CB Financial Services, Inc. - Quarter Report: 2019 June (Form 10-Q)
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 June 30, 2019
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 August 2, 2019, the number of shares outstanding of the Registrant’s Common Stock was 5,433,489.
FORM 10-Q
INDEX
Page
PART I – FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Unaudited) | ||||||||
June 30, | December 31, | |||||||
(Dollars in thousands, except share data) | 2019 | 2018 | ||||||
ASSETS | ||||||||
Cash and Due From Banks: | ||||||||
Interest Bearing | $ | 21,490 | $ | 36,736 | ||||
Non-Interest Bearing | 22,884 | 16,617 | ||||||
Total Cash and Due From Banks | 44,374 | 53,353 | ||||||
Investment Securities: | ||||||||
Available-for-Sale | 236,004 | 225,409 | ||||||
Loans, Net | 926,197 | 903,314 | ||||||
Premises and Equipment, Net | 22,858 | 23,448 | ||||||
Bank-Owned Life Insurance | 23,188 | 22,922 | ||||||
Goodwill | 28,425 | 28,425 | ||||||
Core Deposit Intangible, Net | 9,964 | 10,934 | ||||||
Accrued Interest and Other Assets | 14,178 | 13,496 | ||||||
TOTAL ASSETS | $ | 1,305,188 | $ | 1,281,301 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Demand Deposits | $ | 273,175 | $ | 253,201 | ||||
NOW Accounts | 214,157 | 218,687 | ||||||
Money Market Accounts | 175,760 | 187,627 | ||||||
Savings Accounts | 218,369 | 209,985 | ||||||
Time Deposits | 221,524 | 214,891 | ||||||
Brokered Deposits | 4,118 | 2,267 | ||||||
Total Deposits | 1,107,103 | 1,086,658 | ||||||
Short-Term Borrowings | 27,730 | 30,979 | ||||||
Other Borrowed Funds | 17,000 | 20,000 | ||||||
Accrued Interest and Other Liabilities | 7,848 | 6,039 | ||||||
TOTAL LIABILITIES | 1,159,681 | 1,143,676 | ||||||
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 5,433,489 and 5,432,289 Shares Outstanding at June 30, 2019 and December 31, 2018, Respectively | 2,367 | 2,367 | ||||||
Capital Surplus | 83,380 | 83,225 | ||||||
Retained Earnings | 61,140 | 57,843 | ||||||
Treasury Stock, at Cost (247,504 and 248,704 Shares at June 30, 2019 and December 31, 2018, Respectively) | (4,350 | ) | (4,370 | ) | ||||
Accumulated Other Comprehensive Income (Loss) | 2,970 | (1,440 | ) | |||||
TOTAL STOCKHOLDERS' EQUITY | 145,507 | 137,625 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 1,305,188 | $ | 1,281,301 |
The accompanying notes are an integral part of these consolidated financial statements
1 |
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Dollars in thousands, except share and per share data) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
INTEREST AND DIVIDEND INCOME | ||||||||||||||||
Loans, Including Fees | $ | 10,673 | $ | 9,257 | $ | 21,106 | $ | 17,228 | ||||||||
Federal Funds Sold | 165 | 54 | 279 | 60 | ||||||||||||
Investment Securities: | ||||||||||||||||
Taxable | 1,390 | 988 | 2,654 | 1,422 | ||||||||||||
Exempt From Federal Income Tax | 232 | 303 | 513 | 539 | ||||||||||||
Other Interest and Dividend Income | 209 | 88 | 413 | 148 | ||||||||||||
TOTAL INTEREST AND DIVIDEND INCOME | 12,669 | 10,690 | 24,965 | 19,397 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Deposits | 1,824 | 1,186 | 3,543 | 1,974 | ||||||||||||
Federal Funds Purchased | - | - | - | 1 | ||||||||||||
Short-Term Borrowings | 50 | 208 | 96 | 405 | ||||||||||||
Other Borrowed Funds | 90 | 123 | 187 | 236 | ||||||||||||
TOTAL INTEREST EXPENSE | 1,964 | 1,517 | 3,826 | 2,616 | ||||||||||||
NET INTEREST INCOME | 10,705 | 9,173 | 21,139 | 16,781 | ||||||||||||
Provision For Loan Losses | 350 | 600 | 375 | 2,100 | ||||||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 10,355 | 8,573 | 20,764 | 14,681 | ||||||||||||
NONINTEREST INCOME | ||||||||||||||||
Service Fees on Deposit Accounts | 798 | 719 | 1,551 | 1,310 | ||||||||||||
Insurance Commissions | 1,083 | 880 | 2,234 | 1,811 | ||||||||||||
Other Commissions | 131 | 263 | 289 | 696 | ||||||||||||
Net Gains on Sales of Loans | 50 | 46 | 142 | 54 | ||||||||||||
Net Gain (Loss) on Sales of Investments | 7 | - | (53 | ) | - | |||||||||||
Fair Value of Equity Securities | 109 | 44 | 129 | 19 | ||||||||||||
Net Gains on Purchased Tax Credits | 9 | 11 | 18 | 22 | ||||||||||||
Net Gain on Disposal of Fixed Assets | 8 | - | 2 | - | ||||||||||||
Income from Bank-Owned Life Insurance | 134 | 127 | 266 | 235 | ||||||||||||
Other | 70 | 35 | 136 | 64 | ||||||||||||
TOTAL NONINTEREST INCOME | 2,399 | 2,125 | 4,714 | 4,211 | ||||||||||||
NONINTEREST EXPENSE | ||||||||||||||||
Salaries and Employee Benefits | 4,708 | 4,865 | 9,643 | 8,560 | ||||||||||||
Occupancy | 663 | 788 | 1,422 | 1,358 | ||||||||||||
Equipment | 665 | 632 | 1,369 | 1,130 | ||||||||||||
FDIC Assessment | 175 | 158 | 363 | 294 | ||||||||||||
PA Shares Tax | 249 | 197 | 517 | 396 | ||||||||||||
Contracted Services | 361 | 171 | 633 | 310 | ||||||||||||
Legal and Professional Fees | 160 | 145 | 341 | 285 | ||||||||||||
Advertising | 259 | 211 | 407 | 342 | ||||||||||||
Bankcard Processing Expense | 230 | 139 | 427 | 268 | ||||||||||||
Other Real Estate Owned (Income) | (31 | ) | (19 | ) | (94 | ) | (12 | ) | ||||||||
Amortization of Core Deposit Intangible | 485 | 400 | 970 | 534 | ||||||||||||
Merger-Related | - | 769 | - | 793 | ||||||||||||
Other | 1,107 | 1,038 | 2,114 | 1,903 | ||||||||||||
TOTAL NONINTEREST EXPENSE | 9,031 | 9,494 | 18,112 | 16,161 | ||||||||||||
Income Before Income Taxes | 3,723 | 1,204 | 7,366 | 2,731 | ||||||||||||
Income Taxes | 744 | 234 | 1,462 | 401 | ||||||||||||
NET INCOME | $ | 2,979 | $ | 970 | $ | 5,904 | $ | 2,330 | ||||||||
EARNINGS PER SHARE | ||||||||||||||||
Basic | $ | 0.55 | $ | 0.19 | $ | 1.09 | $ | 0.51 | ||||||||
Diluted | 0.55 | 0.19 | 1.08 | 0.51 | ||||||||||||
WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||||||||||
Basic | 5,433,537 | 5,000,209 | 5,433,198 | 4,550,580 | ||||||||||||
Diluted | 5,444,824 | 5,061,788 | 5,448,040 | 4,601,134 |
The accompanying notes are an integral part of these consolidated financial statements
2 |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Dollars in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net Income | $ | 2,979 | $ | 970 | $ | 5,904 | $ | 2,330 | ||||||||
Other Comprehensive Income: | ||||||||||||||||
Unrealized Gains (Losses) on Available-for-Sale Securities Net of Income Tax Expense (Benefit) of $540 and ($31) for the Three Months Ended June 30, 2019 and 2018, Respectively, and $1,162 and ($409) for the Six Months Ended June 30, 2019 and 2018, Respectively | 2,031 | (70 | ) | 4,368 | (1,491 | ) | ||||||||||
Reclassification Adjustment for (Gains) Losses on Securities: Included in Net Income, Net of Income Tax (Expense) Benefit of ($2) and $11 for the Three and Six Months Ended June 30, 2019, Respectively (1) | (5 | ) | - | 42 | - | |||||||||||
Other Comprehensive Income (Loss), Net of Income Tax Expense (Benefit) | 2,026 | (70 | ) | 4,410 | (1,491 | ) | ||||||||||
Total Comprehensive Income | $ | 5,005 | $ | 900 | $ | 10,314 | $ | 839 |
(1) | The gross amount of gains (losses) on securities of $7 and ($53) for the Three and Six Months Ended June 30, 2019, respectively are reported as Net Gain (Loss) on Sales of Investments on the Consolidated Statement of Income. The income tax expense (benefit) effect is included in Income Taxes on the Consolidated Statement of Income. |
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Accumulated | ||||||||||||||||||||||||||||
Other | Total | |||||||||||||||||||||||||||
Shares | Common | Capital | Retained | Treasury | Comprehensive | Stockholders' | ||||||||||||||||||||||
(Dollars in thousands, except share and per share data) | Issued | Stock | Surplus | Earnings | Stock | Loss | Equity | |||||||||||||||||||||
December 31, 2017 | 4,363,346 | $ | 1,818 | $ | 42,089 | $ | 55,280 | $ | (4,590 | ) | $ | (1,341 | ) | $ | 93,256 | |||||||||||||
Comprehensive Income: | ||||||||||||||||||||||||||||
Net Income | - | - | - | 2,330 | - | - | 2,330 | |||||||||||||||||||||
Other Comprehensive Loss | - | - | - | - | - | (1,491 | ) | (1,491 | ) | |||||||||||||||||||
Impact of change in method of accounting for marketable equity securities (1) | - | - | - | 40 | - | (40 | ) | - | ||||||||||||||||||||
Issuance of Common Stock | ||||||||||||||||||||||||||||
(net of issuance expenses of $515) | 1,317,647 | 549 | 40,978 | - | - | - | 41,527 | |||||||||||||||||||||
Stock-Based Compensation Expense | - | - | 239 | - | - | - | 239 | |||||||||||||||||||||
Exercise of Stock Options | - | - | 5 | - | 208 | - | 213 | |||||||||||||||||||||
Treasury Stock Purchased, at cost (8,624 shares) | - | - | - | - | (298 | ) | - | (298 | ) | |||||||||||||||||||
Dividends Paid ($0.44 Per Share) | - | - | - | (2,092 | ) | - | - | (2,092 | ) | |||||||||||||||||||
June 30, 2018 | 5,680,993 | $ | 2,367 | $ | 83,311 | $ | 55,558 | $ | (4,680 | ) | $ | (2,872 | ) | $ | 133,684 |
Accumulated | ||||||||||||||||||||||||||||
Other | Total | |||||||||||||||||||||||||||
Shares | Common | Capital | Retained | Treasury | Comprehensive | Stockholders' | ||||||||||||||||||||||
(Dollars in thousands, except share and per share data) | Issued | Stock | Surplus | Earnings | Stock | Income (Loss) | Equity | |||||||||||||||||||||
December 31, 2018 | 5,680,993 | $ | 2,367 | $ | 83,225 | $ | 57,843 | $ | (4,370 | ) | $ | (1,440 | ) | $ | 137,625 | |||||||||||||
Comprehensive Income: | ||||||||||||||||||||||||||||
Net Income | - | - | - | 5,904 | - | - | 5,904 | |||||||||||||||||||||
Other Comprehensive Income | - | - | - | - | - | 4,410 | 4,410 | |||||||||||||||||||||
Restricted Stock Awards Granted | - | - | (11 | ) | - | 11 | - | - | ||||||||||||||||||||
Restricted Stock Awards Forfeited | - | - | 8 | - | (8 | ) | - | - | ||||||||||||||||||||
Stock-Based Compensation Expense | - | - | 153 | - | - | - | 153 | |||||||||||||||||||||
Exercise of Stock Options | - | - | 5 | - | 36 | - | 41 | |||||||||||||||||||||
Treasury stock purchased, at cost (800 shares) | - | - | - | - | (19 | ) | - | (19 | ) | |||||||||||||||||||
Dividends Paid ($0.48 Per Share) | - | - | - | (2,607 | ) | - | - | (2,607 | ) | |||||||||||||||||||
June 30, 2019 | 5,680,993 | $ | 2,367 | $ | 83,380 | $ | 61,140 | $ | (4,350 | ) | $ | 2,970 | $ | 145,507 |
(1) | Reclassification due to the adoption of ASU 2016-01. See Note 1 for additional information. |
The accompanying notes are an integral part of these consolidated financial statements
3 |
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months Ended | ||||||||
June 30, | ||||||||
(Dollars in thousands) | 2019 | 2018 | ||||||
OPERATING ACTIVITIES | ||||||||
Net Income | $ | 5,904 | $ | 2,330 | ||||
Αdjustmеnts to Rеconcilе Net Income to Net Cash Provided By Operating Activities: | ||||||||
Net Amortization on Investments | 20 | 115 | ||||||
Depreciation and Amortization | 1,833 | 1,347 | ||||||
Provision for Loan Losses | 375 | 2,100 | ||||||
Unrealized (Gain) Loss on Equity Securities | (129 | ) | (19 | ) | ||||
Gains on Purchased Tax Credits | (18 | ) | (22 | ) | ||||
Income from Bank-Owned Life Insurance | (266 | ) | (235 | ) | ||||
Proceeds From Mortgage Loans Sold | 5,724 | 2,539 | ||||||
Originations of Mortgage Loans for Sale | (5,582 | ) | (2,485 | ) | ||||
Gains on Sales of Loans | (142 | ) | (54 | ) | ||||
Losses on Sales of Investment Securities | 53 | - | ||||||
Gains on Sales of Other Real Estate Owned and Repossessed Assets | (94 | ) | (19 | ) | ||||
Noncash Expense for Stock-Based Compensation | 153 | 239 | ||||||
Increase in Accrued Interest Receivable | (343 | ) | (832 | ) | ||||
Net Gain on Disposal of Fixed Assets | (2 | ) | - | |||||
Increase (Decrease) in Taxes Payable | 536 | (1,914 | ) | |||||
Increase in Accrued Interest Payable | 293 | 106 | ||||||
Net Payment of Federal/State Income Taxes | (1,365 | ) | (820 | ) | ||||
Other, Net | 851 | 1,427 | ||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 7,801 | 3,803 | ||||||
INVESTING ACTIVITIES | ||||||||
Investment Securities Available for Sale: | ||||||||
Proceeds From Principal Repayments and Maturities | 15,703 | 4,823 | ||||||
Purchases of Securities | (33,331 | ) | (1,069 | ) | ||||
Proceeds from Sales of Securities | 12,672 | 80,314 | ||||||
Net Increase in Loans | (23,397 | ) | (53,526 | ) | ||||
Purchase of Premises and Equipment | (54 | ) | (3,742 | ) | ||||
Asset Acquisition of a Customer List | (900 | ) | - | |||||
Proceeds From a Claim on Bank-Owned Life Insurance | - | 951 | ||||||
Proceeds From Sales of Other Real Estate Owned and Repossessed Assets | 773 | 214 | ||||||
Decrease (Increase) in Restricted Equity Securities | 143 | (306 | ) | |||||
Net Cash Received from Acquisition | - | 20,632 | ||||||
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | (28,391 | ) | 48,291 | |||||
FINANCING ACTIVITIES | ||||||||
Net Increase (Decrease) in Deposits | 20,445 | (30,404 | ) | |||||
Net Decrease in Short-Term Borrowings | (3,249 | ) | (12,457 | ) | ||||
Principal Payments on Other Borrowed Funds | (3,000 | ) | (3,500 | ) | ||||
Cash Dividends Paid | (2,607 | ) | (2,092 | ) | ||||
Treasury Stock, Purchases at Cost | (19 | ) | (298 | ) | ||||
Exercise of Stock Options | 41 | 213 | ||||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 11,611 | (48,538 | ) | |||||
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (8,979 | ) | 3,556 | |||||
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR | 53,353 | 20,622 | ||||||
CASH AND DUE FROM BANKS AT END OF PERIOD | $ | 44,374 | $ | 24,178 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
Cash paid for: | ||||||||
Interest on deposits and borrowings (including interest credited to deposit accounts of $3,543 and $1,974, respectively) | $ | 3,532 | $ | 2,511 | ||||
Income taxes | 1,365 | 820 | ||||||
Real estate acquired in settlement of loans | 158 | - | ||||||
SUPPLEMENTAL NONCASH DISCLOSURE: | ||||||||
Right of use asset recognized | 1,706 | - | ||||||
Lease liability recognized | 1,712 | - |
The accompanying notes are an integral part of these consolidated financial statements
4 |
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, 2018. 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 ASC Topic 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, the Bank’s wholly owned subsidiary that is a full-service, independent insurance agency.
Acquired Loans
Loans that were acquired in previous mergers, were recorded at fair value with no carryover of the related allowance for credit losses. The fair value of the acquired loans was estimated by management with the assistance of a third-party valuation specialist.
For performing loans acquired in a merger, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. For purchased credit impaired (“PCI”) loans acquired in a merger, the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require an evaluation to determine the need for an allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount which is then reclassified as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. The evaluation of the amount of future cash flows that is expected to be collected is performed in a similar manner as that used to determine our allowance for credit losses. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment.
5 |
Recognition of Prior Period Errors
In April 2018, the Company discovered an error with the collateral position on a commercial and industrial classified loan relationship that had occurred in April 2017. This error resulted in the loss of the Company’s first lien position, leaving the loan with insufficient collateral. The Company recognized the error by recording a specific reserve and recognizing an additional $300,000 (pre-tax) of provision for loan losses for the quarter-ended March 31, 2018. There was no financial statement impact for the three months ended June 30, 2018. The impact of the correction of the error resulted in a decrease of $300,000 in income before income taxes and a decrease of $63,000 in income taxes. This resulted in a decrease of $237,000 (after-tax) in net income ($0.05 per share) for the six months ended June 30, 2018.
As a result of this error, the Company’s 2017 results were overstated by $237,000 and the Company’s March 31, 2018 quarterly and six months ended June 30, 2018 results were understated by the same amount. Management of the Company concluded the effect of the error was immaterial to the Company’s 2017 and 2018 results.
In March 2019, the Company discovered an error in loan classifications within the commercial and industrial segment of the loan portfolio. The loan reclassifications were due to term loans and revolving lines of credit that were classified as commercial and industrial loans but were partially or primarily secured by commercial and residential real estate. The error resulted in loan reclassifications of $21.7 million from commercial and industrial segment to commercial real estate and residential real estate segments as of and for the year ended December 31, 2018. In addition, as a result of the loan segment reclassifications, the allocated components of the allowance for loan losses were adjusted to reflect the revised loan balances with the residual of $257,000 added to the unallocated component of the allowance for loan loss as of December 31, 2018. Management of the Company has evaluated the loan reclassification error and determined that, based on quantitative and qualitative analysis, this error was not material to the December 31, 2018 consolidated financial statements as presented.
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.
Recent Accounting Standards
In January 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-01, Leases (Topic 842), Land Easement Practical Expedient for Transition to Topic 842. ASU 2018-01 is intended to be effective with ASU 2016-02, as amended. The amendments in ASU 2018-01 are as follows: provide an optional transition practical expedient for the adoption of ASU 2016-02 that, if elected, would not require an organization to reconsider their accounting for existing land easements that are not currently accounted for under the old lease standards; and clarify that new or modified land easements should be evaluated under ASU 2016-02, once an entity has adopted the new standard. ASU 2016-02 will require lessees to recognize a right-of-use (ROU) asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation for leases with terms of more than twelve months. Both the ROU asset and lease liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. Accounting by lessors will remain largely unchanged from current U.S. GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted, and is to be applied as of the beginning of the earliest period presented using a modified retrospective approach. The Company adopted the provisions of ASU 2016-02 effective January 1, 2019, which increased assets and liabilities approximately $1.9 million at the time of adoption, as a result of reporting additional leases on the Company's consolidated statement of financial condition.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 amendments simplify the accounting for certain financial instruments with down round features. The amendments require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered and will also recognize the effect of the trigger within equity. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. The Company adopted the provisions of ASU 2017-11 effective January 1, 2019 and the adoption did not have a material impact on the Company's consolidated financial condition or results of operations.
6 |
In March 2017, the FASB issued ASU 2017-08, Receivables- Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchases of Callable Debt Securities. ASU 2017-08 amends guidance on the amortization period of premiums on certain purchases of callable debt securities. The amendments shorten the amortization period of premiums on certain purchases of callable debt securities to the earliest call date. ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. The Company adopted the provisions of ASU 2017-08 effective January 1, 2019 and the adoption 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 will apply a one-step quantitative test and record 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 that are SEC filers 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 is currently evaluating the provisions of ASU 2017-04, but does not believe that its adoption will have a material impact on the Company's consolidated financial condition or results of operations.
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 will require 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 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the provisions of ASU 2016-13, but does not believe that its adoption will have a material impact on the Company's consolidated financial condition or results of operations. In July 2019, the FASB tentatively decided to delay the required implementation date of ASU 2016-13 for smaller reporting companies. If the decision to delay the required implementation is finalized, the Company would be required to implement the ASU on January 1, 2023.
Note 2. Merger
Effective April 30, 2018, the Company merged with First West Virginia Bancorp, Inc. (“FWVB”), the holding company for Progressive Bank, N.A. (“PB”), a national association. In addition, effective April 30, 2018, PB merged into the Bank. The FWVB merger enhanced the Bank’s exposure into the core of the PA-WV-OH Tri-State region. Through the FWVB merger, the Company anticipates future revenue and earnings growth from an expanded menu of financial services expanding the Company’s business footprint into the Ohio Valley. The FWVB merger resulted in the addition of eight branches and expanded the Company’s reach into West Virginia with seven branches and one branch in Eastern Ohio. The FWVB merger value was approximately $51.3 million. In connection with the FWVB merger, the Company issued 1,317,647 shares of common stock based on the Company’s closing stock price on April 30, 2018, of $31.9068, and paid cash consideration of $9.8 million in exchange for all the outstanding shares of FWVB common stock.
Merger-related expenses are recorded in the Consolidated Statement of Income and include costs relating to the Company’s acquisition of FWVB, as described above. These charges represent one-time costs associated with acquisition activities and do not represent ongoing costs of the fully integrated combined organization. Accounting guidance requires that acquisition-related transactional and restructuring costs incurred by the Company be charged to expense as incurred. There were approximately $1.2 million of cumulative merger-related expenses, of which $769,000 and $793,000, were recorded in the Consolidated Statement of Income for the three and six months ended June 30, 2018, respectively.
As of the date of merger, FWVB had approximately $334.0 million of assets, $96.8 million of loans, and $282.9 million of deposits held across a network of 8 branches located in West Virginia and eastern Ohio. The Company stockholders and FWVB stockholders now own approximately 76% and 24% of the combined company, respectively.
The FWVB merger was accounted for as an acquisition in accordance with the acquisition method of accounting as detailed in Accounting Standards Codification ("ASC") 805, Business Combinations. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed based on their fair values as of the date of acquisition. This process is heavily reliant on measuring and estimating the fair values of all the assets and liabilities of the acquired entity. To the extent we did not have the requisite expertise to determine the fair values of the assets acquired and liabilities assumed, we engaged third-party valuation specialists to assist us in determining such values. The preliminary results of the fair value evaluation generated goodwill and intangible assets. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual obligations or other legal rights.
7 |
The assets acquired and liabilities assumed in the FWVB merger were recorded on the Company’s Consolidated Statement of Financial Condition at their estimated fair values as of April 30, 2018. Based on a purchase price allocation, the Company recorded $23.5 million in goodwill and $9.1 million in core deposit intangibles related to FWVB merger.
None of the goodwill is deductible for income tax purposes, as the merger is accounted for as a tax-free exchange for tax purposes.
The fair value of the assets acquired, and liabilities assumed in the FWVB merger were as follows (dollars in thousands):
Measurement | ||||||||||||
Consideration Paid: | June 30, 2018 | Period Adjustments | December 31, 2018 | |||||||||
Cash Paid for Redemption of FWVB Common Stock | $ | 9,801 | $ | 9,801 | ||||||||
CB Financial Common Stock Issued in | ||||||||||||
Exchange for FWVB Common Stock | 41,527 | 41,527 | ||||||||||
Total Consideration Paid | 51,328 | - | 51,328 | |||||||||
Assets Acquired: | ||||||||||||
Cash and Cash Equivalents | 30,433 | 30,433 | ||||||||||
Net Loans | 95,456 | 95,456 | ||||||||||
Investment Securities | 187,628 | 187,628 | ||||||||||
Premises and Equipment | 13,047 | (9,335 | ) | 3,712 | ||||||||
Bank Owned Life Insurance | 4,212 | 4,212 | ||||||||||
Core Deposit Intangible | 12,789 | (3,662 | ) | 9,127 | ||||||||
Deferred Tax Assets | (87 | ) | 1,411 | 1,324 | ||||||||
Other Assets | 3,030 | 3,030 | ||||||||||
Total Assets Acquired | 346,508 | (11,586 | ) | 334,922 | ||||||||
Liabilities Assumed: | ||||||||||||
Deposits | 281,620 | 281,620 | ||||||||||
Borrowings | 22,329 | 22,329 | ||||||||||
Other Liabilities | 3,117 | 3,117 | ||||||||||
Total Liabilities Assumed | 307,066 | - | 307,066 | |||||||||
Total Identifiable Net Assets | 39,442 | (11,586 | ) | 27,856 | ||||||||
Goodwill Recognized | $ | 11,886 | 11,586 | $ | 23,472 |
As part of the FWVB merger, the Company identified employees from FWVB who would be retained and estimated a severance cost of $100,000 if those employees were terminated without cause within the first year of the merger. For the six months ended June 30, 2019, the Company paid out $52,000 in severance cost according to the FWVB merger agreement. In accordance with the merger agreement and GAAP, the severance accrual that was remaining as of the one-year anniversary of the April 30, 2018 merger, would be reversed, and recorded as an offset to current period compensation expense. As of the three months ended June 30, 2019, $48,000 was offset against compensation expense.
8 |
Note 3. 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 | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Weighted-Average Common Shares Outstanding | 5,680,993 | 5,266,714 | 5,680,993 | 4,817,525 | ||||||||||||
Average Treasury Stock Shares | (247,456 | ) | (266,505 | ) | (247,795 | ) | (266,945 | ) | ||||||||
Weighted-Average Common Shares and Common Stock Equivalents Used to Calculate Basic Earnings Per Share | 5,433,537 | 5,000,209 | 5,433,198 | 4,550,580 | ||||||||||||
Additional Common Stock Equivalents (Stock Options and Restricted Stock) Used to Calculate Diluted Earnings Per Share | 11,287 | 61,579 | 14,842 | 50,554 | ||||||||||||
Weighted-Average Common Shares and Common Stock Equivalents Used to Calculate Diluted Earnings Per Share | 5,444,824 | 5,061,788 | 5,448,040 | 4,601,134 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.55 | $ | 0.19 | $ | 1.09 | $ | 0.51 | ||||||||
Diluted | 0.55 | 0.19 | 1.08 | 0.51 |
Note 4. Revenue Recognition from Contracts with Customers
The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying ASC 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
All the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized as Non-Interest Income except for Other Real Estate Owned (Income), which is accounted for in Non-Interest Expense. The following table presents the Company’s sources of Non-Interest Income and Expense as of the periods indicated:
(Dollars in thousands) | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
NONINTEREST INCOME | ||||||||||||||||
Service Fees on Deposit Accounts (a) | $ | 798 | $ | 719 | $ | 1,551 | $ | 1,310 | ||||||||
Insurance Commissions | 1,083 | 880 | 2,234 | 1,811 | ||||||||||||
Other Commissions (c) | 131 | 263 | 289 | 696 | ||||||||||||
Net Gains on Sales of Loans (b) | 50 | 46 | 142 | 54 | ||||||||||||
Net Gain (Loss) on Sales of Investments (b) | 7 | - | (53 | ) | - | |||||||||||
Fair Value of Equity Securities (b) | 109 | 44 | 129 | 19 | ||||||||||||
Net Gains on Purchased Tax Credits (b) | 9 | 11 | 18 | 22 | ||||||||||||
Net Gain on Disposal of Fixed Assets (b) | 8 | - | 2 | - | ||||||||||||
Income from Bank-Owned Life Insurance (b) | 134 | 127 | 266 | 235 | ||||||||||||
Other (b) | 70 | 35 | 136 | 64 | ||||||||||||
Total non-interest income | 2,399 | 2,125 | 4,714 | 4,211 | ||||||||||||
NONINTEREST EXPENSE | ||||||||||||||||
Other Real Estate Owned (Income) | (31 | ) | (19 | ) | (94 | ) | (12 | ) | ||||||||
Total non-interest expense | (31 | ) | (19 | ) | (94 | ) | (12 | ) | ||||||||
Net non-interest income | $ | 2,430 | $ | 2,144 | $ | 4,808 | $ | 4,223 |
(a) | Interchange fees and ATM fees are included within this line item. |
(b) | Not within the scope of ASC 606. |
(c) | The Other Commissions category includes wealth management referral fees, merchant service fees, check sales and safe deposit box rentals totaling $124,000 and $110,000 for the three months ended June 30, 2019 and 2018, and $254,000 and $209,000 for the six months ended June 30, 2019 and 2018, respectively, which are in the scope of ASC 606. The remaining balances of $7,000 and $36,000 for the three and six months ended June 30, 2019, respectively, represent income from other various commissions. The remaining balances of $152,000 and $487,000 for the three and six months ended June 30, 2018, respectively, mainly represents income derived from an assumable rate conversion (“ARC”) loan referral fee for the three and six months ended June 30, 2018, and a bank-owned life insurance policy claim for the six months ended June 30, 2018, which are all outside the scope of ASC 606. The following narrative describes the Company’s revenue streams accounted for under the guidance of ASC 606 as follows: |
9 |
Service Fees on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees include services fees for ATM uses, stop payment charges, statement production, ACH and wire fees, which are recognized into income at the occurrence of an executed transaction and the point in time the Company fulfills the customer’s request. Account maintenance fees, which are primarily based on monthly maintenance activities, are earned over the course of the month, and satisfy the Company’s performance obligation. Overdraft fees are recognized as the overdrafts on customer’s accounts are incurred. The services fees on deposit accounts are automatically withdrawn from the customer’s accounts balance per their account agreement with the Company.
Interchange Fees: The Company earns interchange fees from debit/credit cardholder transactions conducted through the MasterCard network for our debit cards and through the Visa network for our credit cards. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The Company currently does not offer a cardholder rewards program.
Insurance Commissions: The Company’s insurance subsidiary, Exchange Underwriters, derives commission and fee income from direct and agency bill insurance policies. Direct bill policies are invoiced directly from the insurance company provider to the customer, once the customer remits payment for the policy, the insurance company provider then remits the commission or fee income to EU on a monthly basis. Agency bill policies are invoiced from EU, the insurance underwriting agency, to the customer. EU records the insurance company policy payable and the commission or fee income earned on the policy. As all insurance policies are contracts with customers, each policy has different terms and conditions.
EU utilizes a report from their core insurance data processing program, The Agency Manager, otherwise known as “TAM”. The report from TAM captures all in force policies that are active in the system and annualizes the commission over the life of each individual contract. The report then provides an overall commission and fee income total for the monthly reporting financial statement period. This income is then compared to the amount of direct and agency bill income recorded in TAM for the reporting month and an adjustment to income is made according to the report and this is the income recognized for the portion of the insurance contract that has been earned by EU.
Other Commissions: The Company earns other commissions; such as, wealth management referral fees, merchant service fees, check sales and safe deposit box rentals to customers. The wealth management referral fees are earned as a referral of a bank customer initiates a customer relationship with an associated wealth management firm. These fees fulfill the contract/agreement between the Company and the wealth management firm. Merchant service fees are earned on customers who contract with the Company by utilizing credit card terminals issued and serviced by the Company. These fees are based on the volume and processing of card transactions accepted by customer businesses. Check sales are recognized as customers contact the Company for check supplies or the customer initiates the check order through the Company website to our third-party check company. These commissions are recognized as the third-party check company satisfies the contract of providing check stock to our customers. Safe deposit box rental income is recognized on a monthly basis, per each contract agreement with our customers. The safe deposit box income is automatically withdrawn from the customer’s deposit account on a monthly basis as this revenue is earned by the contract.
Gains/Losses on Sales of Other Real Estate Owned (“OREO”): The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. It is not common policy that the Company will finance an OREO property with the buyer. It is the Company’s belief that once loan collateral has been recognized as an OREO property, it needs to be sold to free the Company of any additional possible loss exposure. In addition, the Company occasionally will receive ownership in mineral rights with an OREO property. It has been the Company’s practice to retain ownership in the mineral rights and proceed to recognize the value of these rights to offset any potential loss exposure.
10 |
Note 5. Investment Securities
The following table presents the amortized cost and fair value of investment securities available-for-sale at the dates indicated:
(Dollars in thousands) | ||||||||||||||||
June 30, 2019 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Government Agencies | $ | 83,545 | $ | 587 | $ | (162 | ) | $ | 83,970 | |||||||
Obligations of States and Political Subdivisions | 28,775 | 760 | (6 | ) | 29,529 | |||||||||||
Mortgage-Backed Securities - Government-Sponsored Enterprises | 117,309 | 2,611 | (34 | ) | 119,886 | |||||||||||
Equity Securities - Mutual Funds | 1,000 | 5 | (10 | ) | 995 | |||||||||||
Equity Securities - Other | 1,534 | 129 | (39 | ) | 1,624 | |||||||||||
Total | $ | 232,163 | $ | 4,092 | $ | (251 | ) | $ | 236,004 |
December 31, 2018 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Government Agencies | $ | 82,506 | $ | 160 | $ | (2,087 | ) | $ | 80,579 | |||||||
Obligations of States and Political Subdivisions | 44,737 | 230 | (366 | ) | 44,601 | |||||||||||
Mortgage-Backed Securities - Government-Sponsored Enterprises | 97,535 | 582 | (346 | ) | 97,771 | |||||||||||
Equity Securities - Mutual Funds | 1,000 | - | (32 | ) | 968 | |||||||||||
Equity Securities - Other | 1,502 | 92 | (104 | ) | 1,490 | |||||||||||
Total | $ | 227,280 | $ | 1,064 | $ | (2,935 | ) | $ | 225,409 |
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:
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
June 30, 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 | ||||||||||||||||||||||||||||
U.S. Government Agencies | 2 | $ | 5,965 | $ | (35 | ) | 14 | $ | 38,372 | $ | (127 | ) | 16 | $ | 44,337 | $ | (162 | ) | ||||||||||||||||||
Obligations of States and Political Subdivisions | - | - | - | 3 | 1,861 | (6 | ) | 3 | 1,861 | (6 | ) | |||||||||||||||||||||||||
Mortgage-Backed Securities - Government Sponsored Enterprises | - | - | - | 6 | 11,131 | (34 | ) | 6 | 11,131 | (34 | ) | |||||||||||||||||||||||||
Equity Securities - Mutual Fund | - | - | - | 1 | 489 | (10 | ) | 1 | 489 | (10 | ) | |||||||||||||||||||||||||
Equity Securities - Other | 7 | 590 | (34 | ) | 1 | 56 | (5 | ) | 8 | 646 | (39 | ) | ||||||||||||||||||||||||
Total | 9 | $ | 6,555 | $ | (69 | ) | 25 | $ | 51,909 | $ | (182 | ) | 34 | $ | 58,464 | $ | (251 | ) |
11 |
December 31, 2018 | ||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||
U.S. Government Agencies | - | $ | - | $ | - | 23 | $ | 65,450 | $ | (2,087 | ) | 23 | $ | 65,450 | $ | (2,087 | ) | |||||||||||||||||||
Obligations of States and Political Subdivisions | 24 | 13,212 | (133 | ) | 25 | 11,918 | (233 | ) | 49 | 25,130 | (366 | ) | ||||||||||||||||||||||||
Mortgage-Backed Securities - Government Sponsored Enterprises | - | - | - | 9 | 13,874 | (346 | ) | 9 | 13,874 | (346 | ) | |||||||||||||||||||||||||
Equity Securities - Mutual Fund | 2 | 968 | (32 | ) | - | - | - | 2 | 968 | (32 | ) | |||||||||||||||||||||||||
Equity Securities - Other | 7 | 592 | (68 | ) | 3 | 225 | (36 | ) | 10 | 817 | (104 | ) | ||||||||||||||||||||||||
Total | 33 | $ | 14,772 | $ | (233 | ) | 60 | $ | 91,467 | $ | (2,702 | ) | 93 | $ | 106,239 | $ | (2,935 | ) |
For debt securities, the Company does not believe that any individual unrealized loss as of June 30, 2019 or December 31, 2018, 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 June 30, 2019 and December 31, 2018 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.
The following table presents the scheduled maturities of investment securities as of the date indicated:
(Dollars in thousands) | ||||||||
June 30, 2019 | ||||||||
Available-for-Sale | ||||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
Due in One Year or Less | $ | 7,205 | $ | 7,217 | ||||
Due after One Year through Five Years | 67,921 | 68,038 | ||||||
Due after Five Years through Ten Years | 40,535 | 41,481 | ||||||
Due after Ten Years | 116,502 | 119,268 | ||||||
Total | $ | 232,163 | $ | 236,004 |
Equity Securities – Mutual Funds and Equity Securities – Other do not have a scheduled maturity date but have been included in the Due After Ten Years category.
12 |
Note 6. Loans and Related Allowance for Loan Loss
The Company’s loan portfolio is made up of four classifications: real estate loans, commercial and industrial loans, consumer loans and other loans. These segments are further segregated between loans accounted for under the amortized cost method (“Originated Loans”) and acquired loans that were originally recorded at fair value with no carryover of the related pre-merger allowance for loan losses (“Loans Acquired at Fair Value”). The following table presents the classifications of loans as of the dates indicated.
(Dollars in thousands) | ||||||||||||||||
June 30, 2019 | December 31, 2018 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Originated Loans | ||||||||||||||||
Real Estate: | ||||||||||||||||
Residential | $ | 246,963 | 32.7 | % | $ | 235,492 | 32.6 | % | ||||||||
Commercial | 247,671 | 32.7 | 229,455 | 31.8 | ||||||||||||
Construction | 56,054 | 7.4 | 46,824 | 6.5 | ||||||||||||
Commercial and Industrial | 79,040 | 10.4 | 78,466 | 10.9 | ||||||||||||
Consumer | 114,897 | 15.2 | 119,731 | 16.6 | ||||||||||||
Other | 12,242 | 1.6 | 11,623 | 1.6 | ||||||||||||
Total Originated Loans | 756,867 | 100.0 | % | 721,591 | 100.0 | % | ||||||||||
Allowance for Loan Losses | (9,091 | ) | (8,942 | ) | ||||||||||||
Loans, Net | $ | 747,776 | $ | 712,649 | ||||||||||||
Loans Acquired at Fair Value | ||||||||||||||||
Real Estate: | ||||||||||||||||
Residential | $ | 83,902 | 46.9 | % | $ | 91,277 | 47.8 | % | ||||||||
Commercial | 69,511 | 38.8 | 77,609 | 40.5 | ||||||||||||
Construction | 4,361 | 2.4 | 2,000 | 1.0 | ||||||||||||
Commercial and Industrial | 14,810 | 8.3 | 12,997 | 6.8 | ||||||||||||
Consumer | 1,830 | 1.0 | 2,510 | 1.3 | ||||||||||||
Other | 4,607 | 2.6 | 4,888 | 2.6 | ||||||||||||
Total Loans Acquired at Fair Value | 179,021 | 100.0 | % | 191,281 | 100.0 | % | ||||||||||
Allowance for Loan Losses | (600 | ) | (616 | ) | ||||||||||||
Loans, Net | $ | 178,421 | $ | 190,665 | ||||||||||||
Total Loans | ||||||||||||||||
Real Estate: | ||||||||||||||||
Residential | $ | 330,865 | 35.3 | % | $ | 326,769 | 35.9 | % | ||||||||
Commercial | 317,182 | 33.9 | 307,064 | 33.6 | ||||||||||||
Construction | 60,415 | 6.5 | 48,824 | 5.3 | ||||||||||||
Commercial and Industrial | 93,850 | 10 | 91,463 | 10.0 | ||||||||||||
Consumer | 116,727 | 12.5 | 122,241 | 13.4 | ||||||||||||
Other | 16,849 | 1.8 | 16,511 | 1.8 | ||||||||||||
Total Loans | 935,888 | 100.0 | % | 912,872 | 100.0 | % | ||||||||||
Allowance for Loan Losses | (9,691 | ) | (9,558 | ) | ||||||||||||
Loans, Net | $ | 926,197 | $ | 903,314 |
Total unamortized net deferred loan fees were $766,000 and $926,000 at June 30, 2019 and December 31, 2018, respectively.
Real estate loans serviced for others, which are not included in the Consolidated Statement of Financial Condition, totaled $101.4 million and $99.0 million at June 30, 2019 and December 31, 2018, respectively.
13 |
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 June 30, 2019 and December 31, 2018, there were no loans in the criticized category of Loss within the internal risk rating system.
(Dollars in thousands) | ||||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||
Special | ||||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||
Originated Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 245,071 | $ | 1,026 | $ | 866 | $ | - | $ | 246,963 | ||||||||||
Commercial | 231,612 | 11,161 | 3,803 | 1,095 | 247,671 | |||||||||||||||
Construction | 55,759 | - | 295 | - | 56,054 | |||||||||||||||
Commercial and Industrial | 69,880 | 8,126 | 39 | 995 | 79,040 | |||||||||||||||
Consumer | 114,792 | - | 105 | - | 114,897 | |||||||||||||||
Other | 12,242 | - | - | - | 12,242 | |||||||||||||||
Total Originated Loans | $ | 729,356 | $ | 20,313 | $ | 5,108 | $ | 2,090 | $ | 756,867 | ||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 83,116 | $ | - | $ | 786 | $ | - | $ | 83,902 | ||||||||||
Commercial | 60,354 | 7,004 | 2,153 | - | 69,511 | |||||||||||||||
Construction | 4,361 | - | - | - | 4,361 | |||||||||||||||
Commercial and Industrial | 14,794 | - | 16 | - | 14,810 | |||||||||||||||
Consumer | 1,830 | - | - | - | 1,830 | |||||||||||||||
Other | 4,509 | 98 | - | - | 4,607 | |||||||||||||||
Total Loans Acquired at Fair Value | $ | 168,964 | $ | 7,102 | $ | 2,955 | $ | - | $ | 179,021 | ||||||||||
Total Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 328,187 | $ | 1,026 | $ | 1,652 | $ | - | $ | 330,865 | ||||||||||
Commercial | 291,966 | 18,165 | 5,956 | 1,095 | 317,182 | |||||||||||||||
Construction | 60,120 | - | 295 | - | 60,415 | |||||||||||||||
Commercial and Industrial | 84,674 | 8,126 | 55 | 995 | 93,850 | |||||||||||||||
Consumer | 116,622 | - | 105 | - | 116,727 | |||||||||||||||
Other | 16,751 | 98 | - | - | 16,849 | |||||||||||||||
Total Loans | $ | 898,320 | $ | 27,415 | $ | 8,063 | $ | 2,090 | $ | 935,888 |
The increase of $4.7 million in the substandard loan category as of June 30, 2019 was mainly due to two commercial real estate relationships for $2.9 million and $1.7 million that were evaluated for impairment and were identified as having additional credit risk. The $2.9 million relationship has been assigned to a receiver to manage the property. The $1.7 million relationship paid current after quarter-end. Additionally, the loan is expected to be paid off without anticipated loss in the third quarter of 2019.
14 |
December 31, 2018 | ||||||||||||||||||||
Special | ||||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||
Originated Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 233,872 | $ | 1,071 | $ | 549 | $ | - | $ | 235,492 | ||||||||||
Commercial | 222,279 | 5,301 | 704 | 1,171 | 229,455 | |||||||||||||||
Construction | 43,522 | 2,902 | 400 | - | 46,824 | |||||||||||||||
Commercial and Industrial | 68,553 | 8,618 | 228 | 1,067 | 78,466 | |||||||||||||||
Consumer | 119,648 | - | 83 | - | 119,731 | |||||||||||||||
Other | 11,623 | - | - | - | 11,623 | |||||||||||||||
Total Originated Loans | $ | 699,497 | $ | 17,892 | $ | 1,964 | $ | 2,238 | $ | 721,591 | ||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 89,490 | $ | 851 | $ | 936 | $ | - | $ | 91,277 | ||||||||||
Commercial | 69,954 | 7,175 | 480 | - | 77,609 | |||||||||||||||
Construction | 2,000 | - | - | - | 2,000 | |||||||||||||||
Commercial and Industrial | 12,981 | - | 16 | - | 12,997 | |||||||||||||||
Consumer | 2,510 | - | - | - | 2,510 | |||||||||||||||
Other | 4,785 | 103 | - | - | 4,888 | |||||||||||||||
Total Loans Acquired at Fair Value | $ | 181,720 | $ | 8,129 | $ | 1,432 | $ | - | $ | 191,281 | ||||||||||
Total Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 323,362 | $ | 1,922 | $ | 1,485 | $ | - | $ | 326,769 | ||||||||||
Commercial | 292,233 | 12,476 | 1,184 | 1,171 | 307,064 | |||||||||||||||
Construction | 45,522 | 2,902 | 400 | - | 48,824 | |||||||||||||||
Commercial and Industrial | 81,534 | 8,618 | 244 | 1,067 | 91,463 | |||||||||||||||
Consumer | 122,158 | - | 83 | - | 122,241 | |||||||||||||||
Other | 16,408 | 103 | - | - | 16,511 | |||||||||||||||
Total Loans | $ | 881,217 | $ | 26,021 | $ | 3,396 | $ | 2,238 | $ | 912,872 |
15 |
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.
(Dollars in thousands) | ||||||||||||||||||||||||||||
June 30, 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 | ||||||||||||||||||||||
Originated Loans | ||||||||||||||||||||||||||||
Real Estate: | ||||||||||||||||||||||||||||
Residential | $ | 245,623 | $ | 229 | $ | 30 | $ | 20 | $ | 279 | $ | 1,061 | $ | 246,963 | ||||||||||||||
Commercial | 244,490 | 32 | - | - | 32 | 3,149 | 247,671 | |||||||||||||||||||||
Construction | 56,054 | - | - | - | - | - | 56,054 | |||||||||||||||||||||
Commercial and Industrial | 78,247 | - | - | - | - | 793 | 79,040 | |||||||||||||||||||||
Consumer | 114,044 | 611 | 120 | 17 | 748 | 105 | 114,897 | |||||||||||||||||||||
Other | 12,242 | - | - | - | - | - | 12,242 | |||||||||||||||||||||
Total Originated Loans | $ | 750,700 | $ | 872 | $ | 150 | $ | 37 | $ | 1,059 | $ | 5,108 | $ | 756,867 | ||||||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||||||||||
Real Estate: | ||||||||||||||||||||||||||||
Residential | $ | 82,696 | $ | 43 | $ | - | $ | - | $ | 43 | $ | 1,163 | $ | 83,902 | ||||||||||||||
Commercial | 67,867 | - | - | 1,644 | 1,644 | - | 69,511 | |||||||||||||||||||||
Construction | 4,361 | - | - | - | - | - | 4,361 | |||||||||||||||||||||
Commercial and Industrial | 14,725 | 69 | - | - | 69 | 16 | 14,810 | |||||||||||||||||||||
Consumer | 1,830 | - | - | - | - | - | 1,830 | |||||||||||||||||||||
Other | 4,607 | - | - | - | - | - | 4,607 | |||||||||||||||||||||
Total Loans Acquired at Fair Value | $ | 176,086 | $ | 112 | $ | - | $ | 1,644 | $ | 1,756 | $ | 1,179 | $ | 179,021 | ||||||||||||||
Total Loans | ||||||||||||||||||||||||||||
Real Estate: | ||||||||||||||||||||||||||||
Residential | $ | 328,319 | $ | 272 | $ | 30 | $ | 20 | $ | 322 | $ | 2,224 | $ | 330,865 | ||||||||||||||
Commercial | 312,357 | 32 | - | 1,644 | 1,676 | 3,149 | 317,182 | |||||||||||||||||||||
Construction | 60,415 | - | - | - | - | - | 60,415 | |||||||||||||||||||||
Commercial and Industrial | 92,972 | 69 | - | - | 69 | 809 | 93,850 | |||||||||||||||||||||
Consumer | 115,874 | 611 | 120 | 17 | 748 | 105 | 116,727 | |||||||||||||||||||||
Other | 16,849 | - | - | - | - | - | 16,849 | |||||||||||||||||||||
Total Loans | $ | 926,786 | $ | 984 | $ | 150 | $ | 1,681 | $ | 2,815 | $ | 6,287 | $ | 935,888 |
16 |
December 31, 2018 | ||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||
Originated Loans | ||||||||||||||||||||||||||||
Real Estate: | ||||||||||||||||||||||||||||
Residential | $ | 232,967 | $ | 1,374 | $ | 72 | $ | 324 | $ | 1,770 | $ | 755 | $ | 235,492 | ||||||||||||||
Commercial | 229,189 | 84 | 182 | - | 266 | - | 229,455 | |||||||||||||||||||||
Construction | 46,824 | - | - | - | - | - | 46,824 | |||||||||||||||||||||
Commercial and Industrial | 77,222 | 216 | - | - | 216 | 1,028 | 78,466 | |||||||||||||||||||||
Consumer | 118,256 | 1,319 | 70 | 3 | 1,392 | 83 | 119,731 | |||||||||||||||||||||
Other | 11,623 | - | - | - | - | - | 11,623 | |||||||||||||||||||||
Total Originated Loans | $ | 716,081 | $ | 2,993 | $ | 324 | $ | 327 | $ | 3,644 | $ | 1,866 | $ | 721,591 | ||||||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||||||||||
Real Estate: | ||||||||||||||||||||||||||||
Residential | $ | 89,405 | $ | 408 | $ | 65 | $ | - | $ | 473 | $ | 1,399 | $ | 91,277 | ||||||||||||||
Commercial | 77,532 | 77 | - | - | 77 | - | 77,609 | |||||||||||||||||||||
Construction | 2,000 | - | - | - | - | - | 2,000 | |||||||||||||||||||||
Commercial and Industrial | 12,929 | 52 | - | - | 52 | 16 | 12,997 | |||||||||||||||||||||
Consumer | 2,491 | 18 | 1 | - | 19 | - | 2,510 | |||||||||||||||||||||
Other | 4,888 | - | - | - | - | - | 4,888 | |||||||||||||||||||||
Total Loans Acquired at Fair Value | $ | 189,245 | $ | 555 | $ | 66 | $ | - | $ | 621 | $ | 1,415 | $ | 191,281 | ||||||||||||||
Total Loans | ||||||||||||||||||||||||||||
Real Estate: | ||||||||||||||||||||||||||||
Residential | $ | 322,372 | $ | 1,782 | $ | 137 | $ | 324 | $ | 2,243 | $ | 2,154 | $ | 326,769 | ||||||||||||||
Commercial | 306,721 | 161 | 182 | - | 343 | - | 307,064 | |||||||||||||||||||||
Construction | 48,824 | - | - | - | - | - | 48,824 | |||||||||||||||||||||
Commercial and Industrial | 90,151 | 268 | - | - | 268 | 1,044 | 91,463 | |||||||||||||||||||||
Consumer | 120,747 | 1,337 | 71 | 3 | 1,411 | 83 | 122,241 | |||||||||||||||||||||
Other | 16,511 | - | - | - | - | - | 16,511 | |||||||||||||||||||||
Total Loans | $ | 905,326 | $ | 3,548 | $ | 390 | $ | 327 | $ | 4,265 | $ | 3,281 | $ | 912,872 |
17 |
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.
(Dollars in Thousands) | ||||||||
June 30, | December 31, | |||||||
2019 | 2018 | |||||||
Nonaccrual Loans: | ||||||||
Originated Loans: | ||||||||
Real Estate: | ||||||||
Residential | $ | 1,061 | $ | 755 | ||||
Commercial | 3,149 | - | ||||||
Commercial and Industrial | 793 | 1,028 | ||||||
Consumer | 105 | 83 | ||||||
Total Originated Nonaccrual Loans | 5,108 | 1,866 | ||||||
Loans Acquired at Fair Value: | ||||||||
Real Estate: | ||||||||
Residential | 1,163 | 1,399 | ||||||
Commercial and Industrial | 16 | 16 | ||||||
Total Loans Acquired at Fair Value Nonaccrual Loans | 1,179 | 1,415 | ||||||
Total Nonaccrual Loans | 6,287 | 3,281 | ||||||
Accruing Loans Past Due 90 Days or More: | ||||||||
Originated Loans: | ||||||||
Real Estate: | ||||||||
Residential | 20 | 324 | ||||||
Consumer | 17 | 3 | ||||||
Total Originated Accruing Loans 90 Days or More Past Due | 37 | 327 | ||||||
Loans Acquired at Fair Value: | ||||||||
Real Estate: | ||||||||
Commercial | 1,644 | - | ||||||
Total Loans Acquired at Fair Value Accruing Loans 90 Days or More Past Due | 1,644 | - | ||||||
Total Accruing Loans 90 Days or More Past Due | 1,681 | 327 | ||||||
Total Nonaccrual Loans and Accruing Loans 90 Days or More Past Due | 7,968 | 3,608 | ||||||
Troubled Debt Restructurings, Accruing: | ||||||||
Originated Loans: | ||||||||
Real Estate - Residential | 85 | 26 | ||||||
Real Estate - Commercial | 1,072 | 980 | ||||||
Commercial and Industrial | 113 | 154 | ||||||
Total Originated Loans | 1,270 | 1,160 | ||||||
Loans Acquired at Fair Value: | ||||||||
Real Estate - Residential | 351 | 1,212 | ||||||
Real Estate - Commercial | 313 | 333 | ||||||
Total Loans Acquired at Fair Value | 664 | 1,545 | ||||||
Total Troubled Debt Restructurings, Accruing | 1,934 | 2,705 | ||||||
Total Nonperforming Loans | 9,902 | 6,313 | ||||||
Real Estate Owned: | ||||||||
Residential | 158 | 46 | ||||||
Commercial | 174 | 871 | ||||||
Total Real Estate Owned | 332 | 917 | ||||||
Total Nonperforming Assets | $ | 10,234 | $ | 7,230 | ||||
Nonperforming Loans to Total Loans | 1.06 | % | 0.69 | % | ||||
Nonperforming Assets to Total Assets | 0.78 | 0.56 |
18 |
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 $962,000 and $1.4 million at June 30, 2019 and December 31, 2018, respectively.
TDRs typically are the result of our loss mitigation activities whereby concessions are granted to minimize loss and avoid foreclosure or repossession of collateral. 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 13 loans totaling $2.8 million and 12 loans totaling $3.6 million at June 30, 2019 and December 31, 2018, respectively. Originated loans classified as TDRs consisted of eight loans totaling $2.2 million and six loans totaling $2.1 million at June 30, 2019 and December 31, 2018, respectively. Loans acquired at fair value classified as TDRs consisted of five loans totaling $664,000 and six loans totaling $1.5 million at June 30, 2019 and December 31, 2018, respectively.
During the three months ended June 30, 2019, one originated commercial real estate loan modified terms in a TDR transaction.
For three months ended June 30, 2018, one originated commercial and industrial line of credit loan entered into a TDR transaction and was termed-out due to declining updated financial information and one acquired loan at fair value TDR for residential real estate was due to the FWVB merger. In addition, there was one acquired loan at fair value TDR from the FFCO merger for commercial real estate that paid off during the three months ended June 30, 2018.
During the six months ended June 30, 2019, one residential real estate loan previously identified as an acquired loan at fair value TDR paid off, and one originated residential real estate loan modified in a TDR transaction by extending the term of the loan.
For the six months ended June 30, 2018, one originated commercial and industrial TDR loan was fully charged-off due to declining updated financial information, one originated consumer loan previously identified as a TDR paid off and one commercial and industrial loan previously identified as an acquired loan at fair value paid off.
No TDRs subsequently defaulted during the three and six months ended June 30, 2019 and 2018, respectively.
19 |
The following table presents information at the time of modification related to loans modified in a TDR during the three months ended June 30, 2019 and 2018, and the six months ended June 30, 2019. There were no loans modified into a TDR transaction during the quarter-ended March 31, 2018.
(Dollars in thousands) | ||||||||||||||||
Three Months Ended June 30, 2019 | ||||||||||||||||
Pre- | Post- | |||||||||||||||
Modification | Modification | |||||||||||||||
Number | Outstanding | Outstanding | ||||||||||||||
of | Recorded | Recorded | Related | |||||||||||||
Contracts | Investment | Investment | Allowance | |||||||||||||
Originated Loans | ||||||||||||||||
Real Estate | ||||||||||||||||
Commercial | 1 | $ | 114 | $ | 114 | $ | - | |||||||||
Total | 1 | $ | 114 | $ | 114 | $ | - |
Three Months Ended June 30, 2018 | ||||||||||||||||
Pre- | Post- | |||||||||||||||
Modification | Modification | |||||||||||||||
Number | Outstanding | Outstanding | ||||||||||||||
of | Recorded | Recorded | Related | |||||||||||||
Contracts | Investment | Investment | Allowance | |||||||||||||
Originated Loans | ||||||||||||||||
Real Estate | ||||||||||||||||
Commercial and Industrial | 1 | $ | 161 | $ | 161 | $ | - | |||||||||
Total | 1 | $ | 161 | $ | 161 | $ | - | |||||||||
Loans Acquired at Fair Value | ||||||||||||||||
Real Estate | ||||||||||||||||
Residential | 1 | $ | 7 | $ | 7 | $ | - | |||||||||
Total | 1 | $ | 7 | $ | 7 | $ | - |
Six Months Ended June 30, 2019 | ||||||||||||||||
Pre- | Post- | |||||||||||||||
Modification | Modification | |||||||||||||||
Number | Outstanding | Outstanding | ||||||||||||||
of | Recorded | Recorded | Related | |||||||||||||
Contracts | Investment | Investment | Allowance | |||||||||||||
Originated Loans | ||||||||||||||||
Real Estate | ||||||||||||||||
Residential | 1 | $ | 61 | $ | 61 | $ | - | |||||||||
Commercial | 1 | 114 | 114 | - | ||||||||||||
Total | 2 | $ | 175 | $ | 175 | $ | - |
20 |
The following table presents a summary of the loans considered to be impaired as of the dates indicated.
(Dollars in thousands) | ||||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Related | Principal | Recorded | Income | ||||||||||||||||
Investment | Allowance | Balance | Investment | Recognized | ||||||||||||||||
With No Related Allowance Recorded: | ||||||||||||||||||||
Originated Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 146 | $ | - | $ | 150 | $ | 153 | $ | 2 | ||||||||||
Commercial | 1,825 | - | 1,835 | 1,890 | 44 | |||||||||||||||
Construction | 296 | - | 296 | 362 | 11 | |||||||||||||||
Commercial and Industrial | 152 | - | 154 | 173 | 4 | |||||||||||||||
Total With No Related Allowance Recorded | $ | 2,419 | $ | - | $ | 2,435 | $ | 2,578 | $ | 61 | ||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 351 | $ | - | $ | 351 | $ | 355 | $ | 8 | ||||||||||
Commercial | 2,465 | - | 2,465 | 2,488 | 76 | |||||||||||||||
Total With No Related Allowance Recorded | $ | 2,816 | $ | - | $ | 2,816 | $ | 2,843 | $ | 84 | ||||||||||
Total Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 497 | $ | - | $ | 501 | $ | 508 | $ | 10 | ||||||||||
Commercial | 4,290 | - | 4,300 | 4,378 | 120 | |||||||||||||||
Construction | 296 | - | 296 | 362 | 11 | |||||||||||||||
Commercial and Industrial | 152 | - | 154 | 173 | 4 | |||||||||||||||
Total With No Related Allowance Recorded | $ | 5,235 | $ | - | $ | 5,251 | $ | 5,421 | $ | 145 | ||||||||||
With A Related Allowance Recorded: | ||||||||||||||||||||
Originated Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Commercial | $ | 3,523 | $ | 656 | $ | 3,523 | $ | 3,528 | $ | 92 | ||||||||||
Commercial and Industrial | 995 | 764 | 1,123 | 1,147 | 31 | |||||||||||||||
Total With A Related Allowance Recorded | $ | 4,518 | $ | 1,420 | $ | 4,646 | $ | 4,675 | $ | 123 | ||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Commercial and Industrial | $ | 16 | $ | 7 | $ | 16 | $ | 16 | $ | - | ||||||||||
Total With A Related Allowance Recorded | $ | 16 | $ | 7 | $ | 16 | $ | 16 | $ | - | ||||||||||
Total Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Commercial | $ | 3,523 | $ | 656 | $ | 3,523 | $ | 3,528 | $ | 92 | ||||||||||
Commercial and Industrial | 1,011 | 771 | 1,139 | 1,163 | 31 | |||||||||||||||
Total With A Related Allowance Recorded | $ | 4,534 | $ | 1,427 | $ | 4,662 | $ | 4,691 | $ | 123 |
21 |
June 30, 2019 (cont.) | ||||||||||||||||||||
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Related | Principal | Recorded | Income | ||||||||||||||||
Investment | Allowance | Balance | Investment | Recognized | ||||||||||||||||
Total Impaired Loans: | ||||||||||||||||||||
Originated Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 146 | $ | - | $ | 150 | $ | 153 | $ | 2 | ||||||||||
Commercial | 5,348 | 656 | 5,358 | 5,418 | 136 | |||||||||||||||
Construction | 296 | - | 296 | 362 | 11 | |||||||||||||||
Commercial and Industrial | 1,147 | 764 | 1,277 | 1,320 | 35 | |||||||||||||||
Total Impaired Loans | $ | 6,937 | $ | 1,420 | $ | 7,081 | $ | 7,253 | $ | 184 | ||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 351 | $ | - | $ | 351 | $ | 355 | $ | 8 | ||||||||||
Commercial | 2,465 | - | 2,465 | 2,488 | 76 | |||||||||||||||
Commercial and Industrial | 16 | 7 | 16 | 16 | - | |||||||||||||||
Total Impaired Loans | $ | 2,832 | $ | 7 | $ | 2,832 | $ | 2,859 | $ | 84 | ||||||||||
Total Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 497 | $ | - | $ | 501 | $ | 508 | $ | 10 | ||||||||||
Commercial | 7,813 | 656 | 7,823 | 7,906 | 212 | |||||||||||||||
Construction | 296 | - | 296 | 362 | 11 | |||||||||||||||
Commercial and Industrial | 1,163 | 771 | 1,293 | 1,336 | 35 | |||||||||||||||
Total Impaired Loans | $ | 9,769 | $ | 1,427 | $ | 9,913 | $ | 10,112 | $ | 268 |
The increase of $1.9 million in impaired loans as of June 30, 2019 was mainly due to additional credit risk assessed on a commercial real estate relationship.
22 |
December 31, 2018 | ||||||||||||||||||||
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Related | Principal | Recorded | Income | ||||||||||||||||
Investment | Allowance | Balance | Investment | Recognized | ||||||||||||||||
With No Related Allowance Recorded: | ||||||||||||||||||||
Originated Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 71 | $ | – | $ | 74 | $ | 82 | $ | 4 | ||||||||||
Commercial | 1,550 | – | 1,550 | 1,626 | 74 | |||||||||||||||
Construction | 400 | – | 400 | 466 | 25 | |||||||||||||||
Commercial and Industrial | 382 | – | 394 | 403 | 5 | |||||||||||||||
Total With No Related Allowance Recorded | $ | 2,403 | $ | – | $ | 2,418 | $ | 2,577 | $ | 108 | ||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 1,212 | $ | – | $ | 1,212 | $ | 1,234 | $ | 63 | ||||||||||
Commercial | 2,466 | – | 2,466 | 1,868 | 123 | |||||||||||||||
Total With No Related Allowance Recorded | $ | 3,678 | $ | – | $ | 3,678 | $ | 3,102 | $ | 186 | ||||||||||
Total Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 1,283 | $ | – | $ | 1,286 | $ | 1,316 | $ | 67 | ||||||||||
Commercial | 4,016 | – | 4,016 | 3,494 | 197 | |||||||||||||||
Construction | 400 | – | 400 | 466 | 25 | |||||||||||||||
Commercial and Industrial | 382 | – | 394 | 403 | 5 | |||||||||||||||
Total With No Related Allowance Recorded | $ | 6,081 | $ | – | $ | 6,096 | $ | 5,679 | $ | 294 | ||||||||||
With A Related Allowance Recorded: | ||||||||||||||||||||
Originated Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Commercial | $ | 674 | $ | 211 | $ | 674 | $ | 716 | $ | 40 | ||||||||||
Commercial and Industrial | 1,066 | 787 | 1,171 | 1,193 | 63 | |||||||||||||||
Total With A Related Allowance Recorded | $ | 1,740 | $ | 998 | $ | 1,845 | $ | 1,909 | $ | 103 | ||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Commercial | $ | 44 | $ | 8 | $ | 44 | $ | 29 | $ | 3 | ||||||||||
Commercial and Industrial | 16 | 6 | 16 | 16 | – | |||||||||||||||
Total With A Related Allowance Recorded | $ | 60 | $ | 14 | $ | 60 | $ | 45 | $ | 3 | ||||||||||
Total Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Commercial | $ | 718 | $ | 219 | $ | 718 | $ | 745 | $ | 43 | ||||||||||
Commercial and Industrial | 1,082 | 793 | 1,187 | 1,209 | 63 | |||||||||||||||
Total With A Related Allowance Recorded | $ | 1,800 | $ | 1,012 | $ | 1,905 | $ | 1,954 | $ | 106 |
23 |
December 31, 2018 (cont.) | ||||||||||||||||||||
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Related | Principal | Recorded | Income | ||||||||||||||||
Investment | Allowance | Balance | Investment | Recognized | ||||||||||||||||
Total Impaired Loans | ||||||||||||||||||||
Originated Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 71 | $ | – | $ | 74 | $ | 82 | $ | 4 | ||||||||||
Commercial | 2,224 | 211 | 2,224 | 2,342 | 114 | |||||||||||||||
Construction | 400 | – | 400 | 466 | 25 | |||||||||||||||
Commercial and Industrial | 1,448 | 787 | 1,565 | 1,596 | 68 | |||||||||||||||
Total Impaired Loans | $ | 4,143 | $ | 998 | $ | 4,263 | $ | 4,486 | $ | 211 | ||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 1,212 | $ | – | $ | 1,212 | $ | 1,234 | $ | 63 | ||||||||||
Commercial | 2,510 | 8 | 2,510 | 1,897 | 126 | |||||||||||||||
Commercial and Industrial | 16 | 6 | 16 | 16 | – | |||||||||||||||
Total Impaired Loans | $ | 3,738 | $ | 14 | $ | 3,738 | $ | 3,147 | $ | 189 | ||||||||||
Total Loans | ||||||||||||||||||||
Real Estate: | ||||||||||||||||||||
Residential | $ | 1,283 | $ | – | $ | 1,286 | $ | 1,316 | $ | 67 | ||||||||||
Commercial | 4,734 | 219 | 4,734 | 4,239 | 240 | |||||||||||||||
Construction | 400 | – | 400 | 466 | 25 | |||||||||||||||
Commercial and Industrial | 1,464 | 793 | 1,581 | 1,612 | 68 | |||||||||||||||
Total Impaired Loans | $ | 7,881 | $ | 1,012 | $ | 8,001 | $ | 7,633 | $ | 400 |
24 |
The following table presents the activity in the allowance for loan losses 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.
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||||||||||||||
Real | Real | Real | Commercial | |||||||||||||||||||||||||||||
Estate | Estate | Estate | and | |||||||||||||||||||||||||||||
Residential | Commercial | Construction | Industrial | Consumer | Other | Unallocated | Total | |||||||||||||||||||||||||
Originated Loans | ||||||||||||||||||||||||||||||||
March 31, 2019 | $ | 1,154 | $ | 2,127 | $ | 500 | $ | 2,468 | $ | 1,733 | $ | – | $ | 811 | $ | 8,793 | ||||||||||||||||
Charge-offs | (21 | ) | – | – | – | (73 | ) | – | – | (94 | ) | |||||||||||||||||||||
Recoveries | 5 | 7 | – | 1 | 29 | – | – | 42 | ||||||||||||||||||||||||
Provision | (42 | ) | 866 | (12 | ) | 136 | (189 | ) | – | (409 | ) | 350 | ||||||||||||||||||||
June 30, 2019 | $ | 1,096 | $ | 3,000 | $ | 488 | $ | 2,605 | $ | 1,500 | $ | – | $ | 402 | $ | 9,091 | ||||||||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||||||||||||||
March 31, 2019 | $ | – | $ | 423 | $ | – | $ | 85 | $ | – | $ | – | $ | 111 | $ | 619 | ||||||||||||||||
Charge-offs | (22 | ) | – | – | – | – | – | – | (22 | ) | ||||||||||||||||||||||
Recoveries | – | 1 | – | – | 2 | – | – | 3 | ||||||||||||||||||||||||
Provision | 22 | 22 | – | 28 | (2 | ) | – | (70 | ) | – | ||||||||||||||||||||||
June 30, 2019 | $ | – | $ | 446 | $ | – | $ | 113 | $ | – | $ | – | $ | 41 | $ | 600 | ||||||||||||||||
Total Allowance for Loan Losses | ||||||||||||||||||||||||||||||||
March 31, 2019 | $ | 1,154 | $ | 2,550 | $ | 500 | $ | 2,553 | $ | 1,733 | $ | – | $ | 922 | $ | 9,412 | ||||||||||||||||
Charge-offs | (43 | ) | – | – | – | (73 | ) | – | – | (116 | ) | |||||||||||||||||||||
Recoveries | 5 | 8 | – | 1 | 31 | – | – | 45 | ||||||||||||||||||||||||
Provision | (20 | ) | 888 | (12 | ) | 164 | (191 | ) | – | (479 | ) | 350 | ||||||||||||||||||||
June 30, 2019 | $ | 1,096 | $ | 3,446 | $ | 488 | $ | 2,718 | $ | 1,500 | $ | – | $ | 443 | $ | 9,691 | ||||||||||||||||
Originated Loans | ||||||||||||||||||||||||||||||||
December 31, 2018 | $ | 1,050 | $ | 2,217 | $ | 395 | $ | 2,698 | $ | 2,027 | $ | – | $ | 555 | $ | 8,942 | ||||||||||||||||
Charge-offs | (21 | ) | – | – | – | (285 | ) | – | – | (306 | ) | |||||||||||||||||||||
Recoveries | 9 | 19 | – | 2 | 50 | – | – | 80 | ||||||||||||||||||||||||
Provision | 58 | 764 | 93 | (95 | ) | (292 | ) | – | (153 | ) | 375 | |||||||||||||||||||||
June 30, 2019 | $ | 1,096 | $ | 3,000 | $ | 488 | $ | 2,605 | $ | 1,500 | $ | – | $ | 402 | $ | 9,091 | ||||||||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||||||||||||||
December 31, 2018 | $ | – | $ | 476 | $ | – | $ | 109 | $ | – | $ | – | $ | 31 | $ | 616 | ||||||||||||||||
Charge-offs | (22 | ) | – | – | – | (1 | ) | – | – | (23 | ) | |||||||||||||||||||||
Recoveries | – | 2 | – | – | 5 | – | – | 7 | ||||||||||||||||||||||||
Provision | 22 | (32 | ) | – | 4 | (4 | ) | – | 10 | – | ||||||||||||||||||||||
June 30, 2019 | $ | – | $ | 446 | $ | – | $ | 113 | $ | – | $ | – | $ | 41 | $ | 600 | ||||||||||||||||
Total Allowance for Loan Losses | ||||||||||||||||||||||||||||||||
December 31, 2018 | $ | 1,050 | $ | 2,693 | $ | 395 | $ | 2,807 | $ | 2,027 | $ | – | $ | 586 | $ | 9,558 | ||||||||||||||||
Charge-offs | (43 | ) | – | – | – | (286 | ) | – | – | (329 | ) | |||||||||||||||||||||
Recoveries | 9 | 21 | – | 2 | 55 | – | – | 87 | ||||||||||||||||||||||||
Provision | 80 | 732 | 93 | (91 | ) | (296 | ) | – | (143 | ) | 375 | |||||||||||||||||||||
June 30, 2019 | $ | 1,096 | $ | 3,446 | $ | 488 | $ | 2,718 | $ | 1,500 | $ | – | $ | 443 | $ | 9,691 |
25 |
June 30, 2019 | ||||||||||||||||||||||||||||||||
Real | Real | Real | Commercial | |||||||||||||||||||||||||||||
Estate | Estate | Estate | and | |||||||||||||||||||||||||||||
Residential | Commercial | Construction | Industrial | Consumer | Other | Unallocated | Total | |||||||||||||||||||||||||
Originated Loans | ||||||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | – | $ | 656 | $ | – | $ | 764 | $ | – | $ | – | $ | – | $ | 1,420 | ||||||||||||||||
Collectively Evaluated for Potential Impairment | $ | 1,096 | $ | 2,344 | $ | 488 | $ | 1,841 | $ | 1,500 | $ | – | $ | 402 | $ | 7,671 | ||||||||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | – | $ | – | $ | – | $ | 7 | $ | – | $ | – | $ | – | $ | 7 | ||||||||||||||||
Collectively Evaluated for Potential Impairment | $ | – | $ | 446 | $ | – | $ | 106 | $ | – | $ | – | $ | 41 | $ | 593 | ||||||||||||||||
Total Allowance for Loan Losses | ||||||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | – | $ | 656 | $ | – | $ | 771 | $ | – | $ | – | $ | – | $ | 1,427 | ||||||||||||||||
Collectively Evaluated for Potential Impairment | $ | 1,096 | $ | 2,790 | $ | 488 | $ | 1,947 | $ | 1,500 | $ | – | $ | 443 | $ | 8,264 |
December 31, 2018 | ||||||||||||||||||||||||||||||||
Real | Real | Real | Commercial | |||||||||||||||||||||||||||||
Estate | Estate | Estate | and | |||||||||||||||||||||||||||||
Residential | Commercial | Construction | Industrial | Consumer | Other | Unallocated | Total | |||||||||||||||||||||||||
Originated Loans | ||||||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | – | $ | 211 | $ | – | $ | 787 | $ | – | $ | – | $ | – | $ | 998 | ||||||||||||||||
Collectively Evaluated for Potential Impairment | $ | 1,050 | $ | 2,006 | $ | 395 | $ | 1,911 | $ | 2,027 | $ | – | $ | 555 | $ | 7,944 | ||||||||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | – | $ | 8 | $ | – | $ | 6 | $ | – | $ | – | $ | – | $ | 14 | ||||||||||||||||
Collectively Evaluated for Potential Impairment | $ | – | $ | 468 | $ | – | $ | 103 | $ | – | $ | – | $ | 31 | $ | 602 | ||||||||||||||||
Total Allowance for Loan Losses | ||||||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | – | $ | 219 | $ | – | $ | 793 | $ | – | $ | – | $ | – | $ | 1,012 | ||||||||||||||||
Collectively Evaluated for Potential Impairment | $ | 1,050 | $ | 2,474 | $ | 395 | $ | 2,014 | $ | 2,027 | $ | – | $ | 586 | $ | 8,546 |
26 |
June 30, 2018 | ||||||||||||||||||||||||||||||||
Real | Real | Real | Commercial | |||||||||||||||||||||||||||||
Estate | Estate | Estate | and | |||||||||||||||||||||||||||||
Residential | Commercial | Construction | Industrial | Consumer | Other | Unallocated | Total | |||||||||||||||||||||||||
Originated Loans | ||||||||||||||||||||||||||||||||
March 31, 2018 | $ | 875 | $ | 2,206 | $ | 156 | $ | 2,771 | $ | 2,156 | $ | – | $ | 36 | $ | 8,200 | ||||||||||||||||
Charge-offs | – | – | – | – | (157 | ) | – | – | (157 | ) | ||||||||||||||||||||||
Recoveries | 8 | 19 | – | 1 | 27 | – | – | 55 | ||||||||||||||||||||||||
Provision | (20 | ) | 86 | 103 | 27 | 104 | – | 300 | 600 | |||||||||||||||||||||||
June 30, 2018 | $ | 863 | $ | 2,311 | $ | 259 | $ | 2,799 | $ | 2,130 | $ | – | $ | 336 | $ | 8,698 | ||||||||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||||||||||||||
March 31, 2018 | $ | – | $ | 487 | $ | – | $ | 167 | $ | – | $ | – | $ | 42 | $ | 696 | ||||||||||||||||
Charge-offs | (32 | ) | – | – | – | – | – | – | (32 | ) | ||||||||||||||||||||||
Recoveries | 7 | 1 | – | – | 1 | – | – | 9 | ||||||||||||||||||||||||
Provision | 25 | 5 | – | (48 | ) | (1 | ) | – | 19 | – | ||||||||||||||||||||||
June 30, 2018 | $ | – | $ | 493 | $ | – | $ | 119 | $ | – | $ | – | $ | 61 | $ | 673 | ||||||||||||||||
Total Allowance for Loan Losses | ||||||||||||||||||||||||||||||||
March 31, 2018 | $ | 875 | $ | 2,693 | $ | 156 | $ | 2,938 | $ | 2,156 | $ | – | $ | 78 | $ | 8,896 | ||||||||||||||||
Charge-offs | (32 | ) | – | – | – | (157 | ) | – | – | (189 | ) | |||||||||||||||||||||
Recoveries | 15 | 20 | – | 1 | 28 | – | – | 64 | ||||||||||||||||||||||||
Provision | 5 | 91 | 103 | (21 | ) | 103 | – | 319 | 600 | |||||||||||||||||||||||
June 30, 2018 | $ | 863 | $ | 2,804 | $ | 259 | $ | 2,918 | $ | 2,130 | $ | – | $ | 397 | $ | 9,371 | ||||||||||||||||
Originated Loans | ||||||||||||||||||||||||||||||||
December 31, 2017 | $ | 891 | $ | 1,799 | $ | 276 | $ | 2,461 | $ | 2,358 | $ | – | $ | 430 | $ | 8,215 | ||||||||||||||||
Charge-offs | (27 | ) | – | – | (1,398 | ) | (298 | ) | – | – | (1,723 | ) | ||||||||||||||||||||
Recoveries | 12 | 19 | – | 3 | 72 | – | – | 106 | ||||||||||||||||||||||||
Provision | (13 | ) | 493 | (17 | ) | 1,733 | (2 | ) | – | (94 | ) | 2,100 | ||||||||||||||||||||
June 30, 2018 | $ | 863 | $ | 2,311 | $ | 259 | $ | 2,799 | $ | 2,130 | $ | – | $ | 336 | $ | 8,698 | ||||||||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||||||||||||||
December 31, 2017 | $ | – | $ | 490 | $ | – | $ | 83 | $ | – | $ | – | $ | 8 | $ | 581 | ||||||||||||||||
Charge-offs | (32 | ) | – | – | – | – | – | – | (32 | ) | ||||||||||||||||||||||
Recoveries | 8 | 115 | – | – | 1 | – | – | 124 | ||||||||||||||||||||||||
Provision | 24 | (112 | ) | – | 36 | (1 | ) | – | 53 | – | ||||||||||||||||||||||
June 30, 2018 | $ | – | $ | 493 | $ | – | $ | 119 | $ | – | $ | – | $ | 61 | $ | 673 | ||||||||||||||||
Total Allowance for Loan Losses | ||||||||||||||||||||||||||||||||
December 31, 2017 | $ | 891 | $ | 2,289 | $ | 276 | $ | 2,544 | $ | 2,358 | $ | – | $ | 438 | $ | 8,796 | ||||||||||||||||
Charge-offs | (59 | ) | – | – | (1,398 | ) | (298 | ) | – | – | (1,755 | ) | ||||||||||||||||||||
Recoveries | 20 | 134 | – | 3 | 73 | – | – | 230 | ||||||||||||||||||||||||
Provision | 11 | 381 | (17 | ) | 1,769 | (3 | ) | – | (41 | ) | 2,100 | |||||||||||||||||||||
June 30, 2018 | $ | 863 | $ | 2,804 | $ | 259 | $ | 2,918 | $ | 2,130 | $ | – | $ | 397 | $ | 9,371 |
June 30, 2018 | ||||||||||||||||||||||||||||||||
Real | Real | Real | Commercial | |||||||||||||||||||||||||||||
Estate | Estate | Estate | and | |||||||||||||||||||||||||||||
Residential | Commercial | Construction | Industrial | Consumer | Other | Unallocated | Total | |||||||||||||||||||||||||
Originated Loans | ||||||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | – | $ | 351 | $ | – | $ | 1,264 | $ | – | $ | – | $ | – | $ | 1,615 | ||||||||||||||||
Collectively Evaluated for Potential Impairment | $ | 863 | $ | 1,960 | $ | 259 | $ | 1,535 | $ | 2,130 | $ | – | $ | 336 | $ | 7,083 | ||||||||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | – | $ | – | $ | – | $ | 3 | $ | – | $ | – | $ | – | $ | 3 | ||||||||||||||||
Collectively Evaluated for Potential Impairment | $ | – | $ | 493 | $ | – | $ | 116 | $ | – | $ | – | $ | 61 | $ | 670 | ||||||||||||||||
Total Allowance for Loan Losses | ||||||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | – | $ | 351 | $ | – | $ | 1,267 | $ | – | $ | – | $ | – | $ | 1,618 | ||||||||||||||||
Collectively Evaluated for Potential Impairment | $ | 863 | $ | 2,453 | $ | 259 | $ | 1,651 | $ | 2,130 | $ | – | $ | 397 | $ | 7,753 |
27 |
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 | ||||
Balance at December 31, 2018 | $ | 1,912 | ||
Accretable Yield | (138 | ) | ||
Balance at June 30, 2019 | $ | 1,774 |
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.
(Dollars in thousands) | ||||||||||||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||||||||||
Real | Real | Real | Commercial | |||||||||||||||||||||||||
Estate | Estate | Estate | and | |||||||||||||||||||||||||
Residential | Commercial | Construction | Industrial | Consumer | Other | Total | ||||||||||||||||||||||
Originated Loans | ||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | 146 | $ | 5,348 | $ | 296 | $ | 1,147 | $ | – | $ | – | $ | 6,937 | ||||||||||||||
Collectively Evaluated for Potential Impairment | 246,817 | 242,323 | 55,758 | 77,893 | 114,897 | 12,242 | 749,930 | |||||||||||||||||||||
$ | 246,963 | $ | 247,671 | $ | 56,054 | $ | 79,040 | $ | 114,897 | $ | 12,242 | $ | 756,867 | |||||||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | 351 | $ | 2,465 | $ | – | $ | 16 | $ | – | $ | – | $ | 2,832 | ||||||||||||||
Collectively Evaluated for Potential Impairment | 83,551 | 67,046 | 4,361 | 14,794 | 1,830 | 4,607 | 176,189 | |||||||||||||||||||||
$ | 83,902 | $ | 69,511 | $ | 4,361 | $ | 14,810 | $ | 1,830 | $ | 4,607 | $ | 179,021 | |||||||||||||||
Total Loans | ||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | 497 | $ | 7,813 | $ | 296 | $ | 1,163 | $ | – | $ | – | $ | 9,769 | ||||||||||||||
Collectively Evaluated for Potential Impairment | 330,368 | 309,369 | 60,119 | 92,687 | 116,727 | 16,849 | 926,119 | |||||||||||||||||||||
$ | 330,865 | $ | 317,182 | $ | 60,415 | $ | 93,850 | $ | 116,727 | $ | 16,849 | $ | 935,888 |
December 31, 2018 | ||||||||||||||||||||||||||||
Real | Real | Real | Commercial | |||||||||||||||||||||||||
Estate | Estate | Estate | and | |||||||||||||||||||||||||
Residential | Commercial | Construction | Industrial | Consumer | Other | Total | ||||||||||||||||||||||
Originated Loans | ||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | 71 | $ | 2,224 | $ | 400 | $ | 1,448 | $ | – | $ | – | $ | 4,143 | ||||||||||||||
Collectively Evaluated for Potential Impairment | 235,421 | 227,231 | 46,424 | 77,018 | 119,731 | 11,623 | 717,448 | |||||||||||||||||||||
$ | 235,492 | $ | 229,455 | $ | 46,824 | $ | 78,466 | $ | 119,731 | $ | 11,623 | $ | 721,591 | |||||||||||||||
Loans Acquired at Fair Value | ||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | 1,212 | $ | 2,510 | $ | – | $ | 16 | $ | – | $ | – | $ | 3,738 | ||||||||||||||
Collectively Evaluated for Potential Impairment | 90,065 | 75,099 | 2,000 | 12,981 | 2,510 | 4,888 | 187,543 | |||||||||||||||||||||
$ | 91,277 | $ | 77,609 | $ | 2,000 | $ | 12,997 | $ | 2,510 | $ | 4,888 | $ | 191,281 | |||||||||||||||
Total Loans | ||||||||||||||||||||||||||||
Individually Evaluated for Impairment | $ | 1,283 | $ | 4,734 | $ | 400 | $ | 1,464 | $ | – | $ | – | $ | 7,881 | ||||||||||||||
Collectively Evaluated for Potential Impairment | 325,486 | 302,330 | 48,424 | 89,999 | 122,241 | 16,511 | 904,991 | |||||||||||||||||||||
$ | 326,769 | $ | 307,064 | $ | 48,824 | $ | 91,463 | $ | 122,241 | $ | 16,511 | $ | 912,872 |
28 |
Note 7. Leases
The Company evaluates all contracts at commencement to determine if a lease is present. The Company adopted ASC 842 using the prospective method approach to all identified lease contracts or agreements, which permits us not to restate comparative periods. The current period adoption also recognized the use of several practical measures that permitted the Company not to reevaluate prior assumptions regarding the identification and classification of leases. In accordance with ASC 842, leases are defined as either operating or finance leases.
The Company identified 12 lease contracts as of ASC 842 adoption date, January 1, 2019. All lease contracts were classified as operating leases and created operating right-of-use (“ROU”) assets and corresponding lease liabilities on the balance sheet. The leases are ROU assets of land and building for branch and loan production locations. These 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 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 | Six Months Ended | |||||||
(dollars in thousands, except weighted-averages) | June 30, 2019 | June 30, 2019 | ||||||
Operating Lease Expense | $ | 122 | $ | 230 | ||||
Operating Leases | ||||||||
ROU Assets | $ | 1,499 | ||||||
Operating Cash Flows | 207 | |||||||
Weighted Average Lease Term | ||||||||
Operating Leases | 6.95 | |||||||
Weighted Average Discount Rate | ||||||||
Operating Leases | 2.86 | % |
Six Months Ended | ||||
(dollars in thousands) | June 30, 2019 | |||
Maturity Analysis | ||||
2019 | $ | 456 | ||
2020 | 358 | |||
2021 | 251 | |||
2022 | 123 | |||
2023 | 57 | |||
2024 and thereafter | 431 | |||
Total | $ | 1,676 | ||
Less: Present Value Discount | 171 | |||
Lease Liabilities | $ | 1,505 |
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Note 8. Deposits
The following table shows the maturities of time deposits for the next five years and beyond at the date indicated (dollars in thousands).
June 30, | ||||
Maturity Period: | 2019 | |||
One Year or Less | $ | 89,955 | ||
Over One Through Two Years | 55,169 | |||
Over Two Through Three Years | 19,094 | |||
Over Three Through Four Years | 43,161 | |||
Over Four Through Five Years | 8,789 | |||
Over Five Years | 5,356 | |||
Total | $ | 221,524 |
The balance in time deposits that meet or exceed the FDIC insurance limit of $250,000 totaled $71.4 million and $68.0 million as of June 30, 2019 and December 31, 2018, respectively.
Note 9. Short-Term Borrowings
The following table sets forth the components of short-term borrowings as of the dates indicated.
(Dollars in thousands) | ||||||||||||||||
June 30, 2019 | December 31, 2018 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
Short-term Borrowings | ||||||||||||||||
Federal Funds Purchased: | ||||||||||||||||
Average Balance Outstanding During the Period | $ | – | – | % | $ | 37 | 2.70 | % | ||||||||
Maximum Amount Outstanding at any Month End | – | 1,500 | ||||||||||||||
FHLB Borrowings: | ||||||||||||||||
Balance at Period End | – | – | – | – | ||||||||||||
Average Balance Outstanding During the Period | – | – | 19,726 | 1.86 | ||||||||||||
Maximum Amount Outstanding at any Month End | – | 98,960 | ||||||||||||||
Securities Sold Under Agreements to Repurchase: | ||||||||||||||||
Balance at Period End | 27,730 | 0.57 | 30,979 | 0.54 | ||||||||||||
Average Balance Outstanding During the Period | 31,377 | 0.61 | 29,300 | 0.53 | ||||||||||||
Maximum Amount Outstanding at any Month End | 34,197 | 35,661 | ||||||||||||||
Securities Collaterizing the Agreements at Period-End: | ||||||||||||||||
Carrying Value | 47,158 | 48,131 | ||||||||||||||
Market Value | 47,417 | 47,083 |
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Note 10. 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.
(Dollars in thousands) | ||||||||||||||||
June 30, 2019 | December 31, 2018 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
Due in One Year | $ | 6,000 | 1.88 | % | $ | 6,000 | 1.78 | % | ||||||||
Due After One Year to Two Years | 5,000 | 2.09 | 6,000 | 1.97 | ||||||||||||
Due After Two Years to Three Years | 3,000 | 2.23 | 5,000 | 2.18 | ||||||||||||
Due After Three Years to Four Years | 3,000 | 2.41 | 3,000 | 2.41 | ||||||||||||
Total | $ | 17,000 | 2.09 | $ | 20,000 | 2.03 |
As of June 30, 2019, the Company maintained a credit arrangement with a maximum borrowing limit of approximately $358.1 million with the FHLB. 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 June 30, 2019 and December 31, 2018, respectively, of which, there was no outstanding balance as of June 30, 2019 and December 31, 2018.
The Company maintains a Borrower-In-Custody of Collateral line of credit agreement with the Federal Reserve Bank (“FRB”) for $101.6 million that requires monthly certification of collateral, is subject to annual renewal, incurs no service charge and is secured by commercial and consumer indirect auto loans. The Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $60.0 million as of June 30, 2019, and December 31, 2018, respectively. As of June 30, 2019, and December 31, 2018, no draws had been taken on these facilities.
Note 11. 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.
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.
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The following table presents the unused and available credit balances of financial instruments whose contracts represent credit risk at the dates indicated.
(Dollars in thousands) | ||||||||
June 30, | December 31, | |||||||
2019 | 2018 | |||||||
Standby Letters of Credit | $ | 35,620 | $ | 37,559 | ||||
Performance Letters of Credit | 3,213 | 3,544 | ||||||
Commitments to Extend Credit | 2,855 | 2,783 | ||||||
Construction Mortgages | 61,371 | 56,691 | ||||||
Personal Lines of Credit | 6,615 | 6,186 | ||||||
Overdraft Protection Lines | 6,316 | 6,140 | ||||||
Home Equity Lines of Credit | 21,330 | 21,520 | ||||||
Commercial Lines of Credit | 85,426 | 74,602 | ||||||
$ | 222,746 | $ | 209,025 |
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.
Note 12. 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 I – | 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. | ||
Level II – | Fair value is based on significant inputs, other than Level I inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level II 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 III – | Fair value would be based on significant unobservable inputs. Examples of valuation methodologies that would result in Level III 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.
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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 II of the fair value hierarchy. Fair values for Level II 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 from Level I to Level II and no transfers into or out of Level III during the six months ended June 30, 2019 or year ended December 31, 2018.
(Dollars in thousands) | ||||||||||
Fair Value | June 30, | December 31, | ||||||||
Hierarchy | 2019 | 2018 | ||||||||
Available for Sales Securities: | ||||||||||
U.S. Government Agencies | Level II | $ | 83,970 | $ | 80,579 | |||||
Obligations of States and Political Subdivisions | Level II | 29,529 | 44,601 | |||||||
Mortgage-Backed Securities - Government-Sponsored Enterprises | Level II | 119,886 | 97,771 | |||||||
Equity Securities - Mutual Funds | Level I | 995 | 968 | |||||||
Equity Securities - Other | Level I | 1,624 | 1,490 | |||||||
Total Available for Sale Securities | $ | 236,004 | $ | 225,409 |
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 I inputs or observable inputs, employed by certified appraisers, for similar assets classified as Level II 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 III inputs.
(Dollars in thousands) | |||||||||||||||||
Fair Value at | Significant | ||||||||||||||||
Fair Value | June 30, | December 31, | Valuation | Significant | Unobservable | ||||||||||||
Financial Asset | Hierarchy | 2019 | 2018 | Techniques | Unobservable Inputs | Input Value | |||||||||||
Impaired Loans | Level III | $ | 3,107 | $ | 788 | Market Comparable Properties | Marketability Discount | 10% to 30% | (1) | ||||||||
OREO | Level III | 158 | 46 | Market Comparable Properties | Marketability Discount | 10% to 50% | (1) |
(1) Range includes discounts taken since appraisal and estimated values.
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 III in the fair value hierarchy. At June 30, 2019 and December 31, 2018, the fair value of impaired loans consists of the loan balances of $4.5 million and $1.8 million, respectively, less their specific valuation allowances of $1.4 and $1.0 million, 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 III in the fair value hierarchy.
During the three months ended June 30, 2019, one acquired residential real estate loan from the FedFirst Financial Corporation (“FFCO”), for $117,000 moved into OREO and one acquired consumer line of credit loan secured by residential real estate from the FWVB merger for $41,000 moved into OREO. For the three months ended June 30, 2018, one acquired loan from the FFCO merger that became an OREO property sold a gain of $7,000.
During the six months ended June 30, 2019, one commercial real estate OREO property with a fair value of $697,000 and that was acquired with the FWVB merger, was sold at a $33,000 gain and one OREO property with a fair value of $46,000, and that was acquired in the merger with FFCO, was sold for a $3,000 loss. During the six months ended June 30, 2018, one originated residential real estate OREO property was sold at a gain of $12,000.
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.
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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.
(Dollars in thousands) | ||||||||||||||||||
June 30, 2019 | December 31, 2018 | |||||||||||||||||
Fair Value | Carrying | Fair | Carrying | Fair | ||||||||||||||
Hierarchy | Value | Value | Value | Value | ||||||||||||||
Financial Assets: | ||||||||||||||||||
Cash and Due From Banks: | ||||||||||||||||||
Interest Bearing | Level I | $ | 21,490 | $ | 21,490 | $ | 36,736 | $ | 36,736 | |||||||||
Non-Interest Bearing | Level I | 22,884 | 22,884 | 16,617 | 16,617 | |||||||||||||
Investment Securities: | ||||||||||||||||||
Available for Sale | See Above | 236,004 | 236,004 | 225,409 | 225,409 | |||||||||||||
Loans, Net | Level III | 926,197 | 939,083 | 903,314 | 899,673 | |||||||||||||
Restricted Stock | Level II | 3,766 | 3,766 | 3,909 | 3,909 | |||||||||||||
Bank-Owned Life Insurance | Level II | 23,188 | 23,188 | 22,922 | 22,922 | |||||||||||||
Accrued Interest Receivable | Level II | 3,779 | 3,779 | 3,436 | 3,436 | |||||||||||||
Financial Liabilities: | ||||||||||||||||||
Deposits | Level II | 1,107,103 | 1,110,223 | 1,086,658 | 1,085,708 | |||||||||||||
Short-term Borrowings | Level II | 27,730 | 27,730 | 30,979 | 30,979 | |||||||||||||
Other Borrowed Funds | Level II | 17,000 | 18,647 | 20,000 | 19,733 | |||||||||||||
Accrued Interest Payable | Level II | 887 | 887 | 594 | 594 |
Note 13. Income Taxes
Due to the FWVB merger, deferred tax assets (“DTA”) were acquired and deferred tax liabilities (“DTL”) were assumed at April 30, 2018. These DTA’s and DTL’s were evaluated by management and the deferred taxes that were deemed obsolete due to the fair value measurement of assets and liabilities at the time of merger were charged against goodwill. In addition, the fair value adjustments that were provided by third party valuation specialists, were tax effected at the federal statutory income tax rate of 21%. The West Virginia (“WV”) state tax effect of 6.5% times the appropriate WV state apportionment according to state revenue laws regarding nexus has been applied. Presented in the table below are the tax effects of deductible and taxable temporary differences that gave rise to significant portions of the net deferred tax assets and liabilities. The net change in deferred taxes is recorded in the accrued interest and other liabilities line on the balance sheet.
34 |
(Dollars in thousands) | ||||||||
June 30, 2019 | December 31, 2018 | |||||||
Deferred Tax Assets: | ||||||||
Allowance for Loan Losses | $ | 2,091 | $ | 2,063 | ||||
Amortization of Core Deposit Intangible | – | 1 | ||||||
Amortization of Intangibles | 77 | 72 | ||||||
Tax Credit Carryforwards | 1,419 | 2,010 | ||||||
Unrealized Loss of AFS - Merger Tax Adjustment | 894 | 894 | ||||||
Postretirement Benefits | 28 | 30 | ||||||
Net Unrealized Loss on Securities | – | 383 | ||||||
Passthrough Entities | 2 | 2 | ||||||
Stock-Based Compensation Expense | 44 | 28 | ||||||
Accrued Payroll | – | 44 | ||||||
OREO | 49 | 121 | ||||||
Purchase Accounting Adjustments - Acquired Loans | 382 | 413 | ||||||
Deferred Compensation | – | 55 | ||||||
Other | 76 | 67 | ||||||
Gross Deferred Tax Assets | 5,062 | 6,183 | ||||||
100% Valuation Allowance - AMT Tax Credit Carryforward | (1) | (1,311 | ) | (1,311 | ) | |||
Deferred Tax Assets net of Valuation Allowance | 3,751 | 4,872 | ||||||
Deferred Tax Liabilities: | ||||||||
Deferred Origination Fees and Costs | 300 | 292 | ||||||
Depreciation | 670 | 714 | ||||||
Net Unrealized Gain on Securities | 786 | – | ||||||
Mortgage Servicing Rights | 211 | 198 | ||||||
Purchase Accounting Adjustment - Core Deposit Intangible | 2,152 | 2,361 | ||||||
Purchase Accounting Adjustments - Fixed Assets | 305 | 321 | ||||||
Purchase Accounting Adjustments - Certificates of Deposit | 96 | 175 | ||||||
Goodwill | 415 | 412 | ||||||
Gross Deferred Tax Liabilities | 4,935 | 4,473 | ||||||
Net Deferred Tax (Liabilities) Assets | $ | (1,184 | ) | $ | 399 |
(1) | The 100% valuation allowance for AMT tax credit carry-forward acquired in the FWVB merger is due to an unaddressed tax deadline as of June 30, 2019. See below narrative for further explanation. |
While the Tax Cuts and Jobs Act (“Tax Act”) was the first major overhaul of the Internal Revenue Code in the last 30 years, it has many items that are left unaddressed once certain tax deadlines pass and no formal regulations are known as of June 30, 2019. One of these unaddressed tax deadlines is the expiration of the AMT credit carry-forward after the 2021 tax year. Pre – Tax Act regulations allowed for AMT credits to carry-forward infinitely. It has been determined that an AMT credit carry-forward of approximately $1.3 million, acquired in the FWVB merger on April 30, 2018, is in an uncertain tax position (“UTP”) and in accordance with FIN 48 – Accounting for Uncertain Tax Positions under ASC Topic 740, a valuation allowance has been established for the AMT credit completely offsetting the deferred tax asset balance of $1.3 million against goodwill. This is in accordance with ASC Topic 805 – Business Combinations, due to the AMT credit carry-forward being realized under current tax law and minimal possibility of utilization as of the 2021 tax year, deemed to have no current value and offset into goodwill as a purchase accounting adjustment.
No other valuation allowance was established against the remaining deferred tax assets in view of the Company’s cumulative history of earnings and anticipated future taxable income as evidenced by the Company’s earnings potential at June 30, 2019 and December 31, 2018.
Deferred taxes at June 30, 2019 and December 31, 2018, are included in other liabilities in the accompanying Consolidated Statement of Financial Condition.
35 |
Note 14. Other Noninterest Expense
The details of other noninterest expense for the Company’s consolidated statement of income for the three and six months ended June 30, 2019 and 2018, are as follows:
(Dollars in thousands) | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Other Noninterest Expense | ||||||||||||||||
Non-employee compensation | $ | 131 | $ | 146 | $ | 271 | $ | 268 | ||||||||
Printing and supplies | 96 | 159 | 193 | 267 | ||||||||||||
Postage | 61 | 50 | 133 | 108 | ||||||||||||
Telephone | 157 | 138 | 299 | 250 | ||||||||||||
Charitable contributions | 52 | 10 | 92 | 21 | ||||||||||||
Dues and subscriptions | 47 | 61 | 98 | 127 | ||||||||||||
Loan expenses | 128 | 113 | 210 | 206 | ||||||||||||
Meals and entertainment | 46 | 66 | 101 | 101 | ||||||||||||
Travel | 61 | 73 | 97 | 110 | ||||||||||||
Training | 13 | 24 | 22 | 37 | ||||||||||||
Miscellaneous | 315 | 198 | 598 | 408 | ||||||||||||
Total Other Noninterest Expense | $ | 1,107 | $ | 1,038 | $ | 2,114 | $ | 1,903 |
Note 15. Segment and Related Information
At June 30, 2019, 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.
36 |
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.
(Dollars in thousands) | Community Bank | Exchange Underwriters, Inc. | CB Financial Services, Inc. | Net Eliminations | Consolidated | |||||||||||||||
June 30, 2019 | ||||||||||||||||||||
Assets | $ | 1,303,476 | $ | 3,361 | $ | 145,110 | $ | (146,759 | ) | $ | 1,305,188 | |||||||||
Liabilities | 1,161,656 | 837 | (396 | ) | (2,416 | ) | 1,159,681 | |||||||||||||
Stockholders' equity | 141,820 | 2,524 | 145,506 | (144,343 | ) | 145,507 | ||||||||||||||
December 31, 2018 | ||||||||||||||||||||
Assets | $ | 1,278,513 | $ | 5,155 | $ | 137,908 | $ | (140,275 | ) | $ | 1,281,301 | |||||||||
Liabilities | 1,144,293 | 2,445 | 282 | (3,344 | ) | 1,143,676 | ||||||||||||||
Stockholders' equity | 134,220 | 2,710 | 137,626 | (136,931 | ) | 137,625 | ||||||||||||||
Three Months Ended June 30,2019 | ||||||||||||||||||||
Total interest income | $ | 12,655 | $ | – | $ | 14 | $ | 12,669 | ||||||||||||
Total interest expense | 1,964 | – | – | 1,964 | ||||||||||||||||
Net interest income | 10,691 | – | 14 | – | 10,705 | |||||||||||||||
Provision for loan losses | 350 | – | – | – | 350 | |||||||||||||||
Net interest income after provision for loan losses | 10,341 | – | 14 | – | 10,355 | |||||||||||||||
Noninterest income | 2,303 | 1,080 | 96 | (1,080 | ) | 2,399 | ||||||||||||||
Noninterest expense | 9,028 | 909 | 3 | (909 | ) | 9,031 | ||||||||||||||
Income before income tax expense (benefit) | 3,616 | 171 | 107 | (171 | ) | 3,723 | ||||||||||||||
Income tax expense (benefit) | 726 | 39 | 18 | (39 | ) | 744 | ||||||||||||||
Net income of CB Financial Services Inc. | $ | 2,890 | $ | 132 | $ | 89 | $ | (132 | ) | $ | 2,979 | |||||||||
Six Months Ended June 30, 2019 | ||||||||||||||||||||
Total interest income | $ | 24,937 | $ | – | $ | 28 | $ | 24,965 | ||||||||||||
Total interest expense | 3,826 | – | – | 3,826 | ||||||||||||||||
Net interest income | 21,111 | – | 28 | – | 21,139 | |||||||||||||||
Provision for loan losses | 375 | – | – | – | 375 | |||||||||||||||
Net interest income after provision for loan losses | 20,736 | – | 28 | – | 20,764 | |||||||||||||||
Noninterest income | 4,610 | 2,229 | 104 | (2,229 | ) | 4,714 | ||||||||||||||
Noninterest expense | 18,106 | 1,905 | 6 | (1,905 | ) | 18,112 | ||||||||||||||
Income before income tax expense (benefit) | 7,240 | 324 | 126 | (324 | ) | 7,366 | ||||||||||||||
Income tax expense (benefit) | 1,442 | 74 | 20 | (74 | ) | 1,462 | ||||||||||||||
Net income of CB Financial Services Inc. | $ | 5,798 | $ | 250 | $ | 106 | $ | (250 | ) | $ | 5,904 |
(Dollars in thousands) | Community Bank | Exchange Underwriters, Inc. | CB Financial Services, Inc. | Net Eliminations | Consolidated | |||||||||||||||
Three Months Ended June 30,2018 | ||||||||||||||||||||
Total interest income | $ | 10,677 | $ | 13 | $ | 10,690 | ||||||||||||||
Total interest expense | 1,517 | 1,517 | ||||||||||||||||||
Net interest income | 9,160 | – | 13 | – | 9,173 | |||||||||||||||
Provision for loan losses | 600 | 600 | ||||||||||||||||||
Net interest income after provision for loan losses | 8,560 | – | 13 | – | 8,573 | |||||||||||||||
Noninterest income | 2,074 | 878 | 51 | (878 | ) | 2,125 | ||||||||||||||
Noninterest expense | 8,710 | 722 | 784 | (722 | ) | 9,494 | ||||||||||||||
Income before income tax expense (benefit) | 1,924 | 156 | (720 | ) | (156 | ) | 1,204 | |||||||||||||
Income tax expense (benefit) | 363 | 36 | (129 | ) | (36 | ) | 234 | |||||||||||||
Net income of CB Financial Services Inc. | $ | 1,561 | $ | 120 | $ | (591 | ) | $ | (120 | ) | $ | 970 | ||||||||
Six Months Ended June 30, 2018 | ||||||||||||||||||||
Total interest income | $ | 19,373 | $ | – | $ | 24 | $ | – | $ | 19,397 | ||||||||||
Total interest expense | 2,616 | – | – | – | 2,616 | |||||||||||||||
Net interest income | 16,757 | – | 24 | – | 16,781 | |||||||||||||||
Provision for loan losses | 2,100 | – | – | 2,100 | ||||||||||||||||
Net interest income after provision for loan losses | 14,657 | – | 24 | – | 14,681 | |||||||||||||||
Noninterest income | 4,177 | 1,806 | 34 | (1,806 | ) | 4,211 | ||||||||||||||
Noninterest expense | 15,351 | 1,404 | 810 | (1,404 | ) | 16,161 | ||||||||||||||
Income before income tax expense (benefit) | 3,483 | 402 | (752 | ) | (402 | ) | 2,731 | |||||||||||||
Income tax expense (benefit) | 537 | 90 | (136 | ) | (90 | ) | 401 | |||||||||||||
Net income of CB Financial Services Inc. | $ | 2,946 | $ | 312 | $ | (616 | ) | $ | (312 | ) | $ | 2,330 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with the unaudited consolidated financial statements, notes and tables included in this report. For further information, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
37 |
Forward-Looking Statements
This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the Company’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions. Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include, but are not limited to, the following:
· | General and local economic conditions; |
· | Changes in interest rates, deposit flows, demand for loans, real estate values and competition; |
· | Competitive products and pricing; |
· | The ability of our customers to make scheduled loan payments; |
· | Loan delinquency rates; |
· | Our ability to manage the risks involved in our business; |
· | Our ability to integrate the operations of businesses we acquire; |
· | Inflation, market and monetary fluctuations; |
· | Our ability to control costs and expenses; |
· | Changes in federal and state legislation and regulation applicable to our business; and |
· | Other factors disclosed in the Company’s periodic filings with the Securities and Exchange Commission. |
The Company uses the current statutory federal income tax rate of 21.0% to value its deferred tax assets and liabilities. In addition, all deferred tax assets and liabilities including deferred tax assets and liabilities that were retained from the FWVB merger have been tax effected at the WV state income tax rate of 6.5% times the appropriate WV state apportionment according to state revenue laws regarding nexus.
The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation.
General
CB Financial Services, Inc. is a bank holding company established in 2006 and headquartered in Carmichaels, Pennsylvania. CB Financial’s business activity is conducted primarily through its wholly owned banking subsidiary Community Bank.
The Bank is 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, Inc., the Bank’s wholly owned subsidiary that is a full-service, independent insurance agency.
On April 30, 2018, the Company completed its merger with FWVB. For additional information regarding the merger, refer to Note 2 in the Notes to Consolidated Financial Statements.
On August 1, 2018, the Bank’s insurance subsidiary, Exchange Underwriters, completed its acquisition of the Beynon Insurance customer list.
Overview
The following discussion and analysis is presented to assist in the understanding and evaluation of our consolidated financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The detailed discussion focuses on our consolidated financial condition as of June 30, 2019, compared to the financial condition as of December 31, 2018 and the consolidated results of operations for the three and six months ended June 30, 2019 and 2018.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of fees and service charges on deposit accounts, fees and charges on loans, insurance commissions, income from bank-owned life insurance and other income. Noninterest expense consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, contracted services, legal fees, OREO, advertising and promotion, stationery and supplies, deposit and general insurance and other expenses.
38 |
Financial institutions like us, in general, are significantly affected by economic conditions, competition, and the monetary and fiscal policies of the federal government. Lending activities are influenced by the demand for and supply of housing, competition among lenders, interest rate conditions, and funds availability. Our operations and lending are principally concentrated in southwestern Pennsylvania and Ohio Valley market areas.
Statement of Financial Condition Analysis
Total assets increased $23.9 million, or 1.9%, to over $1.3 billion at June 30, 2019, from just under $1.3 billion at December 31, 2018.
Cash and due from banks decreased $9.0 million, or 16.8%, to $44.4 million at June 30, 2019, compared to $53.4 million at December 31, 2018. This is primarily the result of funding loan growth and security purchases.
Investment securities classified as available-for-sale increased $10.6 million, or 4.7%, to $236.0 million at June 30, 2019, compared to $225.4 million at December 31, 2018. This increase was primarily the result of security purchases and current securities portfolio market value.
Loans, net, increased $22.9 million, or 2.5%, to $926.2 million at June 30, 2019, compared to $903.3 million at December 31, 2018. This was primarily due to net loan originations of $11.6 million in construction loans, $10.1 million in commercial real estate loans, $4.1 million in residential mortgage loans, $2.4 million in commercial and industrial loans, partially offset by a decrease of $5.5 million in consumer loans. There was an increase of $1.9 million in impaired loans due to increased credit risk on a commercial real estate relationship contributing to an increase in nonperforming loans to total loans. This ratio increased 37 basis points, or 53.6%, to 1.06% at June 30, 2019, compared to 0.69% at December 31, 2018.
Premises and equipment, net, decreased $590,000, or 2.5%, to $22.9 million at June 30, 2019 compared to $23.4 million at December 31, 2018. This is due to current period depreciation on capitalized assets.
Liabilities. Total liabilities increased $16.0 million, or 1.4%, to $1.2 billion at June 30, 2019 compared to $1.1 billion at December 31, 2018.
Total deposits increased $20.4 million, or 1.9%, to over $1.1 billion at June 30, 2019, from just under $1.1 billion at December 31, 2018. There were increases of $20.0 million in demand deposits, $8.4 million in savings accounts, $6.6 million in time deposits and $1.9 million in brokered deposits, partially offset by decreases of $11.9 million in money market accounts and $4.5 million in NOW accounts. This increase is largely the result of demand, savings and time deposits greater than $100,000 during the current period. The legacy Bank deposit portfolio had approximately $19.1 million increase in deposits. The FWVB acquired deposit portfolio had an increase of $1.3 million in deposits. The Bank has been selective on offering promotional interest rates and has concentrated its efforts on increasing noninterest-bearing accounts by building strong customer relationships.
Short-term borrowings decreased $3.2 million, or 10.5%, to $27.7 million at June 30, 2019, compared to $31.0 million at December 31, 2018. At June 30, 2019 and December 31, 2018, short-term borrowings were comprised entirely of securities sold under agreements to repurchase. The decrease is related to business deposit customers whose funds, above designated target balances, are transferred into an overnight interest-earning investment account by purchasing securities from the Bank’s investment portfolio under an agreement to repurchase. Other borrowed funds decreased by $3.0 million, due to a maturing FHLB long-term borrowing that was retired in the current period. As a result of the current period activity, the weighted average interest rate on long-term borrowings increased by 6 basis points to 2.09%.
Stockholders’ Equity. Stockholders’ equity increased $7.9 million, or 5.7%, to $145.5 million at June 30, 2019, compared to $137.6 million at December 31, 2018. Net income was $5.9 million for the six months ended June 30, 2019. Book value per share was $26.78, an increase of $1.45, or 5.7%, at June 30, 2019, compared to $25.33 for December 31, 2018. The Company paid $2.6 million in dividends to stockholders and the unrealized gain on investment securities increased by $4.4 million due to improved current period market interest rate conditions.
Results of Operations for the Three Months Ended June 30, 2019 and 2018
Overview. Net income increased $2.0 million, to $3.0 million for the three months ended June 30, 2019, compared to $970,000 for the three months ended June 30, 2018. The quarterly results were mainly impacted by the FWVB merger and loan growth, which produced increased net interest income, and the acquisition of the Beynon Insurance customer list on August 1, 2018, which produced additional noninterest income through increased commission and fees and contingency income. In addition, reduced provision for loan losses in the current quarter attributed to overall net income.
39 |
Net Interest Income. Net interest income increased $1.5 million, or 16.7%, to $10.7 million for the three months ended June 30, 2019, compared to $9.2 million for the three months ended June 30, 2018.
Interest and dividend income increased $2.0 million, or 18.5%, to $12.7 million for the three months ended June 30, 2019 compared to $10.7 million for the three months ended June 30, 2018. Interest income on loans increased $1.4 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018. Average net loans increased by $65.5 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018. This was primarily due to the FWVB merger and organic loan growth. The FWVB merger not only affected the average loan balance, it also contributed to an increase of 31 basis points in loan yield. The credit mark recorded for the acquired loans in the FWVB merger was approximately $1.3 million for the prior quarter-ended June 30, 2018. The impact of the accretion from both the FWVB and FedFirst Financial Corporation (“FFCO”) acquired loan portfolios for the three months ended June 30, 2019 was $78,000, or 3 basis points increase, compared to $93,000, or 4 basis points increase, for the three months ended June 30, 2018. The remaining credit mark balance for both acquired loan portfolios was $1.8 million as of June 30, 2019. Interest income on taxable securities increased $402,000, mainly due to an increase of $51.1 million in the average balance and 14 basis points in yield in the current period. Other interest and dividend income increased $121,000, as a result of increased interest earned on correspondent deposit banks in the current period. This is a result of the FWVB merger and organic deposit growth. Interest income on federal funds sold increased $111,000, mainly due to an increase of $36.2 million in the average balance of other interest-earning assets comprised mainly of an increase of $15.8 million in interest-bearing cash at the Federal Reserve Bank and the two quarterly interest rate hikes of 25 basis points each by the Federal Reserve Board (“FRB”) since the three months ended June 30, 2018. Interest income on securities exempt from federal income tax decreased $71,000 in the current period. This was due to lower yielding security calls and sales for securities exempt from federal income tax, which attributed to an average balance decrease of $15.0 million.
Interest expense increased $447,000, or 29.5%, to $2.0 million for the three months ended June 30, 2019, compared to $1.5 million for the three months ended June 30, 2018. Interest expense on deposits increased $638,000, due to an increase in average interest-bearing deposits of $122.6 million, primarily due to increases in deposits as a result of the FWVB merger. The average cost of interest-bearing deposits increased 21 basis points. This was primarily related to previously mentioned interest rate hikes by the FRB. Interest expense on short-term borrowings decreased $158,000, due to a decrease of $33.6 million in the average balance of FHLB borrowings, partially offset by an increase of $1.1 million in the average balance of securities sold under agreement to repurchase. Interest expense on other borrowed funds decreased $33,000 primarily due to FHLB long-term borrowings that had a decrease in the average balance of $4.8 million during the current quarter. This is a result of maturing FHLB long-term borrowings being retired.
40 |
Average Balances and Yields. The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% for 2019 and 2018. As such, amounts will not agree to income as reported in the consolidated financial statements. Average balances for loans are net of the allowance for loan losses, and include nonaccrual loans. Nonaccrual loans are included in average balances only. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.
(Dollars in thousands) (Unaudited) | ||||||||||||||||||||||||
Three Months Ended June 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | and | Yield/ | Average | and | Yield/ | |||||||||||||||||||
Balance | Dividends | Cost (1) | Balance | Dividends | Cost (1) | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Interest-Earning Assets: | ||||||||||||||||||||||||
Loans, Net | $ | 906,038 | $ | 10,707 | 4.74 | % | $ | 840,537 | $ | 9,288 | 4.43 | % | ||||||||||||
Investment Securities | ||||||||||||||||||||||||
Taxable | 204,010 | 1,390 | 2.73 | 152,867 | 988 | 2.59 | ||||||||||||||||||
Exempt From Federal Tax | 31,130 | 285 | 3.66 | 46,101 | 371 | 3.22 | ||||||||||||||||||
Other Interest-Earning Assets | 53,479 | 374 | 2.81 | 17,232 | 142 | 3.31 | ||||||||||||||||||
Total Interest-Earning Assets | 1,194,657 | 12,756 | 4.28 | 1,056,737 | 10,789 | 4.10 | ||||||||||||||||||
Noninterest-Earning Assets | 113,447 | 89,120 | ||||||||||||||||||||||
Total Assets | $ | 1,308,104 | $ | 1,145,857 | ||||||||||||||||||||
Liabilities and Stockholders' equity: | ||||||||||||||||||||||||
Interest-Bearing Liabilities: | ||||||||||||||||||||||||
Interest-Bearing Demand Deposits | $ | 215,139 | 295 | 0.55 | % | $ | 163,801 | 139 | 0.34 | % | ||||||||||||||
Savings | 217,426 | 149 | 0.27 | 188,628 | 124 | 0.26 | ||||||||||||||||||
Money Market | 178,561 | 263 | 0.59 | 159,898 | 201 | 0.50 | ||||||||||||||||||
Time Deposits | 221,126 | 1,117 | 2.03 | 197,281 | 722 | 1.47 | ||||||||||||||||||
Total Interest-Bearing Deposits | 832,252 | 1,824 | 0.88 | 709,608 | 1,186 | 0.67 | ||||||||||||||||||
Borrowings | 47,560 | 140 | 1.18 | 84,834 | 331 | 1.56 | ||||||||||||||||||
Total Interest-Bearing Liabilities | 879,812 | 1,964 | 0.90 | 794,442 | 1,517 | 0.77 | ||||||||||||||||||
Noninterest-Bearing Demand Deposits | 274,804 | 231,491 | ||||||||||||||||||||||
Other Liabilities | 9,872 | 5,527 | ||||||||||||||||||||||
Total Liabilities | 1,164,488 | 1,031,460 | ||||||||||||||||||||||
Stockholders' Equity | 143,616 | 114,397 | ||||||||||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 1,308,104 | $ | 1,145,857 | ||||||||||||||||||||
Net Interest Income | $ | 10,792 | $ | 9,272 | ||||||||||||||||||||
Net Interest Rate Spread (2) | 3.38 | % | 3.33 | % | ||||||||||||||||||||
Net Interest-Earning Assets (3) | $ | 314,845 | $ | 262,295 | ||||||||||||||||||||
Net Interest Margin (4) | 3.62 | 3.52 | ||||||||||||||||||||||
Return on Average Assets | 0.91 | 0.34 | ||||||||||||||||||||||
Return on Average Equity | 8.32 | 3.40 | ||||||||||||||||||||||
Average Equity to Average Assets | 10.98 | 9.98 | ||||||||||||||||||||||
Average Interest-Earning Assets to Average Interest-Bearing Liabilities | 135.79 | 133.02 |
(1) | Annualized. |
(2) | Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. |
(3) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
(4) | Net interest margin represents annualized net interest income divided by average total interest-earning assets. Interest income and yields are on a fully tax equivalent basis utilizing a marginal tax rate of 21% for the three months ended June 30, 2019, and 2018, respectively. |
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Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% for 2019 and 2018. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. The total column represents the sum of the prior columns.
(Dollars in thousands) (Unaudited) | ||||||||||||
Three Months Ended June 30, 2019 | ||||||||||||
Compared To | ||||||||||||
Three Months Ended June 30, 2018 | ||||||||||||
Increase (Decrease) Due to | ||||||||||||
Volume | Rate | Total | ||||||||||
Interest and Dividend Income: | ||||||||||||
Loans, net | $ | 745 | $ | 674 | $ | 1,419 | ||||||
Investment Securities: | ||||||||||||
Taxable | 345 | 57 | 402 | |||||||||
Exempt From Federal Tax | (132 | ) | 46 | (86 | ) | |||||||
Other Interest-Earning Assets | 256 | (24 | ) | 232 | ||||||||
Total Interest-Earning Assets | 1,214 | 753 | 1,967 | |||||||||
Interest Expense: | ||||||||||||
Deposits | 225 | 413 | 638 | |||||||||
Borrowings | (123 | ) | (68 | ) | (191 | ) | ||||||
Total Interest-Bearing Liabilities | 102 | 345 | 447 | |||||||||
Change in Net Interest Income | $ | 1,112 | $ | 408 | $ | 1,520 |
Provision for Loan Losses. The provision for loan losses was $350,000 for the three months ended June 30, 2019, compared to $600,000, for the three months ended June 30, 2018. Net charge-offs for the three months ended June 30, 2019, were $71,000, which included net-charge-offs of $47,000 on automobile loans, compared to $125,000 of net charge-offs for the three months ended June 30, 2018, which included $113,000 of net charge-offs on automobile loans. Management analyzes the loan portfolio on a quarterly basis to determine the adequacy of the allowance for loan losses and the need for additional provisions for loan losses. The decrease in the quarterly provision was primarily due to improved credit metrics for criticized loans and reduced charge-offs. In addition, overall improvements in credit matrix factors had a positive impact on the qualitative factors within the allowance calculation.
Noninterest Income. Noninterest income increased $274,000, or 12.9%, to $2.4 million for the three months ended June 30, 2019, compared to $2.1 million for the three months ended June 30, 2018. Insurance commissions from Exchange Underwriters increased $203,000 due to increased direct bill commercial lines commission and fee income as a result of the Beynon customer list acquisition and contingency fees received. Contingency fees are commissions that are contingent upon several factors including, but not limited to, eligible written premiums, earned premiums, incurred losses and stop loss charges. Service fees on deposit accounts increased $79,000 due to increased volume in ATM and Mastercard debit card fees as a result of the FWVB merger in the current quarter. The fair value of equity securities increased $65,000, due to the $109,000 gain for the three months ended June 30, 2019, as compared to the $44,000 gain for the three months ended June 30, 2018. This was a result of current market interest rate conditions. Other noninterest income increased $35,000 due to decreased amortization of mortgage servicing rights on sold mortgages and reduced student loan origination fees as a result of the student loan insurance company insolvency, and the discontinuing of student loan originations in the prior year. Other commissions decreased $132,000, due to the prior quarter recognition of a loan referral fee and liquidation of a partnership interest in the West Virginia Bankers Title Company, a legacy item from the FWVB merger.
Noninterest Expense. Noninterest expense decreased $463,000, or 4.9%, to $9.0 million for the three months ended June 30, 2019, compared to $9.5 million for the three months ended June 30, 2018. Merger-related expense decreased $769,000, due to the prior quarter FWVB merger. Salaries and employee benefits decreased $157,000, primarily related to our health care insurance benefit attaining the stop-loss policy cap as a result of isolated participant claims and the prior quarter incentive compensation accrual related to loan growth. Occupancy decreased $125,000, primarily due to decreases in acquired bank building purchase accounting adjustments from the post-prior quarter finalization of all purchase accounting adjustments. In addition, there were decreases in building repairs and maintenance and other property expense. Contracted services increased $190,000, mainly as a result of the additional branch locations acquired in the FWVB merger. Bankcard processing expenses increased $91,000, due to increased ATM transactions as a result of the FWVB merger. Amortization of Core Deposit Intangible (“CDI”) increased $85,000, due to the CDI recorded for the FWVB merger. Other noninterest expense increased $69,000, primarily due to other losses that were charged-off as a result of fraudulent phishing transactions on customer accounts, amortization of the Beynon customer list for Exchange Underwriters, telephone, insurance, loan expenses and postage. These items were partially offset by decreases in office supplies, meals and entertainment, dues and subscriptions, travel and conference expenses. PA shares tax expense increased $52,000, due to the increase in equity based on the FWVB merger. Advertising expense increased $48,000, due to the Bank’s expanded marketing initiatives in various media outlets. Equipment expense increased $33,000 primarily due to additional branch locations requiring equipment maintenance contracts and data processing related to the FWVB merger. The Federal Deposit Insurance Corporation (“FDIC”) assessment expense increased $17,000, due to average asset growth and an assessment factor increase by the FDIC in the computation of the insurance assessment related to the FWVB merger.
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Income Tax Expense. Income taxes increased $510,000 to $744,000 for the three months ended June 30, 2019, compared to $234,000, for the three months ended June 30, 2018. The effective tax rate for the three months ended June 30, 2019 was 20.0%, compared to 19.4%, for the three months ended June 30, 2018. The increase in income taxes was due to an increase of $2.5 million in pre-tax income. The increase in the effective tax rate is due to a current quarter decline in tax-exempt income from securities.
Results of Operations for the Six Months Ended June 30, 2019 and 2018
Overview. Net income increased $3.6 million, to $5.9 million as of the six months ended June 30, 2019, as compared to $2.3 million for the six months ended June 30, 2018.
Net Interest Income. Net interest income increased $4.4 million, or 26.0%, to $21.1 million for the six months ended June 30, 2019, compared to $16.8 million for the six months ended June 30, 2018.
Interest and dividend income increased $5.6 million, or 28.7%, to $25.0 million for the six months ended June 30, 2019, compared to $19.4 million for the six months ended June 30, 2018. Interest income on loans increased $3.9 million primarily due to an increase in average loans outstanding of $106.3 million and an increase of 35 basis points in loan yield for the six months ended June 30, 2019. The increase in average loans was mainly due to the FWVB merger and total loan growth of $22.9 million during the current period. This was partially offset by a decrease of $21,000 in accretion on the acquired loan portfolios credit mark for the six months ended June 30, 2019. Credit mark accretion of $138,000, or 3 basis points, was recognized for the six months ended June 30, 2019, compared to $159,000, or 4 basis points for the six months ended June 30, 2018. Interest income on taxable securities increased $1.2 million in the current period. In addition, an increase of 35 basis points in yield resulted from securities acquired in the FWVB merger. The average balance for taxable securities increased $75.0 million for the six months ended June 30, 2019. Other interest and dividend income increased $265,000 as a result of increased interest earned on correspondent deposit banks in the current period. The average balance of correspondent bank deposits increased $21.7 million in the current period. Interest income on federal funds sold increased $219,000, mainly due to an increase in the average balance of federal funds by $17.4 million for the current year and the two quarterly interest rate hikes of 25 basis points each by the FRB. Interest income on securities exempt from federal tax decreased $26,000 due to a decrease of $6.9 million in the average balance on securities exempt from federal tax. Despite the average balance decrease, there was an increase of 43 basis points in yield as a result of calls and sales of securities exempt from income tax with lower prevailing yields.
Interest expense increased $1.2 million, or 46.3%, to $3.8 million for the six months ended June 30, 2019, compared to $2.6 million for the six months ended June 30, 2018. Interest expense on deposits increased $1.6 million due to an increase in average interest-bearing deposits of $189.9 million, which is attributed primarily to the FWVB merger. The average cost of interest-bearing deposits increased 24 basis points in the current period. Interest expense on short-term borrowings decreased $309,000 in the current period primarily due to retired FHLB overnight borrowings that had an average balance of $38.0 million, partially offset by an increase of $5.1 million in the average balance of securities sold under agreements to repurchase. Interest expense on other borrowed funds decreased $49,000, primarily due to FHLB long-term borrowings that had a decrease in the average balance of $4.5 million during the current period. This is a result of maturing FHLB long-term borrowings being retired.
43 |
Average Balances and Yields. The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% for 2019 and 2018. As such, amounts will not agree to income as reported in the consolidated financial statements. Average balances for loans are net of the allowance for loan losses, and include nonaccrual loans. Nonaccrual loans are included in average balances only. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.
(Dollars in thousands) (Unaudited) | ||||||||||||||||||||||||
Six Months Ended June 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | and | Yield/ | Average | and | Yield/ | |||||||||||||||||||
Balance | Dividends | Cost (1) | Balance | Dividends | Cost (1) | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Interest-Earning Assets: | ||||||||||||||||||||||||
Loans, Net | $ | 902,183 | $ | 21,174 | 4.73 | % | $ | 795,872 | $ | 17,295 | 4.38 | % | ||||||||||||
Investment Securities | ||||||||||||||||||||||||
Taxable | 194,683 | 2,654 | 2.73 | 119,720 | 1,422 | 2.38 | ||||||||||||||||||
Exempt From Federal Tax | 35,783 | 629 | 3.52 | 42,672 | 660 | 3.09 | ||||||||||||||||||
Other Interest-Earning Assets | 49,617 | 692 | 2.81 | 12,483 | 208 | 3.36 | ||||||||||||||||||
Total Interest-Earning Assets | 1,182,266 | 25,149 | 4.29 | 970,747 | 19,585 | 4.07 | ||||||||||||||||||
Noninterest-Earning Assets | 112,727 | 73,793 | ||||||||||||||||||||||
Total Assets | $ | 1,294,993 | $ | 1,044,540 | ||||||||||||||||||||
Liabilities and Stockholders' equity: | ||||||||||||||||||||||||
Interest-Bearing Liabilities: | ||||||||||||||||||||||||
Interest-Bearing Demand Deposits | $ | 213,674 | 570 | 0.54 | % | $ | 147,790 | 241 | 0.33 | % | ||||||||||||||
Savings | 215,283 | 294 | 0.28 | 161,610 | 186 | 0.23 | ||||||||||||||||||
Money Market | 181,515 | 536 | 0.60 | 148,667 | 320 | 0.43 | ||||||||||||||||||
Time Deposits | 219,220 | 2,143 | 1.97 | 181,751 | 1,227 | 1.36 | ||||||||||||||||||
Total Interest-Bearing Deposits | 829,692 | 3,543 | 0.86 | 639,818 | 1,974 | 0.62 | ||||||||||||||||||
Borrowings | 49,322 | 283 | 1.16 | 86,782 | 642 | 1.49 | ||||||||||||||||||
Total Interest-Bearing Liabilities | 879,014 | 3,826 | 0.88 | 726,600 | 2,616 | 0.73 | ||||||||||||||||||
Noninterest-Bearing Demand Deposits | 265,194 | 209,713 | ||||||||||||||||||||||
Other Liabilities | 9,420 | 4,472 | ||||||||||||||||||||||
Total Liabilities | 1,153,628 | 940,785 | ||||||||||||||||||||||
Stockholders' Equity | 141,365 | 103,755 | ||||||||||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 1,294,993 | $ | 1,044,540 | ||||||||||||||||||||
Net interest income | $ | 21,323 | $ | 16,969 | ||||||||||||||||||||
Net Interest Rate Spread (2) | 3.41 | % | 3.34 | % | ||||||||||||||||||||
Net Interest-Earning Assets (3) | $ | 303,252 | $ | 244,147 | ||||||||||||||||||||
Net Interest Margin (4) | 3.64 | 3.53 | ||||||||||||||||||||||
Return on Average Assets | 0.92 | 0.45 | ||||||||||||||||||||||
Return on Average Equity | 8.42 | 4.53 | ||||||||||||||||||||||
Average Equity to Average Assets | 10.92 | 9.93 | ||||||||||||||||||||||
Average Interest-Earning Assets to Average Interest-Bearing Liabilities | 134.50 | 133.60 |
(1) | Annualized. |
(2) | Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. |
(3) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
(4) | Net interest margin represents annualized net interest income divided by average total interest-earning assets. Interest income and yields are on a fully tax equivalent basis utilizing a marginal tax rate of 21% for the six months ended June 30, 2019, and 2018, respectively. |
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Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% for 2019 and 2018. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. The total column represents the sum of the prior columns.
(Dollars in thousands) (Unaudited) | ||||||||||||
Six Months Ended June 30, 2019 | ||||||||||||
Compared To | ||||||||||||
Six Months Ended June 30, 2018 | ||||||||||||
Increase (Decrease) Due to | ||||||||||||
Volume | Rate | Total | ||||||||||
Interest and Dividend Income: | ||||||||||||
Loans, net | $ | 2,429 | $ | 1,450 | $ | 3,879 | ||||||
Investment Securities: | ||||||||||||
Taxable | 997 | 235 | 1,232 | |||||||||
Exempt From Federal Tax | (116 | ) | 85 | (31 | ) | |||||||
Other Interest-Earning Assets | 523 | (39 | ) | 484 | ||||||||
Total Interest-Earning Assets | 3,833 | 1,731 | 5,564 | |||||||||
Interest Expense: | ||||||||||||
Deposits | 680 | 889 | 1,569 | |||||||||
Borrowings | (238 | ) | (121 | ) | (359 | ) | ||||||
Total Interest-Bearing Liabilities | 442 | 768 | 1,210 | |||||||||
Change in Net Interest Income | $ | 3,391 | $ | 963 | $ | 4,354 |
Provision for Loan Losses. The provision for loan losses decreased $1.7 million, to $375,000, for the six months ended June 30, 2019, compared to $2.1 million of provision for loan losses for the six months ended June 30, 2018. Net charge-offs for the six months ended June 30, 2019, were $242,000, which included $180,000 of net charge-offs on automobile loans and $25,000 of net-charge-offs for student loans, compared to net charge-offs of $1.5 million for the six months ended June 30, 2018, which included $200,000 of net charge-offs on automobile loans. The decrease in net charge-offs for the current period was due to prior period charge-offs of $1.2 million for three commercial and industrial relationships in the first quarter of 2018. The provision for loan losses was impacted in the prior period by recording $2.1 million of provision for the originated loan portfolio due to the above-mentioned loan charge-offs and to appropriately reflect risk associated with the originated loan portfolio as of the six months ended June 30, 2018. Additionally, this was due to growth in the loan portfolio and average loan balances. The acquired loan portfolio from the FWVB merger included a credit mark of approximately $1.3 million in the prior period. The current period showed improved credit metrics within criticized loans, which had a positive impact on the qualitative factors within the allowance calculation. Management analyzes the loan portfolio on a quarterly basis to determine the adequacy of the allowance for loan losses and credit mark on acquired loan portfolios, with the possible need for additional provisions for loan losses.
Noninterest Income. Noninterest income increased $503,000, or 11.9%, to $4.7 million for the six months ended June 30, 2019, compared to $4.2 million for the six months ended June 30, 2018. There was a $423,000 increase in insurance commissions from Exchange Underwriters mainly due to the Beynon customer list acquisition in the prior year. Service fees on deposit accounts increased $241,000 primarily due to increased ATM fees due to an increased volume of customer transactions and check card fees related to the FWVB merger. The fair value of equity securities increased $110,000, due to the $129,000 gain for the six months ended June 30, 2019, as compared to the $19,000 gain for the six months ended June 30, 2018, which was a result of current market interest rate conditions. There was an increase in the net gains on sales of residential mortgage loans of $88,000. The increase in gains was primarily due to an increase in the number of loans originated and subsequently sold to the FHLB as part of the Mortgage Partnership Finance® (“MPF®”) program and a stabilization in mortgage rates. The MPF® program enables member financial institutions to offer competitive interest rates for fixed-rate mortgage loans without assuming any of the interest rate risk associated with a long-term asset. Other noninterest income increased $72,000 due to decreased amortization of mortgage servicing rights on sold mortgages and reduced student loan origination fees as a result of the student loan insurance company insolvency, and the discontinuing of student loan originations in the prior year. Income on bank-owned life insurance (“BOLI”) increased by $31,000 due to the BOLI policies acquired in the FWVB merger. There was a decrease of $407,000, for other commissions due to prior period items of insurance proceeds recognized by a claim on a bank-owned life insurance policy due to the death of a former officer of the Bank, recognition of an ARC loan referral fee and liquidation of a partnership interest in the West Virginia Bankers Title Company, a legacy item from the FWVB merger. Net gains on the sales of investments decreased $53,000 due to investments sold at a loss of $60,000 in the first quarter of the current period. The losses were strategically recognized and designed to mitigate deteriorating investments-credit risk and to reinvest in higher yielding, longer-term investments.
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Noninterest Expense. Noninterest expense increased $2.0 million, or 12.1%, to $18.1 million for the six months ended June 30, 2019, compared to $16.2 million for the six months ended June 30, 2018. Salaries and employee benefits increased $1.1 million, primarily due to additional employees, salary increases, and employee group health insurance as a direct result of the FWVB merger. CDI amortization increased $436,000 due to the CDI recorded for the FWVB merger. Contracted services increased $323,000, due to the additional branch locations acquired in the FWVB merger. Equipment increased $239,000, primarily due to equipment purchases and new maintenance contracts related to the FWVB merger. Other noninterest expense increased $211,000, primarily due to the recorded amortization related to the Exchange Underwriters acquisition of the Beynon customer list, well as other losses that were charged-off as a result of fraudulent phishing transactions on customer accounts, telephone, West Virginia Business Office (“B&O”) taxes for the WV branch locations, and postage; partially offset by decreases in office supplies, and dues and subscriptions. Bankcard processing expense increased $159,000, due to the increased number of ATM and debit card transactions as a result of the FWVB merger. PA shares tax expense increased $121,000 due to the increase in equity based on the FWVB merger. OREO expense decreased $82,000, primarily due to recognized income of $76,000 for the leasing of mineral rights and a $33,000 gain on the sale of the acquired OREO property from the FWVB merger. This was partially offset by expenses related to two new properties that moved into OREO in the current period. FDIC assessment fees increased $69,000 due to average asset growth and an assessment factor increase by the FDIC in the computation of the insurance assessment related to the FWVB merger. Advertising increased $65,000 related to the Bank’s expanded marketing initiatives in various media outlet and promotional items to promote the FWVB merger. Occupancy and legal and professional fees increased $64,000 and $56,000, respectively, due to increased real estate taxes, utilities, audit, consultation and legal fees in connection with post-merger Bank and Exchange Underwriters acquisition of the Beynon customer list. Merger-related expenses decreased $793,000 due to the absence of such expenses in the current period.
Income Tax Expense. Income taxes increased $1.1 million, to $1.5 million for the six months ended June 30, 2019, compared to $401,000 for the six months ended June 30, 2018. The effective tax rate for the six months ended June 30, 2019 was 19.8% compared to 14.7% for the six months ended June 30, 2018. The increase in income taxes was related to an increase of $4.6 million in pre-tax income. The increase in the current period effective tax rate was due to the prior period recognition of the one-time income on a bank-owned life insurance claim of approximately $421,000, which was a discrete tax item for the first quarter of 2018. In addition, there was a decrease in income on securities exempt from federal income tax.
Off-Balance Sheet Arrangements.
Other than loan commitments and standby and performance letters of credit, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a significant current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. Refer to Note 11 in the Notes to Consolidated Financial Statements for a summary of commitments outstanding as of June 30, 2019.
Liquidity and Capital Management
Liquidity. Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Company’s primary sources of funds consist of deposit inflows, loan repayments and maturities, calls and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
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The Company regularly adjusts its investments in liquid assets based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits with other banks and short- and intermediate-term securities. The Company believes that it had sufficient liquidity at June 30, 2019 to satisfy its short- and long-term liquidity needs.
The Company’s most liquid assets are cash and due from banks, which totaled $44.4 million at June 30, 2019. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. Unpledged securities, which provide an additional source of liquidity, totaled $82.9 million at June 30, 2019. In addition, at June 30, 2019, the Company had the ability to borrow up to $358.1 million from the FHLB of Pittsburgh, of which $35.2 million was utilized toward standby letters of credit. The Company also has the ability to borrow up to $101.6 million from the FRB through its Borrower-In-Custody line of credit agreement and the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $60.0 million as of both June 30, 2019 and December 31, 2018.
At June 30, 2019, time deposits due within one year of that date totaled $90.0 million, or 40.6% of total time deposits. If these time deposits do not remain with the Company, the Company will be required to seek other sources of funds. Depending on market conditions, the Company may be required to pay higher rates on such deposits or other borrowings than it currently pays on these certificates of deposit. The Company believes, however, based on past experience that a significant portion of its certificates of deposit will remain with it, either as certificates of deposit or as other deposit products. The Company has the ability to attract and retain deposits by adjusting the interest rates offered.
CB Financial is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to its shareholders and for other corporate purposes. Its primary source of liquidity is dividend payments it receives from the Bank. The Bank’s ability to pay dividends to CB Financial is subject to regulatory limitations. At June 30, 2019, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $3.3 million.
We are committed to maintaining a strong liquidity position; therefore, we monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. The marginal cost of new funding, however, whether from deposits or borrowings from the FHLB, will be carefully considered as we monitor our liquidity needs. Therefore, in order to minimize our cost of funds, we may consider additional borrowings from the FHLB in the future.
Capital Management. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Under the Regulatory Capital Rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier I capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The capital conservation buffer, which is composed of common equity Tier I capital, began on January 1, 2016 at the 0.625% level and was phased in over a three-year period (increasing by that amount on each January 1, until it reached 2.5% on January 1, 2019).
At June 30, 2019 and December 31, 2018, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action. The following table presents the Bank’s regulatory capital amounts and ratios, as well as the minimum amounts and ratios required to be well capitalized as of the dates indicated.
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(Dollars in thousands) | ||||||||||||||||
June 30, 2019 | December 31, 2018 | |||||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||||
Common Equity Tier 1 (to risk weighted assets) | ||||||||||||||||
Actual | $ | 100,469 | 11.47 | % | $ | 96,985 | 11.44 | % | ||||||||
For Capital Adequacy Purposes | 39,416 | 4.50 | 38,137 | 4.50 | ||||||||||||
To Be Well Capitalized | 56,934 | 6.50 | 55,086 | 6.50 | ||||||||||||
Tier 1 Capital (to risk weighted assets) | ||||||||||||||||
Actual | 100,469 | 11.47 | 96,985 | 11.44 | ||||||||||||
For Capital Adequacy Purposes | 52,554 | 6.00 | 50,849 | 6.00 | ||||||||||||
To Be Well Capitalized | 70,072 | 8.00 | 67,799 | 8.00 | ||||||||||||
Total Capital (to risk weighted assets) | ||||||||||||||||
Actual | 110,160 | 12.58 | 106,543 | 12.57 | ||||||||||||
For Capital Adequacy Purposes | 70,072 | 8.00 | 67,799 | 8.00 | ||||||||||||
To Be Well Capitalized | 87,590 | 10.00 | 84,748 | 10.00 | ||||||||||||
Tier 1 Leverage (to adjusted total assets) | ||||||||||||||||
Actual | 100,469 | 7.93 | 96,985 | 7.82 | ||||||||||||
For Capital Adequacy Purposes | 50,658 | 4.00 | 49,637 | 4.00 | ||||||||||||
To Be Well Capitalized | 63,322 | 5.00 | 62,046 | 5.00 |
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
The Company believes that as of June 30, 2019, there was no material change in the quantitative and qualitative disclosure about market risk data as of December 31, 2018, as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Item 4. Controls and Procedures.
(a) | Evaluation of Disclosure Controls and Procedures |
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.
Based on this evaluation, management concluded as of June 30, 2019, that our disclosure controls and procedures were not effective at the reasonable assurance level due to the following:
In connection with the preparation of our interim consolidated financial statements as of and for the three months ended March 31, 2019, we concluded that there was a material weakness in the design and operating effectiveness of our internal control over financial reporting as defined in SEC Regulation S-X. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in the annual or interim financial statements will not be prevented or detected on a timely basis. A description of the identified material weakness in internal control over financial reporting is as follows:
The design and operating effectiveness of internal controls related to management’s review of our consolidated financial results did not operate at a level of precision sufficient to allow for accurate reporting of our consolidated financial results. Our consolidation process is substantially a manual process and inherently subject to error. During the preparation and review of our interim and annual consolidated financial statements, management was unable to perform adequate review and detect a classification error within the loan classification segments impacting commercial and industrial, commercial real estate and residential real estate loans, which are disclosed in the Company’s notes to the consolidated financial statements at a sufficient level of precision to prevent or detect reclassification misstatement. As a result, we corrected loan classifications for related loan segments in order to prepare the consolidated financial statements included in the Form 10-Q for the period ended March 31, 2019.
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Although this control deficiency did not result in a material misstatement in our interim and annual consolidated financial statements as of and for the year ended December 31, 2018, it created a reasonable possibility that a material misstatement would not have been prevented or detected on a timely basis. Therefore, we concluded the deficiency represented a material weakness in our internal control over financial reporting.
Also, the material weakness in our internal control over financial reporting discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed on March 18, 2019 continues to exist as of June 30, 2019.
As a result of the material weakness identified as of March 31, 2019 and noted above and material weakness discussed in our Annual Report on Form 10-K, we performed additional analysis and other post-closing procedures to ensure our condensed consolidated financial statements were prepared in accordance with GAAP. Accordingly, management believes that the consolidated financial statements and related notes thereto included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
(b) | Changes to Internal Control Over Financial Reporting |
During the quarter ended March 31, 2019, the Company made the following changes to its internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act in order to remediate the above material weaknesses:
• implementation of recruitment for experienced accounting staff;
• a thorough review of the finance and loan departments to ensure that the areas of responsibilities are properly matched to the staff competencies and that the lines of communication and processes are as effective as possible;
• a thorough review of the processes and procedures used in the Company’s loan classification; and
• development of a standardized method for the review of loan disclosures.
The Company previously filed a Form 8-K on May 24, 2019 discussing the transition at the CFO role and subsequent to the quarter-ended June 30, 2019, the Company hired a Senior Vice President that has accreditation as a Certified Public Accountant (“CPA”) with extensive SEC reporting experience; The remaining changes are being evaluated in conjunction with the implementation of Section 404 of Sarbanes Oxley, assessment and documentation of internal controls. The Company believes it has strengthened the controls and procedures with respect to these items. The Company’s independent auditors will test the internal controls and procedures in place by year-end and the Company’s independent public accounting firm will provide an attestation report on the Company’s internal control over financial reporting for the year ending December 31, 2019.
Management believes the measures described above will remediate the control deficiencies the Company has identified and strengthen its internal control over financial reporting. Management is committed to continuous improvement of the Company’s internal control processes and will continue to diligently review the Company’s financial reporting controls and procedures. As management continues to evaluate and work to improve internal control over financial reporting, the Company may determine to take additional measures to address control deficiencies or determine to modify certain of the remediation measures described above. The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Although this control deficiency did not result in a material misstatement in our interim and annual consolidated financial statements, it created a reasonable possibility that a material misstatement would not have been prevented or detected on a timely basis. Therefore, we concluded the deficiency represented a material weakness in our internal control over financial reporting.
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Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, claims seeking damages for improper collection procedures or misrepresentations, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any other pending legal proceedings that we believe would have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
None.
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Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CB FINANCIAL SERVICES, INC. | |||
(Registrant) | |||
Date: | August 8, 2019 | /s/ Patrick G. O’Brien | |
Patrick G. O’Brien | |||
President and Chief Executive Officer | |||
Date: | August 8, 2019 | /s/ Jamie L. Prah | |
Jamie L. Prah | |||
Executive Vice President and Chief Financial Officer | |||
(Principal Financial Officer and Chief Accounting Officer) |
51