Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Consolidated Financial Statements include the accounts of The Community Financial Corporation and its wholly-owned subsidiary Community Bank of the Chesapeake (the “Bank”), and the Bank’s wholly-owned subsidiary Community Mortgage Corporation of Tri-County (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America and to general practices within the banking industry.
Accounting Changes and Reclassifications
Certain items in prior financial statements have been reclassified to conform to the current presentation.
Nature of Operations
The Company provides a variety of financial services to individuals and businesses through its offices in Southern Maryland and Fredericksburg, Virginia. Its primary deposit products are demand, savings and time deposits, and its primary lending products are commercial and residential mortgage loans, commercial loans, construction and land development loans, home equity and second mortgages and commercial equipment loans.
The Bank is headquartered in Southern Maryland with 12 branches located in Maryland and Virginia. The Bank is a wholly-owned subsidiary of The Community Financial Corporation (the “Company”). The Bank’s branches are located in Waldorf (two branches), Bryans Road, Dunkirk, Leonardtown, La Plata (two branches), Charlotte Hall, Prince Frederick, Lusby, California, Maryland; and Fredericksburg, Virginia. The Bank has two operation centers located at the main office in Waldorf, Maryland and in Fredericksburg, Virginia. The Company maintains four loan production offices (“LPOs”) in La Plata, Prince Frederick and Leonardtown, Maryland; and Fredericksburg, Virginia. The Leonardtown LPO is co-located with the branch and the Fredericksburg LPO is co-located with the operation center.
Use of Estimates
In preparing Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of OREO, the valuation of goodwill and deferred tax assets.
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus ("COVID-19") as a global pandemic. The COVID-19 pandemic has adversely impacted many of the Company's customers and impaired their abilities to fulfill their financial obligations to the Company. In response to the likely effects on the economy from the pandemic, the Federal Open Market Committee reduced the federal funds rate from a target range of 1.50% to 1.75% to a target range of 0% to 0.25%. These reductions in interest rates along with other effects of the COVID-19 outbreak may adversely affect the Company's financial condition and results of operations.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located in the Fredericksburg area of Virginia and the Southern Maryland counties of Calvert, Charles and St. Mary’s. Notes 2 and 3 discuss the types of securities and loans held by the Company. The Company does not have significant concentration in any one customer or industry.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly-liquid debt instruments with original maturities of three months or less when purchased to be cash equivalents.
Securities
Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity (“HTM”) and recorded at amortized cost. At December 31, 2020 the Company had no HTM securities. See Note 2 Securities for additional information. Securities purchased and held principally for trading in the near term are classified as “trading securities” and are reported at fair value, with unrealized gains and losses included in earnings. The Company held no trading securities for the years ended December 31, 2020 and 2019. Securities not classified as HTM or trading securities are classified as available for sale (“AFS”) and recorded at estimated fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Equity securities with readily-determinable fair values are recorded at fair value with unrealized gains and losses included in noninterest income in the consolidated statements of income.
Debt securities are evaluated quarterly to determine whether a decline in their value is other-than-temporary impairment (“OTTI”). The term other-than-temporary is not necessarily intended to indicate a permanent decline in value. It means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Under accounting guidance, for recognition and presentation of other-than-temporary impairments the amount of other-than-temporary impairment that is recognized through earnings for debt securities is determined by comparing the present value of the expected cash flows to the amortized cost of the security. The discount rate used to determine the credit loss is the expected book yield on the security. The Company does not evaluate declines in the value of securities of Government Sponsored Enterprises (“GSEs”) or investments backed by the full faith and credit of the United States government (e.g. US Treasury Bills), for other-than-temporary impairment.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the estimated fair value of HTM and AFS securities below their cost that are deemed to be OTTI are reflected in earnings as realized losses. In estimating OTTI losses, management considers: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. Investments in Federal Reserve Bank and Federal Home Loan Bank of Atlanta stocks are recorded at cost and are considered restricted as to marketability. The Bank is required to maintain investments in the Federal Home Loan Bank based upon levels of borrowings.
Loans Held for Sale
The Company exited the residential mortgage origination line of business in April 2015 for individual owner-occupied residential first mortgages and established third-party sources to supply its residential whole loan portfolio. The Company continues to underwrite loans for non-owner-occupied residential rental properties. The Company may sell certain loans forward into the secondary market at a specified price with a specified date on a best efforts basis. These forward sales are derivative financial instruments. The Company does not recognize gains or losses due to interest rate changes for loans sold forward on a best efforts basis. The Bank had no loans held for sale at December 31, 2020 and 2019, respectively, and sold no 1-4 family residential mortgage loans for the year ended December 31, 2020 and 2019.
Loans Receivable
The Company originates real estate mortgages, construction and land development loans, commercial loans and consumer loans. The Company purchases residential owner-occupied first mortgages from established third parties. A substantial portion of the loan portfolio comprises loans throughout Southern Maryland and the Fredericksburg area of Virginia. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.
Loans that the Company has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances, adjusted for the allowance for loan losses and any deferred fees or premiums. Interest income is accrued on the unpaid principal balance. Loan origination fees and premiums, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered credit impaired. Evidence of credit quality deterioration as of the purchase date may include statistics such as internal risk grade, past due and nonaccrual status, recent borrower credit scores and recent loan-to-value (“LTV”) percentages. Purchased credit-impaired (“PCI”) loans are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Management estimates the cash flows expected to be collected at acquisition using specific credit review of certain loans, quantitative credit risk, interest rate risk and prepayment risk models, and qualitative economic and environmental assessments, each of which incorporates our best estimates of current key relevant factors, such as property values, default rates, loss severity and prepayment speeds.
Under the accounting guidance for PCI loans, the excess of the total cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan, or pool of loans, in situations where there is a reasonable expectation about the timing and amount of cash flows to be collected. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference and is available to absorb future charge-offs.
In addition, subsequent to acquisition, management periodically evaluates estimated cash flows expected to be collected. These evaluations require the continued usage of key assumptions and estimates, similar to the initial estimate of fair value. Estimates of cash flows for PCI loans require significant judgment given the impact of property value changes, changing loss severities, prepayment speeds and other relevant factors. Decreases in the expected cash flows will generally result in a charge to the provision for loan losses resulting in an increase to the allowance for loan losses. Significant increases in the expected cash flows will generally result in an increase in interest income over the remaining life of the loan, or pool of loans. Disposals of loans, which may include sales of loans to third parties, receipt of payments in full or part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount.
Loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collection of additional interest is doubtful. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Non-accrual loans include certain loans that are current with all loan payments and are placed on non-accrual status due to customer operating results and cash flows. Non-accrual loans are evaluated for impairment on a loan-by-loan basis in accordance with the Company’s impairment methodology.
Consumer loans are typically charged-off no later than 90 days past due. Mortgage and commercial loans are fully or partially charged-off when in management’s judgment all reasonable efforts to return a loan to performing status have occurred. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected from loans that are placed on non-accrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.
In 2019 the Bank entered into a Servicing and Intercreditor Agreement ("SIA") with a correspondent bank which allows us to offer interest rate protection to our customers. In most cases, the Bank is paid a referral fee for these transactions.
COVID-19 Deferrals
On March 22, 2020, federal banking regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation ("the agencies") issued an interagency statement on loan modifications and reporting for financial institutions working with customer affected by the Coronavirus. The interagency statement impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, "Receivables - Troubled Debt Restructurings by Creditors." ("ASC 310-40"), a restructuring of debt constitutes a trouble debt restructure ("TDR") if the creditor, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers, who were current prior to any relief, are not to be considered TDRs. This includes modification such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Under the March 22, 2020 interagency statement loan modifications were required to be executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. The loan modification date was later extended to the earlier of (A) January 1, 2022 or (B) 60 after the date on which the national COVID-19 emergency terminates by the Consolidated Appropriations Act, 2021 that was signed into law by President Trump on December 27, 2020.
Under the Coronavirus Aid, Relief and Economic Security ("CARES") Act, borrowers who were making payments as required and were not considered past due prior to becoming affected by COVID-19 and then receive payment accommodations as a result of the effects of COVID-19 generally would not be reported as past due or nonaccrual for regulatory and financial reporting during the accommodation period. Consistent with regulatory guidance, if new information during the deferral period indicates that there is evidence of default, the Bank may change the classification rating (e.g., change from passing credit to substandard) and accrual status (e.g., change from accrual to non-accrual status) as deemed appropriate.
In keeping with regulatory guidance to work with borrowers as outlined in the CARES Act, the Company offered payment deferral programs for customers who were adversely affected by the pandemic. Generally, depending on the demonstrated need of the client, the Company deferred either the full loan payment or the principal component of the loan payment between 90 and 180 days. While interest and fees continue to accrue to income, should credit losses on these deferred payments emerge or if a loan is placed on nonaccrual status, accrued interest income and fees would be reversed. Given the ongoing uncertainty, regarding the length and economic impact of the COVID-19 crisis and the effects of various government stimulus programs, the estimated number and dollar impact of loan deferrals the Company could execute in the future is subject to change. As of December 31, 2020, the Company had $32.0 million loan deferrals on outstanding loan balances of $35.4 million, which represented 2.35% of gross portfolio loans.
Allowance for Loan Losses and Impaired Loans
The allowance for loan losses is established as probable losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the loan is uncollectible. Subsequent recoveries, if any, are credited to the allowance. Management believes it has established its existing allowance for loan losses in accordance with U.S. GAAP and is in compliance with appropriate regulatory guidelines.
Management regularly evaluates the allowance for loan losses considering historical collection experience, the composition and size of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance for loan losses consists of a general and a specific component. The general component is based upon historical loss experience and a review of qualitative risk factors by portfolio segment (See Note 3 for a description of portfolio segments). The historical loss experience factor is tracked over various time horizons for each portfolio segment. Qualitative risk factors include trends by portfolio segment in charge-offs, delinquencies, classified loans, loan concentrations and the rate of portfolio segment growth as well as an assessment of the current regulatory environment, the quality of credit administration and loan portfolio management, and national and local economic trends.
The specific component of the allowance for loan losses relates to individual impaired loans with an identified impairment loss. The Company evaluates substandard and doubtful classified loans, loans delinquent 90 days or greater, non-accrual loans and troubled debt restructured loans (“TDRs”) to determine whether a loan is impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. In determining impairment, management considers payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and shortfalls on a case-by-case basis, considering the length of the delay, the reasons for the delay, the borrower’s payment record and the amount of the shortfall in relation to the principal and interest owed. Loans not impaired are included in the pool of loans evaluated in the general component of the allowance.
If a specific loan is deemed to be impaired, it is evaluated for impairment. Impairment is measured on a loan-by-loan basis using one of three acceptable methods: the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral, if the loan is collateral dependent. For loans that have an impairment, a specific allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than carrying value of that loan. The Company will use the fair value of collateral if repayment is expected solely from the collateral.
TDRs are loans that have been modified to provide for a reduction or a delay in the payment of either interest or principal because of deterioration in the financial condition of the borrower. A loan extended or renewed at a stated interest rate equal to the current interest rate for new debt with similar risk is not considered a TDR. Once an obligation has been classified as a TDR it continues to be considered a TDR until paid in full or until the debt is refinanced and considered unimpaired. All TDRs are considered impaired and are evaluated for impairment on a loan-by-loan basis. The Company does not participate in any specific government or Company-sponsored loan modification programs. All restructured loan agreements are individual contracts negotiated with a borrower.
Servicing
Servicing assets are recognized as separate assets when rights are acquired or retained through the purchase or sale of financial assets and are evaluated for impairment based upon the estimated fair value of the rights as compared to amortized cost. Servicing fee income is recorded over the servicing period. Servicing assets are not a significant asset of the Bank's operations.
Premises and Equipment
Land is carried at cost. Premises, improvements and equipment are carried at cost, less accumulated depreciation and amortization, computed by the straight-line method over the estimated useful lives of the assets, which are as follows:
Buildings and Improvements: 10 to 50 years
Furniture and Equipment: three to 15 years
Automobiles: four to five years
Maintenance and repairs are charged to expense as incurred, while improvements that extend the useful life of premises and equipment are capitalized. For the years ended December 31, 2020 and 2019, the Company recognized depreciation expense of $1.6 million.
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842.The Company leases certain properties and land under operating leases. The Company recognizes a liability to make lease payments, the “lease liability”, and an asset representing the right to use the underlying asset during the lease term, the “right-of-use asset”. The right of use assets and lease liabilities are impacted by the length of the lease term and the rate used to discount the minimum lease payments to present value. The lease liability is measured at the present value of the remaining lease payments, discounted at the Company's incremental borrowing rate. The right-of-use asset is measured at the amount of the lease liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the right-of-use-asset. Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis.
The Company's lease agreements often include one or more options to renew at the Company's discretion. If at lease inception, the Company reasonably expects to exercise the renewal option, the Company will include the extended term in the calculation of the right of use asset and lease liability. Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception over a similar term. For operating leases existing prior to January 1, 2019, the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 was used.
The Company's leases do not contain residual value guarantees. The Company's variable lease payments are expensed and classified as operating activities in the statement of cash flows. The Company does not have any material restrictions or covenants imposed by leases that would impact the Company's ability to pay dividends or cause the Company to incur additional financial obligations.
Other Real Estate Owned (“OREO”)
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the estimated fair value at the date of foreclosure less selling costs, establishing a new cost basis. Subsequent to foreclosure, management performs periodic valuations, and the assets are carried at the lower of the initial recorded carrying value (initial cost basis) or estimated fair value less the cost to sell. Based on updated valuations, the Bank has the ability to reverse valuation allowances recorded up to the amount of the initial cost basis. Revenues and expenses from operations and changes in the valuation allowance are included in noninterest expense. Gains or losses on disposition are included in noninterest expense.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company; (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Business Combinations
U.S. GAAP requires that the acquisition method of accounting be used for all business combinations and that an acquirer be identified for each business combination. Under U.S. GAAP, the acquirer is the entity that obtains control of one or more businesses in the business combination, and the acquisition date is the date the acquirer achieves control. U.S. GAAP requires that the acquirer recognize the fair value of assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date. The Company determines the fair values of loans, core deposit intangible, and deposits with the assistance of a third-party vendor.
Loans acquired in business combinations are recorded in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations.” Accordingly, acquired loans are segregated between PCI loans (ASC 310-30) and Non-PCI loans (ASC-310-20) and are recorded at fair value without the carryover of the related allowance for loan losses. For PCI loans, the excess of expected cash flows above the fair value will be accreted to interest income over the remaining lives of the loans in accordance with FASB ASC 310-30. For Non-PCI loans, the total discount/premium will be accreted to interest income over the remaining lives of the loans in accordance with FASB ASC 310-20.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. Goodwill is assigned to reporting units and tested for impairment at least annually in the fourth quarter or on an interim basis if an event occurs or circumstances changed that would more likely than not reduce the fair value of the reporting unit below its carrying value. See Note 4 – Goodwill and Other Intangible Assets.
Other intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. The Company's other intangible assets relate to acquired core deposits. Intangible assets with definite useful lives are amortized on an accelerated basis over their estimated lives. Intangible assets with indefinite useful lives are not amortized until their lives are determined to be definite. Intangible assets, premises and equipment and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. See Note 4 - Goodwill and Other Intangible Assets.
Advertising Costs
The Company expenses advertising costs as incurred.
Income Taxes
The Company files a consolidated federal income tax return with its subsidiaries. Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws and when it is considered more likely than not that deferred tax assets will be realized. It is the Company’s policy to recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense.
Off Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under commercial lines of credit, letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.
Stock-Based Compensation
The Company has stock-based incentive arrangements to attract and retain key personnel in order to promote the success of the business. In May 2015, the 2015 Equity Compensation Plan (the “2015 plan”) was approved by shareholders, which authorizes the issuance of restricted stock, stock appreciation rights, stock units and stock options to the Board of Directors and key employees.
Compensation cost for all stock-based awards is measured at fair value on the date of grant and recognized as expense over the service period, net of estimated forfeitures. The estimation of stock awards that ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such differences will be recorded as adjustments in the periods the estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience.
The Company and the Bank currently maintain incentive compensation plans which provide for payments to be made in cash or other share-based compensation. The Company has accrued the full amounts due under these plans.
Earnings Per Common Share (“EPS”)
Basic earnings per common share represent income available to common stockholders, divided by the weighted average number of common shares outstanding during the period. Unencumbered shares held by the Employee Stock Ownership Plan (“ESOP”) are treated as outstanding in computing earnings per share. Shares issued to the ESOP but pledged as collateral for loans obtained to provide funds to acquire the shares are not treated as outstanding in computing earnings per share.
Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential dilutive common shares are determined using the treasury stock method and include incremental shares issuable upon the exercise of stock options and other share-based compensation awards. The Company excludes from the diluted EPS calculation anti-dilutive options, because the exercise price of the options was greater than the average market price of the common shares.
Revenue from Contracts with Customers
The Company records revenue from contracts with customers in accordance with ASC Topic 606, “Revenue from Contracts with Customers”. On January 1, 2018, the Company adopted ASU 2014-9 and all subsequent ASUs that modified ASU 2014-9, which have been codified in ASC Topic 606. Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation.
The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. 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. Adoption of the amendments to the revenue recognition principles, did not materially change our accounting policies
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on AFS securities, are reported as components of comprehensive income as a separate statement in the Consolidated Statements of Comprehensive Income. Additionally, the Company discloses accumulated other comprehensive income as a separate component in the equity section of the balance sheet.
Recent Accounting Pronouncements
ASU 2016-13 – Financial Instruments – Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the existing “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, HTM securities, loan commitments, and financial guarantees. Credit losses relating to AFS debt securities will be recorded through an allowance for credit losses. The ASU also simplifies the accounting model for Purchase Credit Impaired (“PCI”) debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach).
The Company has formed a CECL committee with representation from various departments. The committee has selected a third-party vendor solution to assist us in the application of the ASU 2016-13. The committee continues to make progress in accordance with the Company's plan for adoption. The Company has developed new expected credit loss estimation models, depending on the nature of each identified pool of financial assets with similar risk characteristics, and is currently reviewing and analyzing the different methodologies to estimate expected credit losses. The Company is also documenting new processes and controls, challenging estimated credit loss model assumptions and outputs, refining the qualitative framework as well as drafting policies and disclosures. Additionally, parallel runs will be enhanced throughout 2021 as the processes, controls, and policies are finalized. The adoption of the ASU 2016-13 could result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model to an “expected loss” model. Furthermore, ASU 2016-13 will necessitate the establishment of an allowance for expected credit losses for certain debt securities and other financial assets.
In December 2019, the FASB issued ASU No 2019-10, Financial Instruments - Credit Losses (Topic 326). This update amends the effective date of ASU 2016-13 for certain entities, including smaller reporting companies until fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. Early adoption is permitted. The one-time determination date for identifying as a smaller reporting company was November 15, 2019. The Company met the definition of a smaller reporting company as of that date and plans to adopt the standard with the amended effective date. The Company continues to work through implementation and continues collecting and retaining loan and credit data and evaluating various loss estimation models. Management expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective. While we currently cannot reasonable estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as the general economic conditions and forecasts as of the adoption date.
ASU 2017-04 - Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company adopted ASU 2017-04 on January 1, 2020 and it did not have a material impact on the Company's Consolidated Financial Statements.
ASU 2019-04 - In April 2019, the FASB issued ASU No. 2019-04 which codifies improvements to Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), Financial Instruments (Topic 825). With respect to Topic 326, ASU 2019-04 clarifies the scope of the credit losses standard and addresses issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. With respect to Topic 825, ASU 2019-04 clarifies the scope of the guidance for recognizing and measuring financial instruments, the requirement for remeasurement under ASC 820 when using the measurement alternative, which equity securities have to be remeasured at historical exchange rates, and certain disclosure requirements. The amendments to Topic 326 have the same effective dates as ASU 2016-13. The Company is currently evaluating the potential impact of Topic 326 amendments on the Company's Consolidated Financial Statements. The Company adopted the amendments to Topic 825 on January 1, 2020 and there was no material impact on the Company's Consolidated Financial Statements.
ASU 2019-05 - Financial Instruments-Credit Losses (Topic 326). In May 2019, the FASB issued ASU No. 2019-05. This ASU allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to HTM debt securities. Entities are required to make this election on an instrument-by-instrument basis. The Company plans to adopt ASU 2019-05 upon adoption of ASU 2016-13 unless an earlier adoption is permitted in an accounting update. The Company is evaluating the impact of electing the fair value option of ASU 2019-05 on the Company's Consolidated Financial Statements.
ASU 2019-11 - Codification Improvements to Topic 326, Financial Instruments-Credit Losses. In November 2019, the FASB issued ASU 2019-11 to address issues raised by stakeholders during the implementation of ASU 2016-13. Among other narrow-scope improvements, ASU 2019-11 clarifies guidance around how to report expected recoveries and reinforces existing guidance that prohibits organizations from recording negative allowances for AFS debt securities. For entities that have not yet adopted the amendments in ASU 2016-13, the effective dates and transition requirements for the amendments are the same as the effective dates and transition requirements in ASU 2016-13. Thus, ASU 2019-11 will be effective for us on January 1, 2023.
ASU 2020-02 - Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842). In February 2020, the FASB issued guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its Consolidated Financial Statements.
ASU 2020-04 - Reference Rate Reform (Topic 848). In March 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments are effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material effect on its Consolidated Financial Statements.
NOTE 2 – SECURITIES
Amortized cost and fair values of investment securities at December 31, 2020 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(dollars in thousands)
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
AFS Securities
|
|
|
|
|
|
|
|
|
Asset-backed securities issued by GSEs and U.S. Agencies
|
|
|
|
|
|
|
|
|
Residential Mortgage Backed Securities ("MBS")
|
|
$
|
33,248
|
|
|
$
|
1,735
|
|
|
$
|
30
|
|
|
$
|
34,953
|
|
Residential Collateralized Mortgage Obligations ("CMOs")
|
|
125,564
|
|
|
2,180
|
|
|
297
|
|
|
127,447
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities ("ABSs") issued by Others:
|
|
|
|
|
|
|
|
|
Residential CMOs
|
|
292
|
|
|
5
|
|
|
9
|
|
|
288
|
|
Student Loan Trust ABSs
|
|
37,141
|
|
|
386
|
|
|
88
|
|
|
37,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
1,500
|
|
|
—
|
|
|
—
|
|
|
1,500
|
|
Municipal bonds
|
|
42,268
|
|
|
2,210
|
|
|
—
|
|
|
44,478
|
|
Total AFS Securities
|
|
$
|
240,013
|
|
|
$
|
6,516
|
|
|
$
|
424
|
|
|
$
|
246,105
|
|
|
|
|
|
|
|
|
|
|
Equity securities carried at fair value through income
|
|
|
|
|
|
|
|
|
CRA investment fund
|
|
$
|
4,855
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,855
|
|
Non-marketable equity securities
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
$
|
207
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
207
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
|
|
$
|
245,075
|
|
|
$
|
6,516
|
|
|
$
|
424
|
|
|
$
|
251,167
|
|
Amortized cost and fair values of investment securities at December 31, 2019 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(dollars in thousands)
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
AFS Securities
|
|
|
|
|
|
|
|
|
Asset-backed securities issued by GSEs and U.S. Agencies
|
|
|
|
|
|
|
|
|
Residential Mortgage Backed Securities ("MBS")
|
|
$
|
35,351
|
|
|
$
|
754
|
|
|
$
|
13
|
|
|
$
|
36,092
|
|
Residential Collateralized Mortgage Obligations ("CMOs")
|
|
145,479
|
|
|
1,839
|
|
|
386
|
|
|
146,932
|
|
U.S. Agency
|
|
9,671
|
|
|
122
|
|
|
60
|
|
|
9,733
|
|
Asset-backed securities issued by Others:
|
|
|
|
|
|
|
|
|
Residential CMOs
|
|
380
|
|
|
3
|
|
|
12
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
Callable GSE Agency Bonds
|
|
2,001
|
|
|
1
|
|
|
—
|
|
|
2,002
|
|
Certificates of Deposit Fixed
|
|
250
|
|
|
—
|
|
|
—
|
|
|
250
|
|
U.S. government obligations
|
|
1,490
|
|
|
—
|
|
|
1
|
|
|
1,489
|
|
Municipal bonds
|
|
11,491
|
|
|
—
|
|
|
173
|
|
|
11,318
|
|
Total AFS Securities
|
|
$
|
206,113
|
|
|
$
|
2,719
|
|
|
$
|
645
|
|
|
$
|
208,187
|
|
|
|
|
|
|
|
|
|
|
Equity securities carried at fair value through income
|
|
|
|
|
|
|
|
|
CRA investment fund
|
|
$
|
4,669
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,669
|
|
Non-marketable equity securities
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
$
|
209
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
209
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
|
|
$
|
210,991
|
|
|
$
|
2,719
|
|
|
$
|
645
|
|
|
$
|
213,065
|
|
In December 2019, Management determined that it no longer had the positive intent to hold its investment in securities classified as HTM until maturity and does not intend to hold HTM securities in the future. The Company reclassified the entire HTM investment portfolio, totaling $83.1 million with unrealized holding gains of $0.8 million to the AFS investments category. The reclassification resulted in an increase to accumulated other comprehensive income of $0.6 million and to deferred tax liabilities of $0.2 million. The Bank's primary reasons for the reclassification were to better manage interest rate risks and provide additional on-balance sheet liquidity. Based on accounting rules, the Bank will not be able to designate any securities as HTM securities for a period of time. The Company's HTM portfolio was primarily composed of asset-backed securities issued by GSEs and U.S. Agencies.
At December 31, 2020, and December 31, 2019 securities with an amortized cost of $48.2 million and $47.4 million were pledged to secure certain customer deposits. At December 31, 2020, and December 31, 2019, no securities were pledged as collateral for advances from the FHLB of Atlanta.
During the year ended December 31, 2020, the Company recognized net gains of $1.4 million on the sale of 42 AFS securities with aggregate carrying values of $62.5 million. During the year ended December 31, 2019, the Company recognized net gains of $0.2 million on the sale of 20 AFS securities with aggregate carrying values of $31.6 million.
The Company’s investment portfolio includes securities that are in an unrealized loss position as of December 31, 2020, the details of which are included in the following table. Although these securities, if sold at December 31, 2020 would result in a pretax loss of $0.4 million, the Company has no intent to sell the applicable securities at such fair values, and maintains the Company has the ability to hold these securities until all principal has been recovered. It is more likely than not that the Company will not sell any securities at a loss for liquidity purposes. Declines in the fair values of these securities can be traced to general market conditions which reflect the prospect for the economy as a whole. When determining other-than-temporary impairment on securities, the Company considers such factors as adverse conditions specifically related to a certain security or to specific conditions in an industry or geographic area, the time frame securities have been in an unrealized loss position, the Company’s ability to hold the security for a period of time sufficient to allow for anticipated recovery in value, whether or not the security has been downgraded by a rating agency, and whether or not the financial condition of the security issuer has severely deteriorated. As of December 31, 2020, the Company considers all securities with unrealized loss positions to be temporarily impaired, and consequently, does not believe it will sustain any material realized losses as a result of the current temporary decline in fair value. No charges related to other-than-temporary impairment were made during for the years ended December 31, 2020 and December 31, 2019.
AFS Securities
Gross unrealized losses and estimated fair value by length of time that the individual AFS securities have been in a continuous unrealized loss position at December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Less Than 12 Months
|
|
More Than 12 Months
|
|
Total
|
(dollars in thousands)
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Losses
|
Asset-backed securities issued by GSEs and U.S. Agencies
|
|
$
|
32,281
|
|
|
$
|
320
|
|
|
$
|
670
|
|
|
$
|
7
|
|
|
$
|
32,951
|
|
|
$
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities issued by Others
|
|
—
|
|
|
—
|
|
|
87
|
|
|
9
|
|
|
87
|
|
|
9
|
|
Student Loan Trust ABSs
|
|
12,511
|
|
|
88
|
|
|
—
|
|
|
—
|
|
|
12,511
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,792
|
|
|
$
|
408
|
|
|
$
|
757
|
|
|
$
|
16
|
|
|
$
|
45,549
|
|
|
$
|
424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Less Than 12 Months
|
|
More Than 12 Months
|
|
Total
|
(dollars in thousands)
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Losses
|
Asset-backed securities issued by GSEs and U.S. Agencies
|
|
$
|
15,215
|
|
|
$
|
63
|
|
|
$
|
39,689
|
|
|
$
|
336
|
|
|
$
|
54,904
|
|
|
$
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. SBA Debentures
|
|
—
|
|
|
—
|
|
|
4,744
|
|
|
60
|
|
|
4,744
|
|
|
60
|
|
Asset-backed securities issued by Others
|
|
—
|
|
|
—
|
|
|
136
|
|
|
12
|
|
|
136
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
11,318
|
|
|
173
|
|
|
—
|
|
|
—
|
|
|
11,318
|
|
|
173
|
|
U.S. government obligations
|
|
1,489
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1,489
|
|
|
1
|
|
|
|
$
|
28,022
|
|
|
$
|
237
|
|
|
$
|
44,569
|
|
|
$
|
408
|
|
|
$
|
72,591
|
|
|
$
|
645
|
|
AFS asset-backed securities issued by GSEs are guaranteed by the issuer and AFS U.S. government agency securities and bonds are guaranteed by the full faith and credit of the U.S. government. At December 31, 2020, and 2019 total unrealized losses on the portfolio were $0.4 million and $0.6 million of the portfolio amortized cost of $240.0 million and $206.1 million, respectively.
At December 31, 2020 and 2019, AFS asset-backed securities issued by GSEs and U.S. Agencies with unrealized losses had amortized cost of $33.3 million and $56.8 million, respectively, with the unrealized losses of $0.3 million and $0.4 million, respectively. At December 31, 2020, AFS asset-backed securities issued by student loan trust and others with unrealized losses had amortized cost of $12.6 million with unrealized losses of $0.1 million. The Company's amortized cost investment of $37.1 million in student loan trusts are 97% U.S. government guaranteed. At December 31, 2020, AFS municipal bonds issued by states, political subdivisions, or agencies had no unrealized losses, and at December 31, 2019, AFS municipal bonds issued by states, political subdivisions, or agencies with unrealized losses had amortized cost of $11.5 million, with unrealized losses of $0.2 million. Management believes that the securities will either recover in market value or be paid off as agreed.
Maturities
The amortized cost and estimated fair value of debt securities at December 31, 2020 by contractual maturity, are shown below. The Company has allocated the AFS securities into the four maturity groups listed below using the expected average life of the individual securities based on statistics provided by industry sources. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Available for Sale
|
(dollars in thousands)
|
|
Amortized Cost
|
|
Estimated Fair Value
|
|
|
|
|
|
Within one year
|
|
$
|
36,165
|
|
|
$
|
37,084
|
|
Over one year through five years
|
|
60,669
|
|
|
62,209
|
|
Over five years through ten years
|
|
67,158
|
|
|
68,862
|
|
After ten years
|
|
76,021
|
|
|
77,950
|
|
Total AFS securities
|
|
$
|
240,013
|
|
|
$
|
246,105
|
|
NOTE 3 – LOANS
Loans consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(dollars in thousands)
|
|
Total
|
|
% of Gross Portfolio Loans
|
|
Total
|
|
% of Gross Portfolio Loans
|
Portfolio Loans:
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
1,049,147
|
|
|
69.75
|
%
|
|
$
|
964,777
|
|
|
66.34
|
%
|
Residential first mortgages
|
|
133,779
|
|
|
8.89
|
%
|
|
167,710
|
|
|
11.53
|
%
|
Residential rentals
|
|
139,059
|
|
|
9.24
|
%
|
|
123,601
|
|
|
8.50
|
%
|
Construction and land development
|
|
37,520
|
|
|
2.49
|
%
|
|
34,133
|
|
|
2.35
|
%
|
Home equity and second mortgages
|
|
29,129
|
|
|
1.94
|
%
|
|
36,098
|
|
|
2.48
|
%
|
Commercial loans
|
|
52,921
|
|
|
3.52
|
%
|
|
63,102
|
|
|
4.34
|
%
|
Consumer loans
|
|
1,027
|
|
|
0.07
|
%
|
|
1,104
|
|
|
0.08
|
%
|
Commercial equipment
|
|
61,693
|
|
|
4.10
|
%
|
|
63,647
|
|
|
4.38
|
%
|
Gross portfolio loans
|
|
1,504,275
|
|
|
100.00
|
%
|
|
1,454,172
|
|
|
100.00
|
%
|
Less:
|
|
|
|
|
|
|
|
|
Net deferred costs
|
|
1,264
|
|
|
0.08
|
%
|
|
1,879
|
|
|
0.13
|
%
|
Allowance for loan losses
|
|
(19,424)
|
|
|
(1.29)
|
%
|
|
(10,942)
|
|
|
(0.75)
|
%
|
|
|
(18,160)
|
|
|
|
|
(9,063)
|
|
|
|
Net portfolio loans
|
|
$
|
1,486,115
|
|
|
|
|
$
|
1,445,109
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans
|
|
$
|
110,320
|
|
|
|
|
$
|
—
|
|
|
|
Net deferred fees
|
|
(2,360)
|
|
|
|
|
—
|
|
|
|
Net SBA PPP Loans
|
|
$
|
107,960
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Loans
|
|
$
|
1,594,075
|
|
|
|
|
$
|
1,445,109
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans
|
|
$
|
1,614,595
|
|
|
|
|
$
|
1,454,172
|
|
|
|
The Company has segregated its loans into two categories; portfolio loans and U.S. SBA PPP loans.
Deferred Costs/Fees
Portfolio net deferred loan costs of $1.3 million at December 31, 2020 included deferred fees paid by customers of $3.4 million offset by deferred costs of $4.7 million. Deferred loan costs include premiums paid for the purchase of residential first mortgages and deferred loan origination costs recorded in accordance with ASC 310-20. Net deferred loan costs of $1.9 million at December 31, 2019 included deferred fees paid by customers of $3.3 million offset by deferred costs of $5.2 million.
U.S. SBA PPP loan net deferred fees of $2.4 million at December 31, 2020 included deferred fees paid by the Small Business Administration of $2.9 million partially offset by deferred costs of $0.5 million. The net deferred fees are being amortized as a component of interest income through the contractual maturity date of each individual PPP loan. Net deferred fees include fees (deferred fees) paid to participant banks for each PPP loan underwritten and funded net of costs incurred to underwrite the loans (deferred costs). Net deferred fees will be recognized in income when the PPP loan is forgiven or paid.
Risk Characteristics of Portfolio Segments
Concentrations of Credit - Loans are made primarily within the Company’s operating footprint of Southern Maryland and the greater Fredericksburg area of Virginia. Real estate loans can be affected by the condition of the local real estate market. Commercial and industrial loans can be affected by the local economic conditions. The commercial loan portfolio has concentrations in business loans secured by real estate and real estate development loans. At December 31, 2020 and 2019, the Company had no loans outstanding with foreign entities.
The Company manages its credit products and exposure to credit losses (credit risk) by the following specific portfolio segments (classes), which are levels at which the Company develops and documents its allowance for loan loss methodology. These segments are:
Commercial Real Estate (“CRE”)
Commercial and other real estate projects include office, medical and professional buildings, retail locations, churches, other special purpose buildings and commercial construction. Commercial construction balances were 6.9% and 8.9% of the CRE portfolio at December 31, 2020 and 2019, respectively. The Bank offers both fixed-rate and adjustable-rate loans under these product lines. The primary security on a commercial real estate loan is the real property and the leases that produce income for the real property. Loans secured by commercial real estate are generally limited to 80% of the lower of the appraised value or sales price at origination and have an initial contractual loan payment period ranging from three to 20 years.
Loans secured by commercial real estate are larger and involve greater risks than 1-4 family residential mortgage loans. Because payments on loans secured by such properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy.
At December 31, 2020 and 2019, the largest outstanding commercial real estate loans were $20.7 million and $21.1 million, respectively, which were secured by commercial real estate and performing according to their terms.
Residential First Mortgages
Residential first mortgage loans are generally long-term loans, amortized on a monthly basis, with principal and interest due each month. The contractual loan payment period for residential loans typically ranges from ten to 30 years. The Bank’s experience indicates that real estate loans remain outstanding for significantly shorter time periods than their contractual terms. Borrowers may refinance or prepay loans at their option, without penalty. The Bank’s residential portfolio has both fixed-rate and adjustable-rate residential first mortgages. During the years ended December 31, 2020 and 2019, the Bank purchased residential first mortgages of $22.0 million and $41.0 million, respectively.
The annual and lifetime limitations on interest rate adjustments may constrain interest rate increases on these loans. There are also credit risks resulting from potential increased costs to the borrower as a result of repricing of adjustable-rate mortgage loans. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower. The Bank’s adjustable rate residential first mortgage portfolio was $33.6 million or 2.2% of total gross portfolio loans of $1.50 billion at December 31, 2020 compared to $52.3 million or 3.6% of total gross portfolio loans of $1.45 billion at December 31, 2019.
The Bank generally retains the right to service loans sold for a payment based upon a percentage (generally 0.25% of the outstanding loan balance). As of December 31, 2020, and 2019, the Bank serviced $23.9 million and $32.9 million, respectively, in residential mortgage loans for others.
At December 31, 2020, and 2019, the largest outstanding residential first mortgage loans were $3.0 million and $3.0 million, respectively, which were secured by residences located in the Bank’s market area. The loans were performing according to terms.
Residential Rentals
Residential rental mortgage loans are amortizing, with principal and interest due each month. The loans are secured by income-producing 1-4 family units and apartments. As of December 31, 2020, and 2019, $105.9 million and $97.1 million, respectively, were 1-4 family units and $33.2 million and $26.5 million, respectively, were apartment buildings or multi-family units. Loans secured by residential rental properties are generally limited to 80% of the lower of the appraised value or sales price at origination and have initial contractual loan payment periods ranging from three to 20 years. The primary security on a residential rental loan is the property and the leases that produce income. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower. The Bank’s adjustable rate residential rental portfolio was $118.5 million or 7.9% of total gross portfolio loans of $1.50 billion at December 31, 2020 compared to $102.2 million or 7.0% of total gross portfolio loans of $1.45 billion at December 31, 2019.
Loans secured by residential rental properties involve greater risks than 1-4 family residential mortgage loans. Although, there are similar risk characteristics shared with commercial real estate loans, the balances for the loans secured by residential rental properties are generally smaller. Payments on loans secured by residential rental properties are dependent on the successful operation of the properties and repayment of these loans may be subject to adverse conditions in the rental real estate market or the economy to a greater extent than similar owner-occupied properties.
At December 31, 2020 and 2019, the largest outstanding residential rental mortgage loan was $9.5 million and $9.7 million, respectively, which was secured by over 120 single family homes located in the Bank’s market area. The loan was performing according to its terms at December 31, 2020 and 2019.
Construction and Land Development
The Bank offers loans for the construction of 1-4 family dwellings. Generally, these loans are secured by the real estate under construction as well as by guarantees of the principals involved. In addition, the Bank offers loans to acquire and develop land, as well as loans on undeveloped, subdivided lots for home building. The Bank’s construction and land development portfolio was $37.5 million or 2.5% of total gross portfolio loans of $1.50 billion at December 31, 2020 compared to $34.1 million or 2.4% of total gross portfolio loans of $1.45 billion at December 31, 2019. The Bank’s investment in these loans has declined in recent years as the Bank has deemphasized this product line.
A decline in demand for new housing might adversely affect the ability of borrowers to repay these loans. Construction and land development loans are inherently riskier than financing owner-occupied real estate. The Bank’s risk of loss is affected by the accuracy of the initial estimate of the market value of the completed project as well as the accuracy of the cost estimates to complete the project. In addition, volatility in the real estate market can make it difficult to ensure that the valuation of land associated with these loans is accurate. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, a project’s value might be insufficient to assure full repayment. As a result of these factors, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank forecloses on a project, there can be no assurance that the Bank will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.
At December 31, 2020 and 2019, the largest outstanding construction and land development loans were $12.8 million and $5.3 million, respectively, which were secured by land in the Bank’s market area.
Home Equity and Second Mortgage Loans
The Bank maintains a portfolio of home equity and second mortgage loans. The Bank’s home equity and second mortgage portfolio was $29.1 million or 1.9% of total gross portfolio loans of $1.50 billion at December 31, 2020 compared to $36.1 million or 2.5% of total gross portfolio loans of $1.45 billion at December 31, 2019. These products contain a higher risk of default than residential first mortgages as in the event of foreclosure, the first mortgage would need to be paid off prior to collection of the second mortgage.
Commercial Loans
The Bank offers its customers commercial loan products including term loans, demand loans and lines of credit. Such loans are generally made for terms of five years or less. The Bank offers both fixed-rate and adjustable-rate loans. The portfolio consists primarily of demand loans and lines of credit. When making commercial business loans, the Bank considers the financial condition of the borrower, the borrower’s payment history of both corporate and personal debt, the projected cash flows of the business, the viability of the industry in which the borrower operates, the value of the collateral, and the borrower’s ability to service the debt from income. These loans are primarily secured by equipment, real property, accounts receivable or other security as determined by the Bank. Commercial loans are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. In the case of business failure, collateral would need to be liquidated to provide repayment for the loan. In many cases, the highly specialized nature of collateral would make full recovery from the sale of collateral unlikely.
The Bank’s commercial loan portfolio was $52.9 million or 3.5% of total gross portfolio loans of $1.50 billion at December 31, 2020 compared to $63.1 million or 4.3% of total gross loans of $1.45 billion at December 31, 2019. At December 31, 2020 and 2019, the largest outstanding commercial loans were $5.6 million and $2.8 million, respectively, which were secured by commercial real estate (all of which were located in the Bank’s market area), cash and investments. These loans were performing according to terms at December 31, 2020 and 2019.
Consumer Loans
Consumer loans consist of loans secured by automobiles, boats, recreational vehicles and trucks. The Bank also makes home improvement loans and offers both secured and unsecured personal lines of credit. Consumer loans entail greater risk from other loan types due to being secured by rapidly depreciating assets or the reliance on the borrower’s continuing financial stability.
Commercial Equipment Loans
These loans consist primarily of fixed-rate, short-term loans collateralized by a commercial customer’s equipment or secured by real property, accounts receivable, or other security as determined by the Bank. When making commercial equipment loans, the Bank considers the same factors it considers when underwriting a commercial business loan. Commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business. As a result, repayment of commercial loans may depend substantially on the success of the business itself. In the case of business failure, collateral would need to be liquidated to repay the loan. In many cases, the highly specialized nature of collateral equipment would make full recovery from the sale of collateral problematic.
The Bank’s commercial equipment portfolio was $61.7 million or 4.1% of total gross portfolio loans of $1.50 billion at December 31, 2020 compared to $63.6 million or 4.4% of total gross portfolio loans of $1.45 billion at December 31, 2019. At December 31, 2020 and 2019, the largest outstanding commercial equipment loans were $2.4 million and $2.1 million, respectively, which were secured by commercial real estate (located in the Bank’s market area), cash and investments. These loans were performing according to terms at December 31, 2020 and 2019.
U.S. SBA PPP Loans
The U.S. SBA PPP loan was created to address economic hardships resulting from the COVID-19 pandemic. The program is designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if all employee retention criteria are met, and the funds are used for eligible expenses. U.S. SBA PPP loans carry two- or five-year terms at a 1% annual interest rate until the loan is either forgiven or paid.
No credit issues are anticipated with SBA PPP loans as they are fully guaranteed by the Small Business Administration and the Bank's ALLL does not include an allowance for U.S. SBA PPP loans. Management believes all PPP loans were underwritten in accordance with the program's guidelines. The U.S. SBA PPP guidelines indicate that lenders may rely on certifications of the borrower in order to determine eligibility and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for forgiveness. The guidelines further specify that lenders will be held harmless for a borrowers’ failure to comply with program criteria.
Non-accrual and Aging Analysis of Current and Past Due Loans
Non-accrual loans as of December 31, 2020 and 2019 were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2020
|
|
Non- accrual Delinquent Loans
|
|
Number of Loans
|
|
Non-accrual Current Loans
|
|
Number of Loans
|
|
Total Non-accrual Loans
|
|
Total Number of Loans
|
Commercial real estate
|
|
$
|
11,428
|
|
|
9
|
|
|
$
|
5,184
|
|
|
9
|
|
|
$
|
16,612
|
|
|
18
|
|
Residential first mortgages
|
|
335
|
|
|
2
|
|
|
459
|
|
|
2
|
|
|
794
|
|
|
4
|
|
Residential rentals
|
|
—
|
|
|
—
|
|
|
275
|
|
|
2
|
|
|
275
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
202
|
|
|
2
|
|
|
293
|
|
|
1
|
|
|
495
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial equipment
|
|
—
|
|
|
—
|
|
|
46
|
|
|
3
|
|
|
46
|
|
|
3
|
|
|
|
$
|
11,965
|
|
|
13
|
|
|
$
|
6,257
|
|
|
17
|
|
|
$
|
18,222
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2019
|
|
Non- accrual Delinquent Loans
|
|
Number of Loans
|
|
Non-accrual Current Loans
|
|
Number of Loans
|
|
Total Non-accrual Loans
|
|
Total Number of Loans
|
Commercial real estate
|
|
$
|
10,562
|
|
|
11
|
|
|
$
|
1,687
|
|
|
5
|
|
|
$
|
12,249
|
|
|
16
|
|
Residential first mortgages
|
|
—
|
|
|
—
|
|
|
830
|
|
|
3
|
|
|
830
|
|
|
3
|
|
Residential rentals
|
|
—
|
|
|
—
|
|
|
937
|
|
|
5
|
|
|
937
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mortgages
|
|
177
|
|
|
3
|
|
|
271
|
|
|
3
|
|
|
448
|
|
|
6
|
|
Commercial loans
|
|
1,807
|
|
|
2
|
|
|
1,320
|
|
|
1
|
|
|
3,127
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial equipment
|
|
241
|
|
|
5
|
|
|
25
|
|
|
1
|
|
|
266
|
|
|
6
|
|
|
|
$
|
12,787
|
|
|
21
|
|
|
$
|
5,070
|
|
|
18
|
|
|
$
|
17,857
|
|
|
39
|
|
Non-accrual loans increased $0.4 million from $17.9 million or 1.23% of total loans at December 31, 2019 to $18.2 million or 1.13% of total loans at December 31, 2020. Non-accrual loans can be current but classified as non-accrual due to customer operating results or payment history. All interest accrued but not collected from non-accrual or charged-off loans is reversed against interest income. In accordance with the Company’s policy, interest income is recognized on a cash-basis or cost-recovery method, until the loan returns to accrual status.
At December 31, 2020, non-accrual loans of $18.2 million included 30 loans, of which $15.7 million, or 86% represented 15 loans and six customer relationships. At December 31, 2019, non-accrual loans of $17.9 million included 39 loans, of which $15.0 million, or 84% represented 18 loans and seven customer relationships. At December 31, 2020, $6.3 million (34%) of non-accrual loans were current with all payments of principal and interest with no impairment and $12.0 million (66%) of non-accrual loans were delinquent with specific valuation reserves $1.3 million.
Non-accrual loans at December 31, 2020 and 2019 included three and three TDRs totaling $1.5 million and $1.4 million, respectively. These loans were classified solely as non-accrual for the calculation of financial ratios. Loan delinquency (total past due) decreased $1.2 million from $13.3 million, or 0.92% of loans, at December 31, 2019 to $12.1 million, or 0.81% of loans, at December 31, 2020.
Non-accrual loans on which the recognition of interest has been discontinued, which did not have a specific allowance for impairment, amounted to $12.4 million and $11.7 million at December 31, 2020 and 2019, respectively. Interest due but not recognized on these balances at December 31, 2020 and 2019 was $0.4 million and $0.3 million, respectively. Non-accrual loans with a specific allowance for impairment on which the recognition of interest has been discontinued amounted to $5.8 million and $6.1 million at December 31, 2020 and 2019, respectively. Interest due but not recognized on these balances at December 31, 2020 and 2019 was $0.4 million and $0.3 million, respectively.
The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the borrower. PCI loans are included as a single category in the table below as management believes, regardless of their age, there is a lower likelihood of aggregate loss related to these loan pools. Additionally, PCI loans are discounted to allow for the accretion of income on a level yield basis over the life of the loan based on expected cash flows. Regardless of payment status, as long as cash flows can be reasonably estimated, the associated discount on these loan pools results in income recognition. An analysis of past due loans as of December 31, 2020 and 2019 was as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2020
|
|
31-60 Days
|
|
61-89 Days
|
|
90 or Greater Days
|
|
Total Past Due
|
|
PCI Loans
|
|
Current
|
|
Total Loan Receivables
|
Commercial real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,428
|
|
|
$
|
11,428
|
|
|
$
|
1,572
|
|
|
$
|
1,036,147
|
|
|
$
|
1,049,147
|
|
Residential first mortgages
|
|
—
|
|
|
—
|
|
|
335
|
|
|
335
|
|
|
—
|
|
|
133,444
|
|
|
133,779
|
|
Residential rentals
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
139,059
|
|
|
139,059
|
|
Construction and land dev.
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
37,520
|
|
|
37,520
|
|
Home equity and second mtg.
|
|
167
|
|
|
—
|
|
|
202
|
|
|
369
|
|
|
406
|
|
|
28,354
|
|
|
29,129
|
|
Commercial loans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
52,921
|
|
|
52,921
|
|
Consumer loans
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
1,019
|
|
|
1,027
|
|
Commercial equipment
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
61,689
|
|
|
61,693
|
|
Total portfolio loans
|
|
$
|
175
|
|
|
$
|
4
|
|
|
$
|
11,965
|
|
|
$
|
12,144
|
|
|
$
|
1,978
|
|
|
$
|
1,490,153
|
|
|
$
|
1,504,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. SBA PPP loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
110,320
|
|
|
$
|
110,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2019
|
|
31-60 Days
|
|
61-89 Days
|
|
90 or Greater Days
|
|
Total Past Due
|
|
PCI Loans
|
|
Current
|
|
Total Loan Receivables
|
Commercial real estate
|
|
$
|
—
|
|
|
$
|
217
|
|
|
$
|
10,563
|
|
|
$
|
10,780
|
|
|
$
|
1,738
|
|
|
$
|
952,259
|
|
|
$
|
964,777
|
|
Residential first mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
167,710
|
|
|
167,710
|
|
Residential rentals
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
295
|
|
|
123,306
|
|
|
123,601
|
|
Construction and land dev.
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
34,133
|
|
|
34,133
|
|
Home equity and second mtg.
|
|
98
|
|
|
23
|
|
|
177
|
|
|
298
|
|
|
391
|
|
|
35,409
|
|
|
36,098
|
|
Commercial loans
|
|
—
|
|
|
—
|
|
|
1,807
|
|
|
1,807
|
|
|
—
|
|
|
61,295
|
|
|
63,102
|
|
Consumer loans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,104
|
|
|
1,104
|
|
Commercial equipment
|
|
52
|
|
|
159
|
|
|
231
|
|
|
442
|
|
|
—
|
|
|
63,205
|
|
|
63,647
|
|
Total portfolio loans
|
|
$
|
150
|
|
|
$
|
399
|
|
|
$
|
12,778
|
|
|
$
|
13,327
|
|
|
$
|
2,424
|
|
|
$
|
1,438,421
|
|
|
$
|
1,454,172
|
|
There were no loans that were past due 90 days or greater accruing interest at December 31, 2020 and 2019, respectively.
Impaired Loans and Troubled Debt Restructures (“TDRs”)
Impaired loans, including TDRs, at December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2020
|
|
Unpaid Contractual Principal Balance
|
|
Recorded Investment With No Allowance
|
|
Recorded Investment With Allowance
|
|
Total Recorded Investment
|
|
Related Allowance
|
|
YTD Average Recorded Investment
|
|
YTD Interest Income Recognized
|
Commercial real estate
|
|
$
|
17,952
|
|
|
$
|
11,915
|
|
|
$
|
5,799
|
|
|
$
|
17,714
|
|
|
$
|
1,316
|
|
|
$
|
17,729
|
|
|
$
|
361
|
|
Residential first mortgages
|
|
2,001
|
|
|
1,989
|
|
|
—
|
|
|
1,989
|
|
|
—
|
|
|
2,043
|
|
|
70
|
|
Residential rentals
|
|
626
|
|
|
625
|
|
|
—
|
|
|
625
|
|
|
—
|
|
|
643
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mtg.
|
|
568
|
|
|
555
|
|
|
—
|
|
|
555
|
|
|
—
|
|
|
559
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial equipment
|
|
527
|
|
|
472
|
|
|
40
|
|
|
512
|
|
|
40
|
|
|
531
|
|
|
30
|
|
Total
|
|
$
|
21,674
|
|
|
$
|
15,556
|
|
|
$
|
5,839
|
|
|
$
|
21,395
|
|
|
$
|
1,356
|
|
|
$
|
21,505
|
|
|
$
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2019
|
|
Unpaid Contractual Principal Balance
|
|
Recorded Investment With No Allowance
|
|
Recorded Investment With Allowance
|
|
Total Recorded Investment
|
|
Related Allowance
|
|
YTD Average Recorded Investment
|
|
YTD Interest Income Recognized
|
Commercial real estate
|
|
$
|
20,914
|
|
|
$
|
15,919
|
|
|
$
|
4,788
|
|
|
$
|
20,707
|
|
|
$
|
417
|
|
|
$
|
21,035
|
|
|
$
|
813
|
|
Residential first mortgages
|
|
1,921
|
|
|
1,917
|
|
|
—
|
|
|
1,917
|
|
|
—
|
|
|
1,962
|
|
|
86
|
|
Residential rentals
|
|
941
|
|
|
937
|
|
|
—
|
|
|
937
|
|
|
—
|
|
|
967
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity and second mtg.
|
|
524
|
|
|
510
|
|
|
—
|
|
|
510
|
|
|
—
|
|
|
519
|
|
|
23
|
|
Commercial loans
|
|
3,127
|
|
|
1,807
|
|
|
1,320
|
|
|
3,127
|
|
|
210
|
|
|
3,284
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial equipment
|
|
808
|
|
|
585
|
|
|
203
|
|
|
788
|
|
|
201
|
|
|
826
|
|
|
35
|
|
Total
|
|
$
|
28,235
|
|
|
$
|
21,675
|
|
|
$
|
6,311
|
|
|
$
|
27,986
|
|
|
$
|
828
|
|
|
$
|
28,593
|
|
|
$
|
1,165
|
|
TDRs, included in the impaired loan schedules above, as of December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Dollars
|
|
Number of Loans
|
|
Dollars
|
|
Number of Loans
|
Commercial real estate
|
|
$
|
1,376
|
|
|
2
|
|
|
$
|
1,420
|
|
|
3
|
|
Residential first mortgages
|
|
247
|
|
|
2
|
|
|
64
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial equipment
|
|
471
|
|
|
2
|
|
|
565
|
|
|
4
|
|
Total TDRs
|
|
$
|
2,094
|
|
|
6
|
|
|
$
|
2,049
|
|
|
8
|
|
Less: TDRs included in non-accrual loans
|
|
(1,522)
|
|
|
(3)
|
|
|
(1,399)
|
|
|
(3)
|
|
Total performing accrual TDR loans
|
|
$
|
572
|
|
|
3
|
|
|
$
|
650
|
|
|
5
|
|
TDRs increased slightly from $2.0 million at December 31, 2019 to $2.1 million at December 31, 2020. TDRs that are included in non-accrual are classified as non-accrual loans solely for the calculation of financial ratios. The Company had specific reserves of $0.4 million on one TDR totaling $1.3 million at December 31, 2020 and $87,000 on three TDRs totaling $0.1 million at December 31, 2019. During the year ended December 31, 2020, TDR disposals, which included payoffs and refinancing consisted of three loans totaling $0.1 million. TDR loan principal curtailment was $53,000 for the year ended December 31, 2020. There was one TDR added during the year ended December 31, 2020 totaling $0.2 million. During the year ended December 31, 2019, TDR disposals, which included payoffs and refinancing decreased by seven loans totaling $4.4 million. TDR loan principal curtailment was $0.2 million for the year ended December 31, 2019. There were $25,000 TDRs added during the year ended December 31, 2019.
Interest income in the amount of $96,000 and $92,000 was recognized on outstanding TDR loans for the years ended December 31, 2020 and 2019, respectively. The Bank’s TDRs are performing according to the terms of their agreements at market interest rates appropriate for the level of credit risk of each TDR loan. The average contractual interest rate on performing TDRs at December 31, 2020 and 2019 was 4.60% and 4.51%, respectively.
Allowance for Loan Losses ("ALLL")
The following tables detail activity in the ALLL at and for the years ended December 31, 2020 and 2019, respectively. An allocation of the allowance to one category of loans does not prevent the Company from using that allowance to absorb losses in a different category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31, 2020
|
(dollars in thousands)
|
|
Beginning Balance
|
|
Charge-offs
|
|
Recoveries
|
|
Provisions
|
|
Ending Balance
|
Commercial real estate
|
|
$
|
7,398
|
|
|
$
|
(944)
|
|
|
$
|
17
|
|
|
$
|
7,273
|
|
|
$
|
13,744
|
|
Residential first mortgages
|
|
464
|
|
|
—
|
|
|
—
|
|
|
841
|
|
|
1,305
|
|
Residential rentals
|
|
397
|
|
|
—
|
|
|
—
|
|
|
1,016
|
|
|
1,413
|
|
Construction and land development
|
|
273
|
|
|
—
|
|
|
—
|
|
|
128
|
|
|
401
|
|
Home equity and second mortgages
|
|
149
|
|
|
(53)
|
|
|
9
|
|
|
156
|
|
|
261
|
|
Commercial loans
|
|
1,086
|
|
|
(1,027)
|
|
|
20
|
|
|
1,143
|
|
|
1,222
|
|
Consumer loans
|
|
10
|
|
|
(6)
|
|
|
—
|
|
|
16
|
|
|
20
|
|
Commercial equipment
|
|
1,165
|
|
|
(328)
|
|
|
94
|
|
|
127
|
|
|
1,058
|
|
|
|
$
|
10,942
|
|
|
$
|
(2,358)
|
|
|
$
|
140
|
|
|
$
|
10,700
|
|
|
$
|
19,424
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Credit Impaired**
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
** There is no allowance for loan loss on the PCI or the SBA PPP portfolios. A more detailed rollforward schedule will be presented if an allowance is required.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
December 31, 2019
|
(dollars in thousands)
|
|
Beginning Balance
|
|
Charge-offs
|
|
Recoveries
|
|
Provisions
|
|
Ending Balance
|
Commercial real estate
|
|
$
|
6,882
|
|
|
$
|
(148)
|
|
|
$
|
15
|
|
|
$
|
649
|
|
|
$
|
7,398
|
|
Residential first mortgages
|
|
755
|
|
|
—
|
|
|
—
|
|
|
(291)
|
|
|
464
|
|
Residential rentals
|
|
498
|
|
|
(53)
|
|
|
46
|
|
|
(94)
|
|
|
397
|
|
Construction and land development
|
|
310
|
|
|
(329)
|
|
|
—
|
|
|
292
|
|
|
273
|
|
Home equity and second mortgages
|
|
133
|
|
|
(28)
|
|
|
6
|
|
|
38
|
|
|
149
|
|
Commercial loans
|
|
1,482
|
|
|
(1,127)
|
|
|
40
|
|
|
691
|
|
|
1,086
|
|
Consumer loans
|
|
6
|
|
|
(5)
|
|
|
2
|
|
|
7
|
|
|
10
|
|
Commercial equipment
|
|
910
|
|
|
(685)
|
|
|
102
|
|
|
838
|
|
|
1,165
|
|
|
|
$
|
10,976
|
|
|
$
|
(2,375)
|
|
|
$
|
211
|
|
|
$
|
2,130
|
|
|
$
|
10,942
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Credit Impaired**
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
** There is no allowance for loan loss on the PCI portfolios. A more detailed rollforward schedule will be presented if an allowance is required.
The following tables detail loan receivable and allowance balances disaggregated on the basis of the Company’s impairment methodology at December 31, 2020 and 2019, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(dollars in thousands)
|
|
Ending balance:
individually evaluated for impairment
|
|
Ending balance:
collectively evaluated for impairment
|
|
Purchase Credit Impaired
|
|
Total
|
|
Ending balance:
individually evaluated for impairment
|
|
Ending balance:
collectively evaluated for impairment
|
|
Purchase Credit Impaired
|
|
Total
|
Loan Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
17,714
|
|
|
$
|
1,029,861
|
|
|
$
|
1,572
|
|
|
$
|
1,049,147
|
|
|
$
|
20,707
|
|
|
$
|
942,332
|
|
|
$
|
1,738
|
|
|
$
|
964,777
|
|
Residential first mortgages
|
|
1,989
|
|
|
131,790
|
|
|
—
|
|
|
133,779
|
|
|
1,917
|
|
|
165,793
|
|
|
—
|
|
|
167,710
|
|
Residential rentals
|
|
625
|
|
|
138,434
|
|
|
—
|
|
|
139,059
|
|
|
937
|
|
|
122,369
|
|
|
295
|
|
|
123,601
|
|
Construction and land development
|
|
—
|
|
|
37,520
|
|
|
—
|
|
|
37,520
|
|
|
—
|
|
|
34,133
|
|
|
—
|
|
|
34,133
|
|
Home equity and second mortgages
|
|
555
|
|
|
28,168
|
|
|
406
|
|
|
29,129
|
|
|
510
|
|
|
35,197
|
|
|
391
|
|
|
36,098
|
|
Commercial loans
|
|
—
|
|
|
52,921
|
|
|
—
|
|
|
52,921
|
|
|
3,127
|
|
|
59,975
|
|
|
—
|
|
|
63,102
|
|
Consumer loans
|
|
—
|
|
|
1,027
|
|
|
—
|
|
|
1,027
|
|
|
—
|
|
|
1,104
|
|
|
—
|
|
|
1,104
|
|
Commercial equipment
|
|
512
|
|
|
61,181
|
|
|
—
|
|
|
61,693
|
|
|
788
|
|
|
62,859
|
|
|
—
|
|
|
63,647
|
|
|
|
$
|
21,395
|
|
|
$
|
1,480,902
|
|
|
$
|
1,978
|
|
|
$
|
1,504,275
|
|
|
$
|
27,986
|
|
|
$
|
1,423,762
|
|
|
$
|
2,424
|
|
|
$
|
1,454,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
1,316
|
|
|
$
|
12,428
|
|
|
$
|
—
|
|
|
$
|
13,744
|
|
|
$
|
417
|
|
|
$
|
6,981
|
|
|
$
|
—
|
|
|
$
|
7,398
|
|
Residential first mortgages
|
|
—
|
|
|
1,305
|
|
|
—
|
|
|
1,305
|
|
|
—
|
|
|
464
|
|
|
—
|
|
|
464
|
|
Residential rentals
|
|
—
|
|
|
1,413
|
|
|
—
|
|
|
1,413
|
|
|
—
|
|
|
397
|
|
|
—
|
|
|
397
|
|
Construction and land development
|
|
—
|
|
|
401
|
|
|
—
|
|
|
401
|
|
|
—
|
|
|
273
|
|
|
—
|
|
|
273
|
|
Home equity and second mortgages
|
|
—
|
|
|
261
|
|
|
—
|
|
|
261
|
|
|
—
|
|
|
149
|
|
|
—
|
|
|
149
|
|
Commercial loans
|
|
—
|
|
|
1,222
|
|
|
—
|
|
|
1,222
|
|
|
210
|
|
|
876
|
|
|
—
|
|
|
1,086
|
|
Consumer loans
|
|
—
|
|
|
20
|
|
|
—
|
|
|
20
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
Commercial equipment
|
|
40
|
|
|
1,018
|
|
|
—
|
|
|
1,058
|
|
|
201
|
|
|
964
|
|
|
—
|
|
|
1,165
|
|
|
|
$
|
1,356
|
|
|
$
|
18,068
|
|
|
$
|
—
|
|
|
$
|
19,424
|
|
|
$
|
828
|
|
|
$
|
10,114
|
|
|
$
|
—
|
|
|
$
|
10,942
|
|
Credit Quality Indicators
Credit quality indicators as of December 31, 2020 and 2019 were as follows:
Credit Risk Profile by Internally Assigned Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Commercial Real Estate
|
|
Construction and Land Dev.
|
|
Residential Rentals
|
|
12/31/2020
|
|
12/31/2019
|
|
12/31/2020
|
|
12/31/2019
|
|
12/31/2020
|
|
12/31/2019
|
Unrated
|
|
$
|
162,434
|
|
|
$
|
102,695
|
|
|
$
|
1,036
|
|
|
$
|
2,075
|
|
|
$
|
47,605
|
|
|
$
|
38,139
|
|
Pass
|
|
866,648
|
|
|
840,403
|
|
|
36,484
|
|
|
32,058
|
|
|
90,633
|
|
|
84,811
|
|
Special mention
|
|
2,417
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
821
|
|
|
—
|
|
Substandard
|
|
17,648
|
|
|
21,679
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
651
|
|
Doubtful
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,049,147
|
|
|
$
|
964,777
|
|
|
$
|
37,520
|
|
|
$
|
34,133
|
|
|
$
|
139,059
|
|
|
$
|
123,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Commercial Loans
|
|
Commercial Equipment
|
|
Total Commercial Portfolios
|
|
12/31/2020
|
|
12/31/2019
|
|
12/31/2020
|
|
12/31/2019
|
|
12/31/2020
|
|
12/31/2019
|
Unrated
|
|
$
|
12,962
|
|
|
$
|
16,754
|
|
|
$
|
26,585
|
|
|
$
|
26,045
|
|
|
$
|
250,622
|
|
|
$
|
185,708
|
|
Pass
|
|
39,959
|
|
|
43,221
|
|
|
31,091
|
|
|
37,399
|
|
|
1,064,815
|
|
|
1,037,892
|
|
Special mention
|
|
—
|
|
|
—
|
|
|
3,977
|
|
|
—
|
|
|
7,215
|
|
|
—
|
|
Substandard
|
|
—
|
|
|
3,127
|
|
|
40
|
|
|
203
|
|
|
17,688
|
|
|
25,660
|
|
Doubtful
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
52,921
|
|
|
$
|
63,102
|
|
|
$
|
61,693
|
|
|
$
|
63,647
|
|
|
$
|
1,340,340
|
|
|
$
|
1,249,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Non-Commercial Portfolios**
|
|
U.S. SBA PPP Loans
|
|
Total All Portfolios
|
|
12/31/2020
|
|
12/31/2019
|
|
12/31/2020
|
|
12/31/2019
|
|
12/31/2020
|
|
12/31/2019
|
Unrated
|
|
$
|
136,792
|
|
|
$
|
164,991
|
|
|
$
|
110,320
|
|
|
$
|
—
|
|
|
$
|
497,734
|
|
|
$
|
350,699
|
|
Pass
|
|
25,125
|
|
|
38,718
|
|
|
—
|
|
|
—
|
|
|
1,089,940
|
|
|
1,076,610
|
|
Special mention
|
|
457
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,672
|
|
|
—
|
|
Substandard
|
|
1,561
|
|
|
1,203
|
|
|
—
|
|
|
—
|
|
|
19,249
|
|
|
26,863
|
|
Doubtful
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
163,935
|
|
|
$
|
204,912
|
|
|
$
|
110,320
|
|
|
$
|
—
|
|
|
$
|
1,614,595
|
|
|
$
|
1,454,172
|
|
** Non-commercial portfolios are generally evaluated based on payment activity but may be risk graded if part of a larger commercial relationship or are credit impaired (e.g., non-accrual loans, TDRs).
Credit Risk Profile Based on Payment Activity (Non-Commercial Portfolios)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Residential First Mortgages
|
|
Home Equity and Second Mtg.
|
|
Consumer Loans
|
|
12/31/2020
|
|
12/31/2019
|
|
12/31/2020
|
|
12/31/2019
|
|
12/31/2020
|
|
12/31/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
133,444
|
|
|
$
|
167,710
|
|
|
$
|
28,927
|
|
|
$
|
35,921
|
|
|
$
|
1,027
|
|
|
$
|
1,104
|
|
Nonperforming
|
|
335
|
|
|
—
|
|
|
202
|
|
|
177
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
133,779
|
|
|
$
|
167,710
|
|
|
$
|
29,129
|
|
|
$
|
36,098
|
|
|
$
|
1,027
|
|
|
$
|
1,104
|
|
A risk grading scale is used to assign grades to commercial relationships, which include commercial real estate, residential rentals, construction and land development, commercial loans and commercial equipment loans. Loans are graded at inception, annually thereafter when financial statements are received and at other times when there is an indication that a credit may have weakened or improved. Only commercial loan relationships with an aggregate exposure to the Bank of $1.0 million or greater are subject to being risk rated.
Home equity and second mortgages and consumer loans are evaluated for creditworthiness in underwriting and are monitored based on borrower payment history. Residential first mortgages are evaluated for creditworthiness during credit due diligence before being purchased. Residential first mortgages, home equity and second mortgages and consumer loans are classified as unrated unless they are part of a larger commercial relationship that requires grading or are TDRs or nonperforming loans with an Other Assets Especially Mentioned (“OAEM”) or higher risk rating due to a delinquent payment history.
Management reviews credit quality indicators as part of its individual loan reviews on a quarterly basis. The overall quality of the Bank’s loan portfolio is assessed using the Bank’s risk grading scale, the level and trends of net nonperforming loans and delinquencies, the performance of TDRs and the general economic conditions in the Company’s geographical market. This review process is assisted by frequent internal reporting of loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Credit quality indicators and allowance factors are adjusted based on management’s judgment during the monthly and quarterly review process. Loans subject to risk ratings are graded on a scale of one to ten. The Company considers loans rated substandard, doubtful and loss as classified assets for regulatory and financial reporting.
Ratings 1 thru 6 - Pass
Ratings 1thru 6 have asset risks ranging from excellent low risk to adequate. The specific rating assigned considers customer history of earnings, cash flows, liquidity, leverage, capitalization, consistency of debt service coverage, the nature and extent of customer relationship and other relevant specific business factors such as the stability of the industry or market area, changes to management, litigation or unexpected events that could have an impact on risks.
Rating 7 - OAEM (Other Assets Especially Mentioned) – Special Mention
These credits, while protected by the financial strength of the borrowers, guarantors or collateral, have reduced quality due to economic conditions, less than adequate earnings performance or other factors which require the lending officer to direct more than normal attention to the credit. Financing alternatives may be limited and/or command higher risk interest rates. OAEM loans are the first adversely classified assets on our watch list. These relationships will be reviewed at least quarterly.
Rating 8 - Substandard
Substandard assets are assets that are inadequately protected by the sound worth or paying capacity of the borrower or of the collateral pledged. These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. The loans may have a delinquent history or combination of weak collateral, weak guarantor strength or operating losses. When a loan is assigned to this category the Bank may estimate a specific reserve in the loan loss allowance analysis. These assets listed may include assets with histories of repossessions or some that are non-performing bankruptcies. These relationships will be reviewed at least quarterly.
Rating 9 - Doubtful
Doubtful assets have many of the same characteristics of Substandard with the exception that the Bank has determined that loss is not only possible but is probable and the risk is close to certain that loss will occur. When a loan is assigned to this category the Bank will identify the probable loss and the loan will receive a specific reserve in the loan loss allowance analysis. These relationships will be reviewed at least quarterly.
Rating 10 – Loss
Once an asset is identified as a definite loss to the Bank, it will receive the classification of “loss.” There may be some future potential recovery; however, it is more practical to write off the loan at the time of classification. Losses will be taken in the period in which they are determined to be non-collectable.
Purchased Credit-Impaired Loans and Acquired Loans ("PCI")
PCI loans had an unpaid principal balance of $2.3 million and $2.9 million and a carrying value of $2.0 million and $2.4 million at December 31, 2020 and December 31, 2019, respectively. PCI loans represented 0.10% and 0.13% of total assets at December 31, 2020 and December 31, 2019, respectively. Determining the fair value of the PCI loans at the time of acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest considering prepayment assumptions. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called accretable yield. At acquisition, the difference between contractually required payments and the cash flows expected to be collected reflects estimated credit losses and is called the nonaccretable difference. In accordance with U.S. GAAP, there was no carryover of previously established allowance for loan losses from acquisition.
A summary of changes in the accretable yield for PCI loans for the year ended December 31, 2020 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(dollars in thousands)
|
|
2020
|
|
2019
|
Accretable yield, beginning of period
|
|
$
|
677
|
|
|
$
|
733
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
|
|
(225)
|
|
|
(354)
|
|
Reclassification from nonaccretable difference
|
|
25
|
|
|
330
|
|
Other changes, net
|
|
(135)
|
|
|
(32)
|
|
Accretable yield, end of period
|
|
$
|
342
|
|
|
$
|
677
|
|
Accounting standards require a periodic recast of the expected cash flows on the PCI loan portfolio. The recast was performed during the second and fourth quarters of 2020 and the fourth quarter of 2019 and resulted in a reclassification of $25,000 and $0.3 million, respectively, from the credit (nonaccretable) portion of the discount to the liquidity (accretable) portion of the discount. Also, based on the recast, future expected cash flows, not related to the reclassification, decreased $0.1 million for the year ended December 31, 2020 and decreased $32,000 for the year ended December 31, 2019.
The following is a summary of acquired and non-acquired loans as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BY ACQUIRED AND NON-ACQUIRED
|
|
December 31, 2020
|
|
%
|
|
December 31, 2019
|
|
%
|
Acquired loans - performing
|
|
$
|
58,999
|
|
|
3.66
|
%
|
|
$
|
74,654
|
|
|
5.13
|
%
|
Acquired loans - purchase credit impaired ("PCI")
|
|
1,978
|
|
|
0.12
|
%
|
|
2,424
|
|
|
0.17
|
%
|
Total acquired loans
|
|
60,977
|
|
|
3.78
|
%
|
|
77,078
|
|
|
5.30
|
%
|
U.S. SBA PPP loans
|
|
110,320
|
|
|
6.83
|
%
|
|
—
|
|
|
—
|
%
|
Non-acquired loans**
|
|
1,443,298
|
|
|
89.39
|
%
|
|
1,377,094
|
|
|
94.70
|
%
|
Gross loans
|
|
1,614,595
|
|
|
|
|
1,454,172
|
|
|
|
Net deferred costs (fees)
|
|
(1,096)
|
|
|
(0.07)
|
%
|
|
1,879
|
|
|
0.13
|
%
|
Total loans, net of deferred costs
|
|
$
|
1,613,499
|
|
|
|
|
$
|
1,456,051
|
|
|
|
** Non-acquired loans include loans transferred from acquired pools following release of acquisition accounting FMV adjustments.
At December 31, 2020 acquired performing loans, which totaled $59.0 million, included a $0.8 million net acquisition accounting fair market value adjustment, representing a 1.25% discount and PCI loans which totaled $2.0 million, included a $0.3 million adjustment, representing a 14.95% discount.
At December 31, 2019 acquired performing loans, which totaled $74.7 million, included a $1.2 million net acquisition accounting fair market value adjustment, representing a 1.55% discount and PCI loans which totaled $2.4 million, included a $0.5 million adjustment, representing a 17.55% discount.
Related Party Loans
Included in loans receivable were loans made to executive officers and directors or their related interests. These loans were made in the ordinary course of business at substantially the same terms and conditions as those prevailing at the time for comparable transactions with persons not affiliated with the Bank and are not considered to involve more than the normal risk of collectability. For the years ended December 31, 2020 and 2019, all loans to directors and executive officers of the Bank performed according to original loan terms. Activity in loans outstanding to executive officers and directors and their related interests are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
At and For the Years Ended December 31,
|
|
2020
|
|
2019
|
|
|
Balance, beginning of period
|
|
$
|
19,373
|
|
|
$
|
35,290
|
|
|
|
Loans and additions
|
|
1,569
|
|
|
1,845
|
|
|
|
Change in Directors' status
|
|
(2,617)
|
|
|
(9,408)
|
|
|
|
Repayments
|
|
(1,958)
|
|
|
(8,354)
|
|
|
|
Balance, end of period
|
|
$
|
16,367
|
|
|
$
|
19,373
|
|
|
|
During 2020, we modified our analysis with respect to insider related parties and as a result include additional relationships such as those involving extended family members, resulting in an increase to the previously reported $8.7 million balance of related party loans at December 31, 2019.
In addition, the Bank had outstanding loans of $7.6 million and $5.4 million, respectively, for the years ended December 31, 2020 and 2019 to charitable and community organizations in which the Bank's executive officers and directors volunteer.
Loan Participations
The Bank sells portions of commercial, commercial real estate and commercial construction loans to other lenders. The Bank's sold participated loans with other lenders at December 31, 2020 and 2019 were $17.4 million and $14.9 million, respectively. The Bank may also buy loans, portions of loans, or participation certificates from other lenders to limit overall exposure. The Bank only purchases loans or portions of loans after reviewing loan documents, underwriting support, and completing other procedures, as necessary.
The Bank's purchased participation loans from other lenders at December 31, 2020 and 2019 were $8.7 million and $3.4 million, respectively. Purchased participation loans are subject to the same regulatory and internal policy requirements as other loans in the Bank's portfolio.
NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS
The Company recognized goodwill of $10.8 million and core deposit intangible ("CDI") assets of $3.6 million with the acquisition of County First Bank. Core deposit intangible is amortized on an accelerated basis over its estimated life of 8 years. Amortization expense related to intangible assets totaled $0.6 million and $0.7 million for the years ended December 31, 2020 and 2019.
Goodwill and other intangible assets are presented in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
As of December 31, 2020
|
|
As of December 31, 2019
|
|
|
|
|
|
Goodwill
|
|
$
|
10,835
|
|
|
$
|
10,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
As of December 31, 2019
|
(dollars in thousands)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Intangible Asset
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Intangible Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangibles
|
|
$
|
3,590
|
|
|
$
|
(2,063)
|
|
|
$
|
1,527
|
|
|
$
|
3,590
|
|
|
$
|
(1,472)
|
|
|
$
|
2,118
|
|
The estimated aggregate future amortization expense for intangible assets remaining as of December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
2021
|
|
$
|
495
|
|
2022
|
|
398
|
|
2023
|
|
302
|
|
2024
|
|
205
|
|
2025
|
|
109
|
|
Thereafter
|
|
18
|
|
|
|
$
|
1,527
|
|
As of December 31, 2020, the Company did not have impairment to goodwill or CDI. At December 31, 2020 we had goodwill of $10.8 million or 5.47% of equity and CDI of $1.5 million or 0.77% of equity.
It is the Bank’s policy to test goodwill and the CDI for impairment annually in the fourth quarter. In the third quarter of 2020, management determined that the COVID-19 pandemic and its impact on the banking industry was deemed a triggering event that required an interim impairment test for goodwill. Management engaged an independent consultant to perform a quantitative goodwill and CDI impairment analysis for the Company's single reporting unit, the Bank, as of September 15, 2020 ("the measurement date"). The impairment analysis used both market and income approaches. The market approach used a transaction and control premium analyses and compared resulting valuations both individually and to a selected peer group. The income approach analyzed discounted cash flows. The results of the methods were weighted to determine an overall value. Significant estimates and assumptions included, but were not limited to, projected profitability ratios, discount rates, cash flows projections, selection and evaluation of control premiums in appropriate market transactions and selection of peers.
Management concluded that both goodwill and CDI were not impaired as of the measurement date. Management performed an annual analysis during the fourth quarter and as there were no changes in the Company's financial statements or operations that would indicate that it was more likely than not that goodwill or CDI was impaired subsequent to the measurement date, management concluded that neither goodwill nor CDI was impaired as of December 31, 2020.
It is possible that the length and severity of the COVID-19 crisis could cause the Company's goodwill or CDI to become impaired in future periods due to a sustained decline in the Company's stock price or other financial or qualitative measures. In the event that the Company concludes that all or a portion of its goodwill and CDI are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings in that quarter. Such a charge would have no impact on tangible capital or regulatory capital.
NOTE 5 - PREMISES AND EQUIPMENT AND LEASE COMMITMENTS
A summary of the cost and accumulated depreciation of premises and equipment at December 31, 2020 and 2019 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31,
|
|
2020
|
|
2019
|
Land
|
|
$
|
4,406
|
|
|
$
|
4,406
|
|
Building and improvements
|
|
25,043
|
|
|
25,001
|
|
Furniture and equipment
|
|
10,185
|
|
|
10,149
|
|
Automobiles
|
|
163
|
|
|
256
|
|
Total cost
|
|
39,797
|
|
|
39,812
|
|
Less accumulated depreciation
|
|
(19,526)
|
|
|
(18,150)
|
|
Premises and equipment, net
|
|
$
|
20,271
|
|
|
$
|
21,662
|
|
Operating Leases
The Company's operating lease agreements are primarily for leases of branches and office space. All of these leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheet. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use-asset with a corresponding lease liability. The table below details the Right of Use asset (net of accumulated amortization), lease liability and other information related to the Company's operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
Operating Leases
|
|
|
|
|
Operating lease right of use asset, net
|
|
$
|
7,831
|
|
|
$
|
8,382
|
|
Operating lease liability
|
|
$
|
8,088
|
|
|
$
|
8,495
|
|
Weighted average remaining lease term
|
|
18.21 years
|
|
18.80 years
|
Weighted average discount rate
|
|
3.52
|
%
|
|
3.50
|
%
|
Remaining lease term - min
|
|
0.7 years
|
|
0.0 years
|
Remaining lease term - max
|
|
24.0 years
|
|
25.0 years
|
The table below details the Company's lease cost, which is included in occupancy expense in the Consolidated Statements of Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Operating lease cost
|
|
$
|
791
|
|
|
$
|
854
|
|
|
|
|
|
|
Cash paid for lease liability
|
|
$
|
697
|
|
|
$
|
740
|
|
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
As of December 31, 2020
|
Lease payments due:
|
|
|
Within one year
|
|
$
|
670
|
|
After one but within two years
|
|
602
|
|
After two but within three years
|
|
612
|
|
After three but within four years
|
|
620
|
|
After four but within five years
|
|
658
|
|
After five years
|
|
8,115
|
|
Total undiscounted cash flows
|
|
$
|
11,277
|
|
Discount on cash flows
|
|
(3,189)
|
|
Total lease liability
|
|
$
|
8,088
|
|
Certain Bank facilities are leased under various operating leases. Future minimum rental commitments under non-cancellable operating leases are as follows at December 31, 2020:
|
|
|
|
|
|
|
|
|
(dollar in thousands)
|
|
|
2021
|
|
$
|
670
|
|
2022
|
|
602
|
|
2023
|
|
612
|
|
2024
|
|
620
|
|
2025
|
|
658
|
|
Thereafter
|
|
8,115
|
|
Total
|
|
$
|
11,277
|
|
As of December 31, 2020, the Company had a small office condo held for sale with a fair value of $0.4 million that was recorded as a non-recurring Level 3 asset. The Company recorded an impairment of $1,000 based on fair value of the of the property during the fourth quarter of 2019.
NOTE 6 - OTHER REAL ESTATE OWNED (“OREO”)
OREO assets are presented net of the valuation allowance. The Company considers OREO as classified assets for regulatory and financial reporting. OREO carrying amounts reflect management’s estimate of the realizable value of these properties incorporating current appraised values, local real estate market conditions and related costs. An analysis of the activity follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Years Ended December 31,
|
|
2020
|
|
2019
|
Balance at beginning of year
|
|
$
|
7,773
|
|
|
$
|
8,111
|
|
Additions of underlying property
|
|
1,240
|
|
|
3,567
|
|
Disposals of underlying property
|
|
(2,882)
|
|
|
(3,004)
|
|
|
|
|
|
|
Valuation allowance
|
|
(3,022)
|
|
|
(901)
|
|
Balance at end of period
|
|
$
|
3,109
|
|
|
$
|
7,773
|
|
During the year ended December 31, 2020 and December 31, 2019, OREO additions were $1.2 million and $3.6 million, respectively. During the year ended December 31, 2020, additions of $1.2 million consisted of a commercial lot. During the year ended December 31, 2019, additions of $3.6 million were for commercial real estate acquired at foreclosure on a $3.8 million classified loan relationship recorded at the estimated fair value at the date of foreclosure less selling cost, establishing a new cost basis and $0.1 million for residential lots.
During the year ended December 31, 2020, the Company recognized net losses of $9,000 on disposals of $2.4 million for commercial real estate and $0.5 million for residential real estate. During the year ended December 31, 2019, the Company disposed of commercial real estate for proceeds of $3.1 million and gains of $0.2 million. Residential lots were sold for $63,000 with a loss of $2,000 along with sales of commercial equipment for $35,000 for the year ended December 31, 2019. In connection with the sale of commercial real estate the Bank provided a loan of $0.3 million. The transaction qualified for sales treatment under ASC Topic 610-20 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets".
The Company had no impaired loans secured by residential real estate for which formal foreclosure proceedings were in process at December 31, 2020 and 2019.
To adjust properties to current appraised values, additions to the valuation allowance were taken for the years ended December 31, 2020, and 2019, respectively.
Expenses applicable to OREO assets included the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Years Ended December 31,
|
|
2020
|
|
2019
|
|
|
Valuation allowance
|
|
$
|
3,022
|
|
|
$
|
901
|
|
|
|
Losses (gains) on dispositions
|
|
9
|
|
|
(188)
|
|
|
|
Operating expenses
|
|
169
|
|
|
250
|
|
|
|
|
|
$
|
3,200
|
|
|
$
|
963
|
|
|
|
NOTE 7 - DEPOSITS
Deposits consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31,
|
|
2020
|
|
2019
|
Noninterest-bearing demand
|
|
$
|
362,079
|
|
|
$
|
241,174
|
|
Interest-bearing:
|
|
|
|
|
Demand
|
|
590,159
|
|
|
523,802
|
|
Money market deposits
|
|
340,725
|
|
|
283,438
|
|
Savings
|
|
98,783
|
|
|
69,254
|
|
Certificates of deposit
|
|
353,856
|
|
|
394,169
|
|
Total interest-bearing
|
|
1,383,523
|
|
|
1,270,663
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
1,745,602
|
|
|
$
|
1,511,837
|
|
As of December 31, 2020, and 2019, there were $10.6 million and $7.5 million, respectively in deposit accounts held by executive officers and directors and their related interests of the Bank and Company.
The aggregate amount of certificates of deposit that exceed the FDIC insurance limit of $250,000 at December 31, 2020, and 2019 was $64.3 million and $86.6 million, respectively.
At December 31, 2020 the scheduled contractual maturities of certificates of deposit are as follows:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2020
|
Within one year
|
|
$
|
266,134
|
|
Year 2
|
|
62,144
|
|
Year 3
|
|
11,505
|
|
Year 4
|
|
5,441
|
|
Year 5
|
|
8,632
|
|
|
|
$
|
353,856
|
|
The FDIC’s regulatory guidance require that the Company monitor all customer deposit concentrations at or above 2% of total deposits. At December 31, 2020, the Bank had two customer deposit relationships that exceeded 2% of total deposits, totaling $238.8 million which represented 13.7% of total deposits of $1,745.6 million. At December 31, 2019, the Bank had two customer deposit relationship that exceeded 2% of total deposits, totaling $297.1 million which represented 19.6% of total deposits of $1,511.8 million. The reported concentrations at December 31, 2020 and 2019 were with local municipal agencies.
NOTE 8 - SHORT-TERM BORROWINGS AND LONG-TERM DEBT
The Bank’s long-term debt and short-term borrowings consist of advances from the FHLB of Atlanta. In addition, during 2020 the Bank added the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF") to provide liquidity support, if needed, to fund U.S. SBA PPP loans. The Bank classifies debt based upon original maturity and does not reclassify debt to short-term status during its life. Long-term debt and short-term borrowings include fixed-rate long-term advances, short-term advances, daily advances, fixed-rate convertible advances, and variable-rate convertible advances.
Rates and maturities on long-term advances and short-term borrowings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Rate
|
|
Fixed-Rate Convertible
|
|
Variable Convertible
|
December 31, 2020
|
|
|
|
|
|
|
Highest rate
|
|
2.75
|
%
|
|
0.79%
|
|
n/a
|
Lowest rate
|
|
1.00
|
%
|
|
0.43%
|
|
n/a
|
Weighted average rate
|
|
2.01
|
%
|
|
0.59%
|
|
n/a
|
Matures through
|
|
2036
|
|
2030
|
|
n/a
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
Highest rate
|
|
2.92
|
%
|
|
n/a
|
|
n/a
|
Lowest rate
|
|
1.00
|
%
|
|
n/a
|
|
n/a
|
Weighted average rate
|
|
2.26
|
%
|
|
n/a
|
|
n/a
|
Matures through
|
|
2036
|
|
n/a
|
|
n/a
|
Average rates of long-term debt, short-term borrowings, and PPPLF advances were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
At or for the Year Ended December 31,
|
|
2020
|
|
2019
|
Long-term debt
|
|
|
|
|
Long-term debt outstanding at end of period
|
|
$
|
27,302
|
|
|
$
|
40,370
|
|
Weighted average rate on outstanding long-term debt
|
|
0.61
|
%
|
|
2.31
|
%
|
Maximum outstanding long-term debt of any month end
|
|
67,359
|
|
|
55,392
|
|
Average outstanding long-term debt
|
|
53,615
|
|
|
32,702
|
|
Approximate average rate paid on long-term debt
|
|
2.56
|
%
|
|
2.27
|
%
|
|
|
|
|
|
Short-term borrowings
|
|
|
|
|
Short-term borrowings outstanding at end of period
|
|
$
|
—
|
|
|
$
|
5,000
|
|
Weighted average rate on short-term borrowings
|
|
—
|
%
|
|
1.81
|
%
|
Maximum outstanding short-term borrowings at any month end
|
|
27,000
|
|
|
59,500
|
|
Average outstanding short-term borrowings
|
|
8,156
|
|
|
30,965
|
|
Approximate average rate paid on short-term borrowings
|
|
1.36
|
%
|
|
2.50
|
%
|
|
|
|
|
|
PPPLF advances
|
|
|
|
|
PPPLF advances outstanding at end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
Weighted average rate on PPPLF advances
|
|
—
|
%
|
|
—
|
%
|
Maximum outstanding PPPLF advances at any month end
|
|
127,674
|
|
|
—
|
|
Average outstanding PPPLF advances
|
|
60,360
|
|
|
—
|
|
Approximate average rate paid on PPPLF advances
|
|
0.35
|
%
|
|
—
|
%
|
The Bank’s fixed-rate debt generally consists of advances with monthly interest payments and principal due at maturity.
The Bank’s fixed-rate convertible long-term debt is callable by the issuer, after an initial period ranging from 3 months to 10 years. The instruments are callable at the end of the initial period. As of December 31, 2020 and 2019, all fixed-rate convertible debt is callable in 2021. As of December 31, 2019, all fixed-rate convertible debt had passed its call date. All advances have a prepayment penalty, determined based upon prevailing interest rates.
Variable convertible advances have an initial variable rate based on a discount to LIBOR. As of December 31, 2020, there were no remaining variable convertible advances.
During the year ended December 31, 2020, the Bank paid off $10.0 million of maturing long-term debt and added two long-term fixed-rate convertible advances totaling $27.0 million, maturing in 2030 at 0.79% and 0.43%, respectively. The Bank made prepayments of $30.0 million on long-term debt resulting in prepayment fees of $0.6 million, during the year ended December 31, 2020. During the year ended December 31, 2019, the Bank paid off $15.1 million of maturing long-term debt and added five long-term fixed-rate advances totaling $35.0 million, with one $15.1 million advance called in November 2019, $10.0 million maturing in 2020 at 1.85%, $3.0 million in 2021 at 1.70%, $2.0 million in 2022 at 1.69%, and $5.0 million in 2024 at 1.67%, respectively.
During 2020, the Bank used the PPPLF to fund SBA PPP loans to ensure available borrowing availability from the FHLB was not impacted. Federal Reserve PPPLF advances are non-recourse and receive 100% value for the pledged PPP loan collateral. As of December 31, 2020, the Bank did not have any borrowings outstanding under the PPPLF. The Bank has access to this facility in 2021 for any new SBA PPP loans funded with the recent legislation in December 2020 that authorized another round of federal government funding.
At December 31, 2020 and 2019, $0.3 million or 1% and $40.4 million or 100%, respectively, of the Bank’s long-term debt was fixed for rate and term, as the conversion optionality of the advances have either been exercised or expired. The contractual maturities of long-term debt were as follows at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2020
|
|
Fixed-Rate
|
|
Fixed-Rate Convertible
|
|
Variable Convertible
|
|
Total
|
|
|
|
|
|
|
|
|
|
Due in 2021
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Due in 2022
|
|
128
|
|
|
—
|
|
|
—
|
|
|
128
|
|
Due in 2023
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Due in 2024
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Due in 2025
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Thereafter
|
|
174
|
|
|
27,000
|
|
|
—
|
|
|
27,174
|
|
|
|
$
|
302
|
|
|
$
|
27,000
|
|
|
$
|
—
|
|
|
$
|
27,302
|
|
The Bank also has daily advances outstanding and short-term advances with terms of less than one year, which are classified as short-term borrowings. Daily advances are repayable at the Bank’s option at any time and are re-priced daily. There were no daily advances as of December 31, 2020 and December 31, 2019. The Bank had no short-term advances at December 31, 2020 and $5.0 million in short-term advances at December 31, 2019.
Under the terms of an Agreement for Advances and Security Agreement with Blanket Floating Lien (the “Agreement”), the Bank maintains collateral with the FHLB consisting of 1-4 family residential first mortgage loans, second mortgage loans, commercial real estate and securities. The Agreement limits total advances to 30% of assets, which were $607.4 million and $538.8 million at December 31, 2020 and 2019, respectively.
At December 31, 2020, $542.6 million of loans and securities were pledged or in safekeeping at the FHLB. Loans and securities are subject to collateral eligibility rules and are adjusted for market value and collateral value factors to arrive at lendable collateral values. At December 31, 2020, FHLB lendable collateral was valued at $434.6 million. At December 31, 2020, the Bank had total lendable pledged collateral at the FHLB of $257.8 million of which $187.5 million was available to borrow in addition to outstanding advances of $27.3 million and letter of credit of $43.0 million. Unpledged lendable collateral was $176.8 million, bringing total available borrowing capacity to $364.3 million at December 31, 2020.
At December 31, 2019, $578.7 million of loans and securities were pledged or in safekeeping at the FHLB. Loans and securities are subject to collateral eligibility rules and are adjusted for market value and collateral value factors to arrive at lendable collateral values. At December 31, 2019, FHLB lendable collateral was valued at $458.1 million. At December 31, 2019, the Bank had total lendable pledged collateral at the FHLB of $304.6 million of which $216.3 million was available to borrow in addition to outstanding advances of $45.4 million. Unpledged lendable collateral was $153.5 million, bringing total available borrowing capacity to $369.8 million at December 31, 2019.
The Bank has established a short-term credit facility with the Federal Reserve Bank of Richmond under its Borrower in Custody program. The Bank had segregated collateral sufficient to draw $6.0 million and $7.7 million under this agreement at December 31, 2020 and 2019, respectively. In addition, the Bank has established unsecured short-term credit facilities with other commercial banks totaling $32.0 million and $32.0 million at December 31, 2020 and 2019. Additionally, the Bank has a $40.0 million repurchase credit facility. The repurchase facility requires the pledging of securities as collateral. No amounts were outstanding under the Borrower in Custody or the unsecured and secured commercial lines at December 31, 2020 and 2019.
NOTE 9 - GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED DEBENTURES (“TRUPs”)
On June 15, 2005, Tri-County Capital Trust II (“Capital Trust II”), a Delaware business trust formed, funded and wholly-owned by the Company, issued $5.0 million of variable-rate capital securities in a private pooled transaction. The variable rate is based on the 90-day LIBOR rate plus 1.70%. The Trust used the proceeds from this issuance, along with the $0.2 million for Capital Trust II’s common securities, to purchase $5.2 million of the Company’s junior subordinated debentures. The interest rate on the debentures and the trust preferred securities is variable and adjusts quarterly. These capital securities qualify as Tier I capital and are presented in the Consolidated Balance Sheets as “Guaranteed Preferred Beneficial Interests in Junior Subordinated Debentures.” Both the capital securities of Capital Trust II and the junior subordinated debentures are scheduled to mature on June 15, 2035, unless called by the Company.
On July 22, 2004, Tri-County Capital Trust I (“Capital Trust I”), a Delaware business trust formed, funded and wholly-owned by the Company, issued $7.0 million of variable-rate capital securities in a private pooled transaction. The variable rate is based on the 90-day LIBOR rate plus 2.60%. The Trust used the proceeds from this issuance, along with the Company’s $0.2 million capital contribution for Capital Trust I’s common securities, to purchase $7.2 million of the Company’s junior subordinated debentures. The interest rate on the debentures and the trust preferred securities is variable and adjusts quarterly. These debentures qualify as Tier I capital and are presented in the Consolidated Balance Sheets as “Guaranteed Preferred Beneficial Interests in Junior Subordinated Debentures.” Both the capital securities of Capital Trust I and the junior subordinated debentures are scheduled to mature on July 22, 2034, unless called by the Company.
NOTE 10 – SUBORDINATED NOTES
On February 6, 2015 the Company issued $23.0 million of unsecured 6.25% fixed-to-floating-rate subordinated notes due February 15, 2025 (“subordinated notes”). The subordinated notes qualified as Tier 2 regulatory capital and replaced SBLF Tier 1 capital. The subordinated notes were not listed on any securities exchange or included in any automated dealer quotation system and there was no market for the notes. The notes were unsecured obligations and were subordinated in right of payment to all existing and future senior debt, whether secured or unsecured. The notes were not guaranteed obligations of any of the Company’s subsidiaries. Interest accrued at a fixed per annum rate of 6.25% from and including the issue date to but excluding February 15, 2020. The subordinated notes were able to be redeemed in whole or in part on February 15, 2020. The redemption price was equal to 100% of the principal amount of the subordinated notes to be redeemed plus accrued and unpaid interest to the date of redemption.
On December 31, 2019, the Company issued a total of 312,747 shares of its common stock, par value $0.01 in a private placement offering. The Company received net proceeds of $10.6 million after deal expenses. On February 15, 2020, the Company used the proceeds and a cash dividend from the Bank to redeem the Company's outstanding $23.0 million of 6.25% fixed to floating rate subordinate notes.
On October 14, 2020, the Company entered into Subordinated Note Purchase Agreements (collectively, the "Purchase Agreements'') with qualified institutional buyers and accredited investors (collectively, the "Purchasers") pursuant to which the Company issued and sold $20.0 million in aggregate principal amount of its 4.75% Fixed to Floating Rate Subordinated Notes due 2030 (the "Notes"). The Notes were sold by the Company in a private offering. The Notes mature on October 15, 2030 and bear interest at a fixed rate of 4.75% to October 14, 2025. From October 15, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum, expected to be the then-current-three-month Secured Overnight Financing Rate ("SOFR") provided by the Federal Reserve Bank of New York plus 458 basis points. The Company may redeem the Notes at any time after October 14, 2025, and at any time in whole, but not in part, upon the occurrence of certain events. Any redemption of the Notes will be subject to prior regulatory approval. The Company incurred debt issuance costs for placement fees, legal and other out-of-pocket expenses of approximately $0.5 million, which are being amortized over the life of the Notes.
NOTE 11 - REGULATORY CAPITAL
The Bank’s primary regulator is the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to regulation, supervision and regular examination by the Maryland Commissioner of Financial Regulation (the “Commissioner”) and the FDIC. The Company is subject to regulation, examination and supervision by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “BHCA”).
The Company and Bank are subject to the Basel III Capital Rules which establish a comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s “Basel III” framework for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions compared to the previous U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach with a more risk-sensitive approach. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules.
The rules include a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio (“Min. Ratio”) of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer (“CCB”) is also established above the regulatory minimum capital requirements. The capital conservation buffer was phased-in over a three-year period before reaching its final level of 2.5% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the rules. The rules revised the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets.
On April 13, 2020, the regulatory agencies published an interim final rule, which permits banking organizations to exclude from regulatory capital requirements SBA PPP covered loans pledged under the PPPLF. The interim final rule also clarifies that PPP covered loans as defined in section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)) receive a zero percent risk weight.
The interim final rule modifies the agencies’ capital rule and allows PPPLF-eligible banking organizations to neutralize the regulatory effects of PPP covered loans on their risk-based capital ratios, as well as PPP covered loans pledged under the PPPLF on their leverage capital ratios. When calculating leverage capital ratios, a banking organization may exclude from average total consolidated assets and, as applicable, total leverage exposure a PPP covered loan as of the date that it has been pledged under the PPPLF. Accordingly, a PPP covered loan that has not been pledged as collateral in connection with an extension of credit under the PPPLF would be included in the calculation of the banking organization’s average total consolidated assets and, as applicable, total leverage exposure. On November 30, 2020 the Federal Reserve Board and U.S. Department of Treasury jointly announced the extension of the PPPLF facility to March 31, 2021.
As of December 31, 2020, and 2019, the Company and Bank were well-capitalized under the regulatory framework for prompt corrective action under the new Basel III Capital Rules. Management believes, as of December 31, 2020 and 2019, that the Company and the Bank met all capital adequacy requirements to which they were subject. The Company’s and the Bank’s actual regulatory capital amounts and ratios are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Capital and Ratios
|
|
The Company
|
|
The Bank
|
(dollars in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2020
|
|
December 31, 2019
|
Common equity
|
|
$
|
198,013
|
|
|
$
|
181,494
|
|
|
$
|
217,142
|
|
|
$
|
202,604
|
|
Goodwill
|
|
(10,835)
|
|
|
(10,835)
|
|
|
(10,835)
|
|
|
(10,835)
|
|
Core deposit intangible (net of deferred tax liability)
|
|
(1,129)
|
|
|
(1,534)
|
|
|
(1,129)
|
|
|
(1,534)
|
|
AOCI (gains) losses
|
|
(4,504)
|
|
|
(1,504)
|
|
|
(4,504)
|
|
|
(1,504)
|
|
Common Equity Tier 1 Capital
|
|
181,545
|
|
|
167,621
|
|
|
200,674
|
|
|
188,731
|
|
TRUPs
|
|
12,000
|
|
|
12,000
|
|
|
—
|
|
|
—
|
|
Tier 1 Capital
|
|
193,545
|
|
|
179,621
|
|
|
200,674
|
|
|
188,731
|
|
Allowable reserve for credit losses and other Tier 2 adjustments
|
|
19,475
|
|
|
10,993
|
|
|
19,475
|
|
|
10,993
|
|
Subordinated notes
|
|
19,526
|
|
|
23,000
|
|
|
—
|
|
|
—
|
|
Tier 2 Capital
|
|
$
|
232,546
|
|
|
$
|
213,614
|
|
|
$
|
220,149
|
|
|
$
|
199,724
|
|
|
|
|
|
|
|
|
|
|
Risk-Weighted Assets ("RWA")
|
|
$
|
1,582,581
|
|
|
$
|
1,508,352
|
|
|
$
|
1,580,786
|
|
|
$
|
1,506,766
|
|
|
|
|
|
|
|
|
|
|
Average Assets ("AA")
|
|
$
|
2,025,061
|
|
|
$
|
1,782,834
|
|
|
$
|
2,023,325
|
|
|
$
|
1,781,415
|
|
Regulatory Min. Ratio + CCB (1)
|
|
|
|
|
|
|
|
|
Common Tier 1 Capital to RWA
|
7.00%
|
11.47
|
%
|
|
11.11
|
%
|
|
12.69
|
%
|
|
12.53
|
%
|
Tier 1 Capital to RWA
|
8.50
|
12.23
|
|
|
11.91
|
|
|
12.69
|
|
|
12.53
|
|
Tier 2 Capital to RWA
|
10.50
|
14.69
|
|
|
14.16
|
|
|
13.93
|
|
|
13.26
|
|
Tier 1 Capital to AA (Leverage) (2)
|
n/a
|
9.56
|
|
|
10.08
|
|
|
9.92
|
|
|
10.59
|
|
(1) The regulatory minimum capital ratio ("Min. Ratio") + the capital conservation buffer ("CCB").
(2) Tier 1 Capital to AA ("Leverage") has no capital conservation buffer defined. The prompt corrective action ("PCA") well capitalized is defined as 5.00%.
Dividends paid by the Company are substantially funded from dividends received from the Bank. Federal and holding company regulations, as well as Maryland law, imposes certain restrictions on capital distributions, including dividend payments and share repurchases. These restrictions generally require advanced approval from the Bank's regulator for payment of dividends in excess of the sum of net income for the current calendar year and the retained net income of the prior two calendar years.
NOTE 12 - ACCUMULATED OTHER COMPREHENSIVE INCOME ("AOCI")
The following table presents the changes in each component of accumulated other comprehensive income, net of tax, for the years ended December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
|
(dollars in thousands)
|
|
Net Unrealized Gains And Losses
|
|
Net Unrealized Gains And Losses
|
|
|
Beginning of period
|
|
$
|
1,504
|
|
|
$
|
(1,847)
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
Other comprehensive gains, net of tax before reclassifications
|
|
1,977
|
|
|
2,600
|
|
|
|
Amounts reclassified for reclassification of HTM to AFS securities
|
|
—
|
|
|
587
|
|
|
|
Amounts reclassified from accumulated other comprehensive gain
|
|
1,023
|
|
|
164
|
|
|
|
Net other comprehensive income
|
|
$
|
3,000
|
|
|
$
|
3,351
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
4,504
|
|
|
$
|
1,504
|
|
|
|
As of December 31, 2020 and 2019, reclassification adjustments were due to the gain on sale of AFS investment securities of $1.4 million and $0.2 million, respectively.
NOTE 13 - EARNINGS PER SHARE ("EPS")
Basic earnings per common share represent income available to common shareholders, divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may have been issued by the Company related to outstanding unvested restricted stock unit and performance stock unit awards were determined using the treasury stock method. The Company has not granted any stock options since 2007 and all outstanding options expired on July 17, 2017.
As of December 31, 2020 and 2019, there were no unvested restricted stock and performance stock unit awards which were excluded from the calculation as their effect would be anti-dilutive. Basic and diluted earnings per share have been computed based on weighted-average common and common equivalent shares outstanding as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Years Ended December 31,
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
16,136
|
|
|
$
|
15,272
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding
|
|
5,892,269
|
|
|
5,560,588
|
|
|
|
Dilutive effect of common stock equivalents
|
|
1,290
|
|
|
—
|
|
|
|
Average number of shares used to calculate diluted EPS
|
|
5,893,559
|
|
|
5,560,588
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share
|
|
|
|
|
|
|
Basic
|
|
$
|
2.74
|
|
|
$
|
2.75
|
|
|
|
Diluted
|
|
$
|
2.74
|
|
|
$
|
2.75
|
|
|
|
NOTE 14 - INCOME TAXES
Allocation of federal and state income taxes between current and deferred portions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2020
|
|
2019
|
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
6,412
|
|
|
$
|
4,234
|
|
|
|
State
|
|
839
|
|
|
2,179
|
|
|
|
|
|
7,251
|
|
|
6,413
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
Federal
|
|
(2,018)
|
|
|
(547)
|
|
|
|
State
|
|
(739)
|
|
|
(201)
|
|
|
|
|
|
(2,757)
|
|
|
(748)
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
4,494
|
|
|
$
|
5,665
|
|
|
|
The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
Amount
|
|
Percent of Pre-Tax Income
|
|
Amount
|
|
Percent of Pre-Tax Income
|
|
|
|
|
Expected income tax expense at federal tax rate
|
|
$
|
4,332
|
|
|
21.00
|
%
|
|
$
|
4,397
|
|
|
21.00
|
%
|
|
|
|
|
State taxes net of federal benefit
|
|
1,071
|
|
|
5.19
|
%
|
|
1,745
|
|
|
8.33
|
%
|
|
|
|
|
Nondeductible expenses
|
|
85
|
|
|
0.41
|
%
|
|
103
|
|
|
0.49
|
%
|
|
|
|
|
Nontaxable income
|
|
(396)
|
|
|
(1.91
|
%)
|
|
(277)
|
|
|
(1.31
|
%)
|
|
|
|
|
Income tax apportionment adjustment
|
|
(743)
|
|
|
(3.60)
|
%
|
|
—
|
|
|
—
|
%
|
|
|
|
|
Other
|
|
145
|
|
|
0.70
|
%
|
|
(303)
|
|
|
(1.45
|
%)
|
|
|
|
|
|
|
$
|
4,494
|
|
|
21.79
|
%
|
|
$
|
5,665
|
|
|
27.06
|
%
|
|
|
|
|
Income tax expense for 2019 was impacted by a change in the Company's state tax apportionment approach which was implemented during the first quarter of 2020 and included the impact of amended income tax filings of the Company and Bank. Management determined the change in tax position qualified as a change in estimate under FASB ASC Section 250.
The net deferred tax assets in the accompanying balance sheets include the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Deferred tax assets
|
|
|
|
|
Allowance for loan losses
|
|
$
|
5,018
|
|
|
$
|
3,011
|
|
Deferred compensation
|
|
3,218
|
|
|
3,239
|
|
Lease liability
|
|
2,090
|
|
|
2,338
|
|
OREO valuation allowance & expenses
|
|
718
|
|
|
457
|
|
|
|
|
|
|
Depreciation
|
|
158
|
|
|
50
|
|
Deferred fees
|
|
283
|
|
|
—
|
|
Other
|
|
287
|
|
|
189
|
|
|
|
11,772
|
|
|
9,284
|
|
Deferred tax liabilities
|
|
|
|
|
Fair value adjustments for acquired assets and liabilities
|
|
111
|
|
|
115
|
|
FHLB stock dividends
|
|
102
|
|
|
109
|
|
Unrealized gain on investment securities
|
|
1,627
|
|
|
585
|
|
Right of use asset
|
|
2,023
|
|
|
2,307
|
|
|
|
|
|
|
|
|
3,863
|
|
|
3,116
|
|
|
|
|
|
|
|
|
$
|
7,909
|
|
|
$
|
6,168
|
|
Retained earnings at December 31, 2020 and 2019 included approximately $1.2 million of bad debt deductions allowed for federal income tax purposes (the “base year tax reserve”) for which no deferred income tax has been recognized. If, in the future, this portion of retained earnings is used for any purpose other than to absorb bad debt losses, it would create income for tax purposes only and income taxes would be imposed at the then prevailing rates. The unrecorded income tax liability on the above amount was approximately $0.3 million at December 31, 2020 and 2019.
The Company does not have uncertain tax positions that are deemed material and did not recognize any adjustments for unrecognized tax benefits. The Company’s policy is to recognize interest and penalties on income taxes as a component of tax expense. The Company is no longer subject to U.S. Federal tax examinations by tax authorities for years before 2017.
NOTE 15 - STOCK-BASED COMPENSATION
The Company has stock-based incentive arrangements to attract and retain key personnel. In May 2015, the 2015 Equity Compensation Plan (the “2015 plan”) was approved by shareholders, which authorizes the issuance of restricted stock, stock appreciation rights, stock units and stock options to the Board of Directors and key employees. Compensation expense for service-based awards is recognized over the vesting period. Performance-based awards are recognized based on a vesting schedule and the probability of achieving goals specified at the time of the grant. The 2015 plan replaced the 2005 Equity Compensation Plan.
Stock-based compensation expense totaled $0.4 million, and $0.3 million for the years ended December 31, 2020 and 2019, respectively, which consisted of grants of restricted stock, restricted stock units and performance stock units.
The Company granted restricted stock in accordance with the Plan. The vesting period for outstanding restricted stock grants is between three and five years.
During 2020, the Company granted restricted stock units to the Board of Directors and key employees. Service based awards vest between one and three years. Performance-based awards cliff vest in approximately three years from the date of grant, with payouts based on threshold, target or stretch average performance targets over a three year period. There are two performance metrics: a three year reported average return on average assets and a three year reported average return on average equity. Both metrics are measured on a relative basis against a defined group of peer banks over the three year period. The fair value of the restricted units is based on the Company's closing stock price on the date of grant. The recipients of the restricted stock units and the performance stock units do not have any stockholder rights, including voting, dividend, or liquidation rights, with respect to the shares underlying awarded restricted stock units until the recipient becomes the record holder of those shares.
The Company has outstanding restricted stock, restricted stock units, performance stock units in accordance with the Plan. As of December 31, 2020 and 2019, unrecognized stock compensation expense was $0.8 million and $0.3 million, respectively. The following tables summarize the unvested restricted stock, restricted stock unit, and performance stock unit awards outstanding at December 31, 2020 and 2019 respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Restricted Stock Units
|
|
Performance Stock Units
|
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
Nonvested at January 1, 2020
|
|
14,440
|
|
|
$
|
25.79
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
9,065
|
|
|
33.42
|
|
|
19,151
|
|
|
24.06
|
|
|
8,482
|
|
|
22.64
|
|
Vested
|
|
(8,933)
|
|
|
34.02
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cancelled
|
|
(442)
|
|
|
33.81
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Nonvested at December 31, 2020
|
|
14,130
|
|
$
|
32.77
|
|
|
19,151
|
|
$
|
24.06
|
|
|
8,482
|
|
$
|
22.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Restricted Stock Units
|
|
Performance Stock Units
|
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
Nonvested at January 1, 2019
|
|
25,473
|
|
|
$
|
28.76
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
6,524
|
|
|
31.82
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Vested
|
|
(17,557)
|
|
|
25.83
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cancelled
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Nonvested at December 31, 2019
|
|
14,440
|
|
|
$
|
25.79
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
NOTE 16 - EMPLOYEE BENEFIT PLANS
The Company has an Employee Stock Ownership Plan (“ESOP”) that covers substantially all employees. Employees qualify to participate after one year of service and vest in allocated shares after three years of service. The ESOP acquires stock of the Company by purchasing shares. Dividends on ESOP shares are recorded as a reduction of retained earnings. Contributions are made at the discretion of the Board of Directors. ESOP contributions recognized for the years ended December 31, 2020, and 2019 totaled $0.2 million and $0.2 million, respectively. As of December 31, 2020 and 2019, the ESOP held 156,447 and 156,707 allocated shares and 13,175 and 17,325 unallocated shares. The approximate market values of the unallocated shares were $0.3 million and $0.6 million, respectively as of December 31, 2020 and 2019. The estimated value was determined using the Company’s closing stock price of $26.48 and $35.57 per share as of December 31, 2020 and 2019, respectively. In addition, salary and employee benefit expense for the years ended December 31, 2020 and December 31, 2019 included decreases of $39,000 and $3,000, respectively, for the net change of fair market value of leveraged ESOP shares allocated.
The ESOP has promissory notes with the Company for the purchase of TCFC common stock for the benefit of the participants in the Plan of $0.5 million and $0.6 million at December 31, 2020 and 2019, respectively. The Bank is a guarantor of the ESOP debt with the Company. Loan terms are at prime rate plus one-percentage point and amortize over seven years. As principal is repaid, common shares are allocated to participants based on the participant account allocation rules described in the Plan. During the year ended December 31, 2020, $0.1 million or 4,150 ESOP shares were allocated with the payment of promissory notes. There were no purchases by the ESOP of the Company’s common shares with promissory notes or cash during 2020. During the year ended December 31, 2019, $0.2 million or 4,815 ESOP shares were allocated with the payment of promissory notes. This was offset by the purchase of 3,271 shares of the Company’s common shares for $39,000 with promissory notes by the ESOP and $63,000 in cash during the first and third quarters of 2019, respectively.
The Company also has a 401(k) plan. The Company matches a portion of the employee contributions. This ratio is determined annually by the Board of Directors. In 2020 and 2019, the Company matched one-half of the first 8% of the employee’s contribution. Employees who have completed six months of service are covered under this defined contribution plan. Employee’s vest in the Company’s matching contributions after three years of service. For the years ended December 31, 2020 and 2019, the expense recorded for this plan totaled $0.5 million and $0.5 million, respectively.
The Company maintains a non-qualified deferred compensation plan for the Board of Directors and certain key employees under which each participant may elect to defer all or any portion of board fees or salary otherwise payable. Deferred amounts under this plan will be distributed to participants following termination of service or on a specified date in either lump sum or over a period of one to ten years, as elected by the participant. As of December 31, 2020 and 2019, the liability related to this plan was $2.1 million and $2.2 million, respectively. During 2020, the Company amended the non-qualified compensation plan for certain key employees to include discretionary contributions from the Company. Contributions made by the Company become vested on December 31st of the third year following the year the contribution is made. As of December 31, 2020, the Company contributed approximately $41,000 to the plan.
The Company has a separate non-qualified retirement plan for non-employee directors. Directors are eligible for a maximum benefit of $3,500 a year for ten years following retirement from the Board of Community Bank of the Chesapeake. The maximum benefit is earned at 15 years of service as a non-employee director. Full vesting occurs after two years of service. Expense recorded for this plan was $20,000 and $26,000 for the years ended December 31, 2020 and 2019, respectively.
In addition, the Company has established individual supplemental retirement plans and life insurance benefits for certain key executives and officers of the Bank. The retirement plans provide retirement income payments for 15 years from the date of the employee’s expected retirement at age 65. The retirement benefit amount for each agreement is set at the discretion of the Board of Directors and vests from the date of the agreement. Expense recorded for the plans totaled $0.8 million and $0.9 million for 2020 and 2019, respectively.
NOTE 17 - RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS
The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2020 and 2019, these required reserve balances amounted to $0 and $6.0 million, respectively. The COVID-19 pandemic continues to impact much of the way financial institutions both operate and serve their customers, the Federal Reserve Bank announced on March 15, 2020, the reduction of reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
NOTE 18 - COMMITMENTS AND CONTINGENCIES
in the normal course of business, the Bank is party to financial instruments with commitments that extend credit to meet the financing needs of customers. These instruments may involve elements of credit and interest rate risk in excess of amounts recognized on the balance sheet. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet loans receivable.
As of December 31, 2020, and 2019, the Bank had outstanding loan commitments, consisting of commitments issued to originate loans, of approximately $66.5 million and $96.6 million, respectively, excluding undisbursed portions of loans in process.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are issued primarily to support construction borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds cash or a secured interest in real estate as collateral to support those commitments for which collateral is deemed necessary. Standby letters of credit outstanding amounted to $20.0 million and $22.3 million at December 31, 2020 and 2019, respectively. In addition to the commitments noted above, customers had approximately $225.5 million and $230.5 million available under lines of credit at December 31, 2020 and 2019, respectively.
NOTE 19 - RELATED PARTIES
A member of the board directors of the Company is a shareholder in a law firm that provides ongoing legal services for the Company and its subsidiaries. During 2020 and 2019, the Company paid the law firm annual retainers of $113,000 and $110,000, respectively.
Certain directors and executive officers and their related interests have loan transactions with the Company. Such loans were made in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with outsiders. Please see further details regarding Related Party Loans in Note 3 to the Consolidated Financial Statements.
NOTE 20 - FAIR VALUE MEASUREMENTS
The Company adopted FASB ASC Topic 820, “Fair Value Measurements” and FASB ASC Topic 825, “The Fair Value Option for Financial Assets and Financial Liabilities”, which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. FASB ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, AFS investment securities) or on a nonrecurring basis (for example, impaired loans).
FASB ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. AFS securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis such as loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
Under FASB ASC Topic 820, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine the fair value. These hierarchy levels are:
Level 1 inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s quarterly valuation process. Transfers in and out of level 3 during a quarter are disclosed. There were no transfers between Level 1, 2 or 3 during the years ended December 31, 2020 and December 31, 2019.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
Securities Available for Sale
AFS investment securities are recorded at fair value on a recurring basis. Standard inputs include quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities (“GSEs”), municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Equity Securities Carried at Fair Value Through Income
Equity securities carried at fair value through income are recorded at fair value on a recurring basis. Standard inputs include quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 equity securities include those traded on an active exchange, such as the New York Stock Exchange. Level 2 equity securities include mutual funds with asset-backed securities issued by government sponsored entities (“GSEs”) as the underlying investment supporting the fund. Equity securities classified as Level 3 include mutual funds with asset-backed securities in less liquid markets.
Loans Receivable
The Company does not record loans at fair value on a recurring basis; however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Management estimates the fair value of impaired loans using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At December 31, 2020 and 2019, substantially all impaired loans were evaluated based upon the fair value of the collateral.
In accordance with FASB ASC 820, impaired loans where an allowance is established based on the fair value of collateral (loans with impairment) require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price (e.g., contracted sales price), the Company records the loan as nonrecurring Level 2. When the fair value of the impaired loan is derived from an appraisal, the Company records the loan as nonrecurring Level 3. Fair value is re-assessed at least quarterly or more frequently when circumstances occur that indicate a change in the fair value. The fair values of impaired loans that are not measured based on collateral values are measured using discounted cash flows and considered to be Level 3 inputs.
Premises and Equipment Held For Sale
Premises and equipment are adjusted to fair value upon transfer of the assets to premises and equipment held for sale. Subsequently, premises and equipment held for sale are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised value of the collateral or management's estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price (e.g., contracted sales price), the Company records the asset as nonrecurring Level 2. When the fair value of premises and equipment is derived from an appraisal or a cash flow analysis, the Company records the asset as nonrecurring Level 3.
Other Real Estate Owned (“OREO”)
OREO is adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price (e.g., contracted sales price), the Company records the foreclosed asset as nonrecurring Level 2. When the fair value is derived from an appraisal, the Company records the foreclosed asset at nonrecurring Level 3.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The tables below present the recorded amount of assets as of December 31, 2020 and December 31, 2019 measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2020
|
Description of Asset
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
AFS securities
|
|
|
|
|
|
|
|
|
Asset-backed securities issued by GSEs and U.S. Agencies
|
|
|
|
|
|
|
|
|
MBS
|
|
$
|
34,953
|
|
|
$
|
—
|
|
|
$
|
34,953
|
|
|
$
|
—
|
|
CMOs
|
|
127,447
|
|
|
—
|
|
|
127,447
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities issued by Others:
|
|
|
|
|
|
|
|
|
Residential CMOs
|
|
288
|
|
|
—
|
|
|
288
|
|
|
—
|
|
Student Loan Trust ABSs
|
|
37,439
|
|
|
—
|
|
|
37,439
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
1,500
|
|
|
—
|
|
|
1,500
|
|
|
—
|
|
Municipal bonds
|
|
44,478
|
|
|
—
|
|
|
44,478
|
|
|
—
|
|
Total AFS securities
|
|
$
|
246,105
|
|
|
$
|
—
|
|
|
$
|
246,105
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Equity securities carried at fair value through income
|
|
|
|
|
|
|
|
|
CRA investment fund
|
|
$
|
4,855
|
|
|
$
|
—
|
|
|
$
|
4,855
|
|
|
$
|
—
|
|
Non-marketable equity securities
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
$
|
207
|
|
|
$
|
—
|
|
|
$
|
207
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2019
|
Description of Asset
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
AFS securities
|
|
|
|
|
|
|
|
|
Asset-backed securities issued by GSEs and U.S. Agencies
|
|
|
|
|
|
|
|
|
MBS
|
|
$
|
36,092
|
|
|
$
|
—
|
|
|
$
|
36,092
|
|
|
$
|
—
|
|
CMOs
|
|
146,932
|
|
|
—
|
|
|
146,932
|
|
|
—
|
|
U.S. Agency
|
|
9,733
|
|
|
—
|
|
|
9,733
|
|
|
—
|
|
Asset-backed securities issued by Others:
|
|
|
|
|
|
|
|
|
Residential CMOs
|
|
371
|
|
|
—
|
|
|
371
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Callable GSE Agency Bonds
|
|
2,002
|
|
|
—
|
|
|
2,002
|
|
|
—
|
|
Certificates of Deposit Fixed
|
|
250
|
|
|
—
|
|
|
250
|
|
|
—
|
|
U.S. government obligations
|
|
1,489
|
|
|
—
|
|
|
1,489
|
|
|
—
|
|
Municipal bonds
|
|
11,318
|
|
|
—
|
|
|
11,318
|
|
|
—
|
|
Total AFS securities
|
|
$
|
208,187
|
|
|
$
|
—
|
|
|
$
|
208,187
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Equity securities carried at fair value through income
|
|
|
|
|
|
|
|
|
CRA investment fund
|
|
$
|
4,669
|
|
|
$
|
—
|
|
|
$
|
4,669
|
|
|
$
|
—
|
|
Non-marketable equity securities
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
$
|
209
|
|
|
$
|
—
|
|
|
$
|
209
|
|
|
$
|
—
|
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company may be required to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis as of December 31, 2020 and 2019 are included in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2020
|
Description of Asset
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Loans with impairment
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
4,483
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,483
|
|
Commercial loans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial equipment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total loans with impairment
|
|
$
|
4,483
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,483
|
|
Premises and equipment held for sale
|
|
$
|
430
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
430
|
|
Other real estate owned
|
|
$
|
3,109
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
December 31, 2019
|
Description of Asset
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Loans with impairment
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
4,371
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,371
|
|
Commercial loans
|
|
1,110
|
|
|
—
|
|
|
—
|
|
|
1,110
|
|
Commercial equipment
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Total loans with impairment
|
|
$
|
5,483
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,483
|
|
Premises and equipment held for sale
|
|
$
|
430
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
430
|
|
Other real estate owned
|
|
$
|
7,773
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,773
|
|
Loans with impairment have unpaid principal balances of $5.8 million and $6.3 million at December 31, 2020 and 2019, respectively.
The following tables provide information describing the unobservable inputs used in Level 3 fair value measurements at December 31, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
Description of Asset
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Range (Weighted Average)
|
Loans with impairment
|
|
$
|
4,483
|
|
|
Third party appraisals and in-house real estate evaluations of fair value
|
|
Management discount for property type, selling costs and current market conditions
|
|
0% - 50% - 23%
|
Premises and equipment held for sale
|
|
$
|
430
|
|
|
Third party appraisals, in-house real estate evaluations of fair value and contracts to sell.
|
|
Management discount for property type and current market conditions
|
|
0% - 25% - 10%
|
Other real estate owned
|
|
$
|
3,109
|
|
|
Third party appraisals and in-house real estate evaluations of fair value
|
|
Management discount for property type and current market conditions
|
|
0% - 50% - 47%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
Description of Asset
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Range (Weighted Average)
|
Loans with impairment
|
|
$
|
5,483
|
|
|
Third party appraisals and in-house real estate evaluations of fair value
|
|
Management discount for property type and current market conditions
|
|
0% - 50% - 13%
|
Premises and equipment held for sale
|
|
$
|
430
|
|
|
Third party appraisals, in-house real estate evaluations of fair value and contracts to sell.
|
|
Management discount for property type and current market conditions
|
|
0% - 25% - 10%
|
Other real estate owned
|
|
$
|
7,773
|
|
|
Third party appraisals and in-house real estate evaluations of fair value
|
|
Management discount for property type and current market conditions
|
|
0% - 50% - 18%
|
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the financial instrument fair value disclosure requirements, including the Company’s common stock, OREO, premises and equipment and other assets and liabilities.
The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Therefore, any aggregate unrealized gains or losses should not be interpreted as a forecast of future earnings or cash flows. Furthermore, the fair values disclosed should not be interpreted as the aggregate current value of the Company.
Valuation Methodology
During the three months ended March 31, 2018, the Company implemented “ASU 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires public business entities to use the exit prices when measuring the fair value of financial instruments for disclosure purposes. The other requirements of ASU 2016-01 are described in Note 1. Fair values at December 31, 2020 and December 31, 2019 were measured using an “exit price” notion.
The exit price notion uses a similar approach as the Company’s previous methodology for valuations that used discounted cash flows, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The implementation of ASU 2016-01 was most impactful to the Company’s loan portfolio because the Company’s other financial instruments have one or several other compensating factors (e.g., quoted market prices, lower credit risk, limited liquidity risk, short durations, etc.).
Investment securities - Fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
FHLB stock - Fair values are at cost, which is the carrying value of the securities.
Accrued Interest Receivable - Carrying amount is the estimated fair value.
Investment in bank owned life insurance (“BOLI”) - Fair values are at cash surrender value.
Loans receivable - The fair values for non-impaired loans are estimated using discounted cash flow analysis, applying interest rates currently being offered for loans with similar terms and credit quality. Internal prepayment risk models are used to adjust contractual cash flows.
Management estimates the fair value of impaired loans using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. After evaluating the underlying collateral, the fair value is determined by allocating specific reserves from the allowance for loan losses to the impaired loans.
Deposits - The fair values of checking accounts, saving accounts and money market accounts were the amount payable on demand at the reporting date.
Time certificates - The fair value was determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products.
Long-term debt and short-term borrowings - These were valued using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar borrowings.
Guaranteed preferred beneficial interest in junior subordinated securities ("TRUPs") - These were valued using discounted cash flows. The discount rate was equal to the rate currently offered on similar borrowings.
Subordinated notes - These were valued using discounted cash flows. The discount rate was equal to the rate currently offered on similar borrowings.
Off-balance sheet instruments - The Company charges fees for commitments to extend credit. Interest rates on loans for which these commitments are extended are normally committed for periods of less than one month. Fees charged on standby letters of credit and other financial guarantees are deemed to be immaterial and these guarantees are expected to be settled at face amount or expire unused. It is impractical to assign any fair value to these commitments.
The Company’s estimated fair values of financial instruments are presented in the following tables.
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December 31, 2020
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Carrying Amount
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Fair Value
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Fair Value Measurements
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Description of Asset (dollars in thousands)
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Level 1
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Level 2
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Level 3
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Assets
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Investment securities - AFS
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$
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246,105
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$
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246,105
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$
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—
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$
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246,105
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$
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—
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Equity securities carried at fair value through income
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4,855
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4,855
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—
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4,855
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—
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Non-marketable equity securities in other financial institutions
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207
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207
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—
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207
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—
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FHLB Stock
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2,777
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2,777
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—
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2,777
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—
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Net loans receivable
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1,594,075
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1,581,922
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—
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—
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1,581,922
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Accrued Interest Receivable
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8,717
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8,717
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—
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8,717
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—
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Investment in BOLI
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38,061
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38,061
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—
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38,061
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—
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Liabilities
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Savings, NOW and money market accounts
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$
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1,391,746
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$
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1,391,746
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$
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—
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$
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1,391,746
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$
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—
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Time deposits
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353,856
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355,478
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—
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355,478
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—
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Short-term borrowings
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—
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—
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—
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—
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—
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Long-term debt
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27,302
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27,805
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—
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27,805
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—
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TRUPs
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12,000
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9,444
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—
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9,444
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—
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Subordinated notes
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19,526
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20,106
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—
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20,106
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—
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December 31, 2019
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Carrying Amount
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Fair Value
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Fair Value Measurements
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Description of Asset (dollars in thousands)
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Level 1
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Level 2
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Level 3
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Assets
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Investment securities - AFS
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$
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208,187
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$
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208,187
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$
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—
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$
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208,187
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$
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—
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Equity securities carried at fair value through income
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4,669
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4,669
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—
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4,669
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—
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Non-marketable equity securities in other financial institutions
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209
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209
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—
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209
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—
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FHLB Stock
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3,447
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3,447
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—
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3,447
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—
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Net loans receivable
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1,445,109
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1,424,506
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—
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—
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1,424,506
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Accrued Interest Receivable
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5,019
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5,019
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—
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5,019
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—
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Investment in BOLI
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37,180
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37,180
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—
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37,180
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—
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Liabilities
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Savings, NOW and money market accounts
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$
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1,117,668
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$
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1,117,668
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$
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—
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$
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1,117,668
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$
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—
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Time deposits
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394,169
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396,492
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—
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396,492
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—
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Short-term borrowings
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5,000
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5,007
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—
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5,007
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—
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Long-term debt
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40,370
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40,588
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—
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40,588
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—
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TRUPs
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12,000
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10,129
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—
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10,129
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—
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Subordinated notes
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23,000
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23,031
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—
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23,031
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—
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At December 31, 2020 and 2019, the Company had outstanding loan commitments of $66.5 million and $96.6 million, respectively, and standby letters of credit of $20.0 million and $22.3 million, respectively. Additionally, at December 31, 2020 and 2019, customers had $225.5 million and $230.5 million, respectively, available and unused on lines of credit, which include lines of credit for commercial customers, home equity loans as well as builder and construction lines. Based on the short-term lives of these instruments, the Company does not believe that the fair value of these instruments differs significantly from their carrying values.
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2020 and 2019, respectively. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these Consolidated Financial Statements since that date and, therefore, current estimates of fair value may differ significantly from the amount presented herein.
NOTE 22 - CONDENSED FINANCIAL STATEMENTS – PARENT COMPANY ONLY
Balance Sheets
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(dollars in thousands)
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December 31,
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2020
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2019
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Assets
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Cash - noninterest bearing
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$
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12,076
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$
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3,268
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Cash - interest bearing
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—
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10,759
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Investment in wholly-owned subsidiaries
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217,514
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202,976
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Other assets
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1,423
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1,214
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Total Assets
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$
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231,013
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$
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218,217
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Liabilities and Stockholders' Equity
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Current liabilities
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$
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1,102
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$
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1,351
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Guaranteed preferred beneficial interest in junior subordinated debentures
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12,372
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12,372
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Subordinated notes - 4.75% and 6.25%, respectively
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19,526
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23,000
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Total Liabilities
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33,000
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36,723
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Stockholders' Equity
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Common stock
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59
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59
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Additional paid in capital
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95,965
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95,474
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Retained earnings
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97,944
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85,059
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Accumulated other comprehensive income
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4,504
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1,504
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Unearned ESOP shares
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(459)
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(602)
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Total Stockholders’ Equity
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198,013
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181,494
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Total Liabilities and Stockholders’ Equity
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$
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231,013
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$
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218,217
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Condensed Statements of Income
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(dollars in thousands)
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Years Ended December 31,
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2020
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2019
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Interest and Dividend Income
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Dividends from subsidiary
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$
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17,000
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$
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4,500
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Interest income
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46
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65
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Interest expense
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779
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2,023
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Net Interest Income
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16,267
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2,542
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Miscellaneous expenses
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(2,302)
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(2,408)
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Income before income taxes and equity in undistributed net income of subsidiary
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13,965
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134
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Federal and state income tax benefit
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647
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954
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Equity in undistributed net income of subsidiary
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1,524
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14,184
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Net Income
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$
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16,136
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$
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15,272
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Condensed Statements of Cash Flows
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(dollars in thousands)
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Years Ended December 31,
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2020
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2019
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Cash Flows from Operating Activities
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Net income
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$
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16,136
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$
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15,272
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Adjustments to reconcile net income to net cash provided by operating activities
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Equity in undistributed earnings of subsidiary
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(1,524)
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(14,184)
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Amortization of debt issuance costs
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10
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—
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Stock based compensation
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343
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329
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(Increase) decrease in other assets
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(169)
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164
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(Increase) decrease in deferred income tax benefit
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(41)
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11
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(Decrease) increase in current liabilities
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(248)
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126
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Net Cash Provided by Operating Activities
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14,507
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1,718
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Net Cash Provided by Investing Activities
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—
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—
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Cash Flows from Financing Activities
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Dividends paid
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(2,819)
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(2,668)
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Proceeds from public offering
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—
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10,632
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Capital to subsidiary
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(10,000)
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—
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Proceeds from subordinated notes - 4.75%
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19,516
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—
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Payment of subordinated notes - 6.25%
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(23,000)
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—
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Net change in unearned ESOP shares
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143
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116
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Repurchase of common stock
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(298)
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(17)
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Net Cash (Used in) Provided by Financing Activities
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(16,458)
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8,063
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(Decrease) Increase in Cash
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(1,951)
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9,781
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Cash at Beginning of Year
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14,027
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|
4,246
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Cash at End of Year
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$
|
12,076
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$
|
14,027
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