UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
| OR |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission file number: 001-36706
| CB FINANCIAL SERVICES, INC. | ||
| (Exact name of registrant as specified in its charter) |
| Pennsylvania | 51-0534721 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 100 N. Market Street, Carmichaels, PA | 15320 | |
| (Address of principal executive offices) | (Zip Code) |
| (724) 966-5041 | ||
| (Registrant’s telephone number, including area code) |
| N/A | ||
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Common stock, par value $0.4167 per share | CBFV | The Nasdaq Stock Market, LLC | ||
| (Title of each class) | (Trading symbol) | (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 subject to such filing requirements for the past 90 days.
Yes ☒ 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). Yes ☒ 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.
| Large accelerated filer ☐ | Accelerated filer ☒ | |
| Non-accelerated filer ☐ | 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 ☐ No ☒
As of May 7, 2020, the number of shares outstanding of the Registrant’s Common Stock was 5,393,712.
FORM 10-Q
INDEX
Page
PART I – FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
| (Unaudited) | ||||||||
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| (Dollars in thousands, except per share and share data) | ||||||||
| ASSETS | ||||||||
| Cash and Due From Banks: | ||||||||
| Interest Bearing | $ | 64,004 | $ | 68,798 | ||||
| Non-Interest Bearing | 14,095 | 11,419 | ||||||
| Total Cash and Due From Banks | 78,099 | 80,217 | ||||||
| Investment Securities: | ||||||||
| Available-for-Sale | 171,411 | 197,385 | ||||||
| Loans, Net of Allowance for Loan Losses of $12,322 and $9,867 at March 31, 2020 and December 31, 2019, Respectively | 962,328 | 942,629 | ||||||
| Premises and Equipment, Net | 22,037 | 22,282 | ||||||
| Bank-Owned Life Insurance | 24,361 | 24,222 | ||||||
| Goodwill | 28,425 | 28,425 | ||||||
| Intangible Assets, Net | 9,995 | 10,527 | ||||||
| Accrued Interest and Other Assets | 16,517 | 15,850 | ||||||
| TOTAL ASSETS | $ | 1,313,173 | $ | 1,321,537 | ||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Non-Interest Bearing Demand Deposits | $ | 267,369 | $ | 267,152 | ||||
| NOW Accounts | 229,601 | 232,099 | ||||||
| Money Market Accounts | 177,597 | 182,428 | ||||||
| Savings Accounts | 220,484 | 216,924 | ||||||
| Time Deposits | 211,589 | 219,756 | ||||||
| Total Deposits | 1,106,640 | 1,118,359 | ||||||
| Short-Term Borrowings | 34,967 | 30,571 | ||||||
| Other Borrowings | 11,000 | 14,000 | ||||||
| Accrued Interest and Other Liabilities | 9,041 | 7,510 | ||||||
| TOTAL LIABILITIES | 1,161,648 | 1,170,440 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Preferred Stock, No Par Value; 5,000,000 Shares Authorized | - | - | ||||||
| Common Stock, $0.4167 Par Value; 35,000,000 Shares Authorized, 5,680,993 Shares Issued and 5,393,712 and 5,463,828 Shares Outstanding at March 31, 2020 and December 31, 2019, Respectively | 2,367 | 2,367 | ||||||
| Capital Surplus | 83,216 | 82,971 | ||||||
| Retained Earnings | 66,431 | 66,955 | ||||||
| Treasury Stock, at Cost (287,281 and 217,165 Shares at March 31, 2020 and December 31, 2019, Respectively) | (5,914 | ) | (3,842 | ) | ||||
| Accumulated Other Comprehensive Income | 5,425 | 2,646 | ||||||
| TOTAL STOCKHOLDERS' EQUITY | 151,525 | 151,097 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,313,173 | $ | 1,321,537 | ||||
The accompanying notes are an integral part of these consolidated financial statements
1
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| (Dollars in thousands, except share and per share data) | ||||||||
| INTEREST AND DIVIDEND INCOME | ||||||||
| Loans, Including Fees | $ | 10,764 | $ | 10,433 | ||||
| Investment Securities: | ||||||||
| Taxable | 1,201 | 1,317 | ||||||
| Tax-Exempt | 106 | 208 | ||||||
| Dividends | 20 | 20 | ||||||
| Other Interest and Dividend Income | 238 | 318 | ||||||
| TOTAL INTEREST AND DIVIDEND INCOME | 12,329 | 12,296 | ||||||
| INTEREST EXPENSE | ||||||||
| Deposits | 1,681 | 1,719 | ||||||
| Short-Term Borrowings | 45 | 46 | ||||||
| Other Borrowings | 70 | 97 | ||||||
| TOTAL INTEREST EXPENSE | 1,796 | 1,862 | ||||||
| NET INTEREST INCOME | 10,533 | 10,434 | ||||||
| Provision For Loan Losses | 2,500 | 25 | ||||||
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 8,033 | 10,409 | ||||||
| NONINTEREST INCOME | ||||||||
| Service Fees | 603 | 592 | ||||||
| Insurance Commissions | 1,283 | 1,151 | ||||||
| Other Commissions | 110 | 117 | ||||||
| Net Gain on Sales of Loans | 127 | 92 | ||||||
| Net Loss on Sales of Investment Securities | - | (60 | ) | |||||
| Change in Fair Value of Marketable Equity Securities | (438 | ) | 20 | |||||
| Net Gain on Purchased Tax Credits | 15 | 9 | ||||||
| Net Gain (Loss) on Disposal of Fixed Assets | 17 | (6 | ) | |||||
| Income from Bank-Owned Life Insurance | 139 | 132 | ||||||
| Other Income | 14 | 66 | ||||||
| TOTAL NONINTEREST INCOME | 1,870 | 2,113 | ||||||
| NONINTEREST EXPENSE | ||||||||
| Salaries and Employee Benefits | 4,731 | 4,937 | ||||||
| Occupancy | 733 | 759 | ||||||
| Equipment | 257 | 296 | ||||||
| Data Processing | 425 | 408 | ||||||
| FDIC Assessment | 158 | 188 | ||||||
| PA Shares Tax | 275 | 268 | ||||||
| Contracted Services | 378 | 272 | ||||||
| Legal and Professional Fees | 235 | 181 | ||||||
| Advertising | 183 | 117 | ||||||
| Other Real Estate Owned (Income) | (17 | ) | (63 | ) | ||||
| Amortization of Intangible Assets | 532 | 532 | ||||||
| Other | 1,111 | 984 | ||||||
| TOTAL NONINTEREST EXPENSE | 9,001 | 8,879 | ||||||
| Income Before Income Tax Expense | 902 | 3,643 | ||||||
| Income Tax Expense | 129 | 718 | ||||||
| NET INCOME | $ | 773 | $ | 2,925 | ||||
| EARNINGS PER SHARE | ||||||||
| Basic | $ | 0.14 | $ | 0.54 | ||||
| Diluted | 0.14 | 0.54 | ||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||
| Basic | 5,431,199 | 5,432,856 | ||||||
| Diluted | 5,456,867 | 5,451,478 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
2
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| (Dollars in thousands) | ||||||||
| Net Income | $ | 773 | $ | 2,925 | ||||
| Other Comprehensive Income: | ||||||||
| Unrealized Gains on Available-for-Sale Securities Net of Income, Net of Income Tax | ||||||||
| Expense of $739 and $622 for the Three Months Ended March 31, 2020 and 2019, Respectively | 2,779 | 2,337 | ||||||
| Reclassification Adjustment for Losses on Securities Included in Net | ||||||||
| Income, Net of Income Tax Benefit of ($13) for the Three Months Ended March 31, 2019 (1) | - | 47 | ||||||
| Other Comprehensive Income, Net of Income Tax Expense (Benefit) | 2,779 | 2,384 | ||||||
| Total Comprehensive Income | $ | 3,552 | $ | 5,309 | ||||
| (1) | The gross amount of losses on securities of $(60) for the Three Months Ended March 31, 2019 is reported as Net Loss on Sales of Investments Securities on the Consolidated Statement of Income. The income tax benefit is included in Income Tax Expense on the Consolidated Statement of Income. | |||
The accompanying notes are an integral part of these consolidated financial statements
3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
| Shares Issued | Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income | Total Stockholders' Equity | ||||||||||||||||||||||
| (Dollars in thousands, except share and per share data) | ||||||||||||||||||||||||||||
| December 31, 2019 | 5,680,993 | $ | 2,367 | $ | 82,971 | $ | 66,955 | $ | (3,842 | ) | $ | 2,646 | $ | 151,097 | ||||||||||||||
| Comprehensive Income: | ||||||||||||||||||||||||||||
| Net Income | - | - | - | 773 | - | - | 773 | |||||||||||||||||||||
| Other Comprehensive Income | - | - | - | - | - | 2,779 | 2,779 | |||||||||||||||||||||
| Restricted Stock Awards Granted | - | - | 96 | - | (96 | ) | - | - | ||||||||||||||||||||
| Stock-Based Compensation Expense | - | - | 145 | - | - | - | 145 | |||||||||||||||||||||
| Exercise of Stock Options | - | - | 4 | - | (68 | ) | - | (64 | ) | |||||||||||||||||||
| Treasury stock purchased, at cost (67,816 shares) | - | - | - | - | (1,908 | ) | - | (1,908 | ) | |||||||||||||||||||
| Dividends Paid ($0.24 Per Share) | - | - | - | (1,297 | ) | - | - | (1,297 | ) | |||||||||||||||||||
| March 31, 2020 | 5,680,993 | $ | 2,367 | $ | 83,216 | $ | 66,431 | $ | (5,914 | ) | $ | 5,425 | $ | 151,525 | ||||||||||||||
| Shares Issued | Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||
| (Dollars in thousands, except share and per share data) | ||||||||||||||||||||||||||||
| December 31, 2018 | 5,680,993 | $ | 2,367 | $ | 83,225 | $ | 57,843 | $ | (4,370 | ) | $ | (1,440 | ) | $ | 137,625 | |||||||||||||
| Comprehensive Income: | ||||||||||||||||||||||||||||
| Net Income | - | - | - | 2,925 | - | - | 2,925 | |||||||||||||||||||||
| Other Comprehensive Income | - | - | - | - | - | 2,384 | 2,384 | |||||||||||||||||||||
| Stock-Based Compensation Expense | - | - | 77 | - | - | - | 77 | |||||||||||||||||||||
| Exercise of Stock Options | - | - | 5 | - | 17 | - | 22 | |||||||||||||||||||||
| Dividends Paid ($0.24 Per Share) | - | - | - | (1,304 | ) | - | - | (1,304 | ) | |||||||||||||||||||
| March 31, 2019 | 5,680,993 | $ | 2,367 | $ | 83,307 | $ | 59,464 | $ | (4,353 | ) | $ | 944 | $ | 141,729 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
4
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
| Three Months Ended March 31, | 2020 | 2019 | ||||||
| (Dollars in thousands) | ||||||||
| OPERATING ACTIVITIES | ||||||||
| Net Income | $ | 773 | $ | 2,925 | ||||
| Αdjustmеnts to Rеconcilе Net Income to Net Cash Provided By Operating Activities: | ||||||||
| Net Accretion on Investments | (70 | ) | (1 | ) | ||||
| Depreciation and Amortization | 941 | 913 | ||||||
| Provision for Loan Losses | 2,500 | 25 | ||||||
| Change in Fair Value of Marketable Equity Securities | 438 | (20 | ) | |||||
| Net Gain on Purchased Tax Credits | (15 | ) | (9 | ) | ||||
| Income from Bank-Owned Life Insurance | (139 | ) | (132 | ) | ||||
| Proceeds From Mortgage Loans Sold | 4,771 | 3,995 | ||||||
| Originations of Mortgage Loans for Sale | (4,644 | ) | (3,903 | ) | ||||
| Net Gain on Sales of Loans | (127 | ) | (92 | ) | ||||
| Net Loss on Sales of Investment Securities | - | 60 | ||||||
| Net Gain on Sales of Other Real Estate Owned and Repossessed Assets | (4 | ) | (30 | ) | ||||
| Noncash Expense for Stock-Based Compensation | 145 | 77 | ||||||
| Decrease (Increase) in Accrued Interest Receivable | 23 | (237 | ) | |||||
| Net (Gain) Loss on Disposal of Fixed Assets | (17 | ) | 6 | |||||
| (Decrease) Increase in Taxes Payable | (1,165 | ) | 455 | |||||
| Payments on Operating Leases | (110 | ) | (103 | ) | ||||
| (Decrease) Increase in Accrued Interest Payable | (124 | ) | 176 | |||||
| Net Payment of Federal and State Income Taxes | - | (15 | ) | |||||
| Other, Net | 414 | (2,828 | ) | |||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 3,590 | 1,262 | ||||||
| INVESTING ACTIVITIES | ||||||||
| Investment Securities Available for Sale: | ||||||||
| Proceeds From Principal Repayments and Maturities | 46,498 | 3,901 | ||||||
| Purchases of Debt and Marketable Equity Securities | (19,824 | ) | (10,947 | ) | ||||
| Proceeds from Sales of Securities | - | 10,762 | ||||||
| Net Increase in Loans | (18,861 | ) | 3,845 | |||||
| Purchase of Premises and Equipment | (17 | ) | - | |||||
| Asset Acquisition of a Customer List | - | (900 | ) | |||||
| Proceeds From Sales of Other Real Estate Owned and Repossessed Assets | 22 | 773 | ||||||
| Decrease in Restricted Equity Securities | 66 | 55 | ||||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES | 7,884 | 7,489 | ||||||
| FINANCING ACTIVITIES | ||||||||
| Net (Decrease) Increase in Deposits | (11,719 | ) | 18,807 | |||||
| Net Increase (Decrease) in Short-Term Borrowings | 4,396 | (290 | ) | |||||
| Principal Payments on Other Borrowed Funds | (3,000 | ) | (3,000 | ) | ||||
| Cash Dividends Paid | (1,297 | ) | (1,304 | ) | ||||
| Treasury Stock, Purchases at Cost | (1,908 | ) | - | |||||
| Exercise of Stock Options | (64 | ) | 22 | |||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | (13,592 | ) | 14,235 | |||||
| (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (2,118 | ) | 22,986 | |||||
| CASH AND DUE FROM BANKS AT BEGINNING OF YEAR | 80,217 | 53,353 | ||||||
| CASH AND DUE FROM BANKS AT END OF PERIOD | $ | 78,099 | $ | 76,339 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Cash paid for: | ||||||||
| Interest on deposits and borrowings (including interest credited to deposit accounts of $1,799 and $1,538, respectively) | $ | 1,920 | $ | 1,686 | ||||
| Income taxes | - | 15 | ||||||
| SUPPLEMENTAL NONCASH DISCLOSURE: | ||||||||
| Real estate acquired in settlement of loans | 76 | - | ||||||
| Securities sold not settled | 2,450 | - | ||||||
| Right of use asset recognized | 23 | 1,706 | ||||||
| Lease liability recognized | 23 | 1,712 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of CB Financial Services, Inc. (“CB Financial”) and its wholly owned subsidiary, Community Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Exchange Underwriters, Inc. (“Exchange Underwriters” or “EU”). CB Financial and the Bank are collectively referred to as the “Company”. All intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading in any material respect. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, evaluation of securities for other-than-temporary impairment including related cash flow projections, goodwill and intangible assets impairment, and the valuation of deferred tax assets.
In the opinion of management, the accompanying unaudited interim financial statements include all adjustments considered necessary for a fair presentation of the Company’s financial position and results of operations at the dates and for the periods presented. All these adjustments are of a normal, recurring nature, and they are the only adjustments included in the accompanying unaudited interim financial statements. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Interim results are not necessarily indicative of results for a full year.
The Company evaluated subsequent events through the date the consolidated financial statements were filed with the SEC and incorporated into the consolidated financial statements the effect of all material known events determined by Accounting Standards Codification ("ASC”) 855, Subsequent Events, to be recognizable events.
Nature of Operations
The Company derives substantially all its income from banking and bank-related services which include interest earnings on commercial, commercial mortgage, residential real estate and consumer loan financing, as well as interest earnings on investment securities and fees generated from deposit services to its customers. The Company provides banking services through its subsidiary, Community Bank, a Pennsylvania-chartered commercial bank headquartered in Carmichaels, Pennsylvania. The Bank operates from twenty offices in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania, seven offices in Brooke, Marshall, Ohio, Upshur and Wetzel Counties in West Virginia, and one office in Belmont County in Ohio. The Bank is a community-oriented institution offering residential and commercial real estate loans, commercial and industrial loans, and consumer loans as well as a variety of deposit products for individuals and businesses in its market area. Property and casualty, commercial liability, surety and other insurance products are offered through Exchange Underwriters, a full-service, independent insurance agency.
Reclassifications
Certain comparative amounts for the prior year have been reclassified to conform to the current year presentation. Such reclassifications did not affect net income or stockholders’ equity.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. At March 31, 2020 and December 31, 2019, the carrying value of goodwill was $28.4 million. Goodwill is subject to impairment testing at the reporting unit level, which is conducted at least annually on October 31 or more frequently if triggering events occur or impairment indicators exist. The Company operates two reporting units – Community Banking segment and Insurance Brokerage Services segment. The Company has assigned 100% of the goodwill to the Community Banking reporting unit.
In 2019, the Company adopted Accounting Standards Update (“ASU”) 2017-04 whereby the Company applies a one-step quantitative test and records the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company has the option of performing a qualitative assessment to determine whether any further quantitative testing for impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually. The quantitative test primarily utilizes market comparisons and recent merger and acquisition transactions to determine whether there is goodwill impairment.
6
The COVID-19 pandemic that has impacted the U.S. and most of the world and government response to curtail the spread of the virus through shelter-in-place orders and mandatory closures of all but essential businesses beginning in March 2020 has significantly impacted our market area and the activities of individuals. These restrictions have resulted in significant adverse effects on macroeconomic conditions, and stock market valuations have decreased substantially for most companies, including banks. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. In light of the adverse circumstances resulting from COVID-19, management determined it was necessary to evaluate goodwill for impairment at March 31, 2020.
Determining the fair value of a reporting unit under a quantitative goodwill impairment test is judgmental and often involves the use of significant estimates and assumptions. The Company utilized a market approach to determine the fair value of the Community Banking reporting unit. Significant assumptions inherent in the valuation methodologies for goodwill are employed and include, but are not limited to, current and prospective financial information of the Bank, most recent performance of the Bank’s peers, including common banking industry performance measures and ratios, and comparable multiples from publicly traded companies in our industry. The valuation was primarily based on observable price to tangible book value bank merger and acquisition multiples for similar size community banks, which is the most widely used valuation metric in the community banking industry. As part of its analysis, the Company considered bank transactions of target banks that were comparable in asset size, risk and profitability and efficiency metrics during the “Great Recession” period from 2008 to 2010 when bank stock values were depressed and the stock market decline was similar with the current sudden and unexpected events caused by the COVID-19 pandemic.
Based on the analysis, management determined that goodwill was not impaired as of March 31, 2020. Future events, particularly worsening business, profitability and economic conditions as of a result of the COVID-19 pandemic, could cause additional triggering events and require management to further evaluate goodwill for impairment.
Recent Accounting Standards
In March 2020, the Financial Accounting Standard Board (“FASB”) issued ASU2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The elective guidance in the ASU applies to modifications of contract terms that will directly replace, or have the potential to replace, an affected rate with another interest rate index, as well as certain contemporaneous modifications of other contract terms related to the replacement of an affected rate. The ASU notes that changes in contract terms that are made to effect the reference rate reform transition are considered related to the replacement of a reference rate if they are not the result of a business decision that is separate from or in addition to changes to the terms of a contract to effect that transition. The optional expedient allows companies to account for the modification as if it was not substantial (i.e., do not treat as an extinguishment of debt). The ASU is intended to help stakeholders during the global market-wide reference rate transition period. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. While the LIBOR reform may require extensive changes to the contracts that govern LIBOR based products, as well as our systems and processes, we cannot yet determine whether the Company will be able to use the optional expedient for the changes to contract terms that may be required by LIBOR reform and therefore, the Company cannot yet determine the magnitude of the impact or the overall impact of the new guidance on the Company’s consolidated financial condition or results of operation.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). ASU 2018-15 was issued to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. This guidance became effective for the Company beginning in the first quarter 2020 and the adoption of this ASU did not have a material impact on the Company's consolidated statement of financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). ASU 2018-13 modifies disclosure requirements on fair value measurements. This ASU removes requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that disclosure regarding measurement uncertainty is intended to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 adds certain disclosure requirements, including disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU were effective for the Company beginning in the first quarter 2020. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively, while all other amendments should be applied retrospectively for all periods presented. The adoption of this ASU did not have a material impact on the Company's consolidated statement of financial condition or results of operations.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the second step of the goodwill impairment test. Instead, an entity applies a one-step quantitative test and records the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted, and is to be applied on a prospective basis. The Company elected to early adopt the provisions of ASU 2017-04 effective October 31, 2019 and the adoption did not have a material impact on the Company's consolidated statement of financial condition or results of operations.
7
In September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP; and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however this ASU requires that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects companies holding financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU 2016-13 amendments affect loans, debt securities, trade receivables, net investments in leases, off balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 was originally effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, including the Company, resulting in a required implementation date for the Company of January 1, 2023. Early adoption will continue to be permitted. The Company is evaluating the impact of this ASU and expects to recognize a one-time adjustment to the allowance for loan losses upon adoption, but we cannot yet determine the magnitude of the one-time adjustment or the overall impact of the new guidance on the Company’s consolidated financial condition or results of operation.
Note 2. Earnings Per Share
There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income is used as the numerator.
The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| (Dollars in thousands, except share and per share data) | ||||||||
| Net income | $ | 773 | $ | 2,925 | ||||
| Weighted-Average Basic Common Shares Outstanding | 5,431,199 | 5,432,856 | ||||||
| Dilutive Effect of Common Stock Equivalents (Stock Options and Restricted Stock) | 25,668 | 18,622 | ||||||
| Weighted-Average Diluted Common Shares and Common Stock Equivalents Outstanding | 5,456,867 | 5,451,478 | ||||||
| Earnings per share: | ||||||||
| Basic | $ | 0.14 | $ | 0.54 | ||||
| Diluted | 0.14 | 0.54 | ||||||
The dilutive effect on weighted average diluted common shares outstanding is the result of outstanding stock options and nonvested restricted stock. For the three months ended March 31, 2020 and 2019, options to purchase 78,545 and 83,688 shares of common stock, respectively, were outstanding but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares for the period, therefore the effect would be antidilutive. For the three months ended March 31, 2020, 30,250 shares of restricted stock awards were not included in the computation of diluted earnings per share because the hypothetical repurchase of shares under the treasury stock method exceeded the weighted average nonvested restricted awards, therefore the effect would be anti-dilutive. For the three months ended March 31, 2019, there were no anti-dilutive restricted stock awards.
Note 3. Investment Securities
The following table presents the amortized cost and fair value of investment securities available-for-sale at the dates indicated:
| March 31, 2020 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Debt Securities: | ||||||||||||||||
| U.S. Government Agencies | $ | 7,913 | $ | 95 | $ | - | $ | 8,008 | ||||||||
| Obligations of States and Political Subdivisions | 23,869 | 1,016 | (1 | ) | 24,884 | |||||||||||
| Mortgage-Backed Securities - Government-Sponsored Enterprises | 130,450 | 5,782 | - | 136,232 | ||||||||||||
| Total Debt Securities | $ | 162,232 | $ | 6,893 | $ | (1 | ) | 169,124 | ||||||||
| Marketable Equity Securities: | ||||||||||||||||
| Mutual Funds | 1,013 | |||||||||||||||
| Other | 1,274 | |||||||||||||||
| Total Marketable Equity Securities | 2,287 | |||||||||||||||
| Total Available-for-Sale Securities | $ | 171,411 | ||||||||||||||
8
| December 31, 2019 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Debt Securities: | ||||||||||||||||
| U.S. Government Agencies | $ | 47,993 | $ | 227 | $ | (164 | ) | $ | 48,056 | |||||||
| Obligations of States and Political Subdivisions | 25,026 | 819 | (2 | ) | 25,843 | |||||||||||
| Mortgage-Backed Securities - Government-Sponsored Enterprises | 118,282 | 2,601 | (107 | ) | 120,776 | |||||||||||
| Total Debt Securities | $ | 191,301 | $ | 3,647 | $ | (273 | ) | 194,675 | ||||||||
| Marketable Equity Securities: | ||||||||||||||||
| Mutual Funds | 997 | |||||||||||||||
| Other | 1,713 | |||||||||||||||
| Total Marketable Equity Securities | 2,710 | |||||||||||||||
| Total Available-for-Sale Securities | $ | 197,385 | ||||||||||||||
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at the dates indicated:
| March 31, 2020 | ||||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 Months or Greater | Total | ||||||||||||||||||||||||||||||||||
| Number | Gross | Number | Gross | Number | Gross | |||||||||||||||||||||||||||||||
| of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | ||||||||||||||||||||||||||||
| Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | ||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
| Obligations of States and Political Subdivisions | 1 | $ | 509 | $ | (1 | ) | - | $ | - | $ | - | 1 | $ | 509 | $ | (1 | ) | |||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||||||||||
| Less than 12 months | 12 Months or Greater | Total | ||||||||||||||||||||||||||||||||||
| Number | Gross | Number | Gross | Number | Gross | |||||||||||||||||||||||||||||||
| of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | ||||||||||||||||||||||||||||
| Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | ||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
| U.S. Government Agencies | 6 | $ | 16,116 | $ | (83 | ) | 6 | $ | 13,938 | $ | (81 | ) | 12 | $ | 30,054 | $ | (164 | ) | ||||||||||||||||||
| Obligations of States and | ||||||||||||||||||||||||||||||||||||
| Political Subdivisions | - | - | - | 1 | 509 | (2 | ) | 1 | 509 | (2 | ) | |||||||||||||||||||||||||
| Mortgage-Backed Securities - | ||||||||||||||||||||||||||||||||||||
| Government Sponsored Enterprises | 7 | 20,003 | (104 | ) | 1 | 1,711 | (3 | ) | 8 | 21,714 | (107 | ) | ||||||||||||||||||||||||
| Total | 13 | $ | 36,119 | $ | (187 | ) | 8 | $ | 16,158 | $ | (86 | ) | 21 | $ | 52,277 | $ | (273 | ) | ||||||||||||||||||
For debt securities, the Company does not believe that any individual unrealized loss as of March 31, 2020 or December 31, 2019, represents an other-than-temporary impairment. The Company performs a review of the entire securities portfolio on a quarterly basis to identify securities that may indicate an other-than-temporary impairment. The Company’s management considers the length of time and the extent to which the fair value has been less than cost, and the financial condition of the issuer. The securities that are temporarily impaired at March 31, 2020 and December 31, 2019 relate principally to changes in interest rates subsequent to the acquisition of the specific securities. The Company does not intend to sell, or it is not more likely than not that it will be required to sell any of the securities in an unrealized loss position before recovery of its amortized cost or maturity of the security.
Marketable equity securities are measured at fair value with changes in fair value included in Change in Fair Value of Marketable Equity Securities on the Consolidated Statement of Income. Realized gains and losses on sales of marketable equity securities are included in Net Loss on Sales of Investment Securities on the Consolidated Statement of Income. There were no sales of marketable equity securities for the three months ended March 31, 2020 and 2019, respectively.
9
The following table presents the scheduled maturities of debt securities as of the date indicated:
| March 31, 2020 | ||||||||
| Amortized | Fair | |||||||
| Cost | Value | |||||||
| (Dollars in thousands) | ||||||||
| Due in One Year or Less | $ | 1,535 | $ | 1,536 | ||||
| Due after One Year through Five Years | 6,116 | 6,242 | ||||||
| Due after Five Years through Ten Years | 26,051 | 27,152 | ||||||
| Due after Ten Years | 128,530 | 134,194 | ||||||
| Total | $ | 162,232 | $ | 169,124 | ||||
There were no sales of available-for-sale securities for the three months ended March 31, 2020. Sales of available-for-sale investment securities for the three months ended March 31, 2019 resulted in gross losses of $60,000.
Note 4. Loans and Allowance for Loan Losses
The Company’s loan portfolio consists of four classifications: real estate loans, commercial and industrial loans, consumer loans, and other loans. The following table presents the classifications of loans as of the dates indicated.
| March 31, 2020 | December 31, 2019 | |||||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Real Estate: | ||||||||||||||||
| Residential | $ | 346,864 | 35.5 | % | $ | 347,766 | 36.6 | % | ||||||||
| Commercial | 354,374 | 36.4 | 351,360 | 36.9 | ||||||||||||
| Construction | 50,017 | 5.1 | 35,605 | 3.7 | ||||||||||||
| Commercial and Industrial | 80,721 | 8.3 | 85,586 | 9.0 | ||||||||||||
| Consumer | 121,494 | 12.5 | 113,637 | 11.9 | ||||||||||||
| Other | 21,180 | 2.2 | 18,542 | 1.9 | ||||||||||||
| Total Loans | 974,650 | 100.0 | % | 952,496 | 100.0 | % | ||||||||||
| Allowance for Loan Losses | (12,322 | ) | (9,867 | ) | ||||||||||||
| Loans, Net | $ | 962,328 | $ | 942,629 | ||||||||||||
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020 and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic, which includes authorizing the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). Under the PPP, participating SBA and other qualifying lenders can originate loans to eligible businesses that are fully guaranteed by the SBA as to principal and interest, have more favorable terms than traditional SBA loans and may be forgiven if the proceeds are used by the borrower for certain purposes. PPP is designed to help small businesses keep their workforce employed and cover expenses during the COVID-19 crisis. These loans have a two-year loan term to maturity, an interest rate of 1% per annum and loan payments are deferred for six months. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of a PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses. The Bank receives a processing fee from the SBA ranging from 1% to 5% depending on the size of the loan, which is offset by a 0.75% third-party servicing agent fee. On April 16, 2020, the original $349 billion funding cap was reached. On April 23, 2020, the Paycheck Protection Program and Health Care Enhancement Act (the “PPP Enhancement Act”) was signed into law and includes an additional $484 billion in COVID-19 relief, including allocating an additional $310 billion to replenish the PPP. The second round of the PPP began on April 27, 2020.
As part of the first round of the PPP, the Bank originated 181 loans totaling $38.6 million and generated approximately $1.2 million from processing fees. The total approved loans will impact 3,081 small business employees. The Bank is also participating in the second round of the PPP and as of April 29, 2020, we expect to submit approximately 315 applications totaling $27.6 million and generate an additional $1.0 million in processing fees. All PPP loan originations occurred after the end of the March 31, 2020 reporting period and will be classified as commercial and industrial loans held for investment.
10
Total unamortized net deferred loan fees were $950,000 and $907,000 at March 31, 2020 and December 31, 2019, respectively.
Real estate loans serviced for others, which are not included in the Consolidated Statement of Financial Condition, totaled $101.2 million and $100.0 million at March 31, 2020 and December 31, 2019, respectively.
The following table presents loans summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of the dates indicated. At March 31, 2020 and December 31, 2019, there were no loans in the criticized category of Loss within the internal risk rating system.
| March 31, 2020 | ||||||||||||||||||||
| Special | ||||||||||||||||||||
| Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||
| Residential | $ | 342,785 | $ | 1,028 | $ | 3,051 | $ | - | $ | 346,864 | ||||||||||
| Commercial | 312,089 | 36,496 | 5,789 | - | 354,374 | |||||||||||||||
| Construction | 45,985 | 3,179 | 853 | - | 50,017 | |||||||||||||||
| Commercial and Industrial | 74,264 | 4,109 | 1,667 | 681 | 80,721 | |||||||||||||||
| Consumer | 121,337 | - | 157 | - | 121,494 | |||||||||||||||
| Other | 21,094 | 86 | - | - | 21,180 | |||||||||||||||
| Total Loans | $ | 917,554 | $ | 44,898 | $ | 11,517 | $ | 681 | $ | 974,650 | ||||||||||
| December 31, 2019 | ||||||||||||||||||||
| Special | ||||||||||||||||||||
| Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||
| Residential | $ | 343,851 | $ | 1,997 | $ | 1,918 | $ | - | $ | 347,766 | ||||||||||
| Commercial | 335,436 | 12,260 | 3,664 | - | 351,360 | |||||||||||||||
| Construction | 33,342 | 2,263 | - | - | 35,605 | |||||||||||||||
| Commercial and Industrial | 75,201 | 7,975 | 1,691 | 719 | 85,586 | |||||||||||||||
| Consumer | 113,527 | - | 110 | - | 113,637 | |||||||||||||||
| Other | 18,452 | 90 | - | - | 18,542 | |||||||||||||||
| Total Loans | $ | 919,809 | $ | 24,585 | $ | 7,383 | $ | 719 | $ | 952,496 | ||||||||||
The increase of $20.3 million in the special mention loan category as of March 31, 2020 compared to December 31, 2019 was mainly from the downgrade of the hospitality portfolio due to the economic conditions in that industry caused by the COVID-19 pandemic. The increase of $4.1 million in the substandard category is primarily due to a lease dispute on a $2.3 million industrial building (commercial real estate) and $956,000 associated with two residential real estate loans which have insufficient debt service coverage from the borrower demonstrating an inability to build and sell the speculative homes at a fast enough rate that can service the interest-only debt.
11
The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of the dates indicated.
| March 31, 2020 | ||||||||||||||||||||||||||||
| 30-59 | 60-89 | 90 Days | ||||||||||||||||||||||||||
| Loans | Days | Days | Or More | Total | Non- | Total | ||||||||||||||||||||||
| Current | Past Due | Past Due | Past Due | Past Due | Accrual | Loans | ||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||||||
| Residential | $ | 340,982 | $ | 3,824 | $ | 61 | $ | - | $ | 3,885 | $ | 1,997 | $ | 346,864 | ||||||||||||||
| Commercial | 354,168 | 45 | - | - | 45 | 161 | 354,374 | |||||||||||||||||||||
| Construction | 49,177 | 407 | 433 | - | 840 | - | 50,017 | |||||||||||||||||||||
| Commercial and Industrial | 80,007 | - | - | - | - | 714 | 80,721 | |||||||||||||||||||||
| Consumer | 120,442 | 845 | 50 | - | 895 | 157 | 121,494 | |||||||||||||||||||||
| Other | 21,180 | - | - | - | - | - | 21,180 | |||||||||||||||||||||
| Total Loans | $ | 965,956 | $ | 5,121 | $ | 544 | $ | - | $ | 5,665 | $ | 3,029 | $ | 974,650 | ||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||
| 30-59 | 60-89 | 90 Days | ||||||||||||||||||||||||||
| Loans | Days | Days | Or More | Total | Non- | Total | ||||||||||||||||||||||
| Current | Past Due | Past Due | Past Due | Past Due | Accrual | Loans | ||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||||||
| Residential | $ | 342,010 | $ | 3,462 | $ | 281 | $ | 196 | $ | 3,939 | $ | 1,817 | $ | 347,766 | ||||||||||||||
| Commercial | 351,104 | 22 | - | - | 22 | 234 | 351,360 | |||||||||||||||||||||
| Construction | 35,605 | - | - | - | - | - | 35,605 | |||||||||||||||||||||
| Commercial and Industrial | 84,280 | 388 | 178 | - | 566 | 740 | 85,586 | |||||||||||||||||||||
| Consumer | 112,438 | 923 | 140 | 26 | 1,089 | 110 | 113,637 | |||||||||||||||||||||
| Other | 18,542 | - | - | - | - | - | 18,542 | |||||||||||||||||||||
| Total Loans | $ | 943,979 | $ | 4,795 | $ | 599 | $ | 222 | $ | 5,616 | $ | 2,901 | $ | 952,496 | ||||||||||||||
12
The following table sets forth the amounts and categories of our nonperforming assets at the dates indicated. Included in nonperforming loans and assets are troubled debt restructurings (“TDRs”), which are loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties. Nonaccrual TDRs are included in their specific loan category in the nonaccrual loans section.
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| (Dollars in Thousands) | ||||||||
| Nonaccrual Loans: | ||||||||
| Real Estate: | ||||||||
| Residential | $ | 1,997 | $ | 1,817 | ||||
| Commercial | 161 | 234 | ||||||
| Commercial and Industrial | 714 | 740 | ||||||
| Consumer | 157 | 110 | ||||||
| Total Nonaccrual Loans | 3,029 | 2,901 | ||||||
| Accruing Loans Past Due 90 Days or More: | ||||||||
| Real Estate: | ||||||||
| Residential | - | 196 | ||||||
| Consumer | - | 26 | ||||||
| Total Accruing Loans Past Due 90 Days or More | - | 222 | ||||||
| Total Nonaccrual Loans and Accruing Loans Past Due 90 Days or More | 3,029 | 3,123 | ||||||
| Troubled Debt Restructurings, Accruing: | ||||||||
| Real Estate | ||||||||
| Residential | 503 | 511 | ||||||
| Commercial | 1,621 | 1,648 | ||||||
| Commercial and Industrial | 79 | 100 | ||||||
| Total Troubled Debt Restructurings, Accruing | 2,203 | 2,259 | ||||||
| Total Nonperforming Loans | 5,232 | 5,382 | ||||||
| Other Real Estate Owned: | ||||||||
| Residential | 117 | 41 | ||||||
| Commercial | 174 | 192 | ||||||
| Total Other Real Estate Owned | 291 | 233 | ||||||
| Total Nonperforming Assets | $ | 5,523 | $ | 5,615 | ||||
| Nonperforming Loans to Total Loans | 0.54 | % | 0.57 | % | ||||
| Nonperforming Assets to Total Assets | 0.42 | 0.42 | ||||||
The recorded investment of residential real estate loans for which formal foreclosure proceedings were in process according to applicable requirements of the local jurisdiction was $1.7 million and $1.1 million at March 31, 2020 and December 31, 2019, respectively.
TDRs typically are the result of loss mitigation activities whereby concessions are granted to minimize loss and avoid foreclosure or repossession of collateral. For a loan modification to be considered a TDR, the borrower must be experiencing financial difficulty and a concession must be granted, except for an insignificant delay in payment. Section 4013 of the CARES Act provides temporary relief from accounting and financial reporting requirements for TDRs regarding certain loan modifications related to COVID-19. Specifically, the CARES Act provides that the Bank may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and suspend any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Any modification involving a loan that was not more than 30 days past due as of December 31, 2019 and that occurs beginning on March 1, 2020 and ends on the earlier of December 31, 2020 or the date that is 60 days after the termination date of the national emergency related to the COVID-19 outbreak qualify for this exception, including a forbearance arrangement, interest rate modification, repayment plan or any other similar arrangement that defers or delays the payment of principal or interest.
Banking regulatory agencies released an interagency statement that offers practical expedients for modifications that occur in response to the COVID-19 pandemic, but they differ with the CARES Act in certain areas. The expedients require a lender to conclude that a borrower is not experiencing financial difficulty if either short-term (e.g., six months or less) modifications are made, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented or the modification or deferral program is mandated by the federal government or a state government. The banking regulatory agencies have subsequently confirmed that their guidance could be applicable for loans that do not qualify for favorable accounting treatment under Section 4013 of the CARES Act. Both Section 4013 of the CARES Act and the interagency statement can be applied to a second modification that occurs after the first modification provided that the second modification does not qualify as a TDR under Section 4013 of the CARES Act or the interagency statement. In its evaluation of whether a payment deferral qualifies as short-term under the interagency statement, an entity should assess multiple payment deferrals collectively (i.e., the cumulative deferrals cannot exceed six months).
13
The Bank offered forbearance options for borrowers impacted by COVID-19 that provide a short-term delay in payment by primarily allowing: (a) deferral of three months of payments; or (b) for consumer loans not secured by a real estate mortgage, three months of interest-only payments that also extends the maturity date of the loan by three months. During the forbearance period, the borrower is not considered delinquent for credit bureau reporting purposes. The Company has elected the practical expedients related to TDRs that are available in the CARES Act and interagency guidance as an entity-wide accounting policy and does not consider any of the forbearance agreements TDRs. The following table provides details of loans in forbearance as of April 29, 2020.
| Number | ||||||||
| of | ||||||||
| Loans | Amount | |||||||
| (Dollars in thousands) | ||||||||
| Real Estate: | ||||||||
| Residential | 170 | $ | 21,998 | |||||
| Commercial | 98 | 94,101 | ||||||
| Construction | 1 | 7,109 | ||||||
| Commercial and Industrial | 44 | 13,119 | ||||||
| Consumer | 201 | 4,051 | ||||||
| Other | 1 | 2,504 | ||||||
| Total Loans in Forbearance | 515 | $ | 142,882 | |||||
Forbearance in the commercial real estate category includes, but is not limited to, $24.2 million of retail space, $17.9 million of nonowner occupied multi-family apartments, $15.8 million in hotels, $11.9 million of warehouse space, and $4.7 million in various business that are dependent on the oil and gas industry, which includes $3.1 million of hotels in proximity to oil and gas related activity.
The concessions granted for the TDRs in the portfolio primarily consist of, but are not limited to, modification of payment or other terms, temporary rate modification and extension of maturity date. Loans classified as TDRs consisted of 16 loans totaling $2.9 million and $3.0 million at March 31, 2020 and December 31, 2019, respectively.
For the three months ended March 31, 2020, there were no loans that were modified that were considered a TDR or TDRs that paid off.
For the three months ended March 31, 2019, one residential real estate loan was modified in a TDR transaction by extending the term of the loan and one residential real estate TDR paid off. No TDRs subsequently defaulted during the three months ended March 31, 2020 and 2019, respectively. The following table presents information at the time of modification related to loans modified in a TDR during the three months ended March 31, 2019.
| Three Months Ended March 31, 2019 | ||||||||||||||||
| Pre- | Post- | |||||||||||||||
| Modification | Modification | |||||||||||||||
| Number | Outstanding | Outstanding | ||||||||||||||
| of | Recorded | Recorded | Related | |||||||||||||
| Contracts | Investment | Investment | Allowance | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Real Estate: | ||||||||||||||||
| Residential | 1 | $ | 61 | $ | 61 | $ | - | |||||||||
14
The following table presents a summary of the loans considered to be impaired as of the dates indicated.
| March 31, 2020 | ||||||||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Related | Principal | Recorded | Income | ||||||||||||||||
| Investment | Allowance | Balance | Investment | Recognized | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| With No Related Allowance Recorded: | ||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||
| Residential | $ | 1,495 | $ | - | $ | 1,500 | $ | 1,498 | $ | 17 | ||||||||||
| Commercial | 5,187 | - | 5,203 | 5,230 | 54 | |||||||||||||||
| Construction | 853 | - | 853 | 853 | 10 | |||||||||||||||
| Commercial and Industrial | 792 | - | 957 | 812 | 1 | |||||||||||||||
| Total With No Related Allowance Recorded | $ | 8,327 | $ | - | $ | 8,513 | $ | 8,393 | $ | 82 | ||||||||||
| With A Related Allowance Recorded: | ||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||
| Commercial | $ | 1,619 | $ | 392 | $ | 1,619 | $ | 1,630 | $ | 19 | ||||||||||
| Commercial and Industrial | 1,636 | 259 | 1,636 | 1,648 | 24 | |||||||||||||||
| Total With A Related Allowance Recorded | $ | 3,255 | $ | 651 | $ | 3,255 | $ | 3,278 | $ | 43 | ||||||||||
| Total Impaired Loans: | ||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||
| Residential | $ | 1,495 | $ | - | $ | 1,500 | $ | 1,498 | $ | 17 | ||||||||||
| Commercial | 6,806 | 392 | 6,822 | 6,860 | 73 | |||||||||||||||
| Construction | 853 | - | 853 | 853 | 10 | |||||||||||||||
| Commercial and Industrial | 2,428 | 259 | 2,593 | 2,460 | 25 | |||||||||||||||
| Total Impaired Loans | $ | 11,582 | $ | 651 | $ | 11,768 | $ | 11,671 | $ | 125 | ||||||||||
| December 31, 2019 | ||||||||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Related | Principal | Recorded | Income | ||||||||||||||||
| Investment | Allowance | Balance | Investment | Recognized | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| With No Related Allowance Recorded: | ||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||
| Residential | $ | 549 | $ | - | $ | 553 | $ | 494 | $ | 20 | ||||||||||
| Commercial | 3,058 | - | 3,077 | 3,335 | 177 | |||||||||||||||
| Commercial and Industrial | 133 | - | 135 | 156 | 6 | |||||||||||||||
| Total With No Related Allowance Recorded | $ | 3,740 | $ | - | $ | 3,765 | $ | 3,985 | $ | 203 | ||||||||||
| With A Related Allowance Recorded: | ||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||
| Commercial | $ | 1,646 | $ | 274 | $ | 1,646 | $ | 1,702 | $ | 81 | ||||||||||
| Commercial and Industrial | 2,378 | 610 | 2,529 | 2,448 | 113 | |||||||||||||||
| Total With A Related Allowance Recorded | $ | 4,024 | $ | 884 | $ | 4,175 | $ | 4,150 | $ | 194 | ||||||||||
| Total Impaired Loans | ||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||
| Residential | $ | 549 | $ | - | $ | 553 | $ | 494 | $ | 20 | ||||||||||
| Commercial | 4,704 | 274 | 4,723 | 5,037 | 258 | |||||||||||||||
| Commercial and Industrial | 2,511 | 610 | 2,664 | 2,604 | 119 | |||||||||||||||
| Total Impaired Loans | $ | 7,764 | $ | 884 | $ | 7,940 | $ | 8,135 | $ | 397 | ||||||||||
The $3.8 million increase in recorded investment of loans evaluated for impairment is primarily due to a lease dispute on a $2.3 million industrial building (commercial real estate) and $956,000 and $853,000 associated with two residential real estate loans and one residential construction loan, respectively, which have insufficient debt service coverage from the borrower demonstrating an inability to build and sell the speculative homes at a fast enough rate that can service the interest-only debt. These loans were downgraded to substandard as of March 31, 2020.
15
The following table presents the activity in the allowance for loan losses (“ALLL”) summarized by major classifications and segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for potential impairment at the dates and for the periods indicated.
| Real | Real | Real | Commercial | |||||||||||||||||||||||||||||
| Estate | Estate | Estate | and | |||||||||||||||||||||||||||||
| Residential | Commercial | Construction | Industrial | Consumer | Other | Unallocated | Total | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| December 31, 2019 | $ | 2,023 | $ | 3,210 | $ | 285 | $ | 2,412 | $ | 1,417 | $ | - | $ | 520 | $ | 9,867 | ||||||||||||||||
| Charge-offs | (25 | ) | - | - | - | (99 | ) | - | - | (124 | ) | |||||||||||||||||||||
| Recoveries | 2 | 14 | - | 9 | 54 | - | - | 79 | ||||||||||||||||||||||||
| Provision | 685 | 1,651 | 379 | (829 | ) | 507 | - | 107 | 2,500 | |||||||||||||||||||||||
| March 31, 2020 | $ | 2,685 | $ | 4,875 | $ | 664 | $ | 1,592 | $ | 1,879 | $ | - | $ | 627 | $ | 12,322 | ||||||||||||||||
| March 31, 2020 | ||||||||||||||||||||||||||||||||
| Real | Real | Real | Commercial | |||||||||||||||||||||||||||||
| Estate | Estate | Estate | and | |||||||||||||||||||||||||||||
| Residential | Commercial | Construction | Industrial | Consumer | Other | Unallocated | Total | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Individually Evaluated for Impairment | $ | - | $ | 392 | $ | - | $ | 259 | $ | - | $ | - | $ | - | $ | 651 | ||||||||||||||||
| Collectively Evaluated for Potential Impairment | $ | 2,685 | $ | 4,483 | $ | 664 | $ | 1,333 | $ | 1,879 | $ | - | $ | 627 | $ | 11,671 | ||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||||||
| Real | Real | Real | Commercial | |||||||||||||||||||||||||||||
| Estate | Estate | Estate | and | |||||||||||||||||||||||||||||
| Residential | Commercial | Construction | Industrial | Consumer | Other | Unallocated | Total | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Individually Evaluated for Impairment | $ | - | $ | 274 | $ | - | $ | 610 | $ | - | $ | - | $ | - | $ | 884 | ||||||||||||||||
| Collectively Evaluated for Potential Impairment | $ | 2,023 | $ | 2,936 | $ | 285 | $ | 1,802 | $ | 1,417 | $ | - | $ | 520 | $ | 8,983 | ||||||||||||||||
| Real | Real | Real | Commercial | |||||||||||||||||||||||||||||
| Estate | Estate | Estate | and | |||||||||||||||||||||||||||||
| Residential | Commercial | Construction | Industrial | Consumer | Other | Unallocated | Total | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| December 31, 2018 | $ | 1,050 | $ | 2,693 | $ | 395 | $ | 2,807 | $ | 2,027 | $ | - | $ | 586 | $ | 9,558 | ||||||||||||||||
| Charge-offs | - | - | - | - | (213 | ) | - | - | (213 | ) | ||||||||||||||||||||||
| Recoveries | 4 | 13 | - | 1 | 24 | - | - | 42 | ||||||||||||||||||||||||
| Provision | 100 | (156 | ) | 105 | (255 | ) | (105 | ) | - | 336 | 25 | |||||||||||||||||||||
| March 31, 2019 | $ | 1,154 | $ | 2,550 | $ | 500 | $ | 2,553 | $ | 1,733 | $ | - | $ | 922 | $ | 9,412 | ||||||||||||||||
| March 31, 2019 | ||||||||||||||||||||||||||||||||
| Real | Real | Real | Commercial | |||||||||||||||||||||||||||||
| Estate | Estate | Estate | and | |||||||||||||||||||||||||||||
| Residential | Commercial | Construction | Industrial | Consumer | Other | Unallocated | Total | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
| Individually Evaluated for Impairment | $ | - | $ | 199 | $ | - | $ | 784 | $ | - | $ | - | $ | - | $ | 983 | ||||||||||||||||
| Collectively Evaluated for Potential Impairment | $ | 1,154 | $ | 2,351 | $ | 500 | $ | 1,769 | $ | 1,733 | $ | - | $ | 922 | $ | 8,429 | ||||||||||||||||
The COVID-19 pandemic, which led to state-wide shelter in place orders and mandatory closures of all but essential business has resulted in a dramatic increase in unemployment and recessionary economic conditions. Based on evaluation of the current macroeconomic conditions, the qualitative factors used in the allowance for loan loss analysis related to economic trends and industry conditions, specifically because of vulnerable industries such as hospitality, oil and gas, retail and restaurants, were adjusted for these circumstances and resulted in a $2.5 million provision for loan losses for the three months ended March 31, 2020. This change increased the ALLL in all categories except commercial and industrial due to a decrease in the average loss history factor as further explained below.
Prior to the quarter ended March 31, 2020, management determined historical loss experience for each segment of loans using a two-year rolling average of the net charge-off data within each loan segment, which was then used in combination with qualitative factors to calculate the general allowance component that covers pools of homogeneous loans that are not specifically evaluated for impairment. For the quarter ended March 31, 2020, the Company began using a five-year rolling average of the net charge-off data within each segment. This change was driven by no net charge-off experience in the commercial real estate and commercial and industrial segments in the prior two-year rolling period as of March 31, 2020, which the Company believes does not represent the inherent risks in those segments. In the first quarter of 2018, the Company incurred $1.4 million of commercial and industrial charge-offs, however this period would have dropped off the lookback period as of March 31, 2020 if continuing to use a two-year history. In addition, moving to a five-year history is expected to improve the calculation moving forward by capturing economic ebbs and flows over a longer period while also not heavily weighting one period of charge-off activity.
16
The following table presents changes in the accretable discount on the loans acquired at fair value for the dates indicated (dollars in thousands).
| Accretable Discount | ||||
| (Dollars in Thousands) | ||||
| December 31, 2019 | $ | 1,628 | ||
| Accretable Yield | (76 | ) | ||
| March 31, 2020 | $ | 1,552 | ||
The following table presents the major classifications of loans summarized by individually evaluated for impairment and collectively evaluated for potential impairment as of the dates indicated.
| March 31, 2020 | ||||||||||||||||||||||||||||
| Real | Real | Real | Commercial | |||||||||||||||||||||||||
| Estate | Estate | Estate | and | |||||||||||||||||||||||||
| Residential | Commercial | Construction | Industrial | Consumer | Other | Total | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| Individually Evaluated for Impairment | $ | 1,495 | $ | 6,806 | $ | 853 | $ | 2,428 | $ | - | $ | - | $ | 11,582 | ||||||||||||||
| Collectively Evaluated for Potential Impairment | 345,369 | 347,568 | 49,164 | 78,293 | 121,494 | 21,180 | 963,068 | |||||||||||||||||||||
| Total Loans | $ | 346,864 | $ | 354,374 | $ | 50,017 | $ | 80,721 | $ | 121,494 | $ | 21,180 | $ | 974,650 | ||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||
| Real | Real | Real | Commercial | |||||||||||||||||||||||||
| Estate | Estate | Estate | and | |||||||||||||||||||||||||
| Residential | Commercial | Construction | Industrial | Consumer | Other | Total | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| Individually Evaluated for Impairment | $ | 549 | $ | 4,704 | $ | - | $ | 2,511 | $ | - | $ | - | $ | 7,764 | ||||||||||||||
| Collectively Evaluated for Potential Impairment | 347,217 | 346,656 | 35,605 | 83,075 | 113,637 | 18,542 | 944,732 | |||||||||||||||||||||
| Total Loans | $ | 347,766 | $ | 351,360 | $ | 35,605 | $ | 85,586 | $ | 113,637 | $ | 18,542 | $ | 952,496 | ||||||||||||||
Note 5. Deposits
The following table shows the maturities of time deposits for the next five years and beyond at the date indicated.
| March 31, | ||||
| 2020 | ||||
| (Dollars in thousands) | ||||
| One Year or Less | $ | 82,680 | ||
| Over One Through Two Years | 54,134 | |||
| Over Two Through Three Years | 37,995 | |||
| Over Three Through Four Years | 23,340 | |||
| Over Four Through Five Years | 8,173 | |||
| Over Five Years | 5,267 | |||
| Total | $ | 211,589 | ||
The balance in time deposits that meet or exceed the FDIC insurance limit of $250,000 totaled $67.2 million and $69.3 million as of March 31, 2020 and December 31, 2019, respectively.
17
Note 6. Short-Term Borrowings
The following table sets forth the components of short-term borrowings as of the dates indicated.
| March 31, 2020 | December 31, 2019 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Securities Sold Under Agreements to Repurchase: | ||||||||||||||||
| Balance at Period End | $ | 34,967 | 0.57 | % | $ | 30,571 | 0.57 | % | ||||||||
| Average Balance Outstanding During the Period | 29,539 | 0.61 | 29,976 | 0.62 | ||||||||||||
| Maximum Amount Outstanding at any Month End | 34,967 | 34,197 | ||||||||||||||
| Securities Collaterizing the Agreements at Period-End: | ||||||||||||||||
| Carrying Value | 36,168 | 37,584 | ||||||||||||||
| Market Value | 37,475 | 37,873 | ||||||||||||||
Note 7. Other Borrowed Funds
Other borrowed funds consist of fixed rate advances from the Federal Home Loan Bank of Pittsburgh (“FHLB”). The following table sets forth the scheduled maturities of other borrowed funds at the dates indicated.
| March 31, 2020 | December 31, 2019 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Due in One Year | $ | 5,000 | 2.09 | % | $ | 6,000 | 1.97 | % | ||||||||
| Due After One Year to Two Years | 3,000 | 2.23 | 5,000 | 2.18 | ||||||||||||
| Due After Two Years to Three Years | 3,000 | 2.41 | 3,000 | 2.41 | ||||||||||||
| Total | $ | 11,000 | 2.21 | $ | 14,000 | 2.14 | ||||||||||
As of March 31, 2020, the Company maintained a credit arrangement with a maximum borrowing limit of approximately $420.9 million with the FHLB and available borrowing capacity of $369.8 million. This arrangement is subject to annual renewal, incurs no service charge, and is secured by a blanket security agreement on outstanding residential mortgage loans and the Company’s investment in FHLB stock. Under this arrangement the Company had available a variable rate Line of Credit in the amount of $147.0 million as of March 31, 2020 and December 31, 2019, respectively, of which, there was no outstanding balance as of March 31, 2020 and December 31, 2019.
At March 31, 2020, the Company maintained a Borrower-In-Custody of Collateral line of credit agreement with the Federal Reserve Bank (“FRB”) for $98.0 million that requires monthly certification of collateral, is subject to annual renewal, incurs no service charge and is secured by commercial and industrial and consumer indirect auto loans. The Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $60.0 million as of March 31, 2020, and December 31, 2019, respectively. As of March 31, 2020, and December 31, 2019, no draws had been taken on these facilities.
Note 8. Fair Value Disclosure
FASB ASC 820 “Fair Value Measurement” defines fair value and provides the framework for measuring fair value and required disclosures about fair value measurements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the transaction date. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used in valuation methods to determine fair value.
The three levels of fair value hierarchy are as follows:
| Level 1 – | Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available. | |
18
| Level 2 – | Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs. | |
| Level 3 – | Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques. |
This hierarchy requires the use of observable market data when available. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.
The following table presents the financial assets measured at fair value on a recurring basis and reported on the Consolidated Statement of Financial Condition as of the dates indicated, by level within the fair value hierarchy. The majority of the Company’s securities are included in Level 2 of the fair value hierarchy. Fair values for Level 2 securities were primarily determined by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. The standard inputs that are normally used include benchmark yields of like securities, reportable trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. There were no transfers into or out of Level 3 during the three months ended March 31, 2020 or year ended December 31, 2019.
| Fair Value | March 31, | December 31, | ||||||||
| Hierarchy | 2020 | 2019 | ||||||||
| (Dollars in thousands) | ||||||||||
| Available for Sales Securities: | ||||||||||
| Debt Securities: | ||||||||||
| U.S. Government Agencies | Level 2 | $ | 8,008 | $ | 48,056 | |||||
| Obligations of States and Political Subdivisions | Level 2 | 24,884 | 25,843 | |||||||
| Mortgage-Backed Securities - Government-Sponsored Enterprises | Level 2 | 136,232 | 120,776 | |||||||
| Total Debt Securities | 169,124 | 194,675 | ||||||||
| Marketable Equity Securities: | ||||||||||
| Mutual Funds | Level 1 | 1,013 | 997 | |||||||
| Other | Level 1 | 1,274 | 1,713 | |||||||
| Total Marketable Equity Securities | 2,287 | 2,710 | ||||||||
| Total Available-for-Sale Securities | $ | 171,411 | $ | 197,385 | ||||||
The following table presents the financial assets measured at fair value on a nonrecurring basis on the Consolidated Statement of Financial Condition as of the dates indicated by level within the fair value hierarchy. The table also presents the significant unobservable inputs used in the fair value measurements. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include quoted market prices for identical assets classified as Level 1 inputs or observable inputs, employed by certified appraisers, for similar assets classified as Level 2 inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level 3 inputs.
| Fair Value at | ||||||||||||||||||||
| Fair Value | March 31, | December 31, | Valuation | Significant | ||||||||||||||||
| Financial Asset | Hierarchy | 2020 | 2019 | Techniques | Unobservable Inputs | Range | ||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Impaired Loans | Level 3 | $ | 2,604 | $ | 3,140 | Market Comparable Properties | Marketability Discount | 10% | to | 30% | (1 | ) | ||||||||
| OREO | Level 3 | 76 | 58 | Market Comparable Properties | Marketability Discount | 10% | to | 50% | (1 | ) | ||||||||||
| (1) Range includes discounts taken since appraisal and estimated values. |
19
Impaired loans are evaluated when a loan is identified as impaired and valued at the lower of cost or fair value at that time. Fair value is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. At March 31, 2020 and December 31, 2019, the fair value of impaired loans consists of the loan balances of $3.3 million and $4.0 million, respectively, less their specific valuation allowances of $651,000 and $884,000, respectively.
OREO properties are evaluated at the time of acquisition and recorded at fair value, less estimated selling costs. After acquisition, OREO is recorded at the lower of cost or fair value, less estimated selling costs. The fair value of an OREO property is determined from a qualified independent appraisal and is classified as Level 3 in the fair value hierarchy.
For the three months ended March 31, 2020, one commercial real estate OREO property with a fair value of $18,000 sold at a gain of $4,000. In addition, two residential real estate loans for $76,000 transferred to OREO.
For the three months ended March 31, 2019, one commercial real estate OREO property with a fair value of $697,000 was sold at a $33,000 gain and one residential OREO property, with a fair value of $46,000 was sold for a $3,000 loss.
Financial instruments are defined as cash, evidence of an ownership in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.
Fair value is 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. If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses and other factors, as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the estimated fair values are based may have significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.
The following table presents the estimated fair values of the Company’s financial instruments at the dates indicated.
| March 31, 2020 | December 31, 2019 | |||||||||||||||||
| Fair Value | Carrying | Fair | Carrying | Fair | ||||||||||||||
| Hierarchy | Value | Value | Value | Value | ||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
| Financial Assets: | ||||||||||||||||||
| Cash and Due From Banks: | ||||||||||||||||||
| Interest Bearing | Level 1 | $ | 64,004 | $ | 64,004 | $ | 68,798 | $ | 68,798 | |||||||||
| Non-Interest Bearing | Level 1 | 14,095 | 14,095 | 11,419 | 11,419 | |||||||||||||
| Investment Securities: | ||||||||||||||||||
| Available for Sale | See Above | 171,411 | 171,411 | 197,385 | 197,385 | |||||||||||||
| Loans, Net | Level 3 | 962,328 | 1,004,210 | 942,629 | 961,110 | |||||||||||||
| Restricted Stock | Level 2 | 3,590 | 3,590 | 3,656 | 3,656 | |||||||||||||
| Bank-Owned Life Insurance | Level 2 | 24,361 | 24,361 | 24,222 | 24,222 | |||||||||||||
| Accrued Interest Receivable | Level 2 | 3,274 | 3,274 | 3,297 | 3,297 | |||||||||||||
| Financial Liabilities: | ||||||||||||||||||
| Deposits | Level 2 | 1,106,640 | 1,116,037 | 1,118,359 | 1,128,078 | |||||||||||||
| Short-term Borrowings | Level 2 | 34,967 | 34,967 | 30,571 | 30,571 | |||||||||||||
| Other Borrowed Funds | Level 2 | 11,000 | 11,206 | 14,000 | 15,380 | |||||||||||||
| Accrued Interest Payable | Level 2 | 863 | 863 | 987 | 987 | |||||||||||||
Note 9. Commitments and Contingent Liabilities
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business primarily to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and performance letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statement of Financial Condition. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
20
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and performance letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments and conditional obligations are evaluated the same as on-balance-sheet instruments but do not have a corresponding reserve recorded. The Company’s opinion on not implementing a corresponding reserve for off-balance-sheet instruments is supported by historical factors of no losses recorded due to these items. The Company is continually evaluating these items for credit quality and any future need for the corresponding reserve.
The following table presents the unused and available credit balances of financial instruments whose contracts represent credit risk at the dates indicated.
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| (Dollars in thousands) | ||||||||
| Standby Letters of Credit | $ | 40,906 | $ | 42,041 | ||||
| Performance Letters of Credit | 2,667 | 2,521 | ||||||
| Construction Mortgages | 77,672 | 59,689 | ||||||
| Personal Lines of Credit | 6,561 | 6,456 | ||||||
| Overdraft Protection Lines | 6,474 | 6,415 | ||||||
| Home Equity Lines of Credit | 20,459 | 20,560 | ||||||
| Commercial Lines of Credit | 77,470 | 102,422 | ||||||
| Total Commitments | $ | 232,209 | $ | 240,104 | ||||
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. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Performance letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon expiration of the letter. For secured letters of credit, the collateral is typically Company deposit instruments or customer business assets.
21
Note 10. Leases
The Company evaluates all contracts at commencement to determine if a lease is present. The Company’s lease contracts are all classified as operating leases and created operating right-of-use (“ROU”) assets and corresponding lease liabilities on the balance sheet. The leases are primarily ROU assets of land and building for branch and loan production locations. ROU assets are reported on the accrued interest and other assets line and the related lease liabilities on the accrued interest and other liabilities line on the Consolidated Statement of Financial Condition.
The following tables present the ROU assets, lease expense, weighted average term, discount rate and maturity analysis of lease liabilities for operating leases for the periods indicated.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| (Dollars in thousands) | ||||||||
| Operating Lease Expense | $ | 116 | $ | 115 | ||||
| Variable Lease Expense | 9 | 8 | ||||||
| Total Lease Expense | $ | 125 | $ | 123 | ||||
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Operating Leases: | ||||||||
| ROU Assets | $ | 1,205 | $ | 1,289 | ||||
| Weighted Average Lease Term in Years | 7.11 | 7.06 | ||||||
| Weighted Average Discount Rate | 2.90 | % | 2.89 | % | ||||
| March 31, | ||||
| 2020 | ||||
| Maturity Analysis: | ||||
| Due in One Year | $ | 405 | ||
| Due After One Year to Two Years | 292 | |||
| Due After Two Years to Three Years | 142 | |||
| Due After Three Years to Four Years | 66 | |||
| Due After Four to Five Years | 48 | |||
| Due After Five Years | 398 | |||
| Total | $ | 1,351 | ||
| Less: Present Value Discount | 143 | |||
| Lease Liabilities | $ | 1,208 | ||
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Note 11. Other Noninterest Expense
The details of other noninterest expense for the Company’s consolidated statement of income for the three and nine months ended March 31, 2020 and 2019, are as follows:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| (Dollars in thousands) | ||||||||
| Other Noninterest Expense | ||||||||
| Non-Employee Compensation | $ | 147 | $ | 140 | ||||
| Printing and Supplies | 101 | 97 | ||||||
| Postage | 61 | 72 | ||||||
| Telephone | 167 | 143 | ||||||
| Charitable Contributions | 51 | 41 | ||||||
| Dues and Subscriptions | 76 | 52 | ||||||
| Loan Expenses | 145 | 85 | ||||||
| Meals and Entertainment | 40 | 55 | ||||||
| Travel | 54 | 35 | ||||||
| Training | 7 | 9 | ||||||
| Bank Assessment | 44 | 43 | ||||||
| Insurance | 56 | 53 | ||||||
| Miscellaneous | 162 | 159 | ||||||
| Total Other Noninterest Expense | $ | 1,111 | $ | 984 | ||||
Note 12. Segment and Related Information
At March 31, 2020, the Company’s business activities were comprised of two operating segments, which are community banking and insurance brokerage services. CB Financial Services, Inc. is the parent company of the Bank and Exchange Underwriters, a wholly owned subsidiary of the Bank. Exchange Underwriters has an independent board of directors from the Company and is managed separately from the banking and related financial services that the Company offers. Exchange Underwriters is an independent insurance agency that offers property, casualty, commercial liability, surety and other insurance products.
23
The following is a table of selected financial data for the Company’s subsidiaries and consolidated results at the dates and for the periods indicated.
| Community Bank | Exchange Underwriters, Inc. | CB Financial Services, Inc. | Net Eliminations | Consolidated | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| March 31, 2020 | ||||||||||||||||||||
| Assets | $ | 1,312,732 | $ | 3,911 | $ | 151,555 | $ | (155,025 | ) | $ | 1,313,173 | |||||||||
| Liabilities | 1,166,590 | 1,424 | 30 | (6,396 | ) | 1,161,648 | ||||||||||||||
| Stockholders' equity | 146,142 | 2,487 | 151,525 | (148,629 | ) | 151,525 | ||||||||||||||
| December 31, 2019 | ||||||||||||||||||||
| Assets | $ | 1,321,001 | $ | 4,076 | $ | 151,124 | $ | (154,664 | ) | $ | 1,321,537 | |||||||||
| Liabilities | 1,178,759 | 1,194 | 27 | (9,540 | ) | 1,170,440 | ||||||||||||||
| Stockholders' equity | 142,242 | 2,882 | 151,097 | (145,124 | ) | 151,097 | ||||||||||||||
| Three Months Ended March 31, 2020 | ||||||||||||||||||||
| Interest and dividend income | $ | 12,313 | $ | 1 | $ | 15 | $ | - | $ | 12,329 | ||||||||||
| Interest expense | 1,796 | - | - | - | 1,796 | |||||||||||||||
| Net interest income | 10,517 | 1 | 15 | - | 10,533 | |||||||||||||||
| Provision for loan losses | 2,500 | - | - | - | 2,500 | |||||||||||||||
| Net interest income after provision for loan losses | 8,017 | 1 | 15 | - | 8,033 | |||||||||||||||
| Noninterest income (loss) | 1,044 | 1,281 | (455 | ) | - | 1,870 | ||||||||||||||
| Noninterest expense | 8,021 | 975 | 5 | - | 9,001 | |||||||||||||||
| Undistributed net income of subsidiary | 213 | - | 1,123 | (1,336 | ) | |||||||||||||||