real Estate | | | Construction | | | Real Estate | | | and Other | | | Total | |
| | (In thousands) | |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at beginning of period | | $ | 9,205 | | | $ | 5,660 | | | $ | 6 | | | $ | 47 | | | $ | 8,936 | | | $ | 23,854 | |
(Reversal) provision | | | (2,425 | ) | | | 314 | | | | (4 | ) | | | 3 | | | | 2,114 | | | | 2 | |
Chargeoffs | | | (56 | ) | | | - | | | | - | | | | - | | | | (2,176 | ) | | | (2,232 | ) |
Recoveries | | | 168 | | | | 729 | | | | - | | | | - | | | | 1,361 | | | | 2,258 | |
Total allowance for credit losses | | $ | 6,892 | | | $ | 6,703 | | | $ | 2 | | | $ | 50 | | | $ | 10,235 | | | $ | 23,882 | |
The Company’s customers are primarily small businesses, professionals and consumers. Given the scale of these borrowers, corporate credit rating agencies do not evaluate the borrowers’ financial condition. The Bank maintains a Loan Review Department which reports directly to the Audit Committee of the Board of Directors. The Loan Review Department performs independent evaluations of loans and validates management assigned credit risk grades on evaluated loans using grading standards employed by bank regulatory agencies. Loans judged to carry lower-risk attributes are assigned a “pass” grade, with a minimal likelihood of loss. Loans judged to carry higher-risk attributes are referred to as “classified loans,” and are further disaggregated, with increasing expectations for loss recognition, as “substandard,” “doubtful,” and “loss.” The Loan Review Department performs continuous evaluations throughout the year. If the Bank becomes aware of deterioration in a borrower’s performance or financial condition between Loan Review Department examinations, assigned risk grades are re-evaluated promptly. Credit risk grades assigned by management and validated by the Loan Review Department are subject to review by the Bank’s regulatory authorities during regulatory examinations.
The following summarizes the credit risk profile by internally assigned grade:
| | Credit Risk Profile by Internally Assigned Grade | |
| | At September 30, 2022 | |
| | Commercial | | | Commercial Real Estate | | | Construction | | | Residential Real Estate | | | Consumer Installment and Other | | | Total | |
| | (In thousands) | |
Grade: | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 179,923 | | | $ | 480,476 | | | $ | 2,635 | | | $ | 13,669 | | | $ | 286,386 | | | $ | 963,089 | |
Substandard | | | 493 | | | | 12,273 | | | | - | | | | 1,050 | | | | 419 | | | | 14,235 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | 739 | | | | 739 | |
Loss | | | - | | | | - | | | | - | | | | - | | | | 970 | | | | 970 | |
Total | | $ | 180,416 | | | $ | 492,749 | | | $ | 2,635 | | | $ | 14,719 | | | $ | 288,514 | | | $ | 979,033 | |
| | Credit Risk Profile by Internally Assigned Grade | |
| | At December 31, 2021 | |
| | Commercial | | | Commercial Real Estate | | | Construction | | | Residential Real Estate | | | Consumer Installment and Other | | | Total | |
| | (In thousands) | |
Grade: | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 232,710 | | | $ | 521,300 | | | $ | 48 | | | $ | 16,874 | | | $ | 278,922 | | | $ | 1,049,854 | |
Substandard | | | 380 | | | | 13,961 | | | | - | | | | 1,259 | | | | 1,207 | | | | 16,807 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | 931 | | | | 931 | |
Loss | | | - | | | | - | | | | - | | | | - | | | | 534 | | | | 534 | |
Total | | $ | 233,090 | | | $ | 535,261 | | | $ | 48 | | | $ | 18,133 | | | $ | 281,594 | | | $ | 1,068,126 | |
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18-
The following tables summarize loans by delinquency and nonaccrual status:
| | Summary of Loans by Delinquency and Nonaccrual Status | |
| | At September 30, 2022 | |
| | Current and Accruing | | | 30-59 Days Past Due and Accruing | | | 60-89 Days Past Due and Accruing | | | Past Due 90 Days or More and Accruing | | | Nonaccrual | | | Total Loans | |
| | (In thousands) | |
Commercial | | $ | 179,272 | | | $ | 1,041 | | | $ | 53 | | | $ | - | | | $ | 50 | | | $ | 180,416 | |
Commercial real estate | | | 491,955 | | | | 367 | | | | 371 | | | | - | | | | 56 | | | | 492,749 | |
Construction | | | 2,635 | | | | - | | | | - | | | | - | | | | - | | | | 2,635 | |
Residential real estate | | | 14,425 | | | | 265 | | | | - | | | | - | | | | 29 | | | | 14,719 | |
Consumer installment and other | | | 282,954 | | | | 3,739 | | | | 990 | | | | 769 | | | | 62 | | | | 288,514 | |
Total | | $ | 971,241 | | | $ | 5,412 | | | $ | 1,414 | | | $ | 769 | | | $ | 197 | | | $ | 979,033 | |
| | Summary of Loans by Delinquency and Nonaccrual Status | |
| | At December 31, 2021 | |
| | Current and Accruing | | | 30-59 Days Past Due and Accruing | | | 60-89 Days Past Due and Accruing | | | Past Due 90 Days or More and Accruing | | | Nonaccrual | | | Total Loans | |
| | (In thousands) | |
Commercial | | $ | 232,444 | | | $ | 383 | | | $ | 263 | | | $ | - | | | $ | - | | | $ | 233,090 | |
Commercial real estate | | | 534,748 | | | | 223 | | | | - | | | | - | | | | 290 | | | | 535,261 | |
Construction | | | 48 | | | | - | | | | - | | | | - | | | | - | | | | 48 | |
Residential real estate | | | 17,855 | | | | 141 | | | | - | | | | - | | | | 137 | | | | 18,133 | |
Consumer installment and other | | | 276,793 | | | | 3,184 | | | | 1,013 | | | | 339 | | | | 265 | | | | 281,594 | |
Total | | $ | 1,061,888 | | | $ | 3,931 | | | $ | 1,276 | | | $ | 339 | | | $ | 692 | | | $ | 1,068,126 | |
There was no allowance for credit losses allocated to loans on nonaccrual status as of September 30, 2022 or December 31, 2021. There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2022 or December 31, 2021.
The following tables provide information on troubled debt restructurings (TDRs):
| | Troubled Debt Restructurings | |
| | At September 30, 2022 | |
| | | | | | | | | | | | | | Period-End | |
| | | | | | | | | | | | | | Individual | |
| | Number of | | | Pre-Modification | | | Period-End | | | Credit Loss | |
| | Contracts | | | Carrying Value | | | Carrying Value | | | Allowance | |
| | ($ in thousands) | |
Commercial real estate | | | 2 | | | $ | 2,785 | | | $ | 1,760 | | | $ | - | |
Total | | | 2 | | | $ | 2,785 | | | $ | 1,760 | | | $ | - | |
| | Troubled Debt Restructurings | |
| | At December 31, 2021 | |
| | | | | | | | | | | | | | Period-End | |
| | | | | | | | | | | | | | Individual | |
| | Number of | | | Pre-Modification | | | Period-End | | | Credit Loss | |
| | Contracts | | | Carrying Value | | | Carrying Value | | | Allowance | |
| | ($ in thousands) | |
Commercial real estate | | | 2 | | | $ | 2,785 | | | $ | 1,793 | | | $ | - | |
Residential real estate | | | 1 | | | | 241 | | | | 172 | | | | - | |
Total | | | 3 | | | $ | 3,026 | | | $ | 1,965 | | | $ | - | |
During the three and nine months ended September 30, 2022, the Company did not modify any loans that were considered TDRs. During the three and nine months ended September 30, 2021, the Company did not modify any loans that were considered TDRs for accounting purposes. Section 4013 of the CARES Act allowed certain loan modifications for borrowers impacted by the COVID-19 pandemic to be excluded from TDR accounting. This relief ended on January 1, 2022. During the three and nine months ended September 30, 2021, the Company modified loans under Section 4013 of the CARES Act, granting 90 day deferrals of principal and interest payments. As of September 30, 2021, loans deferred under the CARES Act that are not considered TDRs consisted of consumer loans totaling $1.0 million. There were no chargeoffs related to TDRs made during the three and nine months ended September 30, 2022 and September 30, 2021. During the three and nine months ended September 30, 2022 and September 30, 2021, no TDR loans defaulted within 12 months of the modification date. A troubled debt restructuring is considered to be in default when payments are 90 days or more past due.
No loans on nonaccrual status were included in TDRs of $1,760 thousand at September 30, 2022 and $1,965 thousand at December 31, 2021.
A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. Loans that were considered collateral dependent at September 30, 2022 included the following: six commercial real estate loans totaling $9.0 million secured by real property, $726 thousand of indirect consumer installment loans secured by personal property, one commercial loan with a balance of $204 thousand secured by business assets, and one residential real estate loans totaling $62 thousand secured by real property. There were no other collateral dependent loans at September 30, 2022. Loans that were considered collateral dependent at December 31, 2021 included the following: five commercial real estate loans totaling $8.4 million secured by real property, $394 thousand of indirect consumer installment loans secured by personal property, one commercial loan with a balance of $57 thousand secured by business assets, and three residential real estate loans totaling $420 thousand secured by real property. There were no other collateral dependent loans at December 31, 2021.
Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
| | At September 30, 2022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Line of | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | Total | | | Amortized | | | | | |
| | Prior | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | Term Loans | | | Cost Basis | | | Total | |
| | (In thousands) | |
Commercial loans by grade | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 33,823 | | | $ | 7,392 | | | $ | 13,442 | | | $ | 18,059 | | | $ | 62,055 | | | $ | 16,533 | | | $ | 151,304 | | | $ | 28,619 | | | $ | 179,923 | |
Substandard | | | 24 | | | | 15 | | | | - | | | | - | | | | - | | | | 204 | | | | 243 | | | | 250 | | | | 493 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 33,847 | | | $ | 7,407 | | | $ | 13,442 | | | $ | 18,059 | | | $ | 62,055 | | | $ | 16,737 | | | $ | 151,547 | | | $ | 28,869 | | | $ | 180,416 | |
| | At December 31, 2021 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Line of | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | Total | | | Amortized | | | | | |
| | Prior | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Term Loans | | | Cost Basis | | | Total | |
| | (In thousands) | |
Commercial loans by grade | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 34,784 | | | $ | 3,999 | | | $ | 8,690 | | | $ | 16,919 | | | $ | 30,694 | | | $ | 98,799 | | | $ | 193,885 | | | $ | 38,825 | | | $ | 232,710 | |
Substandard | | | 32 | | | | - | | | | - | | | | - | | | | - | | | | 57 | | | | 89 | | | | 291 | | | | 380 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 34,816 | | | $ | 3,999 | | | $ | 8,690 | | | $ | 16,919 | | | $ | 30,694 | | | $ | 98,856 | | | $ | 193,974 | | | $ | 39,116 | | | $ | 233,090 | |
| | At September 30, 2022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Line of | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | Total | | | Amortized | | | | | |
| | Prior | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | Term Loans | | | Cost Basis | | | Total | |
| | (In thousands) | |
Commercial real estate loans by grade | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 155,099 | | | $ | 59,294 | | | $ | 74,660 | | | $ | 74,703 | | | $ | 73,851 | | | $ | 42,869 | | | $ | 480,476 | | | $ | - | | | $ | 480,476 | |
Substandard | | | 8,354 | | | | - | | | | 832 | | | | 810 | | | | - | | | | 2,277 | | | | 12,273 | | | | - | | | | 12,273 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 163,453 | | | $ | 59,294 | | | $ | 75,492 | | | $ | 75,513 | | | $ | 73,851 | | | $ | 45,146 | | | $ | 492,749 | | | $ | - | | | $ | 492,749 | |
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| | At December 31, 2021 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Line of | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | Total | | | Amortized | | | | | |
| | Prior | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Term Loans | | | Cost Basis | | | Total | |
| | (In thousands) | |
Commercial real estate loans by grade | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 116,181 | | | $ | 87,921 | | | $ | 78,200 | | | $ | 78,647 | | | $ | 83,642 | | | $ | 76,709 | | | $ | 521,300 | | | $ | - | | | $ | 521,300 | |
Substandard | | | 10,993 | | | | - | | | | - | | | | 2,016 | | | | 823 | | | | 129 | | | | 13,961 | | | | - | | | | 13,961 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 127,174 | | | $ | 87,921 | | | $ | 78,200 | | | $ | 80,663 | | | $ | 84,465 | | | $ | 76,838 | | | $ | 535,261 | | | $ | - | | | $ | 535,261 | |
| | At September 30, 2022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Line of | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | Total | | | Amortized | | | | | |
| | Prior | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | Term Loans | | | Cost Basis | | | Total | |
| | (In thousands) | |
Residential real estate loans by grade | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 13,669 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 13,669 | | | $ | - | | | $ | 13,669 | |
Substandard | | | 1,050 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,050 | | | | - | | | | 1,050 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 14,719 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 14,719 | | | $ | - | | | $ | 14,719 | |
| | At December 31, 2021 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Line of | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | Total | | | Amortized | | | | | |
| | Prior | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Term Loans | | | Cost Basis | | | Total | |
| | (In thousands) | |
Residential Real Estate loans by grade | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 16,874 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 16,874 | | | $ | - | | | $ | 16,874 | |
Substandard | | | 1,259 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,259 | | | | - | | | | 1,259 | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 18,133 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 18,133 | | | $ | - | | | $ | 18,133 | |
| | At September 30, 2022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Line of | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | Total | | | Amortized | | | | | |
| | Prior | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | Term Loans | | | Cost Basis | | | Total | |
| | (In thousands) | |
Construction loans by grade | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 2,635 | | | $ | 2,635 | |
Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 2,635 | | | $ | 2,635 | |
| | At December 31, 2021 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Line of | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | Total | | | Amortized | | | | | |
| | Prior | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Term Loans | | | Cost Basis | | | Total | |
| | (In thousands) | |
Construction loans by grade | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 48 | | | $ | 48 | |
Substandard | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Doubtful | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 48 | | | $ | 48 | |
The Company considers the delinquency and nonaccrual status of the consumer loan portfolio and its impact on the allowance for credit losses. The following table presents the amortized cost in consumer installment and other loans based on delinquency and nonaccrual status:
| | At September 30, 2022 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Line of | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | Total | | | Amortized | | | | | |
| | Prior | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | Term Loans | | | Cost Basis | | | Total | |
| | (In thousands) | | | | | |
Consumer installment and other loans by delinquency and nonaccrual status | | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | $ | 8,034 | | | $ | 15,870 | | | $ | 25,405 | | | $ | 40,262 | | | $ | 84,632 | | | $ | 88,962 | | | $ | 263,165 | | | $ | 19,789 | | | $ | 282,954 | |
30-59 days past due | | | 131 | | | | 368 | | | | 446 | | | | 700 | | | | 1,386 | | | | 685 | | | | 3,716 | | | | 23 | | | | 3,739 | |
60-89 days past due | | | 15 | | | | 41 | | | | 67 | | | | 317 | | | | 331 | | | | 219 | | | | 990 | | | | - | | | | 990 | |
Past due 90 days or more | | | 31 | | | | 63 | | | | 134 | | | | 99 | | | | 174 | | | | 253 | | | | 754 | | | | 15 | | | | 769 | |
Nonaccrual | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 62 | | | | 62 | |
Total | | $ | 8,211 | | | $ | 16,342 | | | $ | 26,052 | | | $ | 41,378 | | | $ | 86,523 | | | $ | 90,119 | | | $ | 268,625 | | | $ | 19,889 | | | $ | 288,514 | |
| | At December 31, 2021 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Line of | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | Total | | | Amortized | | | | | |
| | Prior | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Term Loans | | | Cost Basis | | | Total | |
| | (In thousands) | | | | | |
Consumer installment and other loans by delinquency and nonaccrual status | | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | $ | 7,884 | | | $ | 10,162 | | | $ | 25,932 | | | $ | 37,999 | | | $ | 58,178 | | | $ | 113,899 | | | $ | 254,054 | | | $ | 22,739 | | | $ | 276,793 | |
30-59 days past due | | | 197 | | | | 139 | | | | 634 | | | | 504 | | | | 662 | | | | 1,034 | | | | 3,170 | | | | 14 | | | | 3,184 | |
60-89 days past due | | | 5 | | | | 20 | | | | 156 | | | | 150 | | | | 186 | | | | 408 | | | | 925 | | | | 88 | | | | 1,013 | |
Past due 90 days or more | | | 1 | | | | 17 | | | | 81 | | | | 62 | | | | 109 | | | | 40 | | | | 310 | | | | 29 | | | | 339 | |
Nonaccrual | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 265 | | | | 265 | |
Total | | $ | 8,087 | | | $ | 10,338 | | | $ | 26,803 | | | $ | 38,715 | | | $ | 59,135 | | | $ | 115,381 | | | $ | 258,459 | | | $ | 23,135 | | | $ | 281,594 | |
There were no loans held for sale at September 30, 2022 and December 31, 2021.
The Company held no other real estate owned (OREO) at September 30, 2022 and December 31, 2021. The amount of consumer mortgage loans outstanding secured by residential real estate properties for which formal foreclosure proceedings were in process was $62 thousand at September 30, 2022 and $247 thousand at December 31, 2021.
Note 5: Concentration of Credit Risk
Under the California Financial Code, credit extended to any one person owing to a commercial bank at any one time shall not exceed the following limitations as applicable to the Bank: (a) unsecured credits shall not exceed 15 percent of the sum of the common stock outstanding and unimpaired, perpetual preferred stock outstanding and unimpaired, capital surplus, undivided profits, and allowance for credit losses less intangible assets of the Bank, or (b) secured and unsecured credits in all shall not exceed 25 percent of the sum of the common stock outstanding and unimpaired, perpetual preferred stock outstanding and unimpaired, capital surplus, undivided profits, and allowance for credit losses less intangible assets of the Bank. At September 30, 2022, the Bank did not have credit extended to any one entity exceeding these limits. At September 30, 2022, the Bank had 29 lending relationships each with aggregate amounts of $5 million or more. The Company has significant credit arrangements that are secured by real estate collateral. In addition to real estate loans outstanding as disclosed in Note 4, the Company had loan commitments related to real estate loans of $33,342 thousand and $34,226 thousand at September 30, 2022 and December 31, 2021, respectively. The Company requires collateral on all real estate loans with loan-to-value ratios at origination generally no greater than 75% on commercial real estate loans and no greater than 80% on residential real estate loans. At September 30, 2022, the Bank held corporate bonds in 120 issuing entities that exceeded $5 million for each issuer.
Note 6: Other Assets and Other Liabilities
Other assets consisted of the following:
| | At September 30, | | | At December 31, | |
| | 2022 | | | 2021 | |
| | (In thousands) | |
Cost method equity investments: | | | | | | | | |
Federal Reserve Bank stock (1) | | $ | 14,069 | | | $ | 14,069 | |
Other investments | | | 158 | | | | 158 | |
Total cost method equity investments | | | 14,227 | | | | 14,227 | |
Life insurance cash surrender value | | | 63,111 | | | | 63,107 | |
Net deferred tax asset | | | 139,887 | | | | - | |
Right-of-use asset | | | 16,576 | | | | 17,980 | |
Limited partnership investments | | | 35,852 | | | | 37,145 | |
Interest receivable | | | 49,506 | | | | 35,521 | |
Prepaid assets | | | 4,476 | | | | 4,757 | |
Other assets | | | 17,239 | | | | 12,678 | |
Total other assets | | $ | 340,874 | | | $ | 185,415 | |
(1) A bank applying for membership in the Federal Reserve System is required to subscribe to stock in the Federal Reserve Bank (FRB) in its district in a sum equal to six percent of the bank’s paid-up capital stock and surplus. One-half of the amount of the bank's subscription shall be paid to the FRB and the remaining half will be subject to call when deemed necessary by the Board of Governors of the Federal Reserve System.
The Company owns 211 thousand shares of Visa Inc. class B common stock which have transfer restrictions; the carrying value is $-0- thousand. Visa Inc. disclosed a revised conversion rate applicable to its class B common stock in its Form 8-K dated July 6, 2022. The conversion rate of class B common stock into class A common stock, which is unrestricted and trades actively on the New York Stock Exchange, was reduced from 1.6181 to 1.6059 per share, effective as of June 29, 2022. Visa Inc. class A common stock had a closing price of $177.65 per share on September 30, 2022, the last day of stock market trading for the third quarter 2022. The ultimate value of the Company’s Visa Inc. class B shares is subject to the extent of Visa Inc.’s future litigation escrow fundings, the resulting conversion rate to class A common stock, and current and future trading restrictions on the class B common stock.
The Company invests in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for low-income housing tax credits. At September 30, 2022, these investments totaled $35,852 thousand and $25,017 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At December 31, 2021, these investments totaled $37,145 thousand and $26,485 thousand of this amount represents outstanding equity capital commitments that are included in other liabilities. At September 30, 2022, the $25,017 thousand of outstanding equity capital commitments are expected to be paid as follows: $2,519 thousand in the remainder of 2022, $12,200 thousand in 2023, $9,169 thousand in 2024, $244 thousand in 2025, $128 thousand in 2026, $207 thousand in 2027, and $550 thousand in 2028 or thereafter.
The amounts recognized in net income for these investments include:
| | For the Three Months Ended | | | For the Nine Months Ended | |
| | September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (In thousands) | |
Investment loss included in pre-tax income | | $ | 1,431 | | | $ | 620 | | | $ | 4,293 | | | $ | 1,820 | |
Tax credits recognized in provision for income taxes | | | 804 | | | | 200 | | | | 2,412 | | | | 650 | |
Other liabilities consisted of the following:
| | At September 30, | | | At December 31, | |
| | 2022 | | | 2021 | |
| | (In thousands) | |
Net deferred tax liability | | $ | - | | | $ | 2,501 | |
Operating lease liability | | | 16,576 | | | | 17,980 | |
Other liabilities | | | 49,319 | | | | 53,241 | |
Total other liabilities | | $ | 65,895 | | | $ | 73,722 | |
The Company has entered into leases for most branch locations and certain other offices that were classified as operating leases primarily with original terms of five years. Certain lease arrangements contain extension options, which can be exercised at the Company’s option, for one or more additional five year terms. Unexercised extension options are not considered reasonably certain of exercise and have not been included in the lease term used to determine the lease liability or right-of-use asset. The Company did not have any finance leases as of September 30, 2022.
As of September 30, 2022, the Company’s lease liability and right-of-use asset were $16,576 thousand. The weighted average remaining life of operating leases and weighted average discount rate used to determine operating lease liabilities were 3.8 years and 1.79%, respectively, at September 30, 2022. The Company did not have any material lease incentives, unamortized initial direct costs, prepaid lease expense, or accrued lease expense as of September 30, 2022.
Total lease costs during the three and nine months ended September 30, 2022, of $1,664 thousand and $4,934 thousand, respectively, were recorded within occupancy and equipment expense. Total lease costs during the three and nine months ended September 30, 2021, of $1,637 thousand and $4,949 thousand, respectively, were recorded within occupancy and equipment expense. The Company did not have any material short-term or variable leases costs or sublease income during the nine months ended September 30, 2022 and September 30, 2021.
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23-
The following table summarizes the remaining lease payments of operating lease liabilities:
| | Minimum future lease payments | |
| | At September 30, | |
| | 2022 | |
| | (In thousands) | |
The remainder of 2022 | | $ | 1,509 | |
2023 | | | 5,687 | |
2024 | | | 4,110 | |
2025 | | | 2,872 | |
2026 | | | 1,307 | |
Thereafter | | | 1,628 | |
Total minimum lease payments | | | 17,113 | |
Less: discount | | | (537 | ) |
Present value of lease liability | | $ | 16,576 | |
Note 7: Goodwill and Identifiable Intangible Assets
The Company has recorded goodwill and other identifiable intangibles associated with purchase business combinations. Goodwill is not amortized, but is evaluated for impairment at least annually. The Company did not recognize impairment during the three and nine months ended September 30, 2022 and year ended December 31, 2021. Identifiable intangibles are amortized to their estimated residual values over their expected useful lives. Such lives and residual values are also periodically reassessed to determine if any amortization period adjustments are indicated. During the three and nine months ended September 30, 2022 and year ended December 31, 2021 no such adjustments were recorded.
The carrying values of goodwill were:
| | At September 30, 2022 | | | At December 31, 2021 | |
| | (In thousands) | |
Goodwill | | $ | 121,673 | | | $ | 121,673 | |
The gross carrying amount of identifiable intangible assets and accumulated amortization was:
| | At September 30, 2022 | | | At December 31, 2021 | |
| | Gross | | | | | | | Gross | | | | | |
| | Carrying | | | Accumulated | | | Carrying | | | Accumulated | |
| | Amount | | | Amortization | | | Amount | | | Amortization | |
| | (In thousands) | |
Core deposit intangibles | | $ | 56,808 | | | $ | (56,164 | ) | | $ | 56,808 | | | $ | (55,973 | ) |
As of September 30, 2022, the current period and estimated future amortization expense for identifiable intangible assets, to be fully amortized in 2025, was:
| | Total | |
| | Core | |
| | Deposit | |
| | Intangibles | |
| | (In thousands) | |
For the nine months ended September 30, 2022 (actual) | | $ | 191 | |
The remainder of 2022 | | | 61 | |
2023 | | | 236 | |
2024 | | | 222 | |
2025 | | | 125 | |
Note 8: Deposits and Borrowed Funds
The following table provides additional detail regarding deposits.
| | Deposits | |
| | At September 30, | | | At December 31, | |
| | 2022 | | | 2021 | |
| | (In thousands) | |
Noninterest-bearing | | $ | 3,069,907 | | | $ | 3,069,080 | |
Interest-bearing: | | | | | | | | |
Transaction | | | 1,338,855 | | | | 1,260,869 | |
Savings | | | 1,949,711 | | | | 1,940,395 | |
Time deposits less than $100 thousand | | | 68,854 | | | | 72,527 | |
Time deposits $100 thousand through $250 thousand | | | 45,315 | | | | 47,666 | |
Time deposits more than $250 thousand | | | 22,614 | | | | 23,419 | |
Total deposits | | $ | 6,495,256 | | | $ | 6,413,956 | |
Demand deposit overdrafts of $871 thousand and $611 thousand were included as loan balances at September 30, 2022 and December 31, 2021, respectively. Interest expense for aggregate time deposits with individual account balances in excess of $100 thousand was $39 thousand and $120 thousand for the three and nine months ended September 30, 2022, respectively, and $58 thousand and $204 thousand for the three and nine months ended September 30, 2021, respectively.
The following table provides additional detail regarding short-term borrowed funds.
| | Repurchase Agreements (Sweep) Accounted for as Secured Borrowings | |
| | Remaining Contractual Maturity of the Agreements | |
| | Overnight and Continuous | |
| | At September 30, | | | At December 31, | |
| | 2022 | | | 2021 | |
Repurchase agreements: | | (In thousands) | |
Collateral securing borrowings: | | | | | | | | |
Agency residential MBS | | $ | 30,862 | | | $ | 42,295 | |
Corporate securities | | | 197,812 | | | | 254,005 | |
Total collateral carrying value | | $ | 228,674 | | | $ | 296,300 | |
Total short-term borrowed funds | | $ | 76,886 | | | $ | 146,246 | |
Note 9: Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Debt securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as other real estate owned, loans individually evaluated for credit loss, certain loans held for investment, debt securities held to maturity, and other assets. These nonrecurring fair value adjustments typically involve the lower-of-cost or fair-value accounting of individual assets.
In accordance with the Fair Value Measurement and Disclosure topic of the FASB Accounting Standards Codification, the Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in the principal market or most advantageous market for an asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance.
The Company groups its assets and liabilities measured at fair value into a three-level hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. When the valuation assumptions used to measure the fair value of the asset or liability are categorized within different levels of the fair value hierarchy, the asset or liability is categorized in its entirety within the lowest level of the hierarchy. These levels are:
Level 1 – Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Level 1 includes U.S. Treasury and equity securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 includes mutual funds, federal agency securities, mortgage-backed securities, corporate securities, commercial paper, collateralized loan obligations, municipal bonds and securities of U.S government entities and U.S. government sponsored entities.
Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
The Company relies on independent vendor pricing services to measure fair value for equity securities, debt securities available for sale and debt securities held to maturity. The Company employs three pricing services. To validate the pricing of these vendors, the Company compares vendors’ pricing for each of the securities for consistency; significant pricing differences, if any, are evaluated using all available independent quotes with the quote most closely reflecting the market generally used as the fair value estimate. In addition, the Company evaluates debt securities for credit losses on a quarterly basis. As with any valuation technique used to estimate fair value, changes in underlying assumptions used could significantly affect the results of current and future values. Accordingly, these fair value estimates may not be realized in an actual sale of the securities.
The Company regularly reviews the valuation techniques and assumptions used by its vendors and determines which valuation techniques are utilized based on observable market inputs for the type of securities being measured. The Company uses the information to determine the placement in the fair value hierarchy as level 1, 2 or 3.
Assets Recorded at Fair Value on a Recurring Basis
The tables below present assets measured at fair value on a recurring basis on the dates indicated.
| | At September 30, 2022 | |
| | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) (1) | |
| | (In thousands) | |
Debt securities available for sale: | | | | | | | | | | | | | | | | |
Agency residential MBS | | $ | 296,689 | | | $ | - | | | $ | 296,689 | | | $ | - | |
Securities of U.S. Government sponsored entities | | | 272,525 | | | | - | | | | 272,525 | | | | - | |
Obligations of states and political subdivisions | | | 80,987 | | | | - | | | | 80,987 | | | | - | |
Corporate securities | | | 2,138,508 | | | | - | | | | 2,138,508 | | | | - | |
Collateralized loan obligations | | | 1,587,622 | | | | - | | | | 1,587,622 | | | | - | |
Total debt securities available for sale | | $ | 4,376,331 | | | $ | - | | | $ | 4,376,331 | | | $ | - | |
(1) There were no transfers in to or out of level 3 during the nine months ended September 30, 2022.
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| | At December 31, 2021 | |
| | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) (1) | |
| | (In thousands) | |
Debt securities available for sale: | | | | | | | | | | | | | | | | |
Agency residential MBS | | $ | 411,726 | | | $ | - | | | $ | 411,726 | | | $ | - | |
Securities of U.S. Government entities | | | 119 | | | | - | | | | 119 | | | | - | |
Obligations of states and political subdivisions | | | 93,920 | | | | - | | | | 93,920 | | | | - | |
Corporate securities | | | 2,746,735 | | | | - | | | | 2,746,735 | | | | - | |
Collateralized loan obligations | | | 1,386,355 | | | | - | | | | 1,386,355 | | | | - | |
Total debt securities available for sale | | $ | 4,638,855 | | | $ | - | | | $ | 4,638,855 | | | $ | - | |
(1) There were no transfers in to or out of level 3 during the year ended December 31, 2021.
Assets Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower-of-cost or fair-value accounting of individual assets. For assets measured at fair value on a nonrecurring basis that were recorded in the balance sheet at September 30, 2022 and December 31, 2021, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end.
| | | | | | | | | | | | | | | | | | For the Nine | |
| | | | | | | | | | | | | | | | | | Months Ended | |
| | At September 30, 2022 | | | September 30, 2022 | |
| | Carrying Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Total Losses | |
| | (In thousands) | |
Loans: | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 225 | | | $ | - | | | $ | - | | | $ | 225 | | | $ | - | |
Total assets measured at fair value on a nonrecurring basis | | $ | 225 | | | $ | - | | | $ | - | | | $ | 225 | | | $ | - | |
| | | | | | | | | | | | | | | | | | For the | |
| | | | | | | | | | | | | | | | | | Year Ended | |
| | At December 31, 2021 | | | December 31, 2021 | |
| | Carrying Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Total Losses | |
| | (In thousands) | |
Loans: | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | | $ | 225 | | | $ | - | | | $ | - | | | $ | 225 | | | $ | - | |
Residential real estate | | | 172 | | | | - | | | | - | | | | 172 | | | | - | |
Total assets measured at fair value on a nonrecurring basis | | $ | 397 | | | $ | - | | | $ | - | | | $ | 397 | | | $ | - | |
Level 3 – Valuation is based upon present value of expected future cash flows, independent market prices, estimated liquidation values of loan collateral or appraised value of the collateral as determined by third-party independent appraisers, less 10% for selling costs, generally. The unobservable inputs and qualitative information about the unobservable inputs are not presented as the inputs were not developed by the Company.
Disclosures about Fair Value of Financial Instruments
The tables below are a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized, excluding financial instruments recorded at fair value on a recurring basis. The values assigned do not necessarily represent amounts which ultimately may be realized for assets or paid to settle liabilities. In addition, these values do not give effect to adjustments to fair value which may occur when financial instruments are sold or settled in larger quantities. The carrying amounts in the following tables are recorded in the balance sheet under the indicated captions.
The Company has not included assets and liabilities that are not financial instruments such as goodwill, long-term relationships with deposit, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes, and other assets and liabilities. The total estimated fair values do not represent, and should not be construed to represent, the underlying value of the Company.
| | At September 30, 2022 | |
| | Carrying Amount | | | Estimated Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2 ) | | | Significant Unobservable Inputs (Level 3 ) | |
Financial Assets: | | (In thousands) | |
Cash and due from banks | | $ | 413,665 | | | $ | 413,665 | | | $ | 413,665 | | | $ | - | | | $ | - | |
Debt securities held to maturity | | | 936,267 | | | | 878,462 | | | | - | | | | 878,462 | | | | - | |
Loans | | | 957,815 | | | | 911,315 | | | | - | | | | - | | | | 911,315 | |
| | | | | | | | | | | | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 6,495,256 | | | $ | 6,494,193 | | | $ | - | | | $ | 6,358,473 | | | $ | 135,720 | |
Short-term borrowed funds | | | 76,886 | | | | 76,886 | | | | - | | | | 76,886 | | | | - | |
| | At December 31, 2021 | |
| | Carrying Amount | | | Estimated Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2 ) | | | Significant Unobservable Inputs (Level 3 ) | |
Financial Assets: | | (In thousands) | |
Cash and due from banks | | $ | 1,132,085 | | | $ | 1,132,085 | | | $ | 1,132,085 | | | $ | - | | | $ | - | |
Debt securities held to maturity | | | 306,396 | | | | 312,562 | | | | - | | | | 312,562 | | | | - | |
Loans | | | 1,044,612 | | | | 1,059,072 | | | | - | | | | - | | | | 1,059,072 | |
| | | | | | | | | | | | | | | | | | | | |
Financial Liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 6,413,956 | | | $ | 6,413,244 | | | $ | - | | | $ | 6,270,344 | | | $ | 142,900 | |
Short-term borrowed funds | | | 146,246 | | | | 146,246 | | | | - | | | | 146,246 | | | | - | |
The majority of the Company’s standby letters of credit and other commitments to extend credit carry current market interest rates if converted to loans. No premium or discount was ascribed to these commitments because virtually all funding would be at current market rates.
Note 10: Commitments and Contingent Liabilities
Loan commitments are agreements to lend to a customer provided there is no violation of any condition established in the agreement. Certain agreements provide the Company the right to cancel or reduce its obligations to lend to customers. The portions that are not cancellable unconditionally by the Company aggregated $33,342 thousand at September 30, 2022. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future funding requirements. Loan commitments are subject to the Company’s normal credit policies and collateral requirements. Unfunded loan commitments were $217,756 thousand at September 30, 2022 and $233,850 thousand at December 31, 2021. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Standby letters of credit are primarily issued to support customers’ short-term financing requirements and must meet the Company’s normal credit policies and collateral requirements. Financial and performance standby letters of credit outstanding totaled $1,878 thousand at September 30, 2022 and $3,693 thousand at December 31, 2021. Commitments for commercial and similar letters of credit totaled $95 thousand at September 30, 2022 and December 31, 2021. The Company had $880 thousand in outstanding full recourse guarantees to a third party credit card company at September 30, 2022 and $580 thousand at December 31, 2021. At September 30, 2022, the Company had a reserve for unfunded commitments of $201 thousand for the above-mentioned loan commitments of $33,342 thousand that are not cancellable unconditionally by the Company. The Company’s reserve for unfunded commitments was $201 thousand at December 31, 2021. The reserve for unfunded commitments is included in other liabilities.
Due to the nature of its business, the Company is subject to various threatened or filed legal cases. Based on the advice of legal counsel, the Company does not expect such cases will have a material, adverse effect on its financial position or results of operations. Legal liabilities are accrued when obligations become probable and the amount can be reasonably estimated.
Note 11: Earnings Per Common Share
The table below shows earnings per common share and diluted earnings per common share. Basic earnings per common share are computed by dividing net income by the average number of common shares outstanding during the period. Diluted earnings per common share are computed by dividing net income by the average number of common shares outstanding during the period plus the impact of common stock equivalents.
| | For the Three Months | | | For the Nine Months | |
| | Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (In thousands, except per share data) | |
Net income applicable to common equity (numerator) | | $ | 34,760 | | | $ | 22,063 | | | $ | 82,690 | | | $ | 64,789 | |
Basic earnings per common share | | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding - basic (denominator) | | | 26,906 | | | | 26,866 | | | | 26,889 | | | | 26,851 | |
Basic earnings per common share | | $ | 1.29 | | | $ | 0.82 | | | $ | 3.08 | | | $ | 2.41 | |
Diluted earnings per common share | | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding - basic | | | 26,906 | | | | 26,866 | | | | 26,889 | | | | 26,851 | |
Add common stock equivalents for options | | | 10 | | | | 9 | | | | 12 | | | | 17 | |
Weighted average number of common shares outstanding - diluted (denominator) | | | 26,916 | | | | 26,875 | | | | 26,901 | | | | 26,868 | |
Diluted earnings per common share | | $ | 1.29 | | | $ | 0.82 | | | $ | 3.07 | | | $ | 2.41 | |
For the three and nine months ended September 30, 2022, options to purchase 812 thousand and 809 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per common share because the option exercise price exceeded the fair value of the stock such that their inclusion would have had an anti-dilutive effect.
For the three and nine months ended September 30, 2021, options to purchase 744 thousand and 618 thousand shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per common share because the option exercise price exceeded the fair value of the Company’s common stock such that their inclusion would have had an anti-dilutive effect.
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