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Fidelity D&D Bancorp (FDBC)

Filed: 11 Nov 21, 7:00pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

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: 001-38229

FIDELITY D & D BANCORP, INC.

STATE OF INCORPORATION: IRS EMPLOYER IDENTIFICATION NO:

Pennsylvania 23-3017653

Address of principal executive offices:

Blakely & Drinker St.

Dunmore, Pennsylvania 18512

TELEPHONE: 570-342-8281

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class

Trading Symbols(s)

Name of each exchange on which registered

Common stock, without par value

FDBC

The NASDAQ Stock Market, LLC

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] 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). [X] 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 o

Non-accelerated filer x

Accelerated filer o

Smaller reporting company x

Emerging growth company o

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] NO

The number of outstanding shares of Common Stock of Fidelity D & D Bancorp, Inc. on October 31, 2021, the latest practicable date, was 5,645,687 shares.

FIDELITY D & D BANCORP, INC.

Form 10-Q September 30, 2021

Index


PART I – Financial Information

Item 1: Financial Statements

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets

(Unaudited)

(dollars in thousands)

September 30, 2021

December 31, 2020

Assets:

Cash and due from banks

$

51,466 

$

19,408 

Interest-bearing deposits with financial institutions

115,920 

49,938 

Total cash and cash equivalents

167,386 

69,346 

Available-for-sale securities

686,926 

392,420 

Restricted investments in bank stock

3,321 

2,813 

Loans and leases, net (allowance for loan losses of

$15,601 in 2021; $14,202 in 2020)

1,373,237 

1,105,450 

Loans held-for-sale (fair value $48,227 in 2021, $30,858 in 2020)

47,159 

29,786 

Foreclosed assets held-for-sale

803 

256 

Bank premises and equipment, net

29,406 

27,626 

Leased property under finance leases, net

1,365 

283 

Right-of-use assets

7,977 

7,082 

Cash surrender value of bank owned life insurance

52,417 

44,285 

Accrued interest receivable

7,178 

5,712 

Goodwill

19,628 

7,053 

Core deposit intangible, net

2,050 

1,734 

Other assets

12,946 

5,664 

Total assets

$

2,411,799 

$

1,699,510 

Liabilities:

Deposits:

Interest-bearing

$

1,576,498 

$

1,102,009 

Non-interest-bearing

586,952 

407,496 

Total deposits

2,163,450 

1,509,505 

Accrued interest payable and other liabilities

15,955 

10,400 

Finance lease obligation

1,375 

291 

Operating lease liabilities

8,565 

7,644 

Secured borrowings

16,885 

-

FHLB advances

-

5,000 

Total liabilities

2,206,230 

1,532,840 

Shareholders' equity:

Preferred stock authorized 5,000,000 shares with no par value; NaN issued

-

-

Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 5,645,687 at September 30, 2021; and 4,977,750 at December 31, 2020)

113,862 

77,676 

Retained earnings

91,533 

80,042 

Accumulated other comprehensive income

174 

8,952 

Total shareholders' equity

205,569 

166,670 

Total liabilities and shareholders' equity

$

2,411,799 

$

1,699,510 

See notes to unaudited consolidated financial statements


Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Income

(Unaudited)

Three months ended

Nine months ended

(dollars in thousands except per share data)

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Interest income:

Loans and leases:

Taxable

$

14,950 

$

11,655 

$

38,759 

$

30,212 

Nontaxable

409 

339 

1,058 

914 

Interest-bearing deposits with financial institutions

54 

46 

114 

96 

Restricted investments in bank stock

28 

37 

96 

124 

Investment securities:

U.S. government agency and corporations

1,177 

832 

2,731 

2,543 

States and political subdivisions (nontaxable)

1,178 

644 

3,065 

1,568 

States and political subdivisions (taxable)

377 

146 

857 

200 

Other securities

-

-

-

Total interest income

18,173 

13,699 

46,680 

35,660 

Interest expense:

Deposits

878 

1,070 

2,583 

3,781 

Secured borrowings

121 

-

121 

-

Other short-term borrowings

-

53 

-

248 

FHLB advances

-

40 

26 

268 

Total interest expense

999 

1,163 

2,730 

4,297 

Net interest income

17,174 

12,536 

43,950 

31,363 

Provision for loan losses

450 

1,500 

1,550 

3,700 

Net interest income after provision for loan losses

16,724 

11,036 

42,400 

27,663 

Other income:

Service charges on deposit accounts

705 

548 

1,835 

1,521 

Interchange fees

1,089 

871 

3,192 

2,114 

Service charges on loans

517 

451 

1,546 

1,219 

Fees from trust fiduciary activities

598 

480 

1,634 

1,334 

Fees from financial services

273 

221 

665 

534 

Fees and other revenue

239 

234 

592 

595 

Earnings on bank-owned life insurance

326 

216 

899 

577 

Gain (loss) on write-down, sale or disposal of:

Loans

188 

1,346 

3,671 

1,998 

Available-for-sale debt securities

40 

-

40 

-

Premises and equipment

34 

28 

(59)

Total other income

4,009 

4,370 

14,102 

9,833 

Other expenses:

Salaries and employee benefits

7,007 

5,431 

18,693 

14,492 

Premises and equipment

1,916 

1,503 

5,146 

4,032 

Data processing and communication

745 

513 

1,987 

1,820 

Advertising and marketing

668 

204 

1,825 

885 

Professional services

796 

620 

2,563 

1,696 

Merger-related expenses

2,201 

221 

3,143 

2,439 

Automated transaction processing

396 

278 

1,065 

769 

Office supplies and postage

164 

171 

438 

448 

PA shares tax

365 

373 

780 

741 

Loan collection

31 

16 

112 

61 

Other real estate owned

25 

(13)

FDIC assessment

169 

95 

404 

175 

FHLB prepayment fee

-

(1)

369 

481 

Other

721 

49 

942 

63 

Total other expenses

15,185 

9,474 

37,492 

28,089 

Income before income taxes

5,548 

5,932 

19,010 

9,407 

Provision for income taxes

689 

955 

2,788 

1,545 

Net income

$

4,859 

$

4,977 

$

16,222 

$

7,862 

Per share data:

Net income - basic

$

0.86 

$

1.00 

$

3.11 

$

1.76 

Net income - diluted

$

0.85 

$

0.99 

$

3.09 

$

1.75 

Dividends

$

0.30 

$

0.28 

$

0.90 

$

0.84 

See notes to unaudited consolidated financial statements

Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

Three months ended

Nine months ended

(Unaudited)

September 30,

September 30,

(dollars in thousands)

2021

2020

2021

2020

Net income

$

4,859 

$

4,977 

$

16,222 

$

7,862 

Other comprehensive (loss) income, before tax:

Unrealized holding (loss) gain on available-for-sale debt securities

(6,488)

783 

(11,071)

5,339 

Reclassification adjustment for net gains realized in income

(40)

-

(40)

-

Net unrealized (loss) gain

(6,528)

783 

(11,111)

5,339 

Tax effect

1,371 

(164)

2,333 

(1,121)

Unrealized (loss) gain, net of tax

(5,157)

619 

(8,778)

4,218 

Other comprehensive (loss) gain, net of tax

(5,157)

619 

(8,778)

4,218 

Total comprehensive income (loss), net of tax

$

(298)

$

5,596 

$

7,444 

$

12,080 

See notes to unaudited consolidated financial statements


Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Shareholders' Equity

For the nine months ended September 30, 2021 and 2020

Accumulated

other

Capital stock

Retained

comprehensive

(dollars in thousands)

Shares

Amount

earnings

income (loss)

Total

Balance, December 31, 2019

3,781,500 

$

30,848 

$

72,385 

$

3,602 

$

106,835 

Net income

7,862 

7,862 

Other comprehensive income

4,218 

4,218 

Issuance of common stock through Employee Stock Purchase Plan

3,885 

219 

219 

Issuance of common stock from vested restricted share grants through stock compensation plans

15,395 

-

-

Stock-based compensation expense

944 

944 

Issuance of common stock for acquisition

1,176,970 

45,408 

45,408 

Cash dividends declared

(3,875)

(3,875)

Balance, September 30, 2020

4,977,750 

$

77,419 

$

76,372 

$

7,820 

$

161,611 

Balance, December 31, 2020

4,977,750 

$

77,676 

$

80,042 

$

8,952 

$

166,670 

Net income

16,222 

16,222 

Other comprehensive loss

(8,778)

(8,778)

Issuance of common stock through Employee Stock Purchase Plan

4,738 

270 

270 

Issuance of common stock from vested restricted share grants through stock compensation plans

13,209 

-

-

Issuance of common stock through exercise of SSARs

2,000 

-

-

Stock-based compensation expense

860 

860 

Issuance of common stock for acquisition

647,990 

35,056 

35,056 

Cash dividends declared

(4,731)

(4,731)

Balance, September 30, 2021

5,645,687 

$

113,862 

$

91,533 

$

174 

$

205,569 

See notes to unaudited consolidated financial statements


Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Shareholders' Equity

For the three months ended September 30, 2021 and 2020

(Unaudited)

Accumulated

other

Capital stock

Retained

comprehensive

(dollars in thousands)

Shares

Amount

earnings

income (loss)

Total

Balance, June 30, 2020

4,977,750 

$

77,162 

$

72,797 

$

7,201 

$

157,160 

Net income

4,977 

4,977 

Other comprehensive income

619 

619 

Stock-based compensation expense

257 

257 

Cash dividends declared

(1,402)

(1,402)

Balance, September 30, 2020

4,977,750 

$

77,419 

$

76,372 

$

7,820 

$

161,611 

Balance, June 30, 2021

4,995,713 

$

78,473 

$

88,381 

$

5,331 

$

172,185 

Net income

4,859 

4,859 

Other comprehensive loss

(5,157)

(5,157)

Issuance of common stock from vested restricted share grants through stock compensation plans

1,984 

-

-

Issuance of common stock for acquisition

647,990 

35,056 

35,056 

Stock-based compensation expense

333 

333 

Cash dividends declared

(1,707)

(1,707)

Balance, September 30, 2021

5,645,687 

$

113,862 

$

91,533 

$

174 

$

205,569 

See notes to unaudited consolidated financial statements


Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

Nine months ended September 30,

(dollars in thousands)

2021

2020

Cash flows from operating activities:

Net income

$

16,222 

$

7,862 

Adjustments to reconcile net income to net cash provided by

operating activities:

Depreciation, amortization and accretion

4,246 

3,062 

Provision for loan losses

1,550 

3,700 

Deferred income tax expense (benefit)

137 

(1,057)

Stock-based compensation expense

850 

851 

Excess tax benefit from exercise of SSARs

26 

-

Proceeds from sale of loans held-for-sale

143,159 

107,747 

Originations of loans held-for-sale

(149,614)

(112,553)

Earnings from bank-owned life insurance

(899)

(577)

Net gain from sales of loans

(3,671)

(1,998)

Net gain from sales of investment securities

(40)

-

Net gain from sale and write-down of foreclosed assets held-for-sale

(34)

(43)

Net (gain) loss from write-down and disposal of bank premises and equipment

(28)

59 

Operating lease payments

26 

22 

Change in:

Accrued interest receivable

(552)

(976)

Other assets

1,005 

928 

Accrued interest payable and other liabilities

1,514 

1,041 

Net cash provided by operating activities

13,897 

8,068 

Cash flows from investing activities:

Available-for-sale securities:

Proceeds from sales

40,616 

115,234 

Proceeds from maturities, calls and principal pay-downs

41,939 

48,167 

Purchases

(341,890)

(191,070)

Increase in restricted investments in bank stock

678 

2,196 

Net decrease (increase) in loans and leases

18,712 

(148,026)

Principal portion of lease payments received under direct finance leases

3,689 

2,420 

Purchases of bank premises and equipment

(1,803)

(1,401)

Net cash (used in) provided by acquisition

(3,746)

53,004 

Proceeds from sale of bank premises and equipment

299 

12 

Proceeds from sale of foreclosed assets held-for-sale

302 

879 

Net cash used in investing activities

(241,204)

(118,585)

Cash flows from financing activities:

Net increase in deposits

345,477 

285,818 

Net decrease in other borrowings

(5,958)

(37,839)

Proceeds from Paycheck Protection Program Liquidity Facility (PPPLF)

-

152,791 

Repayment of PPPLF

-

(152,791)

Repayment of FHLB advances

(9,602)

(17,627)

Repayment of finance lease obligation

(103)

(60)

Proceeds from employee stock purchase plan participants

270 

219 

Dividends paid

(4,731)

(3,875)

Cash paid in lieu of fractional shares

(6)

(4)

Net cash provided by financing activities

325,347 

226,632 

Net increase in cash and cash equivalents

98,040 

116,115 

Cash and cash equivalents, beginning

69,346 

15,663 

Cash and cash equivalents, ending

$

167,386 

$

131,778 

See notes to unaudited consolidated financial statements


Fidelity D & D Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows (continued)

(Unaudited)

Nine months ended September 30,

(dollars in thousands)

2021

2020

Supplemental Disclosures of Cash Flow Information

Cash payments for:

Interest

$

2,922 

$

4,696 

Income tax

1,900 

2,150 

Supplemental Disclosures of Non-cash Investing Activities:

Net change in unrealized gains on available-for-sale securities

(11,111)

5,339 

Transfers from loans to foreclosed assets held-for-sale

327 

842 

Transfers from loans to loans held-for-sale, net

9,158 

5,129 

Transfers from premises and equipment to other assets held-for-sale

1,495 

-

Security settlement pending

1,419 

9,299 

Right-of-use asset

389 

-

Lease liability

389 

-

Transactions related to acquisition

Increase in assets and liabilities:

Securities

$

49,430 

$

123,420 

Loans

298,860 

245,283 

Restricted investments in bank stocks

1,186 

692 

Premises and equipment

3,405 

6,907 

Investment in bank-owned life insurance

7,233 

9,230 

Goodwill

12,575 

6,843 

Core deposit intangible asset

597 

1,973 

Leased property under finance leases

1,188 

-

Right-of-use assets

756 

1,354 

Other assets

4,128 

2,680 

Non-interest-bearing deposits

(100,472)

(118,822)

Interest-bearing deposits

(208,057)

(276,816)

Short-term borrowings

(2,224)

-

FHLB advances

(4,602)

(7,627)

Secured borrowings

(20,619)

-

Finance lease obligation

(1,188)

-

Operating lease liabilities

(756)

(1,354)

Other liabilities

(2,631)

(1,356)

Fair value of common shares issued

(35,056)

(45,408)

See notes to unaudited consolidated financial statements


FIDELITY D & D BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

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 acquisition of 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 September 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 nine months ended September 30, 2021 and 2020, and consolidated statements of cash flows for the nine months ended September 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 September 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 September 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 September 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 0 goodwill impairment as of September 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.

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. The Company accounts for certain participation interests in commercial loans receivable (loan participation agreements) sold as a sale of financial assets pursuant to ASC 860, Transfers and Servicing. Loan participation agreements that meet the sale criteria under ASC 860 are derecognized from the Consolidated Balance Sheets at the time of transfer. If the transfer of loans does not meet the sale criteria or participating interest criteria under ASC 860, the transfer is accounted for as a secured borrowing and the loan is not de-recognized and a participating liability is recorded in the Consolidated Balance Sheets.

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 4 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.


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 adopted by 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.


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:

As of and for the nine months ended September 30, 2021

Unrealized gains

(losses) on

available-for-sale

(dollars in thousands)

debt securities

Beginning balance

$

8,952

Other comprehensive loss before reclassifications, net of tax

(8,747)

Amounts reclassified from accumulated other comprehensive income, net of tax

(31)

Net current-period other comprehensive loss

(8,778)

Ending balance

$

174

As of and for the three months ended September 30, 2021

Unrealized gains

(losses) on

available-for-sale

(dollars in thousands)

debt securities

Beginning balance

$

5,331

Other comprehensive loss before reclassifications, net of tax

(5,126)

Amounts reclassified from accumulated other comprehensive income, net of tax

(31)

Net current-period other comprehensive loss

(5,157)

Ending balance

$

174

As of and for the nine months ended September 30, 2020

Unrealized gains

(losses) on

available-for-sale

(dollars in thousands)

securities

Beginning balance

$

3,602

Other comprehensive income before reclassifications, net of tax

4,218

Amounts reclassified from accumulated other comprehensive income, net of tax

-

Net current-period other comprehensive income

4,218

Ending balance

$

7,820

As of and for the three months ended September 30, 2020

Unrealized gains

(losses) on

available-for-sale

(dollars in thousands)

securities

Beginning balance

$

7,201

Other comprehensive income before reclassifications, net of tax

619

Amounts reclassified from accumulated other comprehensive income, net of tax

-

Net current-period other comprehensive income

619

Ending balance

$

7,820

Details about accumulated other

comprehensive income components

Amount reclassified from accumulated

Affected line item in the statement

(dollars in thousands)

other comprehensive income

where net income is presented

For the three months

For the nine months

ended September 30,

ended September 30,

2021

2020

2021

2020

Unrealized gains (losses) on AFS debt securities

$

40 

$

-

$

40 

$

-

Gain (loss) on sale of investment securities

Income tax effect

(9)

-

(9)

-

Provision for income taxes

Total reclassifications for the period

$

31 

$

-

$

31 

$

-

Net income

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 September 30, 2021 and December 31, 2020 are summarized as follows:

Gross

Gross

Amortized

unrealized

unrealized

Fair

(dollars in thousands)

cost

gains

losses

value

September 30, 2021

Available-for-sale debt securities:

Agency - GSE

$

112,949

$

386

$

(1,820)

$

111,515

Obligations of states and political subdivisions

335,011

5,527

(4,073)

336,465

MBS - GSE residential

238,745

2,402

(2,201)

238,946

Total available-for-sale debt securities

$

686,705

$

8,315

$

(8,094)

$

686,926

Gross

Gross

Amortized

unrealized

unrealized

Fair

(dollars in thousands)

cost

gains

losses

value

December 31, 2020

Available-for-sale debt securities:

Agency - GSE

$

45,146

$

392

$

(91)

$

45,447

Obligations of states and political subdivisions

192,385

7,480

(152)

199,713

MBS - GSE residential

143,557

3,881

(178)

147,260

Total available-for-sale debt securities

$

381,088

$

11,753

$

(421)

$

392,420


The amortized cost and fair value of debt securities at September 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

$

985

$

1,008

Due after one year through five years

9,207

9,452

Due after five years through ten years

109,420

107,939

Due after ten years

328,348

329,581

MBS - GSE residential

238,745

238,946

Total available-for-sale debt securities

$

686,705

$

686,926

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 September 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

September 30, 2021

Agency - GSE

$

87,844 

$

(1,820)

$

-

$

-

$

87,844 

$

(1,820)

Obligations of states and political subdivisions

204,710 

(3,882)

4,498 

(191)

209,208 

(4,073)

MBS - GSE residential

160,399 

(2,201)

-

-

160,399 

(2,201)

Total

$

452,953 

$

(7,903)

$

4,498 

$

(191)

$

457,451 

$

(8,094)

Number of securities

220 

225 

December 31, 2020

Agency - GSE

$

27,602 

$

(91)

$

-

$

-

$

27,602 

$

(91)

Obligations of states and political subdivisions

15,256 

(152)

-

-

15,256 

(152)

MBS - GSE residential

14,753 

(178)

-

-

14,753 

(178)

Total

$

57,611 

$

(421)

$

-

$

-

$

57,611 

$

(421)

Number of securities

30 

-

30 

The Company had 225 debt securities in an unrealized loss position at September 30, 2021, including 35 agency-GSE securities, 47 MBS – GSE residential securities and 143 municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at September 30, 2021: 2.03% for agency - GSE, 1.35% for total MBS-GSE residential; and 1.91% for municipals. NaN 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 September 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 September 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.

5. Loans and leases

The classifications of loans and leases at September 30, 2021 and December 31, 2020 are summarized as follows:

(dollars in thousands)

September 30, 2021

December 31, 2020

Commercial and industrial

$

264,170

$

280,757

Commercial real estate:

Non-owner occupied

306,537

192,143

Owner occupied

247,563

179,923

Construction

12,081

10,231

Consumer:

Home equity installment

47,331

40,147

Home equity line of credit

53,747

49,725

Auto loans

121,080

98,386

Direct finance leases

23,661

20,095

Other

7,701

7,602

Residential:

Real estate

271,760

218,445

Construction

34,519

23,357

Total

1,390,150

1,120,811

Less:

Allowance for loan losses

(15,601)

(14,202)

Unearned lease revenue

(1,312)

(1,159)

Loans and leases, net

$

1,373,237

$

1,105,450

As of September 30, 2021, total loans of $1.4 billion were reflected net of deferred loan costs of $1.9 million, including $2.1 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 (C&I) loan balances were $264.2 million at September 30, 2021 and $280.8 million at December 31, 2020. As of September 30, 2021, the commercial and industrial loan balance included $64.7 million in PPP loans (net of deferred fees), including $13.4 million in PPP loans acquired from Landmark, compared to $129.9 million as of December 31, 2020. Excluding PPP loans, the balance of C&I loans at September 30, 2021 increased $48.7 million primarily from loans acquired from Landmark during the third quarter of 2021.

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 for others amounted to $433.3 million as of September 30, 2021 and $366.5 million as of December 31, 2020. Mortgage servicing rights amounted to $1.8 million and $1.3 million as of September 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. Businesses and governments injected resources to help lessen the impact of the pandemic and the ultimate effect is uncertain until the government stimulus is fully utilized. 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 September 30, 2021, the Company had 840 PPP loans outstanding totaling $66.8 million, including 148 loans totaling $13.4 million acquired from the Landmark merger, which represents a $65.3 million, or 49%, decrease from the 1,246 loans totaling $132.1 million as of December 31, 2020. From the beginning of the program through September 30, 2021, the Company received forgiveness or paydowns of $182.9 million, or 77%, of the original PPP loan balances of $236.3 million (excludes Landmark-acquired PPP loans) with $155.9 million occurring during the nine months ended September 30, 2021. During the three and nine months ended September 30, 2021, the Company recognized $1.4 million and $4.2 million in SBA fees from PPP loans, net of origination expenses, compared to $1.0 million and $1.8 million for the three and nine months ended September 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 $2.1 million as of September 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 Landmark 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. 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. Risk factors used to identify these loans included: loans that received COVID-19 related forbearance consistent with the regulatory guidance, loans that were in industries determined to be at greater risk to economic disruption due to COVID-19, loans that had a prior history of delinquency greater than 60 days at any point in the lifetime of the loan; loans with a Special Mention or Substandard risk rating; and/or loans borrowers in the Gasoline Station industry due to the environmental risk potential of these loans.

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.

For the nine months ended

(dollars in thousands)

September 30, 2021

September 30, 2020

Balance at beginning of period

$

563

$

-

Accretable yield on acquired loans

589

248

Reclassification from non-accretable difference

197

192

Accretion of accretable yield

(350)

(53)

Balance at end of period

$

999

$

387

The above table excludes the $275 thousand in non-accretable yield accreted to interest income for the nine months ended September 30, 2021 and $3 thousand in non-accretable yield accreted to interest income for the nine months ended September 30, 2020.

During the nine months ended September 30, 2021, management performed an analysis of all loans acquired from mergers, consistent with and applicable to ASC 310-30 (Purchased Credit Impaired loans – PCI). The accretable yield balance increased from $563 thousand at December 31, 2020 to $999 thousand at September 30, 2021. The $436 thousand increase resulted from $589 thousand in accretable yield on loans acquired from the Landmark merger during the third quarter of 2021; $197 thousand reclassified from non-accretable yield to accretable yield including $129 thousand from improved collateral values and $68 thousand from payments received on PCI in excess of estimates; and $350 thousand in accretable yield accreted to interest income due to contractual payments received during the nine months ended September 30, 2021.

Expected cash flows 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 September 30, 2021 and December 31, 2020, were as follows:

(dollars in thousands)

September 30, 2021

December 31, 2020

Commercial and industrial

$

259

$

590

Commercial real estate:

Non-owner occupied

601

846

Owner occupied

1,020

1,123

Consumer:

Home equity installment

27

61

Home equity line of credit

97

395

Auto loans

49

27

Residential:

Real estate

694

727

Total

$

2,747

$

3,769

The table above excludes $4.4 million and $1.3 million in purchased credit impaired loans, net of unamortized fair value adjustments as of September 30, 2021 and December 31, 2020, respectively.

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 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 September 30, 2021, the Company had 0 temporary modifications outstanding compared to 10 temporary modifications with principal balances totaling $2.2 million as of December 31, 2020.

The following presents by class, information related to loans modified in a TDR:

Loans modified as TDRs for the three months ended:

(dollars in thousands)

September 30, 2021

September 30, 2020

Recorded

Increase in

Recorded

Increase in

Number

investment

allowance

Number

investment

allowance

of

(as of

(as of

of

(as of

(as of

contracts

period end)

period end)

contracts

period end)

period end)

Commercial real estate - non-owner occupied

-

$

-

$

-

2

$

1,600

$

475

Total

-

$

-

$

-

2

$

1,600

$

475


Loans modified as TDRs for the nine months ended:

(dollars in thousands)

September 30, 2021

September 30, 2020

Recorded

Increase in

Recorded

Increase in

Number

investment

allowance

Number

investment

allowance

of

(as of

(as of

of

(as of

(as of

contracts

period end)

period end)

contracts

period end)

period end)

Commercial real estate - non-owner occupied

-

$

-

$

-

2

$

1,600

$

475

Total

-

$

-

$

-

2

$

1,600

$

475

In the above tables, the period end balance is inclusive of all partial pay downs and charge-offs since the modification date. For all loans modified in a TDR, the pre-modification recorded investment was the same as the post-modification recorded investment.

Of the TDRs outstanding as of September 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 0 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 nine months ended September 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 September 30, 2021 and 2020, the balance of outstanding TDRs was $3.0 million. As of September 30, 2021 and 2020, the allowance for impaired loans that have been modified in a TDR was $0.5 million and $0.6 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):

Recorded

Past due

investment past

30 - 59 Days

60 - 89 Days

90 days

Total

Total

due ≥ 90 days

September 30, 2021

past due

past due

or more (1)

past due

Current

loans (3)

and accruing

Commercial and industrial

$

19 

$

-

$

259 

$

278 

$

263,892 

$

264,170 

$

-

Commercial real estate:

Non-owner occupied

-

61 

601 

662 

305,875 

306,537 

-

Owner occupied

224 

-

1,020 

1,244 

246,319 

247,563 

-

Construction

-

-

-

-

12,081 

12,081 

-

Consumer:

Home equity installment

70 

-

27 

97 

47,234 

47,331 

-

Home equity line of credit

74 

-

97 

171 

53,576 

53,747 

-

Auto loans

458 

54 

160 

672 

120,408 

121,080 

111 

Direct finance leases

110 

-

117 

22,232 

22,349 

(2)

-

Other

-

10 

7,691 

7,701 

Residential:

Real estate

-

-

694 

694 

271,066 

271,760 

-

Construction

-

-

-

-

34,519 

34,519 

-

Total

$

964 

$

122 

$

2,859 

$

3,945 

$

1,384,893 

$

1,388,838 

$

112 

(1) Includes non-accrual loans. (2) Net of unearned lease revenue of $1.3 million. (3) Includes net deferred loan costs of $1.9 million.


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

$

288 

505 

590 

1,383 

279,374 

280,757 

-

Commercial real estate:

Non-owner occupied

79 

-

846 

925 

191,218 

192,143 

-

Owner occupied

-

1,123 

1,124 

178,799 

179,923 

-

Construction

-

-

-

-

10,231 

10,231 

-

Consumer:

Home equity installment

102 

-

61 

163 

39,984 

40,147 

-

Home equity line of credit

24 

-

395 

419 

49,306 

49,725 

-

Auto loans

197 

25 

27 

249 

98,137 

98,386 

-

Direct finance leases

294 

-

61 

355 

18,581 

18,936 

(2)

61 

Other

-

-

7,593 

7,602 

-

Residential:

Real estate

-

74 

727 

801 

217,644 

218,445 

-

Construction

-

-

-

-

23,357 

23,357 

-

Total

$

994 

$

604 

$

3,830 

$

5,428 

$

1,114,224 

$

1,119,652 

$

61 

(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:

Recorded

Recorded

Unpaid

investment

investment

Total

principal

with

with no

recorded

Related

(dollars in thousands)

balance

allowance

allowance

investment

allowance

September 30, 2021

Commercial and industrial

$

422 

$

19 

$

240 

$

259 

$

19 

Commercial real estate:

Non-owner occupied

2,595 

1,676 

920 

2,596 

470 

Owner occupied

1,904 

1,438 

66 

1,504 

387 

Consumer:

Home equity installment

60 

-

27 

27 

-

Home equity line of credit

137 

-

97 

97 

-

Auto loans

66 

11 

38 

49 

Residential:

Real estate

741 

550 

144 

694 

89 

Total

$

5,925 

$

3,694 

$

1,532 

$

5,226 

$

970 

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

$

688 

$

549 

$

41 

$

590 

$

213 

Commercial real estate:

Non-owner occupied

2,960 

1,677 

1,171 

2,848 

481 

Owner occupied

2,058 

1,219 

473 

1,692 

309 

Consumer:

Home equity installment

106 

-

61 

61 

-

Home equity line of credit

443 

105 

290 

395 

48 

Auto loans

50 

27 

-

27 

Residential:

Real estate

774 

559 

168 

727 

151 

Total

$

7,079 

$

4,136 

$

2,204 

$

6,340 

$

1,206 

At September 30, 2021, impaired loans totaled $5.2 million consisting of $2.5 million in accruing TDRs and $2.7 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 September 30, 2021, the non-accrual loans included 3 TDRs to 2 unrelated borrowers totaling $0.6 million compared with 4 TDRs to 3 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.

For the nine months ended

September 30, 2021

September 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

$

433 

$

$

-

$

327 

$

$

-

Commercial real estate:

Non-owner occupied

2,838 

133 

-

1,531 

18 

-

Owner occupied

1,711 

27 

-

1,984 

42 

-

Construction

-

-

-

-

-

-

Consumer:

Home equity installment

35 

-

50 

-

-

Home equity line of credit

268 

20 

-

341 

-

-

Auto loans

30 

-

-

60 

-

Direct finance leases

-

-

-

-

-

-

Other

-

-

-

-

-

-

Residential:

Real estate

717 

-

-

886 

-

-

Construction

-

-

-

-

-

-

Total

$

6,032 

$

187 

$

-

$

5,179 

$

63 

$

-


For the three months ended

September 30, 2021

September 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

$

325 

$

-

$

-

$

392 

$

$

-

Commercial real estate: