UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
OR
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________to______________________
Commission file number:
STATE OF INCORPORATION: IRS EMPLOYER IDENTIFICATION NO:
Address of principal executive offices:
TELEPHONE:
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title of each class | Trading Symbols(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subjected to such filing requirements for the past 90 days. [X] [ ] NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [X] [ ] NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | Accelerated filer o |
| Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] YES [X]
The number of outstanding shares of Common Stock of Fidelity D & D Bancorp, Inc. on July 31, 2021, the latest practicable date, was
FIDELITY D & D BANCORP, INC.
Form 10-Q June 30, 2021
Index
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| Page | |
Item 1. |
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| Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020 | 3 |
| Consolidated Statements of Income for the three and six months ended June 30, 2021 and 2020 | 4 |
| 5 | |
| 6 | |
| Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 | 8 |
| 10 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 41 |
Item 3. | 63 | |
Item 4. | 68 | |
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Item 1. | 69 | |
Item 1A. | 69 | |
Item 2. | 69 | |
Item 3. | 69 | |
Item 4. | 69 | |
Item 5. | 69 | |
Item 6. | 70 | |
| 72 |
PART I – Financial Information
Item 1: Financial Statements
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Fidelity D & D Bancorp, Inc. and Subsidiary |
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Consolidated Balance Sheets |
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(Unaudited) |
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(dollars in thousands) |
| June 30, 2021 |
| December 31, 2020 | ||
Assets: |
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Cash and due from banks |
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Interest-bearing deposits with financial institutions |
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Total cash and cash equivalents |
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Available-for-sale securities |
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Restricted investments in bank stock |
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Loans and leases, net (allowance for loan losses of |
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$ |
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Loans held-for-sale (fair value $ |
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Foreclosed assets held-for-sale |
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Bank premises and equipment, net |
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Leased property under finance leases, net |
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Right-of-use assets |
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Cash surrender value of bank owned life insurance |
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Accrued interest receivable |
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Goodwill |
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Core deposit intangible, net |
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Other assets |
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Total assets |
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| $ | |
Liabilities: |
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Deposits: |
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Interest-bearing |
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| $ | |
Non-interest-bearing |
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Total deposits |
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Accrued interest payable and other liabilities |
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Finance lease obligation |
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Operating lease liabilities |
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FHLB advances |
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Total liabilities |
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Shareholders' equity: |
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Preferred stock authorized |
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Capital stock, par value ( |
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Retained earnings |
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Accumulated other comprehensive income |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
| $ | |
| $ | |
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See notes to unaudited consolidated financial statements |
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Fidelity D & D Bancorp, Inc. and Subsidiary |
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Consolidated Statements of Income |
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(Unaudited) |
| Three months ended |
| Six months ended | ||||||||
(dollars in thousands except per share data) |
| June 30, 2021 |
| June 30, 2020 |
| June 30, 2021 |
| June 30, 2020 | ||||
Interest income: |
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Loans and leases: |
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Taxable |
| $ | |
| $ | |
| $ | |
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Nontaxable |
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Interest-bearing deposits with financial institutions |
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Restricted investments in bank stock |
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Investment securities: |
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U.S. government agency and corporations |
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States and political subdivisions (nontaxable) |
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States and political subdivisions (taxable) |
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Other securities |
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Total interest income |
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Interest expense: |
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Deposits |
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Other short-term borrowings |
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FHLB advances |
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Total interest expense |
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Net interest income |
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Provision for loan losses |
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Net interest income after provision for loan losses |
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Other income: |
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Service charges on deposit accounts |
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Interchange fees |
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Service charges on loans |
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Fees from trust fiduciary activities |
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Fees from financial services |
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Fees and other revenue |
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Earnings on bank-owned life insurance |
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Gain (loss) on write-down, sale or disposal of: |
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Loans |
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Premises and equipment |
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Total other income |
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Other expenses: |
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Salaries and employee benefits |
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Premises and equipment |
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Data processing and communication |
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Advertising and marketing |
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Professional services |
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Merger-related expenses |
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Automated transaction processing |
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Office supplies and postage |
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PA shares tax |
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Loan collection |
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Other real estate owned |
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FDIC assessment |
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FHLB prepayment fee |
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Other |
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Total other expenses |
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Income before income taxes |
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Provision for income taxes |
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Net income |
| $ | |
| $ | |
| $ | |
| $ | |
Per share data: |
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Net income - basic |
| $ | |
| $ | |
| $ | |
| $ | |
Net income - diluted |
| $ | |
| $ | |
| $ | |
| $ | |
Dividends |
| $ | |
| $ | |
| $ | |
| $ | |
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See notes to unaudited consolidated financial statements |
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Fidelity D & D Bancorp, Inc. and Subsidiary |
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Consolidated Statements of Comprehensive Income | Three months ended |
| Six months ended | ||||||||
(Unaudited) | June 30, |
| June 30, | ||||||||
(dollars in thousands) | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
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Net income | $ | |
| $ | |
| $ | |
| $ | |
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Other comprehensive (loss) income, before tax: |
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Unrealized holding (loss) gain on available-for-sale debt securities |
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Reclassification adjustment for net gains realized in income |
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Net unrealized (loss) gain |
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Tax effect |
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Unrealized (loss) gain, net of tax |
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Other comprehensive (loss) gain, net of tax |
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Total comprehensive income, net of tax | $ | |
| $ | |
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See notes to unaudited consolidated financial statements |
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Fidelity D & D Bancorp, Inc. and Subsidiary |
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Consolidated Statements of Changes in Shareholders' Equity |
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For the six months ended June 30, 2021 and 2020 |
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| Accumulated |
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| other |
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| Capital stock |
| Retained |
| comprehensive |
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(dollars in thousands) | Shares |
| Amount |
| earnings |
| income (loss) |
| Total | |||||
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Balance, December 31, 2019 |
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| $ | |
| $ | |
| $ | |
| $ | |
Net income |
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Other comprehensive income |
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Issuance of common stock through Employee Stock Purchase Plan |
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Issuance of common stock from vested restricted share grants through stock compensation plans |
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Stock-based compensation expense |
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Issuance of common stock for acquisition |
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Cash dividends declared |
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Balance, June 30, 2020 |
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| $ | |
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Balance, December 31, 2020 |
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| $ | |
| $ | |
| $ | |
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Net income |
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Other comprehensive loss |
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Issuance of common stock through Employee Stock Purchase Plan |
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Issuance of common stock from vested restricted share grants through stock compensation plans |
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Issuance of common stock through exercise of SSARs |
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Stock-based compensation expense |
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Cash dividends declared |
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Balance, June 30, 2021 |
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See notes to unaudited consolidated financial statements |
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Fidelity D & D Bancorp, Inc. and Subsidiary |
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Consolidated Statements of Changes in Shareholders' Equity |
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For the three months ended June 30, 2021 and 2020 |
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(Unaudited) |
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| Accumulated |
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| other |
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| Capital stock |
| Retained |
| comprehensive |
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(dollars in thousands) | Shares |
| Amount |
| earnings |
| income (loss) |
| Total | |||||
Balance, March 31, 2020 |
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| $ | |
| $ | |
| $ | |
| $ | |
Net income |
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Other comprehensive income |
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Issuance of common stock from vested restricted share grants through stock compensation plans |
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Stock-based compensation expense |
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Issuance of common stock for acquisition |
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Cash dividends declared |
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Balance, June 30, 2020 |
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| $ | |
| $ | |
| $ | |
| $ | |
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Balance, March 31, 2021 |
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| $ | |
| $ | |
| $ | |
| $ | |
Net income |
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Other comprehensive income |
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Issuance of common stock from vested restricted share grants through stock compensation plans |
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Stock-based compensation expense |
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Cash dividends declared |
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Balance, June 30, 2021 |
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| $ | |
| $ | |
| $ | |
| $ | |
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See notes to unaudited consolidated financial statements |
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Fidelity D & D Bancorp, Inc. and Subsidiary |
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Consolidated Statements of Cash Flows |
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(Unaudited) |
| Six months ended June 30, | ||||
(dollars in thousands) |
| 2021 |
| 2020 | ||
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Cash flows from operating activities: |
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Net income |
| $ | |
| $ | |
Adjustments to reconcile net income to net cash provided by |
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operating activities: |
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Depreciation, amortization and accretion |
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Provision for loan losses |
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Deferred income tax expense (benefit) |
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Stock-based compensation expense |
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Excess tax benefit from exercise of SSARs |
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Proceeds from sale of loans held-for-sale |
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Originations of loans held-for-sale |
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Earnings from bank-owned life insurance |
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Net gain from sales of loans |
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Net gain from sale and write-down of foreclosed assets held-for-sale |
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Net loss from write-down and disposal of bank premises and equipment |
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Operating lease payments |
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Change in: |
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Accrued interest receivable |
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| ( |
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Other assets |
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Accrued interest payable and other liabilities |
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Net cash provided by (used in) operating activities |
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Cash flows from investing activities: |
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Available-for-sale securities: |
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|
|
|
|
|
Proceeds from sales |
|
|
|
|
| |
Proceeds from maturities, calls and principal pay-downs |
|
| |
|
| |
Purchases |
|
| ( |
|
| ( |
(Increase) decrease in restricted investments in bank stock |
|
| ( |
|
| |
Net increase in loans and leases |
|
| ( |
|
| ( |
Principal portion of lease payments received under direct finance leases |
|
| |
|
| |
Purchases of bank premises and equipment |
|
| ( |
|
| ( |
Net cash acquired in acquisition |
|
| - |
|
| |
Proceeds from sale of foreclosed assets held-for-sale |
|
| |
|
| |
Net cash used in investing activities |
|
| ( |
|
| ( |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
Net increase in deposits |
|
| |
|
| |
Net decrease in short-term borrowings |
|
| - |
|
| |
Repayment of FHLB advances |
|
| ( |
|
| ( |
Repayment of finance lease obligation |
|
| ( |
|
| ( |
Proceeds from employee stock purchase plan participants |
|
| |
|
| |
Dividends paid |
|
| ( |
|
| ( |
Cash paid in lieu of fractional shares |
|
| - |
|
| ( |
Net cash provided by financing activities |
|
| |
|
| |
Net increase in cash and cash equivalents |
|
| |
|
| |
Cash and cash equivalents, beginning |
|
| |
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents, ending |
| $ | |
| $ | |
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity D & D Bancorp, Inc. and Subsidiary |
|
|
|
|
|
|
Consolidated Statements of Cash Flows (continued) |
|
|
|
|
|
|
(Unaudited) |
| Six months ended June 30, | ||||
(dollars in thousands) |
| 2021 |
| 2020 | ||
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
Cash payments for: |
|
|
|
|
|
|
Interest |
| $ | |
| $ | |
Income tax |
|
| |
|
| |
Supplemental Disclosures of Non-cash Investing Activities: |
|
|
|
|
|
|
Net change in unrealized gains on available-for-sale securities |
|
| ( |
|
| |
Transfers from loans to foreclosed assets held-for-sale |
|
| |
|
| - |
Transfers from loans to loans held-for-sale, net |
|
| |
|
| |
Security settlement pending |
|
| |
|
| |
Repayment of FHLB advances payable |
|
| - |
|
| |
|
|
|
|
|
|
|
Transactions related to acquisition |
|
|
|
|
|
|
Increase in assets and liabilities: |
|
|
|
|
|
|
Securities |
| $ | - |
| $ | |
Loans |
|
| - |
|
| |
Restricted investments in bank stocks |
|
| - |
|
| |
Premises and equipment |
|
| - |
|
| |
Investment in bank-owned life insurance |
|
| - |
|
| |
Goodwill |
|
| - |
|
| |
Core deposit intangible asset |
|
| - |
|
| |
Right-of-use assets |
|
| - |
|
| |
Other assets |
|
| - |
|
| |
Non-interest-bearing deposits |
|
| - |
|
| ( |
Interest-bearing deposits |
|
| - |
|
| ( |
FHLB advances |
|
| - |
|
| ( |
Lease liabilities |
|
| - |
|
| ( |
Other liabilities |
|
| - |
|
| ( |
Common shares issued |
|
| - |
|
| ( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements |
|
|
|
|
|
|
|
|
|
|
|
|
|
FIDELITY D & D BANCORP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Fidelity D & D Bancorp, Inc. (“the Company”) is a bank holding company and the parent of The Fidelity Deposit and Discount Bank (the “Bank”). The Bank is a commercial bank and trust company chartered under the laws of the Commonwealth of Pennsylvania and a wholly-owned subsidiary of the Company. Having commenced operations in
On July 1, 2021, the Company completed its acquisition of Landmark Bancorp, Inc. (“Landmark”) and its wholly-owned subsidiary, Landmark Community Bank (“Landmark Bank”). At the time of the acquisition, Landmark merged with and into the Company with the Company surviving the merger. In addition, Landmark Bank merged with and into the Bank with the Bank as the surviving bank.
On May 1, 2020, the Company completed its acquisition of MNB Corporation (“MNB”) and its wholly-owned subsidiary, Merchants Bank of Bangor. At the time of the acquisition, MNB merged with and into the Company with the Company surviving the merger. In addition, Merchants Bank of Bangor merged with and into the Bank with the Bank as the surviving bank.
Further discussion of the acquisitions of MNB and Landmark can be found in Footnote 9, “Acquisition”.
The accompanying unaudited consolidated financial statements of the Company and the Bank have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to this Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial condition and results of operations for the periods have been included. All significant inter-company balances and transactions have been eliminated in consolidation.
For additional information and disclosures required under U.S. GAAP, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Management is responsible for the fairness, integrity and objectivity of the unaudited financial statements included in this report. Management prepared the unaudited financial statements in accordance with U.S. GAAP. In meeting its responsibility for the financial statements, management depends on the Company's accounting systems and related internal controls. These systems and controls are designed to provide reasonable but not absolute assurance that the financial records accurately reflect the transactions of the Company, the Company’s assets are safeguarded and that the financial statements present fairly the financial condition and results of operations of the Company.
In the opinion of management, the consolidated balance sheets as of June 30, 2021 and December 31, 2020 and the related consolidated statements of income, consolidated statements of comprehensive income and consolidated statements of changes in shareholders’ equity for the three and six months ended June 30, 2021 and 2020, and consolidated statements of cash flows for the six months ended June 30, 2021 and 2020 present fairly the financial condition and results of operations of the Company. All material adjustments required for a fair presentation have been made. These adjustments are of a normal recurring nature. Certain reclassifications have been made to the 2020 financial statements to conform to the 2021 presentation.
In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after June 30, 2021 through the date these consolidated financial statements were issued.
This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended
Critical accounting policies
recognize losses on loans, changes in economic conditions may necessitate revisions in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgment of information available to them at the time of their examination.
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (CECL). The amendments in this update require financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. Previously, when credit losses were measured under GAAP, an entity only considered past events and current conditions when measuring the incurred loss. The amendments in this update broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgement in determining the relevant information and estimation methods that are appropriate under the
circumstances. The amendments in this update also require that credit losses on available-for-sale debt securities be presented as an allowance for credit losses rather than a writedown.
In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, which clarifies that receivables arising from operating leases are not within the scope of Topic 326. In December 2018, regulators issued a final rule related to regulatory capital (Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations) which is intended to provide regulatory capital relief for entities transitioning to CECL. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments. As it relates to CECL, this guidance amends certain provisions contained in ASU 2016-13, particularly in regards to the inclusion of accrued interest in the definition of amortized cost, as well as clarifying that extension and renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract should be considered in the entity’s determination of expected credit losses.
The amendments in this update are effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019 for public companies. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption (modified-retrospective approach). Upon adoption, the change in this accounting guidance could result in an increase in the Company's allowance for loan losses and require the Company to record loan losses more rapidly. The Company has engaged the services of a qualified third-party service provider to assist management in estimating credit allowances under this standard and is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements. On October 16, 2019, the FASB decided to move forward with finalizing its proposal to defer the effective date for ASU 2016-13 for smaller reporting companies to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. Since the Company currently meets the SEC definition of a smaller reporting company, the delay will be applicable to the Company.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20). The amendments in this update change the disclosure requirements for defined benefit plans. The amendments in this update are effective for fiscal years ending after December 15, 2020 for the Company. An entity should apply the amendments in this update on a retrospective basis to all periods presented. The update was effective for the Company on January 1, 2021 and the amendments in this update did not have a material impact on the Company’s disclosures.
The following tables illustrate the changes in accumulated other comprehensive income by component and the details about the components of accumulated other comprehensive income as of and for the periods indicated:
|
|
|
|
|
|
As of and for the six months ended June 30, 2021 | ||
| Unrealized gains | |
| (losses) on | |
| available-for-sale | |
(dollars in thousands) | debt securities | |
Beginning balance | $ | |
|
|
|
Other comprehensive loss before reclassifications, net of tax |
| ( |
Amounts reclassified from accumulated other comprehensive income, net of tax |
|
|
Net current-period other comprehensive loss |
| ( |
Ending balance | $ | |
|
|
|
As of and for the three months ended June 30, 2021 | ||
| Unrealized gains | |
| (losses) on | |
| available-for-sale | |
(dollars in thousands) | debt securities | |
Beginning balance | $ | |
|
|
|
Other comprehensive income before reclassifications, net of tax |
| |
Amounts reclassified from accumulated other comprehensive income, net of tax |
|
|
Net current-period other comprehensive income |
| |
Ending balance | $ | |
|
|
|
|
|
|
As of and for the six months ended June 30, 2020 | ||
| Unrealized gains | |
| (losses) on | |
| available-for-sale | |
(dollars in thousands) | securities | |
Beginning balance | $ | |
|
|
|
Other comprehensive income before reclassifications, net of tax |
| |
Amounts reclassified from accumulated other comprehensive income, net of tax |
| - |
Net current-period other comprehensive income |
| |
Ending balance | $ | |
|
|
|
|
|
|
As of and for the three months ended June 30, 2020 |
|
|
| Unrealized gains | |
| (losses) on | |
| available-for-sale | |
(dollars in thousands) | securities | |
Beginning balance | $ | |
|
|
|
Other comprehensive income before reclassifications, net of tax |
| |
Amounts reclassified from accumulated other comprehensive income, net of tax |
|
|
Net current-period other comprehensive income |
| |
Ending balance | $ | |
|
|
|
Agency – Government-sponsored enterprise (GSE) and Mortgage-backed securities (MBS) - GSE residential
Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), FNMA, FHLB and Government National Mortgage Association (GNMA). These securities have interest rates that are fixed and adjustable, have varying short to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government.
Obligations of states and political subdivisions (municipal)
The municipal securities are bank qualified or bank eligible, general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities. Fair values of these securities are highly driven by interest rates. Management performs ongoing credit quality reviews on these issues.
The amortized cost and fair value of investment securities at June 30, 2021 and December 31, 2020 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross |
| Gross |
|
|
| ||
|
| Amortized |
| unrealized |
| unrealized |
| Fair | ||||
(dollars in thousands) |
| cost |
| gains |
| losses |
| value | ||||
June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Agency - GSE |
| $ | |
| $ | |
| $ | ( |
| $ | |
Obligations of states and political subdivisions |
|
| |
|
| |
|
| ( |
|
| |
MBS - GSE residential |
|
| |
|
| |
|
| ( |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale debt securities |
| $ | |
| $ | |
| $ | ( |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross |
| Gross |
|
|
| ||
|
| Amortized |
| unrealized |
| unrealized |
| Fair | ||||
(dollars in thousands) |
| cost |
| gains |
| losses |
| value | ||||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Agency - GSE |
| $ | |
| $ | |
| $ | ( |
| $ | |
Obligations of states and political subdivisions |
|
| |
|
| |
|
| ( |
|
| |
MBS - GSE residential |
|
| |
|
| |
|
| ( |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale debt securities |
| $ | |
| $ | |
| $ | ( |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of debt securities at June 30, 2021 by contractual maturity are summarized below:
|
|
|
|
|
|
|
|
|
|
| |||
|
| Amortized |
| Fair | ||
(dollars in thousands) |
| cost |
| value | ||
Available-for-sale securities: |
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
Due in one year or less |
| $ | |
| $ | |
Due after one year through five years |
|
| |
|
| |
Due after five years through ten years |
|
| |
|
| |
Due after ten years |
|
| |
|
| |
|
|
|
|
|
|
|
MBS - GSE residential |
|
| |
|
| |
|
|
|
|
|
|
|
Total available-for-sale debt securities |
| $ | |
| $ | |
Actual maturities will differ from contractual maturities because issuers and borrowers may have the right to call or repay obligations with or without call or prepayment penalty. Agency – GSE and municipal securities are included based on their original stated maturity. MBS – GSE residential, which are based on weighted-average lives and subject to monthly principal pay-downs, are listed in total. Most of the securities have fixed rates or have predetermined scheduled rate changes and many have call features that allow the issuer to call the security at par before its stated maturity without penalty.
The following table presents the fair value and gross unrealized losses of debt securities aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of June 30, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less than 12 months |
| More than 12 months |
| Total | ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||
(dollars in thousands) |
| value |
| losses |
| value |
| losses |
| value |
| losses | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency - GSE |
| $ | |
| $ | ( |
| $ | - |
| $ | - |
| $ | |
| $ | ( |
Obligations of states and political subdivisions |
|
| |
|
| ( |
|
| - |
|
| - |
|
| |
|
| ( |
MBS - GSE residential |
|
| |
|
| ( |
|
| - |
|
| - |
|
| |
|
| ( |
Total |
| $ | |
| $ | ( |
| $ | - |
| $ | - |
| $ | |
| $ | ( |
Number of securities |
|
| |
|
|
|
|
| - |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency - GSE |
| $ | |
| $ | ( |
| $ | - |
| $ | - |
| $ | |
| $ | ( |
Obligations of states and political subdivisions |
|
| |
|
| ( |
|
| - |
|
| - |
|
| |
|
| ( |
MBS - GSE residential |
|
| |
|
| ( |
|
| - |
|
| - |
|
| |
|
| ( |
Total |
| $ | |
| $ | ( |
| $ | - |
| $ | - |
| $ | |
| $ | ( |
Number of securities |
|
| |
|
|
|
|
| - |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had
Management believes the cause of the unrealized losses is related to changes in interest rates, instability in the capital markets or the limited trading activity due to illiquid conditions in the debt market and is not directly related to credit quality. Quarterly, management conducts a formal review of investment securities for the presence of other than temporary impairment (OTTI). The accounting guidance related to OTTI requires the Company to assess whether OTTI is present when the fair value of a debt security is less than its amortized cost as of the balance sheet date. Under those circumstances, OTTI is considered to have occurred if: (1) the entity has the intent to sell the security; (2) more likely than not the entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost. The accounting guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold be recognized in other comprehensive income (OCI). Non-credit-related OTTI is based on other factors affecting market value, including illiquidity.
The Company’s OTTI evaluation process also follows the guidance set forth in topics related to debt securities. The guidance set forth in the pronouncements require the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the ability and intent to hold investments until a recovery of fair value which may be to maturity and other factors when evaluating for the existence of OTTI. The guidance requires that credit-related OTTI be recognized as a realized loss through earnings when there has been an adverse change in the holder’s expected cash flows such that the full amount (principal and interest) will probably not be received. This requirement is consistent with the impairment model in the guidance for accounting for debt securities.
For all debt securities, as of June 30, 2021, the Company applied the criteria provided in the recognition and presentation guidance related to OTTI. That is, management has no intent to sell the securities and nor any conditions were identified by management that, more likely than not, would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there was no presence of OTTI in the Company’s security portfolio. In addition, management believes the change in fair value is attributable to changes in interest rates.
The classifications of loans and leases at June 30, 2021 and December 31, 2020 are summarized as follows:
|
|
|
|
|
|
|
|
| |||
(dollars in thousands) | June 30, 2021 |
| December 31, 2020 | ||
Commercial and industrial | $ | |
| $ | |
Commercial real estate: |
|
|
|
|
|
Non-owner occupied |
| |
|
| |
Owner occupied |
| |
|
| |
Construction |
| |
|
| |
Consumer: |
|
|
|
|
|
Home equity installment |
| |
|
| |
Home equity line of credit |
| |
|
| |
Auto loans |
| |
|
| |
Direct finance leases |
| |
|
| |
Other |
| |
|
| |
Residential: |
|
|
|
|
|
Real estate |
| |
|
| |
Construction |
| |
|
| |
Total |
| |
|
| |
Less: |
|
|
|
|
|
Allowance for loan losses |
| ( |
|
| ( |
Unearned lease revenue |
| ( |
|
| ( |
Loans and leases, net | $ | |
| $ | |
As of June 30, 2021, total loans of $
Commercial and industrial loan balances were $
Direct finance leases include the lease receivable and the guaranteed lease residual. Unearned lease revenue represents the difference between the lessor’s investment in the property and the gross investment in the lease. Unearned revenue is accrued over the life of the lease using the effective interest method.
The Company services real estate loans for investors in the secondary mortgage market which are not included in the accompanying consolidated balance sheets. The approximate unpaid principal balance of mortgages serviced amounted to $
Management is responsible for conducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis. Results of these reviews are presented to management and the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.
The global pandemic referred to as COVID-19 has created many barriers to loan production relative to the measures taken to slow the spread. These measures have put a large strain on a wide variety of industries within the global economy generally, and the Company’s market specifically. The overall economic impact and effect of the measures is yet to be fully understood as its effects will most likely lag timewise behind while businesses and governments inject resources to help lessen the impact. Despite efforts to lessen the impact, it is the Company’s current belief that the pandemic will temporarily, or in some cases permanently, damage our borrower’s ability to repay loans and comply with terms.
Paycheck Protection Program Loans
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP).
As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrowers’ PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP.
On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) was enacted, extending the authority to make PPP loans through May 31, 2021, revising certain PPP requirements, and permitting second draw PPP loans. On March 11, 2021, the American Rescue Plan Act of 2021 (American Rescue Plan Act) was enacted expanding eligibility for first and second draw PPP loans and revising the exclusions from payroll costs for purposes of loan forgiveness.
As of June 30, 2021, the Company had
Acquired loans
Acquired loans are marked to fair value on the date of acquisition. For detailed information on calculating the fair value of acquired loans, see Footnote 9, “Acquisition.”
The carryover of allowance for loan losses related to acquired loans is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. The allowance for loan losses on acquired loans reflects only those losses incurred after acquisition and represents the present value of cash flows expected at acquisition that is no longer expected to be collected.
The Company reported provisional fair value adjustments regarding the acquired MNB Corporation loan portfolio. Therefore, the Company did not record an allowance on the acquired non-purchased credit impaired loans. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan losses, the Company performs an analysis on acquired loans to determine whether there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in the calculation of the allowance for loan losses after the initial valuation and provide reserves accordingly.
Upon acquisition, in accordance with U.S. GAAP, the Company has individually determined whether each acquired loan is within the scope of ASC 310-30 deemed as purchased credit impaired (PCI). As part of this process, the Company’s senior management and other relevant individuals reviewed the seller’s loan portfolio on a loan-by-loan basis to determine if any loans met the two-part definition of an impaired loan as defined by ASC 310-30: 1) Credit deterioration on the loan from its inception until the acquisition date, and 2) It is probable that not all contractual cash flows will be collected on the loan.
With regards to ASC 310-30 loans, for external disclosure purposes, the aggregate contractual cash flows less the aggregate expected cash flows result in a credit related non-accretable yield amount. The aggregate expected cash flows less the acquisition date fair value result in an accretable yield amount. The accretable yield reflects the contractual cash flows management expects to collect above the loan's acquisition date fair value and will be recognized over the life of the loan on a level-yield basis as a component of interest income.
Over the life of the acquired ASC 310-30 loan, the Company continues to estimate cash flows expected to be collected. Decreases in expected cash flows, other than from prepayments or rate adjustments, are recognized as impairments through a charge to the provision for credit losses resulting in an increase in the allowance for credit losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized after acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized on a prospective basis over the loan’s remaining life.
Acquired ASC 310-30 loans that met the criteria for non-accrual of interest prior to acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Company can reasonably estimate the timing and amount of expected cash flows on such loans. Accordingly, the Company does not consider acquired contractually delinquent loans to be non-accruing and continues to recognize accretable yield on these loans which is recognized as interest income on a level yield method over the life of the loan.
Acquired ASC 310-20 loans, which are loans that did not meet the criteria above, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. For these pools, the Company used certain loan information, including outstanding principal balance, estimated expected losses, weighted average maturity, weighted average margin,
and weighted average interest rate along with estimated prepayment rates, expected lifetime losses, and environment factors to estimate the expected cash flow for each loan pool.
Within the ASC 310-20 loans, the Company identified certain loans that have higher risk due to the COVID-19 pandemic. Although performing at the time of acquisition and likely will continue making payments in accordance with contractual terms, management elected a higher credit adjustment on these loans to reflect the greater inherent risk that the borrower will default on payments. These higher risk factors include loans that requested forbearance consistent with FIL-17-2020 FDIC Statement on Financial Institutions Working with Customers Affected by the Coronavirus and Regulatory and Supervisory Assistance, loans that were in industries determined to be at greater risk to economic disruption due to COVID-19, and loans that had a prior history of delinquency greater than 60 days at any point in the lifetime of the loan.
The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-30. Loans accounted for under ASC 310-20 are not included in this table.
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|
|
| For the six months ended | ||||
(dollars in thousands) | June 30, 2021 |
| June 30, 2020 | ||
Balance at beginning of period | $ | |
| $ |
|
Accretable yield on acquired loans |
| - |
|
| |
Reclassification from non-accretable difference |
| |
|
| - |
Accretion of accretable yield |
| ( |
|
| ( |
Balance at end of period | $ | |
| $ | |
|
|
|
|
|
|
During the first and second quarters of 2021, management performed an analysis of all loans accounted for under ASC 310-30.
Cash flows expected to be collected on acquired loans are estimated quarterly by incorporating several key assumptions. These key assumptions include probability of default and the number of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Improved cash flow expectations for loans or pools are recorded first as a reversal of previously recorded impairment, if any, and then as an increase in prospective yield when all previously recorded impairment has been recaptured.
Non-accrual loans
Non-accrual loans, segregated by class, at June 30, 2021 and December 31, 2020, were as follows:
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| ||||
(dollars in thousands) | June 30, 2021 |
| December 31, 2020 | ||
Commercial and industrial | $ | |
| $ | |
Commercial real estate: |
|
|
|
|
|
Non-owner occupied |
| |
|
| |
Owner occupied |
| |
|
| |
Consumer: |
|
|
|
|
|
Home equity installment |
| |
|
| |
Home equity line of credit |
| |
|
| |
Auto loans |
| |
|
| |
Residential: |
|
|
|
|
|
Real estate |
| |
|
| |
Total | $ | |
| $ | |
The table above excludes $
The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan. C&I and CRE loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection. Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at 90 days past due as to principal and interest and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest. The Company considers all non-accrual loans to be impaired loans.
Troubled Debt Restructuring (TDR)
A modification of a loan constitutes a troubled debt restructuring (TDR) when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company considers all TDRs to be impaired loans. The Company typically considers the following concessions when modifying a loan, which may include lowering interest rates below the market rate, temporary interest-only payment periods, term extensions at interest rates lower than the current market rate for new debt with similar risk and/or converting revolving credit lines to term loans. The Company typically does not forgive principal when granting a TDR modification.
Consistent with Section 4013 and the Revised Statement of Section 4013 of the CARES Act, specifically “Temporary Relief From Troubled Debt Restructurings”, the Company approved requests by borrowers to modify loan terms and defer principal and/or interest payment for loans. U.S. GAAP permits the suspension of TDR determination defined under ASC 310-40 provided that such modifications are made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief. This includes short-term (i.e. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current for purposes of Section 4013 are those that are less than 30 days past due on their contractual payments at the time the modification program is implemented.
Beginning the week of March 16, 2020, the Company began receiving requests for temporary modifications to the repayment structure for borrower loans. Modification terms included interest only or full payment deferral for up to 6 months. As of June 30, 2021, the Company had
There were
Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. There were no loans modified as a TDR within the previous twelve months that subsequently defaulted (i.e. 90 days or more past due following a modification) during the three and six months ended June 30, 2021 and 2020.
The allowance for loan losses (allowance) may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price. If the loan is collateral dependent, the estimated fair value of the collateral is used to establish the allowance.
As of June 30, 2021 and 2020, the balance of outstanding TDRs was $
Past due loans
Loans are considered past due when the contractual principal and/or interest is not received by the due date. For loans reported 30-59 days past due, certain categories of loans are reported past due as and when the loan is in arrears for two payments or billing cycles. An aging analysis of past due loans, segregated by class of loans, as of the period indicated is as follows (dollars in thousands):
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| Recorded | |
|
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| Past due |
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| investment past | |||
| 30 - 59 Days |
| 60 - 89 Days |
| 90 days |
| Total |
|
|
|
| Total |
| due ≥ 90 days | ||||||
June 30, 2021 | past due |
| past due |
| or more (1) |
| past due |
| Current |
| loans (3) |
| and accruing | |||||||
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
| |
|
| - |
|
| |
|
| |
|
| |
|
| |
|
| - |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied |
| |
|
| - |
|
| |
|
| |
|
| |
|
| |
|
| - |
Owner occupied |
| |
|
| - |
|
| |
|
| |
|
| |
|
| |
|
| - |
Construction |
| - |
|
| - |
|
| - |
|
| - |
|
| |
|
| |
|
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity installment |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| - |
Home equity line of credit |
| - |
|
| - |
|
| |
|
| |
|
| |
|
| |
|
| - |
Auto loans |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| - |
Direct finance leases |
| |
|
| - |
|
| |
|
| |
|
| |
|
| | (2) |
| |
Other |
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
|
| - |
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
| - |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| - |
Construction |
| - |
|
| - |
|
| - |
|
| - |
|
| |
|
| |
|
| - |
Total | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
(1) Includes non-accrual loans. (2) Net of unearned lease revenue of $
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| Recorded | |
|
|
|
|
|
|
| Past due |
|
|
|
|
|
|
|
|
| investment past | |||
| 30 - 59 Days |
| 60 - 89 Days |
| 90 days |
| Total |
|
|
|
| Total |
| due ≥ 90 days | ||||||
December 31, 2020 | past due |
| past due |
| or more (1) |
| past due |
| Current |
| loans (3) |
| and accruing | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial | $ | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| - |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied |
| |
|
| - |
|
| |
|
| |
|
| |
|
| |
|
| - |
Owner occupied |
| |
|
| - |
|
| |
|
| |
|
| |
|
| |
|
| - |
Construction |
| - |
|
| - |
|
| - |
|
| - |
|
| |
|
| |
|
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity installment |
| |
|
| - |
|
| |
|
| |
|
| |
|
| |
|
| - |
Home equity line of credit |
| |
|
| - |
|
| |
|
| |
|
| |
|
| |
|
| - |
Auto loans |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| - |
Direct finance leases |
| |
|
| - |
|
| |
|
| |
|
| |
|
| | (2) |
| |
Other |
| |
|
| - |
|
| - |
|
| |
|
| |
|
| |
|
| - |
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
| - |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| - |
Construction |
| - |
|
| - |
|
| - |
|
| - |
|
| |
|
| |
|
| - |
Total | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
(1) Includes non-accrual loans. (2) Net of unearned lease revenue of $
Impaired loans
|
|
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|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Recorded |
| Recorded |
|
|
|
|
|
| ||
| Unpaid |
| investment |
| investment |
| Total |
|
|
| ||||
| principal |
| with |
| with no |
| recorded |
| Related | |||||
(dollars in thousands) | balance |
| allowance |
| allowance |
| investment |
| allowance | |||||
June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied |
| |
|
| |
|
| |
|
| |
|
| |
Owner occupied |
| |
|
| |
|
| |
|
| |
|
| |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity installment |
| |
|
| - |
|
| |
|
| |
|
| - |
Home equity line of credit |
| |
|
| - |
|
| |
|
| |
|
| - |
Auto loans |
| |
|
| |
|
| |
|
| |
|
| |
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
| |
|
| |
|
| |
|
| |
|
| |
Total | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Recorded |
| Recorded |
|
|
|
|
|
| ||
| Unpaid |
| investment |
| investment |
| Total |
|
|
| ||||
| principal |
| with |
| with no |
| recorded |
| Related | |||||
(dollars in thousands) | balance |
| allowance |
| allowance |
| investment |
| allowance | |||||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied |
| |
|
| |
|
| |
|
| |
|
| |
Owner occupied |
| |
|
| |
|
| |
|
| |
|
| |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity installment |
| |
|
| - |
|
| |
|
| |
|
| - |
Home equity line of credit |
| |
|
| |
|
| |
|
| |
|
| |
Auto loans |
| |
|
| |
|
| - |
|
| |
|
| |
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
| |
|
| |
|
| |
|
| |
|
| |
Total | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
At June 30, 2021, impaired loans totaled $
A loan is considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting payments when due. The significance of payment delays and/or shortfalls is determined on a case-by-case basis. All circumstances surrounding the loan are considered. Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record. Impairment is measured on these loans on a loan-by-loan basis. Impaired loans include non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors.
The following table presents the average recorded investments in impaired loans and related amount of interest income recognized during the periods indicated below. The average balances are calculated based on the quarter-end balances of impaired loans. Payments received from non-accruing impaired loans are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts. Any excess is treated as a recovery of interest income. Payments received from accruing impaired loans are applied to principal and interest, as contractually agreed upon.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the six months ended | ||||||||||||||||
| June 30, 2021 |
| June 30, 2020 | ||||||||||||||
|
|
|
|
|
|
| Cash basis |
|
|
|
|
|
|
| Cash basis | ||
| Average |
| Interest |
| interest |
| Average |
| Interest |
| interest | ||||||
| recorded |
| income |
| income |
| recorded |
| income |
| income | ||||||
(dollars in thousands) | investment |
| recognized |
| recognized |
| investment |
| recognized |
| recognized | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial | $ | |
| $ | |
| $ |
|
| $ | |
| $ |
|
| $ |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied |
| |
|
| |
|
|
|
|
| |
|
| |
|
|
|
Owner occupied |
| |
|
| |
|
|
|
|
| |
|
| |
|
|
|
Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity installment |
| |
|
| |
|
|
|
|
| |
|
|
|
|
|
|
Home equity line of credit |
| |
|
| |
|
|
|
|
| |
|
|
|
|
|
|
Auto loans |
| |
|
|
|
|
|
|
|
| |
|
| |
|
|
|
Direct finance leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | $ | |
| $ | |
| $ |
|
| $ | |
| $ | |
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended | ||||||||||||||||
| June 30, 2021 |
| June 30, 2020 | ||||||||||||||
|
|
|
|
|
|
| Cash basis |
|
|
|
|
|
|
| Cash basis | ||
| Average |
| Interest |
| interest |
| Average |
| Interest |
| interest | ||||||
| recorded |
| income |
| income |
| recorded |
| income |
| income | ||||||
(dollars in thousands) | investment |
| recognized |
| recognized |
| investment |
| recognized |
| recognized | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial | $ | |
| $ | |
| $ | - |
| $ | |
| $ | - |
| $ | - |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied |
| |
|
| |
|
| - |
|
| |
|
| |
|
| - |
Owner occupied |
| |
|
| |
|
| - |
|
| |
|
| |
|
| - |
Construction |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity installment |
| |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
Home equity line of credit |
| |
|
| |
|
| - |
|
| |
|
| - |
|
| - |
Auto loans |
| |
|
| - |
|
| - |
|
| |
|
| |
|
| - |
Direct finance leases |
| - |
|
| - |
|
|
|
|
| - |
|
| - |
|
| - |
Other |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
| |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
Construction |
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
Total | $ | |
| $ | |
| $ | - |
| $ | |
| $ | |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Indicators
Commercial and industrial and commercial real estate
The Company utilizes a loan grading system and assigns a credit risk grade to its loans in the C&I and CRE portfolios. The grading system provides a means to measure portfolio quality and aids in the monitoring of the credit quality of the overall loan portfolio. The credit risk grades are arrived at using a risk rating matrix to assign a grade to each of the loans in the C&I and CRE portfolios.
The following is a description of each risk rating category the Company uses to classify each of its C&I and CRE loans:
Pass
Loans in this category have an acceptable level of risk and are graded in a range of one to five. Secured loans generally have good collateral coverage. Current financial statements reflect acceptable balance sheet ratios, sales and earnings trends. Management is competent, and a reasonable succession plan is evident. Payment experience on the loans has been good with minor or no delinquency experience. Loans with a grade of one are of the highest quality in the range. Those graded five are of marginally acceptable quality.
Special Mention
Loans in this category are graded a six and may be protected but are potentially weak. They constitute a credit risk to the Company but have not yet reached the point of adverse classification. Some of the following conditions may exist: little or no collateral coverage; lack of current financial information; delinquency problems; highly leveraged; available financial information reflects poor balance sheet ratios and profit and loss statements reflect uncertain trends; and document exceptions. Cash flow may not be sufficient to support total debt service requirements.
Substandard
Loans in this category are graded a seven and have a well-defined weakness which may jeopardize the ultimate collectability of the debt. The collateral pledged may be lacking in quality or quantity. Financial statements may indicate insufficient cash flow to service the debt; and/or do not reflect a sound net worth. The payment history indicates chronic delinquency problems. Management is weak. There is a distinct possibility that the Company may sustain a loss. All loans on non-accrual are rated substandard. Other loans that are included in the substandard category can be accruing, as well as loans that are current or past due. Loans 90 days or more past due, unless otherwise fully supported, are classified substandard. Also, borrowers that are bankrupt or have loans categorized as TDRs can be graded substandard.
Doubtful
Loans in this category are graded an eight and have a better than 50% possibility of the Company sustaining a loss, but the loss cannot be determined because of specific reasonable factors which may strengthen credit in the near-term. Many of the weaknesses present in a substandard loan exist. Liquidation of collateral, if any, is likely. Any loan graded lower than an eight is considered to be uncollectible and charged-off.
Consumer and residential
The consumer and residential loan segments are regarded as homogeneous loan pools and as such are not risk rated. For these portfolios, the Company utilizes payment activity and history in assessing performance. Non-performing loans are comprised of non-accrual loans and loans past due 90 days or more and accruing. All loans not classified as non-performing are considered performing.
The following table presents loans including $
Credit risk profile by creditworthiness category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2021 | |||||||||||||
(dollars in thousands) | Pass |
| Special mention |
| Substandard |
| Doubtful |
| Total | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial | $ | |
|
| |
|
| |
| $ |
|
| $ | |
Commercial real estate - non-owner occupied |
| |
|
| |
|
| |
|
|
|
|
| |
Commercial real estate - owner occupied |
| |
|
| |
|
| |
|
|
|
|
| |
Commercial real estate - construction |
| |
|
| - |
|
| - |
|
|
|
|
| |
Total commercial | $ | |
| $ | |
| $ | |
| $ |
|
| $ | |
Consumer & Mortgage lending credit exposure
Credit risk profile based on payment activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
| June 30, 2021 | |||||||||||
(dollars in thousands) |
|
|
|
| Performing |
| Non-performing |
| Total | |||||
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity installment |
|
|
|
|
|
| $ | |
|
| |
| $ | |
Home equity line of credit |
|
|
|
|
|
|
| |
|
| |
|
| |
Auto loans |
|
|
|
|
|
|
| |
|
| |
|
| |
Direct finance leases (1) |
|
|
|
|
|
|
| |
|
| |
|
| |
Other |
|
|
|
|
|
|
| |
|
| - |
|
| |
Total consumer |
|
|
|
|
|
|
| |
|
| |
|
| |
Residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
|
|
|
|
| |
|
| |
|
| |
Construction |
|
|
|
|
|
|
| |
|
| - |
|
| |
Total residential |
|
|
|
|
|
|
| |
|
| |
|
| |
Total consumer & residential |
|
|
|
|
|
| $ | |
| $ | |
| $ | |
(1)Net of unearned lease revenue of $
Commercial credit exposure
Credit risk profile by creditworthiness category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2020 | |||||||||||||
(dollars in thousands) | Pass |
| Special mention |
| Substandard |
| Doubtful |
| Total | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
Commercial real estate - non-owner occupied |
| |
|
| |
|
| |
|
| - |
|
| |
Commercial real estate - owner occupied |
| |
|
| |
|
| |
|
| - |
|
| |
Commercial real estate - construction |
| |
|
| |
|
| |
|
| - |
|
| |
Total commercial | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
Consumer & Mortgage lending credit exposure
Credit risk profile based on payment activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2020 | |||||||
(dollars in thousands) |
|
|
|
|
|
| Performing |
| Non-performing |
| Total | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity installment |
|
|
|
|
|
| $ | |
| $ | |
| $ | |
Home equity line of credit |
|
|
|
|
|
|
| |
|
| |
|
| |
Auto loans |
|
|
|
|
|
|
| |
|
| |
|
| |
Direct finance leases (2) |
|
|
|
|
|
|
| |
|
| |
|
| |
Other |
|
|
|
|
|
|
| |
|
| - |
|
| |
Total consumer |
|
|
|
|
|
|
| |
|
| |
|
| |
Residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
|
|
|
|
| |
|
| |
|
| |
Construction |
|
|
|
|
|
|
| |
|
| - |
|
| |
Total residential |
|
|
|
|
|
|
| |
|
| |
|
| |
Total consumer & residential |
|
|
|
|
|
| $ | |
| $ | |
| $ | |
(2)Net of unearned lease revenue of $
Allowance for loan losses
Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. Management’s judgment is based on the evaluation of individual loans, experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. Loan losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received.
Management applies two primary components during the loan review process to determine proper allowance levels. The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated. The methodology to analyze the adequacy of the allowance for loan losses is as follows:
identification of specific impaired loans by loan category;
identification of specific loans that are not impaired, but have an identified potential for loss;
calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;
determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;
application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation;
application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio.
Qualitative factor adjustments include:
olevels of and trends in delinquencies and non-accrual loans;
olevels of and trends in charge-offs and recoveries;
otrends in volume and terms of loans;
ochanges in risk selection and underwriting standards;
ochanges in lending policies and legal and regulatory requirements;
oexperience, ability and depth of lending management;
onational and local economic trends and conditions; and
ochanges in credit concentrations.
Allocation of the allowance for different categories of loans is based on the methodology as explained above. A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of
individual C&I and CRE loans. C&I and CRE loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The credit risk grades for the C&I and CRE loan portfolios are considered in the reserve methodology and loss factors are applied based upon the credit risk grades. The loss factors applied are based upon the Company’s historical experience as well as what we believe to be best practices and common industry standards. Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs. The changes in allocations in the C&I and CRE loan portfolio from period to period are based upon the credit risk grading system and from periodic reviews of the loan portfolio. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies.
Each quarter, management performs an assessment of the allowance. The Company’s Special Assets Committee meets quarterly, and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due in payment. The assessment process also includes the review of all loans on a non-accruing basis as well as a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating.
The Company’s policy is to charge-off unsecured consumer loans when they become 90 days or more past due as to principal and interest. In the other portfolio segments, amounts are charged-off at the point in time when the Company deems the balance, or a portion thereof, to be uncollectible.
Information related to the change in the allowance and the Company’s recorded investment in loans by portfolio segment as of the period indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the six months ended June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Commercial & |
| Commercial |
|
|
|
| Residential |
|
|
|
|
|
| |||
(dollars in thousands) | industrial |
| real estate |
| Consumer |
| real estate |
| Unallocated |
| Total | ||||||
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Charge-offs |
| ( |
|
| ( |
|
| ( |
|
| ( |
|
| - |
|
| ( |
Recoveries |
| |
|
| |
|
| |
|
| - |
|
| - |
|
| |
Provision |
| |
|
| |
|
| ( |
|
| |
|
| |
|
| |
Ending balance | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Ending balance: individually evaluated for impairment | $ | |
| $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
Ending balance: collectively evaluated for impairment | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Loans Receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance (2) | $ | |
| $ | |
| $ | | (1) | $ | |
| $ | - |
| $ | |
Ending balance: individually evaluated for impairment | $ | |
| $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
Ending balance: collectively evaluated for impairment | $ | |
| $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
(1) Net of unearned lease revenue of $
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Commercial & |
| Commercial |
|
|
|
| Residential |
|
|
|
|
|
| |||
(dollars in thousands) | industrial |
| real estate |
| Consumer |
| real estate |
| Unallocated |
| Total | ||||||
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Charge-offs |
| ( |
|
| ( |
|
| ( |
|
| - |
|
| - |
|
| ( |
Recoveries |
| |
|
| |
|
| |
|
| - |
|
| - |
|
| |
Provision |
| |
|
| ( |
|
| |
|
| |
|
| |
|
| |
Ending balance | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial & |
| Commercial |
|
|
| Residential |
|
|
|
|
|
| ||||
(dollars in thousands) | industrial |
| real estate |
| Consumer |
| real estate |
| Unallocated |
| Total | ||||||
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Charge-offs |
| ( |
|
| ( |
|
| ( |
|
| ( |
|
| - |
|
| ( |
Recoveries |
| |
|
| |
|
| |
|
| |
|
| - |
|
| |
Provision |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Ending balance | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Ending balance: individually evaluated for impairment | $ | |
| $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
Ending balance: collectively evaluated for impairment | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Loans Receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance (2) | $ | |
| $ | |
| $ | | (1) | $ | |
| $ | - |
| $ | |
Ending balance: individually evaluated for impairment | $ | |
| $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
Ending balance: collectively evaluated for impairment | $ | |
| $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
(1) Net of unearned lease revenue of $
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the six months ended June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Commercial & |
| Commercial |
|
|
|
| Residential |
|
|
|
|
|
| |||
(dollars in thousands) | industrial |
| real estate |
| Consumer |
| real estate |
| Unallocated |
| Total | ||||||
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Charge-offs |
| ( |
|
| ( |
|
| ( |
|
| ( |
|
| - |
|
| ( |
Recoveries |
| |
|
| |
|
| |
|
| |
|
| - |
|
| |
Provision |
| |
|
| |
|
| |
|
| |
|
| ( |
|
| |
Ending balance | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
| Commercial & |
| Commercial |
|
|
|
| Residential |
|
|
|
|
|
| |||
(dollars in thousands) | industrial |
| real estate |
| Consumer |
| real estate |
| Unallocated |
| Total | ||||||
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Charge-offs |
| ( |
|
| - |
|
| ( |
|
| ( |
|
| - |
|
| ( |
Recoveries |
| |
|
| |
|
| |
|
| - |
|
| - |
|
| |
Provision |
| |
|
| |
|
| |
|
| |
|
| ( |
|
| |
Ending balance | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Direct finance leases
On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), and subsequent related updates to revise the accounting for leases. Lessor accounting was largely unchanged as a result of the standard. Additional disclosures required under the standard are included in this section and in Footnote 12, “Leases”.
The Company originates direct finance leases through
The undiscounted cash flows to be received on an annual basis for the direct finance leases are as follows:
|
|
|
|
|
|
(dollars in thousands) | Amount | |
|
|
|
2021 | $ | |
2022 |
| |
2023 |
| |
2024 |
| |
2025 |
| |
2026 and thereafter |
| |
Total future minimum lease payments receivable |
| |
Less: Unearned income |
| ( |
Undiscounted cash flows to be received | $ | |
|
|
|
In the computation of diluted EPS, the Company uses the treasury stock method to determine the dilutive effect of its granted but unexercised stock options and SSARs and unvested restricted stock. Under the treasury stock method, the assumed proceeds, as defined, received from shares issued in a hypothetical stock option exercise or restricted stock grant, are assumed to be used to purchase treasury stock. Proceeds include amounts received from the exercise of outstanding stock options and compensation cost for future service that the Company has not yet recognized in earnings. The Company does not consider awards from share-based grants in the computation of basic EPS.
The following table illustrates the data used in computing basic and diluted EPS for the periods indicated:
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|
|
|
|
|
|
| Three months ended June 30, |
| Six months ended June 30, | ||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
(dollars in thousands except per share data) |
|
|
|
|
|
|
|
|
|
|
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders | $ | |
| $ | |
| $ | |
| $ | |
Weighted-average common shares outstanding |
| |
|
| |
|
| |
|
| |
Basic EPS | $ | |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders | $ | |
| $ | |
| $ | |
| $ | |
Weighted-average common shares outstanding |
| |
|
| |
|
| |
|
| |
Potentially dilutive common shares |
| |
|
| |
|
| |
|
| |
Weighted-average common and potentially dilutive shares outstanding |
| |
|
| |
|
| |
|
| |
Diluted EPS | $ | |
| $ | |
| $ | |
| $ | |
The Company has
motivate the employees and directors who are responsible for the operation and the management of the affairs of the Company by aligning the interest of its employees and directors with the interest of its shareholders. In the stock compensation plans, employees and directors are eligible to be awarded stock-based compensation grants which can consist of stock options (qualified and non-qualified), stock appreciation rights (SARs) and restricted stock.
At the 2012 annual shareholders’ meeting, the Company’s shareholders approved and the Company adopted the 2012 Omnibus Stock Incentive Plan and the 2012 Director Stock Incentive Plan (collectively, the 2012 stock incentive plans). Unless terminated by the Company’s board of directors, the 2012 stock incentive plans will expire on and no stock-based awards shall be granted after the year .
In each of the 2012 stock incentive plans, the Company has reserved
During the first quarter of 2021, the Company approved a
During the first quarter of 2020, the Company approved a
The following table summarizes the weighted-average fair value and vesting of restricted stock grants awarded during the periods ended June 30, 2021 and 2020 under the 2012 stock incentive plans:
|
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|
|
|
|
| June 30, 2021 |
| June 30, 2020 | ||||||
|
|
| Weighted- |
|
|
| Weighted- | ||
| Shares |
| average grant |
| Shares |
| average grant | ||
| granted |
| date fair value |
| granted |
| date fair value | ||
|
|
|
|
|
|
|
|
|
|
Director plan | | (2) | $ | |
| | (2) | $ | |
Omnibus plan | | (3) |
| |
| | (3) |
| |
Omnibus plan | | (1) |
| |
| | (1) |
| |
Omnibus plan | | (3) |
| |
| | (2) |
| |
Total | |
| $ | |
| |
| $ | |
(1) Vest after
The fair value of the shares granted in 2021 was calculated using the grant date stock price.
A summary of the status of the Company’s non-vested restricted stock as of and changes during the period indicated are presented in the following table:
|
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| 2012 Stock incentive plans | |||||||
| Director |
| Omnibus |
| Total |
|
| Weighted- average grant date fair value |
Non-vested balance at December 31, 2020 | |
| |
| |
| $ | |
Granted | |
| |
| |
|
| |
Forfeited |
|
| ( |
| ( |
|
| |
Vested | ( |
| ( |
| ( |
|
| |
Non-vested balance at June 30, 2021 | |
| |
| |
| $ | |
|
|
|
|
|
|
|
|
|
A summary of the status of the Company’s SSARs as of and changes during the period indicated are presented in the following table:
|
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|
|
|
|
|
|
| Awards |
|
| Weighted-average grant date fair value |
| Weighted-average remaining contractual term (years) |
Outstanding December 31, 2020 |
| |
| $ | |
| |
Granted |
|
|
|
|
|
|
|
Exercised |
| ( |
|
| |
|
|
Forfeited |
|
|
|
|
|
|
|
Outstanding June 30, 2021 |
| |
| $ | |
| |
|
|
|
|
|
|
|
|
Of the SSARs outstanding at June 30, 2021,
During the first quarter of 2021, there were
Share-based compensation expense is included as a component of salaries and employee benefits in the consolidated statements of income. The following tables illustrate stock-based compensation expense recognized on non-vested equity awards during the three and six months ended June 30, 2021 and 2020 and the unrecognized stock-based compensation expense as of June 30, 2021:
|
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|
|
|
|
|
|
|
|
|
| |||
|
| Three months ended June 30, |
| Six months ended June 30, | |||||||
(dollars in thousands) | 2021 |
| 2020 |
| 2021 |
|
| 2020 | |||
Stock-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
Director stock incentive plan | $ | |
| $ | |
| $ | |
| $ | |
Omnibus stock incentive plan |
| |
|
| |
|
| |
|
| |
Employee stock purchase plan |
| - |
|
| - |
|
| |
|
| |
Total stock-based compensation expense | $ | |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of | |
(dollars in thousands) |
|
|
|
|
|
| June 30, 2021 | |
Unrecognized stock-based compensation expense: |
|
|
|
|
|
|
|
|
Director plan |
|
|
|
|
|
| $ | |
Omnibus plan |
|
|
|
|
|
|
| |
Total unrecognized stock-based compensation expense |
|
|
|
|
|
| $ | |
The accounting guidelines establish a framework for measuring and disclosing information about fair value measurements. The guidelines of fair value reporting instituted a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 - inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument;
Level 3 - inputs are unobservable and are based on the Company’s own assumptions to measure assets and liabilities at fair value. Level 3 pricing for securities may also include unobservable inputs based upon broker-traded transactions.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The Company uses fair value to measure certain assets and, if necessary, liabilities on a recurring basis when fair value is the primary measure for accounting. Thus, the Company uses fair value for AFS securities. Fair value is used on a non-recurring basis to measure certain assets when adjusting carrying values to market values, such as impaired loans, other real estate owned (ORE) and other repossessed assets.
The following table represents the carrying amount and estimated fair value of the Company’s financial instruments as of the periods indicated:
|
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|
|
|
|
|
|
|
|
|
June 30, 2021 | ||||||||||||||
|
|
|
|
|
|
| Quoted prices |
| Significant |
| Significant | |||
|
|
|
|
|
|
| in active |
| other |
| other | |||
| Carrying |
| Estimated |
| markets |
| observable inputs |
| unobservable inputs | |||||
(dollars in thousands) | amount |
| fair value |
| (Level 1) |
| (Level 2) |
| (Level 3) | |||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | |
| $ | |
| $ | |
| $ | - |
| $ | - |
Available-for-sale debt securities |
| |
|
| |
|
| - |
|
| |
|
| - |
Restricted investments in bank stock |
| |
|
| |
|
| - |
|
| |
|
| - |
Loans and leases, net |
| |
|
| |
|
| - |
|
| - |
|
| |
Loans held-for-sale |
| |
|
| |
|
| - |
|
| |
|
| - |
Accrued interest receivable |
| |
|
| |
|
| - |
|
| |
|
| - |
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with no stated maturities |
| |
|
| |
|
| - |
|
| |
|
| - |
Time deposits |
| |
|
| |
|
| - |
|
| |
|
| - |
Accrued interest payable |
| |
|
| |
|
| - |
|
| |
|
| - |
|
|
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|
|
December 31, 2020 | ||||||||||||||
|
|
|
|
|
|
| Quoted prices |
| Significant |
| Significant | |||
|
|
|
|
|
|
| in active |
| other |
| other | |||
| Carrying |
| Estimated |
| markets |
| observable inputs |
| unobservable inputs | |||||
(dollars in thousands) | amount |
| fair value |
| (Level 1) |
| (Level 2) |
| (Level 3) | |||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | |
| $ | |
| $ | |
| $ | - |
| $ | - |
Available-for-sale debt securities |
| |
|
| |
|
| - |
|
| |
|
| - |
Restricted investments in bank stock |
| |
|
| |
|
| - |
|
| |
|
| - |
Loans and leases, net |
| |
|
| |
|
| - |
|
| - |
|
| |
Loans held-for-sale |
| |
|
| |
|
| - |
|
| |
|
| - |
Accrued interest receivable |
| |
|
| |
|
| - |
|
| |
|
| - |
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with no stated maturities |
| |
|
| |
|
| - |
|
| |
|
| - |
Time deposits |
| |
|
| |
|
| - |
|
| |
|
| - |
FHLB advances |
| |
|
| |
|
| - |
|
| |
|
| - |
Accrued interest payable |
| |
|
| |
|
| - |
|
| |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying value of short-term financial instruments, as listed below, approximates their fair value. These instruments generally have limited credit exposure, no stated or short-term maturities, carry interest rates that approximate market and generally are recorded at amounts that are payable on demand:
Cash and cash equivalents;
Non-interest bearing deposit accounts;
Savings, interest-bearing checking and money market accounts and
Short-term borrowings.
Securities: Fair values on investment securities are determined by prices provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.
Originated loans and leases: The fair value of accruing loans is estimated by calculating the net present value of the future expected
cash flows discounted using the exit price notion. The discount rate is based upon current offering rates, with an additional discount for expected potential charge-offs. Additionally, an environmental general credit risk adjustment is subtracted from the net present value to arrive at the total estimated fair value of the accruing loan portfolio.
The carrying value that fair value is compared to is net of the allowance for loan losses and since there is significant judgment included in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.
Non-accrual loans: Loans which the Company has measured as non-accruing are generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. These loans are classified within Level 3 of the fair value hierarchy. The fair value consists of loan balances less the valuation allowance.
Acquired loans: Acquired loans (performing and non-performing) are initially recorded at their acquisition-date fair values using Level 3 inputs. For more information on the calculation of the fair value of acquired loans, see Footnote 9, “Acquisition.”
Loans held-for-sale: The fair value of loans held-for-sale is estimated using rates currently offered for similar loans and is typically obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank of Pittsburgh (FHLB).
Certificates of deposit: The fair value of certificates of deposit is based on discounted cash flows using rates which approximate market rates for deposits of similar maturities.
FHLB advances: Fair value is estimated using the rates currently offered for similar borrowings.
The following tables illustrate the financial instruments measured at fair value on a recurring basis segregated by hierarchy fair value levels as of the periods indicated:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quoted prices |
|
|
|
|
|
| |
|
|
|
| in active |
| Significant other |
| Significant other | |||
| Total carrying value |
| markets |
| observable inputs |
| unobservable inputs | ||||
(dollars in thousands) | June 30, 2021 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
Agency - GSE | $ | |
| $ | - |
| $ | |
| $ | - |
Obligations of states and political subdivisions |
| |
|
| - |
|
| |
|
| - |
MBS - GSE residential |
| |
|
| - |
|
| |
|
| - |
Total available-for-sale debt securities | $ | |
| $ | - |
| $ | |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quoted prices |
|
|
|
|
|
| |
|
|
|
| in active |
| Significant other |
| Significant other | |||
| Total carrying value |
| markets |
| observable inputs |
| unobservable inputs | ||||
(dollars in thousands) | December 31, 2020 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
Agency - GSE | $ | |
| $ | - |
| $ | |
| $ | - |
Obligations of states and political subdivisions |
| |
|
| - |
|
| |
|
| - |
MBS - GSE residential |
| |
|
| - |
|
| |
|
| - |
Total available-for-sale debt securities | $ | |
| $ | - |
| $ | |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities in the AFS portfolio are measured at fair value using market quotations provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Assets classified as Level 2 use valuation techniques that are common to bond valuations. That is, in active markets whereby bonds of similar characteristics frequently trade, quotes for similar assets are obtained.
There were
The following table illustrates the financial instruments newly measured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quoted prices in |
| Significant other |
| Significant other | |||
| Total carrying value |
| active markets |
| observable inputs |
| unobservable inputs | ||||
(dollars in thousands) | at June 30, 2021 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Impaired loans | $ | |
| $ | - |
| $ | - |
| $ | |
Other real estate owned |
| |
|
| - |
|
| - |
|
| |
Total | $ | |
| $ | - |
| $ | - |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quoted prices in |
| Significant other |
| Significant other | |||
| Total carrying value |
| active markets |
| observable inputs |
| unobservable inputs | ||||
(dollars in thousands) | at December 31, 2020 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Impaired loans | $ | |
| $ | - |
| $ | - |
| $ | |
Other real estate owned |
| |
|
| - |
|
| - |
|
| |
Total | $ | |
| $ | - |
| $ | - |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
From time-to-time, the Company may be required to record at fair value financial instruments on a non-recurring basis, such as impaired loans, ORE and other repossessed assets. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting on write downs of individual assets. The fair value of impaired loans was calculated using the value of the impaired loans with an allowance less the related allowance.
The following describes valuation methodologies used for financial instruments measured at fair value on a non-recurring basis. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component of the allowance for loan losses, and as such are carried at the lower of net recorded investment or the estimated fair value. Estimates of fair value of the collateral are determined based on a variety of information, including available valuations from certified appraisers for similar assets, present value of discounted cash flows and inputs that are estimated based on commonly used and generally accepted industry liquidation advance rates and estimates and assumptions developed by management.
Valuation techniques for impaired loans are typically determined through independent appraisals of the underlying collateral or may be determined through present value of discounted cash flows. Both techniques include various Level 3 inputs which are not identifiable. The valuation technique may be adjusted by management for estimated liquidation expenses and qualitative factors such as economic conditions. If real estate is not the primary source of repayment, present value of discounted cash flows and estimates using generally accepted industry liquidation advance rates and other factors may be utilized to determine fair value.
At June 30, 2021 and December 31, 2020, the range of liquidation expenses and other valuation adjustments applied to impaired loans ranged from -
For ORE, fair value is generally determined through independent appraisals of the underlying properties which generally include various Level 3 inputs which are not identifiable. Appraisals form the basis for determining the net realizable value from these properties. Net realizable value is the result of the appraised value less certain costs or discounts associated with liquidation which occurs in the normal course of business. Management’s assumptions may include consideration of the location and occupancy of the property, along with current economic conditions. Subsequently, as these properties are actively marketed, the estimated fair values may be periodically adjusted through incremental subsequent write-downs. These write-downs usually reflect decreases in estimated values resulting from sales price observations as well as changing economic and market conditions. At June 30, 2021 and December 31, 2020, the discounts applied to the appraised values of ORE ranged from -
On May 1, 2020, the Company completed its previously announced acquisition of MNB of Bangor, Pennsylvania. MNB was a
of the Commonwealth of Pennsylvania. Merchants Bank conducted full-service commercial banking services through
In accordance with the terms of the Reorganization Agreement, on May 1, 2020 each share of MNB common stock was converted into the right to receive
The following table summarizes the consideration paid for MNB and the fair value of assets acquired, and liabilities assumed as of the acquisition date:
|
|
|
|
Purchase Price Consideration in Common Stock |
|
|
|
MNB shares outstanding |
|
| |
Exchange ratio |
|
| |
Total FDBC shares |
|
| |
|
|
|
|
Shares paid in cash for fractional shares |
|
| |
Cash consideration (per MNB share) |
| $ | |
Cash portion of purchase price (cash in lieu of fractional shares) |
| $ | |
|
|
|
|
Total FDBC shares issued |
|
| |
FDBC’s share price for purposes of calculation |
| $ | |
Equity portion of purchase price |
| $ | |
Total consideration paid |
| $ | |
|
|
|
|
Allocation of Purchase Price | In thousands |
|
|
Total Purchase Price |
| $ | |
|
|
|
|
Estimated Fair Value of Assets Acquired |
|
|
|
Cash and cash equivalents | |
|
|
Investment securities | |
|
|
Loans held for sale | |
|
|
Loans | |
|
|
Restricted investments in bank stock | |
|
|
Premises and equipment | |
|
|
Core deposit intangible asset | |
|
|
Other assets | |
|
|
Total assets acquired | |
|
|
|
|
|
|
Estimated Fair Value of Liabilities Assumed |
|
|
|
Non-interest bearing deposits | |
|
|
Interest bearing deposits | |
|
|
FHLB borrowings | |
|
|
Other liabilities | |
|
|
Total liabilities assumed | |
|
|
|
|
|
|
Net Assets Acquired |
|
| |
Goodwill Recorded in Acquisition |
| $ | |
|
|
|
|
Pursuant to the accounting requirements, the Corporation assigned a fair value to the assets acquired and liabilities assumed of MNB. ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
The assets acquired and liabilities assumed in the acquisition of MNB were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. While the fair values are not expected to be materially different from the estimates, any material adjustments to the estimates will be reflected, retroactively, as of the date of the acquisition. The items most susceptible to adjustment are the fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition. Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:
Investment securities available-for-sale
The estimated fair values of the investment securities available for sale, primarily comprised of U.S. Government agency mortgage-backed securities, U.S. government agencies and municipal bonds, were determined using Level 1 and Level 2 inputs in the fair value hierarchy. The fair values were determined using executable market bids or independent pricing services. The Corporation’s independent pricing service utilized matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific security but rather relying on the security’s relationship to other benchmark quoted prices. Management reviewed the data and assumptions used in pricing the securities. A fair value premium of $
Loans
Acquired loans (performing and non-performing) are initially recorded at their acquisition-date fair values using Level 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Specifically, the Corporation has prepared
The table below illustrates the fair value adjustments made to the amortized cost basis in order to present the fair value of the loans acquired. The credit adjustment on purchased credit impaired loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that has been deemed uncollectible based on the Corporation’s expectations of future cash flows for each respective loan.
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Dollars in thousands |
|
| |
Gross amortized cost basis at April 30, 2020 |
| $ | |
Interest rate fair value adjustment on pools of homogeneous loans |
|
| |
Credit fair value adjustment on pools of homogeneous loans |
|
| ( |
Credit fair value adjustment on purchased credit impaired loans |
|
| ( |
Fair value of acquired loans at April 30, 2020 |
| $ | |
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|
For loans acquired without evidence of credit quality deterioration, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into homogeneous pools by characteristics such as loan type, term, collateral, and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value premium of $
The following table presents the acquired purchased credit impaired loans receivable at the acquisition date:
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Dollars in thousands |
|
| |
Contractual principal and interest at acquisition |
| $ | |
Nonaccretable difference |
|
| ( |
Expected cash flows at acquisition |
|
| |
Accretable yield |
|
| ( |
Fair value of purchased impaired loans |
| $ | |
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The Company assumed leases on
Core Deposit Intangible
The fair value of the core deposit intangible was determined based on a discounted cash flow (present value) analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the higher cost of alternative funding sources available through national brokered CD offering rates and FHLB advance rates. The projected cash flows were developed using projected deposit attrition rates based on the average rate experienced by both institutions. The core deposit intangible will be amortized over
Time Deposits
The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit premium is being amortized into income on a level yield amortization method over the contractual life of the deposits.
FHLB Borrowings
The Company assumed FHLB borrowings in connection with the merger. The fair value of FHLB Borrowings was determined by using FHLB prepayment penalty as a proxy for the fair value adjustment. The Company decided to pay off the borrowing post acquisition date therefore no amortization is warranted.
Supplemental Pro Forma Financial Information
The following table presents certain unaudited pro forma financial information for illustrative purposes only, for the twelve months ended December 31, 2020 and 2019, respectively, as if MNB had been acquired on January 1, 2019. This unaudited pro forma information combines the historical results of MNB with the Corporation’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision expense resulting from recording loan assets at fair value, cost savings or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented and the differences could be significant.
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| Years ended December 31, | ||||
(Dollars in thousands) | 2020 |
| 2019 | ||
Net interest income | $ | |
| $ | |
Other income |
| |
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| |
Total net interest income and other income | $ | |
| $ | |
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Net income |
| |
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| |
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Basic earnings per common share | $ |
| $ | ||
Diluted earnings per common share | $ |
| $ | ||
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Landmark Acquisition
On July 1, 2021, the Company completed the acquisition of Landmark Bancorp, Inc. (“Landmark”) and its wholly-owned subsidiary. At the effective time of the merger, Landmark merged with and into the Company with the Company surviving the merger. Landmark was the holding company of Landmark Community Bank (“Landmark Bank”) which operated
Effective July 1, 2021, in connection with the merger and pursuant to the terms of the Reorganization Agreement, Paul C. Woelkers was appointed as a Class C Director of Fidelity’s Board of Directors. Mr. Woelkers was also appointed as a Director of Fidelity Bank’s Board of Directors.
Under the terms of the agreement, Landmark shareholders received as consideration
With the combination of the
The merger transaction will be accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged will be recorded at estimated fair values on the acquisition date. Management is in the process of assessing the assets purchased and liabilities assumed in connection with the merger.
Merger-related expenses
Bank-Owned Life Insurance (BOLI)
The Company has purchased single premium BOLI policies on certain officers. The policies are recorded at their cash surrender values. Increases in cash surrender values are included in non-interest income in the consolidated statements of income. As a result of the acquisition of MNB, the Company added BOLI with a value of $
Officer Life Insurance
In 2017, the Bank entered into separate split dollar life insurance arrangements (Split Dollar Agreements) with
Supplemental Executive Retirement plan (SERP)
As of January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. The Company has elected to use the modified retrospective approach with prior period financial statements unadjusted and presented with historical revenue recognition methods. The implementation of the new standard had no material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.
The majority of the Company’s revenues are generated through interest earned on securities and loans, which is explicitly excluded from the scope of the guidance. In addition, certain non-interest income streams such as fees associated with mortgage servicing rights, loan service charges, life insurance earnings, rental income and gains/losses on the sale of loans and securities are
not in the scope of the new guidance. The main types of contracts with customers that are in the scope of the new guidance are:
Service charges on deposit accounts – Deposit service charges represent fees charged by the Company for the performance obligation of providing services to a customer’s deposit account. The transaction price for deposit services includes both fixed and variable amounts based on the Company’s fee schedules. Revenue is recognized and payment is received either at a point in time for transactional fees or on a monthly basis for non-transactional fees.
Interchange fees – Interchange fees represent fees charged by the Company for customers using debit cards. The contract is between the Company and the processor and the performance obligation is the ability of customers to use debit cards to make purchases at a point in time. The transaction price is a percentage of debit card usage and the processor pays the Company and revenue is recorded throughout the month as the performance obligations are being met.
Fees from trust fiduciary activities – Trust fees represent fees charged by the Company for the management, custody and/or administration of trusts. These are mostly monthly fees based on the market value of assets in the trust account at the prior month end. Payment is generally received a few weeks after month end through a direct charge to customers’ accounts. Estate fees are recognized and charged as the Company reaches each of six different stages of the estate administration process.
Fees from financial services – Financial service fees represent fees charged by the Company for the performance obligation of providing various services for an investment account. Revenue is recognized twice monthly for fees on sales transactions and on a monthly basis for advisory fees and quarterly for trail fees.
Gain/loss on ORE sales – Gain/loss on the sale of ORE is recognized at the closing date when the sales proceeds are received. In seller-financed ORE transactions, the contract is made subject to our normal underwriting standards and pricing. The Company does not have any obligation or right to repurchase any sales of ORE.
Contract balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before the payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity already received payment (or payment is due) from the customer. The Company’s non-interest income streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company typically does not enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2021 and December 31, 2020, the Company did
Remaining performance obligations
The Company’s performance obligations have an original expected duration of less than one year and follow the relevant guidance for recognizing revenue over time. There is no variable consideration subject to constraint that is not included in information about transaction price.
Contract acquisition costs
ASU 2016-02 Leases (Topic 842) became effective for the Company on January 1, 2019. For all operating lease contracts where the Company is lessee, a right-of-use (ROU) asset and lease liability was recorded as of the effective date. The Company assumed all renewal terms will be exercised when calculating the ROU assets and lease liabilities. For leases existing at the transition date, any prepaid or deferred rent was added to the ROU asset to calculate the lease liability. The discount rate used to calculate the present value of future payments at the transition date was the Company’s incremental borrowing rate. The Company used the FHLB fixed rate borrowing rates on December 29, 2018 as the discount rate at transition. For all classes of underlying assets, the Company has elected not to record short-term leases (leases with a term of 12 months or less) on the balance sheet when the Company is lessee. Instead, the Company will recognize the lease payment on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. For all asset classes, the Company has elected, as a lessee, not to separate nonlease components from lease components and instead to account for each separate lease component and nonlease components associated with that lease component as a single lease component.
Management determines if an arrangement is or contains a lease at contract inception. If an arrangement is determined to be or contains a lease, the Company recognizes a ROU asset and a lease liability when the asset is placed in service.
The Company’s operating leases, where the Company is lessee, include property, land and equipment. As of June 30, 2021,
Company’s branch properties were leased under operating leases. In
The following is an analysis of the leased property under finance leases:
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(dollars in thousands) | June 30, 2021 |
| December 31, 2020 | ||
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Equipment | $ | |
| $ | |
Less accumulated depreciation and amortization |
| ( |
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| ( |
Leased property under finance leases, net | $ | |
| $ | |
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The following is a schedule of future minimum lease payments under finance leases together with the present value of the net minimum lease payments as of June 30, 2021:
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(dollars in thousands) | Amount | |
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2021 | $ | |
2022 |
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2023 |
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2024 |
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2025 |
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2026 and thereafter |
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Total minimum lease payments (a) |
| |
Less amount representing interest (b) |
| ( |
Present value of net minimum lease payments | $ | |
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(a)The future minimum lease payments have not been reduced by estimated executory costs (such as taxes and maintenance) since this amount was deemed immaterial by management.
(b)Amount necessary to reduce net minimum lease payments to present value calculated at the Company’s incremental borrowing rate upon lease inception.
As of June 30, 2021, the Company leased its Green Ridge, Pittston, Peckville, Back Mountain, Mountain Top, Abington, Nazareth, Easton, Bethlehem and Martins Creek branches under the terms of operating leases. Common area maintenance is included in variable lease payments in the table below. The Abington branch has variable lease payments which are calculated as a percentage of the national prime rate of interest and are expensed as incurred. The Bethlehem branch has variable lease payments that increase annually and are expensed as incurred.
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(dollars in thousands) | June 30, 2021 |
| June 30, 2020 | ||
Lease cost |
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Finance lease cost: |
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Amortization of right-of-use assets | $ | |
| $ | |
Interest on lease liabilities |
| |
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Operating lease cost |
| |
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Short-term lease cost |
| |
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Variable lease cost |
| |
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| ( |
Total lease cost | $ | |
| $ | |
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Other information |
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Cash paid for amounts included in the measurement of lease liabilities |
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Operating cash flows from finance leases | $ | |
| $ | |
Operating cash flows from operating leases (Fixed payments) | $ | |
| $ | |
Operating cash flows from operating leases (Liability reduction) | $ | |
| $ | |
Financing cash flows from finance leases | $ | |
| $ | |
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | - |
| $ | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | - |
| $ | |
Weighted-average remaining lease term - finance leases |
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Weighted average remaining lease term - operating leases |
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Weighted-average discount rate - finance leases |
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Weighted-average discount rate - operating leases |
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During the first six months of 2021, $
The future minimum lease payments for the Company’s branch network and equipment under operating leases that have lease terms in excess of one year as of June 30, 2021 are as follows:
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(dollars in thousands) | Amount | |
|
|
|
2021 | $ | |
2022 |
| |
2023 |
| |
2024 |
| |
2025 |
| |
2026 and thereafter |
| |
Total future minimum lease payments |
| |
Plus variable payment adjustment |
| |
Less amount representing interest |
| ( |
Present value of net future minimum lease payments | $ | |
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|
|
The Company leases several properties, where the Company is lessor, under operating leases to unrelated parties. Some of these properties are residential properties surrounding the Main Branch that the Company leases on a month-to-month basis and are considered short-term leases. The undiscounted cash flows to be received on an annual basis for the remaining three properties under long-term operating leases are as follows:
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(dollars in thousands) | Amount | |
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2021 | $ | |
2022 |
| |
2023 |
| |
2024 |
| |
2025 |
| |
2026 and thereafter |
| |
Total lease payments to be received | $ | |
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|
The Company also indirectly originates automobile leases classified as direct finance leases. See Footnote 5, “Loans and leases”, for more information about the Company’s direct finance leases.
Lease income recognized from direct finance leases was included in interest income from loans and leases on the consolidated statements of income. Lease income related to operating leases is included in fees and other revenue on the consolidated statements of income. The Company only receives a variable payment for taxes from one of its lessees, but the amount is immaterial and excluded from rental income. The amount of lease income recognized on the consolidated statements of income was as follows for the periods indicated:
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| For the three months ended June 30, |
| For the six months ended June 30, | ||||||||
(dollars in thousands) | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Lease income - direct finance leases |
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Interest income on lease receivables | $ | |
| $ | |
| $ | |
| $ | |
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Lease income - operating leases |
| |
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Total lease income | $ | |
| $ | |
| $ | |
| $ | |
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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management's discussion and analysis of the significant changes in the consolidated financial condition of the Company as of June 30, 2021 compared to December 31, 2020 and a comparison of the results of operations for the three and six months ended June 30, 2021 and 2020. Current performance may not be indicative of future results. This discussion should be read in conjunction with the Company’s 2020 Annual Report filed on Form 10-K.
Forward-looking statements
Certain of the matters discussed in this Quarterly Report on Form 10-Q may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” and similar expressions are intended to identify such forward-looking statements.
The Company’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:
the effects of economic conditions particularly with regard to the negative impact of severe, wide-ranging and continuing disruptions caused by the spread of Coronavirus Disease 2019 (COVID-19) and responses thereto on current customers and the operations of the Company, specifically the effect of the economy on loan customers’ ability to repay loans;
acquisitions and integration of acquired businesses, including but not limited to, the recent acquisition of MNB Corporation (“MNB”) and its wholly-owned bank subsidiary and Landmark Bancorp Inc. (“Landmark”) and its wholly-owned bank subsidiary;
the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;
the impact of new or changes in existing laws and regulations, including the Tax Cuts and Jobs Act and Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the regulations promulgated there under;
impacts of the capital and liquidity requirements of the Basel III standards and other regulatory pronouncements, regulations and rules;
governmental monetary and fiscal policies, as well as legislative and regulatory changes;
effects of short- and long-term federal budget and tax negotiations and their effect on economic and business conditions;
the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters;
the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities and interest rate protection agreements, as well as interest rate risks;
the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet;
technological changes;
the interruption or breach in security of our information systems and other technological risks and attacks resulting in failures or disruptions in customer account management, general ledger processing and loan or deposit updates and potential impacts resulting therefrom including additional costs, reputational damage, regulatory penalties, and financial losses;
acquisitions and integration of acquired businesses;
the failure of assumptions underlying the establishment of reserves for loan losses and estimations of values of collateral and various financial assets and liabilities;
volatilities in the securities markets;
acts of war or terrorism;
disruption of credit and equity markets; and
the risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.
The Company cautions readers not to place undue reliance on forward-looking statements, which reflect analyses only as of the date of this document. The Company has no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document.
Readers should review the risk factors described in other documents that we file or furnish, from time to time, with the Securities and Exchange Commission, including Annual Reports to Shareholders, Annual Reports filed on Form 10-K and other current reports filed or furnished on Form 8-K.
Executive Summary
The Company is a Pennsylvania corporation and a bank holding company, whose wholly-owned state chartered commercial bank and trust company is The Fidelity Deposit and Discount Bank. The Company is headquartered in Dunmore, Pennsylvania. We consider Lackawanna, Northampton and Luzerne Counties our primary marketplace.
As a leading Northeastern Pennsylvania community bank, our goals are to enhance shareholder value while continuing to build a full-service community bank. We focus on growing our core business of retail and business lending and deposit gathering while maintaining strong asset quality and controlling operating expenses. We continue to implement strategies to diversify earning assets (see “Funds Deployed” section of this management’s discussion and analysis) and to increase low cost core deposits (see “Funds Provided” section of this management’s discussion and analysis). These strategies include a greater level of commercial lending and the ancillary business products and services supporting our commercial customers’ needs as well as residential lending strategies and an array of consumer products. We focus on developing a full banking relationship with existing, as well as new business prospects. The Bank has a personal and corporate trust department and also provides alternative financial and insurance products with asset management services. In addition, we explore opportunities to selectively expand our franchise footprint, consisting presently of our 20-branch network.
We are impacted by both national and regional economic factors, with commercial, commercial real estate and residential mortgage loans concentrated in Northeastern Pennsylvania, primarily in Lackawanna and Luzerne counties, and Eastern Pennsylvania, primarily Northampton County. Rate cuts of 50 and 100 basis points during the first quarter of 2020 at the start of the pandemic completely reversed the increase initiated by the Federal Open Market Committee (FOMC) at the end of 2015. According to the U.S. Bureau of Labor Statistics, the national unemployment rate for June 2021 was 5.9%, down 0.8 percentage points from December 2020. However, the unemployment rates in the Scranton - Wilkes-Barre - Hazleton and the Allentown – Bethlehem - Easton Metropolitan Statistical Areas (local) remained at a higher level than the national unemployment rate. The local unemployment rates at June 30, 2021 were 7.6% and 6.7%, respectively, a decrease of 0.4 percentage points and an increase of 0.1 percentage point from the 8.0% and 6.6%, respectively, at December 31, 2020. The local unemployment rates have fluctuated as a result of the effects of the pandemic. The pandemic-related business restrictions have been lifted in our local area but unemployment is expected to remain above the pre-pandemic levels for the next few months. Stimulus payments and enhanced unemployment benefits have supported the economy throughout 2020 and the first half of 2021 and the government could continue to provide this support throughout the remainder of 2021. The median home values in the Scranton-Wilkes-Barre-Hazleton metro and Allentown-Bethlehem-Easton metro increased 17.2% and 18.7%, respectively, from a year ago, according to Zillow, an online database advertising firm providing access to its real estate search engines to various media outlets. Values in the markets are expected to grow 12.1% and 12.5% in the next year. In light of these expectations, we will continue to monitor the economic climate in our region and scrutinize growth prospects with credit quality as a principal consideration.
On May 1, 2020, the Company completed its acquisition of MNB Corporation (“MNB”) and its wholly-owned bank subsidiary. The merger expanded the Company’s full-service footprint into Northampton County, PA and the Lehigh Valley. Non-recurring costs to facilitate the merger and integrate systems of $2.5 million were incurred during 2020.
On July 1, 2021, the Company completed its acquisition of Landmark Bancorp, Inc. (“Landmark”) and its wholly-owned bank subsidiary. The Company expects non-recurring costs to facilitate the anticipated merger and integrate systems in 2021 incurred by the Company to be $3.4 million, of which $0.9 million was recognized in the first half of 2021. The Company remains committed to selectively expanding branch banking and wealth management locations in Northeastern and Eastern Pennsylvania as opportunities arrive going forward.
For the first half of 2021, net income was $11.4 million, or $2.26 diluted earnings per share, compared to $2.9 million, or $0.68 diluted earnings per share, for the first half of 2020. Non-recurring merger-related costs and FHLB prepayment penalties incurred are not a part of the Company’s normal operations. If these expenses had not occurred, adjusted net income (non-GAAP) for the six months ended June 30, 2021 and 2020 would have been $12.5 million and $5.1 million, respectively. Adjusted diluted EPS (non-GAAP) would have been $2.49 and $1.21 for the six months ended June 30, 2021 and 2020, respectively.
As of June 30, 2021 and 2020, tangible common book value per share (non-GAAP) was $32.74 and $29.77, respectively. These non-GAAP measures should be reviewed in connection with the reconciliation of these non-GAAP ratios. See “Non-GAAP Financial Measures” located below within this management’s discussion and analysis.
Branch managers, relationship bankers, mortgage originators and our business service partners are all focused on developing a mutually profitable full banking relationship. We understand our markets, offer products and services along with financial advice that is appropriate for our community, clients and prospects. The Company continues to focus on the “trusted financial advisor” model by utilizing the team approach of experienced bankers that are fully engaged and dedicated towards maintaining and growing profitable relationships.
In addition to the challenging economic environment in which we compete, the regulation and oversight of our business has changed significantly in recent years. As described more fully in Part II, Item 1A, “Risk Factors” below, as well as Part I, Item 1A, “Risk Factors,” and in the “Supervisory and Regulation” section of management’s discussion and analysis of financial condition and results
of operations in our 2020 Annual Report filed on Form 10-K, certain aspects of the Dodd-Frank Wall Street Reform Act (Dodd-Frank Act) continue to have a significant impact on us.
Non-GAAP Financial Measures
The following are non-GAAP financial measures which provide useful insight to the reader of the consolidated financial statements but should be supplemental to GAAP used to prepare the Company’s financial statements and should not be read in isolation or relied upon as a substitute for GAAP measures. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. The Company’s tax rate used to calculate the fully-taxable equivalent (FTE) adjustment was 21% at June 30, 2021 and 2020.
The following table reconciles the non-GAAP financial measures of FTE net interest income:
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| Three months ended |
| Six months ended | ||||||||
(dollars in thousands) | June 30, 2021 |
| June 30, 2020 |
| June 30, 2021 |
| June 30, 2020 | ||||
Interest income (GAAP) | $ | 14,167 |
| $ | 12,250 |
| $ | 28,507 |
| $ | 21,961 |
Adjustment to FTE |
| 487 |
|
| 217 |
|
| 903 |
|
| 408 |
Interest income adjusted to FTE (non-GAAP) |
| 14,654 |
|
| 12,467 |
|
| 29,410 |
|
| 22,369 |
Interest expense (GAAP) |
| 841 |
|
| 1,429 |
|
| 1,731 |
|
| 3,134 |
Net interest income adjusted to FTE (non-GAAP) | $ | 13,813 |
| $ | 11,038 |
| $ | 27,679 |
| $ | 19,235 |
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The efficiency ratio is non-interest expenses as a percentage of FTE net interest income plus non-interest income. The following table reconciles the non-GAAP financial measures of the efficiency ratio to GAAP:
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| Three months ended |
| Six months ended | ||||||||
(dollars in thousands) | June 30, 2021 |
| June 30, 2020 |
| June 30, 2021 |
| June 30, 2020 | ||||
Efficiency Ratio (non-GAAP) |
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Non-interest expenses (GAAP) | $ | 10,851 |
| $ | 11,311 |
| $ | 22,307 |
| $ | 18,615 |
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Net interest income (GAAP) |
| 13,326 |
|
| 10,821 |
|
| 26,776 |
|
| 18,827 |
Plus: taxable equivalent adjustment |
| 487 |
|
| 217 |
|
| 903 |
|
| 408 |
Non-interest income (GAAP) |
| 4,577 |
|
| 2,708 |
|
| 10,093 |
|
| 5,463 |
Net interest income (FTE) plus non-interest income (non-GAAP) | $ | 18,390 |
| $ | 13,746 |
| $ | 37,772 |
| $ | 24,698 |
Efficiency ratio (non-GAAP) |
| 59.01% |
|
| 82.29% |
|
| 59.06% |
|
| 75.37% |
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of the tangible common equity (non-GAAP) and the calculation of tangible book value per share:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
| June 30, 2021 |
| June 30, 2020 | ||||
Tangible Book Value per Share (non-GAAP) |
|
|
|
|
|
|
|
|
|
|
|
Total assets (GAAP) |
|
|
|
|
|
| $ | 1,949,233 |
| $ | 1,801,530 |
Less: Intangible assets, primarily goodwill |
|
|
|
|
|
|
| (8,613) |
|
| (8,966) |
Tangible assets |
|
|
|
|
|
|
| 1,940,620 |
|
| 1,792,564 |
Total shareholders' equity (GAAP) |
|
|
|
|
|
|
| 172,185 |
|
| 157,160 |
Less: Intangible assets, primarily goodwill |
|
|
|
|
|
|
| (8,613) |
|
| (8,966) |
Tangible common equity |
|
|
|
|
|
| $ | 163,572 |
| $ | 148,194 |
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding, end of period |
|
|
|
|
|
|
| 4,995,713 |
|
| 4,977,750 |
Tangible Common Book Value per Share |
|
|
|
|
|
| $ | 32.74 |
| $ | 29.77 |
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of the Company’s earnings results under GAAP to comparative non-GAAP results excluding merger-related expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended | ||||||||||||||||||||||
| June 30, 2021 |
| June 30, 2020 | ||||||||||||||||||||
(dollars in thousands except per share data) | Income before |
| Provision for |
| Net income |
| Diluted earnings |
| Income before |
| Provision for |
| Net income |
| Diluted earnings | ||||||||
Results of operations (GAAP) | $ | 13,462 |
| $ | 2,099 |
| $ | 11,363 |
| $ | 2.26 |
| $ | 3,475 |
| $ | 589 |
| $ | 2,886 |
| $ | 0.68 |
Add: Merger-related expenses |
| 942 |
|
| 52 |
|
| 890 |
|
| 0.17 |
|
| 2,219 |
|
| 380 |
|
| 1,839 |
|
| 0.44 |
Add: FHLB prepayment penalty |
| 369 |
|
| 78 |
|
| 291 |
|
| 0.06 |
|
| 482 |
|
| 102 |
|
| 380 |
|
| 0.09 |
Adjusted earnings (non-GAAP) | $ | 14,773 |
| $ | 2,228 |
| $ | 12,544 |
| $ | 2.49 |
| $ | 6,176 |
| $ | 1,071 |
| $ | 5,105 |
| $ | 1.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended | ||||||||||||||||||||||
| June 30, 2021 |
| June 30, 2020 | ||||||||||||||||||||
(dollars in thousands except per share data) | Income before |
| Provision for |
| Net income |
| Diluted earnings |
| Income before |
| Provision for |
| Net income |
| Diluted earnings | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of operations (GAAP) | $ | 6,752 |
| $ | 1,056 |
| $ | 5,696 |
| $ | 1.13 |
| $ | 318 |
| $ | 66 |
| $ | 252 |
| $ | 0.05 |
Add: Merger-related expenses |
| 419 |
|
| 44 |
|
| 375 |
|
| 0.08 |
|
| 1,947 |
|
| 370 |
|
| 1,577 |
|
| 0.34 |
Add: FHLB prepayment penalty |
| - |
|
| - |
|
| - |
|
| - |
|
| 482 |
|
| 101 |
|
| 381 |
|
| 0.09 |
Adjusted earnings (non-GAAP) | $ | 7,171 |
| $ | 1,100 |
| $ | 6,071 |
| $ | 1.21 |
| $ | 2,747 |
| $ | 537 |
| $ | 2,210 |
| $ | 0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
The Company’s earnings depend primarily on net interest income. Net interest income is the difference between interest income and interest expense. Interest income is generated from yields earned on interest-earning assets, which consist principally of loans and investment securities. Interest expense is incurred from rates paid on interest-bearing liabilities, which consist of deposits and borrowings. Net interest income is determined by the Company’s interest rate spread (the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Interest rate spread is significantly impacted by: changes in interest rates and market yield curves and their related impact on cash flows; the composition and characteristics of interest-earning assets and interest-bearing liabilities; differences in the maturity and re-pricing characteristics of assets compared to the maturity and re-pricing characteristics of the liabilities that fund them and by the competition in the marketplace.
The Company’s earnings are also affected by the level of its non-interest income and expenses and by the provisions for loan losses and income taxes. Non-interest income mainly consists of: service charges on the Company’s loan and deposit products; interchange fees; trust and asset management service fees; increases in the cash surrender value of the bank owned life insurance and from net gains or losses from sales of loans and securities. Non-interest expense consists of: compensation and related employee benefit costs; occupancy; equipment; data processing; advertising and marketing; FDIC insurance premiums; professional fees; loan collection; net other real estate owned (ORE) expenses; supplies and other operating overhead.
Net interest income, net interest rate margin, net interest rate spread and the efficiency ratio are presented in the MD&A on a fully-taxable equivalent (FTE) basis. The Company believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts.
Comparison of the results of operations
Three and six months ended June 30, 2021 and 2020
Overview
For the second quarter of 2021, the Company generated net income of $5.7 million, or $1.13 per diluted share, compared to $0.3 million, or $0.05 per diluted share, for the second quarter of 2020. The $5.4 million increase in net income was primarily the result of $2.5 million higher net interest income, $1.9 million more non-interest income and $1.6 million lower provision for loan losses. Non-interest expenses decreased quarter over-quarter due to the majority of merger-related expenses from the acquisition of MNB being recognized during the second quarter of 2020. In the year-to-date comparison, net income increased by $8.5 million to $11.4 million, or $2.26 per diluted share, from $2.9 million, or $0.68 per diluted share. Higher revenue and a lower provision for loan losses offset higher non-interest expenses year-over-year.
Return on average assets (ROA) was 1.20% and 0.07% for the second quarters of 2021 and 2020, respectively, and 1.24% and 0.46% for the six months ended June 30, 2021 and 2020, respectively. During the same time periods, return on average shareholders’ equity (ROE) was 13.63% and 0.71%, respectively, and 13.68% and 4.63%, respectively. ROA and ROE both
increased due to the growth in net income relative to the increase in average assets and equity for the quarter and year-to-date comparisons.
Net interest income and interest sensitive assets / liabilities
For the second quarter of 2021, net interest income increased $2.5 million, or 23%, to $13.3 million from $10.8 million for the second quarter of 2020. The $1.9 million growth in interest income was produced by the addition of $457.3 million in average interest-earning assets partially offset by the effect of a 48 basis point decline in FTE yield earned on those assets. The loan portfolio contributed the most by providing $1.2 million more in FTE interest income due to $126.1 million more in average loans, primarily from commercial real estate loan growth. In the investment portfolio, an increase in the average balances of municipal securities was the biggest driver of interest income growth. The average balance of total securities grew $247.4 million producing $1.0 million in additional FTE interest income despite a decrease of 54 basis points in yields earned on investments. On the liability side, total interest-bearing liabilities grew $233.0 million, on average, with a 30 basis point decrease in rates paid thereon. A 27 basis point decrease in rates paid on deposits offset the effect of $353.0 million higher average interest-bearing deposits resulting in $0.4 million less interest expense from deposits for the second quarter of 2021 compared to the 2020 like period. There was also $0.2 million less in interest expense on borrowings due to a lower balance of average borrowings.
Net interest income increased $7.9 million, or 42%, from $18.8 million for the six months ended June 30, 2020 to $26.7 million for the six months ended June 30, 2021, due to $6.5 million higher interest income and $1.4 million lower interest expense. Total average interest-earning assets increased $582.8 million while FTE yields on these assets declined 50 basis points resulting in $7.0 million of growth in FTE interest income. In the loan portfolio, the Company experienced average balance growth of $265.9 million which had the effect of producing $5.3 million more interest income, including $2.0 million in additional fees earned under the Paycheck Protection Program (PPP) during the first half of 2021. The average balance of the investment portfolio grew $235.4 million which resulted in $1.7 million in additional FTE interest income despite a 72 basis point reduction in yields. On the liability side, total interest-bearing liabilities grew $343.9 million on average with a 44 basis point decrease in rates paid on these interest-bearing liabilities. Growth in average interest-bearing deposits of $417.8 million was offset by a 41 basis point decrease in the rates paid on deposits reducing interest expense by $1.0 million. In addition, the Company utilized $73.8 million less in average borrowings during the first half of 2021 which resulted in $0.4 million less interest expense from borrowings.
The FTE net interest rate spread decreased by 18 and 6 basis points and margin decreased by 24 and 15 basis points, respectively, for the three and six months ended June 30, 2021 compared to the same 2020 periods. The yields earned on interest-earning assets declined faster than the rates paid on interest-bearing liabilities causing the reduction in net interest rate spread. The decrease in net interest rate margin was due to the higher average balance of interest-bearing cash. The overall 20 and 21 basis point cost of funds, which includes the impact of non-interest bearing deposits, decreased 22 and 35 basis points for the three and six months ended June 30, 2021 compared to the same 2020 periods. The primary reason for the decline was the reduction in rates paid on deposits compared to the same 2020 periods.
For the remainder of 2021, the Company expects to operate in a relatively low interest rate environment. A rate environment with falling interest rates positions the Company to reduce its interest income performance from new and maturing earning assets. Until there is a sustained period of yield curve steepening, with rates rising more sharply at the long end of the curve, the interest rate margin is likely to experience compression. The FOMC began easing the federal funds rate during the second half of 2019 and continued through the first quarter of 2020 which reduced rates paid on interest-bearing liabilities. On the asset side, the prime interest rate, the benchmark rate that banks use as a base rate for adjustable rate loans was cut 75 basis points in the second half of 2019 and another 150 basis points in the first quarter of 2020. Consensus economic forecasts are predicting modest increases in long-term rates. The 2021 focus is to manage net interest income through a relatively flat forecasted rate cycle by controlling loan and deposit pricing to maintain a reasonable spread. Interest income is projected to increase from investing low earning cash balances in securities and the Landmark acquisition for the remainder of 2021 into 2022. Management expects to actively reduce the cost of funds to partially mitigate spread compression throughout this flat rate cycle. Continued growth in the loan portfolios complemented with investment security growth is expected to boost interest income, and when coupled with a proactive relationship approach to loan rate/deposit cost setting strategies should help mitigate spread compression and contain the interest rate margin at acceptable levels.
The Company’s cost of interest-bearing liabilities was 0.27% and 0.29% for the three and six months ended June 30, 2021, or 30 and 44 basis points lower than the cost for the same 2020 periods. The decrease in interest paid on both deposits and borrowings contributed to the lower cost of interest-bearing liabilities. The FOMC is not expected to cut the federal funds rate further in the immediate future, but the Company has the opportunity to reduce rates paid on deposits as higher-priced promotional rates and negotiated rates reprice into products with lower rates. To help mitigate the impact of the imminent change to the economic landscape, the Company has successfully developed and will continue to strengthen its association with existing customers, develop new business relationships, generate new loan volumes, and retain and generate higher levels of average non-interest bearing deposit balances. Strategically deploying no- and low-cost deposits into interest earning-assets is an effective margin-preserving strategy that the Company expects to continue to pursue and expand to help stabilize net interest margin.
The Company’s Asset Liability Management (ALM) team meets regularly to discuss among other things, interest rate risk and when deemed necessary adjusts interest rates. ALM is actively addressing the Company's sensitivity to a changing rate environment to ensure interest rate risks are contained within acceptable levels. ALM also discusses revenue enhancing strategies to help combat the
potential for a decline in net interest income. The Company’s marketing department, together with ALM, lenders and deposit gatherers, continue to develop prudent strategies that will grow the loan portfolio and accumulate low-cost deposits to improve net interest income performance.
The table that follows sets forth a comparison of average balances of assets and liabilities and their related net tax equivalent yields and rates for the periods indicated. Within the table, interest income was FTE adjusted, using the corporate federal tax rate of 21% for June 30, 2021 and 2020 to recognize the income from tax-exempt interest-earning assets as if the interest was taxable. See “Non-GAAP Financial Measures” within this management’s discussion and analysis for the FTE adjustments. This treatment allows a uniform comparison among yields on interest-earning assets. Loans include loans held-for-sale (HFS) and non-accrual loans but exclude the allowance for loan losses. Home equity lines of credit (HELOC) are included in the residential real estate category since they are secured by real estate. Net deferred loan fee accretion of $0.8 million and $0.6 million during the second quarters of 2021 and 2020, respectively, and $2.1 million and $0.4 million for the six months ended June 30, 2021 and 2020, respectively, are included in interest income from loans. MNB loan fair value purchase accounting adjustments of $482 thousand and $162 thousand are included in interest income from loans and $6 thousand and $70 thousand reduced interest expense on deposits for the three months ended June 30, 2021 and 2020. MNB loan fair value purchase accounting adjustments of $937 thousand and $162 thousand are included in interest income from loans and $36 thousand and $70 thousand reduced interest expense on deposits for the six months ended June 30, 2021 and 2020. Average balances are based on amortized cost and do not reflect net unrealized gains or losses. Residual values for direct finance leases are included in the average balances for consumer loans. Net interest margin is calculated by dividing net interest income-FTE by total average interest-earning assets. Cost of funds includes the effect of average non-interest bearing deposits as a funding source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended | ||||||||||||||||
(dollars in thousands) | June 30, 2021 |
| June 30, 2020 | ||||||||||||||
| Average |
|
|
| Yield / |
| Average |
|
|
| Yield / | ||||||
Assets | balance |
| Interest |
| rate |
| balance |
| Interest |
| rate | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits | $ | 149,522 |
| $ | 39 |
| 0.11 | % |
| $ | 65,645 |
| $ | 38 |
| 0.23 | % |
Restricted investments in bank stock |
| 3,152 |
|
| 36 |
| 4.56 |
|
|
| 3,159 |
|
| 21 |
| 2.74 |
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency - GSE |
| 76,614 |
|
| 257 |
| 1.35 |
|
|
| 15,014 |
|
| 66 |
| 1.76 |
|
MBS - GSE residential |
| 168,387 |
|
| 597 |
| 1.42 |
|
|
| 149,186 |
|
| 799 |
| 2.15 |
|
State and municipal (nontaxable) |
| 185,061 |
|
| 1,434 |
| 3.11 |
|
|
| 66,360 |
|
| 647 |
| 3.92 |
|
State and municipal (taxable) |
| 55,287 |
|
| 255 |
| 1.85 |
|
|
| 7,058 |
|
| 49 |
| 2.82 |
|
Other |
| - |
|
| - |
| - |
|
|
| 356 |
|
| 3 |
| 3.42 |
|
Total investments |
| 485,349 |
|
| 2,543 |
| 2.10 |
|
|
| 237,974 |
|
| 1,564 |
| 2.64 |
|
Loans and leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C&I and CRE (taxable) |
| 639,756 |
|
| 7,375 |
| 4.62 |
|
|
| 529,575 |
|
| 6,075 |
| 4.61 |
|
C&I and CRE (nontaxable) |
| 42,504 |
|
| 415 |
| 3.92 |
|
|
| 40,899 |
|
| 350 |
| 3.44 |
|
Consumer |
| 162,333 |
|
| 1,548 |
| 3.82 |
|
|
| 170,223 |
|
| 1,704 |
| 4.03 |
|
Residential real estate |
| 305,693 |
|
| 2,698 |
| 3.54 |
|
|
| 283,537 |
|
| 2,715 |
| 3.85 |
|
Total loans and leases |
| 1,150,286 |
|
| 12,036 |
| 4.20 |
|
|
| 1,024,234 |
|
| 10,844 |
| 4.26 |
|
Total interest-earning assets |
| 1,788,309 |
|
| 14,654 |
| 3.29 | % |
|
| 1,331,012 |
|
| 12,467 |
| 3.77 | % |
Non-interest earning assets |
| 112,730 |
|
|
|
|
|
|
|
| 193,539 |
|
|
|
|
|
|
Total assets | $ | 1,901,039 |
|
|
|
|
|
|
| $ | 1,524,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking | $ | 549,364 |
| $ | 418 |
| 0.31 | % |
| $ | 347,097 |
| $ | 327 |
| 0.38 | % |
Savings and clubs |
| 200,386 |
|
| 31 |
| 0.06 |
|
|
| 144,121 |
|
| 27 |
| 0.07 |
|
MMDA |
| 391,439 |
|
| 251 |
| 0.26 |
|
|
| 264,180 |
|
| 371 |
| 0.56 |
|
Certificates of deposit |
| 108,158 |
|
| 141 |
| 0.52 |
|
|
| 140,906 |
|
| 470 |
| 1.34 |
|
Total interest-bearing deposits |
| 1,249,347 |
|
| 841 |
| 0.27 |
|
|
| 896,304 |
|
| 1,195 |
| 0.54 |
|
Short-term borrowings |
| 177 |
|
| - |
| 0.27 |
|
|
| 102,652 |
|
| 120 |
| 0.47 |
|
FHLB advances |
| - |
|
| - |
| - |
|
|
| 17,555 |
|
| 114 |
| 2.61 |
|
Total interest-bearing liabilities |
| 1,249,524 |
|
| 841 |
| 0.27 | % |
|
| 1,016,511 |
|
| 1,429 |
| 0.57 | % |
Non-interest bearing deposits |
| 464,818 |
|
|
|
|
|
|
|
| 348,275 |
|
|
|
|
|
|
Non-interest bearing liabilities |
| 19,026 |
|
|
|
|
|
|
|
| 17,624 |
|
|
|
|
|
|
Total liabilities |
| 1,733,368 |
|
|
|
|
|
|
|
| 1,382,410 |
|
|
|
|
|
|
Shareholders' equity |
| 167,671 |
|
|
|
|
|
|
|
| 142,141 |
|
|
|
|
|
|
Total liabilities and shareholders' equity | $ | 1,901,039 |
|
|
|
|
|
|
| $ | 1,524,551 |
|
|
|
|
|
|
Net interest income - FTE |
|
|
| $ | 13,813 |
|
|
|
|
|
|
| $ | 11,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
| 3.02 | % |
|
|
|
|
|
|
| 3.20 | % |
Net interest margin |
|
|
|
|
|
| 3.10 | % |
|
|
|
|
|
|
| 3.34 | % |
Cost of funds |
|
|
|
|
|
| 0.20 | % |
|
|
|
|
|
|
| 0.42 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended | ||||||||||||||||
(dollars in thousands) | June 30, 2021 |
| June 30, 2020 | ||||||||||||||
| Average |
|
|
| Yield / |
| Average |
|
|
| Yield / | ||||||
Assets | balance |
| Interest |
| rate |
| balance |
| Interest |
| rate | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits | $ | 117,929 |
| $ | 60 |
| 0.10 | % |
| $ | 36,249 |
| $ | 50 |
| 0.28 | % |
Restricted investments in bank stock |
| 3,023 |
|
| 68 |
| 4.56 |
|
|
| 3,297 |
|
| 86 |
| 5.28 |
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency - GSE |
| 64,906 |
|
| 438 |
| 1.36 |
|
|
| 10,479 |
|
| 106 |
| 2.02 |
|
MBS - GSE residential |
| 157,498 |
|
| 1,116 |
| 1.43 |
|
|
| 137,345 |
|
| 1,605 |
| 2.35 |
|
State and municipal (nontaxable) |
| 171,360 |
|
| 2,620 |
| 3.08 |
|
|
| 58,836 |
|
| 1,182 |
| 4.04 |
|
State and municipal (taxable) |
| 52,367 |
|
| 480 |
| 1.85 |
|
|
| 3,849 |
|
| 54 |
| 2.83 |
|
Other |
| - |
|
| - |
| - |
|
|
| 178 |
|
| 3 |
| 3.42 |
|
Total investments |
| 446,131 |
|
| 4,654 |
| 2.10 |
|
|
| 210,687 |
|
| 2,950 |
| 2.82 |
|
Loans and leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C&I and CRE (taxable) |
| 642,660 |
|
| 15,180 |
| 4.76 |
|
|
| 424,797 |
|
| 10,061 |
| 4.76 |
|
C&I and CRE (nontaxable) |
| 42,399 |
|
| 819 |
| 3.89 |
|
|
| 38,787 |
|
| 726 |
| 3.77 |
|
Consumer |
| 162,329 |
|
| 3,122 |
| 3.88 |
|
|
| 166,800 |
|
| 3,315 |
| 4.00 |
|
Residential real estate |
| 308,778 |
|
| 5,507 |
| 3.60 |
|
|
| 259,837 |
|
| 5,181 |
| 4.01 |
|
Total loans and leases |
| 1,156,166 |
|
| 24,628 |
| 4.30 |
|
|
| 890,221 |
|
| 19,283 |
| 4.36 |
|
Total interest-earning assets |
| 1,723,249 |
|
| 29,410 |
| 3.44 | % |
|
| 1,140,454 |
|
| 22,369 |
| 3.94 | % |
Non-interest earning assets |
| 117,246 |
|
|
|
|
|
|
|
| 131,597 |
|
|
|
|
|
|
Total assets | $ | 1,840,495 |
|
|
|
|
|
|
| $ | 1,272,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking | $ | 516,985 |
| $ | 794 |
| 0.31 | % |
| $ | 297,730 |
| $ | 700 |
| 0.47 | % |
Savings and clubs |
| 193,468 |
|
| 63 |
| 0.07 |
|
|
| 124,215 |
|
| 53 |
| 0.09 |
|
MMDA |
| 376,525 |
|
| 517 |
| 0.28 |
|
|
| 231,629 |
|
| 965 |
| 0.84 |
|
Certificates of deposit |
| 113,892 |
|
| 331 |
| 0.59 |
|
|
| 129,511 |
|
| 993 |
| 1.54 |
|
Total interest-bearing deposits |
| 1,200,870 |
|
| 1,705 |
| 0.29 |
|
|
| 783,085 |
|
| 2,711 |
| 0.70 |
|
Short-term borrowings |
| 161 |
|
| - |
| 0.38 |
|
|
| 59,413 |
|
| 195 |
| 0.66 |
|
FHLB advances |
| 1,685 |
|
| 26 |
| 3.12 |
|
|
| 16,278 |
|
| 228 |
| 2.82 |
|
Total interest-bearing liabilities |
| 1,202,716 |
|
| 1,731 |
| 0.29 | % |
|
| 858,776 |
|
| 3,134 |
| 0.73 | % |
Non-interest bearing deposits |
| 451,354 |
|
|
|
|
|
|
|
| 271,561 |
|
|
|
|
|
|
Non-interest bearing liabilities |
| 18,985 |
|
|
|
|
|
|
|
| 16,257 |
|
|
|
|
|
|
Total liabilities |
| 1,673,055 |
|
|
|
|
|
|
|
| 1,146,594 |
|
|
|
|
|
|
Shareholders' equity |
| 167,440 |
|
|
|
|
|
|
|
| 125,457 |
|
|
|
|
|
|
Total liabilities and shareholders' equity | $ | 1,840,495 |
|
|
|
|
|
|
| $ | 1,272,051 |
|
|
|
|
|
|
Net interest income - FTE |
|
|
| $ | 27,679 |
|
|
|
|
|
|
| $ | 19,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
| 3.15 | % |
|
|
|
|
|
|
| 3.21 | % |
Net interest margin |
|
|
|
|
|
| 3.24 | % |
|
|
|
|
|
|
| 3.39 | % |
Cost of funds |
|
|
|
|
|
| 0.21 | % |
|
|
|
|
|
|
| 0.56 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in net interest income are a function of both changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities. The following table presents the extent to which changes in interest rates and changes in volumes of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (1) the changes attributable to changes in volume (changes in volume multiplied by the prior period rate), (2) the changes attributable to changes in interest rates (changes in rates multiplied by prior period volume) and (3) the net change. The combined effect of changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. Tax-exempt income was not converted to a tax-equivalent basis on the rate/volume analysis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six months ended June 30, | ||||||||||||||||
(dollars in thousands) | 2021 compared to 2020 |
| 2020 compared to 2019 | ||||||||||||||
| Increase (decrease) due to | ||||||||||||||||
| Volume |
| Rate |
| Total |
| Volume |
| Rate |
| Total | ||||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits | $ | 57 |
| $ | (47) |
| $ | 10 |
| $ | 67 |
| $ | (45) |
| $ | 22 |
Restricted investments in bank stock |
| (7) |
|
| (11) |
|
| (18) |
|
| (43) |
|
| (56) |
|
| (99) |
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency - GSE |
| 377 |
|
| (45) |
|
| 332 |
|
| 50 |
|
| (24) |
|
| 26 |
MBS - GSE residential |
| 209 |
|
| (698) |
|
| (489) |
|
| 138 |
|
| (334) |
|
| (196) |
State and municipal |
| 1,790 |
|
| (402) |
|
| 1,388 |
|
| 223 |
|
| (111) |
|
| 112 |
Other |
| (3) |
|
| - |
|
| (3) |
|
| 3 |
|
| - |
|
| 3 |
Total investments |
| 2,373 |
|
| (1,145) |
|
| 1,228 |
|
| 414 |
|
| (469) |
|
| (55) |
Loans and leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
| 899 |
|
| (573) |
|
| 326 |
|
| 958 |
|
| (529) |
|
| 429 |
C&I and CRE |
| 5,087 |
|
| 106 |
|
| 5,193 |
|
| 2,744 |
|
| (685) |
|
| 2,059 |
Consumer |
| (92) |
|
| (101) |
|
| (193) |
|
| 205 |
|
| 88 |
|
| 293 |
Total loans and leases |
| 5,894 |
|
| (568) |
|
| 5,326 |
|
| 3,907 |
|
| (1,126) |
|
| 2,781 |
Total interest income |
| 8,317 |
|
| (1,771) |
|
| 6,546 |
|
| 4,345 |
|
| (1,696) |
|
| 2,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking |
| 392 |
|
| (298) |
|
| 94 |
|
| 201 |
|
| (189) |
|
| 12 |
Savings and clubs |
| 24 |
|
| (14) |
|
| 10 |
|
| 4 |
|
| (25) |
|
| (21) |
Money market |
| 406 |
|
| (854) |
|
| (448) |
|
| 498 |
|
| (584) |
|
| (86) |
Certificates of deposit |
| (108) |
|
| (554) |
|
| (662) |
|
| 84 |
|
| (84) |
|
| - |
Total deposits |
| 714 |
|
| (1,720) |
|
| (1,006) |
|
| 787 |
|
| (882) |
|
| (95) |
Overnight borrowings |
| (136) |
|
| (59) |
|
| (195) |
|
| 184 |
|
| (521) |
|
| (337) |
FHLB advances |
| (224) |
|
| 22 |
|
| (202) |
|
| (67) |
|
| 25 |
|
| (42) |
Total interest expense |
| 354 |
|
| (1,757) |
|
| (1,403) |
|
| 904 |
|
| (1,378) |
|
| (474) |
Net interest income | $ | 7,963 |
| $ | (14) |
| $ | 7,949 |
| $ | 3,441 |
| $ | (318) |
| $ | 3,123 |
Provision for loan losses
The provision for loan losses represents the necessary amount to charge against current earnings, the purpose of which is to increase the allowance for loan losses (the allowance) to a level that represents management’s best estimate of known and inherent losses in the Company’s loan portfolio. Loans determined to be uncollectible are charged off against the allowance. The required amount of the provision for loan losses, based upon the adequate level of the allowance, is subject to the ongoing analysis of the loan portfolio. The Company’s Special Assets Committee meets periodically to review problem loans. The committee is comprised of management, including credit administration officers, loan officers, loan workout officers and collection personnel. The committee reports quarterly to the Credit Administration Committee of the board of directors.
Management continuously reviews the risks inherent in the loan portfolio. Specific factors used to evaluate the adequacy of the loan loss provision during the formal process include:
•specific loans that could have loss potential;
•levels of and trends in delinquencies and non-accrual loans;
•levels of and trends in charge-offs and recoveries;
•trends in volume and terms of loans;
•changes in risk selection and underwriting standards;
•changes in lending policies and legal and regulatory requirements;
•experience, ability and depth of lending management;
•national and local economic trends and conditions; and
•changes in credit concentrations.
For the six months ended June 30, 2021 and 2020, the Company recorded a provision for loan losses of $1.1 million and $2.2 million, respectively, a $1.1 million, or 50%, decrease. The decrease in the provision for loan losses from the year earlier period was primarily attributed to the COVID-related provisioning that occurred during the six months ended June 30, 2020, which was
not similarly warranted during the six months ended June 30, 2021 based upon the Company’s assessment of risk inherent in the portfolio, improving economic conditions both macro and micro, and qualitative and quantitative factors.
See the discussion of the qualitative factors within the “Allowance for loan losses” section of this management’s discussion and analysis. Although uncertainty over COVID’s duration and severity complicates management’s ability to render a more precise estimate of credit losses, management currently believes the level of provisioning for the six months ended June 30, 2021 was adequate based on the information that was available as of the reporting date and subsequent period up to the filing date.
The provision for loan losses derives from the reserve required from the allowance for loan losses calculation. The Company continued provisioning for the six months ended June 30, 2021 to maintain an allowance level that management deemed adequate.
For a discussion on the allowance for loan losses, see “Allowance for loan losses,” located in the comparison of financial condition section of management’s discussion and analysis contained herein.
Other income
For the second quarter of 2021, non-interest income amounted to $4.6 million, an increase of $1.9 million, or 69%, compared to $2.7 million recorded for the same 2020 period. Heightened mortgage activity, both originations and sales, caused gains on loan sales to increase $0.7 million. Interchange fees were $0.5 million higher than the second quarter of 2020 from increased debit card usage. Additionally, there were increases in loan service charges of $0.2 million, deposit service charges of $0.2 million and wealth management fees (fees from trust fiduciary activities and financial services) of $0.2 million.
Non-interest income totaled $10.1 million for the six months ended June 30, 2021, an increase of $4.6 million, or 85%, from the $5.5 million recorded for the six months ended June 30, 2020. The increase was primarily due to $2.8 million higher gains on loan sales due to continued demand for mortgages and $0.9 million in additional interchange fees from a higher number of transactions. Also contributing to the increase was $0.3 million in additional loan service charges, $0.2 million higher earnings on bank-owned life insurance, $0.3 million more in wealth management fees and $0.2 million higher service charges on deposits.
Operating expenses
For the quarter ended June 30, 2021, total non-interest expenses were $10.9 million, a decrease of $0.4 million, or 4%, compared to $11.3 million for the same 2020 quarter. The lower non-interest expenses resulted from $1.5 million less in merger-related expenses from the timing of the MNB merger and a $0.5 million FHLB prepayment penalty incurred during the second quarter of 2020. Excluding these non-recurring expenses, non-interest expenses increased 17% quarter-over-quarter. Salary and employee benefits rose $0.7 million, or 13%, to $5.8 million for the second quarter of 2021 from $5.1 million for the second quarter of 2020. The increase was primarily due to salaries and benefits from additional employees resulting from the merger. Premises and equipment expenses increased $0.2 million, or 13%, primarily due to property and equipment acquired from the merger. Professional fees increased $0.2 million due to expenses related to the pandemic, higher legal and audit expenses, and expenses after the merger with MNB. There was also a $0.5 million increase in other expenses primarily due to lower loan origination cost deferrals from commercial lending due to less PPP originations. Partially offsetting these increases was $0.2 million less in data processing and communications expenses.
For the six months ended June 30, 2021, non-interest expenses increased $3.7 million, or 20%, compared to the six months ended June 30, 2020, from $18.6 million to $22.3 million. Salaries and employee benefit expenses grew $2.6 million, or 29%. The increase stemmed from staff additions from new hires and employees from the MNB acquisition. Premises and equipment expenses increased $0.7 million, or 28%, due to higher expenses for pandemic response, depreciation and other expenses related to premises and equipment acquired from the merger. Professional services increased $0.7 million primarily due to higher audit, legal and pandemic-related service expenses. Advertising and marketing expenses increased $0.5 million from additional advertising and donations. Partially offsetting these increases, merger-related expenses were $1.3 million lower for the first half of 2021 compared to the same 2020 period due to the timing of the closing of the MNB merger compared to the Landmark merger.
The ratios of non-interest expense less non-interest income to average assets, known as the expense ratio, were 1.34% and 2.08% for the six months ended June 30, 2021 and 2020. The expense ratio decreased because of increased levels of average assets. The efficiency ratio (non-GAAP) decreased from 75.37% at June 30, 2020 to 59.06% at June 30, 2021 due to revenue increasing faster than expenses with a larger amount of merger-related expenses recognized during the first half of 2020. For more information on the calculation of the efficiency ratio, see “Non-GAAP Financial Measures” located within this management’s discussion and analysis.
Merger related expenses expected to be incurred by the Company of $2.4 million are anticipated over the remainder of 2021 for legal, audit, data processing, regulatory filings, shareholder conversion and severance costs for the pending merger with Landmark Bancorp, Inc.
Provision for income taxes
The provision for income taxes increased $1.0 million and $1.5 million for the three and six months ended June 30, 2021 compared to the same 2020 periods due to higher pre-tax income. The Company's effective tax rate was 15.6% at June 30, 2021 compared to 16.9% at June 30, 2020. The difference between the effective rate and the enacted statutory corporate rate of 21% is due mostly to the effect of tax-exempt income in relation to the level of pre-tax income. The decrease in the effective tax rate was primarily due to
higher tax-exempt interest income. Due to challenges relating to current market conditions, the Company may not have the ability to make a reliable estimate of all or part of its ordinary income. If the federal corporate tax rate is increased, the Company’s net deferred tax liabilities will be re-valued upon adoption of the new tax rate. A federal tax rate increase will increase net deferred tax liabilities with a corresponding increase to provision for income taxes.
Comparison of financial condition at
June 30, 2021 and December 31, 2020
Overview
Consolidated assets increased $249.7 million, or 15%, to $1.9 billion as of June 30, 2021 from $1.7 billion as of December 31, 2020. The increase in assets occurred primarily in cash and cash equivalents and the investment portfolio funded by growth in deposits. As explained in greater detail below, growth in deposits occurred because of business activity, government relief due to the pandemic and increases in personal account balances. Cash inflow from growth in deposits of $248.2 million was used to purchase investment securities and pay down borrowings.
Funds Deployed:
Investment securities
At the time of purchase, management classifies investment securities into one of three categories: trading, available-for-sale (AFS) or held-to-maturity (HTM). To date, management has not purchased any securities for trading purposes. All of the securities the Company purchases are classified as AFS even though there is no immediate intent to sell them. The AFS designation affords management the flexibility to sell securities and position the balance sheet in response to capital levels, liquidity needs or changes in market conditions. Debt securities AFS are carried at fair value on the consolidated balance sheets with unrealized gains and losses, net of deferred income taxes, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (AOCI). Securities designated as HTM are carried at amortized cost and represent debt securities that the Company has the ability and intent to hold until maturity.
As of June 30, 2021, the carrying value of investment securities amounted to $555.0 million, or 28% of total assets, compared to $392.4 million, or 23% of total assets, at December 31, 2020. As of June 30, 2021, 36% of the carrying value of the investment portfolio was comprised of U.S. Government Sponsored Enterprise residential mortgage-backed securities (MBS – GSE residential or mortgage-backed securities) that amortize and provide monthly cash flow that the Company can use for reinvestment, loan demand, unexpected deposit outflow, facility expansion or operations.
Investment securities were comprised of AFS securities as of June 30, 2021 and December 31, 2020. The AFS securities were recorded with a net unrealized gain of $6.7 million as of June 30, 2021 and a net unrealized gain of $11.3 million as of December 31, 2020. Of the net decline in the unrealized gain position of $4.6 million, $1.4 million was attributable to municipal securities, $2.2 million was attributable to mortgage-backed securities and $1.0 million was attributable to agency securities. The direction and magnitude of the change in value of the Company’s investment portfolio is attributable to the direction and magnitude of the change in interest rates along the treasury yield curve. Generally, the values of debt securities move in the opposite direction of the changes in interest rates. As interest rates along the treasury yield curve rise, especially at the intermediate and long end, the values of debt securities tend to decline. Whether or not the value of the Company’s investment portfolio will continue to change above or below its amortized cost will be largely dependent on the direction and magnitude of interest rate movements and the duration of the debt securities within the Company’s investment portfolio. Management does not consider the reduction in value attributable to changes in credit quality. Correspondingly, when interest rates decline, the market values of the Company’s debt securities portfolio could be subject to market value increases.
As of June 30, 2021, the Company had $306.5 million in public deposits, or 17% of total deposits. Pennsylvania state law requires the Company to maintain pledged securities on these public deposits or otherwise obtain a FHLB letter of credit or FDIC insurance for these customers. As of June 30, 2021, the balance of pledged securities required for public and trust deposits was $310.7 million, or 56% of total securities.
Quarterly, management performs a review of the investment portfolio to determine the causes of declines in the fair value of each security. The Company uses inputs provided by independent third parties to determine the fair value of its investment securities portfolio. Inputs provided by the third parties are reviewed and corroborated by management. Evaluations of the causes of the unrealized losses are performed to determine whether impairment exists and whether the impairment is temporary or other-than-temporary. Considerations such as the Company’s intent and ability to hold the securities until or sell prior to maturity, recoverability of the invested amounts over the intended holding period, the length of time and the severity in pricing decline below cost, the interest rate environment, the receipt of amounts contractually due and whether or not there is an active market for the securities, for example, are applied, along with an analysis of the financial condition of the issuer for management to make a realistic judgment of the probability that the Company will be unable to collect all amounts (principal and interest) due in determining whether a security is other-than-temporarily impaired. If a decline in value is deemed to be other-than-temporary, the amortized cost of the security is reduced by the credit impairment amount and a corresponding charge to current earnings is recognized. During the six months ended June 30, 2021, the Company did not incur other-than-temporary impairment charges from its investment securities portfolio.
During the six months ended June 30, 2021, the carrying value of total investments increased $162.5 million, or 41%. The growth in the investment portfolio was due to the increase in low earning cash that was used to purchase higher yielding securities. The Company attempts to maintain a well-diversified and proportionate investment portfolio that is structured to complement the strategic direction of the Company. Its growth typically supplements the lending activities but also considers the current and forecasted economic conditions, the Company’s liquidity needs and interest rate risk profile.
A comparison of investment securities at June 30, 2021 and December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2021 | December 31, 2020 | ||||||||
(dollars in thousands) | Amount |
| % | Amount |
| % | ||||
|
|
|
|
|
|
|
|
|
|
|
MBS - GSE residential | $ | 198,330 |
| 35.7 | % | $ | 147,260 |
| 37.5 | % |
State & municipal subdivisions |
| 261,227 |
| 47.1 |
|
| 199,713 |
| 50.9 |
|
Agency - GSE |
| 95,398 |
| 17.2 |
|
| 45,447 |
| 11.6 |
|
Total | $ | 554,955 |
| 100.0 | % | $ | 392,420 |
| 100.0 | % |
As of June 30, 2021, there were no investments from any one issuer with an aggregate book value that exceeded 10% of the Company’s shareholders’ equity.
The distribution of debt securities by stated maturity and tax-equivalent yield at June 30, 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| More than |
| More than |
| More than |
|
|
|
|
| |||||||||
| One year or less |
| one year to five years |
| five years to ten years |
| ten years |
| Total | |||||||||||||||
(dollars in thousands) | $ | % |
| $ | % |
| $ | % |
| $ | % |
| $ | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS - GSE residential | $ | - | - | % |
| $ | 151 | 3.88 | % |
| $ | 5,401 | 2.24 | % |
| $ | 192,778 | 1.65 | % |
| $ | 198,330 | 1.67 | % |
State & municipal subdivisions |
| 1,212 | 4.61 |
|
|
| - | - |
|
|
| 23,972 | 1.59 |
|
|
| 236,043 | 2.50 |
|
|
| 261,227 | 2.42 |
|
Agency - GSE |
| - | - |
|
|
| 6,260 | 2.69 |
|
|
| 73,275 | 1.25 |
|
|
| 15,863 | 1.72 |
|
|
| 95,398 | 1.41 |
|
Total debt securities | $ | 1,212 | 4.61 | % |
| $ | 6,411 | 2.72 | % |
| $ | 102,648 | 1.38 | % |
| $ | 444,684 | 2.08 | % |
| $ | 554,955 | 1.96 | % |
|
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|
In the above table, the book yields on state & municipal subdivisions were adjusted to a tax-equivalent basis using the corporate federal tax rate of 21%. In addition, average yields on securities AFS are based on amortized cost and do not reflect unrealized gains or losses.
Restricted investments in bank stock
Investment in Federal Home Loan Bank (FHLB) stock is required for membership in the organization and is carried at cost since there is no market value available. The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB of Pittsburgh. Excess stock is repurchased from the Company at par if the amount of borrowings decline to a predetermined level. In addition, the Company earns a return or dividend based on the amount invested. Atlantic Community Bankers Bank (ACBB) stock totaling $45 thousand was acquired from the merger with MNB in 2020. The dividends received from the FHLB totaled $70 thousand and $119 thousand for the six months ended June 30, 2021 and 2020, respectively. The balance in FHLB and ACBB stock was $3.2 million and $2.8 million as of June 30, 2021 and December 31, 2020, respectively.
Loans held-for-sale (HFS)
Upon origination, most residential mortgages and certain Small Business Administration (SBA) guaranteed loans may be classified as held-for-sale (HFS). In the event of market rate increases, fixed-rate loans and loans not immediately scheduled to re-price would no longer produce yields consistent with the current market. In declining interest rate environments, the Company would be exposed to prepayment risk as rates on fixed-rate loans decrease, and customers look to refinance loans. Consideration is given to the Company’s current liquidity position and projected future liquidity needs. To better manage prepayment and interest rate risk, loans that meet these conditions may be classified as HFS. Occasionally, residential mortgage and/or other nonmortgage loans may be transferred from the loan portfolio to HFS. The carrying value of loans HFS is based on the lower of cost or estimated fair value. If the fair values of these loans decline below their original cost, the difference is written down and charged to current earnings. Subsequent appreciation in the portfolio is credited to current earnings but only to the extent of previous write-downs.
As of June 30, 2021 and December 31, 2020, loans HFS consisted of residential mortgages with carrying amounts of $6.7 million and $29.8 million, respectively, which approximated their fair values. During the six months ended June 30, 2021, residential mortgage loans with principal balances of $133.6 million were sold into the secondary market and the Company recognized net gains of $3.5 million, compared to $41.2 million and $0.7 million, respectively, during the six months ended June 30, 2020.
The Company retains mortgage servicing rights (MSRs) on loans sold into the secondary market. MSRs are retained so that the Company can foster personal relationships. At June 30, 2021 and December 31, 2020, the servicing portfolio balance of sold residential mortgage loans was $447.8 million and $366.5 million, respectively, with mortgage servicing rights of $2.0 million and $1.3 million for the same periods, respectively.
Loans and leases
As of June 30, 2021, the Company had gross loans and leases, including originated loans, MNB-acquired loans, and PPP loans, totaling $1.13 billion compared to $1.12 billion at December 31, 2020, an increase of $8 million, or 1%.
Growth in the portfolio was attributed to a $76 million, or 10%, increase in originated loans (excluding PPP loans) partially offset by a $32 million, or 15%, decrease in MNB-acquired loans, and $36 million, or 28%, decrease in PPP loans, net of deferred fees. Growth in originated loans was primarily attributed to the commercial real estate portfolio, resulting from the origination of several large commercial real estate loans during 2021, and the residential portfolio, stemming from the strength of the housing market in the Company’s service area and the low interest rate environment.
The composition of the loan portfolio at June 30, 2021 and December 31, 2020 is summarized as follows:
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|
|
| June 30, 2021 |
| December 31, 2020 | ||||||||
(dollars in thousands) | Amount |
| % |
| Amount |
| % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial | $ | 247,796 |
| 21.9 | % |
| $ | 280,757 |
| 25.0 | % |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied |
| 210,236 |
| 18.6 |
|
|
| 192,143 |
| 17.1 |
|
Owner occupied |
| 181,378 |
| 16.1 |
|
|
| 179,923 |
| 16.1 |
|
Construction |
| 11,983 |
| 1.1 |
|
|
| 10,231 |
| 0.9 |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
Home equity installment |
| 38,123 |
| 3.4 |
|
|
| 40,147 |
| 3.6 |
|
Home equity line of credit |
| 50,478 |
| 4.5 |
|
|
| 49,725 |
| 4.4 |
|
Auto |
| 98,007 |
| 8.7 |
|
|
| 98,386 |
| 8.8 |
|
Direct finance leases |
| 22,091 |
| 2.0 |
|
|
| 20,095 |
| 1.8 |
|
Other |
| 7,183 |
| 0.6 |
|
|
| 7,602 |
| 0.7 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
Real estate |
| 233,970 |
| 20.7 |
|
|
| 218,445 |
| 19.5 |
|
Construction |
| 27,511 |
| 2.4 |
|
|
| 23,357 |
| 2.1 |
|
Gross loans |
| 1,128,756 |
| 100.0 | % |
|
| 1,120,811 |
| 100.0 | % |
Less: |
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
| (15,245) |
|
|
|
|
| (14,202) |
|
|
|
Unearned lease revenue |
| (1,261) |
|
|
|
|
| (1,159) |
|
|
|
Net loans | $ | 1,112,250 |
|
|
|
| $ | 1,105,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale | $ | 6,662 |
|
|
|
| $ | 29,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & industrial and commercial real estate
As of June 30, 2021, the commercial loan portfolio declined by $12 million, or 2%, to $651 million over the December 31, 2020 balance of $663 million. Year-to-date portfolio contraction was attributed to a $36 million net reduction in PPP loans and $23 million decrease in the MNB-acquired loans partially offset by $47 million net growth in the remaining portfolio. During the first half of 2021, the Company experienced commercial loan growth, excluding PPP loans, from originating over $67 million in commercial loans.
The commercial loan portfolio consisted of $513 million in originated loans, including $94 million in PPP loans, and $138 million in loans acquired from MNB as of June 30, 2021.
Paycheck Protection Program Loans
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”).
As a qualified SBA lender, the Company was automatically authorized to originate PPP loans, and during the second and third quarter of 2020, the Company originated 1,551 loans totaling $159 million under the Paycheck Protection Program.
Under the PPP, the entire principal amount of the borrower’s loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount, so long as the employer maintains or quickly rehires employees and maintains salary levels and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.
As part of the Economic Relief Act, which became law on December 27, 2020, an additional $284 billion of federal resources was allocated to a reauthorized and revised PPP. On January 19, 2021, the Company began processing and originating PPP loans for this second round, which subsequently ended on May 31, 2021, and during this round, the Company originated 1,022 loans totaling $77 million.
Beginning in the fourth quarter of 2020 and continuing during 2021, the Company submitted PPP forgiveness applications to the SBA, and through June 30, 2021, the Company received forgiveness or paydowns of $139 million, or 59%, of the original PPP loan balances of $236 million with $112 million occurring during the six months ended June 30, 2021.
As a PPP lender, the Company received fee income of approximately $9.9 million with $6.2 million recognized to date, including $3.3 million of PPP fee income recognized during 2020 and $2.9 million recognized during the six months ended June 30, 2021. Unearned fees attributed to PPP loans, net of $0.2 million in fees paid to referral sources as prescribed by the SBA under the PPP, were $3.5 million as of June 30, 2021.
The PPP loans originated by size were as follows as of June 30, 2021:
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|
|
(dollars in thousands) | Balance originated |
| Current balance |
| Total SBA fee |
| SBA fee recognized | ||||
$150,000 or less | $ | 76,594 |
| $ | 33,090 |
| $ | 4,866 |
| $ | 2,728 |
Greater than $150,000 but less than $2,000,000 |
| 128,082 |
|
| 54,511 |
|
| 4,765 |
|
| 3,228 |
$2,000,000 or higher |
| 31,656 |
|
| 10,000 |
|
| 316 |
|
| 282 |
Total PPP loans originated | $ | 236,332 |
| $ | 97,601 |
| $ | 9,947 |
| $ | 6,238 |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
The consumer loan portfolio consisted of home equity installment, home equity line of credit, auto, direct finance leases and other consumer loans.
As of June 30, 2021, the consumer loan portfolio was $216 million, unchanged from the December 31, 2020 balance, as $2 million in growth in originated loans, specifically home equity lines of credit and direct finance leases, was offset by a $2 million reduction in MNB-acquired loans from pay-downs.
Residential
As of June 30, 2021, the residential loan portfolio increased by $19 million, or 8%, to $261 million over the December 31, 2020 balance of $242 million. Growth was attributed to the strength of the housing market in the Company’s service area and the low interest rate environment.
The residential loan portfolio consisted primarily of held-for-investment residential loans for primary residences. Originated loans totaled $230 million and MNB-acquired loans totaled $31 million as of June 30, 2021 compared to Originated loans of $203 million and MNB-acquired loans of $38 million as of December 31, 2020.
The Company’s service team is experienced, knowledgeable, and dedicated to servicing the community and its clients. The Company will continue to provide products and services that benefit our clients as well as the community which is very important to our success. There is much uncertainty regarding the effects COVID-19 may have on demand for loans and leases. The Company has been proactively trying to reach out to customers to understand their needs during this crisis.
Allowance for loan losses
Management evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance for loan losses (allowance) on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. Management’s judgment is based on the evaluation of individual loans, experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. The provision for loan losses represents the amount necessary to maintain an appropriate allowance. Loan losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received.
Management applies two primary components during the loan review process to determine proper allowance levels. The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated. The methodology to analyze the adequacy of the allowance for loan losses is as follows:
identification of specific impaired loans by loan category;
calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;
determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;
application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation;
application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio, regulations, and/or current economic conditions.
A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial loans. Commercial loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management determines an upgrade or downgrade may be warranted. The credit risk grades for the commercial loan portfolio are considered in the reserve methodology and loss factors are applied based upon the credit risk grades. The loss factors applied are based upon the Company’s historical experience as well as what management believes to be best practices and within common industry standards. Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs. The changes in allocations in the commercial loan portfolio from period-to-period are based upon the credit risk grading system and from periodic reviews of the loan portfolio.
Acquired loans are initially recorded at their acquisition date fair values with no carryover of the existing related allowance for loan losses. Fair values are based on a discounted cash flow methodology that involves assumptions and judgements as to credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Upon acquisition, in accordance with GAAP, the Company has individually determined whether each acquired loan is within the scope of ASC 310-30. These loans are deemed purchased credit impaired loans and the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non accretable discount.
Acquired ASC 310-20 loans, which are loans that did not meet the criteria of ASC 310-30, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. These loans are initially recorded at fair value and include credit and interest rate marks associated with purchase accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. An allowance for loan losses is recorded for any credit deterioration in these loans after acquisition. As of June 30, 2021, no allowance was recorded for credit deterioration in acquired loans.
Each quarter, management performs an assessment of the allowance for loan losses. The Company’s Special Assets Committee meets quarterly, and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due. The assessment process also includes the review of all loans on non-accrual status as well as a review of certain loans to which the lenders or the Credit Administration function have assigned a criticized or classified risk rating.
The following tables set forth the activity in the allowance for loan losses and certain key ratios for the period indicated:
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|
|
|
|
|
|
|
|
|
| As of and for the | As of and for the | As of and for the | ||||||
| six months ended | twelve months ended | six months ended | ||||||
(dollars in thousands) | June 30, 2021 | December 31, 2020 | June 30, 2020 | ||||||
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period | $ | 14,202 |
| $ | 9,747 |
| $ | 9,747 |
|
|
|
|
|
|
|
|
|
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
Commercial and industrial |
| (106) |
|
| (372) |
|
| (260) |
|
Commercial real estate |
| (132) |
|
| (465) |
|
| (164) |
|
Consumer |
| (82) |
|
| (296) |
|
| (115) |
|
Residential |
| (43) |
|
| (35) |
|
| (31) |
|
Total |
| (363) |
|
| (1,168) |
|
| (570) |
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
Commercial and industrial |
| 15 |
|
| 26 |
|
| 18 |
|
Commercial real estate |
| 235 |
|
| 30 |
|
| 3 |
|
Consumer |
| 56 |
|
| 120 |
|
| 81 |
|
Residential |
| - |
|
| 197 |
|
| 192 |
|
Total |
| 306 |
|
| 373 |
|
| 294 |
|
Net charge-offs |
| (57) |
|
| (795) |
|
| (276) |
|
Provision for loan losses |
| 1,100 |
|
| 5,250 |
|
| 2,200 |
|
Balance at end of period | $ | 15,245 |
| $ | 14,202 |
| $ | 11,671 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans |
| 1.35 | % |
| 1.27 | % |
| 1.04 | % |
Net charge-offs to average total loans outstanding |
| 0.01 | % |
| 0.08 | % |
| 0.06 | % |
Average total loans | $ | 1,156,166 |
| $ | 1,019,373 |
| $ | 890,221 |
|
Loans 30 - 89 days past due and accruing | $ | 5,072 |
| $ | 1,598 |
| $ | 893 |
|
Loans 90 days or more past due and accruing | $ | 24 |
| $ | 61 |
| $ | 122 |
|
Non-accrual loans | $ | 3,171 |
| $ | 3,769 |
| $ | 4,262 |
|
Allowance for loan losses to non-accrual loans |
| 4.81 | x |
| 3.77 | x |
| 2.74 | x |
Allowance for loan losses to non-performing loans |
| 4.77 | x |
| 3.71 | x |
| 2.66 | x |
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2021, the allowance increased $1.0 million, or 7%, to $15.2 million from $14.2 million at December 31, 2020 due to provisioning of $1.1 million partially offset by $0.1 million in net charge-offs. The allowance for loan and lease losses increased as a percentage of total loans to 1.35% from 1.27% at December 31, 2020 as the loan portfolio increased by 1% while the allowance for loan losses increased by 7% during the same period.
Loans acquired from the MNB merger (performing and non-performing) were initially recorded at their acquisition-date fair values. Because there is no initial credit valuation allowance recorded under this method, the Company establishes a post-acquisition allowance of loan losses to record losses which may subsequently arise on the acquired loans. Since no deterioration was noted for any such loans following acquisition, no allowance for loan and lease losses was provided at this time.
PPP loans made to eligible borrowers have a 100% SBA guarantee. Given this guarantee, no allowance for loan and lease losses was recorded for these loans.
Management believes that the current balance in the allowance for loan losses is sufficient to meet the identified potential credit quality issues that may arise and other issues unidentified but inherent to the portfolio. Potential problem loans are those where there is known information that leads management to believe repayment of principal and/or interest is in jeopardy and the loans are currently neither on non-accrual status nor past due 90 days or more.
During the first quarter of 2021, management increased the qualitative factors associated with its commercial, consumer, and residential portfolios related to the rise in rates that occurred during the quarter, and the adverse impact that these increased rates are anticipated to have on estimated credit losses.
During the second quarter of 2021, management increased the qualitative factors associated with its commercial & industrial portfolio related to the rising delinquency observed during this period.
Management will continue to monitor the potential for increased risk exposure due to the adverse economic impact of a prolonged COVID-19 pandemic. Should the duration and/or severity of the pandemic’s economic impact increase, management will take
measures commensurate with the then observed risk to increase the provision for loan losses and, by extension, the allowance for loan and lease losses as appropriate.
The allocation of net charge-offs among major categories of loans are as follows for the periods indicated:
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|
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|
|
|
|
|
|
|
|
|
| For the six |
| % of Total |
| For the six |
| % of Total | ||||
| months ended |
| Net |
| months ended |
| Net | ||||
(dollars in thousands) | June 30, 2021 |
| Charge-offs |
| June 30, 2020 |
| Charge-offs | ||||
Net charge-offs |
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial | $ | (91) |
| 160 | % |
| $ | (242) |
| 88 | % |
Commercial real estate |
| 103 |
| (181) |
|
|
| (161) |
| 58 |
|
Consumer |
| (26) |
| 46 |
|
|
| (34) |
| 12 |
|
Residential |
| (43) |
| 75 |
|
|
| 161 |
| (58) |
|
Total net charge-offs | $ | (57) |
| 100 | % |
| $ | (276) |
| 100 | % |
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2021, net charge-offs against the allowance totaled $57 thousand compared with net charge-offs of $276 thousand for the six months ended June 30, 2020, representing a $219 thousand, or 79%, decease. This decrease was attributed to general economic improvement and continued high levels of liquidity for the Company’s customers.
For a discussion on the provision for loan losses, see the “Provision for loan losses,” located in the results of operations section of management’s discussion and analysis contained herein.
The allowance for loan losses can generally absorb losses throughout the loan portfolio. However, in some instances an allocation is made for specific loans or groups of loans. Allocation of the allowance for loan losses for different categories of loans is based on the methodology used by the Company, as previously explained. The changes in the allocations from period-to-period are based upon quarter-end reviews of the loan portfolio.
Allocation of the allowance among major categories of loans for the periods indicated, as well as the percentage of loans in each category to total loans, is summarized in the following table. This table should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or proportions, or that the allocation indicates future charge-off trends. When present, the portion of the allowance designated as unallocated is within the Company’s guidelines:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2021 |
| December 31, 2020 |
| June 30, 2020 | ||||||||||||
|
|
|
| Category |
|
|
|
| Category |
|
|
|
| Category | |||
|
|
|
| % of |
|
|
|
| % of |
|
|
|
| % of | |||
(dollars in thousands) | Allowance |
| Loans |
| Allowance |
| Loans |
| Allowance |
| Loans | ||||||
Category |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate | $ | 7,228 |
| 36 | % |
| $ | 6,383 |
| 34 | % |
| $ | 5,346 |
| 34 | % |
Commercial and industrial |
| 2,324 |
| 22 |
|
|
| 2,407 |
| 25 |
|
|
| 1,467 |
| 26 |
|
Consumer |
| 2,497 |
| 19 |
|
|
| 2,552 |
| 19 |
|
|
| 2,146 |
| 19 |
|
Residential real estate |
| 3,070 |
| 23 |
|
|
| 2,781 |
| 22 |
|
|
| 2,688 |
| 21 |
|
Unallocated |
| 126 |
| - |
|
|
| 79 |
| - |
|
|
| 24 |
| - |
|
Total | $ | 15,245 |
| 100 | % |
| $ | 14,202 |
| 100 | % |
| $ | 11,671 |
| 100 | % |
The allocation of the allowance for the commercial loan portfolio, which is comprised of CRE and C&I loans, accounted for approximately 63% of the total allowance for loan losses at June 30, 2021, which represents a one percentage point increase from 62% of the total allowance for loan losses at December 31, 2020 and a five percentage point increase from the 58% of the total allowance for loan and lease losses at June 30, 2020.
The increase in the allowance allocated to the commercial portfolio was attributed to the recognition of increased inherent risk due to the economic impact of the COVID-19 pandemic.
The allocation of the allowance for the consumer loan portfolio, accounted for approximately 16% of the total allowance for loan losses at June 30, 2021, which represents a two percentage point decrease from 18% of the total allowance for loan losses at December 31, 2020 and a two percentage point decrease from 18% of the total allowance for loan losses at June 30, 2020.
The decrease in the allowance allocated to the consumer loan portfolio was attributed to the relative increase in the COVID-related inherent risk in the commercial loan portfolio.
The allocation of the allowance for the residential real estate portfolio, accounted for approximately 20% of the total allowance for loan losses at June 30, 2021 unchanged from 20% of the total allowance for loan losses at December 31, 2020 and a three percentage point decrease from 23% of the total allowance for loan losses at June 30, 2020.
The year-over-year decrease in the allowance allocated to the residential real estate portfolio was attributed to the relative increase in the COVID-related inherent risk in the commercial loan portfolio.
The unallocated amount represents the portion of the allowance not specifically identified with a loan or groups of loans. The unallocated reserve was less than 1% of the total allowance for loan losses at June 30, 2021, unchanged from less than 1% of the total allowance for loan losses at December 31, 2020 and June 30, 2020.
Non-performing assets
The Company defines non-performing assets as accruing loans past due 90 days or more, non-accrual loans, troubled debt restructurings (TDRs), other real estate owned (ORE) and repossessed assets.
The following table sets forth non-performing assets data as of the period indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) | June 30, 2021 |
| December 31, 2020 |
| June 30, 2020 | |||
|
|
|
|
|
|
|
|
|
Loans past due 90 days or more and accruing | $ | 24 |
| $ | 61 |
| $ | 122 |
Non-accrual loans * |
| 3,171 |
|
| 3,769 |
|
| 4,262 |
Total non-performing loans |
| 3,195 |
|
| 3,830 |
|
| 4,384 |
Troubled debt restructurings |
| 2,484 |
|
| 2,571 |
|
| 983 |
Other real estate owned and repossessed assets |
| 365 |
|
| 256 |
|
| 185 |
Total non-performing assets | $ | 6,044 |
| $ | 6,657 |
| $ | 5,552 |
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|
|
Total loans, including loans held-for-sale | $ | 1,134,157 |
| $ | 1,149,438 |
| $ | 1,141,692 |
Total assets | $ | 1,949,233 |
| $ | 1,699,510 |
| $ | 1,801,530 |
Non-accrual loans to total loans |
| 0.28% |
|
| 0.33% |
|
| 0.37% |
Non-performing loans to total loans |
| 0.28% |
|
| 0.33% |
|
| 0.38% |
Non-performing assets to total assets |
| 0.31% |
|
| 0.39% |
|
| 0.31% |
* In the table above, the amount includes non-accrual TDRs of $0.6 million as of June 30, 2021, $0.7 million as of December 31, 2020 and $0.6 million as of June 30, 2020.
In the review of loans for both delinquency and collateral sufficiency, management concluded that there were several loans that lacked the ability to repay in accordance with contractual terms. The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan. Generally, commercial loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection. Consumer loans secured by residential real estate and residential mortgage loans are placed on non-accrual status at 90 days past due as to principal and interest, and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest. Uncollected interest income accrued on all loans placed on non-accrual is reversed and charged to interest income.
Non-performing assets represented 0.31% of total assets June 30, 2021 compared with 0.39% at December 31, 2020 and 0.31% at June 30, 2020. The year-to-date improvement in the non-performing assets ratio was the result of the $0.6 million, or 9%, decrease in non-performing assets, specifically non-accrual loans, coupled with the $250 million, or 15%, increase in total assets to $1.9 billion at June 30, 2021.
From December 31, 2020 to June 30, 2021, non-accrual loans declined $0.6 million, or 16%, from $3.8 million to $3.2 million. The $0.6 million decline in non-accrual loans was the result of $0.9 million in payments, $0.2 million in charge-offs, and $0.1 million in moves to ORE offset by $0.6 million in additions. At June 30, 2021, there were a total of 35 loans to 30 unrelated borrowers with balances that ranged from less than $1 thousand to $0.5 million. At December 31, 2020, there were a total of 46 loans to 38 unrelated borrowers with balances that ranged from less than $1 thousand to $0.5 million.
There was one direct finance lease totaling $24 thousand that was over 90 days past due as of June 30, 2021 compared to two direct finance leases totaling $61 thousand that were over 90 days past due as of December 31, 2020. The Company seeks payments from all past due customers through an aggressive customer communication process. A past due loan will be placed on non-accrual at the 90-day point when it is deemed that a customer is non-responsive and uncooperative to collection efforts.
The composition of non-performing loans as of June 30, 2021 is as follows:
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| Past due |
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| |
| Gross |
| 90 days or |
| Non- |
| Total non- |
| % of | ||||
| loan |
| more and |
| accrual |
| performing |
| gross | ||||
(dollars in thousands) | balances |
| still accruing |
| loans |
| loans |
| loans | ||||
Commercial and industrial | $ | 247,796 |
| $ | - |
| $ | 390 |
| $ | 390 |
| 0.16% |
Commercial real estate: |
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|
|
|
|
|
|
|
Non-owner occupied |
| 210,236 |
|
| - |
|
| 759 |
|
| 759 |
| 0.36% |
Owner occupied |
| 181,378 |
|
| - |
|
| 1,120 |
|
| 1,120 |
| 0.62% |
Construction |
| 11,983 |
|
| - |
|
| - |
|
| - |
| - |
Consumer: |
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|
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|
|
|
Home equity installment |
| 38,123 |
|
| - |
|
| 28 |
|
| 28 |
| 0.07% |
Home equity line of credit |
| 50,478 |
|
| - |
|
| 131 |
|
| 131 |
| 0.26% |
Auto loans |
| 98,007 |
|
| - |
|
| 39 |
|
| 39 |
| 0.04% |
Direct finance leases * |
| 20,830 |
|
| 24 |
|
| - |
|
| 24 |
| 0.12% |
Other |
| 7,183 |
|
| - |
|
| - |
|
| - |
| - |
Residential: |
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|
|
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|
|
|
Real estate |
| 233,970 |
|
| - |
|
| 704 |
|
| 704 |
| 0.30% |
Construction |
| 27,511 |
|
| - |
|
| - |
|
| - |
| - |
Loans held-for-sale |
| 6,662 |
|
| - |
|
| - |
|
| - |
| - |
Total | $ | 1,134,157 |
| $ | 24 |
| $ | 3,171 |
| $ | 3,195 |
| 0.28% |
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*Net of unearned lease revenue of $1.3 million.
Payments received from non-accrual loans are recognized on a cost recovery method. Payments are first applied to the outstanding principal balance, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of interest income. If the non-accrual loans that were outstanding as of June 30, 2021 had been performing in accordance with their original terms, the Company would have recognized interest income with respect to such loans of $150 thousand.
The following tables set forth the activity in TDRs for the periods indicated:
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As of and for the six months ended June 30, 2021 |
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| |||||
| Accruing |
| Non-accruing |
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| |||||
| Commercial |
| Commercial |
| Commercial |
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| ||||
(dollars in thousands) | real estate |
| real estate |
| & industrial |
| Total | ||||
Troubled Debt Restructures: |
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Beginning balance | $ | 2,571 |
| $ | 456 |
| $ | 206 |
| $ | 3,233 |
Additions |
| 2 |
|
| - |
|
| - |
|
| 2 |
Pay downs / payoffs |
| (89) |
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| (37) |
|
| (6) |
|
| (132) |
Charge offs |
| - |
|
| - |
|
| (65) |
|
| (65) |
Ending balance | $ | 2,484 |
| $ | 419 |
| $ | 135 |
| $ | 3,038 |
Number of loans |
| 7 |
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| 1 |
|
| 2 |
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| 10 |
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As of and for the year ended December 31, 2020 |
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| ||
| Accruing |
| Non-accruing |
|
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| |||||
| Commercial |
| Commercial |
| Commercial |
|
| ||||
(dollars in thousands) | real estate |
| real estate |
| & industrial |
| Total | ||||
Troubled Debt Restructures: |
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|
|
Beginning balance | $ | 991 |
| $ | 561 |
| $ | - |
| $ | 1,552 |
Additions |
| 1,600 |
|
| 2 |
|
| 206 |
|
| 1,808 |
Pay downs / payoffs |
| (20) |
|
| (8) |
|
| - |
|
| (28) |
Charge offs |
| - |
|
| (99) |
|
| - |
|
| (99) |
Ending balance | $ | 2,571 |
| $ | 456 |
| $ | 206 |
| $ | 3,233 |
Number of loans |
| 8 |
|
| 2 |
|
| 2 |
|
| 12 |
The Company, on a regular basis, reviews changes to loans to determine if they meet the definition of a TDR. TDRs arise when a borrower experiences financial difficulty and the Company grants a concession that it would not otherwise grant based on current underwriting standards in order to maximize the Company’s recovery.
Consistent with Section 4013 and the Revised Statement of Section 4013 of the CARES Act, specifically “Temporary Relief From Troubled Debt Restructurings”, the Company approved requests by borrowers to modify loan terms and defer principal and/or interest payment for loans. U.S. GAAP permits the temporary suspension of TDR determination defined under ASC 310-40 provided that such modifications are made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief. This includes short-term (i.e. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current for purposes of Section 4013 are those that are less than 30 days past due on their contractual payments at the time the modification program is implemented.
From December 31, 2020 to June 30, 2021, TDRs decreased $195 thousand, or 6%, primarily due to the payoff of a $78 thousand accruing commercial real estate TDR and charge-offs totaling $65 thousand for two non-accrual commercial real estate TDRs to a single borrower. At December 31, 2020, there were a total of 12 TDRs by 9 unrelated borrowers with balances that ranged from $1 thousand to $1.3 million, and at June 30, 2021, there were a total of 10 TDRs by 7 unrelated borrowers with balances that ranged from $50 thousand to $1.3 million.
Loans modified in a TDR may or may not be placed on non-accrual status. At June 30, 2021, there were three TDRs totaling $0.6 million that were on non-accrual status compared to four TDRs totaling $0.7 million at December 31, 2020.
Beginning the week of March 16, 2020, the Company began receiving requests for temporary modifications to the repayment structure for borrower loans. Modification terms included interest only or full payment deferral for up to 6 months. As of June 30, 2021, the Company had 2 temporary modifications with principal balances totaling $0.7 million outstanding, which included 1 additional deferral request for temporary forbearance modifications totaling $0.5 million and 1 first request for temporary forbearance modification totaling $0.2 million.
Details with respect to the actual loan modifications are as follows:
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Types of Loans |
| Number of Loans |
| Deferral Period |
| Balance |
| Percentage of Tier 1 Capital |
Commercial Purpose |
| 2 |
| Up to 6 months | $ | 725 |
| 0.5% |
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The following table provides information with respect to the Company’s commercial COVID-19 accommodations by sector at June 30, 2021.
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(dollars in thousands) | Count |
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| Balance |
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Retail Trade | 1 |
| $ | 544 |
Manufacturing | 1 |
|
| 181 |
Total commercial accommodations | 2 |
| $ | 725 |
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|
The global pandemic referred to as COVID-19, and the government responses, thereafter, have created many impediments to loan production relative to the measures taken to slow the spread. These measures have put a large strain on a wide variety of industries within the global economy generally, and the Company’s market specifically. The overall economic impact and effect of the measures is yet to be fully understood as its effects will most likely lag while businesses and governments inject resources to help lessen the impact. Despite efforts to lessen the impact, it is the Company’s current belief that the pandemic will temporarily, or in some cases permanently, damage our borrower’s ability to repay loans and comply with terms.
Foreclosed assets held-for-sale
From December 31, 2020 to June 30, 2021, foreclosed assets held-for-sale (ORE) increased from $256 thousand to $365 thousand, a $109 thousand, or 43%, increase.
During the first quarter, two properties to two unrelated borrowers for $248 thousand were added; two properties for $90 thousand were sold; and one foreclosed asset was written down by $1 thousand to fair market value.
During the second quarter, one property for $44 thousand was added; two properties for $79 thousand were sold; and one foreclosed asset was written down by $13 thousand to fair market value.
The following table sets forth the activity in the ORE component of foreclosed assets held-for-sale:
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| June 30, 2021 |
| December 31, 2020 | ||||
(dollars in thousands) | Amount | # |
| Amount | # | ||
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Balance at beginning of period | $ | 256 | 6 |
| $ | 349 | 7 |
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Additions |
| 292 | 3 |
|
| 770 | 10 |
Pay downs |
| - |
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|
| (1) |
|
Write downs |
| (14) |
|
|
| (36) |
|
Sold |
| (169) | (4) |
|
| (826) | (11) |
Balance at end of period | $ | 365 | 5 |
| $ | 256 | 6 |
As of June 30, 2021, ORE consisted of five properties securing loans to five unrelated borrowers totaling $365 thousand. Two properties ($280 thousand) to two unrelated borrowers were added in 2021; one property ($53 thousand) was added in 2020; one property ($31 thousand) was added in 2019 and one property ($1 thousand) was added in 2017. Of the five properties, three properties are under agreement of sale and two properties are listed for sale.
As of June 30, 2021 and December 31, 2020, the Company had no other repossessed assets held-for-sale.
Cash surrender value of bank owned life insurance
The Company maintains bank owned life insurance (BOLI) for a chosen group of employees at the time of purchase, namely its officers, where the Company is the owner and sole beneficiary of the policies. BOLI is classified as a non-interest earning asset. Increases in the cash surrender value are recorded as components of non-interest income. The BOLI is profitable from the appreciation of the cash surrender values of the pool of insurance and its tax-free advantage to the Company. This profitability is used to offset a portion of current and future employee benefit costs. In March 2019, the Company invested $2.0 million in additional BOLI as a source of funding for additional life insurance benefits that provides for payments upon death for officers and employee benefit expenses related to the Company’s non-qualified SERP implemented for certain executive officers. In December 2020, the Company invested $6 million in BOLI and $5 million in BOLI with taxable annuity rider investments. The BOLI cash surrender value build-up can be liquidated if necessary, with associated tax costs. However, the Company intends to hold this pool of insurance, because it provides income that enhances the Company’s capital position. Therefore, the Company has not provided for deferred income taxes on the earnings from the increase in cash surrender value.
Premises and equipment
Net of depreciation, premises and equipment remained unchanged for the first half of 2021. The Company added $1.1 million in fixed assets which was offset by $1.0 million in depreciation expense and a $0.1 million charge-off of construction in process. The Company expects to begin branch remodeling and corporate center planning which may increase construction in process by approximately $2.5 million in 2021. On December 23, 2020, the Commonwealth of Pennsylvania authorized the release of $2.0 million in Redevelopment Assistance Capital Program (RACP) funding for the Company’s headquarters project in Lackawanna County. Although the Company was awarded the grant, funds will not be available until a final project is selected and certain requirements are met.
Other assets
During the first six months of 2021, the $1.8 million increase in other assets was due mostly to $1.1 million of security settlements pending and $0.7 million increase in mortgage servicing rights.
Funds Provided:
Deposits
The Company is a community based commercial depository financial institution, member FDIC, which offers a variety of deposit products with varying ranges of interest rates and terms. Generally, deposits are obtained from consumers, businesses and public entities within the communities that surround the Company’s 20 branch offices and all deposits are insured by the FDIC up to the full extent permitted by law. Deposit products consist of transaction accounts including: savings; clubs; interest-bearing checking; money market and non-interest bearing checking (DDA). The Company also offers short- and long-term time deposits or certificates of deposit (CDs). CDs are deposits with stated maturities which can range from seven days to ten years. Cash flow from deposits is influenced by economic conditions, changes in the interest rate environment, pricing and competition. To determine interest rates on its deposit products, the Company considers local competition, spreads to earning-asset yields, liquidity position and rates charged for alternative sources of funding such as short-term borrowings and FHLB advances.
The following table represents the components of deposits as of the date indicated:
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| June 30, 2021 | December 31, 2020 | ||||||||
(dollars in thousands) | Amount |
| % | Amount |
| % | ||||
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Interest-bearing checking | $ | 564,849 |
| 32.2 | % | $ | 453,896 |
| 30.0 | % |
Savings and clubs |
| 203,495 |
| 11.6 |
|
| 179,676 |
| 11.9 |
|
Money market |
| 394,187 |
| 22.4 |
|
| 340,654 |
| 22.6 |
|
Certificates of deposit |
| 104,078 |
| 5.9 |
|
| 127,783 |
| 8.5 |
|
Total interest-bearing |
| 1,266,609 |
| 72.1 |
|
| 1,102,009 |
| 73.0 |
|
Non-interest bearing |
| 491,051 |
| 27.9 |
|
| 407,496 |
| 27.0 |
|
Total deposits | $ | 1,757,660 |
| 100.0 | % | $ | 1,509,505 |
| 100.0 | % |
Total deposits increased $248.2 million, or 16%, from $1.5 billion at December 31, 2020 to $1.8 billion at June 30, 2021. Non-interest bearing and interest-bearing checking accounts contributed the most to the deposit growth with increases of $83.6 million and $111.0 million, respectively. Non-interest bearing checking included a $12.0 million temporary deposit from one business customer deposited at the end of the second quarter of 2021 that was withdrawn in the beginning of July. The remaining growth was primarily due to an increase in business account balances supplemented by an increase in personal account balances. The increase in interest-bearing checking accounts was primarily due to business activity, government relief due to the pandemic and shifts from maturing CDs. Money market accounts also increased $53.5 million mostly due to higher balances of personal and business accounts and shifts from other types of deposit accounts. The Company focuses on obtaining a full-banking relationship with existing checking account customers as well as forming new customer relationships. Savings accounts increased $23.8 million due primarily to an increase in personal account balances. The Company will continue to execute on its relationship development strategy, explore the demographics within its marketplace and develop creative programs for its customers. For the second half of 2021, the Company expects deposit growth to fund asset growth with expansion in the new Lehigh Valley market and the acquisition of Landmark during the third quarter. With pandemic-related restrictions fully lifted, the Company anticipates personal and business spending to increase and therefore average deposit balances to decline. Seasonal public deposit fluctuations are usual, and at times may partially offset future deposit growth.
During the first six months of 2021, CDs decreased $23.7 million as rates dropped during 2020 and previous years' promotional CDs reached maturity. Almost 50% of the maturing CD balances were rolled into a new CD. The majority of the remaining maturing CD balances were transferred to transactional accounts primarily interest-bearing checking and money market accounts. The Company will continue to pursue strategies to grow and retain retail and business customers with an emphasis on deepening and broadening existing and creating new relationships.
The Company uses the Certificate of Deposit Account Registry Service (CDARS) reciprocal program and Insured Cash Sweep (ICS) reciprocal program to obtain FDIC insurance protection for customers who have large deposits that at times may exceed the FDIC maximum insured amount of $250,000. In the CDARS program, deposits with varying terms and interest rates, originated in the Company’s own markets, are exchanged for deposits of other financial institutions that are members in the CDARS network. By placing the deposits in other participating institutions, the deposits of our customers are fully insured by the FDIC. In return for deposits placed with network institutions, the Company receives from network institutions deposits that are approximately equal in amount and are comprised of terms similar to those placed for our customers. Deposits the Company receives from other institutions are considered reciprocal deposits by regulatory definitions. The Company did not have any CDARs as of June 30, 2021 and December 31, 2020. As of June 30, 2021 and December 31, 2020, ICS reciprocal deposits represented $5.4 million and $46.2 million, or less than 1% and 3%, of total deposits which are included in interest-bearing checking accounts in the table above. The $40.5 million decrease in ICS deposits is primarily due to public funds deposit transfers from ICS accounts to other interest-bearing checking accounts.
The maturity distribution of certificates of deposit at June 30, 2021 is as follows:
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| More than |
| More than |
| More |
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| |||
| Three months |
| three months |
| six months to |
| than twelve |
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| ||||
(dollars in thousands) | or less |
| to six months |
| twelve months |
| months |
| Total | |||||
CDs of $100,000 or more | $ | 17,508 |
| $ | 9,062 |
| $ | 15,723 |
| $ | 10,015 |
| $ | 52,308 |
CDs of less than $100,000 |
| 8,021 |
|
| 8,160 |
|
| 17,137 |
|
| 18,446 |
|
| 51,764 |
Total CDs | $ | 25,529 |
| $ | 17,222 |
| $ | 32,860 |
| $ | 28,461 |
| $ | 104,072 |
There is a remaining time deposit premium of $6 thousand that will be amortized into income on a level yield amortization method over the contractual life of the deposits.
Certificates of deposit of $250,000 or more amounted to $29.5 million and $41.1 million as of June 30, 2021 and December 31, 2020, respectively.
Approximately 41% of the CDs, with a weighted-average interest rate of 0.42%, are scheduled to mature during the second half of 2021 and an additional 43%, with a weighted-average interest rate of 0.47%, are scheduled to mature during 2022. Renewing CDs are currently expected to re-price to lower market rates depending on the rate on the maturing CD, the pace and direction of interest rate movements, the shape of the yield curve, competition, the rate profile of the maturing accounts and depositor preference for alternative, non-term products. The Company plans to address repricing CDs in the ordinary course of business on a relationship basis and is prepared to match rates when prudent to maintain relationships. Growth in CD accounts is challenged by the current and expected rate environment and clients’ preference for short-term rates, as well as aggressive competitor rates. The Company is not currently offering any CD promotions but may resume promotions in the future. The Company will consider the needs of the customers and simultaneously be mindful of the liquidity levels, borrowing rates and the interest rate sensitivity exposure of the Company.
Borrowings
Borrowings are used as a complement to deposit generation as an alternative funding source whereby the Company will borrow under advances from the FHLB of Pittsburgh and other correspondent banks for asset growth and liquidity needs.
Short-term borrowings may include overnight balances with FHLB line of credit and/or correspondent bank’s federal funds lines which the Company may require to fund daily liquidity needs such as deposit outflow, loan demand and operations. There were no short-term borrowings as of June 30, 2021 and December 31, 2020 as growth in deposits funded asset growth.
During the first quarter of 2021, the Company paid off $5 million in FHLB advances with a weighted average interest rate of 3.07%. The Company had no FHLB advances as of June 30, 2021. As of June 30, 2021, the Company had the ability to borrow an additional $431.4 million from the FHLB.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Management of interest rate risk and market risk analysis.
The adequacy and effectiveness of an institution’s interest rate risk management process and the level of its exposures are critical factors in the regulatory evaluation of an institution’s sensitivity to changes in interest rates and capital adequacy. Management believes the Company’s interest rate risk measurement framework is sound and provides an effective means to measure, monitor, analyze, identify and control interest rate risk in the balance sheet.
The Company is subject to the interest rate risks inherent in its lending, investing and financing activities. Fluctuations of interest rates will impact interest income and interest expense along with affecting market values of all interest-earning assets and interest-bearing liabilities, except for those assets or liabilities with a short term remaining to maturity. Interest rate risk management is an integral part of the asset/liability management process. The Company has instituted certain procedures and policy guidelines to manage the interest rate risk position. Those internal policies enable the Company to react to changes in market rates to protect net interest income from significant fluctuations. The primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income along with creating an asset/liability structure that maximizes earnings.
Asset/Liability Management. One major objective of the Company when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income. The management of and authority to assume interest rate risk is the responsibility of the Company’s Asset/Liability Committee (ALCO), which is comprised of senior management and members of the board of directors. ALCO meets quarterly to monitor the relationship of interest sensitive assets to interest sensitive liabilities. The process to review interest rate risk is a regular part of managing the Company. Consistent policies and practices of measuring and reporting interest rate risk exposure, particularly regarding the treatment of non-contractual assets and liabilities, are in effect. In addition, there is an annual process to review the interest rate risk policy with the board of directors which includes limits on the impact to earnings from shifts in interest rates.
Interest Rate Risk Measurement. Interest rate risk is monitored through the use of three complementary measures: static gap analysis, earnings at risk simulation and economic value at risk simulation. While each of the interest rate risk measurements has limitations, collectively, they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company and the distribution of risk along the yield curve, the level of risk through time and the amount of exposure to changes in certain interest rate relationships.
Static Gap. The ratio between assets and liabilities re-pricing in specific time intervals is referred to as an interest rate sensitivity gap. Interest rate sensitivity gaps can be managed to take advantage of the slope of the yield curve as well as forecasted changes in the level of interest rate changes.
To manage this interest rate sensitivity gap position, an asset/liability model commonly known as cumulative gap analysis is used to monitor the difference in the volume of the Company’s interest sensitive assets and liabilities that mature or re-price within given time intervals. A positive gap (asset sensitive) indicates that more assets will re-price during a given period compared to liabilities, while a negative gap (liability sensitive) indicates the opposite effect. The Company employs computerized net interest income simulation modeling to assist in quantifying interest rate risk exposure. This process measures and quantifies the impact on net interest income
through varying interest rate changes and balance sheet compositions. The use of this model assists the ALCO to gauge the effects of the interest rate changes on interest-sensitive assets and liabilities in order to determine what impact these rate changes will have upon the net interest spread. At June 30, 2021, the Company maintained a one-year cumulative gap of positive (asset sensitive) $193.1 million, or 10%, of total assets. The effect of this positive gap position provided a mismatch of assets and liabilities which may expose the Company to interest rate risk during periods of falling interest rates. Conversely, in an increasing interest rate environment, net interest income could be positively impacted because more assets than liabilities will re-price upward during the one-year period.
Certain shortcomings are inherent in the method of analysis discussed above and presented in the next table. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table amounts. The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.
The following table illustrates the Company’s interest sensitivity gap position at June 30, 2021:
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| More than three |
| More than |
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|
| ||
| Three months |
| months to |
| one year |
| More than |
|
|
| ||||
(dollars in thousands) | or less |
| twelve months |
| to three years |
| three years |
| Total | |||||
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|
Cash and cash equivalents | $ | 134,732 |
| $ | - |
| $ | - |
| $ | 35,332 |
| $ | 170,064 |
Investment securities (1)(2) |
| 10,702 |
|
| 33,904 |
|
| 107,095 |
|
| 406,485 |
|
| 558,186 |
Loans and leases(2) |
| 345,059 |
|
| 204,764 |
|
| 307,180 |
|
| 261,910 |
|
| 1,118,913 |
Fixed and other assets |
| - |
|
| 44,858 |
|
| - |
|
| 57,212 |
|
| 102,070 |
Total assets | $ | 490,493 |
| $ | 283,526 |
| $ | 414,275 |
| $ | 760,939 |
| $ | 1,949,233 |
Total cumulative assets | $ | 490,493 |
| $ | 774,019 |
| $ | 1,188,294 |
| $ | 1,949,233 |
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Non-interest-bearing transaction deposits (3) | $ | - |
| $ | 49,155 |
| $ | 134,941 |
| $ | 306,955 |
| $ | 491,051 |
Interest-bearing transaction deposits (3) |
| 456,100 |
|
| - |
|
| 282,572 |
|
| 423,859 |
|
| 1,162,531 |
Certificates of deposit |
| 26,358 |
|
| 49,289 |
|
| 20,740 |
|
| 7,691 |
|
| 104,078 |
Other liabilities |
| - |
|
| - |
|
| - |
|
| 19,388 |
|
| 19,388 |
Total liabilities | $ | 482,458 |
| $ | 98,444 |
| $ | 438,253 |
| $ | 757,893 |
| $ | 1,777,048 |
Total cumulative liabilities | $ | 482,458 |
| $ | 580,902 |
| $ | 1,019,155 |
| $ | 1,777,048 |
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Interest sensitivity gap | $ | 8,035 |
| $ | 185,082 |
| $ | (23,978) |
| $ | 3,046 |
|
|
|
Cumulative gap | $ | 8,035 |
| $ | 193,117 |
| $ | 169,139 |
| $ | 172,185 |
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|
|
Cumulative gap to total assets |
| 0.4% |
|
| 9.9% |
|
| 8.7% |
|
| 8.8% |
|
|
|
(1) Includes restricted investments in bank stock and the net unrealized gains/losses on available-for-sale securities.
(2) Investments and loans are included in the earlier of the period in which interest rates were next scheduled to adjust or the period in which they are due. In addition, loans were included in the periods in which they are scheduled to be repaid based on scheduled amortization. For amortizing loans and MBS – GSE residential, annual prepayment rates are assumed reflecting historical experience as well as management’s knowledge and experience of its loan products.
(3) The Company’s demand and savings accounts were generally subject to immediate withdrawal. However, management considers a certain amount of such accounts to be core accounts having significantly longer effective maturities based on the retention experiences of such deposits in changing interest rate environments. The effective maturities presented are the recommended maturity distribution limits for non-maturing deposits based on historical deposit studies.
Earnings at Risk and Economic Value at Risk Simulations. The Company recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet that extend beyond static re-pricing gap analysis. Although it will continue to measure its re-pricing gap position, the Company utilizes additional modeling for identifying and measuring the interest rate risk in the overall balance sheet. The ALCO is responsible for focusing on “earnings at risk” and “economic value at risk”, and how both relate to the risk-based capital position when analyzing the interest rate risk.
Earnings at Risk. An earnings at risk simulation measures the change in net interest income and net income should interest rates rise and fall. The simulation recognizes that not all assets and liabilities re-price one-for-one with market rates (e.g., savings rate). The ALCO looks at “earnings at risk” to determine income changes from a base case scenario under an increase and decrease of 200 basis points in interest rate simulation models.
Economic Value at Risk. An earnings at risk simulation measures the short-term risk in the balance sheet. Economic value (or portfolio equity) at risk measures the long-term risk by finding the net present value of the future cash flows from the Company’s existing assets and liabilities. The ALCO examines this ratio quarterly utilizing an increase and decrease of 200 basis points in interest rate simulation models. The ALCO recognizes that, in some instances, this ratio may contradict the “earnings at risk” ratio.
The following table illustrates the simulated impact of an immediate 200 basis points upward or downward movement in interest rates on net interest income, net income and the change in the economic value (portfolio equity). This analysis assumed that the adjusted interest-earning asset and interest-bearing liability levels at June 30, 2021 remained constant. The impact of the rate movements was developed by simulating the effect of the rate change over a twelve-month period from the June 30, 2021 levels:
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| % change | |||
| Rates +200 | Rates -200 | ||
Earnings at risk: |
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|
Net interest income | 0.3 | % | (2.7) | % |
Net income | 1.6 |
| (5.5) |
|
Economic value at risk: |
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|
|
Economic value of equity | 4.9 |
| (32.2) |
|
Economic value of equity as a percent of total assets | 0.7 |
| (4.3) |
|
Economic value has the most meaning when viewed within the context of risk-based capital. Therefore, the economic value may normally change beyond the Company’s policy guideline for a short period of time as long as the risk-based capital ratio (after adjusting for the excess equity exposure) is greater than 10%. At June 30, 2021, the Company’s risk-based capital ratio was 16.27%.
The table below summarizes estimated changes in net interest income over a twelve-month period beginning July 1, 2021, under alternate interest rate scenarios using the income simulation model described above:
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| Net interest |
| $ |
| % | |||
(dollars in thousands) | income |
| variance |
| variance | |||
Simulated change in interest rates |
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|
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|
|
|
|
|
+200 basis points | $ | 53,221 |
| $ | 133 |
| 0.3 | % |
+100 basis points |
| 52,808 |
|
| (280) |
| (0.5) |
|
Flat rate |
| 53,088 |
|
| - |
| - |
|
-100 basis points |
| 52,904 |
|
| (184) |
| (0.3) |
|
-200 basis points |
| 51,640 |
|
| (1,448) |
| (2.7) |
|
Simulation models require assumptions about certain categories of assets and liabilities. The models schedule existing assets and liabilities by their contractual maturity, estimated likely call date or earliest re-pricing opportunity. MBS – GSE residential securities and amortizing loans are scheduled based on their anticipated cash flow including estimated prepayments. For investment securities, the Company uses a third-party service to provide cash flow estimates in the various rate environments. Savings, money market and interest-bearing checking accounts do not have stated maturities or re-pricing terms and can be withdrawn or re-price at any time. This may impact the margin if more expensive alternative sources of deposits are required to fund loans or deposit runoff. Management projects the re-pricing characteristics of these accounts based on historical performance and assumptions that it believes reflect their rate sensitivity. The model reinvests all maturities, repayments and prepayments for each type of asset or liability into the same product for a new like term at current product interest rates. As a result, the mix of interest-earning assets and interest bearing-liabilities is held constant.
Liquidity
Liquidity management ensures that adequate funds will be available to meet customers’ needs for borrowings, deposit withdrawals and maturities, facility expansion and normal operating expenses. Sources of liquidity are cash and cash equivalents, asset maturities and pay-downs within one year, loans HFS, investments AFS, growth of core deposits, utilization of borrowing capacities from the FHLB, correspondent banks, ICS and CDARs, the Discount Window of the Federal Reserve Bank of Philadelphia (FRB), Atlantic Community Bankers Bank (ACBB) and proceeds from the issuance of capital stock. Though regularly scheduled investment and loan payments are dependable sources of daily liquidity, sales of both loans HFS and investments AFS, deposit activity and investment and loan prepayments are significantly influenced by general economic conditions including the interest rate environment. During low and declining interest rate environments, prepayments from interest-sensitive assets tend to accelerate and provide significant liquidity that can be used to invest in other interest-earning assets but at lower market rates. Conversely, in periods of high or rising interest rates, prepayments from interest-sensitive assets tend to decelerate causing prepayment cash flows from mortgage loans and mortgage-backed securities to decrease. Rising interest rates may also cause deposit inflow but priced at higher market interest rates or could also cause deposit outflow due to higher rates offered by the Company’s competition for similar products. The Company closely monitors activity in the capital markets and takes appropriate action to ensure that the liquidity levels are adequate for funding, investing and operating activities.
The Company’s contingency funding plan (CFP) sets a framework for handling liquidity issues in the event circumstances arise which the Company deems to be less than normal. The Company established guidelines for identifying, measuring, monitoring and managing the resolution of potentially serious liquidity crises. The CFP outlines required monitoring tools, acceptable alternative funding sources and required actions during various liquidity scenarios. Thus, the Company has implemented a proactive means for the measurement and resolution for handling potentially significant adverse liquidity conditions. At least quarterly, the CFP monitoring tools, current liquidity position and monthly projected liquidity sources and uses are presented and reviewed by the Company’s Asset/Liability Committee. As of June 30, 2021, the Company had not experienced any adverse issues that would give rise to its inability to raise liquidity in an emergency situation.
During the six months ended June 30, 2021, the Company generated $100.7 million of cash. During the period, the Company’s operations provided approximately $41.4 million mostly from $27.5 million of net cash inflow from the components of net interest income and $28.6 million of proceeds over originations of loans held for sale, partially offset by net non-interest expense/income related payments of $13.8 million and $1.2 million in estimated tax payments. Cash inflow from interest-earning assets, deposits, loan payments and the sale of securities were used to purchase investment securities and replace maturing and cash runoff of securities, fund the loan portfolio, pay down borrowings, invest in bank premises and equipment and make net dividend payments. The Company received a large amount of public deposits over the past five years. The seasonal nature of deposits from municipalities and other public funding sources requires the Company to be prepared for the inherent volatility and the unpredictable timing of cash outflow from this customer base, including maintaining the requirements to pledge investment securities. Accordingly, the use of short-term overnight borrowings could be used to fulfill funding gap needs. The CFP is a tool to help the Company ensure that alternative funding sources are available to meet its liquidity needs.
During 2020 and the first half of 2021, the Company also experienced deposit inflow resulting from businesses and municipalities that received relief from the CARES Act and less consumer spending along with the third round of economic impact payments. There is uncertainty about the length of time that these deposits will remain which could require the Company to maintain elevated cash balances. The Company will continue to monitor deposit fluctuation for significant changes.
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers and in connection with the overall interest rate management strategy. These instruments involve, to a varying degree, elements of credit, interest rate and liquidity risk. In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts. Such instruments primarily include lending commitments.
Lending commitments include commitments to originate loans and commitments to fund unused lines of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
As of June 30, 2021, the Company maintained $162.3 million in cash and cash equivalents and $561.6 million of investments AFS and loans HFS. Also as of June 30, 2021, the Company had approximately $431.4 million available to borrow from the FHLB, $31.0 million from correspondent banks, $85.4 million from the FRB and $286.2 million from the Promontory One-Way Buy program. The combined total of $1.6 billion represented 80% of total assets at June 30, 2021. Management believes this level of liquidity to be strong and adequate to support current operations.
Capital
During the six months ended June 30, 2021, total shareholders' equity increased $5.5 million, or 3%, due principally to the $11.4 million in net income added into retained earnings. Capital was enhanced by $0.3 million from investments in the Company’s common stock via the Employee Stock Purchase Plan (ESPP) and $0.5 million from stock-based compensation expense from the ESPP and restricted stock and SSARs. These items were offset by a $3.6 million after tax reduction in the net unrealized gain position in the Company’s investment portfolio and $3.0 million of cash dividends declared on the Company’s common stock. The Company’s dividend payout ratio, defined as the rate at which current earnings are paid to shareholders, was 26.6% for the six months ended June 30, 2021. The bank paid a $7.8 million special dividend to the holding company in June 2021 that funded ensuing payment of the escrowed cash portion of the Landmark acquisition. The balance of earnings is retained to further strengthen the Company’s capital position.
As of June 30, 2021, the Company reported a net unrealized gain position of $5.3 million, net of tax, from the securities AFS portfolio compared to a net unrealized gain of $9.0 million as of December 31, 2020. The reduction during the first six months of 2021 was from the $3.6 million reduction in net unrealized gains on AFS securities, net of tax. Lower net unrealized gains on municipal and mortgage-backed securities and net unrealized losses on agency securities contributed to the lower total net unrealized gains in investment portfolio. Management believes that changes in fair value of the Company’s securities are due to changes in interest rates and not in the creditworthiness of the issuers. Generally, when U.S. Treasury rates rise, investment securities’ pricing declines and fair values of investment securities also decline. While volatility has existed in the yield curve within the past twelve months, an improving rate environment is expected and during the period of increasing rates, the Company expects pricing in the bond portfolio to decline. There is no assurance that future realized and unrealized losses will not be recognized from the Company’s portfolio of
investment securities. To help maintain a healthy capital position, the Company can issue stock to participants in the DRP and ESPP plans. The DRP affords the Company the option to acquire shares in open market purchases and/or issue shares directly from the Company to plan participants. During the first six months of 2021, the Company acquired shares in the open market to fulfill the needs of the DRP. Both the DRP and the ESPP plans have been a consistent source of capital from the Company’s loyal employees and shareholders and their participation in these plans will continue to help strengthen the Company’s balance sheet.
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Under these guidelines, assets and certain off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets. The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk-based capital to total risk-weighted assets (Total Risk Adjusted Capital) of 8%, including Tier I common equity to total risk-weighted assets (Tier I Common Equity) of 4.5%, Tier I capital to total risk-weighted assets (Tier I Capital) of 6% and Tier I capital to average total assets (Leverage Ratio) of at least 4%. A capital conservation buffer, comprised of common equity Tier I capital, is also established above the regulatory minimum capital requirements of 2.50%. As of June 30, 2021 and December 31, 2020, the Company and the Bank exceeded all capital adequacy requirements to which it was subject.
The Company continues to closely monitor and evaluate alternatives to enhance its capital ratios as the regulatory and economic environments change. The following table depicts the capital amounts and ratios of the Company, on a consolidated basis, and the Bank as of June 30, 2021 and December 31, 2020:
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| For capital adequacy |
| To be well capitalized | |||||||
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| For capital |
| purposes with capital |
| under prompt corrective | |||||||||||
| Actual | adequacy purposes |
| conservation buffer |
| action provisions | ||||||||||||||
(dollars in thousands) | Amount |
| Ratio | Amount | Ratio |
| Amount | Ratio |
| Amount | Ratio | |||||||||
As of June 30, 2021: |
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Total capital (to risk-weighted assets) |
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Consolidated | $ | 171,439 |
| 16.3% | ≥ | $ | 84,307 |
| 8.0% | ≥ | $ | 110,653 |
| 10.5% |
|
|
| N/A |
| N/A |
Bank | $ | 163,607 |
| 15.6% | ≥ | $ | 84,178 |
| 8.0% | ≥ | $ | 110,483 |
| 10.5% |
| ≥ | $ | 105,222 |
| 10.0% |
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Tier 1 common equity (to risk-weighted assets) |
|
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|
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Consolidated | $ | 158,240 |
| 15.0% | ≥ | $ | 47,423 |
| 4.5% | ≥ | $ | 73,769 |
| 7.0% |
|
|
| N/A |
| N/A |
Bank | $ | 150,428 |
| 14.3% | ≥ | $ | 47,350 |
| 4.5% | ≥ | $ | 73,655 |
| 7.0% |
| ≥ | $ | 68,394 |
| 6.5% |
|
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Tier I capital (to risk-weighted assets) |
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Consolidated | $ | 158,240 |
| 15.0% | ≥ | $ | 63,231 |
| 6.0% | ≥ | $ | 89,577 |
| 8.5% |
|
|
| N/A |
| N/A |
Bank | $ | 150,428 |
| 14.3% | ≥ | $ | 63,133 |
| 6.0% | ≥ | $ | 89,439 |
| 8.5% |
| ≥ | $ | 84,178 |
| 8.0% |
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Tier I capital (to average assets) |
|
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Consolidated | $ | 158,240 |
| 8.4% | ≥ | $ | 75,534 |
| 4.0% | ≥ | $ | 75,534 |
| 4.0% |
|
|
| N/A |
| N/A |
Bank | $ | 150,428 |
| 8.0% | ≥ | $ | 75,526 |
| 4.0% | ≥ | $ | 75,526 |
| 4.0% |
| ≥ | $ | 94,408 |
| 5.0% |
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As of December 31, 2020: |
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Total capital (to risk-weighted assets) |
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Consolidated | $ | 161,199 |
| 16.5% | ≥ | $ | 78,356 |
| 8.0% | ≥ | $ | 102,842 |
| 10.5% |
|
|
| N/A |
| N/A |
Bank | $ | 161,145 |
| 16.5% | ≥ | $ | 78,342 |
| 8.0% | ≥ | $ | 102,823 |
| 10.5% |
| ≥ | $ | 97,927 |
| 10.0% |
|
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|
|
|
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|
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Tier 1 common equity (to risk-weighted assets) |
|
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|
|
|
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|
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|
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Consolidated | $ | 148,931 |
| 15.2% | ≥ | $ | 44,075 |
| 4.5% | ≥ | $ | 68,562 |
| 7.0% |
|
|
| N/A |
| N/A |
Bank | $ | 148,879 |
| 15.2% | ≥ | $ | 44,067 |
| 4.5% | ≥ | $ | 68,549 |
| 7.0% |
| ≥ | $ | 63,653 |
| 6.5% |
|
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|
|
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|
|
|
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|
Tier I capital (to risk-weighted assets) |
|
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|
|
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|
|
|
|
|
|
|
|
|
Consolidated | $ | 148,931 |
| 15.2% | ≥ | $ | 58,767 |
| 6.0% | ≥ | $ | 83,253 |
| 8.5% |
|
|
| N/A |
| N/A |
Bank | $ | 148,879 |
| 15.2% | ≥ | $ | 58,756 |
| 6.0% | ≥ | $ | 83,238 |
| 8.5% |
| ≥ | $ | 78,342 |
| 8.0% |
|
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Tier I capital (to average assets) |
|
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|
Consolidated | $ | 148,931 |
| 8.8% | ≥ | $ | 67,584 |
| 4.0% | ≥ | $ | 67,584 |
| 4.0% |
|
|
| N/A |
| N/A |
Bank | $ | 148,879 |
| 8.8% | ≥ | $ | 67,584 |
| 4.0% | ≥ | $ | 67,584 |
| 4.0% |
| ≥ | $ | 84,479 |
| 5.0% |
|
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The Company advises readers to refer to the Supervision and Regulation section of Management’s Discussion and Analysis of Financial Condition and Results of Operation, of its 2020 Form 10-K for a discussion on the regulatory environment and recent legislation and rulemaking.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by the Company’s management, with the participation of its President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on such evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and are effective. The Company made no changes in its internal controls over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, these controls during the last fiscal quarter ended June 30, 2021.
PART II - Other Information
Item 1. Legal Proceedings
The nature of the Company’s business generates a certain amount of litigation involving matters arising in the ordinary course of business. However, in the opinion of the Company after consultation with legal counsel, no legal proceedings are pending, which, if determined adversely to the Company or the Bank, would have a material adverse effect on the Company’s undivided profits or financial condition, operations or the results of such operations. No legal proceedings are pending other than ordinary routine litigation incidental to the business of the Company and the Bank. In addition, to management’s knowledge, no governmental authorities have initiated or contemplated any material legal or regulatory actions against the Company or the Bank.
Item 1A. Risk Factors
Management of the Company does not believe there have been any material changes to the risk factors that were disclosed in the 2020 Form 10-K filed with the Securities and Exchange Commission on March 19, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Default Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
Item 6. Exhibits
The following exhibits are filed herewith or incorporated by reference as a part of this Form 10-Q:
to Registrant’s Current Report on Form 8-K filed with the SEC on March 21, 2019.
31.1 Rule 13a-14(a) Certification of Principal Executive Officer, filed herewith.
31.2 Rule 13a-14(a) Certification of Principal Financial Officer, filed herewith.
101 Interactive data files: The following, from Fidelity D&D Bancorp, Inc.’s. Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, is formatted in XBRL (eXtensible Business Reporting Language): Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020; Consolidated Statements of Income for the three and six months ended June 30, 2021 and 2020; Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020; Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2021 and 2020; Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 and the Notes to the Consolidated Financial Statements. **
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
________________________________________________
* Management contract or compensatory plan or arrangement.
** Pursuant to Rule 406T of Regulation S-T, the interactive data files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
Signatures
FIDELITY D & D BANCORP, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Fidelity D & D Bancorp, Inc. |
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Date: August 10, 2021 | /s/Daniel J. Santaniello |
| Daniel J. Santaniello, President and Chief Executive Officer |
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| Fidelity D & D Bancorp, Inc. |
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Date: August 10, 2021 | /s/Salvatore R. DeFrancesco, Jr. |
| Salvatore R. DeFrancesco, Jr., Treasurer and Chief Financial Officer |
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Exhibit 31.1
CERTIFICATION
I, Daniel J. Santaniello, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Fidelity D & D Bancorp, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions);
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees, who have a significant role in the registrant’s internal control over financial reporting.
Date: August 10, 2021 |
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/s/Daniel J. Santaniello |
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Daniel J. Santaniello, |
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President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Salvatore R. DeFrancesco, Jr., certify that:
1.I have reviewed this quarterly report on Form 10-Q of Fidelity D & D Bancorp, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions);
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees, who have a significant role in the registrant’s internal control over financial reporting.
Date: August 10, 2021 |
/s/Salvatore R. DeFrancesco, Jr. |
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Salvatore R. DeFrancesco, Jr., |
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Treasurer and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Fidelity D & D Bancorp, Inc. (the “Company”) for the period ended June 30, 2021, as filed with the Securities and Exchange Commission (the “Report”), I, Daniel J. Santaniello, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as added by §906 of the Sarbanes-Oxley Act of 2002, that:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.
Date: August 10, 2021 |
By:/s/ Daniel J. Santaniello |
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Daniel J. Santaniello |
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President and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Fidelity D & D Bancorp, Inc. (the “Company”) for the period ended June 30, 2021, as filed with the Securities and Exchange Commission (the “Report”), I, Salvatore R. DeFrancesco, Jr., Treasurer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as added by §906 of the Sarbanes-Oxley Act of 2002, that:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.
Date: August 10, 2021 |
By:/s/ Salvatore R. DeFrancesco, Jr. |
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Salvatore R. DeFrancesco, Jr., |
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Treasurer and Chief Financial Officer |
Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands |
Jun. 30, 2021 |
Dec. 31, 2020 |
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Consolidated Balance Sheets [Abstract] | ||
Loans and leases, allowance for loan losses | $ 15,245 | $ 14,202 |
Loans held-for-sale, fair value | $ 6,731 | $ 30,858 |
Preferred stock, shares authorized | 5,000,000 | 5,000,000 |
Preferred stock, no par value | ||
Preferred stock, shares issued | 0 | 0 |
Capital stock, no par value | ||
Capital stock, shares authorized | 10,000,000 | 10,000,000 |
Capital stock, shares issued | 4,995,713 | 4,977,750 |
Capital stock, shares outstanding | 4,995,713 | 4,977,750 |
Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2021 |
Jun. 30, 2020 |
Jun. 30, 2021 |
Jun. 30, 2020 |
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Consolidated Statements of Comprehensive Income [Abstract] | ||||
Net income | $ 5,696 | $ 252 | $ 11,363 | $ 2,886 |
Other comprehensive (loss) income, before tax: | ||||
Unrealized holding (loss) gain on available-for-sale debt securities | 5,276 | 444 | (4,583) | 4,556 |
Reclassification adjustment for net gains realized in income | ||||
Net unrealized (loss) gain | 5,276 | 444 | (4,583) | 4,556 |
Tax effect | (1,108) | (93) | 962 | (957) |
Unrealized (loss) gain, net of tax | 4,168 | 351 | (3,621) | 3,599 |
Other comprehensive (loss) gain, net of tax | 4,168 | 351 | (3,621) | 3,599 |
Total comprehensive income, net of tax | $ 9,864 | $ 603 | $ 7,742 | $ 6,485 |
Nature of Operations and Critical Accounting Policies |
6 Months Ended |
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Jun. 30, 2021 | |
Nature of Operations and Critical Accounting Policies [Abstract] | |
Nature of Operations and Critical Accounting Policies | 1. Nature of operations and critical accounting policies Nature of operations Fidelity D & D Bancorp, Inc. (“the Company”) is a bank holding company and the parent of The Fidelity Deposit and Discount Bank (the “Bank”). The Bank is a commercial bank and trust company chartered under the laws of the Commonwealth of Pennsylvania and a wholly-owned subsidiary of the Company. Having commenced operations in 1903, the Bank is committed to provide superior customer service, while offering a full range of banking products and financial and trust services to both our consumer and commercial customers from our main office located in Dunmore and other branches located throughout Lackawanna, Northampton and Luzerne Counties and Wealth Management offices in Schuylkill and Lebanon Counties. On July 1, 2021, the Company completed its acquisition of Landmark Bancorp, Inc. (“Landmark”) and its wholly-owned subsidiary, Landmark Community Bank (“Landmark Bank”). At the time of the acquisition, Landmark merged with and into the Company with the Company surviving the merger. In addition, Landmark Bank merged with and into the Bank with the Bank as the surviving bank. On May 1, 2020, the Company completed its acquisition of MNB Corporation (“MNB”) and its wholly-owned subsidiary, Merchants Bank of Bangor. At the time of the acquisition, MNB merged with and into the Company with the Company surviving the merger. In addition, Merchants Bank of Bangor merged with and into the Bank with the Bank as the surviving bank. Further discussion of the acquisitions of MNB and Landmark can be found in Footnote 9, “Acquisition”. Principles of consolidation The accompanying unaudited consolidated financial statements of the Company and the Bank have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to this Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial condition and results of operations for the periods have been included. All significant inter-company balances and transactions have been eliminated in consolidation. For additional information and disclosures required under U.S. GAAP, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Management is responsible for the fairness, integrity and objectivity of the unaudited financial statements included in this report. Management prepared the unaudited financial statements in accordance with U.S. GAAP. In meeting its responsibility for the financial statements, management depends on the Company's accounting systems and related internal controls. These systems and controls are designed to provide reasonable but not absolute assurance that the financial records accurately reflect the transactions of the Company, the Company’s assets are safeguarded and that the financial statements present fairly the financial condition and results of operations of the Company. In the opinion of management, the consolidated balance sheets as of June 30, 2021 and December 31, 2020 and the related consolidated statements of income, consolidated statements of comprehensive income and consolidated statements of changes in shareholders’ equity for the three and six months ended June 30, 2021 and 2020, and consolidated statements of cash flows for the six months ended June 30, 2021 and 2020 present fairly the financial condition and results of operations of the Company. All material adjustments required for a fair presentation have been made. These adjustments are of a normal recurring nature. Certain reclassifications have been made to the 2020 financial statements to conform to the 2021 presentation. In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after June 30, 2021 through the date these consolidated financial statements were issued. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2020, and the notes included therein, included within the Company’s Annual Report filed on Form 10-K. Critical accounting policies The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses. Management believes that the allowance for loan losses at June 30, 2021 is adequate and reasonable to cover incurred losses. Given the subjective nature of identifying and estimating loan losses, it is likely that well-informed individuals could make different assumptions and could, therefore, calculate a materially different allowance amount. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgment of information available to them at the time of their examination. Another material estimate is the calculation of fair values of the Company’s investment securities. Fair values of investment securities are determined by pricing provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Based on experience, management is aware that estimated fair values of investment securities tend to vary among valuation services. Accordingly, when selling investment securities, price quotes may be obtained from more than one source. All of the Company’s debt securities are classified as available-for-sale (AFS). AFS debt securities are carried at fair value on the consolidated balance sheets, with unrealized gains and losses, net of income tax, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (AOCI). The fair value of residential mortgage loans, classified as held-for-sale (HFS), is obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank (FHLB). Generally, the market to which the Company sells residential mortgages it originates for sale is restricted and price quotes from other sources are not typically obtained. On occasion, the Company may transfer loans from the loan portfolio to loans HFS. Under these circumstances, pricing may be obtained from other entities and the residential mortgage loans are transferred at the lower of cost or market value and simultaneously sold. For other loans transferred to HFS, pricing may be obtained from other entities or modeled and the other loans are transferred at the lower of cost or market value and then sold. As of June 30, 2021 and December 31, 2020, loans classified as HFS consisted of residential mortgage loans. Financing of automobiles, provided to customers under lease arrangements of varying terms, are accounted for as direct finance leases. Interest income on automobile direct finance leasing is determined using the interest method to arrive at a level effective yield over the life of the lease. The lease residual and the lease receivable, net of unearned lease income, are recorded within loans and leases on the balance sheet. Foreclosed assets held-for-sale includes other real estate acquired through foreclosure (ORE) and may, from time-to-time, include repossessed assets such as automobiles. ORE is carried at the lower of cost (principal balance at date of foreclosure) or fair value less estimated cost to sell. Any write-downs at the date of foreclosure are charged to the allowance for loan losses. Expenses incurred to maintain ORE properties, subsequent write downs to the asset’s fair value, any rental income received and gains or losses on disposal are included as components of other real estate owned expense in the consolidated statements of income. We account for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that management believes to be reasonable. Goodwill is recorded on the consolidated balance sheets as the excess of liabilities assumed over identifiable assets acquired on the acquisition date. Goodwill is recorded at its net carrying value which represents estimated fair value. The goodwill is deductible for tax purposes over a 15-year period. Goodwill is tested for impairment on at least an annual basis. There was no goodwill impairment as of June 30, 2021 and December 31, 2020. Other acquired intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives and subject to periodic impairment testing. The Company holds separate supplemental executive retirement (SERP) agreements for certain officers and an amount is credited to each participant’s SERP account monthly while they are actively employed by the bank until retirement. A deferred tax asset is provided for the non-deductible SERP expense. The Company also entered into separate split dollar life insurance arrangements with four executives providing post-retirement benefits and accrues monthly expense for this benefit. The split dollar life insurance expense is not deductible for tax purposes. Monthly expenses for the SERP and post-retirement split dollar life benefit are recorded as components of salaries and employee benefit expense on the consolidated statements of income. For purposes of the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and interest-bearing deposits with financial institutions. |
New Accounting Pronouncements |
6 Months Ended |
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Jun. 30, 2021 | |
New Accounting Pronouncements [Abstract] | |
New Accounting Pronouncements | 2. New accounting pronouncements In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (CECL). The amendments in this update require financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. Previously, when credit losses were measured under GAAP, an entity only considered past events and current conditions when measuring the incurred loss. The amendments in this update broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgement in determining the relevant information and estimation methods that are appropriate under the circumstances. The amendments in this update also require that credit losses on available-for-sale debt securities be presented as an allowance for credit losses rather than a writedown. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, which clarifies that receivables arising from operating leases are not within the scope of Topic 326. In December 2018, regulators issued a final rule related to regulatory capital (Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations) which is intended to provide regulatory capital relief for entities transitioning to CECL. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments. As it relates to CECL, this guidance amends certain provisions contained in ASU 2016-13, particularly in regards to the inclusion of accrued interest in the definition of amortized cost, as well as clarifying that extension and renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract should be considered in the entity’s determination of expected credit losses. The amendments in this update are effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019 for public companies. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption (modified-retrospective approach). Upon adoption, the change in this accounting guidance could result in an increase in the Company's allowance for loan losses and require the Company to record loan losses more rapidly. The Company has engaged the services of a qualified third-party service provider to assist management in estimating credit allowances under this standard and is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements. On October 16, 2019, the FASB decided to move forward with finalizing its proposal to defer the effective date for ASU 2016-13 for smaller reporting companies to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. Since the Company currently meets the SEC definition of a smaller reporting company, the delay will be applicable to the Company. In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20). The amendments in this update change the disclosure requirements for defined benefit plans. The amendments in this update are effective for fiscal years ending after December 15, 2020 for the Company. An entity should apply the amendments in this update on a retrospective basis to all periods presented. The update was effective for the Company on January 1, 2021 and the amendments in this update did not have a material impact on the Company’s disclosures. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in this update are elective and apply to all entities that have contracts that reference LIBOR or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. An optional expedient simplifies accounting for contract modifications to loans receivable and debt, by prospectively adjusting the effective interest rate. The amendments in ASU 2020-04 are effective as of March 12, 2020 through December 31, 2022. The Company expects to apply the amendments prospectively for applicable loan and other contracts within the effective period of ASU 2020-04. |
Accumulated Other Comprehensive Income |
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Accumulated Other Comprehensive Income | 3. Accumulated other comprehensive income The following tables illustrate the changes in accumulated other comprehensive income by component and the details about the components of accumulated other comprehensive income as of and for the periods indicated:
There were no amounts reclassified from accumulated other comprehensive income for the three and six months ended June 30, 2021 and 2020. |
Investment Securities |
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Investment Securities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment Securities | 4. Investment securities Agency – Government-sponsored enterprise (GSE) and Mortgage-backed securities (MBS) - GSE residential Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), FNMA, FHLB and Government National Mortgage Association (GNMA). These securities have interest rates that are fixed and adjustable, have varying short to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government. Obligations of states and political subdivisions (municipal) The municipal securities are bank qualified or bank eligible, general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities. Fair values of these securities are highly driven by interest rates. Management performs ongoing credit quality reviews on these issues.
The amortized cost and fair value of investment securities at June 30, 2021 and December 31, 2020 are summarized as follows:
The amortized cost and fair value of debt securities at June 30, 2021 by contractual maturity are summarized below:
Actual maturities will differ from contractual maturities because issuers and borrowers may have the right to call or repay obligations with or without call or prepayment penalty. Agency – GSE and municipal securities are included based on their original stated maturity. MBS – GSE residential, which are based on weighted-average lives and subject to monthly principal pay-downs, are listed in total. Most of the securities have fixed rates or have predetermined scheduled rate changes and many have call features that allow the issuer to call the security at par before its stated maturity without penalty.
The following table presents the fair value and gross unrealized losses of debt securities aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of June 30, 2021 and December 31, 2020:
The Company had 108 debt securities in an unrealized loss position at June 30, 2021, including 25 agency securities, 29 mortgage-backed securities and 54 municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at June 30, 2021: 1.96% for agencies, 0.96% for total MBS-GSE; and 1.40% for municipals. None of these securities had been in an unrealized loss position in excess of 12 months. Management has no intent to sell any securities in an unrealized loss position as of June 30, 2021. Management believes the cause of the unrealized losses is related to changes in interest rates, instability in the capital markets or the limited trading activity due to illiquid conditions in the debt market and is not directly related to credit quality. Quarterly, management conducts a formal review of investment securities for the presence of other than temporary impairment (OTTI). The accounting guidance related to OTTI requires the Company to assess whether OTTI is present when the fair value of a debt security is less than its amortized cost as of the balance sheet date. Under those circumstances, OTTI is considered to have occurred if: (1) the entity has the intent to sell the security; (2) more likely than not the entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost. The accounting guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold be recognized in other comprehensive income (OCI). Non-credit-related OTTI is based on other factors affecting market value, including illiquidity. The Company’s OTTI evaluation process also follows the guidance set forth in topics related to debt securities. The guidance set forth in the pronouncements require the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the ability and intent to hold investments until a recovery of fair value which may be to maturity and other factors when evaluating for the existence of OTTI. The guidance requires that credit-related OTTI be recognized as a realized loss through earnings when there has been an adverse change in the holder’s expected cash flows such that the full amount (principal and interest) will probably not be received. This requirement is consistent with the impairment model in the guidance for accounting for debt securities. For all debt securities, as of June 30, 2021, the Company applied the criteria provided in the recognition and presentation guidance related to OTTI. That is, management has no intent to sell the securities and nor any conditions were identified by management that, more likely than not, would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there was no presence of OTTI in the Company’s security portfolio. In addition, management believes the change in fair value is attributable to changes in interest rates. |
Loans and Leases |
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Loans and Leases | 5. Loans and leases The classifications of loans and leases at June 30, 2021 and December 31, 2020 are summarized as follows:
As of June 30, 2021, total loans of $1.1 billion were reflected net of deferred loan costs of $0.5 million, including $3.5 million in deferred fee income from Paycheck Protection Program (PPP) loans and $4.0 million in deferred loan costs. Net deferred loan costs of $1.7 million, including $2.2 million in deferred fee income from PPP loans and $3.9 million in deferred loan costs, have been included in the carrying values of loans at December 31, 2020. Commercial and industrial loan balances were $247.8 million at June 30, 2021 and $280.8 million on December 31, 2020. As of June 30, 2021, the commercial and industrial loan balance included $94.1 million in PPP loans (net of deferred fees) compared to $129.9 million as of December 31, 2020. Direct finance leases include the lease receivable and the guaranteed lease residual. Unearned lease revenue represents the difference between the lessor’s investment in the property and the gross investment in the lease. Unearned revenue is accrued over the life of the lease using the effective interest method. The Company services real estate loans for investors in the secondary mortgage market which are not included in the accompanying consolidated balance sheets. The approximate unpaid principal balance of mortgages serviced amounted to $447.8 million as of June 30, 2021 and $366.5 million as of December 31, 2020. Mortgage servicing rights amounted to $2.0 million and $1.3 million as of June 30, 2021 and December 31, 2020, respectively. Management is responsible for conducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis. Results of these reviews are presented to management and the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures. The global pandemic referred to as COVID-19 has created many barriers to loan production relative to the measures taken to slow the spread. These measures have put a large strain on a wide variety of industries within the global economy generally, and the Company’s market specifically. The overall economic impact and effect of the measures is yet to be fully understood as its effects will most likely lag timewise behind while businesses and governments inject resources to help lessen the impact. Despite efforts to lessen the impact, it is the Company’s current belief that the pandemic will temporarily, or in some cases permanently, damage our borrower’s ability to repay loans and comply with terms.
Paycheck Protection Program Loans The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP). As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrowers’ PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) was enacted, extending the authority to make PPP loans through May 31, 2021, revising certain PPP requirements, and permitting second draw PPP loans. On March 11, 2021, the American Rescue Plan Act of 2021 (American Rescue Plan Act) was enacted expanding eligibility for first and second draw PPP loans and revising the exclusions from payroll costs for purposes of loan forgiveness. As of June 30, 2021, the Company had 1,135 PPP loans outstanding totaling $97.6 million, which represents a $34.5 million, or 26%, decrease from the 1,246 loans totaling $132.1 million as of December 31, 2020. From the beginning of the program through June 30, 2021, the Company received forgiveness or paydowns of $138.7 million, or 59%, of the original PPP loan balances of $236.3 million with $111.7 million occurring during the six months ended June 30, 2021. During the three and six months ended June 30, 2021, the Company recognized $1.1 million and $2.8 million in SBA fees from PPP loans, net of origination expenses, compared to $0.8 million for both the three and six months ended June 30, 2020. Unearned fees attributed to PPP loans, net of $0.2 million in fees paid to referral sources as prescribed by the SBA under the PPP program, were $3.5 million as of June 30, 2021. Acquired loans Acquired loans are marked to fair value on the date of acquisition. For detailed information on calculating the fair value of acquired loans, see Footnote 9, “Acquisition.” The carryover of allowance for loan losses related to acquired loans is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. The allowance for loan losses on acquired loans reflects only those losses incurred after acquisition and represents the present value of cash flows expected at acquisition that is no longer expected to be collected. The Company reported provisional fair value adjustments regarding the acquired MNB Corporation loan portfolio. Therefore, the Company did not record an allowance on the acquired non-purchased credit impaired loans. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan losses, the Company performs an analysis on acquired loans to determine whether there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in the calculation of the allowance for loan losses after the initial valuation and provide reserves accordingly. Upon acquisition, in accordance with U.S. GAAP, the Company has individually determined whether each acquired loan is within the scope of ASC 310-30 deemed as purchased credit impaired (PCI). As part of this process, the Company’s senior management and other relevant individuals reviewed the seller’s loan portfolio on a loan-by-loan basis to determine if any loans met the two-part definition of an impaired loan as defined by ASC 310-30: 1) Credit deterioration on the loan from its inception until the acquisition date, and 2) It is probable that not all contractual cash flows will be collected on the loan. With regards to ASC 310-30 loans, for external disclosure purposes, the aggregate contractual cash flows less the aggregate expected cash flows result in a credit related non-accretable yield amount. The aggregate expected cash flows less the acquisition date fair value result in an accretable yield amount. The accretable yield reflects the contractual cash flows management expects to collect above the loan's acquisition date fair value and will be recognized over the life of the loan on a level-yield basis as a component of interest income. Over the life of the acquired ASC 310-30 loan, the Company continues to estimate cash flows expected to be collected. Decreases in expected cash flows, other than from prepayments or rate adjustments, are recognized as impairments through a charge to the provision for credit losses resulting in an increase in the allowance for credit losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized after acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized on a prospective basis over the loan’s remaining life. Acquired ASC 310-30 loans that met the criteria for non-accrual of interest prior to acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Company can reasonably estimate the timing and amount of expected cash flows on such loans. Accordingly, the Company does not consider acquired contractually delinquent loans to be non-accruing and continues to recognize accretable yield on these loans which is recognized as interest income on a level yield method over the life of the loan. Acquired ASC 310-20 loans, which are loans that did not meet the criteria above, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. For these pools, the Company used certain loan information, including outstanding principal balance, estimated expected losses, weighted average maturity, weighted average margin, and weighted average interest rate along with estimated prepayment rates, expected lifetime losses, and environment factors to estimate the expected cash flow for each loan pool. Within the ASC 310-20 loans, the Company identified certain loans that have higher risk due to the COVID-19 pandemic. Although performing at the time of acquisition and likely will continue making payments in accordance with contractual terms, management elected a higher credit adjustment on these loans to reflect the greater inherent risk that the borrower will default on payments. These higher risk factors include loans that requested forbearance consistent with FIL-17-2020 FDIC Statement on Financial Institutions Working with Customers Affected by the Coronavirus and Regulatory and Supervisory Assistance, loans that were in industries determined to be at greater risk to economic disruption due to COVID-19, and loans that had a prior history of delinquency greater than 60 days at any point in the lifetime of the loan. The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-30. Loans accounted for under ASC 310-20 are not included in this table.
During the first and second quarters of 2021, management performed an analysis of all loans accounted for under ASC 310-30. Three loans had an improvement in collateral values resulting in a $129 thousand reclassification from non-accretable discount to accretable discount. Two loans had actual payments exceed estimates resulting in a $33 thousand reclassification from non-accretable discount to accretable discount. During the six months ended June 30, 2021, $193 thousand in accretable yield and $273 in non-accretable yield accreted to interest income. Cash flows expected to be collected on acquired loans are estimated quarterly by incorporating several key assumptions. These key assumptions include probability of default and the number of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Improved cash flow expectations for loans or pools are recorded first as a reversal of previously recorded impairment, if any, and then as an increase in prospective yield when all previously recorded impairment has been recaptured. Non-accrual loans Non-accrual loans, segregated by class, at June 30, 2021 and December 31, 2020, were as follows:
The table above excludes $1.3 million in purchased credit impaired loans, net of unamortized fair value adjustments as of June 30, 2021 and December 31, 2020. The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan. C&I and CRE loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection. Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at 90 days past due as to principal and interest and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest. The Company considers all non-accrual loans to be impaired loans.
Troubled Debt Restructuring (TDR) A modification of a loan constitutes a troubled debt restructuring (TDR) when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company considers all TDRs to be impaired loans. The Company typically considers the following concessions when modifying a loan, which may include lowering interest rates below the market rate, temporary interest-only payment periods, term extensions at interest rates lower than the current market rate for new debt with similar risk and/or converting revolving credit lines to term loans. The Company typically does not forgive principal when granting a TDR modification. Consistent with Section 4013 and the Revised Statement of Section 4013 of the CARES Act, specifically “Temporary Relief From Troubled Debt Restructurings”, the Company approved requests by borrowers to modify loan terms and defer principal and/or interest payment for loans. U.S. GAAP permits the suspension of TDR determination defined under ASC 310-40 provided that such modifications are made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief. This includes short-term (i.e. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current for purposes of Section 4013 are those that are less than 30 days past due on their contractual payments at the time the modification program is implemented. Beginning the week of March 16, 2020, the Company began receiving requests for temporary modifications to the repayment structure for borrower loans. Modification terms included interest only or full payment deferral for up to 6 months. As of June 30, 2021, the Company had 2 temporary modifications with principal balances totaling $0.7 million compared to 10 temporary modifications with principal balances totaling $2.2 million as of December 31, 2020. There were no loans modified in a TDR for the three and six months ended June 30, 2021 and 2020. Of the TDRs outstanding as of June 30, 2021 and 2020, when modified, the concessions granted consisted of temporary interest-only payments, extensions of maturity date, or a reduction in the rate of interest to a below-market rate for a contractual period of time. Other than the TDRs that were placed on non-accrual status, the TDRs were performing in accordance with their modified terms. Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. There were no loans modified as a TDR within the previous twelve months that subsequently defaulted (i.e. 90 days or more past due following a modification) during the three and six months ended June 30, 2021 and 2020. The allowance for loan losses (allowance) may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price. If the loan is collateral dependent, the estimated fair value of the collateral is used to establish the allowance. As of June 30, 2021 and 2020, the balance of outstanding TDRs was $3.0 million and $1.5 million, respectively. As of June 30, 2021 and 2020, the allowance for impaired loans that have been modified in a TDR was $0.5 million and $0.4 million, respectively. Past due loans Loans are considered past due when the contractual principal and/or interest is not received by the due date. For loans reported 30-59 days past due, certain categories of loans are reported past due as and when the loan is in arrears for two payments or billing cycles. An aging analysis of past due loans, segregated by class of loans, as of the period indicated is as follows (dollars in thousands):
(1) Includes non-accrual loans. (2) Net of unearned lease revenue of $1.3 million. (3) Includes net deferred loan costs of $0.5 million.
(1) Includes non-accrual loans. (2) Net of unearned lease revenue of $1.2 million. (3) Includes net deferred loan costs of $1.7 million.
Impaired loans Impaired loans, segregated by class, as of the period indicated are detailed below:
At June 30, 2021, impaired loans totaled $5.7 million consisting of $2.5 million in accruing TDRs and $3.2 million in non-accrual loans. At December 31, 2020, impaired loans totaled $6.3 million consisting of $2.5 million in accruing TDRs and $3.8 million in non-accrual loans. As of June 30, 2021, the non-accrual loans included three TDRs to two unrelated borrowers totaling $0.6 million compared with four TDRs to three unrelated borrowers totaling $0.7 million as of December 31, 2020. A loan is considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting payments when due. The significance of payment delays and/or shortfalls is determined on a case-by-case basis. All circumstances surrounding the loan are considered. Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record. Impairment is measured on these loans on a loan-by-loan basis. Impaired loans include non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors. The following table presents the average recorded investments in impaired loans and related amount of interest income recognized during the periods indicated below. The average balances are calculated based on the quarter-end balances of impaired loans. Payments received from non-accruing impaired loans are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts. Any excess is treated as a recovery of interest income. Payments received from accruing impaired loans are applied to principal and interest, as contractually agreed upon.
Credit Quality Indicators Commercial and industrial and commercial real estate The Company utilizes a loan grading system and assigns a credit risk grade to its loans in the C&I and CRE portfolios. The grading system provides a means to measure portfolio quality and aids in the monitoring of the credit quality of the overall loan portfolio. The credit risk grades are arrived at using a risk rating matrix to assign a grade to each of the loans in the C&I and CRE portfolios. The following is a description of each risk rating category the Company uses to classify each of its C&I and CRE loans: Pass Loans in this category have an acceptable level of risk and are graded in a range of one to five. Secured loans generally have good collateral coverage. Current financial statements reflect acceptable balance sheet ratios, sales and earnings trends. Management is competent, and a reasonable succession plan is evident. Payment experience on the loans has been good with minor or no delinquency experience. Loans with a grade of one are of the highest quality in the range. Those graded five are of marginally acceptable quality.
Special Mention Loans in this category are graded a six and may be protected but are potentially weak. They constitute a credit risk to the Company but have not yet reached the point of adverse classification. Some of the following conditions may exist: little or no collateral coverage; lack of current financial information; delinquency problems; highly leveraged; available financial information reflects poor balance sheet ratios and profit and loss statements reflect uncertain trends; and document exceptions. Cash flow may not be sufficient to support total debt service requirements. Substandard Loans in this category are graded a seven and have a well-defined weakness which may jeopardize the ultimate collectability of the debt. The collateral pledged may be lacking in quality or quantity. Financial statements may indicate insufficient cash flow to service the debt; and/or do not reflect a sound net worth. The payment history indicates chronic delinquency problems. Management is weak. There is a distinct possibility that the Company may sustain a loss. All loans on non-accrual are rated substandard. Other loans that are included in the substandard category can be accruing, as well as loans that are current or past due. Loans 90 days or more past due, unless otherwise fully supported, are classified substandard. Also, borrowers that are bankrupt or have loans categorized as TDRs can be graded substandard. Doubtful Loans in this category are graded an eight and have a better than 50% possibility of the Company sustaining a loss, but the loss cannot be determined because of specific reasonable factors which may strengthen credit in the near-term. Many of the weaknesses present in a substandard loan exist. Liquidation of collateral, if any, is likely. Any loan graded lower than an eight is considered to be uncollectible and charged-off. Consumer and residential The consumer and residential loan segments are regarded as homogeneous loan pools and as such are not risk rated. For these portfolios, the Company utilizes payment activity and history in assessing performance. Non-performing loans are comprised of non-accrual loans and loans past due 90 days or more and accruing. All loans not classified as non-performing are considered performing. The following table presents loans including $0.5 million and $1.7 million of deferred costs, segregated by class, categorized into the appropriate credit quality indicator category as of June 30, 2021 and December 31, 2020, respectively:
Commercial credit exposure Credit risk profile by creditworthiness category
Consumer & Mortgage lending credit exposure Credit risk profile based on payment activity
(1)Net of unearned lease revenue of $1.3 million.
Commercial credit exposure Credit risk profile by creditworthiness category
Consumer & Mortgage lending credit exposure Credit risk profile based on payment activity
(2)Net of unearned lease revenue of $1.2 million. Allowance for loan losses Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. Management’s judgment is based on the evaluation of individual loans, experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. Loan losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received. Management applies two primary components during the loan review process to determine proper allowance levels. The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated. The methodology to analyze the adequacy of the allowance for loan losses is as follows: identification of specific impaired loans by loan category; identification of specific loans that are not impaired, but have an identified potential for loss; calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence; determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans; application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation; application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio. Qualitative factor adjustments include: olevels of and trends in delinquencies and non-accrual loans; olevels of and trends in charge-offs and recoveries; otrends in volume and terms of loans; ochanges in risk selection and underwriting standards; ochanges in lending policies and legal and regulatory requirements; oexperience, ability and depth of lending management; onational and local economic trends and conditions; and ochanges in credit concentrations. Allocation of the allowance for different categories of loans is based on the methodology as explained above. A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual C&I and CRE loans. C&I and CRE loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The credit risk grades for the C&I and CRE loan portfolios are considered in the reserve methodology and loss factors are applied based upon the credit risk grades. The loss factors applied are based upon the Company’s historical experience as well as what we believe to be best practices and common industry standards. Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs. The changes in allocations in the C&I and CRE loan portfolio from period to period are based upon the credit risk grading system and from periodic reviews of the loan portfolio. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies. Each quarter, management performs an assessment of the allowance. The Company’s Special Assets Committee meets quarterly, and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due in payment. The assessment process also includes the review of all loans on a non-accruing basis as well as a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating. The Company’s policy is to charge-off unsecured consumer loans when they become 90 days or more past due as to principal and interest. In the other portfolio segments, amounts are charged-off at the point in time when the Company deems the balance, or a portion thereof, to be uncollectible. Information related to the change in the allowance and the Company’s recorded investment in loans by portfolio segment as of the period indicated is as follows:
(1) Net of unearned lease revenue of $1.3 million. (2) Includes $0.5 million of net deferred loan costs.
(1) Net of unearned lease revenue of $1.2 million. (2) Includes $1.7 million of net deferred loan costs.
Direct finance leases On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), and subsequent related updates to revise the accounting for leases. Lessor accounting was largely unchanged as a result of the standard. Additional disclosures required under the standard are included in this section and in Footnote 12, “Leases”. The Company originates direct finance leases through two automobile dealerships. The carrying amount of the Company’s lease receivables, net of unearned income, was $6.9 million and $6.0 million as of June 30, 2021 and December 31, 2020, respectively. The residual value of the direct finance leases is fully guaranteed by the dealerships. Residual values amounted to $13.9 million and $12.9 million at June 30, 2021 and December 31, 2020, respectively, and are included in the carrying value of direct finance leases.
The undiscounted cash flows to be received on an annual basis for the direct finance leases are as follows:
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Earnings Per Share |
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Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share | 6. Earnings per share Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed in the same manner as basic EPS but also reflects the potential dilution that could occur from the grant of stock-based compensation awards. The Company maintains two active share-based compensation plans that may generate additional potentially dilutive common shares. For granted and unexercised stock-settled stock appreciation rights (SSARs), dilution would occur if Company-issued SSARs were exercised and converted into common stock. As of the three and six months ended June 30, 2021, there were 29,718 and 30,828 potentially dilutive shares related to issued and unexercised SSARs compared to 19,109 and 23,637 for the same 2020 periods, respectively. For restricted stock, dilution would occur from the Company’s previously granted but unvested shares. There were 10,351 and 10,700 potentially dilutive shares related to unvested restricted share grants as of the three and six months ended June 30, 2021 compared to 871 and 2,871 for the same 2020 periods, respectively. In the computation of diluted EPS, the Company uses the treasury stock method to determine the dilutive effect of its granted but unexercised stock options and SSARs and unvested restricted stock. Under the treasury stock method, the assumed proceeds, as defined, received from shares issued in a hypothetical stock option exercise or restricted stock grant, are assumed to be used to purchase treasury stock. Proceeds include amounts received from the exercise of outstanding stock options and compensation cost for future service that the Company has not yet recognized in earnings. The Company does not consider awards from share-based grants in the computation of basic EPS. The following table illustrates the data used in computing basic and diluted EPS for the periods indicated:
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Stock Plans |
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Stock Plans | 7. Stock plans The Company has two stock-based compensation plans (the stock compensation plans) from which it can grant stock-based compensation awards and applies the fair value method of accounting for stock-based compensation provided under current accounting guidance. The guidelines require the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. The Company’s stock compensation plans were shareholder-approved and permit the grant of share-based compensation awards to its employees and directors. The Company believes that the stock-based compensation plans will advance the development, growth and financial condition of the Company by providing incentives through participation in the appreciation in the value of the Company’s common stock. In return, the Company hopes to secure, retain and motivate the employees and directors who are responsible for the operation and the management of the affairs of the Company by aligning the interest of its employees and directors with the interest of its shareholders. In the stock compensation plans, employees and directors are eligible to be awarded stock-based compensation grants which can consist of stock options (qualified and non-qualified), stock appreciation rights (SARs) and restricted stock. At the 2012 annual shareholders’ meeting, the Company’s shareholders approved and the Company adopted the 2012 Omnibus Stock Incentive Plan and the 2012 Director Stock Incentive Plan (collectively, the 2012 stock incentive plans). Unless terminated by the Company’s board of directors, the 2012 stock incentive plans will expire on and no stock-based awards shall be granted after the year . In each of the 2012 stock incentive plans, the Company has reserved 750,000 shares of its no-par common stock for future issuance. The Company recognizes share-based compensation expense over the requisite service or vesting period. During 2015, the Company created a Long-Term Incentive Plan (LTIP) that awarded restricted stock and stock-settled stock appreciation rights (SSARs) to senior officers based on the attainment of performance goals. The service requirement was the participant’s continued employment throughout the LTIP with a three year vesting period. Under this plan, the restricted stock had a two year post vesting holding period requirement. The SSAR awards have a ten year term from the date of each grant. During the first quarter of 2021, the Company approved a 1-year LTIP and awarded restricted stock to senior officers and managers in February and March 2021 based on 2020 performance. During the first quarter of 2020, the Company approved a 1-year LTIP and awarded restricted stock to senior officers and managers in February and March 2020 based on 2019 performance. The following table summarizes the weighted-average fair value and vesting of restricted stock grants awarded during the periods ended June 30, 2021 and 2020 under the 2012 stock incentive plans:
(1) Vest after 1 year (2) Vest after 3 years – 33% each year (3) Vest fully after 3 years The fair value of the shares granted in 2021 was calculated using the grant date stock price. A summary of the status of the Company’s non-vested restricted stock as of and changes during the period indicated are presented in the following table:
A summary of the status of the Company’s SSARs as of and changes during the period indicated are presented in the following table:
Of the SSARs outstanding at June 30, 2021, 90,639 vested and were exercisable. SSARs vest over a three year period – 33% per year. During the first quarter of 2021, there were 2,932 SSARs exercised. The intrinsic value recorded for these SSARs was $10,190. The tax deduction realized from the exercise of these SSARs was $125,810 resulting in a tax benefit of $26,420. There were no SSARs exercised during the first or second quarters of 2020. Share-based compensation expense is included as a component of salaries and employee benefits in the consolidated statements of income. The following tables illustrate stock-based compensation expense recognized on non-vested equity awards during the three and six months ended June 30, 2021 and 2020 and the unrecognized stock-based compensation expense as of June 30, 2021:
In addition, during the six months ended June 30, 2021, the Company reversed accruals of ($10 thousand) in stock-based compensation expense for restricted stock and SSARs awarded under the Omnibus Plan. During the three and six months ended June 30, 2020, the Company reversed accruals of ($31 thousand) and ($63 thousand) in stock-based compensation expense for restricted stock and SSARs awarded under the Omnibus Plan.
The unrecognized stock-based compensation expense as of June 30, 2021 will be recognized ratably over the periods ended February 2024 and March 2024 for the Director Plan and the Omnibus Plan, respectively. In addition to the 2012 stock incentive plans, the Company established the 2002 Employee Stock Purchase Plan (the ESPP) and reserved 165,000 shares of its un-issued capital stock for issuance under the plan. The ESPP was designed to promote broad-based employee ownership of the Company’s stock and to motivate employees to improve job performance and enhance the financial results of the Company. Under the ESPP, participation is voluntary whereby employees use automatic payroll withholdings to purchase the Company’s capital stock at a discounted price based on the fair market value of the capital stock as measured on either the commencement or termination dates, as defined. As of June 30, 2021, 89,642 shares have been issued under the ESPP. The ESPP is considered a compensatory plan and is required to comply with the provisions of current accounting guidance. The Company recognizes compensation expense on its ESPP on the date the shares are purchased, and it is included as a component of salaries and employee benefits in the consolidated statements of income. |
Fair Value Measurements |
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Fair Value Measurements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurements | 8. Fair value measurements The accounting guidelines establish a framework for measuring and disclosing information about fair value measurements. The guidelines of fair value reporting instituted a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 - inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; Level 3 - inputs are unobservable and are based on the Company’s own assumptions to measure assets and liabilities at fair value. Level 3 pricing for securities may also include unobservable inputs based upon broker-traded transactions.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The Company uses fair value to measure certain assets and, if necessary, liabilities on a recurring basis when fair value is the primary measure for accounting. Thus, the Company uses fair value for AFS securities. Fair value is used on a non-recurring basis to measure certain assets when adjusting carrying values to market values, such as impaired loans, other real estate owned (ORE) and other repossessed assets. The following table represents the carrying amount and estimated fair value of the Company’s financial instruments as of the periods indicated:
The carrying value of short-term financial instruments, as listed below, approximates their fair value. These instruments generally have limited credit exposure, no stated or short-term maturities, carry interest rates that approximate market and generally are recorded at amounts that are payable on demand: Cash and cash equivalents; Non-interest bearing deposit accounts; Savings, interest-bearing checking and money market accounts and Short-term borrowings. Securities: Fair values on investment securities are determined by prices provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Originated loans and leases: The fair value of accruing loans is estimated by calculating the net present value of the future expected cash flows discounted using the exit price notion. The discount rate is based upon current offering rates, with an additional discount for expected potential charge-offs. Additionally, an environmental general credit risk adjustment is subtracted from the net present value to arrive at the total estimated fair value of the accruing loan portfolio. The carrying value that fair value is compared to is net of the allowance for loan losses and since there is significant judgment included in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy. Non-accrual loans: Loans which the Company has measured as non-accruing are generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. These loans are classified within Level 3 of the fair value hierarchy. The fair value consists of loan balances less the valuation allowance. Acquired loans: Acquired loans (performing and non-performing) are initially recorded at their acquisition-date fair values using Level 3 inputs. For more information on the calculation of the fair value of acquired loans, see Footnote 9, “Acquisition.” Loans held-for-sale: The fair value of loans held-for-sale is estimated using rates currently offered for similar loans and is typically obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank of Pittsburgh (FHLB). Certificates of deposit: The fair value of certificates of deposit is based on discounted cash flows using rates which approximate market rates for deposits of similar maturities. FHLB advances: Fair value is estimated using the rates currently offered for similar borrowings. The following tables illustrate the financial instruments measured at fair value on a recurring basis segregated by hierarchy fair value levels as of the periods indicated:
Debt securities in the AFS portfolio are measured at fair value using market quotations provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Assets classified as Level 2 use valuation techniques that are common to bond valuations. That is, in active markets whereby bonds of similar characteristics frequently trade, quotes for similar assets are obtained. There were no changes in Level 3 financial instruments measured at fair value on a recurring basis as of and for the periods ending June 30, 2021 and December 31, 2020, respectively.
The following table illustrates the financial instruments newly measured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of the periods indicated:
From time-to-time, the Company may be required to record at fair value financial instruments on a non-recurring basis, such as impaired loans, ORE and other repossessed assets. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting on write downs of individual assets. The fair value of impaired loans was calculated using the value of the impaired loans with an allowance less the related allowance. The following describes valuation methodologies used for financial instruments measured at fair value on a non-recurring basis. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component of the allowance for loan losses, and as such are carried at the lower of net recorded investment or the estimated fair value. Estimates of fair value of the collateral are determined based on a variety of information, including available valuations from certified appraisers for similar assets, present value of discounted cash flows and inputs that are estimated based on commonly used and generally accepted industry liquidation advance rates and estimates and assumptions developed by management. Valuation techniques for impaired loans are typically determined through independent appraisals of the underlying collateral or may be determined through present value of discounted cash flows. Both techniques include various Level 3 inputs which are not identifiable. The valuation technique may be adjusted by management for estimated liquidation expenses and qualitative factors such as economic conditions. If real estate is not the primary source of repayment, present value of discounted cash flows and estimates using generally accepted industry liquidation advance rates and other factors may be utilized to determine fair value. At June 30, 2021 and December 31, 2020, the range of liquidation expenses and other valuation adjustments applied to impaired loans ranged from -22.52% and -47.66% and from -27.04% to -70.66%, respectively. The weighted average of liquidation expenses and other valuation adjustments applied to impaired loans amounted to -40.68% as of June 30, 2021 and -44.49% as of December 31, 2020, respectively. Due to the multitude of assumptions, many of which are subjective in nature, and the varying inputs and techniques used to determine fair value, the Company recognizes that valuations could differ across a wide spectrum of techniques employed. Accordingly, fair value estimates for impaired loans are classified as Level 3. For ORE, fair value is generally determined through independent appraisals of the underlying properties which generally include various Level 3 inputs which are not identifiable. Appraisals form the basis for determining the net realizable value from these properties. Net realizable value is the result of the appraised value less certain costs or discounts associated with liquidation which occurs in the normal course of business. Management’s assumptions may include consideration of the location and occupancy of the property, along with current economic conditions. Subsequently, as these properties are actively marketed, the estimated fair values may be periodically adjusted through incremental subsequent write-downs. These write-downs usually reflect decreases in estimated values resulting from sales price observations as well as changing economic and market conditions. At June 30, 2021 and December 31, 2020, the discounts applied to the appraised values of ORE ranged from -16.63% and -77.60% and from -21.47% and -77.60%, respectively. As of June 30, 2021 and December 31, 2020, the weighted average of discount to the appraisal values of ORE amounted to -29.17% and -31.30%, respectively. At June 30, 2021 and December 31, 2020, there were no other repossessed assets. The Company refers to the National Automobile Dealers Association (NADA) guide to determine a vehicle’s fair value. |
Acquisition |
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Acquisition [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Acquisition | 9. Acquisition On May 1, 2020, the Company completed its previously announced acquisition of MNB of Bangor, Pennsylvania. MNB was a one-bank holding company organized under the laws of the Commonwealth of Pennsylvania and was headquartered in Bangor, PA. Its wholly owned subsidiary, founded in 1890, Merchants Bank of Bangor, was an independent community bank chartered under the laws of the Commonwealth of Pennsylvania. Merchants Bank conducted full-service commercial banking services through nine bank centers located in Northampton County, Pennsylvania. The acquisition expanded Fidelity Deposit and Discount Bank’s full-service footprint into Northampton County, Pennsylvania, and the Lehigh Valley. The Company transacted the merger to complement the Company’s existing operations, while consistent with the Company’s strategic plan of enhancing long-term shareholder value. The fair value of total assets acquired as a result of the merger totaled $451.4 million, loans totaled $245.3 million and deposits totaled $395.6 million. Goodwill recorded in the merger was $6.8 million. In accordance with the terms of the Reorganization Agreement, on May 1, 2020 each share of MNB common stock was converted into the right to receive 1.039 shares of the Company’s common stock. As a result of the merger, the Company issued 1,176,970 shares of its common stock, valued at $45.4 million, and cash in exchange for fractional shares based upon $43.77, the determined market price of the Company’s common stock in accordance with the Reorganization Agreement. The results of the combined entity’s operations are included in the Company’s Consolidated Financial Statements from the date of acquisition. The acquisition of MNB was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition. The following table summarizes the consideration paid for MNB and the fair value of assets acquired, and liabilities assumed as of the acquisition date:
Pursuant to the accounting requirements, the Corporation assigned a fair value to the assets acquired and liabilities assumed of MNB. ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The assets acquired and liabilities assumed in the acquisition of MNB were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. While the fair values are not expected to be materially different from the estimates, any material adjustments to the estimates will be reflected, retroactively, as of the date of the acquisition. The items most susceptible to adjustment are the fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition. Fair values of the major categories of assets acquired and liabilities assumed were determined as follows: Investment securities available-for-sale The estimated fair values of the investment securities available for sale, primarily comprised of U.S. Government agency mortgage-backed securities, U.S. government agencies and municipal bonds, were determined using Level 1 and Level 2 inputs in the fair value hierarchy. The fair values were determined using executable market bids or independent pricing services. The Corporation’s independent pricing service utilized matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific security but rather relying on the security’s relationship to other benchmark quoted prices. Management reviewed the data and assumptions used in pricing the securities. A fair value premium of $3.9 million was recorded and will be amortized over the estimated life of the investments using the interest rate method. Loans Acquired loans (performing and non-performing) are initially recorded at their acquisition-date fair values using Level 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Specifically, the Corporation has prepared three separate loan fair value adjustments that it believed a market participant might employ in estimating the entire fair value adjustment necessary under ASC 820-10 for the acquired loan portfolio. The three-separate fair valuation methodology employed are: 1) an interest rate loan fair value adjustment, 2) a general credit fair value adjustment, and 3) a specific credit fair value adjustment for purchased credit impaired loans subject to ASC 310-30 procedures. The acquired loans were recorded at fair value at the acquisition date without carryover of MNB’s previously established allowance for loan losses. The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $250.3 million. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present the fair value of the loans acquired. The credit adjustment on purchased credit impaired loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that has been deemed uncollectible based on the Corporation’s expectations of future cash flows for each respective loan.
For loans acquired without evidence of credit quality deterioration, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into homogeneous pools by characteristics such as loan type, term, collateral, and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value premium of $3.3 million. Additionally, for loans acquired without credit deterioration, a credit fair value adjustment was calculated using a two-part credit fair value analysis: 1) expected lifetime credit migration losses; and 2) estimated fair value adjustment for certain qualitative factors. The expected lifetime losses were calculated using historical losses observed by the Company, MNB and peer banks. The Company also estimated an environmental factor to apply to each loan type. The environmental factor represents the potential discount which may arise due to general credit and economic factors. A credit fair value discount of $6.9 million was determined. Both the interest rate and credit fair value adjustments relate to loans acquired with evidence of credit quality deterioration will be substantially recognized as interest income on a level yield amortization method over the expected life of the loans.
The following table presents the acquired purchased credit impaired loans receivable at the acquisition date:
The Company assumed leases on 4 branch facilities of MNB. The Company prepared an internal analysis to compare the lease contract obligations to comparable market rental rates. The Company believed that the leased contract rates were in a reasonable range of market rental rates and concluded that no fair market value adjustment related to leasehold interest was necessary. The fair value of MNB’s buildings, and improvements, was determined by the Company that the book value will be used as a proxy for fair value therefore no fair value adjustment is warranted. Core Deposit Intangible The fair value of the core deposit intangible was determined based on a discounted cash flow (present value) analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the higher cost of alternative funding sources available through national brokered CD offering rates and FHLB advance rates. The projected cash flows were developed using projected deposit attrition rates based on the average rate experienced by both institutions. The core deposit intangible will be amortized over ten years using the sum-of-years digits method. Time Deposits The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit premium is being amortized into income on a level yield amortization method over the contractual life of the deposits. FHLB Borrowings The Company assumed FHLB borrowings in connection with the merger. The fair value of FHLB Borrowings was determined by using FHLB prepayment penalty as a proxy for the fair value adjustment. The Company decided to pay off the borrowing post acquisition date therefore no amortization is warranted. Supplemental Pro Forma Financial Information The following table presents certain unaudited pro forma financial information for illustrative purposes only, for the twelve months ended December 31, 2020 and 2019, respectively, as if MNB had been acquired on January 1, 2019. This unaudited pro forma information combines the historical results of MNB with the Corporation’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision expense resulting from recording loan assets at fair value, cost savings or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented and the differences could be significant.
Landmark Acquisition On July 1, 2021, the Company completed the acquisition of Landmark Bancorp, Inc. (“Landmark”) and its wholly-owned subsidiary. At the effective time of the merger, Landmark merged with and into the Company with the Company surviving the merger. Landmark was the holding company of Landmark Community Bank (“Landmark Bank”) which operated 5 retail community banking offices in Northeastern Pennsylvania. Landmark Bank merged with and into Fidelity Bank, with Fidelity Bank surviving the merger.
Effective July 1, 2021, in connection with the merger and pursuant to the terms of the Reorganization Agreement, Paul C. Woelkers was appointed as a Class C Director of Fidelity’s Board of Directors. Mr. Woelkers was also appointed as a Director of Fidelity Bank’s Board of Directors. Under the terms of the agreement, Landmark shareholders received as consideration 0.272 shares of Fidelity common stock and $3.26 in cash for each share of Landmark common stock that they owned as of the closing date. As a result of the merger, the Company issued 647,990 shares of its common stock and $7.8 million in cash. With the combination of the two organizations, the Company, on a consolidated basis, has approximately $2.3 billion in assets, $2.1 billion in deposits, and $1.4 billion in loans. The merger transaction will be accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged will be recorded at estimated fair values on the acquisition date. Management is in the process of assessing the assets purchased and liabilities assumed in connection with the merger. Merger-related expenses For the three and six months ended June 30, 2021, the Company incurred $0.4 million and $0.9 million in merger-related expenses related to the merger with Landmark, primarily consisting of professional fees. The Company expects to incur another $2.4 million in non-recurring costs to facilitate the merger and integrate systems in the second half of 2021. For the three and six months ended June 30, 2020, the Company incurred merger-related expenses related to the merger with MNB totaling $1.9 million and $2.2 million, primarily consisting of professional fees, salaries and employee benefits and data processing fees. |
Employee Benefits |
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Employee Benefits [Abstract] | |
Employee Benefits | 10. Employee Benefits Bank-Owned Life Insurance (BOLI) The Company has purchased single premium BOLI policies on certain officers. The policies are recorded at their cash surrender values. Increases in cash surrender values are included in non-interest income in the consolidated statements of income. As a result of the acquisition of MNB, the Company added BOLI with a value of $9.3 million during 2020. During the fourth quarter of 2020, the Company purchased an additional $11.0 million of BOLI. The policies’ cash surrender value totaled $44.9 million and $44.3 million, respectively, as of June 30, 2021 and December 31, 2020 and is reflected as an asset on the consolidated balance sheets. For the six months ended June 30, 2021 and 2020, the Company has recorded income of $573 thousand and $361 thousand, respectively. Officer Life Insurance In 2017, the Bank entered into separate split dollar life insurance arrangements (Split Dollar Agreements) with eleven officers. This plan provides each officer a specified death benefit should the officer die while in the Bank’s employ. The Bank paid the insurance premiums in March 2017 and the arrangements were effective in March 2017. In March 2019, the Bank entered into a new Split Dollar Agreement with one officer. In January 2021, the Bank entered into Split Dollar Agreements with fifteen officers. The Bank owns the policies and all cash values thereunder. Upon death of the covered employee, the agreed-upon amount of death proceeds from the policies will be paid directly to the insured’s beneficiary. As of June 30, 2021, the policies had total death benefits of $44.9 million of which $4.4 million would have been paid to the officer’s beneficiaries and the remaining $40.5 million would have been paid to the Bank. In addition, four executive officers have the opportunity to retain a split dollar benefit equal to two times their highest base salary after separation from service if the vesting requirements are met. As of June 30, 2021 and December 31, 2020, the Company accrued expenses of $176 thousand and $154 thousand for the split dollar benefit. Supplemental Executive Retirement plan (SERP) On March 29, 2017, the Bank entered into separate supplemental executive retirement agreements (individually the “SERP Agreement”) with five officers, pursuant to which the Bank will credit an amount to a SERP account established on each participant’s behalf while they are actively employed by the Bank for each calendar month from March 1, 2017 until retirement. On March 20, 2019, the Bank entered into a SERP Agreement with one officer, pursuant to which the Bank will credit an amount to a SERP account established for the participant’s behalf while they are actively employed by the Bank for each calendar month from March 1, 2019 until normal retirement age. As of June 30, 2021 and December 31, 2020, the Company accrued expenses of $2.3 million and $2.0 million in connection with the SERP. |
Revenue Recognition |
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Jun. 30, 2021 | |
Revenue Recognition [Abstract] | |
Revenue Recognition | 11. Revenue Recognition As of January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. The Company has elected to use the modified retrospective approach with prior period financial statements unadjusted and presented with historical revenue recognition methods. The implementation of the new standard had no material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. The majority of the Company’s revenues are generated through interest earned on securities and loans, which is explicitly excluded from the scope of the guidance. In addition, certain non-interest income streams such as fees associated with mortgage servicing rights, loan service charges, life insurance earnings, rental income and gains/losses on the sale of loans and securities are not in the scope of the new guidance. The main types of contracts with customers that are in the scope of the new guidance are: Service charges on deposit accounts – Deposit service charges represent fees charged by the Company for the performance obligation of providing services to a customer’s deposit account. The transaction price for deposit services includes both fixed and variable amounts based on the Company’s fee schedules. Revenue is recognized and payment is received either at a point in time for transactional fees or on a monthly basis for non-transactional fees. Interchange fees – Interchange fees represent fees charged by the Company for customers using debit cards. The contract is between the Company and the processor and the performance obligation is the ability of customers to use debit cards to make purchases at a point in time. The transaction price is a percentage of debit card usage and the processor pays the Company and revenue is recorded throughout the month as the performance obligations are being met. Fees from trust fiduciary activities – Trust fees represent fees charged by the Company for the management, custody and/or administration of trusts. These are mostly monthly fees based on the market value of assets in the trust account at the prior month end. Payment is generally received a few weeks after month end through a direct charge to customers’ accounts. Estate fees are recognized and charged as the Company reaches each of six different stages of the estate administration process. Fees from financial services – Financial service fees represent fees charged by the Company for the performance obligation of providing various services for an investment account. Revenue is recognized twice monthly for fees on sales transactions and on a monthly basis for advisory fees and quarterly for trail fees. Gain/loss on ORE sales – Gain/loss on the sale of ORE is recognized at the closing date when the sales proceeds are received. In seller-financed ORE transactions, the contract is made subject to our normal underwriting standards and pricing. The Company does not have any obligation or right to repurchase any sales of ORE. Contract balances A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before the payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity already received payment (or payment is due) from the customer. The Company’s non-interest income streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company typically does not enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2021 and December 31, 2020, the Company did not have any significant contract balances. Remaining performance obligations The Company’s performance obligations have an original expected duration of less than one year and follow the relevant guidance for recognizing revenue over time. There is no variable consideration subject to constraint that is not included in information about transaction price. Contract acquisition costs In connection with the adoption of Topic 606, an entity is required to capitalize and subsequently amortize into expense, certain incremental costs of obtaining a contract if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition costs. |
Leases |
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Leases [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Leases | 12. Leases ASU 2016-02 Leases (Topic 842) became effective for the Company on January 1, 2019. For all operating lease contracts where the Company is lessee, a right-of-use (ROU) asset and lease liability was recorded as of the effective date. The Company assumed all renewal terms will be exercised when calculating the ROU assets and lease liabilities. For leases existing at the transition date, any prepaid or deferred rent was added to the ROU asset to calculate the lease liability. The discount rate used to calculate the present value of future payments at the transition date was the Company’s incremental borrowing rate. The Company used the FHLB fixed rate borrowing rates on December 29, 2018 as the discount rate at transition. For all classes of underlying assets, the Company has elected not to record short-term leases (leases with a term of 12 months or less) on the balance sheet when the Company is lessee. Instead, the Company will recognize the lease payment on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. For all asset classes, the Company has elected, as a lessee, not to separate nonlease components from lease components and instead to account for each separate lease component and nonlease components associated with that lease component as a single lease component. Management determines if an arrangement is or contains a lease at contract inception. If an arrangement is determined to be or contains a lease, the Company recognizes a ROU asset and a lease liability when the asset is placed in service. The Company’s operating leases, where the Company is lessee, include property, land and equipment. As of June 30, 2021, ten of the Company’s branch properties were leased under operating leases. In four of the branch leases, the Company leases the land from an unrelated third party, and the buildings are the Company’s own capital improvement. The Company also leases three standalone ATMs under operating leases. Additionally, the Company has four equipment leases classified as finance leases. The following is an analysis of the leased property under finance leases:
The following is a schedule of future minimum lease payments under finance leases together with the present value of the net minimum lease payments as of June 30, 2021:
(a)The future minimum lease payments have not been reduced by estimated executory costs (such as taxes and maintenance) since this amount was deemed immaterial by management. (b)Amount necessary to reduce net minimum lease payments to present value calculated at the Company’s incremental borrowing rate upon lease inception.
As of June 30, 2021, the Company leased its Green Ridge, Pittston, Peckville, Back Mountain, Mountain Top, Abington, Nazareth, Easton, Bethlehem and Martins Creek branches under the terms of operating leases. Common area maintenance is included in variable lease payments in the table below. The Abington branch has variable lease payments which are calculated as a percentage of the national prime rate of interest and are expensed as incurred. The Bethlehem branch has variable lease payments that increase annually and are expensed as incurred.
During the first six months of 2021, $342 thousand of the total lease cost is included in premises and equipment expense and $17 thousand is included in other expenses on the consolidated statements of income. Operating lease expense is recognized on a straight-line basis over the lease term. We recognized both the interest expense and amortization expense for finance leases in premises and equipment expense since the interest expense portion was immaterial. The future minimum lease payments for the Company’s branch network and equipment under operating leases that have lease terms in excess of one year as of June 30, 2021 are as follows:
The Company leases several properties, where the Company is lessor, under operating leases to unrelated parties. Some of these properties are residential properties surrounding the Main Branch that the Company leases on a month-to-month basis and are considered short-term leases. The undiscounted cash flows to be received on an annual basis for the remaining three properties under long-term operating leases are as follows:
The Company also indirectly originates automobile leases classified as direct finance leases. See Footnote 5, “Loans and leases”, for more information about the Company’s direct finance leases. Lease income recognized from direct finance leases was included in interest income from loans and leases on the consolidated statements of income. Lease income related to operating leases is included in fees and other revenue on the consolidated statements of income. The Company only receives a variable payment for taxes from one of its lessees, but the amount is immaterial and excluded from rental income. The amount of lease income recognized on the consolidated statements of income was as follows for the periods indicated:
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Nature of Operations and Critical Accounting Policies (Policy) |
6 Months Ended |
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Jun. 30, 2021 | |
Nature of Operations and Critical Accounting Policies [Abstract] | |
Nature of Operations | Nature of operations Fidelity D & D Bancorp, Inc. (“the Company”) is a bank holding company and the parent of The Fidelity Deposit and Discount Bank (the “Bank”). The Bank is a commercial bank and trust company chartered under the laws of the Commonwealth of Pennsylvania and a wholly-owned subsidiary of the Company. Having commenced operations in 1903, the Bank is committed to provide superior customer service, while offering a full range of banking products and financial and trust services to both our consumer and commercial customers from our main office located in Dunmore and other branches located throughout Lackawanna, Northampton and Luzerne Counties and Wealth Management offices in Schuylkill and Lebanon Counties. On July 1, 2021, the Company completed its acquisition of Landmark Bancorp, Inc. (“Landmark”) and its wholly-owned subsidiary, Landmark Community Bank (“Landmark Bank”). At the time of the acquisition, Landmark merged with and into the Company with the Company surviving the merger. In addition, Landmark Bank merged with and into the Bank with the Bank as the surviving bank. On May 1, 2020, the Company completed its acquisition of MNB Corporation (“MNB”) and its wholly-owned subsidiary, Merchants Bank of Bangor. At the time of the acquisition, MNB merged with and into the Company with the Company surviving the merger. In addition, Merchants Bank of Bangor merged with and into the Bank with the Bank as the surviving bank. Further discussion of the acquisitions of MNB and Landmark can be found in Footnote 9, “Acquisition”. |
Principles of Consolidation | Principles of consolidation The accompanying unaudited consolidated financial statements of the Company and the Bank have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to this Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial condition and results of operations for the periods have been included. All significant inter-company balances and transactions have been eliminated in consolidation. For additional information and disclosures required under U.S. GAAP, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Management is responsible for the fairness, integrity and objectivity of the unaudited financial statements included in this report. Management prepared the unaudited financial statements in accordance with U.S. GAAP. In meeting its responsibility for the financial statements, management depends on the Company's accounting systems and related internal controls. These systems and controls are designed to provide reasonable but not absolute assurance that the financial records accurately reflect the transactions of the Company, the Company’s assets are safeguarded and that the financial statements present fairly the financial condition and results of operations of the Company. In the opinion of management, the consolidated balance sheets as of June 30, 2021 and December 31, 2020 and the related consolidated statements of income, consolidated statements of comprehensive income and consolidated statements of changes in shareholders’ equity for the three and six months ended June 30, 2021 and 2020, and consolidated statements of cash flows for the six months ended June 30, 2021 and 2020 present fairly the financial condition and results of operations of the Company. All material adjustments required for a fair presentation have been made. These adjustments are of a normal recurring nature. Certain reclassifications have been made to the 2020 financial statements to conform to the 2021 presentation. In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after June 30, 2021 through the date these consolidated financial statements were issued. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2020, and the notes included therein, included within the Company’s Annual Report filed on Form 10-K. |
Use of Estimates | The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. |
Allowance For Loan Losses | A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses. Management believes that the allowance for loan losses at June 30, 2021 is adequate and reasonable to cover incurred losses. Given the subjective nature of identifying and estimating loan losses, it is likely that well-informed individuals could make different assumptions and could, therefore, calculate a materially different allowance amount. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgment of information available to them at the time of their examination. |
Investment Securities | Another material estimate is the calculation of fair values of the Company’s investment securities. Fair values of investment securities are determined by pricing provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Based on experience, management is aware that estimated fair values of investment securities tend to vary among valuation services. Accordingly, when selling investment securities, price quotes may be obtained from more than one source. All of the Company’s debt securities are classified as available-for-sale (AFS). AFS debt securities are carried at fair value on the consolidated balance sheets, with unrealized gains and losses, net of income tax, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (AOCI). |
Loans Held-for-Sale | The fair value of residential mortgage loans, classified as held-for-sale (HFS), is obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank (FHLB). Generally, the market to which the Company sells residential mortgages it originates for sale is restricted and price quotes from other sources are not typically obtained. On occasion, the Company may transfer loans from the loan portfolio to loans HFS. Under these circumstances, pricing may be obtained from other entities and the residential mortgage loans are transferred at the lower of cost or market value and simultaneously sold. For other loans transferred to HFS, pricing may be obtained from other entities or modeled and the other loans are transferred at the lower of cost or market value and then sold. As of June 30, 2021 and December 31, 2020, loans classified as HFS consisted of residential mortgage loans. |
Automobile Leasing | Financing of automobiles, provided to customers under lease arrangements of varying terms, are accounted for as direct finance leases. Interest income on automobile direct finance leasing is determined using the interest method to arrive at a level effective yield over the life of the lease. The lease residual and the lease receivable, net of unearned lease income, are recorded within loans and leases on the balance sheet. |
Foreclosed Assets Held-for-Sale | Foreclosed assets held-for-sale includes other real estate acquired through foreclosure (ORE) and may, from time-to-time, include repossessed assets such as automobiles. ORE is carried at the lower of cost (principal balance at date of foreclosure) or fair value less estimated cost to sell. Any write-downs at the date of foreclosure are charged to the allowance for loan losses. Expenses incurred to maintain ORE properties, subsequent write downs to the asset’s fair value, any rental income received and gains or losses on disposal are included as components of other real estate owned expense in the consolidated statements of income. |
Business Combinations | We account for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that management believes to be reasonable. |
Goodwill | Goodwill is recorded on the consolidated balance sheets as the excess of liabilities assumed over identifiable assets acquired on the acquisition date. Goodwill is recorded at its net carrying value which represents estimated fair value. The goodwill is deductible for tax purposes over a 15-year period. Goodwill is tested for impairment on at least an annual basis. There was no goodwill impairment as of June 30, 2021 and December 31, 2020. Other acquired intangible assets that have finite lives, such as core deposit intangibles, are amortized over their estimated useful lives and subject to periodic impairment testing. |
Employee Benefits | The Company holds separate supplemental executive retirement (SERP) agreements for certain officers and an amount is credited to each participant’s SERP account monthly while they are actively employed by the bank until retirement. A deferred tax asset is provided for the non-deductible SERP expense. The Company also entered into separate split dollar life insurance arrangements with four executives providing post-retirement benefits and accrues monthly expense for this benefit. The split dollar life insurance expense is not deductible for tax purposes. Monthly expenses for the SERP and post-retirement split dollar life benefit are recorded as components of salaries and employee benefit expense on the consolidated statements of income. |
Cash Flows | For purposes of the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and interest-bearing deposits with financial institutions. |
Earnings Per Share (Policy) |
6 Months Ended |
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Jun. 30, 2021 | |
Earnings Per Share [Abstract] | |
Earnings Per Share | Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed in the same manner as basic EPS but also reflects the potential dilution that could occur from the grant of stock-based compensation awards. The Company maintains two active share-based compensation plans that may generate additional potentially dilutive common shares. For granted and unexercised stock-settled stock appreciation rights (SSARs), dilution would occur if Company-issued SSARs were exercised and converted into common stock. As of the three and six months ended June 30, 2021, there were 29,718 and 30,828 potentially dilutive shares related to issued and unexercised SSARs compared to 19,109 and 23,637 for the same 2020 periods, respectively. For restricted stock, dilution would occur from the Company’s previously granted but unvested shares. There were 10,351 and 10,700 potentially dilutive shares related to unvested restricted share grants as of the three and six months ended June 30, 2021 compared to 871 and 2,871 for the same 2020 periods, respectively. In the computation of diluted EPS, the Company uses the treasury stock method to determine the dilutive effect of its granted but unexercised stock options and SSARs and unvested restricted stock. Under the treasury stock method, the assumed proceeds, as defined, received from shares issued in a hypothetical stock option exercise or restricted stock grant, are assumed to be used to purchase treasury stock. Proceeds include amounts received from the exercise of outstanding stock options and compensation cost for future service that the Company has not yet recognized in earnings. The Company does not consider awards from share-based grants in the computation of basic EPS. |
Accumulated Other Comprehensive Income (Tables) |
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Accumulated Other Comprehensive Income [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Accumulated Other Comprehensive Income |
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Investment Securities (Tables) |
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Investment Securities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortized Cost and Fair Value of Investment Securities |
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Amortized Cost and Fair Value of Debt Securities by Contractual Maturity Date |
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Available-for-Sale Securities, Continuous Unrealized Loss Position, Fair Value |
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Loans and Leases (Tables) |
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Loans and Leases [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loan Classifications |
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Schedule of Accretable Yield |
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Non-Accrual Loans, Segregated by Class |
The table above excludes $1.3 million in purchased credit impaired loans, net of unamortized fair value adjustments as of June 30, 2021 and December 31, 2020. |
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Past Due Loans |
(1) Includes non-accrual loans. (2) Net of unearned lease revenue of $1.3 million. (3) Includes net deferred loan costs of $0.5 million.
(1) Includes non-accrual loans. (2) Net of unearned lease revenue of $1.2 million. (3) Includes net deferred loan costs of $1.7 million. |
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Impaired Loans | Impaired loans, segregated by class, as of the period indicated are detailed below:
At June 30, 2021, impaired loans totaled $5.7 million consisting of $2.5 million in accruing TDRs and $3.2 million in non-accrual loans. At December 31, 2020, impaired loans totaled $6.3 million consisting of $2.5 million in accruing TDRs and $3.8 million in non-accrual loans. As of June 30, 2021, the non-accrual loans included three TDRs to two unrelated borrowers totaling $0.6 million compared with four TDRs to three unrelated borrowers totaling $0.7 million as of December 31, 2020. A loan is considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting payments when due. The significance of payment delays and/or shortfalls is determined on a case-by-case basis. All circumstances surrounding the loan are considered. Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record. Impairment is measured on these loans on a loan-by-loan basis. Impaired loans include non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors. The following table presents the average recorded investments in impaired loans and related amount of interest income recognized during the periods indicated below. The average balances are calculated based on the quarter-end balances of impaired loans. Payments received from non-accruing impaired loans are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts. Any excess is treated as a recovery of interest income. Payments received from accruing impaired loans are applied to principal and interest, as contractually agreed upon.
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Credit Quality Indicator Loan Categories | Commercial credit exposure Credit risk profile by creditworthiness category
Consumer & Mortgage lending credit exposure Credit risk profile based on payment activity
(1)Net of unearned lease revenue of $1.3 million.
Commercial credit exposure Credit risk profile by creditworthiness category
Consumer & Mortgage lending credit exposure Credit risk profile based on payment activity
(2)Net of unearned lease revenue of $1.2 million. |
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Schedule of Change in Allowance for Loan Losses and the Recorded Investment in Loans |
(1) Net of unearned lease revenue of $1.3 million. (2) Includes $0.5 million of net deferred loan costs.
(1) Net of unearned lease revenue of $1.2 million. (2) Includes $1.7 million of net deferred loan costs.
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Undiscounted Cash Flows to be Received on Annual Basis for Direct Finance Leases |
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Earnings Per Share (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Earnings Per Share, Basic and Diluted |
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Stock Plans (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock Plans [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Weighted-Average Fair-Value and Vesting of Restricted Stock Grants |
(1) Vest after 1 year (2) Vest after 3 years – 33% each year (3) Vest fully after 3 years |
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Schedule of Non-Vested Restricted Stock Units Activity |
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Schedule of SSARs Activity |
Of the SSARs outstanding at June 30, 2021, 90,639 vested and were exercisable. SSARs vest over a three year period – 33% per year. |
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Schedule of Compensation Cost for Share-Based Payment Arrangements, Allocation of Share-Based Compensation Costs by Plan |
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Schedule of Unrecognized Compensation Cost, Non-Vested Awards |
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Fair Value Measurements (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Fair Value Measurements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Carrying Amount and Estimated Fair Value by Balance Sheet Grouping |
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Financial Instruments Measured at Fair Value on Recurring Basis |
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Fair Value Measurements at Fair Value Segregated by Hierarchy Fair Value Levels |
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Acquisition (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Acquisition [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Consideration Paid for MNB |
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Summary of Fair Value Adjustments of Loans Acquired |
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Summary of Credit Adjustment on Acquired Impaired Loans |
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Summary of Supplemental Pro Forma Financial Information |
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Leases (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Leases [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Analysis of Leased Property under Finance Leases |
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Schedule of Future Minimum Lease Payments under Finance Leases |
(a)The future minimum lease payments have not been reduced by estimated executory costs (such as taxes and maintenance) since this amount was deemed immaterial by management. (b)Amount necessary to reduce net minimum lease payments to present value calculated at the Company’s incremental borrowing rate upon lease inception. |
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Schedule of Lease Costs and Other Information |
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Schedule of Future Minimum Lease Payments under Operating Leases |
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Schedule of Undiscounted Cash Flows to be Received |
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Schedule of Lease Income |
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Nature of Operations and Critical Accounting Policies (Narrative) (Details) |
6 Months Ended | 12 Months Ended |
---|---|---|
Jun. 30, 2021
USD ($)
employee
|
Dec. 31, 2020
USD ($)
|
|
Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Line Items] | ||
Year founded | 1903 | |
Goodwill term | 15 years | |
Goodwill impairment | $ | $ 0 | $ 0 |
Executives [Member] | ||
Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Line Items] | ||
Number of individuals with split dollar life insurance arrangement | employee | 4 |
Accumulated Other Comprehensive Income (Narrative) (Details) - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2021 |
Jun. 30, 2020 |
Jun. 30, 2021 |
Jun. 30, 2020 |
|
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items] | ||||
Net income | $ 5,696,000 | $ 252,000 | $ 11,363,000 | $ 2,886,000 |
Reclassified from Accumulated Other Comprehensive Income [Member] | ||||
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items] | ||||
Net income | $ 0 | $ 0 | $ 0 | $ 0 |
Accumulated Other Comprehensive Income (Schedule of Accumulated Other Comprehensive Income) (Details) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2021 |
Jun. 30, 2020 |
Jun. 30, 2021 |
Jun. 30, 2020 |
|
Accumulated Other Comprehensive Income (Loss) [Line Items] | ||||
Beginning balance | $ 163,582 | $ 112,140 | $ 166,670 | $ 106,835 |
Ending balance | 172,185 | 157,160 | 172,185 | 157,160 |
Unrealized Gains (Losses) on Available-for-Sale Debt Securities [Member] | ||||
Accumulated Other Comprehensive Income (Loss) [Line Items] | ||||
Beginning balance | 1,163 | 6,850 | 8,952 | 3,602 |
Other comprehensive (loss) income before reclassifications, net of tax | 4,168 | 351 | (3,621) | 3,599 |
Amounts reclassified from accumulated other comprehensive income, net of tax | ||||
Net current-period other comprehensive income (loss) | 4,168 | 351 | (3,621) | 3,599 |
Ending balance | $ 5,331 | $ 7,201 | $ 5,331 | $ 7,201 |
Investment Securities (Amortized Cost and Fair Value of Debt Securities by Contractual Maturity Date) (Details) - USD ($) $ in Thousands |
Jun. 30, 2021 |
Dec. 31, 2020 |
---|---|---|
Investment Securities [Abstract] | ||
Amortized cost: Due in one year or less | $ 975 | |
Amortized cost: Due after one year through five years | 5,966 | |
Amortized cost: Due after five years through ten years | 98,216 | |
Amortized cost: Due after ten years | 246,251 | |
Amortized cost: MBS - GSE residential | 196,798 | |
Amortized cost: Total available-for-sale debt securities | 548,206 | $ 381,088 |
Fair value: Due in one year or less | 1,007 | |
Fair value: Due after one year through five years | 6,261 | |
Fair value: Due after five years through ten years | 97,247 | |
Fair value: Due after ten years | 252,110 | |
Fair value: MBS - GSE residential | 198,330 | |
Fair value: Total available-for-sale debt securities | $ 554,955 | $ 392,420 |
Loans and Leases (Schedule of Accretable Yield) (Details) - USD ($) $ in Thousands |
6 Months Ended | |
---|---|---|
Jun. 30, 2021 |
Jun. 30, 2020 |
|
Loans and Leases [Abstract] | ||
Balance at beginning of period | $ 563 | |
Accretable yield on acquired loans | 248 | |
Reclassification from non-accretable difference | 162 | |
Accretion of accretable yield | (193) | (19) |
Balance at end of period | $ 532 | $ 229 |
Loans and Leases (Undiscounted Cash Flows to be Received on Annual Basis for Direct Finance Leases) (Details) $ in Thousands |
Jun. 30, 2021
USD ($)
|
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Loans and Leases [Abstract] | |
2021 | $ 3,169 |
2022 | 6,814 |
2023 | 5,517 |
2024 | 5,915 |
2025 | 646 |
2026 and thereafter | 30 |
Total future minimum lease payments receivable | 22,091 |
Less: Unearned income | (1,261) |
Undiscounted cash flows to be received | $ 20,830 |
Earnings Per Share (Narrative) (Details) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2021
shares
|
Jun. 30, 2020
shares
|
Jun. 30, 2021
ShareBasedCompensationPlan
shares
|
Jun. 30, 2020
shares
|
|
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items] | ||||
Number of active share-based compensation plans | ShareBasedCompensationPlan | 2 | |||
Potentially dilutive common shares | 40,069 | 19,980 | 41,528 | 26,508 |
Stock-Settled Stock Appreciation Rights (SSARs) [Member] | ||||
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items] | ||||
Potentially dilutive common shares | 29,718 | 19,109 | 30,828 | 23,637 |
Restricted Stock [Member] | ||||
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items] | ||||
Potentially dilutive common shares | 10,351 | 871 | 10,700 | 2,871 |
Earnings Per Share (Schedule of Earnings Per Share, Basic and Diluted) (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2021 |
Jun. 30, 2020 |
Jun. 30, 2021 |
Jun. 30, 2020 |
|
Basic EPS: | ||||
Net income available to common shareholders | $ 5,696 | $ 252 | $ 11,363 | $ 2,886 |
Weighted-average common shares outstanding | 4,995,658 | 4,588,050 | 4,993,226 | 4,190,395 |
Basic EPS | $ 1.14 | $ 0.05 | $ 2.28 | $ 0.69 |
Diluted EPS: | ||||
Net income available to common shareholders | $ 5,696 | $ 252 | $ 11,363 | $ 2,886 |
Weighted-average common shares outstanding | 4,995,658 | 4,588,050 | 4,993,226 | 4,190,395 |
Potentially dilutive common shares | 40,069 | 19,980 | 41,528 | 26,508 |
Weighted-average common and potentially dilutive shares outstanding | 5,035,727 | 4,608,030 | 5,034,754 | 4,216,903 |
Diluted EPS | $ 1.13 | $ 0.05 | $ 2.26 | $ 0.68 |
Stock Plans (Schedule of SSARs Activity) (Details) - Stock-Settled Stock Appreciation Rights (SSARs) [Member] - $ / shares |
3 Months Ended | 6 Months Ended | 12 Months Ended | ||
---|---|---|---|---|---|
Mar. 31, 2021 |
Jun. 30, 2020 |
Mar. 31, 2020 |
Jun. 30, 2021 |
Dec. 31, 2020 |
|
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||
Outstanding December 31, 2020 | 97,264 | 97,264 | |||
Granted | |||||
Exercised | (2,932) | 0 | 0 | (2,932) | |
Forfeited | |||||
Outstanding June 30, 2021 | 94,332 | 97,264 | |||
Weighted-average grant date fair value, Outstanding December 31, | $ 9.47 | $ 9.47 | |||
Weighted-average grant date fair value - Exercised | 3.48 | ||||
Weighted-average grant date fair value, Outstanding June 30, 2021 | $ 9.66 | $ 9.47 | |||
Weighted-average remaining contractual term (years), Outstanding | 6 years | 6 years 6 months | |||
Vested and exercisable | 90,639 | ||||
Vesting period | 3 years | ||||
Share-based Compensation Award, Tranche One, Two and Three [Member] | |||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||
Vesting period, percentage per year | 33.00% |
Stock Plans (Schedule of Unrecognized Compensation Cost, Non-Vested Awards) (Details) - Stock-Based Compensation Plan [Member] $ in Thousands |
Jun. 30, 2021
USD ($)
|
---|---|
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |
Unrecognized stock-based compensation expense | $ 1,834 |
Director Plan [Member] | |
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |
Unrecognized stock-based compensation expense | 752 |
Omnibus Plan [Member] | |
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |
Unrecognized stock-based compensation expense | $ 1,082 |
Acquisition (Summary of Fair Value Adjustments of Loans Acquired) (Details) - MNB Corporation [Member] - USD ($) |
May 31, 2020 |
Apr. 30, 2020 |
---|---|---|
Business Acquisition [Line Items] | ||
Gross amortized cost basis at April 30, 2020 | $ 250,347,000 | |
Interest rate fair value adjustment on pools of homogeneous loans | 3,335,000 | |
Credit fair value adjustment on pools of homogeneous loans | (6,863,000) | |
Credit fair value adjustment on purchased credit impaired loans | (1,536,000) | |
Fair value of acquired loans at April 30, 2020 | $ 245,300,000 | $ 245,283,000 |
Acquisition (Summary of Credit Adjustment on Acquired Impaired Loans) (Details) - MNB Corporation [Member] |
May 01, 2020
USD ($)
|
---|---|
Business Acquisition [Line Items] | |
Contractual principal and interest at acquisition | $ 3,778,000 |
Nonaccretable difference | (2,214,000) |
Expected cash flows at acquisition | 1,564,000 |
Accretable yield | (248,000) |
Fair value of purchased impaired loans | $ 1,316,000 |
Acquisition (Summary of Supplemental Pro Forma Financial Information) (Details) - MNB Corporation [Member] - USD ($) $ / shares in Units, $ in Thousands |
12 Months Ended | |
---|---|---|
Dec. 31, 2020 |
Dec. 31, 2019 |
|
Business Acquisition [Line Items] | ||
Net interest income | $ 48,812 | $ 46,199 |
Other income | 14,387 | 11,966 |
Total net interest income and other income | 63,199 | 58,165 |
Net income | $ 14,272 | $ 16,035 |
Basic earnings per common share | $ 2.87 | $ 3.24 |
Diluted earnings per common share | $ 2.85 | $ 3.21 |
Revenue Recognition (Narrative) (Details) - USD ($) |
Jun. 30, 2021 |
Dec. 31, 2020 |
Dec. 31, 2018 |
---|---|---|---|
Revenue Recognition [Abstract] | |||
Contract balance | $ 0 | $ 0 | |
Capitalized contract cost | $ 0 |
Leases (Narrative) (Details) $ in Thousands |
6 Months Ended | |
---|---|---|
Jun. 30, 2021
USD ($)
item
|
Jun. 30, 2020
USD ($)
|
|
Leases [Line Items] | ||
Number of properties leased under operating lease | 10 | |
Number of leases classified as finance lease | 4 | |
Total lease cost | $ | $ 359 | $ 292 |
Premise and Equipment [Member] | ||
Leases [Line Items] | ||
Total lease cost | $ | 342 | |
Other Expense [Member] | ||
Leases [Line Items] | ||
Total lease cost | $ | $ 17 | |
Land [Member] | ||
Leases [Line Items] | ||
Number of properties leased under operating lease | 4 | |
Standalone ATM [Member] | ||
Leases [Line Items] | ||
Number of properties leased under operating lease | 3 |
Leases (Analysis of Leased Property under Finance Leases) (Details) - USD ($) $ in Thousands |
Jun. 30, 2021 |
Dec. 31, 2020 |
---|---|---|
Leases [Abstract] | ||
Equipment | $ 485 | $ 485 |
Less accumulated depreciation and amortization | (250) | (202) |
Leased property under finance leases, net | $ 235 | $ 283 |
Leases (Schedule of Future Minimum Lease Payments under Finance Leases) (Details) - USD ($) $ in Thousands |
Jun. 30, 2021 |
Dec. 31, 2020 |
---|---|---|
Leases [Abstract] | ||
2021 | $ 51 | |
2022 | 101 | |
2023 | 74 | |
2024 | 17 | |
2025 | 7 | |
2026 and thereafter | ||
Total minimum lease payments | 250 | |
Less amount representing interest | (7) | |
Present value of net minimum lease payments | $ 243 | $ 291 |
Leases (Schedule of Future Minimum Lease Payments under Operating Leases) (Details) - USD ($) $ in Thousands |
Jun. 30, 2021 |
Dec. 31, 2020 |
---|---|---|
Leases [Abstract] | ||
2021 | $ 279 | |
2022 | 527 | |
2023 | 507 | |
2024 | 510 | |
2025 | 515 | |
2026 and thereafter | 8,258 | |
Total future minimum lease payments | 10,596 | |
Plus variable payment adjustment | 339 | |
Less amount representing interest | (3,438) | |
Present value of net future minimum lease payments | $ 7,497 | $ 7,644 |
Leases (Schedule of Undiscounted Cash Flows to be Received) (Details) $ in Thousands |
Jun. 30, 2021
USD ($)
|
---|---|
Leases [Abstract] | |
2021 | $ 100 |
2022 | 104 |
2023 | 48 |
2024 | 51 |
2025 | 54 |
2026 and thereafter | 81 |
Total lease payments to be received | $ 438 |
Leases (Schedule of Lease Income) (Details) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2021 |
Jun. 30, 2020 |
Jun. 30, 2021 |
Jun. 30, 2020 |
|
Leases [Abstract] | ||||
Lease income - direct finance leases: Interest income on lease receivables | $ 205 | $ 169 | $ 395 | $ 345 |
Lease income - operating leases | 77 | 53 | 128 | 111 |
Total lease income | $ 282 | $ 222 | $ 523 | $ 456 |
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