Notes to Consolidated Financial Statements
(All dollar amounts presented in the tables, except share and per share amounts, are in thousands)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the consolidated financial statements and related notes of this Form 10-K.
Nature of Operations – Orrstown Financial Services, Inc. is a financial holding company that operates Orrstown Bank, a commercial bank with banking and financial advisory offices in Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry and York Counties, Pennsylvania, and in Anne Arundel, Baltimore, Howard and Washington Counties, Maryland, as well as Baltimore City, Maryland. The Company operates in the community banking segment and engages in lending activities, including commercial, residential, commercial mortgages, construction, municipal, and various forms of consumer lending, and deposit services, including checking, savings, time, and money market deposits. The Company also provides fiduciary services, investment advisory, insurance and brokerage services. Effective July 31, 2020, Wheatland Advisors, Inc., a registered investment advisor non-bank subsidiary, headquartered in Lancaster County, Pennsylvania was discontinued. The Company and the Bank are subject to regulation by certain federal and state agencies and undergo periodic examinations by such regulatory authorities.
Basis of Presentation – The accompanying consolidated financial statements include the accounts of Orrstown Financial Services, Inc. and its wholly owned subsidiary, the Bank. The accounting and reporting policies of the Company conform to GAAP and, where applicable, to accounting and reporting guidelines prescribed by bank regulatory authorities. All significant intercompany transactions and accounts have been eliminated. Certain reclassifications have been made to prior year amounts to conform with current year classifications. In October 2018, the Company acquired Mercersburg Financial Corporation and its wholly-owned subsidiary, First Community Bank of Mercersburg, based in Mercersburg, Pennsylvania. In May 2019, the Company acquired Hamilton Bancorp, Inc., and its wholly-owned subsidiary, Hamilton Bank, based in Towson, Maryland. The results of operations and assets acquired and liabilities assumed from acquired entities are included only from the date of acquisition. The comparability of the Company's results of operations for the years ended December 31, 2020, to 2019 and 2018 have been impacted by these acquisitions.
The Company's management has evaluated all activity of the Company and concluded that subsequent events are properly reflected in the Company's consolidated financial statements and notes as required by GAAP.
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.
Concentration of Credit Risk – The Company grants commercial, residential, construction, municipal, and various forms of consumer lending to clients primarily in its market area in south central Pennsylvania and in the greater Baltimore region and Washington County, Maryland. Therefore, the Company's exposure to credit risk is significantly affected by changes in the economy in those areas. Although the Company maintains a diversified loan portfolio, a significant portion of its clients’ ability to honor their contracts is dependent upon economic sectors for commercial real estate, including office space, retail strip centers, sales finance, sub-dividers and developers, and multi-family, hospitality, and residential building operators. Management evaluates each clients' creditworthiness on a case-by-case basis. The amount of collateral obtained upon the extension of credit is based on management’s credit evaluation of the client. Types of collateral held varies, but generally includes real estate and equipment.
The types of securities the Company invests in are included in Note 3, Securities Available for Sale, and the types of lending the Company engages in are included in Note 4, Loans and Allowance for Loan Losses.
Cash and Cash Equivalents – Cash and cash equivalents include cash, balances due from banks, federal funds sold and interest-bearing deposits due on demand, all of which have original maturities of 90 days or less. Net cash flows are reported for client loan and deposit transactions, loans held for sale, redemption (purchases) of restricted investments in bank stocks, and short-term borrowings.
Cash and cash equivalents includes amounts that the Company is required to maintain on hand or on deposit at the Federal Reserve Bank to meet certain regulatory reserve balance requirements. At December 31, 2020 and 2019, the Company had reserve requirements of zero and $9.2 million, respectively.
Balances with correspondent banks may, at times, exceed federally insured limits. The Company considers this to be a normal business risk and reviews the financial condition of its correspondent banks on a quarterly basis.
Restricted Investments in Bank Stocks – Restricted investments in bank stocks consist of Federal Reserve Bank of Philadelphia stock, FHLB of Pittsburgh stock and Atlantic Community Bankers Bank stock. Federal law requires a member institution of the district Federal Reserve Bank and FHLB to hold stock according to predetermined formulas. Atlantic Community Bankers Bank requires its correspondent banking institutions to hold stock as a condition of membership. The restricted investment in bank stocks is carried at cost. On a quarterly basis, management evaluates the bank stocks for impairment based on assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as operating performance, liquidity, funding and capital positions, stock repurchase history, dividend history, and impact of legislative and regulatory changes.
Securities – The Company typically classifies debt securities as available for sale on the date of purchase. At December 31, 2020 and 2019, the Company had no held to maturity or trading securities. AFS securities are reported at fair value. Interest income and dividends on debt securities are recognized in interest income on an accrual basis. Purchase premiums and discounts on debt securities are amortized to interest income using the interest method over the terms of the securities and approximate the level yield method.
Changes in unrealized gains and losses, net of related deferred taxes, for AFS securities are recorded in AOCI. Realized gains and losses on securities are recorded on the trade date using the specific identification method and are included in noninterest income on the consolidated statements of income.
AFS securities include investments that management intends to use as part of its asset/liability management strategy. Securities may be sold in response to changes in interest rates, changes in prepayment rates and other factors. The Company does not have the intent to sell any of its AFS securities that are in an unrealized loss position and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost.
Management evaluates securities for OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as an impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components: OTTI related to other factors, which is recognized in OCI, and the remaining OTTI, which is recognized in earnings. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
The Company’s securities are exposed to various risks, such as interest rate risk, market risk, and credit risk. Due to the level of risk associated with certain investments and the level of uncertainty related to changes in the value of investments, it is at least reasonably possible that changes in risks in the near term would materially affect investment assets reported in the consolidated financial statements.
Loans Held for Sale – Effective October 1, 2019, The Company adopted the fair value option on these loans which allows the Company to record the mortgage loans held for sale portfolio at fair market value as opposed to the lower of cost or market. The Company economically hedges its residential loans held for sale portfolio with forward sale agreements which are reported at fair value. A lower of cost or market accounting treatment would not allow the Company to record the excess of the fair market value over book value but would require the Company to record the corresponding reduction in value on the hedges. Both the loans and related hedges are carried at fair value which reduces earnings volatility as the amounts more closely offset, particularly in environments when interest rates are declining. For loans held for sale for which the fair value option has been elected, the aggregate fair value exceeded the aggregate principal balance by $436 thousand. There were no loans held for sale that were nonaccrual or 90 or more days past due as of December 31, 2020. In previous periods, loans originated and intended for sale in the secondary market were carried at the lower of aggregate cost or fair value. Gains and losses on loan sales (sales proceeds minus carrying value) are recorded in noninterest income. Interest income on these loans is recognized in interest and fees on loans in the consolidated statements of operations.
Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the ALL, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and amortized as a yield adjustment over the respective term of the loan. For purchased loans that are not deemed impaired at the acquisition date, premiums and discounts are amortized or accreted as adjustments to interest income using the effective yield method.
For all classes of loans, the accrual of interest income on loans, including impaired loans, ceases when principal or interest is past due 90 days or more or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to
accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, at the date of placement on nonaccrual status, is reversed and charged against interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending upon management’s assessment of the ultimate collectability of principal. Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loan has performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on the contractual terms of the loan.
Loans, the terms of which are modified, are classified as TDRs if a concession was granted in connection with the modification, for legal or economic reasons, related to the debtor’s financial difficulties. Concessions granted under a TDR typically involve a temporary deferral of scheduled loan payments, an extension of a loans' stated maturity date, a temporary reduction in interest rates, or granting of an interest rate below market rates given the risk of the transaction. If a modification occurs while the loan is on accrual status, it will continue to accrue interest under the modified terms. Nonaccrual TDRs may be restored to accrual status if scheduled principal and interest payments, under the modified terms, are current for six months after modification, and the borrower continues to demonstrate its ability to meet the modified terms. TDRs are evaluated individually for impairment on a quarterly basis including monitoring of performance according to their modified terms.
Allowance for Loan Losses – The ALL is evaluated on at least a quarterly basis, as losses are estimated to be probable and incurred, and, if deemed necessary, is increased or decreased through the provision for loan losses on the consolidated statements of income. Loan losses are charged against the ALL when management determines that all or a portion of the loan is uncollectible. Recoveries on previously charged-off loans are credited to the ALL when received. The ALL is allocated to loan portfolio classes on a quarterly basis, but the entire balance is available to cover losses from any of the portfolio classes when those losses are confirmed.
Management uses internal policies and bank regulatory guidance in periodically evaluating loans for collectability and incorporates historical experience, the nature and volume 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.
See Note 4, Loans and Allowance for Loan Losses, for additional information.
Acquired Loans - Loans acquired in connection with business combinations are recorded at fair value with no carryover of any allowance for loan losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.
The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. These loans are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases in expected cash flows will require us to evaluate the need for an addition to the allowance for loan losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount, which we will then reclassify as accretable discount to be recognized into interest income over the remaining life of the loan.
Loans acquired through business combinations that do meet the specific criteria of ASC 310-30 are individually evaluated each period to analyze expected cash flows. To the extent that the expected cash flows of a loan have decreased due to credit deterioration, the Company establishes an allowance.
Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30 are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs. These loans are initially recorded at fair value, and include credit and interest rate marks associated with acquisition accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. An allowance for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.
Acquired loans that meet the criteria for impairment or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the client is contractually delinquent if the Company expects to fully collect the new carrying value (i.e., fair value) of the loans. As such, the Company may no longer consider the loan to be nonperforming and may accrue interest on these loans, including the impact of any accretable discount. In addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value adjustment.
Loan Commitments and Related Financial Instruments – Financial instruments include off-balance sheet credit commitments issued to meet client financing needs, such as commitments to make loans and commercial letters of credit. These financial instruments are recorded when they are funded. The face amount represents the exposure to loss, before considering client collateral or ability to repay. The Company maintains a reserve for probable losses on off-balance sheet commitments which is included in other liabilities on the consolidated balance sheets.
Loans Serviced – The Bank administers secondary market mortgage programs available through the FHLB and the Federal National Mortgage Association and offers residential mortgage products and services to clients. The Bank originates single-family residential mortgage loans for immediate sale in the secondary market and retains the servicing of those loans. At December 31, 2020 and 2019, the balance of loans serviced for others totaled $441.1 million and $360.1 million, respectively.
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.
Cash Surrender Value of Life Insurance – The Company has purchased life insurance policies on certain employees. Life insurance is recorded at the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Derivatives - FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.
The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. The Company's objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
Changes to the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged transaction affects earnings. During 2020, such derivatives were used to hedge the variable cash flows associated with overnight borrowings.
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
Premises and Equipment – Buildings, improvements, equipment, furniture and fixtures are carried at cost less accumulated depreciation and amortization. Land is carried at cost. Depreciation and amortization has been recognized generally on the straight-line method and is computed over the estimated useful lives of the various assets as follows: buildings
and improvements, including leasehold improvements – 10 to 40 years; and furniture and equipment – 3 to 15 years. Leasehold improvements are amortized over the shorter of the lease term or the indicated life. Repairs and maintenance are charged to operations as incurred, while additions and improvements are typically capitalized. Gains or losses on the retirement or disposal of individual assets is recorded as income or expense in the period of retirement or disposal. Premises no longer in use and held for sale are included in other assets on the consolidated balance sheets at the lower of carrying value or fair value and no depreciation is charged on them. At December 31, 2020 and 2019, premises held for sale totaled $1.1 million and $5.2 million, respectively.
Leases - The Company evaluates its contracts at inception to determine if an arrangement is,or contains, a lease. Operating leases are included in operating lease ROU assets in other assets and operating lease liabilities in accrued interest payable and other liabilities in the consolidated balance sheets. The Company had no finance leases at December 31, 2020.
ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company's leases do not provide an implicit rate, so the Company's incremental borrowing rate is used, which approximates its fully collateralized borrowing rate, based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is reevaluated upon lease modification. The operating lease ROU asset also includes any initial direct costs and prepaid lease payments made less any lease incentives. In calculating the present value of lease payments, the Company may include options to extend the lease when it is reasonably certain that it will exercise that option.
In accordance with ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), the Company keeps leases with an initial term of 12 months or less off of the balance sheet. The Company recognizes these lease payments in the unaudited condensed consolidated statements of income on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components and has elected the practical expedient to account for them as a single lease component.
The Company's operating leases relate primarily to bank branches and office space. Upon the adoption of ASU 2016-02 on January 1, 2019, operating lease liabilities of $10.5 million and related lease assets of $7.5 million were recognized on the consolidated balance sheets. The difference between the lease assets and lease liabilities primarily consists of deferred rent liabilities reclassified upon adoption to reduce the measurement of the lease assets. The standard did not materially impact the Company's consolidated net income and had no impact on cash flows.
Goodwill and Other Intangible Assets – Goodwill is calculated as the purchase premium, if any, after adjusting for the fair value of net assets acquired in purchase transactions. Goodwill is not amortized but is reviewed for potential impairment on at least an annual basis, with testing between annual tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit. Other intangible assets represent purchased assets that can be distinguished from goodwill because of contractual or other legal rights. The Company’s other intangible assets have finite lives and are amortized on either an accelerated amortization method or straight line basis over their estimated lives, generally 10 years for deposit premiums and 10 to 15 years for other client relationship intangibles.
Mortgage Servicing Rights – The estimated fair value of MSRs related to loans sold and serviced by the Company is recorded as an asset upon the sale of such loans. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are evaluated periodically for impairment by comparing the carrying amount to estimated fair value. Fair value is determined periodically through a discounted cash flow valuation performed by a third party. Significant inputs to the valuation include expected servicing income, net of expense, the discount rate and the expected life of the underlying loans. To the extent the amortized cost of the MSRs exceeds their estimated fair values, a valuation allowance is established for such impairment through a charge against servicing income on the consolidated statements of income. If the Company determines, based on subsequent valuations, that the impairment no longer exists or is reduced, the valuation allowance is reduced through a credit to earnings. MSRs totaled $2.8 million and $3.1 million at December 31, 2020 and December 31, 2019, respectively, and are included in other assets on the consolidated balance sheets.
Foreclosed Real Estate – Real estate acquired through foreclosure or other means is initially recorded at the fair value of the related real estate collateral at the transfer date less estimated selling costs, and subsequently at the lower of its carrying value or fair value less estimated costs to sell. Fair value is determined based on an independent third party appraisal of the property or, when appropriate, a recent sales offer. Costs to maintain such real estate are expensed as incurred. Costs that significantly improve the value of the properties are capitalized. Real estate acquired through foreclosure or other means totaled zero and $197 thousand at December 31, 2020 and 2019, respectively, and is included in other assets on the consolidated balance sheets.
Investments in Real Estate Partnerships – The Company has a 99% limited partner interest in several real estate partnerships in central Pennsylvania. These investments are affordable housing projects, which entitle the Company to tax deductions and credits that expire through 2025. The Company accounts for its investments in affordable housing projects
under the proportional amortization method when the criteria are met, which is limited to one investment at December 31, 2020. Other investments are accounted for under the equity method of accounting. The investment in these real estate partnerships, included in other assets on the consolidated balance sheets, totaled $3.1 million and $3.6 million at December 31, 2020 and 2019, respectively, of which $1.1 million and $1.3 million are accounted for under the proportional amortization method.
Equity method losses totaled $299 thousand, $55 thousand and $331 thousand for the years ended December 31, 2020, 2019 and 2018, respectively, and are included in other noninterest income on the consolidated income statements. Proportional amortization method losses totaled $214 thousand for the years ended December 31, 2020, 2019 and 2018, and are included in income tax expense on the consolidated income statements. During 2020, 2019 and 2018, the Company recognized federal tax credits from these projects totaling $460 thousand, $460 thousand and $578 thousand, respectively, which are included in income tax expense on the consolidated income statements.
Advertising – The Company expenses advertising as incurred. Advertising expense totaled $392 thousand, $577 thousand and $418 thousand for the years ended December 31, 2020, 2019 and 2018, respectively.
Repurchase Agreements – The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities which are included in short-term borrowings on the consolidated balance sheets. Under these agreements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability on the Company’s consolidated balance sheets, while the securities underlying the repurchase agreements remaining are reflected in AFS securities. The repurchase obligation and underlying securities are not offset or netted as the Company does not enter into reverse repurchase agreements.
The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Company be in default (e.g., fail to make an interest payment to the counterparty). For the repurchase agreements, the collateral is held by the Company in a segregated custodial account under a third party agreement. Repurchase agreements are secured by GSE MBSs and mature overnight.
Share Compensation Plans – The Company has share compensation plans that cover employees and non-employee directors. Compensation expense relating to share-based payment transactions is measured based on the grant date fair value of the share award, including a Black-Scholes model for stock options. Compensation expense for all share awards is calculated and recognized over the employees’ or non-employee directors' service period, generally defined as the vesting period.
Income Taxes – Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of enacted tax law to taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more likely than not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more likely than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes interest and penalties, if any, on income taxes as a component of income tax expense.
Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Treasury Stock – Common stock shares repurchased are recorded as treasury stock, at cost on the consolidated balance sheets.
Earnings Per Share – Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Restricted stock awards are included in weighted average common shares outstanding as they are earned. Diluted earnings per share includes additional common shares that
would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate solely to outstanding stock options and restricted stock awards and are determined using the treasury stock method.
Treasury shares are not deemed outstanding for earnings per share calculations.
Comprehensive Income – Comprehensive income consists of net income and OCI. Unrealized gains (losses) on securities available for sale and derivatives, net of tax, were the components of AOCI at December 31, 2020. Unrealized gains(losses) on securities available for sale was the sole component of AOCI at December 31, 2019.
Fair Value – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in the Fair Value note to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.
Segment Reporting – The Company operates in one segment – Community Banking. The Company’s non-community banking activities are insignificant to the consolidated financial statements.
Recent Accounting Pronouncements - ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The amendments in this update require an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the amendments in this update amend the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For certain public companies, this update was effective for interim and annual periods beginning after December 15, 2019. The Company delayed the adoption of ASU 2016-13 as noted below.
ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates ("ASU 2019-10"), extended the implementation deadline of ASU 2016-13 for smaller reporting and other companies until the fiscal year and interim periods beginning after December 15, 2022. The Company meets the requirements to be considered a smaller reporting company under SEC Regulation S-K and SEC Rule 405, and did not adopt ASU 2016-13 on January 1, 2020. The Company is evaluating the impact of the delay for adoption of ASU 2016-13, and is working with a third-party vendor solution to assist with the application of ASU 2016-13 and finalizing the loss estimation models to be used. Once management determines which methods will be utilized, a third party will be contracted to perform a model validation prior to adoption. While the Company anticipates the allowance for loan losses will increase under its current assumptions, it expects the impact of adopting ASU 2016-13 will be influenced by the composition, characteristics and quality of its loan and securities portfolios, as well as general economic conditions and forecasts at the adoption date. The other provisions of ASU 2019-10 were not applicable to the Company.
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The adoption of this guidance, effective January 1, 2020, did not have a material impact on the Company's consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). ASU 2020-04 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The optional expedients apply consistently to all contracts or transactions within the scope of this topic, while the optional expedients for hedging relationships can be elected on an individual basis. The Company has formed a cross-functional working group to lead the transition from LIBOR to a planned adoption of an alternate index. The Company plans to replace LIBOR with SOFR in its loan agreements. The Company is in the process of implementing fallback language for loans that will mature after 2021. The Company expects to adopt the LIBOR transition relief allowed under this standard, and is currently evaluating the potential impact of this guidance on its financial statements.
NOTE 2. MERGERS AND ACQUISITIONS AND BRANCH CONSOLIDATIONS
Mercersburg Financial Corporation
On October 1, 2018, the Company acquired 100% of the outstanding common shares of Mercersburg Financial Corporation and its wholly-owned subsidiary, First Community Bank of Mercersburg, headquartered in Mercersburg, Pennsylvania. The Company issued 1,052,635 shares of its common stock and paid $4.9 million in cash for all outstanding shares of Mercersburg stock. Based on the Company's $23.80 closing stock price on Friday, September 28, 2018, the consideration paid to acquire Mercersburg totaled $29.9 million.
The fair value of assets acquired, excluding goodwill, totaled $181.4 million, including loans totaling $141.1 million and investment securities available for sale totaling $7.4 million. The fair value of liabilities assumed totaled $163.4 million, including deposits totaling $160.4 million. The Company recognized $11.9 million in initial goodwill, representing consideration transferred in excess of the fair value of the net assets acquired in the Mercersburg acquisition. The goodwill resulting from the acquisition represents the value expected from the expansion of our market in south central Pennsylvania and the enhancement of our operations through client synergies and efficiencies, thereby providing enhanced client service.
The Mercersburg acquisition was accounted for using the acquisition method of accounting and, accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The fair value measurements of assets acquired and liabilities assumed were subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values became available. No material measurement period adjustments were made in the year ended December 31, 2020. The results of operations for the Company include Mercersburg's results from and after October 1, 2018.
Hamilton Bancorp, Inc.
On May 1, 2019, the Company acquired 100% of the outstanding common shares of Hamilton Bancorp, Inc., and its wholly-owned subsidiary, Hamilton Bank, based in Towson, Maryland. The Company acquired Hamilton to introduce our banking and financial services into the greater Baltimore area of Maryland.
Pursuant to the merger agreement, the Company issued 1,765,704 shares of its common stock and paid $14.2 million in cash for all outstanding shares of Hamilton stock and options vesting upon acquisition. Based on the Company's closing stock price of $20.74 on Tuesday, April 30, 2019, the consideration paid to acquire Hamilton totaled $50.8 million.
The fair value of assets acquired, excluding goodwill, totaled $494.0 million, including loans totaling $347.1 million. The fair value of liabilities assumed totaled $449.4 million, including deposits totaling $388.2 million. Goodwill represents consideration transferred in excess of the fair value of the net assets acquired. At May 1, 2019, the Company recognized $6.1 million in goodwill associated with the Hamilton acquisition. The goodwill resulting from the acquisition represents the value expected from the expansion of our market in the greater Baltimore area and the enhancement of our operations through client synergies and efficiencies, thereby providing enhanced client service. Goodwill acquired in the Hamilton acquisition is not deductible for tax purposes.
The Hamilton acquisition was accounted for using the acquisition method of accounting and, accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The fair value measurements of assets acquired and liabilities assumed are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. The Company finalized the fair values of loans, intangible assets, other assets, income taxes and liabilities associated with Hamilton as of May 1, 2020. Measurement period adjustments made from the date of acquisition through May 1, 2020 are summarized in Note 7 - Goodwill and Other Intangible Assets. The results of operations for the Company include Hamilton's results from and after May 1, 2019.
The following table summarizes the consideration paid for Hamilton and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
|
|
|
|
|
|
|
|
Fair value of consideration transferred:
|
|
Cash
|
$
|
14,197
|
|
Common stock issued
|
36,622
|
|
Total consideration transferred
|
$
|
50,819
|
|
|
|
Estimated fair values of assets acquired and liabilities assumed:
|
|
Cash and cash equivalents
|
$
|
43,140
|
|
Securities available for sale
|
60,882
|
|
Restricted investments in bank stocks
|
2,658
|
|
Loans
|
347,143
|
|
Premises and equipment
|
3,749
|
|
Core deposit intangible
|
4,550
|
|
Goodwill
|
6,132
|
|
Cash surrender value of life insurance
|
17,948
|
|
Deferred tax asset, net
|
7,257
|
|
ROU lease asset
|
2,793
|
|
Other assets
|
3,925
|
|
Total assets acquired
|
$
|
500,177
|
|
|
|
Deposits
|
$
|
(388,246)
|
|
Borrowings
|
(51,393)
|
|
Other liabilities
|
(9,719)
|
|
Total liabilities assumed
|
$
|
(449,358)
|
|
The determination of estimated fair values of the acquired loans required the Company to make certain estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature. Based on such factors as past due status, nonaccrual status, bankruptcy status, and credit risk ratings, the acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (purchased credit impaired), and loans that do not meet these criteria, which are accounted for under ASC 310-20 (purchased non-impaired). Expected cash flows, both principal and interest, were estimated based on key assumptions covering such factors as prepayments, default rates and severity of loss given default. These assumptions were developed using both Hamilton's historical experience and the portfolio characteristics as of the acquisition date as well as available market research. The fair value estimates for acquired loans were based on the amount and timing of expected principal, interest and other cash flows, including expected prepayments, discounted at prevailing market interest rates applicable to the types of acquired loans, which the Company considered to be level 3 fair value measurements. Deposit liabilities assumed in the Hamilton acquisition were segregated into two categories: time-deposits (i.e., deposit accounts with a stated maturity) and demand deposits, both using level 2 fair value measurements. In determining fair value of time deposits, the Company discounted the contractual cash flows of the deposit accounts using prevailing market interest rates for time deposit accounts of similar type and duration. For demand deposits, the acquisition date outstanding balance of the assumed demand deposit accounts approximates fair value. Acquisition date fair values for securities available for sale were determined using Level 1 or Level 2 inputs consistent with the methods discussed further in Note 20 - Fair Value. The remaining acquisition date fair values represent either Level 2 or Level 3 fair value measurements (premises and equipment and core deposit intangible).
The Company recognized a core deposit intangible of $4.6 million, which is being amortized using an accelerated method over a 10-year amortization period, consistent with expected future cash flows.
Loans acquired from Hamilton were measured at fair value at the acquisition date with no carryover of any ALL. Loans were segregated into those loans considered to be performing and those considered PCI. The following table presents performing and PCI loans acquired, by loan class, at May 1, 2019.
Upon completion of the Hamilton acquisition, the Company sold the acquired investment portfolio and paid off acquired borrowings at the indicated fair value amounts in conjunction with its asset/liability management strategies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
PCI
|
|
Total
|
Commercial real estate:
|
|
|
|
|
|
Owner-occupied
|
$
|
42,148
|
|
|
$
|
5,894
|
|
|
$
|
48,042
|
|
Non-owner occupied
|
45,401
|
|
|
770
|
|
|
46,171
|
|
Multi-family
|
10,773
|
|
|
—
|
|
|
10,773
|
|
|
|
|
|
|
|
Acquisition and development:
|
|
|
|
|
|
1-4 family residential construction
|
7,450
|
|
|
—
|
|
|
7,450
|
|
Commercial and land development
|
4,528
|
|
|
—
|
|
|
4,528
|
|
Commercial and industrial
|
32,316
|
|
|
1,914
|
|
|
34,230
|
|
|
|
|
|
|
|
Residential mortgage:
|
|
|
|
|
|
First lien
|
152,657
|
|
|
10,494
|
|
|
163,151
|
|
Home-equity - term
|
4,478
|
|
|
1
|
|
|
4,479
|
|
Home equity - lines of credit
|
13,657
|
|
|
—
|
|
|
13,657
|
|
Installment and other loans
|
14,467
|
|
|
195
|
|
|
14,662
|
|
Total loans acquired
|
$
|
327,875
|
|
|
$
|
19,268
|
|
|
$
|
347,143
|
|
The following table presents the fair value adjustments made to the amortized cost basis of loans acquired at May 1, 2019.
|
|
|
|
|
|
|
|
Gross amortized cost basis at acquisition
|
$
|
362,125
|
|
Market rate adjustment
|
(5,309)
|
|
Credit fair value adjustment on non-credit impaired loans
|
(3,947)
|
|
Credit fair value adjustment on impaired loans
|
(5,726)
|
|
Estimated fair value of acquired loans
|
$
|
347,143
|
|
The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the contractual rates of the acquired loans. The credit fair value adjustment made on non-credit impaired loans represents the changes in credit quality of the underlying borrowers from loan inception to the acquisition date. The credit fair value adjustment on PCI loans is derived in accordance with ASC 310-30 and represents the portion of the loan balance that has been deemed uncollectible based on our expectations of future cash flows for each respective loan.
The following table provides information about acquired PCI loans at May 1, 2019.
|
|
|
|
|
|
|
|
Contractually required principal and interest at acquisition
|
$
|
31,599
|
|
Contractual cash flows not expected to be collected (nonaccretable discount)
|
(8,834)
|
|
Expected cash flows at acquisition
|
22,765
|
|
Interest component of expected cash flows (accretable discount)
|
(3,497)
|
|
Estimated fair value of acquired PCI loans
|
$
|
19,268
|
|
Unaudited pro forma net income for the year ended December 31, 2019, would have totaled $20.9 million, and revenues would have totaled $102.5 million for the same period had the Hamilton acquisitions occurred January 1, 2019.
In connection with the Mercersburg and Hamilton acquisitions, the Company incurred merger related expenses. Mercersburg related merger expenses totaled $280 thousand during the year ended December 31, 2019. which is included in merger related and branch consolidation expenses on the consolidated statements of income. For December 31, 2019, the
expenses consisted primarily of $81 thousand of investment banking, legal and consulting fees; and $199 thousand of information systems expense, including canceling of contracts. Hamilton related merger expenses totaled $7.7 million for the year ended December 31, 2019, which is included in merger related and branch consolidation expenses on the consolidated statements of income. For December 31, 2019, these expenses consisted primarily $1.9 million of investment banking, legal and consulting fees; $3.7 million of information systems expense, including canceling of contracts; and $2.2 million of other expenses, including payout of employee termination contracts.
Branch Consolidation
During the year ended December 31, 2020, the Company recognized charges associated with the consolidation of six branch locations, the discontinuance of three loan production offices, a reduction in back-office real estate and staffing model adjustments. These actions were initiated due to evolving client preferences for the digital delivery of products and services. In addition, the anticipated future cost reductions resulting from these actions will prepare the Company for a challenging operating environment in 2021. A charge of $1.6 million was recorded in the year ended December 31, 2020, which included $1.3 million related to branch consolidations.
In October, 2019, the Company announced the consolidation of five branches in Franklin and Perry Counties, Pennsylvania, into other, larger branches of the Bank, as part of its ongoing evaluation of branch profitability. The Company also announced the sale/leaseback of an operations center facility to eliminate approximately 50,000 square feet of excess back office space. The branch consolidations were completed in January 2020, and the sale of the operations center facility was completed in the second quarter of 2020.
In conjunction with the consolidation and operations center facility sale/leaseback, the Company recorded $988 thousand in expenses in the fourth quarter of 2019, consisting of $762 thousand in fixed asset write downs, $126 thousand in lease termination costs, and $100 thousand in severance and other costs. At December 31, 2019, fixed assets included in this consolidation, with an estimated fair value of $4.9 million, were held for sale and carried in other assets on the consolidated balances sheets.
NOTE 3. INVESTMENT SECURITIES
At December 31, 2020 and 2019, all investment securities were classified as AFS. The following table summarizes amortized cost and fair value of AFS securities, and the corresponding amounts of gross unrealized gains and losses recognized in AOCI at December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
$
|
104,704
|
|
|
$
|
9,091
|
|
|
$
|
1,125
|
|
|
$
|
112,670
|
|
GSE residential MBSs
|
4,197
|
|
|
96
|
|
|
—
|
|
|
4,293
|
|
GSE residential CMOs
|
56,856
|
|
|
2,226
|
|
|
1,071
|
|
|
58,011
|
|
Non-agency CMOs
|
16,505
|
|
|
413
|
|
|
—
|
|
|
16,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label commercial CMOs
|
63,941
|
|
|
57
|
|
|
1,762
|
|
|
62,236
|
|
Asset-backed
|
214,425
|
|
|
171
|
|
|
2,630
|
|
|
211,966
|
|
Other
|
371
|
|
|
—
|
|
|
—
|
|
|
371
|
|
Totals
|
$
|
460,999
|
|
|
$
|
12,054
|
|
|
$
|
6,588
|
|
|
$
|
466,465
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
$
|
83,607
|
|
|
$
|
4,288
|
|
|
$
|
32
|
|
|
$
|
87,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE residential CMOs
|
67,928
|
|
|
1,000
|
|
|
774
|
|
|
68,154
|
|
Non-agency CMOs
|
17,210
|
|
|
—
|
|
|
123
|
|
|
17,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label commercial CMOs
|
86,704
|
|
|
156
|
|
|
231
|
|
|
86,629
|
|
Asset-backed
|
235,406
|
|
|
138
|
|
|
5,029
|
|
|
230,515
|
|
Other
|
637
|
|
|
—
|
|
|
—
|
|
|
637
|
|
Totals
|
$
|
491,492
|
|
|
$
|
5,582
|
|
|
$
|
6,189
|
|
|
$
|
490,885
|
|
The following table summarizes investment securities with unrealized losses at December 31, 2020 and 2019, aggregated by major security type and length of time in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
# of Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
# of Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
# of Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
1
|
|
|
$
|
9,079
|
|
|
$
|
1,125
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
1
|
|
|
$
|
9,079
|
|
|
$
|
1,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE residential CMOs
|
3
|
|
|
23,954
|
|
|
1,071
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
23,954
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label commercial CMOs
|
1
|
|
|
4,314
|
|
|
685
|
|
|
10
|
|
|
42,403
|
|
|
1,077
|
|
|
11
|
|
|
46,717
|
|
|
1,762
|
|
Asset-backed
|
2
|
|
|
16,921
|
|
|
12
|
|
|
15
|
|
|
183,161
|
|
|
2,618
|
|
|
17
|
|
|
200,082
|
|
|
2,630
|
|
Totals
|
7
|
|
|
$
|
54,268
|
|
|
$
|
2,893
|
|
|
25
|
|
|
$
|
225,564
|
|
|
$
|
3,695
|
|
|
32
|
|
|
$
|
279,832
|
|
|
$
|
6,588
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
1
|
|
|
$
|
6,173
|
|
|
$
|
32
|
|
|
—
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
1
|
|
|
$
|
6,173
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE residential CMOs
|
5
|
|
|
37,158
|
|
|
309
|
|
|
1
|
|
|
11,602
|
|
|
465
|
|
|
6
|
|
|
48,760
|
|
|
774
|
|
Non-agency CMOs
|
1
|
|
|
17,087
|
|
|
123
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
17,087
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label commercial CMOs
|
6
|
|
|
26,079
|
|
|
67
|
|
|
8
|
|
|
39,726
|
|
|
164
|
|
|
14
|
|
|
65,805
|
|
|
231
|
|
Asset-backed
|
9
|
|
|
92,189
|
|
|
1,145
|
|
|
9
|
|
|
121,399
|
|
|
3,884
|
|
|
18
|
|
|
213,588
|
|
|
5,029
|
|
Totals
|
22
|
|
|
$
|
178,686
|
|
|
$
|
1,676
|
|
|
18
|
|
|
$
|
172,727
|
|
|
$
|
4,513
|
|
|
40
|
|
|
$
|
351,413
|
|
|
$
|
6,189
|
|
The Company determines whether unrealized losses are temporary in nature in accordance with FASB ASC 320-10, Investments - Overall, (“FASB ASC 320-10”) and FASB ASC 325-40, Investments – Beneficial Interests in Securitized Financial Assets, when applicable. The evaluation is based upon factors such as the creditworthiness of the underlying borrowers, performance of the underlying collateral, if applicable, and the level of credit support in the security structure. Management also evaluates other factors and circumstances that may be indicative of an OTTI condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost and near-term prospects of the issuer.
FASB ASC 320-10 requires the Company to assess if an OTTI exists by considering whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before recovery. If either of these situations applies, the guidance requires the Company to record an OTTI charge to earnings on debt securities for the difference between the amortized cost basis of the security and the fair value of the security. If neither of these situations applies, the Company is required to assess whether it is expected to recover the entire amortized cost basis of the security. If the Company is not expected to recover the entire amortized cost basis of the security, the guidance requires the Company to bifurcate the identified OTTI into a credit loss component and a component representing loss related to other factors. A discount rate is applied which equals the effective yield of the security. The difference between the present value of the expected flows and the amortized book value is considered a credit loss, which would be recorded through earnings as an OTTI charge. When a market price is not readily available, the market value of the security is determined using the same expected cash flows; the discount rate is a rate the Company determines from the open market and other sources as appropriate for the security. The difference between the market value and the present value of cash flows expected to be collected is recognized in accumulated other comprehensive loss on the consolidated statements of financial condition.
As of December 31, 2020, the Company had no cumulative OTTI. There were no OTTI charges recognized in earnings as a result of credit losses on investments in the years ended December 31, 2020, 2019 and 2018. During the year ended December 31, 2020, unrealized losses were substantially higher due to market uncertainty brought about by the COVID-19 pandemic. The sudden and desperate need for liquidity from many institutional pools of capital combined with the global economic implications of the COVID-19 pandemic caused significant widening of spreads.
State and Political Subdivisions. The unrealized losses presented in the table above have been caused by a widening of spreads and/or a rise in interest rates from the time these securities were purchased. Management considers the investment rating, the state of the issuer of the security and other credit support in determining whether the security is OTTI. As of December 31, 2020 and 2019, management concluded that an OTTI did not exist on any of the aforementioned securities based upon its assessment. Management also concluded that it does not intend to sell nor will it be required to sell the securities, before their recovery, which may be maturity, and management expects to recover the entire amortized cost basis of these securities.
GSE Residential CMOs. The unrealized losses presented in the table above have been caused by a widening of spreads and/or a rise in interest rates from the time these securities were purchased. The contractual terms of these securities do not permit the issuer to settle the securities at a price less than its par value basis. As of December 31, 2020 and 2019, management concluded that an OTTI did not exist on any of the aforementioned securities based upon its assessment. Management also concluded that it does not intend to sell nor will it be required to sell the securities, before their recovery, which may be maturity, and management expects to recover the entire amortized cost basis of these securities.
Non-agency CMOs. The unrealized losses presented in the table above were caused by a widening of spreads and/or a rise in interest rates from the time the securities were purchased. As of December 31, 2019, management concluded that an OTTI did not exist on any of the aforementioned securities based upon its assessment. Management also concluded that it does not intend to sell nor will it be required to sell the securities, before their recovery, which may be maturity, and management expects to recover the entire amortized cost basis of these securities.
Private Label Commercial CMOs and Asset-backed. The unrealized losses presented in the table above have been caused by a widening of spreads from the time the securities were purchased. Management considers the investment rating and other credit support in determining whether a security is other-than-temporarily impaired. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be maturity, the Company does not consider these securities to be OTTI at December 31, 2020 and 2019.
The following table summarizes amortized cost and fair value of investment securities by contractual maturity at December 31, 2020. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Fair Value
|
Due in one year or less
|
$
|
—
|
|
|
$
|
—
|
|
Due after one year through five years
|
249
|
|
|
249
|
|
Due after five years through ten years
|
27,419
|
|
|
29,709
|
|
Due after ten years
|
77,407
|
|
|
83,083
|
|
CMOs and MBSs
|
141,499
|
|
|
141,458
|
|
Asset-backed
|
214,425
|
|
|
211,966
|
|
|
$
|
460,999
|
|
|
$
|
466,465
|
|
The following table summarizes proceeds from sales of investment securities and gross gains and gross losses for the years ended December 31, 2020, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Proceeds from sale of investment securities
|
$
|
—
|
|
|
$
|
199,429
|
|
|
$
|
156,364
|
|
Gross gains
|
—
|
|
|
4,974
|
|
|
1,681
|
|
Gross losses
|
16
|
|
|
225
|
|
|
675
|
|
During the year ended December 31, 2020, a loss of $16 thousand was recorded to adjust an equity security to market value, compared to net investment security gains of $4.7 million and $1.0 million for years ended December 31, 2019 and 2018. Investment securities with a fair value of $398.7 million and $158.7 million at December 31, 2020 and 2019, respectively, were pledged to secure public funds and for other purposes as required or permitted by law.
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company’s loan portfolio is grouped into classes to allow management to monitor the performance by the borrower and to monitor the yield on the portfolio. Consistent with ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses, the segments are further broken down into classes to allow for differing risk characteristics within a segment.
The risks associated with lending activities differ among the various loan classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may adversely impact both the borrower’s ability to repay its loans and associated collateral.
The Company has various types of commercial real estate loans, which have differing levels of credit risk. Owner occupied commercial real estate loans are generally dependent upon the successful operation of the borrower’s business, with
the cash flows generated from the business being the primary source of repayment of the loan. If the business suffers a downturn in sales or profitability, the borrower’s ability to repay the loan could be in jeopardy.
Non-owner occupied and multi-family commercial real estate loans and non-owner occupied residential loans present a different credit risk to the Company than owner occupied commercial real estate loans, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirements and operating expenses. Lower occupancy or lease rates may result in a reduction in cash flows, which hinders the ability of the borrower to meet debt service requirements, and may result in lower collateral values. The Company generally recognizes that greater risk is inherent in these credit relationships as compared to owner occupied loans mentioned above.
Acquisition and development loans consist of 1-4 family residential construction and commercial and land development loans. The risk of loss on these loans is largely dependent on the Company’s ability to assess the property’s value at the completion of the project, which should exceed the property’s construction costs. During the construction phase, a number of factors could potentially negatively impact the collateral value, including cost overruns, delays in completing the project, competition, and real estate market conditions which may change based on the supply of similar properties in the area. In the event the collateral value at the completion of the project is not sufficient to cover the outstanding loan balance, the Company must rely upon other repayment sources, if any, including the guarantors of the project or other collateral securing the loan.
Commercial and industrial loans include advances to local and regional businesses for general commercial purposes and include permanent and short-term working capital, machinery and equipment financing, and may be either in the form of lines of credit or term loans. Although commercial and industrial loans may be unsecured to our highest-rated borrowers, the majority of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a significant number of these loans, the collateral also includes the business real estate or the business owner’s personal real estate or assets. Commercial and industrial loans present credit exposure to the Company, as they are more susceptible to risk of loss during a downturn in the economy as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. The Company attempts to mitigate this risk through its underwriting standards, including evaluating the creditworthiness of the borrower and, to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers are typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending. At December 31, 2020 and December 31, 2019, commercial and industrial loans include $403.3 million and $0, respectively, of loans, net of deferred fees and costs, originated through the U.S. Small Business Administration Paycheck Protection Program ("SBA PPP").
Municipal loans consist of extensions of credit to municipalities and school districts within the Company’s market area. These loans generally present a lower risk than commercial and industrial loans, as they are generally secured by the municipality’s full taxing authority, by revenue obligations, or by its ability to raise assessments on its clients for a specific utility.
The Company originates loans to its retail clients, including fixed-rate and adjustable first lien mortgage loans with the underlying 1-4 family owner occupied residential property securing the loan. The Company’s risk exposure is minimized in these types of loans through the evaluation of the creditworthiness of the borrower, including credit scores and debt-to-income ratios, and underwriting standards which limit the loan-to-value ratio to generally no more than 80% upon loan origination, unless the borrower obtains private mortgage insurance.
Home equity loans, including term loans and lines of credit, present a slightly higher risk to the Company than 1-4 family first liens, as these loans can be first or second liens on 1-4 family owner occupied residential property, but can have loan-to-value ratios of no greater than 90% of the value of the real estate taken as collateral. The creditworthiness of the borrower is considered including credit scores and debt-to-income ratios.
Installment and other loans’ credit risk are mitigated through prudent underwriting standards, including evaluation of the creditworthiness of the borrower through credit scores and debt-to-income ratios and, if secured, the collateral value of the assets. These loans can be unsecured or secured by assets the value of which may depreciate quickly or may fluctuate, and may present a greater risk to the Company than 1-4 family residential loans.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted. The CARES Act established the SBA PPP. The SBA PPP is intended to provide economic relief to small businesses nationwide adversely impacted under the COVID-19 Emergency Declaration issued on March 13, 2020. The SBA PPP, which began on April 3, 2020, provides small businesses with funds to cover up to 24 weeks of payroll costs and other expenses, including benefits. It also provides for forgiveness of up to the full principal amount of qualifying loans. The Bank closed and funded almost 2,700 PPP loans for a total loan amount of $409.1 million in the year ended December 31, 2020. As these loans are 100% guaranteed by the SBA, there is no associated allowance for loan losses at December 31, 2020. These loans resulted in net fee income of $13.5 million to be recognized through net interest income over the life of the loans, which is between two and five years.
During the year ended December 31, 2020, the Company recognized $7.7 million of net deferred SBA PPP fees, included in interest income on loans on the condensed consolidated statements of income. At December 31, 2020, the Bank had $5.8 million of unrecognized SBA PPP net deferred fees. The timing of the recognition of these fees is dependent upon the forgiveness process established by the SBA. The Bank continues to closely monitor the SBA guidance regarding this process. The Bank is working on implementing the SBA's recently announced, streamlined forgiveness approval process, which is anticipated to make the forgiveness process easier for both borrowers and lenders.
In an effort to assist clients which were negatively impacted by the COVID-19 pandemic, the Bank offered various mitigation options, including a loan payment deferral program. Under this program, most commercial deferrals were for a 90-day period, while most consumer deferrals were for a 180-day period. Commercial and consumer deferrals totaled $15.7 million and $2.5 million, respectively, at December 31, 2020. In accordance with the revised Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus issued on April 7, 2020, these deferrals are exempt from TDR status as they meet the specified requirements. In addition, modifications pursuant to the CARES Act do not represent TDRs.
The following table presents the loan portfolio by segment and class, excluding residential LHFS, at December 31, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Commercial real estate:
|
|
|
|
Owner-occupied
|
$
|
174,908
|
|
|
$
|
170,884
|
|
Non-owner occupied
|
409,567
|
|
|
361,050
|
|
Multi-family
|
113,635
|
|
|
106,893
|
|
Non-owner occupied residential
|
114,505
|
|
|
120,038
|
|
Acquisition and development:
|
|
|
|
1-4 family residential construction
|
9,486
|
|
|
15,865
|
|
Commercial and land development
|
51,826
|
|
|
41,538
|
|
Commercial and industrial (1)
|
647,368
|
|
|
214,554
|
|
Municipal
|
20,523
|
|
|
47,057
|
|
Residential mortgage:
|
|
|
|
First lien
|
244,321
|
|
|
336,372
|
|
Home equity – term
|
10,169
|
|
|
14,030
|
|
Home equity – lines of credit
|
157,021
|
|
|
165,314
|
|
Installment and other loans
|
26,361
|
|
|
50,735
|
|
Total loans
|
$
|
1,979,690
|
|
|
$
|
1,644,330
|
|
(1) This balance includes $403.3 million and $0 of SBA PPP loans, net of deferred fees and costs, at December 31, 2020 and December 31, 2019, respectively.
In order to monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including "Special Mention," "Substandard," "Doubtful" or "Loss." The Special Mention category includes loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank's position at some future date. These assets pose elevated risk, but their weakness does not yet justify a more severe, or classified rating. Substandard loans are classified as they have a well-defined weakness, or weaknesses that jeopardize liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans include loans that management has determined not to be impaired, as well as loans considered to be impaired. A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as Loss is deferred. Loss loans are considered uncollectible, as the borrowers are often in bankruptcy, have suspended debt repayments, or have ceased business operations. Once a loan is classified as Loss, there is little prospect of collecting the loan’s principal or interest and it is charged-off.
The following summarizes the Company’s loan portfolio ratings based on its internal risk rating system at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
Special
Mention
|
|
Non-Impaired
Substandard
|
|
Impaired -
Substandard
|
|
Doubtful
|
|
PCI Loans
|
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
$
|
148,846
|
|
|
$
|
12,491
|
|
|
$
|
7,855
|
|
|
$
|
3,260
|
|
|
$
|
—
|
|
|
$
|
2,456
|
|
|
$
|
174,908
|
|
Non-owner occupied
|
351,860
|
|
|
57,378
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
329
|
|
|
409,567
|
|
Multi-family
|
92,769
|
|
|
20,224
|
|
|
642
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
113,635
|
|
Non-owner occupied residential
|
107,557
|
|
|
3,948
|
|
|
1,422
|
|
|
268
|
|
|
—
|
|
|
1,310
|
|
|
114,505
|
|
Acquisition and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
9,101
|
|
|
385
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,486
|
|
Commercial and land development
|
49,832
|
|
|
655
|
|
|
525
|
|
|
814
|
|
|
—
|
|
|
—
|
|
|
51,826
|
|
Commercial and industrial
|
617,213
|
|
|
17,561
|
|
|
6,118
|
|
|
3,639
|
|
|
—
|
|
|
2,837
|
|
|
647,368
|
|
Municipal
|
20,523
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,523
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
236,381
|
|
|
—
|
|
|
—
|
|
|
2,628
|
|
|
—
|
|
|
5,312
|
|
|
244,321
|
|
Home equity – term
|
10,076
|
|
|
—
|
|
|
64
|
|
|
10
|
|
|
—
|
|
|
19
|
|
|
10,169
|
|
Home equity – lines of credit
|
156,264
|
|
|
95
|
|
|
54
|
|
|
608
|
|
|
—
|
|
|
—
|
|
|
157,021
|
|
Installment and other loans
|
26,283
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
—
|
|
|
61
|
|
|
26,361
|
|
|
$
|
1,826,705
|
|
|
$
|
112,737
|
|
|
$
|
16,680
|
|
|
$
|
11,244
|
|
|
$
|
—
|
|
|
$
|
12,324
|
|
|
$
|
1,979,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
$
|
151,161
|
|
|
$
|
4,513
|
|
|
$
|
3,163
|
|
|
$
|
5,872
|
|
|
$
|
—
|
|
|
$
|
6,175
|
|
|
$
|
170,884
|
|
Non-owner occupied
|
342,753
|
|
|
17,152
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,145
|
|
|
361,050
|
|
Multi-family
|
100,361
|
|
|
4,822
|
|
|
682
|
|
|
345
|
|
|
—
|
|
|
683
|
|
|
106,893
|
|
Non-owner occupied residential
|
111,697
|
|
|
4,534
|
|
|
1,115
|
|
|
235
|
|
|
—
|
|
|
2,457
|
|
|
120,038
|
|
Acquisition and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
15,865
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,865
|
|
Commercial and land development
|
39,939
|
|
|
206
|
|
|
1,393
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41,538
|
|
Commercial and industrial
|
198,951
|
|
|
1,133
|
|
|
8,899
|
|
|
1,763
|
|
|
—
|
|
|
3,808
|
|
|
214,554
|
|
Municipal
|
42,649
|
|
|
4,408
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47,057
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
323,040
|
|
|
978
|
|
|
—
|
|
|
2,590
|
|
|
—
|
|
|
9,764
|
|
|
336,372
|
|
Home equity – term
|
13,774
|
|
|
74
|
|
|
149
|
|
|
13
|
|
|
—
|
|
|
20
|
|
|
14,030
|
|
Home equity – lines of credit
|
164,469
|
|
|
74
|
|
|
38
|
|
|
733
|
|
|
—
|
|
|
—
|
|
|
165,314
|
|
Installment and other loans
|
50,497
|
|
|
—
|
|
|
—
|
|
|
85
|
|
|
—
|
|
|
153
|
|
|
50,735
|
|
|
$
|
1,555,156
|
|
|
$
|
37,894
|
|
|
$
|
15,439
|
|
|
$
|
11,636
|
|
|
$
|
—
|
|
|
$
|
24,205
|
|
|
$
|
1,644,330
|
|
For commercial real estate, acquisition and development, and commercial and industrial loans, 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. Factors considered by management in determining impairment include 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. Generally, loans that are more than 90 days past due are deemed impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed to determine if the loan should be placed on nonaccrual status. Nonaccrual loans in the commercial and commercial real estate portfolios and any TDRs are, by definition, deemed to be impaired. Impairment is measured on a loan-by-loan basis for commercial, construction and restructured loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For loans that are deemed to be impaired for extended periods of time, periodic updates on fair values are obtained, which may include updated appraisals. Updated fair values are incorporated into the impairment analysis in the next reporting period.
Loan charge-offs, which may include partial charge-offs, are taken on an impaired loan that is collateral dependent if the loan’s carrying balance exceeds its collateral’s appraised value, the loan has been identified as uncollectible, and it is deemed to be a confirmed loss. Typically, impaired loans with a charge-off or partial charge-off will continue to be considered impaired, unless the note is split into two and management expects the performing note to continue to perform and the loan is adequately secured. The second, or non-performing note, would be charged-off. Generally, an impaired loan with a partial charge-off may continue to have an impairment reserve on it after the partial charge-off, if factors warrant.
At December 31, 2020 and 2019, nearly all of the Company’s loan impairments were measured based on the estimated fair value of the collateral securing the loan, except for TDRs. By definition, TDRs are considered impaired. All TDR impairment analyses are initially based on discounted cash flows for those loans. For real estate loans, collateral generally consists of commercial real estate, but in the case of commercial and industrial loans, it could also consist of accounts receivable, inventory, equipment or other business assets. Commercial and industrial loans may also have real estate collateral.
Updated appraisals are generally required every 18 months for classified commercial loans in excess of $250 thousand. The “as is" value provided in the appraisal is often used as the fair value of the collateral in determining impairment, unless circumstances, such as subsequent improvements or approvals, dictate that another value provided by the appraiser is more appropriate.
Generally, impaired commercial loans secured by real estate, other than new and performing TDRs, are measured at fair value using certified real estate appraisals that had been completed within the last 18 months. Appraised values are discounted for estimated costs to sell the property and other selling considerations to arrive at the property’s fair value. In those situations, in which it is determined an updated appraisal is not required for loans individually evaluated for impairment, fair values are based on either an existing appraisal or a discounted cash flow analysis as determined by management. The approaches are discussed below:
•Existing appraisal – if the existing appraisal provides a strong loan-to-value ratio (generally 70% or lower) and, after consideration of market conditions and knowledge of the property and area, it is determined by the Credit Administration staff that there has not been a significant deterioration in the collateral value, the existing certified appraised value may be used. Discounts to the appraised value, as deemed appropriate for selling costs, are factored into the fair value.
•Discounted cash flows – in limited cases, discounted cash flows may be used on projects in which the collateral is liquidated to reduce the borrowings outstanding, and is used to validate collateral values derived from other approaches.
Collateral on certain impaired loans is not limited to real estate, and may consist of accounts receivable, inventory, equipment or other business assets. Estimated fair values may be determined based on borrowers’ financial statements, inventory ledgers, accounts receivable agings or appraisals from individuals with knowledge in the business. Stated balances are generally discounted for the age of the financial information or the quality of the assets. In determining fair value, liquidation discounts are applied to this collateral based on existing loan valuation policies.
The Company distinguishes substandard loans on both an impaired and non-impaired basis, as it places less emphasis on a loan’s classification, and increased reliance on whether the loan was performing in accordance with the contractual terms. A substandard classification does not automatically meet the definition of impaired. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual extensions of credit classified as substandard. As a result, the
Company’s methodology includes an evaluation of certain accruing commercial real estate, acquisition and development, and commercial and industrial loans rated substandard to be collectively evaluated for impairment. Although the Company believes these loans meet the definition of substandard, they are generally performing and management has concluded that it is likely the Company will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.
Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Generally, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
The following table, which excludes PCI loans, summarizes impaired loans by segment and class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at December 31, 2020 and 2019. The recorded investment in loans excludes accrued interest receivable due to insignificance. Related allowances established generally pertain to those loans in which loan forbearance agreements were in the process of being negotiated or updated appraisals were pending and any partial charge-off will be recorded when final information is received.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans with a Specific Allowance
|
|
Impaired Loans with No Specific Allowance
|
|
Recorded
Investment
(Book Balance)
|
|
Unpaid
Principal Balance
(Legal Balance)
|
|
Related
Allowance
|
|
Recorded
Investment
(Book Balance)
|
|
Unpaid
Principal Balance
(Legal Balance)
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,260
|
|
|
$
|
4,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied residential
|
—
|
|
|
—
|
|
|
—
|
|
|
268
|
|
|
393
|
|
Acquisition and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and land development
|
—
|
|
|
—
|
|
|
—
|
|
|
814
|
|
|
875
|
|
Commercial and industrial
|
—
|
|
|
—
|
|
|
—
|
|
|
3,639
|
|
|
4,269
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
First lien
|
424
|
|
|
508
|
|
|
33
|
|
|
2,204
|
|
|
3,264
|
|
Home equity—term
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
13
|
|
Home equity—lines of credit
|
—
|
|
|
—
|
|
|
—
|
|
|
608
|
|
|
832
|
|
Installment and other loans
|
—
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
18
|
|
|
$
|
424
|
|
|
$
|
508
|
|
|
$
|
33
|
|
|
$
|
10,820
|
|
|
$
|
13,755
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,872
|
|
|
$
|
8,086
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
—
|
|
|
—
|
|
|
—
|
|
|
345
|
|
|
569
|
|
Non-owner occupied residential
|
—
|
|
|
—
|
|
|
—
|
|
|
235
|
|
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
—
|
|
|
—
|
|
|
—
|
|
|
1,763
|
|
|
3,361
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
First lien
|
425
|
|
|
425
|
|
|
36
|
|
|
2,165
|
|
|
3,164
|
|
Home equity—term
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
15
|
|
Home equity—lines of credit
|
—
|
|
|
—
|
|
|
—
|
|
|
733
|
|
|
1,077
|
|
Installment and other loans
|
—
|
|
|
—
|
|
|
—
|
|
|
85
|
|
|
97
|
|
|
$
|
425
|
|
|
$
|
425
|
|
|
$
|
36
|
|
|
$
|
11,211
|
|
|
$
|
16,791
|
|
The following table, which excludes PCI loans, summarizes the average recorded investment in impaired loans and related recognized interest income for the years ended December 31, 2020, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Average
Impaired
Balance
|
|
Interest
Income
Recognized
|
|
Average
Impaired
Balance
|
|
Interest
Income
Recognized
|
|
Average
Impaired
Balance
|
|
Interest
Income
Recognized
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
$
|
4,636
|
|
|
$
|
1
|
|
|
$
|
2,455
|
|
|
$
|
2
|
|
|
$
|
1,495
|
|
|
$
|
2
|
|
Non-owner occupied
|
83
|
|
|
—
|
|
|
46
|
|
|
—
|
|
|
1,842
|
|
|
—
|
|
Multi-family
|
205
|
|
|
—
|
|
|
152
|
|
|
—
|
|
|
148
|
|
|
—
|
|
Non-owner occupied residential
|
388
|
|
|
—
|
|
|
217
|
|
|
—
|
|
|
346
|
|
|
—
|
|
Acquisition and development:
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
181
|
|
|
—
|
|
Commercial and land development
|
641
|
|
|
—
|
|
|
21
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Commercial and industrial
|
1,196
|
|
|
—
|
|
|
683
|
|
|
—
|
|
|
322
|
|
|
—
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
2,995
|
|
|
48
|
|
|
2,582
|
|
|
50
|
|
|
3,234
|
|
|
59
|
|
Home equity – term
|
11
|
|
|
—
|
|
|
13
|
|
|
—
|
|
|
19
|
|
|
—
|
|
Home equity – lines of credit
|
692
|
|
|
1
|
|
|
750
|
|
|
2
|
|
|
657
|
|
|
2
|
|
Installment and other loans
|
25
|
|
|
—
|
|
|
13
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
$
|
10,872
|
|
|
$
|
50
|
|
|
$
|
6,932
|
|
|
$
|
54
|
|
|
$
|
8,249
|
|
|
$
|
63
|
|
The following table presents impaired loans that are TDRs, with the recorded investment at December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Number of
Contracts
|
|
Recorded
Investment
|
|
Number of
Contracts
|
|
Recorded
Investment
|
Accruing:
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
Owner-occupied
|
1
|
|
|
$
|
28
|
|
|
1
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
First lien
|
9
|
|
|
898
|
|
|
9
|
|
|
931
|
|
Home equity - lines of credit
|
1
|
|
|
8
|
|
|
1
|
|
|
18
|
|
|
11
|
|
|
934
|
|
|
11
|
|
|
979
|
|
Nonaccruing:
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
Owner-occupied
|
—
|
|
|
—
|
|
|
4
|
|
|
1,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
First lien
|
5
|
|
|
320
|
|
|
5
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
320
|
|
|
9
|
|
|
2,268
|
|
|
16
|
|
|
$
|
1,254
|
|
|
20
|
|
|
$
|
3,247
|
|
The following table presents the number of loans modified as TDRs, and their pre-modification and post-modification investment balances for the year ended December 31, 2019. There were no loans modified as TDRs during 2020 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Contracts
|
|
Pre-
Modification
Investment
Balance
|
|
Post-
Modification
Investment
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
Owner occupied
|
3
|
|
|
$
|
1,866
|
|
|
$
|
1,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loans presented in the table above were considered TDRs as a result of the Company agreeing to below market interest rates given the risk of the transaction; allowing the loan to remain on interest only status; or a reduction in interest rates, in order to give the borrowers an opportunity to improve their cash flows. For new and accruing TDRs, impairment is generally assessed using a discounted cash flow analysis. For TDRs in default of their modified terms, impairment is generally determined on a collateral dependent approach. Certain loans modified during a period may no longer be outstanding at the end of the period if the loan was paid off.
Management further monitors the performance and credit quality of the loan portfolio by analyzing the length of time a portfolio is past due, by aggregating loans based on their delinquencies. The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual loans at December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days Past Due
|
|
|
|
|
|
|
|
Current
|
|
30-59
|
|
60-89
|
|
90+
(still accruing)
|
|
Total
Past Due
|
|
Non-
Accrual
|
|
Total
Loans
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
$
|
168,262
|
|
|
$
|
958
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
958
|
|
|
$
|
3,232
|
|
|
$
|
172,452
|
|
Non-owner occupied
|
409,130
|
|
|
108
|
|
|
—
|
|
|
—
|
|
|
108
|
|
|
—
|
|
|
409,238
|
|
Multi-family
|
113,635
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
113,635
|
|
Non-owner occupied residential
|
112,443
|
|
|
484
|
|
|
—
|
|
|
—
|
|
|
484
|
|
|
268
|
|
|
113,195
|
|
Acquisition and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
9,486
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,486
|
|
Commercial and land development
|
50,922
|
|
|
32
|
|
|
58
|
|
|
—
|
|
|
90
|
|
|
814
|
|
|
51,826
|
|
Commercial and industrial
|
640,573
|
|
|
9
|
|
|
310
|
|
|
—
|
|
|
319
|
|
|
3,639
|
|
|
644,531
|
|
Municipal
|
19,677
|
|
|
846
|
|
|
—
|
|
|
—
|
|
|
846
|
|
|
—
|
|
|
20,523
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
230,903
|
|
|
5,758
|
|
|
535
|
|
|
83
|
|
|
6,376
|
|
|
1,730
|
|
|
239,009
|
|
Home equity – term
|
10,099
|
|
|
40
|
|
|
—
|
|
|
1
|
|
|
41
|
|
|
10
|
|
|
10,150
|
|
Home equity – lines of credit
|
156,153
|
|
|
268
|
|
|
—
|
|
|
—
|
|
|
268
|
|
|
600
|
|
|
157,021
|
|
Installment and other loans
|
26,052
|
|
|
168
|
|
|
49
|
|
|
14
|
|
|
231
|
|
|
17
|
|
|
26,300
|
|
Subtotal
|
1,947,335
|
|
|
8,671
|
|
|
952
|
|
|
98
|
|
|
9,721
|
|
|
10,310
|
|
|
1,967,366
|
|
Loans acquired with credit deterioration:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
2,456
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,456
|
|
Non-owner occupied
|
329
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied residential
|
1,161
|
|
|
—
|
|
|
—
|
|
|
149
|
|
|
149
|
|
|
—
|
|
|
1,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
2,837
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
4,341
|
|
|
655
|
|
|
9
|
|
|
307
|
|
|
971
|
|
|
—
|
|
|
5,312
|
|
Home equity – term
|
19
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment and other loans
|
57
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
61
|
|
Subtotal
|
11,200
|
|
|
659
|
|
|
9
|
|
|
456
|
|
|
1,124
|
|
|
—
|
|
|
12,324
|
|
|
$
|
1,958,535
|
|
|
$
|
9,330
|
|
|
$
|
961
|
|
|
$
|
554
|
|
|
$
|
10,845
|
|
|
$
|
10,310
|
|
|
$
|
1,979,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Days Past Due
|
|
|
|
|
|
|
|
Current
|
|
30-59
|
|
60-89
|
|
90+
(still accruing)
|
|
Total
Past Due
|
|
Non-
Accrual
|
|
Total
Loans
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
$
|
158,723
|
|
|
$
|
144
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
144
|
|
|
$
|
5,842
|
|
|
$
|
164,709
|
|
Non-owner occupied
|
359,425
|
|
|
480
|
|
|
—
|
|
|
—
|
|
|
480
|
|
|
—
|
|
|
359,905
|
|
Multi-family
|
105,865
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
345
|
|
|
106,210
|
|
Non-owner occupied residential
|
116,370
|
|
|
841
|
|
|
66
|
|
|
69
|
|
|
976
|
|
|
235
|
|
|
117,581
|
|
Acquisition and development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential construction
|
15,587
|
|
|
278
|
|
|
—
|
|
|
—
|
|
|
278
|
|
|
—
|
|
|
15,865
|
|
Commercial and land development
|
40,403
|
|
|
1,135
|
|
|
—
|
|
|
—
|
|
|
1,135
|
|
|
—
|
|
|
41,538
|
|
Commercial and industrial
|
208,668
|
|
|
315
|
|
|
—
|
|
|
—
|
|
|
315
|
|
|
1,763
|
|
|
210,746
|
|
Municipal
|
47,057
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47,057
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
314,473
|
|
|
9,092
|
|
|
1,234
|
|
|
150
|
|
|
10,476
|
|
|
1,659
|
|
|
326,608
|
|
Home equity – term
|
13,993
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
|
13
|
|
|
14,010
|
|
Home equity – lines of credit
|
163,907
|
|
|
417
|
|
|
275
|
|
|
—
|
|
|
692
|
|
|
715
|
|
|
165,314
|
|
Installment and other loans
|
50,224
|
|
|
236
|
|
|
37
|
|
|
—
|
|
|
273
|
|
|
85
|
|
|
50,582
|
|
Subtotal
|
1,594,695
|
|
|
12,938
|
|
|
1,616
|
|
|
219
|
|
|
14,773
|
|
|
10,657
|
|
|
1,620,125
|
|
Loans acquired with credit deterioration:
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
6,015
|
|
|
—
|
|
|
129
|
|
|
31
|
|
|
160
|
|
|
—
|
|
|
6,175
|
|
Non-owner occupied
|
564
|
|
|
—
|
|
|
—
|
|
|
581
|
|
|
581
|
|
|
—
|
|
|
1,145
|
|
Multi-family
|
683
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
683
|
|
Non-owner occupied residential
|
1,710
|
|
|
105
|
|
|
111
|
|
|
531
|
|
|
747
|
|
|
—
|
|
|
2,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
3,792
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
16
|
|
|
—
|
|
|
3,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien
|
6,308
|
|
|
1,857
|
|
|
745
|
|
|
854
|
|
|
3,456
|
|
|
—
|
|
|
9,764
|
|
Home equity – term
|
16
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment and other loans
|
131
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
153
|
|
Subtotal
|
19,219
|
|
|
1,988
|
|
|
985
|
|
|
2,013
|
|
|
4,986
|
|
|
—
|
|
|
24,205
|
|
|
$
|
1,613,914
|
|
|
$
|
14,926
|
|
|
$
|
2,601
|
|
|
$
|
2,232
|
|
|
$
|
19,759
|
|
|
$
|
10,657
|
|
|
$
|
1,644,330
|
|
The Company maintains its ALL at a level management believes adequate for probable incurred credit losses. The ALL is established and maintained through a provision for loan losses charged to earnings. On a quarterly basis, management assesses the adequacy of the ALL utilizing a defined methodology which considers specific credit evaluation of impaired loans as discussed above, historical loan loss experience, and qualitative factors. Management believes its approach properly addresses relevant accounting guidance for loans individually identified as impaired and for loans collectively evaluated for impairment, and other bank regulatory guidance.
In connection with its quarterly evaluation of the adequacy of the ALL, management reviews its methodology to determine if it properly addresses the current risk in the loan portfolio. For each loan class, general allowances based on quantitative factors, principally historical loss trends, are provided for loans that are collectively evaluated for impairment. An adjustment to historical loss factors may be incorporated for delinquency and other potential risk not elsewhere defined within the ALL methodology.
In addition to this quantitative analysis, adjustments to the ALL requirements are allocated on loans collectively evaluated for impairment based on additional qualitative factors, including:
Nature and Volume of Loans – including loan growth in the current and subsequent quarters based on the Company’s targeted growth and strategic plan, coupled with the types of loans booked based on risk management and credit culture; the number of exceptions to loan policy; and supervisory loan to value exceptions.
Concentrations of Credit and Changes within Credit Concentrations – including the composition of the Company’s overall portfolio makeup and management's evaluation related to concentration risk management and the inherent risk associated with the concentrations identified.
Underwriting Standards and Recovery Practices – including changes to underwriting standards and perceived impact on anticipated losses; trends in the number of exceptions to loan policy; supervisory loan to value exceptions; and administration of loan recovery practices.
Delinquency Trends – including delinquency percentages noted in the portfolio relative to economic conditions; severity of the delinquencies; and whether the ratios are trending upwards or downwards.
Classified Loans Trends – including internal loan ratings of the portfolio; severity of the ratings; whether the loan segment’s ratings show a more favorable or less favorable trend; and underlying market conditions and impact on the collateral values securing the loans.
Experience, Ability and Depth of Management/Lending staff – including the years’ experience of senior and middle management and the lending staff; turnover of the staff; and instances of repeat criticisms of ratings.
Quality of Loan Review – including the years of experience of the loan review staff; in-house versus outsourced provider of review; turnover of staff and the perceived quality of their work in relation to other external information.
National and Local Economic Conditions – including trends in the consumer price index, unemployment rates, the housing price index, housing statistics compared to the prior year, bankruptcy rates, regulatory and legal environment risks and competition. During the year ended December 31, 2020, this factor was increased for the commercial and consumer portfolios to account for the negative economic impact of the COVID-19 pandemic.
COVID-19 – during the year ended December 31, 2020, a qualitative allocation was implemented associated with the potential impact of the COVID-19 pandemic on the Company's commercial loan portfolio. The factor assumes downgrades of loans which were granted deferrals or forbearances based upon identified hardships resulting from the economic shutdown driven by the pandemic. The qualitative reserve on these loans will be reduced over time as sustained performance is demonstrated after the loans are removed from deferral status or the forbearance period has ended.
The following table presents activity in the ALL for the years ended December 31, 2020, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Consumer
|
|
|
|
|
|
Commercial
Real Estate
|
|
Acquisition
and
Development
|
|
Commercial
and
Industrial
|
|
Municipal
|
|
Total
|
|
Residential
Mortgage
|
|
Installment
and Other
|
|
Total
|
|
Unallocated
|
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
$
|
7,634
|
|
|
$
|
959
|
|
|
$
|
2,356
|
|
|
$
|
100
|
|
|
$
|
11,049
|
|
|
$
|
3,147
|
|
|
$
|
319
|
|
|
$
|
3,466
|
|
|
$
|
140
|
|
|
$
|
14,655
|
|
Provision for loan losses
|
2,745
|
|
|
146
|
|
|
2,096
|
|
|
(60)
|
|
|
4,927
|
|
|
203
|
|
|
117
|
|
|
320
|
|
|
78
|
|
|
5,325
|
|
Charge-offs
|
(3)
|
|
|
—
|
|
|
(748)
|
|
|
—
|
|
|
(751)
|
|
|
(114)
|
|
|
(146)
|
|
|
(260)
|
|
|
—
|
|
|
(1,011)
|
|
Recoveries
|
775
|
|
|
9
|
|
|
238
|
|
|
—
|
|
|
1,022
|
|
|
126
|
|
|
34
|
|
|
160
|
|
|
—
|
|
|
1,182
|
|
Balance, end of year
|
$
|
11,151
|
|
|
$
|
1,114
|
|
|
$
|
3,942
|
|
|
$
|
40
|
|
|
$
|
16,247
|
|
|
$
|
3,362
|
|
|
$
|
324
|
|
|
$
|
3,686
|
|
|
$
|
218
|
|
|
$
|
20,151
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
$
|
6,876
|
|
|
$
|
817
|
|
|
$
|
1,656
|
|
|
$
|
98
|
|
|
$
|
9,447
|
|
|
$
|
3,753
|
|
|
$
|
244
|
|
|
$
|
3,997
|
|
|
$
|
570
|
|
|
$
|
14,014
|
|
Provision for loan losses
|
515
|
|
|
139
|
|
|
841
|
|
|
2
|
|
|
1,497
|
|
|
(347)
|
|
|
180
|
|
|
(167)
|
|
|
(430)
|
|
|
900
|
|
Charge-offs
|
(25)
|
|
|
—
|
|
|
(299)
|
|
|
—
|
|
|
(324)
|
|
|
(386)
|
|
|
(155)
|
|
|
(541)
|
|
|
—
|
|
|
(865)
|
|
Recoveries
|
268
|
|
|
3
|
|
|
158
|
|
|
—
|
|
|
429
|
|
|
127
|
|
|
50
|
|
|
177
|
|
|
—
|
|
|
606
|
|
Balance, end of year
|
$
|
7,634
|
|
|
$
|
959
|
|
|
$
|
2,356
|
|
|
$
|
100
|
|
|
$
|
11,049
|
|
|
$
|
3,147
|
|
|
$
|
319
|
|
|
$
|
3,466
|
|
|
$
|
140
|
|
|
$
|
14,655
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
$
|
6,763
|
|
|
$
|
417
|
|
|
$
|
1,446
|
|
|
$
|
84
|
|
|
$
|
8,710
|
|
|
$
|
3,400
|
|
|
$
|
211
|
|
|
$
|
3,611
|
|
|
$
|
475
|
|
|
$
|
12,796
|
|
Provision for loan losses
|
(442)
|
|
|
396
|
|
|
209
|
|
|
14
|
|
|
177
|
|
|
363
|
|
|
165
|
|
|
528
|
|
|
95
|
|
|
800
|
|
Charge-offs
|
(17)
|
|
|
(7)
|
|
|
—
|
|
|
—
|
|
|
(24)
|
|
|
(148)
|
|
|
(292)
|
|
|
(440)
|
|
|
—
|
|
|
(464)
|
|
Recoveries
|
572
|
|
|
11
|
|
|
1
|
|
|
—
|
|
|
584
|
|
|
138
|
|
|
160
|
|
|
298
|
|
|
—
|
|
|
882
|
|
Balance, end of year
|
$
|
6,876
|
|
|
$
|
817
|
|
|
$
|
1,656
|
|
|
$
|
98
|
|
|
$
|
9,447
|
|
|
$
|
3,753
|
|
|
$
|
244
|
|
|
$
|
3,997
|
|
|
$
|
570
|
|
|
$
|
14,014
|
|
The following table summarizes the ending loan balances individually evaluated for impairment based upon loan segment, as well as the related ALL loss allocation for each at December 31, 2020 and 2019. PCI loans are excluded from loans individually evaluated for impairment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Consumer
|
|
|
|
|
|
Commercial
Real Estate
|
|
Acquisition
and
Development
|
|
Commercial
and
Industrial
|
|
Municipal
|
|
Total
|
|
Residential
Mortgage
|
|
Installment
and Other
|
|
Total
|
|
Unallocated
|
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans allocated by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
3,528
|
|
|
$
|
814
|
|
|
$
|
3,639
|
|
|
$
|
—
|
|
|
$
|
7,981
|
|
|
$
|
3,246
|
|
|
$
|
17
|
|
|
$
|
3,263
|
|
|
$
|
—
|
|
|
$
|
11,244
|
|
Collectively evaluated for impairment
|
809,087
|
|
|
60,498
|
|
|
643,729
|
|
|
20,523
|
|
|
1,533,837
|
|
|
408,265
|
|
|
26,344
|
|
|
434,609
|
|
|
—
|
|
|
1,968,446
|
|
|
$
|
812,615
|
|
|
$
|
61,312
|
|
|
$
|
647,368
|
|
|
$
|
20,523
|
|
|
$
|
1,541,818
|
|
|
$
|
411,511
|
|
|
$
|
26,361
|
|
|
$
|
437,872
|
|
|
$
|
—
|
|
|
$
|
1,979,690
|
|
Allowance for loan losses allocated by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
34
|
|
Collectively evaluated for impairment
|
11,151
|
|
|
1,114
|
|
|
3,941
|
|
|
40
|
|
|
16,246
|
|
|
3,329
|
|
|
324
|
|
|
3,653
|
|
|
218
|
|
|
20,117
|
|
|
$
|
11,151
|
|
|
$
|
1,114
|
|
|
$
|
3,942
|
|
|
$
|
40
|
|
|
$
|
16,247
|
|
|
$
|
3,362
|
|
|
$
|
324
|
|
|
$
|
3,686
|
|
|
$
|
218
|
|
|
$
|
20,151
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans allocated by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
6,452
|
|
|
$
|
—
|
|
|
$
|
1,763
|
|
|
$
|
—
|
|
|
$
|
8,215
|
|
|
$
|
3,336
|
|
|
$
|
85
|
|
|
$
|
3,421
|
|
|
$
|
—
|
|
|
$
|
11,636
|
|
Collectively evaluated for impairment
|
752,413
|
|
|
57,403
|
|
|
212,791
|
|
|
47,057
|
|
|
1,069,664
|
|
|
512,380
|
|
|
50,650
|
|
|
563,030
|
|
|
—
|
|
|
1,632,694
|
|
|
$
|
758,865
|
|
|
$
|
57,403
|
|
|
$
|
214,554
|
|
|
$
|
47,057
|
|
|
$
|
1,077,879
|
|
|
$
|
515,716
|
|
|
$
|
50,735
|
|
|
$
|
566,451
|
|
|
$
|
—
|
|
|
$
|
1,644,330
|
|
Allowance for loan losses allocated by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
36
|
|
Collectively evaluated for impairment
|
7,634
|
|
|
959
|
|
|
2,356
|
|
|
100
|
|
|
11,049
|
|
|
3,111
|
|
|
319
|
|
|
3,430
|
|
|
140
|
|
|
14,619
|
|
|
$
|
7,634
|
|
|
$
|
959
|
|
|
$
|
2,356
|
|
|
$
|
100
|
|
|
$
|
11,049
|
|
|
$
|
3,147
|
|
|
$
|
319
|
|
|
$
|
3,466
|
|
|
$
|
140
|
|
|
$
|
14,655
|
|
The following table provides activity for the accretable yield of purchased impaired loans for the years ended December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Accretable yield, beginning of period
|
$
|
6,950
|
|
|
$
|
2,065
|
|
|
|
Additions (1)
|
570
|
|
|
3,497
|
|
|
|
Accretion of income
|
(3,457)
|
|
|
(2,336)
|
|
|
|
Reclassifications from nonaccretable difference due to improvement in expected cash flows
|
1,871
|
|
|
2,444
|
|
|
|
Other changes, net (2)
|
(2,496)
|
|
|
1,280
|
|
|
|
Accretable yield, end of period
|
$
|
3,438
|
|
|
$
|
6,950
|
|
|
|
(1) The amount for the year ended December 31, 2020 reflects a measurement period adjustment for Hamilton loans that should have been in the PCI pool at the acquisition date. The amount for the year ended December 31, 2019 reflects loans acquired from Hamilton.
(2) The amount for the year ended December 31, 2020 represents the impact of purchased credit impaired loans sold during that year.
NOTE 5. PREMISES AND EQUIPMENT
The following table summarizes premises and equipment at December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Land
|
$
|
8,586
|
|
|
$
|
8,786
|
|
Buildings and improvements
|
27,569
|
|
|
27,520
|
|
Leasehold improvements
|
6,570
|
|
|
6,216
|
|
Furniture and equipment
|
23,254
|
|
|
22,293
|
|
Construction in progress
|
115
|
|
|
593
|
|
|
66,094
|
|
|
65,408
|
|
Less accumulated depreciation
|
30,945
|
|
|
27,884
|
|
|
$
|
35,149
|
|
|
$
|
37,524
|
|
Depreciation expense totaled $3.2 million, $2.7 million, and $2.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.
NOTE 6. LEASES
A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. The Company has primarily entered into operating leases for branches and office space. Most of the Company's leases contain renewal options, which the Company is reasonably certain to exercise. Including renewal options, the Company's leases range from three to 33 years. Operating lease right-of-use assets and lease liabilities are included in other assets and accrued interest and other liabilities on the Company's consolidated balance sheets.
The Company uses its incremental borrowing rate to determine the present value of the lease payments, as the rate implicit in the Company's leases is not readily determinable. Lease agreements that contain non-lease components are generally accounted for as a single lease component, while variable costs, such as common area maintenance expenses and property taxes, are expensed as incurred.
The following table summarizes the Company's right-of-use assets and related lease liabilities for the year ended December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Operating lease ROU assets
|
$
|
8,686
|
|
|
$
|
9,222
|
|
Operating lease ROU liabilities
|
9,143
|
|
|
9,688
|
|
Weighted-average remaining lease term (in years)
|
16.8
|
|
17.6
|
Weighted-average discount rate
|
4.3
|
%
|
|
4.5
|
%
|
The following table presents information related to the Company's operating leases for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Cash paid for operating lease liabilities
|
$
|
1,202
|
|
|
$
|
1,122
|
|
Operating lease expense
|
1,620
|
|
|
1,405
|
|
The following table presents maturities of the Company's lease liabilities by year.
|
|
|
|
|
|
2021
|
$
|
1,208
|
|
2022
|
785
|
|
2023
|
807
|
|
2024
|
827
|
|
2025
|
839
|
|
Thereafter
|
9,449
|
|
|
13,915
|
|
Less: imputed interest
|
4,772
|
|
Total lease liabilities
|
$
|
9,143
|
|
NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents changes in goodwill for the years ended December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Balance, beginning of year
|
$
|
19,925
|
|
|
$
|
12,592
|
|
Acquired goodwill
|
—
|
|
|
7,029
|
|
Adjustments to acquired goodwill (1)
|
(1,201)
|
|
|
304
|
|
|
|
|
|
Balance, end of year
|
$
|
18,724
|
|
|
$
|
19,925
|
|
(1) The Company finalized its purchase accounting adjustments associated with Hamilton as of May 1, 2020.
Goodwill is not amortized but is reviewed for potential impairment on at least an annual basis, with testing between annual tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit.
The Company typically completes its annual goodwill impairment assessment as of November 30. Due to the severe economic impact of COVID-19 and a resulting sustained decline in the Company's market value below book value, management performed a quantitative Step 1 impairment analysis of its goodwill to determine whether the Company's goodwill was impaired as of August 31, 2020. This analysis, which was performed in accordance with ASU 2017-04, Intangibles-Goodwill and Other, considered several factors, such as future cash flow projections and estimated market acquisition premiums in its analysis. In performing the analysis, management made several assumptions with respect to future operating performance, economic and market conditions and various others, many of which require significant judgment. The analysis performed and the related assumptions reflect the best currently available estimates and judgements regarding future performance of the Company. It was concluded that no impairment existed at August 31, 2020 as the calculated fair value of the reporting unit exceeded its book value. No changes occurred that would impact the results of that analysis through December 31, 2020.
The following tables present changes in and components of other intangible assets for the years ended December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Balance, beginning of year
|
$
|
7,180
|
|
|
$
|
3,910
|
|
Acquired CDI
|
—
|
|
|
4,550
|
|
|
|
|
|
Non-compete agreement
|
—
|
|
|
290
|
|
Amortization expense
|
(1,569)
|
|
|
(1,570)
|
|
Impairment
|
(153)
|
|
|
—
|
|
Balance, end of year
|
$
|
5,458
|
|
|
$
|
7,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
Core deposit intangibles
|
$
|
8,390
|
|
|
$
|
2,935
|
|
|
$
|
8,390
|
|
|
$
|
1,493
|
|
Other client relationship intangibles
|
25
|
|
|
22
|
|
|
524
|
|
|
338
|
|
Non-compete agreement
|
—
|
|
|
—
|
|
|
290
|
|
|
193
|
|
Total
|
$
|
8,415
|
|
|
$
|
2,957
|
|
|
$
|
9,204
|
|
|
$
|
2,024
|
|
During the year ended December 31, 2020, other client relationship intangibles with a gross carrying amount of $149 thousand were fully amortized and there was a further reduction of the gross carrying amount of $350 thousand due to the dissolution of Wheatland which resulted in an impairment charge of $153 thousand.
The following table presents future estimated aggregate amortization expense at December 31, 2020.
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
1,275
|
|
2022
|
|
1,105
|
|
2023
|
|
935
|
|
2024
|
|
766
|
|
2025
|
|
596
|
|
Thereafter
|
|
781
|
|
|
|
$
|
5,458
|
|
The Company incurred amortization expense of $1.6 million, $1.6 million and $286 thousand, respectively, in the years ending December 31, 2020, 2019 and 2018.
NOTE 8. INCOME TAXES
The Company files income tax returns in the U.S. federal jurisdiction, the Commonwealth of Pennsylvania and the State of Maryland. The Company is no longer subject to tax examination by tax authorities for years before 2017.
The following table summarizes income tax expense for the years ended December 31, 2020, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Current expense
|
$
|
6,602
|
|
|
$
|
934
|
|
|
$
|
1,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred expense
|
(554)
|
|
|
1,776
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
$
|
6,048
|
|
|
$
|
2,710
|
|
|
$
|
1,640
|
|
The following table reconciles the Company's effective income tax rate to its statutory federal rate for the years ended December 31, 2020, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Statutory federal tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
Increase (decrease) resulting from:
|
|
|
|
|
|
State taxes, net of federal benefit
|
1.0
|
%
|
|
(0.1)
|
%
|
|
—
|
%
|
|
|
|
|
|
|
Tax exempt interest income
|
(2.0)
|
%
|
|
(4.2)
|
%
|
|
(7.7)
|
%
|
|
|
|
|
|
|
Income from life insurance
|
(1.1)
|
%
|
|
(1.7)
|
%
|
|
(1.7)
|
%
|
Disallowed interest expense
|
0.1
|
%
|
|
0.3
|
%
|
|
0.8
|
%
|
Low-income housing credits and related expense
|
(0.8)
|
%
|
|
(1.3)
|
%
|
|
(2.5)
|
%
|
Merger related
|
—
|
%
|
|
0.7
|
%
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
0.4
|
%
|
|
(0.9)
|
%
|
|
0.9
|
%
|
Effective income tax rate
|
18.6
|
%
|
|
13.8
|
%
|
|
11.4
|
%
|
Income tax expense includes $3 thousand related to net security losses for the year ended December 31, 2020 and $997 thousand and $211 thousand related to net security gains for the years ended December 31, 2019, and 2018, respectively.
The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the results of operations. There were no penalties or interest related to income taxes recorded in the consolidated income statements for the years ended December 31, 2020, 2019 and 2018 and no amounts accrued for penalties at December 31, 2020 and 2019.
The following table summarizes the Company's deferred tax assets and liabilities at December 31, 2020, and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Allowance for loan losses
|
$
|
4,457
|
|
|
$
|
3,418
|
|
Deferred compensation
|
578
|
|
|
415
|
|
Retirement and salary continuation plans
|
2,536
|
|
|
2,357
|
|
Share-based compensation
|
735
|
|
|
631
|
|
Off-balance sheet reserves
|
345
|
|
|
234
|
|
Nonaccrual loan interest
|
395
|
|
|
697
|
|
Deferred loan fees
|
1,483
|
|
|
153
|
|
Net unrealized losses on securities available for sale
|
—
|
|
|
127
|
|
Net unrealized losses on interest rate swaps
|
258
|
|
|
—
|
|
Purchase accounting adjustments
|
1,886
|
|
|
4,081
|
|
Bonus accrual
|
622
|
|
|
493
|
|
ROU liability
|
2,003
|
|
|
2,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
2,472
|
|
|
1,872
|
|
Other
|
448
|
|
|
417
|
|
Total deferred tax assets
|
18,218
|
|
|
17,018
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation
|
74
|
|
|
452
|
|
Net unrealized gains on securities available for sale
|
1,148
|
|
|
—
|
|
|
|
|
|
Mortgage servicing rights
|
614
|
|
|
694
|
|
Purchase accounting adjustments
|
1,206
|
|
|
1,599
|
|
ROU Asset
|
1,903
|
|
|
2,021
|
|
|
|
|
|
Other
|
340
|
|
|
275
|
|
Total deferred tax liabilities
|
5,285
|
|
|
5,041
|
|
Net deferred tax asset, included in other assets
|
$
|
12,933
|
|
|
$
|
11,977
|
|
At December 31, 2020, the Company had acquired federal and state net operating loss carryforwards of $11.2 million and $9.0 million, respectively, subject to annual loss limitation limits, that expire beginning in 2033. A deferred tax asset is recognized for these carryforwards because the benefit is more likely than not to be realized.
FASB ASC 740, Income Taxes, (“ASC 740”) clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in ASC 740 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 was applied to all existing tax positions upon initial adoption. There was no liability for uncertain tax positions and no known unrecognized tax benefits at December 31, 2020 or 2019.
NOTE 9. RETIREMENT PLANS
The Company maintains a 401(k) profit-sharing plan for all qualified employees. Employees are eligible to participate in the 401(k) profit-sharing plan following completion of one month of service and attaining age 18. Pursuant to the 401(k) profit-sharing plan, employees can contribute up to the lesser of $57 thousand, or 100% of their compensation. Substantially all of the Company’s employees are covered by the plan, which contains limited match or safe harbor provisions. The Company will match 50% of the first 6% of the base contribution that an employee contributes. The Company’s match is immediately vested and paid at the end of the year. Employer contributions to the plan are based on the performance of the Company and are at the discretion of the Board of Directors. Employer contribution expense totaled $626 thousand, $590 thousand and $479 thousand for the years ended December 31, 2020, 2019, and 2018, respectively.
The Company has deferred compensation agreements with certain present and former directors, whereby a director or his beneficiaries will receive a monthly retirement benefit beginning at age 65. The arrangement is funded by an amount of life insurance on the participating director, which is calculated to meet the Company’s obligations under the compensation agreement. The cash value of the life insurance policies is an unrestricted asset of the Company. The estimated present value of future benefits to be paid totaled $53 thousand and $68 thousand at December 31, 2020 and 2019, respectively. Expense for this plan totaled $7 thousand, $8 thousand and $9 thousand for the years ended December 31, 2020, 2019, and 2018, respectively.
The Company also has supplemental discretionary deferred compensation plans for directors and executive officers. The plans are funded annually with director fees and salary reductions which are either placed in a trust account invested by the Bank’s OFA division or recognized as a liability. The trust account balance totaled $2.5 million and $1.8 million at December 31, 2020 and 2019, respectively, and is directly offset in other liabilities. Expense for these plans totaled $61 thousand for each of the years ended December 31, 2020, 2019, and 2018.
In addition, the Company has two supplemental retirement and salary continuation plans for directors and executive officers. These plans are funded with single premium life insurance on the plan participants. The cash value of the life insurance policies is an unrestricted asset of the Company. The estimated present value of future benefits to be paid on these plans totaled $11.4 million and $10.6 million at December 31, 2020 and 2019, respectively. Expense for these plans totaled $1.5 million, $1.0 million and $872 thousand, for the years ended December 31, 2020, 2019, and 2018, respectively.
The Company has promised a continuation of life insurance coverage to certain persons post-retirement. The estimated present value of future benefits to be paid totaled $1.5 million at December 31, 2020 and 2019. Expense for this plan totaled $25 thousand, $22 thousand and $126 thousand for the years ended December 31, 2020, 2019, and 2018, respectively.
Trust account balances, and estimated present values of future benefits and deferred compensation liabilities, noted above are included in other assets and other liabilities, respectively, on the consolidated balance sheets.
NOTE 10. SHARE-BASED COMPENSATION PLANS
The Company maintains share-based compensation plans under the shareholder-approved 2011 Plan. The purpose of the share-based compensation plans is to provide officers, employees, and non-employee members of the Board of Directors of the Company with additional incentive to further the success of the Company. At December 31, 2020, 881,920 shares of the common stock of the Company were reserved to be issued and 356,479 shares were available to be issued.
The 2011 Plan incentive awards may consist of grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units and performance shares. All employees and members of the Board of Directors of the Company and its subsidiaries, are eligible to participate in the 2011 Plan. The 2011 Plan allows for the Compensation Committee of the Board of Directors to determine the type of incentive to be awarded, its term, manner of exercise, vesting and restrictions on shares. Generally, awards are nonqualified under the IRC, unless the awards are deemed to be incentive awards to employees at the Compensation Committee’s discretion.
The following table presents a summary of nonvested restricted shares activity for 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date
Fair Value
|
|
|
|
|
Nonvested shares, beginning of year
|
228,758
|
|
|
$
|
21.90
|
|
Granted
|
114,182
|
|
|
20.09
|
|
Forfeited
|
(15,633)
|
|
|
21.4
|
|
Vested
|
(81,731)
|
|
|
20.92
|
|
Nonvested shares, end of year
|
245,576
|
|
|
$
|
21.45
|
|
The following table presents restricted shares compensation expense, with tax benefit information, and fair value of shares vested at December 31, 2020, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Restricted share award expense
|
$
|
1,710
|
|
|
$
|
1,578
|
|
|
$
|
1,479
|
|
Restricted share award tax benefit
|
359
|
|
|
451
|
|
|
374
|
|
Fair value of shares vested
|
1,384
|
|
|
2,744
|
|
|
1,074
|
|
At December 31, 2020 and 2019, unrecognized compensation expense related to the share awards totaled $2.0 million and $2.2 million, respectively. The unrecognized compensation expense at December 31, 2020 is expected to be recognized over a weighted-average period of 1.8 years.
The following table presents a summary of outstanding stock options activity for 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Exercise Price
|
Outstanding, beginning of year
|
30,559
|
|
|
$
|
21.56
|
|
Forfeited
|
(1,000)
|
|
|
21.14
|
|
Expired
|
(29,559)
|
|
|
25.76
|
|
|
|
|
|
Options outstanding and exercisable, end of year
|
—
|
|
|
$
|
—
|
|
The Company maintains an employee stock purchase plan to provide employees of the Company an opportunity to purchase Company common stock. Eligible employees may purchase shares in an amount that does not exceed 10% of their annual salary at the lower of 95% of the fair market value of the shares on the semi-annual offering date, or related purchase date. The Company reserved 350,000 shares of its common stock to be issued under the employee stock purchase plan. At December 31, 2020, 160,235 shares were available to be issued.
The following table presents information for the employee stock purchase plan for years ended December 31, 2020, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Shares purchased
|
7,831
|
|
|
5,399
|
|
|
5,907
|
|
Weighted average price of shares purchased
|
$
|
14.85
|
|
|
$
|
20.69
|
|
|
$
|
23.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company issues new shares or treasury shares, depending on market conditions, in its share-based compensation plans.
NOTE 11. DEPOSITS
The following table summarizes deposits by type at December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Noninterest-bearing
|
$
|
456,778
|
|
|
$
|
249,450
|
|
NOW and money market
|
1,327,459
|
|
|
963,672
|
|
Savings
|
176,425
|
|
|
142,832
|
|
Time ($250,000 or less)
|
334,280
|
|
|
450,490
|
|
Time (over $250,000)
|
61,938
|
|
|
69,078
|
|
Total
|
$
|
2,356,880
|
|
|
$
|
1,875,522
|
|
The following table summarizes scheduled future maturities of time deposits as of December 31, 2020.
|
|
|
|
|
|
|
|
2021
|
$
|
310,287
|
|
2022
|
45,029
|
|
2023
|
27,622
|
|
2024
|
6,718
|
|
2025
|
4,226
|
|
Thereafter
|
2,336
|
|
|
$
|
396,218
|
|
Brokered time deposits totaled zero and $16.1 million at December 31, 2020 and 2019, respectively. Management evaluates brokered deposits as a funding option, taking into consideration regulatory views on such deposits as non-core funding sources. Time deposits that meet or exceed the FDIC limit of $250,000 at December 31, 2020 and 2019 totaled $61.9 million and $69.1 million, respectively.
NOTE 12. RELATED PARTY TRANSACTIONS
Directors and executive officers of the Company, including their immediate families and companies in which they have a direct or indirect material interest, are considered to be related parties. In the ordinary course of business, the Company engages in various related party transactions, including extending credit and bank service transactions. The Company relies on the directors and executive officers for the identification of their associates.
Federal banking regulations require that any extensions of credit to insiders and their related interests not be offered on terms more favorable than would be offered to non-related borrowers of similar creditworthiness. The following table presents the aggregate activity in loans to related parties during 2020.
|
|
|
|
|
|
Balance, beginning of year
|
$
|
1,318
|
|
New loans
|
5,432
|
|
Repayments
|
(1,530)
|
|
Director and officer relationship changes
|
(171)
|
|
Balance, end of year
|
$
|
5,049
|
|
None of these loans are past due, on nonaccrual status or have been restructured to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. There were no loans to a related party that were considered classified loans at December 31, 2020 or 2019.
NOTE 13. SHORT-TERM BORROWINGS
The Company has short-term borrowing capability from the FHLB, federal funds purchased and the FRB discount window. The following table summarizes these short-term borrowings at and for the years ended December 31, 2020, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Balance at year-end
|
$
|
55,729
|
|
|
$
|
146,600
|
|
|
$
|
55,000
|
|
Weighted average interest rate at year-end
|
0.41
|
%
|
|
1.87
|
%
|
|
2.76
|
%
|
Average balance during the year
|
$
|
138,310
|
|
|
$
|
23,171
|
|
|
$
|
71,457
|
|
Average interest rate during the year
|
0.67
|
%
|
|
2.20
|
%
|
|
2.09
|
%
|
Maximum month-end balance during the year
|
$
|
178,729
|
|
|
$
|
146,600
|
|
|
$
|
103,000
|
|
The Company also enters into borrowing arrangements with certain of its deposit clients by agreements to repurchase ("repurchase agreements") under which the Company pledges investment securities owned and under its control as collateral against the borrowing arrangement, which generally matures within one day from the transaction date. The Company is required to hold U.S. Treasury, U.S. Agency or U.S. GSE securities as underlying securities for repurchase agreements. The following table provides additional details for repurchase agreements at and for the years ended December 31, 2020, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Balance at year-end
|
$
|
19,466
|
|
|
$
|
8,269
|
|
|
$
|
9,069
|
|
Weighted average interest rate at year-end
|
0.23
|
%
|
|
1.31
|
%
|
|
1.22
|
%
|
Average balance during the year
|
$
|
18,064
|
|
|
$
|
8,830
|
|
|
$
|
9,715
|
|
Average interest rate during the year
|
0.47
|
%
|
|
1.28
|
%
|
|
0.82
|
%
|
Maximum month-end balance during the year
|
$
|
24,403
|
|
|
$
|
12,774
|
|
|
$
|
14,591
|
|
Fair value of securities underlying the agreements at year-end
|
29,477
|
|
|
13,062
|
|
|
17,942
|
|
NOTE 14. LONG-TERM DEBT
The following table presents components of the Company’s long-term debt at December 31, 2020, and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Weighted Average rate
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
FHLB fixed rate advances maturing:
|
|
|
|
|
|
|
|
2021
|
$
|
—
|
|
|
$
|
40,350
|
|
|
—
|
%
|
|
1.76
|
%
|
|
|
|
|
|
|
|
|
2023
|
—
|
|
|
20,000
|
|
|
—
|
%
|
|
3.06
|
%
|
|
—
|
|
|
60,350
|
|
|
—
|
%
|
|
2.19
|
%
|
FHLB amortizing advance requiring monthly principal and interest payments, maturing:
|
|
|
|
|
|
|
|
2025
|
2,316
|
|
|
2,717
|
|
|
4.74
|
%
|
|
4.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FHLB Advances
|
$
|
2,316
|
|
|
$
|
63,067
|
|
|
4.74
|
%
|
|
2.30
|
%
|
(1) $20,000,000 of borrowings was prepaid and $40,350,000 of borrowings matured during the year ended December 31, 2020.
Except for amortizing advances, interest only is paid on a quarterly basis.
The following table summarizes the future annual principal payments required on these borrowings at December 31, 2020.
|
|
|
|
|
|
2021
|
$
|
421
|
|
2022
|
441
|
|
2023
|
462
|
|
2024
|
484
|
|
2025
|
508
|
|
Thereafter
|
—
|
|
|
$
|
2,316
|
|
The Bank is a member of the FHLB of Pittsburgh and has access to the FHLB program of overnight and term advances. Under terms of a blanket collateral agreement for advances, lines and letters of credit from the FHLB, collateral for all outstanding advances, lines and letters of credit consisted of 1-4 family mortgage loans and other real estate secured loans totaling $830.3 million at December 31, 2020. The Bank had additional availability of $678.9 million at the FHLB on December 31, 2020 based on its qualifying collateral, net of short-term borrowings and long-term debt detailed above, deposit letters of credit totaling $93.0 million and non-deposit letters of credit totaling $354 thousand at December 31, 2020.
The Bank has available unsecured lines of credit, with interest based on the daily Federal Funds rate, with two correspondent banks totaling $30.0 million, at December 31, 2020. There were no borrowings under these lines of credit at December 31, 2020 and 2019.
NOTE 15. SUBORDINATED NOTES
The Company has unsecured subordinated notes payable, which mature on December 30, 2028. At December 31, 2020 and 2019, subordinated notes payable outstanding totaled $31.9 million and $31.8 million, respectively, which qualified for Tier 2 capital. The notes are recorded on the consolidated balance sheets net of remaining debt issuance costs totaling $597 thousand and $653 thousand at December 31, 2020 and 2019, respectively, which are amortized over a 10-year period on an effective yield basis. The subordinated notes have a fixed interest rate of 6.0% through December 30, 2023, which then converts to a variable rate of three-month LIBOR for the applicable interest period plus 3.16% through maturity. The Company may, at its option, redeem the notes, in whole or in part, on any interest payment date on or after December 30, 2023, and at any time upon the occurrence of certain events. There are no debt covenants on the subordinated notes payable.
NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used as risk management tools by the Company to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings and are not used for trading or speculative purposes.
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. The purpose of the interest rate swaps is to convert short-term debt to longer term fixed rate debt. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. At December 31, 2020, the Company had one interest rate derivative designated as a hedging instrument with a notional amount of $50.0 million. The Company had no derivative instruments at December 31, 2019. Such derivatives were used to hedge the variable cash flows associated with the Company's borrowings. At December 31, 2020, the Company had cash collateral of $1.7 million held with the counterparty for this derivative.
The Company enters into interest rate swaps that allow its commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap
the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges and are marked through earnings. At December 31, 2020, the Company had three customer and three corresponding third-party broker interest rate derivatives not designated as a hedging instrument with an aggregate notional amount of $61.3 million. The Company had no such derivative instruments at December 31, 2019.
As a part of its normal residential mortgage operations, the Company will enter into an interest rate lock commitment with a potential borrower. The Company enters into a corresponding commitment to an investor to sell that loan at a specific price shortly after origination. In accordance with FASB ASC 820, adjustments are recorded through earnings to account for the net change in fair value of these transactions for the held for sale pipeline.
The following table summarizes the fair value of the Company's derivative instruments at December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Notional Amount
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Notional Amount
|
|
Balance Sheet Location
|
|
Fair Value
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps - balance sheet hedge
|
$
|
50,000
|
|
|
Other liabilities
|
|
$
|
(1,234)
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Total derivatives designated as hedging instruments
|
|
|
|
|
$
|
(1,234)
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap - commercial borrower
|
$
|
30,673
|
|
|
Other assets
|
|
$
|
708
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Interest rate swap - counterparty
|
30,673
|
|
|
Other liabilities
|
|
(744)
|
|
|
—
|
|
|
|
|
—
|
|
Interest Rate lock commitments with customers
|
22,560
|
|
|
Other assets
|
|
673
|
|
|
4,408
|
|
|
Other assets
|
|
103
|
|
Forward sale commitment
|
10,400
|
|
|
Other liabilities
|
|
(61)
|
|
|
8,969
|
|
|
Other assets
|
|
1
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
|
$
|
576
|
|
|
|
|
|
|
$
|
104
|
|
The following tables summarize the effect of the Company's derivative financial instruments on OCI and net income at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) Gain Recognized in OCI on Derivative
|
|
|
|
|
|
2020
|
|
2019
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
Interest rate products
|
|
|
|
|
$
|
(1,347)
|
|
|
$
|
—
|
|
Total
|
|
|
|
|
$
|
(1,347)
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Reclassified from AOCI into Income
|
|
Location of Loss Recognized from AOCI into Income
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
Interest rate products
|
|
|
|
|
$
|
117
|
|
|
$
|
—
|
|
|
Interest expense
|
Total
|
|
|
|
|
$
|
117
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in Income
|
|
Location of Gain (Loss) Recognized in Income
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate products
|
|
|
|
|
$
|
(56)
|
|
|
$
|
—
|
|
|
Other operating expenses
|
Interest rate lock commitments with customers
|
|
|
|
|
570
|
|
|
—
|
|
|
Mortgage banking activities
|
Forward sale commitment
|
|
|
|
|
(203)
|
|
|
—
|
|
|
Mortgage banking activities
|
Total
|
|
|
|
|
$
|
311
|
|
|
$
|
—
|
|
|
|
The following table is a summary of interest rate swap components at December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Weighted average pay rate
|
0.77
|
%
|
|
—
|
%
|
Weighted average receive rate
|
0.09
|
%
|
|
—
|
%
|
Weighted average maturity in years
|
4.2
|
|
0.0
|
NOTE 17. SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL
The Company maintains a stockholder dividend reinvestment and stock purchase plan. Under the plan, shareholders may purchase additional shares of the Company’s common stock at the prevailing market prices with reinvestment dividends and voluntary cash payments. The Company reserved 1,045,000 shares of its common stock to be issued under the dividend reinvestment and stock purchase plan. At December 31, 2020, approximately 665,000 shares were available to be issued under the plan.
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under the Basel Committee on Banking Supervision's capital guidelines for U.S. Banks ("Basel III rules"), an entity must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The required capital conservation buffer was 1.25% for 2017, 1.875% for 2018 and 2.50% for 2019 under phase-in rules. The Company and the Bank have elected not to include net unrealized gain or loss on available for sale securities in computing regulatory capital.
Effective with the third quarter of 2018, the FRB raised the consolidated asset limit to be considered a small bank holding company from $1.0 billion to $3.0 billion, and a company with assets under the revised limits is not subject to the FRB consolidated capital rules. A company with consolidated assets under the revised limit may continue to file reports that include capital amounts and ratios. The Company has elected to continue to file those reports.
Management believes, at December 31, 2020 and 2019, that the Company and the Bank met all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's classification.
The following table presents capital amounts and ratios at December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
For Capital Adequacy Purposes
(includes applicable capital conservation buffer)
|
|
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital:
|
|
|
|
|
|
|
|
|
|
|
|
Orrstown Financial Services, Inc.
|
$
|
271,184
|
|
|
15.6
|
%
|
|
$
|
183,099
|
|
|
10.5
|
%
|
|
n/a
|
|
n/a
|
Orrstown Bank
|
256,376
|
|
|
14.7
|
%
|
|
183,012
|
|
|
10.5
|
%
|
|
$
|
174,297
|
|
|
10.0
|
%
|
Tier 1 risk-based capital:
|
|
|
|
|
|
|
|
|
|
|
|
Orrstown Financial Services, Inc.
|
217,582
|
|
|
12.5
|
%
|
|
148,223
|
|
|
8.5
|
%
|
|
n/a
|
|
n/a
|
Orrstown Bank
|
234,677
|
|
|
13.5
|
%
|
|
148,152
|
|
|
8.5
|
%
|
|
139,437
|
|
|
8.0
|
%
|
Tier 1 common equity risk-based capital:
|
|
|
|
|
|
|
|
|
|
|
|
Orrstown Financial Services, Inc.
|
217,582
|
|
|
12.5
|
%
|
|
122,066
|
|
|
7.0
|
%
|
|
n/a
|
|
n/a
|
Orrstown Bank
|
234,677
|
|
|
13.5
|
%
|
|
122,008
|
|
|
7.0
|
%
|
|
113,293
|
|
|
6.5
|
%
|
Tier 1 leverage capital:
|
|
|
|
|
|
|
|
|
|
|
|
Orrstown Financial Services, Inc.
|
217,582
|
|
|
8.1
|
%
|
|
108,063
|
|
|
4.0
|
%
|
|
n/a
|
|
n/a
|
Orrstown Bank
|
234,677
|
|
|
8.7
|
%
|
|
108,148
|
|
|
4.0
|
%
|
|
135,185
|
|
|
5.0
|
%
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital:
|
|
|
|
|
|
|
|
|
|
|
|
Orrstown Financial Services, Inc.
|
$
|
244,003
|
|
|
14.1
|
%
|
|
$
|
182,028
|
|
|
10.5
|
%
|
|
n/a
|
|
n/a
|
Orrstown Bank
|
231,805
|
|
|
13.4
|
%
|
|
181,948
|
|
|
10.5
|
%
|
|
$
|
173,284
|
|
|
10.0
|
%
|
Tier 1 risk-based capital:
|
|
|
|
|
|
|
|
|
|
|
|
Orrstown Financial Services, Inc.
|
196,451
|
|
|
11.3
|
%
|
|
147,356
|
|
|
8.5
|
%
|
|
n/a
|
|
n/a
|
Orrstown Bank
|
216,100
|
|
|
12.5
|
%
|
|
147,291
|
|
|
8.5
|
%
|
|
138,627
|
|
|
8.0
|
%
|
Tier 1 common equity risk-based capital:
|
|
|
|
|
|
|
|
|
|
|
|
Orrstown Financial Services, Inc.
|
196,451
|
|
|
11.3
|
%
|
|
121,352
|
|
|
7.0
|
%
|
|
n/a
|
|
n/a
|
Orrstown Bank
|
216,100
|
|
|
12.5
|
%
|
|
121,299
|
|
|
7.0
|
%
|
|
112,635
|
|
|
6.5
|
%
|
Tier 1 leverage capital:
|
|
|
|
|
|
|
|
|
|
|
|
Orrstown Financial Services, Inc.
|
196,451
|
|
|
8.6
|
%
|
|
91,782
|
|
|
4.0
|
%
|
|
n/a
|
|
n/a
|
Orrstown Bank
|
216,100
|
|
|
9.4
|
%
|
|
91,798
|
|
|
4.0
|
%
|
|
114,747
|
|
|
5.0
|
%
|
In September 2015, the Board of Directors of the Company authorized a share repurchase program under which the Company may repurchase up to 5% of the Company's outstanding shares of common stock, or approximately 416,000 shares, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. When and if appropriate, repurchases may be made in open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time. At December 31, 2020, 154,680 shares had been repurchased under the program at a total cost of $2.6 million, or $16.88 per share.
On January 20, 2021, the Board declared a cash dividend of $0.18 per common share, which was paid on February 8, 2021.
Banking regulations limit the ability of the Bank to pay dividends or make loans or advances to the Parent Company. Dividends that may be paid in any calendar year are limited to the current year's net profits, combined with the retained net profits of the preceding two years. At December 31, 2020, dividends from the Bank available to be paid to the Parent Company, without prior approval of the Bank's regulatory agency, totaled $47.4 million, subject to the Bank meeting or exceeding regulatory capital requirements. The Parent Company's principal source of funds for dividend payments to shareholders is dividends received from the Bank.
At December 31, 2020, there were no loans from the Bank to any nonbank affiliate, including the Parent Company. The Bank's loans to a single affiliate may not exceed 10%, and loans to all affiliates may not exceed 20%, of the Bank’s capital
stock, surplus, and undivided profits, plus the ALL (as defined by regulation). Loans from the Bank to nonbank affiliates, including the Parent Company, are also required to be collateralized according to regulatory guidelines. At December 31, 2020, the maximum amount the Bank had available to loan nonbank affiliates totaled $199.9 million.
NOTE 18. EARNINGS PER SHARE
The following table presents earnings per share for the years ended December 31, 2020, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Net income
|
$
|
26,463
|
|
|
$
|
16,924
|
|
|
$
|
12,805
|
|
Weighted average shares outstanding - basic
|
10,942
|
|
|
10,362
|
|
|
8,360
|
|
Dilutive effect of share-based compensation
|
92
|
|
|
152
|
|
|
177
|
|
Weighted average shares outstanding - diluted
|
11,034
|
|
|
10,514
|
|
|
8,537
|
|
Per share information:
|
|
|
|
|
|
Basic earnings per share
|
$
|
2.42
|
|
|
$
|
1.63
|
|
|
$
|
1.53
|
|
Diluted earnings per share
|
2.40
|
|
|
1.61
|
|
|
1.50
|
|
Average outstanding stock options of approximately 16,109, 22,223 and 20,574, respectively, for the years ended December 31, 2020, 2019 and 2018 were not included in the computation of earnings per share because the effect was antidilutive, as the exercise price exceeded the average market price. The dilutive effect of share-based compensation in each year above relates principally to restricted stock awards.
NOTE 19. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The following table presents these contractual, or notional, amounts at December 31, 2020, and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Commitments to fund:
|
|
|
|
Home equity lines of credit
|
$
|
223,216
|
|
|
$
|
205,502
|
|
1-4 family residential construction loans
|
28,928
|
|
|
19,812
|
|
Commercial real estate, construction and land development loans
|
60,606
|
|
|
19,018
|
|
Commercial, industrial and other loans
|
268,931
|
|
|
222,288
|
|
Standby letters of credit
|
14,491
|
|
|
10,588
|
|
Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the client. Collateral varies but may include accounts receivable, inventory, equipment, residential real estate, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a client to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to clients. The Company holds collateral supporting those commitments when deemed necessary by management. The liability, at December 31, 2020 and 2019, for guarantees under standby letters of credit issued was not considered to be material.
The Company maintains a reserve, based on historical loss experience of the related loan class, for off-balance sheet credit exposures that currently are not funded, in other liabilities on the condensed consolidated balance sheets. This reserve totaled $1.5 million and $1.0 million at December 31, 2020 and 2019, respectively. The net amount expensed for this off-balance sheet credit exposures reserve was $511 thousand, $39 thousand and $182 thousand for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company sells loans to the FHLB of Chicago as part of its MPF Program. Under the terms of the MPF Program, there is limited recourse back to the Company for loans that do not perform in accordance with the terms of the loan agreement. Each loan that is sold under the program is “credit enhanced” such that the individual loan’s rating is raised to a minimum “BBB,” as determined by the FHLB of Chicago. Outstanding loans sold under the MPF Program totaled $18.9 million and $26.0 million at December 31, 2020 and 2019, respectively, with limited recourse back to the Company on these loans of $777 thousand at December 31, 2020 and 2019. Many of the loans sold under the MPF Program have primary mortgage insurance, which reduces the Company’s overall exposure. The net amount expensed or recovered for the Company's estimate of losses under its recourse exposure for loans foreclosed, or in the process of foreclosure, is recorded in other operating expenses on the consolidated statements of income. These amounts were not material for the years ended December 31, 2020, 2019 and 2018.
NOTE 20. FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. Certain financial instruments and all non-financial instruments are excluded from fair value disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:
Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.
Level 2 – significant other observable inputs other than Level 1 prices such as prices for similar assets and liabilities in active markets; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – at least one significant unobservable input that reflects a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability or quoted prices for identical or similar instruments in markets that are not active; .
In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The Company used the following methods and significant assumptions to estimate fair value for financial instruments measured on a recurring basis:
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, securities are classified within Level 2 and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. Level 2 securities include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. All of the Company’s securities are classified as available for sale.
The Company had no fair value liabilities measured on a recurring basis at December 31, 2020 or 2019.
The following table summarizes assets measured at fair value on a recurring basis at December 31, 2020 or 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair
Value
Measurements
|
December 31, 2020
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
$
|
—
|
|
|
$
|
103,591
|
|
|
$
|
9,079
|
|
|
$
|
112,670
|
|
GSE residential MBSs
|
—
|
|
|
4,293
|
|
|
—
|
|
|
4,293
|
|
|
|
|
|
|
|
|
|
GSE residential CMOs
|
—
|
|
|
58,011
|
|
|
—
|
|
|
58,011
|
|
Non-agency CMOs
|
—
|
|
|
—
|
|
|
16,918
|
|
|
16,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label commercial CMOs
|
—
|
|
|
56,730
|
|
|
5,506
|
|
|
62,236
|
|
Asset-backed
|
—
|
|
|
211,966
|
|
|
—
|
|
|
211,966
|
|
Other
|
371
|
|
|
—
|
|
|
—
|
|
|
371
|
|
Loans held for sale
|
—
|
|
|
11,734
|
|
|
—
|
|
|
11,734
|
|
Interest rate swaps
|
—
|
|
|
690
|
|
|
—
|
|
|
690
|
|
Interest rate lock commitments on residential mortgages
|
—
|
|
|
—
|
|
|
673
|
|
|
673
|
|
Totals
|
$
|
371
|
|
|
$
|
447,015
|
|
|
$
|
32,176
|
|
|
$
|
479,562
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions
|
$
|
—
|
|
|
$
|
87,863
|
|
|
$
|
—
|
|
|
$
|
87,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE residential CMOs
|
—
|
|
|
68,154
|
|
|
—
|
|
|
68,154
|
|
Non-agency CMOs
|
—
|
|
|
—
|
|
|
17,087
|
|
|
17,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label commercial CMOs
|
—
|
|
|
79,437
|
|
|
7,192
|
|
|
86,629
|
|
Asset-backed
|
—
|
|
|
230,515
|
|
|
—
|
|
|
230,515
|
|
Other
|
637
|
|
|
—
|
|
|
—
|
|
|
637
|
|
Loans held for sale
|
—
|
|
|
9,364
|
|
|
—
|
|
|
9,364
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments on residential mortgages
|
—
|
|
|
—
|
|
|
103
|
|
|
103
|
|
Totals
|
$
|
637
|
|
|
$
|
475,333
|
|
|
$
|
24,382
|
|
|
$
|
500,352
|
|
The Company has CMOs measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2020 and 2019. The Level 3 valuation is based on a non-executable broker quote, which is considered a significant unobservable input. Such quotes are updated as available and may remain constant for a period of time for certain broker-quoted securities that do not move with the market or that are not interest rate sensitive as a result of their structure or overall attributes.
Effective October 1, 2019, the Company’s residential mortgage loans held-for-sale were recorded at fair value utilizing Level 2 measurements. This fair value measurement is determined based upon third party quotes obtained on similar loans. The adoption of this accounting election resulted in an increase of $226 thousand in gain on sale of loans in the consolidated statements of income for the year ended December 31, 2019. For loans held-for-sale for which the fair value option has been elected, the aggregate fair value exceeded the aggregate principal balance by $436 thousand and $226 thousand as of December 31, 2020 and 2019, respectively.
The determination of the fair value of interest rate lock commitments on residential mortgages is based on agreed upon pricing with the respective investor on each loan and includes a pull through percentage. The pull through percentage represents an estimate of loans in the pipeline to be delivered to an investor versus the total loans committed for delivery. Significant changes in this input could result in a significantly higher or lower fair value measurement. As the pull through percentage is a significant unobservable input, this is deemed a Level 3 valuation input. The average pull through percentage, which is based upon historical experience, was 90% as of December 31, 2020. An increase or decrease of 5% in the pull through assumption would result in a positive or negative change of $42 thousand in the fair value of interest rate lock commitments at December 31, 2020. The fair value of interest rate lock commitments was $673 thousand and $103 thousand at December 31, 2020 and 2019, respectively, and is included in other assets on the consolidated balance sheets.
The following provides details of the Level 3 fair value measurement activity for the years ended December 31, 2020 or 2019.
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
2020
|
|
2019
|
Balance, beginning of year
|
$
|
24,279
|
|
|
$
|
7,209
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) included in OCI
|
(668)
|
|
|
(17)
|
|
Purchases
|
—
|
|
|
17,619
|
|
Net discount accretion
|
571
|
|
|
7
|
|
Principal payments
|
(10,571)
|
|
|
(539)
|
|
|
|
|
|
Transfers into Level 3
|
17,892
|
|
|
—
|
|
Balance, end of year
|
$
|
31,503
|
|
|
$
|
24,279
|
|
The transfers into Level 3 for 2020 noted above relate to two CMO investment securities and one municipal bond for which trading was substantially limited during the year due to the COVID-19 pandemic. As such, older trades or trades of similar securities were utilized to approximate fair value.
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments on residential mortgages:
|
|
|
|
|
2020
|
|
2019
|
Balance, beginning of year
|
$
|
103
|
|
|
$
|
—
|
|
Total gain included in earnings
|
570
|
|
|
103
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
$
|
673
|
|
|
$
|
103
|
|
Certain financial assets are measured at fair value on a nonrecurring basis. Adjustments to the fair value of these assets usually results from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The Company used the following methods and significant assumptions to estimate fair value for these financial assets.
Impaired Loans
Loans are designated as impaired when, in the judgment of management and based on current information and events, it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected. The measurement of loss associated with impaired loans for all loan classes can be based on either the observable market price of the loan, the fair value of the collateral, or discounted cash flows using a market rate of interest for performing TDRs. For collateral-dependent loans, fair value is measured based on the value of the collateral securing the loan, less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of the real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, or if management adjusts the appraisal value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Impaired loans with an allocation to the ALL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the unaudited condensed consolidated statements of income.
Changes in the fair value of impaired loans for those still held at December 31 considered in the determination of the provision for loan losses totaled $244 thousand, $77 thousand and $146 thousand for the years ended December 31, 2020, 2019, and 2018, respectively.
Foreclosed Real Estate
OREO property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, OREO is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. There were no specific charges to value OREO at the lower of cost or fair value on properties held at December 31, 2020 and 2019. Changes in the fair value of foreclosed real estate for those still held at December 31 charged to OREO totaled $0 for the years ended December 31, 2020, 2019, and 2018.
Mortgage Servicing Rights
The MSR fair value is estimated to be equal to its carrying value, unless the quarterly valuation model calculates the present value of the estimated net servicing income is less than its carrying value, in which case an impairment charge is taken. At December 31, 2020, a $1.1 million lower of cost or fair value reserve existed on the mortgage servicing right portfolio. In 2019, net impairment charges of $997 thousand were recorded in mortgage banking activities on the consolidated statements of income. A reserve of $70 thousand existed at December 31, 2019, and $70 thousand in impairment charges were recorded in 2019.
The following table summarizes assets measured at fair value on a nonrecurring basis at December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
Measurements
|
December 31, 2020
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
Owner-occupied
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
846
|
|
|
$
|
846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied residential
|
—
|
|
|
—
|
|
|
36
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
—
|
|
|
—
|
|
|
12
|
|
|
12
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
First lien
|
—
|
|
|
—
|
|
|
638
|
|
|
638
|
|
|
|
|
|
|
|
|
|
Home equity - lines of credit
|
—
|
|
|
—
|
|
|
89
|
|
|
89
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,621
|
|
|
$
|
1,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,745
|
|
|
$
|
2,745
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
Owner-occupied
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
938
|
|
|
$
|
938
|
|
|
|
|
|
|
|
|
|
Multi-family
|
—
|
|
|
—
|
|
|
96
|
|
|
96
|
|
Non-owner occupied residential
|
—
|
|
|
—
|
|
|
103
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
—
|
|
|
—
|
|
|
11
|
|
|
11
|
|
Residential mortgage:
|
|
|
|
|
|
|
|
First lien
|
—
|
|
|
—
|
|
|
641
|
|
|
641
|
|
|
|
|
|
|
|
|
|
Home equity - lines of credit
|
—
|
|
|
—
|
|
|
400
|
|
|
400
|
|
Installment and other loans
|
—
|
|
|
—
|
|
|
7
|
|
|
7
|
|
Total impaired loans
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,196
|
|
|
$
|
2,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,119
|
|
|
$
|
3,119
|
|
The following table presents additional qualitative information about assets measured on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Estimate
|
|
Valuation Techniques
|
|
Unobservable Input
|
|
Range
|
December 31, 2020
|
|
|
|
|
|
|
|
Impaired loans
|
$
|
1,621
|
|
|
Appraisal of collateral
|
|
Management adjustments on appraisals for property type and recent activity
|
|
5% - 25% discount
|
|
|
|
|
|
- Management adjustments for liquidation expenses
|
|
6.02% - 19.32% discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
2,745
|
|
|
Discounted cash flows
|
|
Weighted average CPR
|
|
18.02%
|
|
|
|
|
|
Discount rate
|
|
9.56%
|
December 31, 2019
|
|
|
|
|
|
|
|
Impaired loans
|
$
|
2,196
|
|
|
Appraisal of collateral
|
|
Management adjustments on appraisals for property type and recent activity
|
|
0% - 20% discount
|
|
|
|
|
|
- Management adjustments for liquidation expenses
|
|
6% - 33% discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
3,119
|
|
|
Discounted cash flows
|
|
Weighted average CPR
|
|
11.63%
|
|
|
|
|
|
Discount rate
|
|
9.54%
|
Fair values of financial instruments
GAAP requires disclosure of the fair value of financial assets and liabilities, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The following table presents the carrying amounts and estimated fair values of financial assets and liabilities at December 31, 2020, and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
26,203
|
|
|
$
|
26,203
|
|
|
$
|
26,203
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest-bearing deposits with banks
|
99,055
|
|
|
99,055
|
|
|
99,055
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Restricted investments in bank stock
|
10,563
|
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
Investment securities
|
466,465
|
|
|
466,465
|
|
|
371
|
|
|
434,591
|
|
|
31,503
|
|
Loans held for sale
|
11,734
|
|
|
11,734
|
|
|
—
|
|
|
11,734
|
|
|
—
|
|
Loans, net of allowance for loan losses
|
1,959,539
|
|
|
1,953,860
|
|
|
—
|
|
|
—
|
|
|
1,953,860
|
|
Interest rate lock commitments on residential mortgages
|
673
|
|
|
673
|
|
|
—
|
|
|
—
|
|
|
673
|
|
Interest rate swaps
|
690
|
|
|
690
|
|
|
—
|
|
|
690
|
|
|
—
|
|
Accrued interest receivable
|
8,927
|
|
|
8,927
|
|
|
—
|
|
|
1,529
|
|
|
7,398
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
Deposits
|
2,356,880
|
|
|
2,359,317
|
|
|
—
|
|
|
2,359,317
|
|
|
—
|
|
Securities sold under agreements to repurchase
|
19,466
|
|
|
19,466
|
|
|
—
|
|
|
19,466
|
|
|
—
|
|
FHLB advances and other
|
58,045
|
|
|
58,298
|
|
|
—
|
|
|
58,298
|
|
|
—
|
|
Subordinated notes
|
31,903
|
|
|
31,712
|
|
|
—
|
|
|
31,712
|
|
|
—
|
|
Interest rate swaps
|
1,956
|
|
|
1,956
|
|
|
—
|
|
|
1,956
|
|
|
—
|
|
Accrued interest payable
|
238
|
|
|
238
|
|
|
—
|
|
|
238
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
25,969
|
|
|
$
|
25,969
|
|
|
$
|
25,969
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest-bearing deposits with banks
|
30,493
|
|
|
30,493
|
|
|
30,493
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Restricted investments in bank stock
|
16,184
|
|
|
n/a
|
|
n/a
|
|
n/a
|
|
n/a
|
Investment securities
|
490,885
|
|
|
490,885
|
|
|
637
|
|
|
465,969
|
|
|
24,279
|
|
Loans held for sale
|
9,364
|
|
|
9,364
|
|
|
—
|
|
|
9,364
|
|
|
—
|
|
Loans, net of allowance for loan losses
|
1,629,675
|
|
|
1,652,788
|
|
|
—
|
|
|
—
|
|
|
1,652,788
|
|
Interest rate lock commitments on residential mortgages
|
103
|
|
|
103
|
|
|
—
|
|
|
—
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
6,040
|
|
|
6,040
|
|
|
—
|
|
|
1,863
|
|
|
4,177
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
Deposits
|
1,875,522
|
|
|
1,876,555
|
|
|
—
|
|
|
1,876,555
|
|
|
—
|
|
Securities sold under agreements to repurchase
|
8,269
|
|
|
8,269
|
|
|
—
|
|
|
8,269
|
|
|
—
|
|
FHLB advances and other
|
209,667
|
|
|
210,005
|
|
|
—
|
|
|
210,005
|
|
|
—
|
|
Subordinated notes
|
31,847
|
|
|
33,953
|
|
|
—
|
|
|
33,953
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
879
|
|
|
879
|
|
|
—
|
|
|
879
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
The methods used to estimate the fair value of financial instruments at December 31, 2020 did not necessarily represent an exit price. In accordance with the Company's adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the methods utilized to measure the fair value of financial instruments at December 31, 2020 represents an approximation of exit price; however, an actual exit price may differ.
NOTE 21. REVENUE FROM CONTRACTS WITH CLIENTS
On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent amendments (collectively “ASC 606”). The update implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to clients in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The majority of the Company's revenue comes from interest income, including loans and securities, that are outside the scope of ASC 606. The Company's services that fall within the scope of ASC 606 are presented within noninterest income on the consolidated statements of income and are recognized as revenue as the Company satisfies its obligation to the client. Services within the scope of ASC 606 include service charges on deposit accounts, income from fiduciary investment management and brokerage activities and interchange fees from service charges on ATM and debit card transactions. ASC 606 did not result in a change to the accounting for any in-scope revenue streams; as such, no cumulative effect adjustment was recorded.
Descriptions of revenue generating activities that are within the scope of ASC 606 are as follows:
Service Charges on Deposit Accounts - The Company earns fees from its deposit clients for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the client's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the client's account balance.
Interchange Income - The Company earns interchange fees from debit/credit cardholder transactions conducted through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange income is presented net of cardholder rewards.
Loan swap referral fees - The Company earns fees from a third-party service provider for loan hedging referrals provided to lending clients. The Company acts as an agent in arranging the relationship between our client and the third-party service provider. The Company is paid and recognizes income upon completion of the loan hedge between our client and the third-party service provider.
Trust and Investment Management Income - The Company earns wealth management and investment brokerage fees from its contracts with trust and wealth management clients to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company provides the contracted services and are generally assessed based on a tiered scale of the market value of assets under management. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e., the trade date. Other related services provided included financial planning services and the associated fees the Company earns, which are based on a fixed fee schedule, are recognized when the services are rendered. Services are generally billed in arrears and a receivable is recorded until fees are paid.
Brokerage Income - The Company earns fees from investment management and brokerage services provided to its clients through a third-party service provider. The Company receives commissions from the third-party service provider and recognizes income on a weekly basis based upon client activity. As the Company acts as an agent in arranging the relationship between the client and the third-party service provider and does not control the services rendered to the clients, brokerage income is presented net of related costs.
Gains/Losses on Sales of OREO - The Company records a gain or loss on the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. If the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present.
At December 31, 2020 and December 31, 2019, the Company had receivables from trust and wealth management clients totaling $661 thousand and $719 thousand, respectively.
The following table presents the Company's noninterest income disaggregated by revenue source for the years ended December 31, 2020, 2019 and 2018.
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|
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|
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|
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2020
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2019
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2018
|
Noninterest income
|
|
|
|
|
|
Service charges on deposit accounts
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$
|
3,113
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|
|
$
|
3,793
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|
|
$
|
3,578
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Loan swap referral fees
|
847
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|
1,197
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|
|
—
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Trust and investment management income
|
6,912
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|
|
7,255
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|
|
6,576
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Brokerage income
|
2,821
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|
|
2,426
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|
|
2,035
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Interchange income
|
3,423
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|
|
3,281
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|
|
2,821
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Revenue from contracts with clients
|
17,116
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17,952
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|
15,010
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|
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Other service charges
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444
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416
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562
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Mortgage banking activities
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5,274
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3,047
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2,663
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Gain on sale of commercial loans
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2,803
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—
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|
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—
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Income from life insurance
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2,261
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|
2,044
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|
1,463
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Other income
|
427
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331
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320
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Investment securities gains
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(16)
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4,749
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|
1,006
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Total noninterest income
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$
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28,309
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$
|
28,539
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$
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21,024
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NOTE 22. ORRSTOWN FINANCIAL SERVICES, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL INFORMATION
Condensed Balance Sheets
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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 in Orrstown Bank
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$
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13,961
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$
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11,568
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Investment in Orrstown Bank
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263,346
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242,041
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|
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Other assets
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941
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|
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1,724
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Total assets
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$
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278,248
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|
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$
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255,333
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Liabilities
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|
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Subordinated notes
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$
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31,903
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$
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31,847
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Accrued interest and other liabilities
|
96
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|
|
237
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Total liabilities
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31,999
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|
|
32,084
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Shareholders’ Equity
|
|
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Common stock
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586
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|
584
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Additional paid-in capital
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189,066
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|
188,365
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Retained earnings
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54,099
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|
35,246
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Accumulated other comprehensive income (loss)
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3,346
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(480)
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Treasury stock
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(848)
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(466)
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Total shareholders’ equity
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246,249
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|
|
223,249
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Total liabilities and shareholders’ equity
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$
|
278,248
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|
|
$
|
255,333
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Condensed Statements of Income
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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For the Years Ended December 31,
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2020
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|
2019
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2018
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Income
|
|
|
|
|
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Dividends from bank subsidiary
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$
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14,000
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$
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2,000
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|
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$
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4,450
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Interest income from bank subsidiary
|
76
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|
|
257
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|
|
7
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Other income
|
62
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|
|
55
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|
|
102
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|
|
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|
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Total income
|
14,138
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|
|
2,312
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|
|
4,559
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Expenses
|
|
|
|
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Interest on short-term borrowings
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—
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|
—
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|
|
57
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Interest on subordinated notes
|
2,006
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|
|
1,987
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|
|
73
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Total interest expense
|
2,006
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|
|
1,987
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|
|
130
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Share-based compensation
|
463
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|
|
236
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|
|
205
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Management fee to bank subsidiary
|
1,254
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|
|
1,350
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|
|
1,042
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Merger related expenses
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—
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|
|
1,574
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|
|
1,545
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Other expenses
|
1,324
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|
|
802
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|
|
656
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Total expenses
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5,047
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|
|
5,949
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|
|
3,578
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Income (loss) before income tax benefit and equity in undistributed income of subsidiaries
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9,091
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(3,637)
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|
981
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Income tax benefit
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(1,022)
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|
|
(1,182)
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|
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(735)
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(Loss) income before equity in undistributed income of subsidiaries
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10,113
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(2,455)
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|
|
1,716
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Equity in undistributed income of subsidiaries
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16,350
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|
19,379
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|
|
11,089
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Net income
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$
|
26,463
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|
|
$
|
16,924
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$
|
12,805
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Condensed Statements of Cash Flows
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For the Years Ended December 31,
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|
2020
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|
2019
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2018
|
Cash flows from operating activities:
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|
|
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|
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Net income
|
$
|
26,463
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|
|
$
|
16,924
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$
|
12,805
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Adjustments to reconcile net income to cash provided by (used in) operating activities:
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Amortization
|
56
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47
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3
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Deferred income taxes
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(39)
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16
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22
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Equity in undistributed income of subsidiaries
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(16,350)
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(19,379)
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(11,089)
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Share-based compensation
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463
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236
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|
205
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Net change in other liabilities
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(141)
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(423)
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|
12
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Net change in other assets
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(221)
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|
|
311
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|
|
2,039
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Net cash provided by (used in) operating activities
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10,231
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(2,268)
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|
|
3,997
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Cash flows from investing activities:
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|
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Capital contributed to subsidiaries
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—
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(100)
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|
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—
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Net cash paid for acquisitions
|
(85)
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|
|
(8,142)
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|
|
(4,597)
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|
|
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Net cash used in investing activities
|
(85)
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|
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(8,242)
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|
|
(4,597)
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Cash flows from financing activities:
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Dividends paid
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(7,610)
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|
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(6,150)
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|
|
(4,375)
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Proceeds from issuance of subordinated notes, net of costs
|
—
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|
|
—
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|
|
31,857
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|
|
|
|
|
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|
Proceeds from issuance of common stock
|
1,628
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|
|
1,463
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|
|
1,448
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|
Payments to repurchase common stock
|
(1,887)
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|
|
(1,772)
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|
|
(651)
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Other, net
|
116
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|
|
(59)
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|
|
—
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
(7,753)
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|
|
(6,518)
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|
|
28,279
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Net increase (decrease) in cash
|
2,393
|
|
|
(17,028)
|
|
|
27,679
|
|
Cash, beginning
|
11,568
|
|
|
28,596
|
|
|
917
|
|
Cash, ending
|
$
|
13,961
|
|
|
$
|
11,568
|
|
|
$
|
28,596
|
|
NOTE 23. CONTINGENCIES
The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. Except as described below, in the opinion of management, there are no legal proceedings that might have a material effect on the results of operations, liquidity, or the financial position of the Company at this time.
On March 5, 2019, Paul Parshall, a purported individual stockholder of Hamilton, filed, on behalf of himself and all of Hamilton’s stockholders other than the named defendants and their affiliates (the “Purported Class”), a derivative and putative class action complaint in the Circuit Court for Baltimore City, Maryland, captioned Paul Parshall v. Carol Coughlin et. al., naming each Hamilton director, Orrstown, and Hamilton as defendants (the “Action”). The Action alleged, among other things, that Hamilton’s directors breached their fiduciary duties to the Purported Class in connection with the merger, and that the Proxy Statement/Prospectus omitted certain material information regarding the merger. Orrstown was alleged to have aided and abetted the Hamilton directors’ alleged breaches of their fiduciary duties. The Action sought, among other remedies, to enjoin the merger or, in the event the merger was completed, rescission of the merger or rescissory damages; unspecified damages; and costs of the lawsuit, including attorneys’ and experts’ fees. A settlement was reached on the Action in March 2020 which resulted in a payment by the Company of $135 thousand in mootness fees to the defendants in April 2020.
On May 25, 2012, SEPTA filed a putative class action complaint in the U.S. District Court for the Middle District of Pennsylvania against the Company, the Bank and certain current and former directors and officers (collectively, the “Orrstown Defendants”). The complaint alleged, among other things, that (i) in connection with the Company’s Registration Statement on Form S-3 dated February 23, 2010 and its Prospectus Supplement dated March 23, 2010, and (ii) during the purported class period of March 24, 2010 through October 27, 2011, the Company issued materially false and misleading statements regarding the Company’s lending practices and financial results, including misleading statements concerning the stringent nature of the
Bank’s credit practices and underwriting standards, the quality of its loan portfolio, and the intended use of the proceeds from the Company’s March 2010 public offering of common stock. The complaint asserted claims under Sections 11, 12(a) and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and sought class certification, unspecified money damages, interest, costs, fees and equitable or injunctive relief. Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), the Court appointed SEPTA Lead Plaintiff on August 20, 2012.
On March 4, 2013, SEPTA filed an amended complaint. The amended complaint expanded the list of defendants in the action to include the Company’s former independent registered public accounting firm, Smith Elliott Kearns & Company, LLC (“SEK”), and the underwriters of the Company’s March 2010 public offering of common stock. In addition, among other things, the amended complaint extended the purported 1934 Exchange Act class period from March 15, 2010 through April 5, 2012.
On June 22, 2015, in a 96-page Memorandum, the Court dismissed without prejudice SEPTA’s amended complaint against all defendants, finding that SEPTA failed to state a claim under either the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. On February 8, 2016, the Court granted SEPTA’s motion for leave to amend again and SEPTA filed its second amended complaint that same day.
On December 7, 2016, the Court issued an Order and Memorandum granting in part and denying in part defendants’ motions to dismiss SEPTA’s second amended complaint. The Court granted the motions to dismiss the Securities Act claims against all defendants, and granted the motions to dismiss the Exchange Act Section 10(b) and Rule 10b-5 claims against all defendants except Orrstown Financial Services, Inc., Orrstown Bank, Thomas R. Quinn, Jr., Bradley S. Everly, and Jeffrey W. Embly. The Court also denied the motions to dismiss the Exchange Act Section 20(a) claims against Quinn, Everly, and Embly.
On December 15, 2017, the Orrstown Defendants and SEPTA exchanged expert reports in opposition to and in support of class certification, respectively. On January 15, 2018, the parties exchanged expert rebuttal reports. SEPTA has not yet filed a motion for class certification.
On August 9, 2018, SEPTA filed a motion to compel the production of Confidential Supervisory Information (CSI) of non-parties the Board of Governors of the Federal Reserve System (FRB) and the Pennsylvania Department of Banking and Securities, in the possession of Orrstown and third parties. On August 30, 2018, the FRB filed an unopposed motion to intervene in the Action for the purpose of opposing SEPTA’s motion to compel. On February 12, 2019, the Court denied SEPTA’s motion to compel the production of CSI on the ground that SEPTA had failed to exhaust its administrative remedies.
On April 11, 2019, SEPTA filed a motion for leave to file a third amended complaint. The proposed third amended complaint seeks to reassert the Securities Act claims that the Court dismissed as to all defendants on December 7, 2016, when the Court granted in part and denied in part defendants’ motions to dismiss SEPTA’s second amended complaint. The proposed third amended complaint also seeks to reassert the Exchange Act claims against those defendants that the Court dismissed from the case on December 7, 2016.
On June 13, 2019, Orrstown filed a motion for protective order to stay discovery pending resolution of SEPTA’s motion for leave to file a third amended complaint. On July 17, 2019, the Court entered an Order partially granting Orrstown’s motion for protective order, ruling that all deposition discovery in the case was stayed pending a decision on SEPTA’s motion for leave to file a third amended complaint. Party and non-party document discovery in the case has largely been completed.
On February 14, 2020, the Court issued an Order and Memorandum granting SEPTA’s motion for leave to file a third amended complaint. The third amended complaint is now the operative complaint. It reinstates the Orrstown Defendants, as well as SEK and the underwriter defendants, previously dismissed from the case on December 7, 2016. The third amended complaint also revives the previously-dismissed 1933 Securities Act claim against the Orrstown Defendants, SEK, and the underwriter defendants. Defendants filed their motions to dismiss the third amended complaint on April 24, 2020. SEPTA’s opposition was filed on July 8, 2020, and Orrstown’s reply brief was filed on August 12, 2020. The motions to dismiss the third amended complaint are currently pending.
Additionally, on February 24, 2020, the Orrstown Defendants, and the underwriter defendants and SEK, separately filed motions under 28 U.S.C. § 1292(b) asking the District Court to certify its February 14, 2020 Order granting leave to file the third amended complaint for interlocutory appeal to the Third Circuit Court of Appeals. The District Court granted those motions on July 17, 2020, and defendants filed their Petition for Permission to Appeal with the Third Circuit on July 27, 2020. The Third Circuit granted permission to appeal the Order pursuant to 28 U.S.C. § 1292(b) on August 13, 2020. Defendants filed their joint Opening Brief in the Third Circuit on November 2, 2020, asking the Court to reverse the district court’s Order. SEPTA filed its responsive brief on December 2, 2020 and defendants filed their reply brief on December 23, 2020. Oral argument was held on February 10, 2021. The Third Circuit’s decision is pending.
The Company believes that the allegations of SEPTA’s third amended complaint are without merit and intends to defend itself vigorously against those claims. It is not possible at this time to reasonably estimate possible losses, or even a range of reasonably possible losses, in connection with the litigation.