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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
For the transition period from ____________ to_____________
Commission File Number
(Exact name of registrant as specified in its charter)
| |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
(Address of principal executive offices) | (Zip Code) | ||
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title Of Each Class | Trading Symbol | Name of Each Exchange On Which Registered |
The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ◻ | Accelerated Filer ◻ | Smaller Reporting Company | |
Emerging growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class |
| Outstanding at August 1, 2022 | |
Common Stock, par value $0.01 | |
AmeriServ Financial, Inc.
INDEX
2
Item 1. Financial Statements
AmeriServ Financial, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
June 30, 2022 | December 31, 2021 | |||||
ASSETS |
|
|
|
| ||
Cash and due from depository institutions | $ | | $ | | ||
Interest bearing deposits |
| |
| | ||
Short-term investments |
| — |
| | ||
Cash and cash equivalents |
| |
| | ||
Investment securities: |
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|
|
| ||
Available for sale, at fair value |
| |
| | ||
Held to maturity (fair value $ |
| |
| | ||
Loans held for sale |
| |
| | ||
Loans |
| |
| | ||
Less: Unearned income |
| |
| | ||
Less: Allowance for loan losses |
| |
| | ||
Net loans |
| |
| | ||
Premises and equipment: |
|
| ||||
Operating lease right-of-use asset | | | ||||
Financing lease right-of-use asset | | | ||||
Other premises and equipment, net | | | ||||
Accrued interest income receivable |
| |
| | ||
Intangible assets: |
|
| ||||
Goodwill |
| |
| | ||
Core deposit intangible |
| |
| | ||
Bank owned life insurance |
| |
| | ||
Net deferred tax asset |
| |
| — | ||
Federal Home Loan Bank stock |
| |
| | ||
Federal Reserve Bank stock |
| |
| | ||
Other assets |
| |
| | ||
TOTAL ASSETS | $ | | $ | | ||
LIABILITIES | ||||||
Non-interest bearing deposits | $ | | $ | | ||
Interest bearing deposits |
| |
| | ||
Total deposits |
| |
| | ||
Short-term borrowings |
| — |
| — | ||
Advances from Federal Home Loan Bank |
| |
| | ||
Operating lease liabilities | | | ||||
Financing lease liabilities | | | ||||
Subordinated debt |
| |
| | ||
Total borrowed funds |
| |
| | ||
Net deferred tax liability |
| — |
| | ||
Other liabilities |
| |
| | ||
TOTAL LIABILITIES |
| |
| | ||
SHAREHOLDERS' EQUITY |
|
|
|
| ||
Common stock, par value $ |
| |
| | ||
Treasury stock at cost, |
| ( |
| ( | ||
Capital surplus |
| |
| | ||
Retained earnings |
| |
| | ||
Accumulated other comprehensive loss, net |
| ( |
| ( | ||
TOTAL SHAREHOLDERS' EQUITY |
| |
| | ||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | | $ | | ||
See accompanying notes to unaudited consolidated financial statements.
3
AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended | Six months ended | ||||||||||||
| June 30, | June 30, |
| ||||||||||
2022 |
| 2021 |
| 2022 |
| 2021 | |||||||
INTEREST INCOME |
|
|
|
|
|
|
|
|
| ||||
Interest and fees on loans |
| $ | |
| $ | |
| $ | |
| $ | |
|
Interest bearing deposits |
| |
| |
| |
| | |||||
Short-term investments |
| |
| |
| |
| | |||||
Investment securities: |
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|
|
|
| |||||
Available for sale |
| |
| |
| |
| | |||||
Held to maturity |
| |
| |
| |
| | |||||
Total Interest Income |
| |
| |
| |
| | |||||
INTEREST EXPENSE |
|
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|
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| |||||
Deposits |
| |
| |
| |
| | |||||
Short-term borrowings |
| |
| — |
| |
| | |||||
Advances from Federal Home Loan Bank |
| |
| |
| |
| | |||||
Financing lease liabilities | | | | | |||||||||
Guaranteed junior subordinated deferrable interest debentures |
| — |
| |
| — |
| | |||||
Subordinated debt |
| |
| |
| |
| | |||||
Total Interest Expense |
| |
| |
| |
| | |||||
Net Interest Income |
| |
| |
| |
| | |||||
Provision (credit) for loan losses |
| ( |
| |
| ( |
| | |||||
Net Interest Income after Provision (Credit) for Loan Losses |
| |
| |
| |
| | |||||
NON-INTEREST INCOME |
|
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|
|
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|
|
| |||||
Wealth management fees |
| |
| |
| |
| | |||||
Service charges on deposit accounts |
| |
| |
| |
| | |||||
Net gains on loans held for sale |
| |
| |
| |
| | |||||
Mortgage related fees |
| |
| |
| |
| | |||||
Net realized gains on investment securities |
| — |
| |
| — |
| | |||||
Bank owned life insurance |
| |
| |
| |
| | |||||
Other income |
| |
| |
| |
| | |||||
Total Non-Interest Income |
| |
| |
| |
| | |||||
NON-INTEREST EXPENSE |
|
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| |||||
Salaries and employee benefits |
| |
| |
| |
| | |||||
Net occupancy expense |
| |
| |
| |
| | |||||
Equipment expense |
| |
| |
| |
| | |||||
Professional fees |
| |
| |
| |
| | |||||
Supplies, postage and freight |
| |
| |
| |
| | |||||
Miscellaneous taxes and insurance |
| |
| |
| |
| | |||||
Federal deposit insurance expense |
| |
| |
| |
| | |||||
Branch acquisition costs |
| — |
| |
| — |
| | |||||
Other expense |
| |
| |
| |
| | |||||
Total Non-Interest Expense |
| |
| |
| |
| | |||||
PRETAX INCOME | | | | | |||||||||
Provision for income taxes | | | | | |||||||||
NET INCOME | $ | | $ | | $ | | $ | | |||||
PER COMMON SHARE DATA: | |||||||||||||
Basic: | |||||||||||||
Net income | $ | | $ | | $ | | $ | | |||||
Average number of shares outstanding | | | | | |||||||||
Diluted: | |||||||||||||
Net income | $ | | $ | | $ | | $ | | |||||
Average number of shares outstanding | | | | | |||||||||
See accompanying notes to unaudited consolidated financial statements.
4
AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
(Unaudited)
Three months ended | Six months ended | |||||||||||
| June 30, | June 30, | ||||||||||
2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
COMPREHENSIVE (LOSS) INCOME |
|
|
|
|
|
|
|
| ||||
Net income | $ | | $ | | $ | | $ | | ||||
Other comprehensive (loss) income |
|
|
|
|
|
|
|
| ||||
Pension obligation change for defined benefit plan |
| ( |
| |
| ( |
| | ||||
Income tax effect |
| |
| ( |
| |
| ( | ||||
Unrealized holding gains (losses) on available for sale securities arising during period |
| ( |
| |
| ( |
| ( | ||||
Income tax effect |
| |
| ( |
| |
| | ||||
Reclassification adjustment for net realized gains on available for sale securities included in net income |
| — |
| ( |
| — |
| ( | ||||
Income tax effect |
| — |
| |
| — |
| | ||||
Other comprehensive (loss) income |
| ( |
| |
| ( |
| | ||||
Comprehensive (loss) income | $ | ( | $ | | $ | ( | $ | | ||||
See accompanying notes to unaudited consolidated financial statements.
5
AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share and per share data)
(Unaudited)
Three months ended | Six months ended | |||||||||||
| June 30, | June 30, | ||||||||||
2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
COMMON STOCK |
|
|
|
|
|
|
|
| ||||
Balance at beginning of period | $ | | $ | | $ | | $ | | ||||
New common shares issued for exercise of stock options ( |
| — |
| — |
| — |
| — | ||||
Balance at end of period |
| |
| |
| |
| | ||||
TREASURY STOCK |
|
|
|
|
|
|
|
| ||||
Balance at beginning of period |
| ( |
| ( |
| ( |
| ( | ||||
Treasury stock purchased |
| — |
| — |
| — |
| — | ||||
Balance at end of period |
| ( |
| ( |
| ( |
| ( | ||||
CAPITAL SURPLUS |
|
|
|
|
|
|
|
| ||||
Balance at beginning of period |
| |
| |
| |
| | ||||
New common shares issued for exercise of stock options ( |
| — |
| |
| |
| | ||||
Stock option expense |
| |
| |
| |
| | ||||
Balance at end of period |
| |
| |
| |
| | ||||
RETAINED EARNINGS |
|
|
|
|
|
|
|
| ||||
Balance at beginning of period |
| |
| |
| |
| | ||||
Net income |
| |
| |
| |
| | ||||
Cash dividend declared on common stock ($ |
| ( |
| ( |
| ( |
| ( | ||||
Balance at end of period |
| |
| |
| |
| | ||||
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET |
|
|
|
|
|
|
|
| ||||
Balance at beginning of period |
| ( |
| ( |
| ( |
| ( | ||||
Other comprehensive (loss) income |
| ( |
| |
| ( |
| | ||||
Balance at end of period |
| ( |
| ( |
| ( |
| ( | ||||
TOTAL SHAREHOLDERS’ EQUITY | $ | | $ | | $ | | $ | | ||||
See accompanying notes to unaudited consolidated financial statements.
6
AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended | |||||||
| June 30, |
| |||||
| 2022 |
| 2021 |
| |||
OPERATING ACTIVITIES | |||||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
| |||
Provision (credit) for loan losses |
| ( |
| | |||
Depreciation and amortization expense |
| |
| | |||
Amortization expense of core deposit intangible |
| |
| | |||
Amortization of fair value adjustment on acquired time deposits |
| ( |
| ( | |||
Net amortization of investment securities |
| |
| | |||
Net realized gains on investment securities — available for sale |
| — |
| ( | |||
Net gains on loans held for sale |
| ( |
| ( | |||
Net amortization of deferred loan fees |
| ( |
| ( | |||
Origination of mortgage loans held for sale |
| ( |
| ( | |||
Sales of mortgage loans held for sale |
| |
| | |||
(Increase) decrease in accrued interest receivable |
| ( |
| | |||
Decrease in accrued interest payable |
| ( |
| ( | |||
Earnings on bank-owned life insurance |
| ( |
| ( | |||
Deferred income taxes |
| |
| | |||
Stock compensation expense |
| |
| | |||
Net change in operating leases | ( | ( | |||||
Other, net |
| ( |
| ( | |||
Net cash provided by operating activities |
| |
| | |||
INVESTING ACTIVITIES |
|
|
|
| |||
Purchase of investment securities — available for sale |
| ( |
| ( | |||
Purchase of investment securities — held to maturity |
| ( |
| ( | |||
Proceeds from maturities of investment securities — available for sale |
| |
| | |||
Proceeds from maturities of investment securities — held to maturity |
| |
| | |||
Proceeds from sales of investment securities — available for sale |
| — |
| | |||
Purchase of regulatory stock |
| ( |
| ( | |||
Proceeds from redemption of regulatory stock |
| |
| | |||
Long-term loans originated |
| ( |
| ( | |||
Principal collected on long-term loans |
| |
| | |||
Purchases of premises and equipment |
| ( |
| ( | |||
Proceeds from sale of other real estate owned and repossessed assets |
| |
| — | |||
Cash acquired in branch acquisition, net |
| — |
| | |||
Proceeds from life insurance policies |
| — |
| | |||
Net cash used in investing activities |
| ( |
| ( | |||
FINANCING ACTIVITIES |
|
|
|
| |||
Net increase in deposit balances |
| |
| | |||
Net decrease in other short-term borrowings |
| — |
| ( | |||
Principal repayments on advances from Federal Home Loan Bank |
| ( |
| ( | |||
Principal payments on financing lease liabilities | ( | ( | |||||
Stock options exercised |
| |
| | |||
Common stock dividend paid |
| ( |
| ( | |||
Net cash (used in) provided by financing activities |
| ( |
| | |||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
| ( |
| | |||
CASH AND CASH EQUIVALENTS AT JANUARY 1 |
| |
| | |||
CASH AND CASH EQUIVALENTS AT JUNE 30 | $ | | $ | | |||
See accompanying notes to unaudited consolidated financial statements.
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of AmeriServ Financial, Inc. (the Company) and its wholly-owned subsidiaries, AmeriServ Financial Bank (the Bank) and AmeriServ Trust and Financial Services Company (the Trust Company). The Bank is a Pennsylvania state-chartered full service bank with
In addition, the Parent Company is an administrative group that provides support in such areas as audit, finance, investments, loan review, general services, and marketing. Intercompany accounts and transactions have been eliminated in preparing the Consolidated Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (generally accepted accounting principles, or GAAP) requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from these estimates and the differences may be material to the Consolidated Financial Statements. The Company’s most significant estimates relate to the allowance for loan losses, intangible assets, income taxes, investment securities, pension, and the fair value of financial instruments.
2. Basis of Preparation
The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. In the opinion of management, all adjustments consisting of normal recurring entries considered necessary for a fair presentation have been included. They are not, however, necessarily indicative of the results of consolidated operations for a full-year.
For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
3. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which changes the impairment model for most financial assets. This update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
The Company, as a smaller reporting company, continues to evaluate the impact that ASU 2016-13 will have on our consolidated financial statements. We are currently working with an industry leading third-party consultant and software provider to assist us in the implementation of ASU 2016-13. Our implementation plan includes assessment and documentation of processes, internal controls and data sources; model development, documentation and validation, including loan segmentation procedures and analyzing the methodology options; and system configuration, among other things. The Company intends to adopt ASU 2016-13 effective January 1, 2023.
The allowance for credit losses (ACL) will be based on our historical loss experience, borrower characteristics, reasonable and supportable forecasts of future economic conditions, and other relevant factors. We will also apply
8
qualitative factors to account for information that may not be reflected in quantitatively derived results to ensure that the ACL reflects the best estimate of current expected credit losses.
Our team, under the direction of senior management, has completed the initial data gap assessment, enhancement of existing data, finalizing the loan segmentation selections, and analyzing the methodology options regarding the calculation of expected credit losses. After analyzing our data and the nature of our portfolio in relation to the CECL transition, the team agreed to utilize the static pool analysis (cohort) method. This methodology most closely aligns with the Company’s current methodology leveraged in our incurred loss model calculation. The Company’s current methodology will be adjusted to appropriately incorporate and comply with ASU 2016-13 and, thus, offers an effective and efficient path to CECL compliance.
The static pool analysis methodology captures loans that qualify for a segment (i.e. balance of a pool of loans with similar risk characteristics) as of a point in time to form a cohort, then tracks that cohort over their remaining lives to determine their loss behavior. The remaining lifetime loss rate is then applied to current loans that qualify for the same segmentation criteria to form a remaining life expectation on current loans. The Company is working to determine preliminary expected loss estimates under the CECL methodology. However, such estimates are subject to significant change as we continue to finalize the judgmental qualitative factors. The Company will continue to make refinements to its expected credit loss estimates throughout the remainder of 2022.
Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for held to maturity (HTM) debt securities. Based on the credit quality of the Company’s HTM debt securities portfolio, we do not expect the ACL to be significant.
The ultimate impact of adoption on January 1, 2023 could be significantly different than our current expectation as our modeling processes will be significantly influenced by the composition, characteristics and quality of our loan and HTM securities portfolios as well as the prevailing economic conditions and forecasts at that time.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of an existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments of ASC 326 require that an entity disclose current-period gross writeoffs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments of ASU 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations which will be adopted with ASU 2016-13 effective January 1, 2023.
4. Revenue Recognition
ASU 2014-09, Revenue from Contracts with Customers – Topic 606, requires the Company to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers at the time the transfer of goods or services takes place. Management determined that the primary sources of revenue associated with financial instruments, including interest and fee income on loans and interest on investments, along with certain non-interest revenue sources including net realized gains (losses) on investment securities, mortgage related fees, net gains on loans held for sale, and bank owned life insurance are not within the scope of Topic 606. These sources of revenue cumulatively comprise
9
Non-interest income within the scope of Topic 606 are as follows:
| ● | Wealth management fees - Wealth management fee income is primarily comprised of fees earned from the management and administration of trusts and customer investment portfolios. The Company’s performance obligation is generally satisfied over a period of time and the resulting fees are billed monthly or quarterly, based upon the month end market value of the assets under management. Payment is generally received after month end through a direct charge to customers’ accounts. Due to this delay in payment, a receivable of $ |
| ● | Service charges on deposit accounts - The Company has contracts with its deposit account customers where fees are charged for certain items or services. Service charges include account analysis fees, monthly service fees, overdraft fees, and other deposit account related fees. Revenue related to account analysis fees and service fees is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. Fees attributable to specific performance obligations of the Company (i.e. overdraft fees, etc.) are recognized at a defined point in time based on completion of the requested service or transaction. |
| ● | Other non-interest income - Other non-interest income consists of other recurring revenue streams such as safe deposit box rental fees, gain (loss) on sale of other real estate owned, ATM and VISA debit card fees, and other miscellaneous revenue streams. Safe deposit box rental fees are charged to the customer on an annual basis and recognized when billed. However, if the safe deposit box rental fee is prepaid (i.e. paid prior to issuance of annual bill), the revenue is recognized upon receipt of payment. The Company has determined that since rentals and renewals occur consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Gains and losses on the sale of other real estate owned are recognized at the completion of the property sale when the buyer obtains control of the real estate and all the performance obligations of the Company have been satisfied. The Company offers ATM and VISA debit cards to deposit account holders which allows our customers to access their account electronically at ATMs and POS terminals. Fees related to ATM and VISA debit card transactions are recognized when the transactions are completed and the Company has satisfied its performance obligation. |
The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six month periods ending June 30, 2022 and 2021 (in thousands).
| Three months ended |
| Six months ended | |||||||||
| June 30, | June 30, | ||||||||||
2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
Non-interest income: | ||||||||||||
In-scope of Topic 606 |
|
|
|
|
|
|
|
| ||||
Wealth management fees | $ | | $ | | $ | | $ | | ||||
Service charges on deposit accounts |
| |
| |
| |
| | ||||
Other |
| |
| |
| |
| | ||||
Non-interest income (in-scope of topic 606) |
| |
| |
| |
| | ||||
Non-interest income (out-of-scope of topic 606) |
| |
| |
| |
| | ||||
Total non-interest income | $ | | $ | | $ | | $ | | ||||
5. Earnings Per Common Share
Basic earnings per share include only the weighted average common shares outstanding. Diluted earnings per share include the weighted average common shares outstanding and any potentially dilutive common stock equivalent shares
10
in the calculation. Treasury shares are excluded for earnings per share purposes. For the three month periods ending June 30, 2022 and 2021, options to purchase
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(In thousands, except per share data) | ||||||||||||
Numerator: |
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|
| ||||||
Net income | $ | | $ | | $ | | $ | | ||||
Denominator: |
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|
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| ||||
Weighted average common shares outstanding (basic) |
| |
| |
| |
| | ||||
Effect of stock options |
| |
| |
| |
| | ||||
Weighted average common shares outstanding (diluted) |
| |
| |
| |
| | ||||
Earnings per common share: |
|
|
|
|
|
|
|
| ||||
Basic | $ | | $ | | $ | | $ | | ||||
Diluted |
| |
| |
| |
| | ||||
6. Consolidated Statement of Cash Flows
On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest bearing deposits and short-term investments in both money market funds and commercial paper. The Company made $
7. Investment Securities
The cost basis and fair values of investment securities are summarized as follows:
Investment securities available for sale (AFS):
June 30, 2022 | ||||||||||||
GROSS | GROSS | |||||||||||
UNREALIZED | UNREALIZED | FAIR | ||||||||||
| COST BASIS |
| GAINS |
| LOSSES |
| VALUE | |||||
(IN THOUSANDS) | ||||||||||||
U.S. Agency | $ | | $ | — | $ | ( | $ | | ||||
U.S. Agency mortgage-backed securities |
| |
| |
| ( |
| | ||||
Municipal |
| |
| |
| ( |
| | ||||
Corporate bonds |
| |
| |
| ( |
| | ||||
Total | $ | | $ | | $ | ( | $ | | ||||
11
Investment securities held to maturity (HTM):
June 30, 2022 | ||||||||||||
GROSS | GROSS | |||||||||||
UNREALIZED | UNREALIZED | FAIR | ||||||||||
| COST BASIS |
| GAINS |
| LOSSES |
| VALUE | |||||
(IN THOUSANDS) | ||||||||||||
U.S. Agency | $ | | $ | — | $ | ( | $ | | ||||
U.S. Agency mortgage-backed securities | | | ( | | ||||||||
Municipal |
| |
| |
| ( |
| | ||||
Corporate bonds and other securities |
| |
| — |
| ( |
| | ||||
Total | $ | | $ | | $ | ( | $ | | ||||
Investment securities available for sale (AFS):
December 31, 2021 | ||||||||||||
GROSS | GROSS | |||||||||||
UNREALIZED | UNREALIZED | FAIR | ||||||||||
| COST BASIS |
| GAINS |
| LOSSES |
| VALUE | |||||
(IN THOUSANDS) | ||||||||||||
U.S. Agency | $ | | $ | | $ | ( | $ | | ||||
U.S. Agency mortgage-backed securities |
| |
| |
| ( |
| | ||||
Municipal |
| |
| |
| ( |
| | ||||
Corporate bonds |
| |
| |
| ( |
| | ||||
Total | $ | | $ | | $ | ( | $ | | ||||
Investment securities held to maturity (HTM):
December 31, 2021 | ||||||||||||
GROSS | GROSS | |||||||||||
UNREALIZED | UNREALIZED | FAIR | ||||||||||
COST BASIS |
| GAINS |
| LOSSES |
| VALUE | ||||||
(IN THOUSANDS) | ||||||||||||
U.S. Agency |
| $ | | $ | — | $ | ( | $ | | |||
U.S. Agency mortgage-backed securities |
| | | ( | | |||||||
Municipal |
| |
| |
| ( |
| | ||||
Corporate bonds and other securities |
| |
| |
| ( |
| | ||||
Total | $ | | $ | | $ | ( | $ | | ||||
Maintaining investment quality is a primary objective of the Company’s investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody’s Investor’s Service or Standard Poor’s rating of “A.” At June 30, 2022,
The Company sold
The carrying value of securities, both available for sale and held to maturity, pledged to secure public and trust deposits was $
12
The following tables present information concerning investments with unrealized losses as of June 30, 2022 and December 31, 2021 (in thousands):
Total investment securities:
June 30, 2022 | ||||||||||||||||||
LESS THAN 12 MONTHS | 12 MONTHS OR LONGER | TOTAL | ||||||||||||||||
FAIR | UNREALIZED | FAIR | UNREALIZED | FAIR | UNREALIZED | |||||||||||||
| VALUE |
| LOSSES |
| VALUE |
| LOSSES |
| VALUE |
| LOSSES | |||||||
U.S. Agency | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
U.S. Agency mortgage-backed securities | | ( | | ( | | ( | ||||||||||||
Municipal |
| | ( | | ( | | ( | |||||||||||
Corporate bonds and other securities |
| | ( | |
| ( |
| | ( | |||||||||
Total | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Total investment securities:
December 31, 2021 | ||||||||||||||||||
LESS THAN 12 MONTHS | 12 MONTHS OR LONGER | TOTAL | ||||||||||||||||
FAIR | UNREALIZED | FAIR | UNREALIZED | FAIR | UNREALIZED | |||||||||||||
| VALUE |
| LOSSES |
| VALUE |
| LOSSES |
| VALUE |
| LOSSES | |||||||
U.S. Agency | $ | | $ | ( | $ | — | $ | — | $ | | $ | ( | ||||||
U.S. Agency mortgage-backed securities | | ( | | ( | | ( | ||||||||||||
Municipal |
| | ( | — | — | | ( | |||||||||||
Corporate bonds and other securities |
| | ( | |
| ( |
| | ( | |||||||||
Total | $ | $ | ( | $ | $ | ( | $ | | $ | ( | ||||||||
The unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. There are
The interest rate environment and market yields can also have a significant impact on the yield earned on mortgage-backed securities (MBS). Prepayment speed assumptions are an important factor to consider when evaluating the returns on an MBS. Generally, as interest rates decline, borrowers have more incentive to refinance into a lower rate, so prepayments will rise. Conversely, as interest rates increase, prepayments will decline. When an MBS is purchased at a premium, the yield will decrease as prepayments increase and the yield will increase as prepayments decrease. As of June 30, 2022, the Company had low premium risk as the book value of our mortgage-backed securities purchased at a premium was only
Contractual maturities of securities at June 30, 2022 are shown below (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties. The weighted average duration of the total investment securities portfolio at June 30, 2022 is
13
Total investment securities:
June 30, 2022 | ||||||||||||
Available for sale | Held to maturity | |||||||||||
| Cost Basis |
| Fair Value |
| Cost Basis |
| Fair Value | |||||
Within 1 year | $ | | $ | | $ | | $ | | ||||
After 1 year but within 5 years |
| |
| |
| |
| | ||||
After 5 years but within 10 years |
| |
| |
| |
| | ||||
Over 10 years |
| |
| |
| |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
8. Loans
The loan portfolio of the Company consists of the following (in thousands):
June 30, 2022 | December 31, 2021 | |||||
Commercial: | ||||||
Commercial and industrial | $ | | $ | | ||
Paycheck Protection Program (PPP) | | | ||||
Commercial loans secured by owner occupied real estate (1) |
| | | |||
Commercial loans secured by non-owner occupied real estate (1) |
| | | |||
Real estate − residential mortgage (1) |
| | | |||
Consumer |
| | | |||
Loans, net of unearned income | $ | | $ | |||
| (1) | Real estate construction loans constituted |
Loan balances at June 30, 2022 and December 31, 2021 are net of unearned income of $
The ongoing COVID-19 pandemic is a fluid situation and continues to evolve, impacting the way many businesses operate. The pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, inflation, and consumer spending has resulted in less economic activity and significant volatility and disruption. Certain loans within our commercial and commercial real estate portfolios have been disproportionately adversely affected by the pandemic.
14
The following table provides information regarding our potential COVID-19 risk concentrations for commercial and commercial real estate loans by industry type at June 30, 2022 and December 31, 2021 (in thousands).
June 30, 2022 | |||||||||||||||
Paycheck | Commercial loans | Commercial loans | |||||||||||||
Commercial | Protection | secured by owner | secured by non-owner | ||||||||||||
| and industrial |
| Program |
| occupied real estate |
| occupied real estate |
| Total | ||||||
1-4 unit residential | $ | | $ | — | $ | — | $ | | $ | | |||||
Multifamily/apartments/student housing |
| — |
| — |
| |
| |
| | |||||
Office |
| |
| — |
| |
| |
| | |||||
Retail |
| |
| — |
| |
| |
| | |||||
Industrial/manufacturing/warehouse |
| |
| — |
| |
| |
| | |||||
Hotels |
| — |
| |
| — |
| |
| | |||||
Eating and drinking places |
| |
| |
| |
| |
| | |||||
Personal care |
| |
| — |
| — |
| |
| | |||||
Amusement and recreation |
| |
| — |
| |
| |
| | |||||
Mixed use |
| — |
| — |
| |
| |
| | |||||
Other |
| |
| — |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
December 31, 2021 | |||||||||||||||
Paycheck | Commercial loans | Commercial loans | |||||||||||||
Commercial | Protection | secured by owner | secured by non-owner | ||||||||||||
| and industrial |
| Program |
| occupied real estate |
| occupied real estate |
| Total | ||||||
1-4 unit residential | $ | | $ | — | $ | | $ | | $ | | |||||
Multifamily/apartments/student housing |
| — |
| — |
| |
| |
| | |||||
Office |
| |
| |
| |
| |
| | |||||
Retail |
| |
| |
| |
| |
| | |||||
Industrial/manufacturing/warehouse |
| |
| |
| |
| |
| | |||||
Hotels |
| |
| |
| — |
| |
| | |||||
Eating and drinking places |
| |
| |
| |
| |
| | |||||
Personal care |
| |
| |
| — |
| |
| | |||||
Amusement and recreation |
| |
| |
| |
| |
| | |||||
Mixed use |
| — |
| — |
| |
| |
| | |||||
Other |
| |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
Paycheck Protection Program
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provides emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act and subsequent legislation authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) program called the Paycheck Protection Program (PPP). As a qualified SBA lender, the Company was automatically authorized to originate PPP loans.
An eligible business could apply for a PPP loan up to the lesser of: (1)
15
In addition, PPP allowed certain eligible borrowers that previously received a PPP loan to apply for a second draw loan with the same general loans terms described above. The maximum loan amount of a second draw PPP loan was 2.5 times, or 3.5 times for borrowers within the hospitality industry, the average monthly 2019 or 2020 payroll costs up to $2.0 million. Eligibility for a second draw PPP loan was based on the following criteria: (a) borrower previously received a first draw PPP loan and used the full amount for only authorized expenditures; (b) borrower has 300 or less employees; and (c) borrower can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. The PPP loan program expired on May 31, 2021 for originating new loans.
As of June 30, 2022, the Company had
9. Allowance for Loan Losses
The following tables summarize the rollforward of the allowance for loan losses by portfolio segment for the three and six month periods ending June 30, 2022 and 2021 (in thousands).
Three months ended June 30, 2022 | |||||||||||||||
Balance at | Charge- | Provision | Balance at | ||||||||||||
March 31, 2022 | Offs | Recoveries | (Credit) | June 30, 2022 | |||||||||||
Commercial |
| $ | |
| $ | — |
| $ | — |
| $ | ( |
| $ | |
Commercial loans secured by non-owner occupied real estate |
| |
| — |
| |
| ( |
| | |||||
Real estate-residential mortgage |
| |
| ( |
| |
| |
| | |||||
Consumer |
| |
| ( |
| |
| |
| | |||||
Allocation for general risk |
| |
| — |
| — |
| ( |
| | |||||
Total | $ | | $ | ( | $ | | $ | ( | $ | | |||||
Three months ended June 30, 2021 | |||||||||||||||
Balance at | Charge- | Provision | Balance at | ||||||||||||
March 31, 2021 | Offs | Recoveries | (Credit) | June 30, 2021 | |||||||||||
Commercial |
| $ | |
| $ | ( |
| $ | — |
| $ | ( |
| $ | |
Commercial loans secured by non-owner occupied real estate |
| |
| — |
| |
| |
| | |||||
Real estate-residential mortgage |
| |
| — |
| |
| |
| | |||||
Consumer |
| |
| ( |
| |
| ( |
| | |||||
Allocation for general risk |
| |
| — |
| — |
| |
| | |||||
Total | $ | | $ | ( | $ | | $ | | $ | | |||||
Six months ended June 30, 2022 | |||||||||||||||
Balance at | Charge- | Provision | Balance at | ||||||||||||
December 31, 2021 | Offs | Recoveries | (Credit) | June 30, 2022 | |||||||||||
Commercial |
| $ | |
| $ | ( |
| $ | |
| $ | |
| $ | |
Commercial loans secured by non-owner occupied real estate |
| |
|
| |
| ( |
| | ||||||
Real estate-residential mortgage |
| |
| ( |
| |
| ( |
| | |||||
Consumer |
| |
| ( |
| |
| |
| | |||||
Allocation for general risk |
| |
|
|
| ( |
| | |||||||
Total | $ | | $ | ( | $ | | $ | ( | $ | | |||||
16
Six months ended June 30, 2021 | |||||||||||||||
Balance at | Charge- | Balance at | |||||||||||||
December 31, 2020 | Offs | Recoveries | Provision | June 30, 2021 | |||||||||||
Commercial |
| $ | |
| $ | ( |
| $ | |
| $ | |
| $ | |
Commercial loans secured by non-owner occupied real estate |
| |
| |
| |
| |
| | |||||
Real estate-residential mortgage |
| |
| ( |
| |
| |
| | |||||
Consumer |
| |
| ( |
| |
| |
| | |||||
Allocation for general risk |
| |
|
|
| |
| | |||||||
Total | $ | | $ | ( | $ | | $ | | $ | | |||||
The Company recorded a $
The Company continues to experience low net loan charge-offs, which were $
The following tables summarize the loan portfolio and allowance for loan loss by the primary segments of the loan portfolio (in thousands).
At June 30, 2022 | ||||||||||||||||||
Commercial Loans | ||||||||||||||||||
Secured by | ||||||||||||||||||
Non-Owner | Real Estate- | |||||||||||||||||
Occupied | Residential | Allocation for | ||||||||||||||||
| Commercial |
| Real Estate |
| Mortgage |
| Consumer |
| General Risk |
| Total | |||||||
Loans: | ||||||||||||||||||
Individually evaluated for impairment | $ | | $ | | $ | | $ | |
|
| $ | | ||||||
Collectively evaluated for impairment |
| |
| |
| |
| |
|
|
| | ||||||
Total loans | $ | | $ | | $ | | $ | |
|
| $ | | ||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Specific reserve allocation | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
General reserve allocation |
| |
| |
| |
| |
| |
| | ||||||
Total allowance for loan losses | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
17
At December 31, 2021 | ||||||||||||||||||
Commercial Loans | ||||||||||||||||||
Secured by | ||||||||||||||||||
Non-Owner | Real Estate- | |||||||||||||||||
Occupied | Residential | Allocation for | ||||||||||||||||
| Commercial |
| Real Estate |
| Mortgage |
| Consumer |
| General Risk |
| Total | |||||||
Loans: | ||||||||||||||||||
Individually evaluated for impairment | $ | | $ | | $ | | $ | |
|
| $ | | ||||||
Collectively evaluated for impairment |
| |
| |
| |
| |
|
|
| | ||||||
Total loans | $ | | $ | | $ | | $ | |
|
| $ | | ||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Specific reserve allocation | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
General reserve allocation |
| |
| |
| |
| |
| |
| | ||||||
Total allowance for loan losses | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
The segments of the Company’s loan portfolio are disaggregated into classes that allows management to monitor risk and performance. The loan classes used are consistent with the internal reports evaluated by the Company’s management and Board of Directors to monitor risk and performance within various segments of its loan portfolio. The commercial loan segment includes both the commercial and industrial and the owner occupied commercial real estate loan classes while the remaining segments are not separated into classes as management monitors risk in these loans at the segment level. The residential mortgage loan segment is comprised of first lien amortizing residential mortgage loans and home equity loans secured by residential real estate. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.
Management evaluates for possible impairment any individual loan in the commercial or commercial real estate segment that is in non-accrual status or classified as a Troubled Debt Restructure (TDR). In addition, consumer and residential mortgage loans with a balance of $
Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs for collateral dependent loans. The method is selected on a loan-by-loan basis, with management primarily utilizing either the discounted cash flows or the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.
The need for an updated appraisal on collateral dependent loans is determined on a case-by-case basis. The useful life of an appraisal or evaluation will vary depending upon the circumstances of the property and the economic conditions in the marketplace. A new appraisal is not required if there is an existing appraisal which, along with other information, is sufficient to determine a reasonable value for the property and to support an appropriate and adequate allowance for loan losses. At a minimum, annual documented reevaluation of the property is completed by the Bank’s internal Collections and Assigned Risk Department to support the value of the property.
When reviewing an appraisal associated with an existing real estate collateral dependent transaction, the Bank’s internal Collections and Assigned Risk Department must determine if there have been material changes to the underlying
18
assumptions in the appraisal which affect the original estimate of value. Some of the factors that could cause material changes to reported values include:
| ● | the passage of time; |
| ● | the volatility of the local market; |
| ● | the availability of financing; |
| ● | natural disasters; |
| ● | the inventory of competing properties; |
| ● | new improvements to, or lack of maintenance of, the subject property or competing properties upon physical inspection by the Bank; |
| ● | changes in underlying economic and market assumptions, such as material changes in current and projected vacancy, absorption rates, capitalization rates, lease terms, rental rates, sales prices, concessions, construction overruns and delays, zoning changes, etc.; and/or |
| ● | environmental contamination. |
The value of the property is adjusted to appropriately reflect the above listed factors and the value is discounted to reflect the value impact of a forced or distressed sale, any outstanding senior liens, any outstanding unpaid real estate taxes, transfer taxes and closing costs that would occur with sale of the real estate. If the Collections and Assigned Risk Department personnel determine that a reasonable value cannot be derived based on available information, a new appraisal is ordered. The determination of the need for a new appraisal, versus completion of a property valuation by the Bank’s Collections and Assigned Risk Department personnel, rests with the Collections and Assigned Risk Department and not the originating account officer.
The following tables present impaired loans by portfolio segment, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary.
At June 30, 2022 | |||||||||||||||
IMPAIRED | |||||||||||||||
LOANS WITH | |||||||||||||||
IMPAIRED LOANS WITH | NO SPECIFIC | ||||||||||||||
SPECIFIC ALLOWANCE | ALLOWANCE | TOTAL IMPAIRED LOANS | |||||||||||||
| UNPAID | ||||||||||||||
| RECORDED |
| RELATED |
| RECORDED |
| RECORDED |
| PRINCIPAL | ||||||
| INVESTMENT |
| ALLOWANCE |
| INVESTMENT |
| INVESTMENT |
| BALANCE | ||||||
| (IN THOUSANDS) | ||||||||||||||
Commercial | $ | | $ | | $ | | $ | | $ | | |||||
Commercial loans secured by non-owner occupied real estate | | | | | | ||||||||||
Total impaired loans | $ | | $ | | $ | | $ | | $ | | |||||
At December 31, 2021 | |||||||||||||||
IMPAIRED | |||||||||||||||
LOANS WITH | |||||||||||||||
IMPAIRED LOANS WITH | NO SPECIFIC | ||||||||||||||
SPECIFIC ALLOWANCE | ALLOWANCE | TOTAL IMPAIRED LOANS | |||||||||||||
UNPAID | |||||||||||||||
RECORDED | RELATED | RECORDED | RECORDED | PRINCIPAL | |||||||||||
| INVESTMENT |
| ALLOWANCE |
| INVESTMENT |
| INVESTMENT |
| BALANCE | ||||||
| (IN THOUSANDS) | ||||||||||||||
Commercial | $ | | $ | | $ | | $ | | $ | | |||||
Commercial loans secured by non-owner occupied real estate | | | | | | ||||||||||
Total impaired loans | $ | | $ | | $ | | $ | | $ | | |||||
19
The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated (in thousands).
Three months ended | Six months ended | |||||||||||
| June 30, | June 30, | ||||||||||
2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
Average impaired balance: |
|
|
|
|
|
|
|
| ||||
Commercial | $ | | $ | | $ | | $ | | ||||
Commercial loans secured by non-owner occupied real estate |
| |
| |
| |
| | ||||
Average investment in impaired loans | $ | | $ | | $ | | $ | | ||||
Interest income recognized: |
|
|
|
|
|
|
|
| ||||
Commercial | $ | | $ | | $ | — | $ | | ||||
Commercial loans secured by non-owner occupied real estate |
| |
| |
| |
| | ||||
Interest income recognized on a cash basis on impaired loans | $ | | $ | | $ | — | $ | | ||||
Management uses a nine-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized. The first five “Pass” categories are aggregated, while the Pass-6, Special Mention, Substandard and Doubtful categories are disaggregated to separate pools. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due, or for which any portion of the loan represents a specific allocation of the allowance for loan losses are placed in Substandard or Doubtful.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process, which dictates that, at a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $
In addition to loan monitoring by the account officer and Loan Review Department, the Company also requires presentation of all credits rated Pass-6 with aggregate balances greater than $
20
The following table presents the classes of the commercial and commercial real estate loan portfolios summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system.
At June 30, 2022 | |||||||||||||||
SPECIAL | |||||||||||||||
| PASS |
| MENTION |
| SUBSTANDARD |
| DOUBTFUL |
| TOTAL | ||||||
(IN THOUSANDS) | |||||||||||||||
Commercial and industrial | $ | | $ | — | $ | | $ | — | $ | | |||||
Paycheck Protection Program (PPP) | | — | — | — | | ||||||||||
Commercial loans secured by owner occupied real estate |
| |
| — |
| |
| — |
| | |||||
Commercial loans secured by non-owner occupied real estate |
| |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
At December 31, 2021 | |||||||||||||||
SPECIAL | |||||||||||||||
| PASS |
| MENTION |
| SUBSTANDARD |
| DOUBTFUL |
| TOTAL | ||||||
(IN THOUSANDS) | |||||||||||||||
Commercial and industrial | $ | | $ | | $ | | $ | | $ | | |||||
Paycheck Protection Program (PPP) | | — | — | — | | ||||||||||
Commercial loans secured by owner occupied real estate |
| |
| |
| |
| — |
| | |||||
Commercial loans secured by non-owner occupied real estate |
| |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
It is generally the policy of the Bank that the outstanding balance of any residential mortgage loan that exceeds 90-days past due as to principal and/or interest is transferred to non-accrual status and an evaluation is completed to determine the fair value of the collateral less selling costs, unless the balance is minor. A charge down is recorded for any deficiency balance determined from the collateral evaluation. The remaining non-accrual balance is reported as impaired with no specific allowance. It is generally the policy of the Bank that the outstanding balance of any consumer loan that exceeds 90-days past due as to principal and/or interest is charged off.
At June 30, 2022 | |||||||||
| NON- |
| |||||||
| PERFORMING |
| PERFORMING |
| TOTAL | ||||
(IN THOUSANDS) | |||||||||
Real estate – residential mortgage | $ | | $ | | $ | | |||
Consumer |
| |
| | | ||||
Total | $ | | $ | | $ | | |||
At December 31, 2021 | |||||||||
|
| NON- |
| ||||||
| PERFORMING |
| PERFORMING |
| TOTAL | ||||
(IN THOUSANDS) | |||||||||
Real estate – residential mortgage | $ | | $ | | $ | | |||
Consumer |
| |
| | | ||||
Total | $ | | $ | | $ | | |||
21
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.
At June 30, 2022 | |||||||||||||||||||||
90 DAYS | |||||||||||||||||||||
30 – 59 | 60 – 89 | PAST DUE | |||||||||||||||||||
DAYS | DAYS | 90 DAYS | TOTAL | TOTAL | AND STILL | ||||||||||||||||
| CURRENT |
| PAST DUE |
| PAST DUE |
| PAST DUE |
| PAST DUE |
| LOANS |
| ACCRUING | ||||||||
(IN THOUSANDS) | |||||||||||||||||||||
Commercial and industrial | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Paycheck Protection Program (PPP) | | | | | | | | ||||||||||||||
Commercial loans secured by owner occupied real estate |
| |
| | |
| |
| | |
| | |||||||||
Commercial loans secured by non-owner occupied real estate |
| |
| | |
| |
| | |
| | |||||||||
Real estate – residential mortgage |
| |
| | |
| |
| | |
| | |||||||||
Consumer |
| |
| |
| |
| |
| | |
| | ||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
At December 31, 2021 | |||||||||||||||||||||
| 90 DAYS | ||||||||||||||||||||
30 – 59 | 60 – 89 | PAST DUE | |||||||||||||||||||
DAYS | DAYS | 90 DAYS | TOTAL | TOTAL | AND STILL | ||||||||||||||||
| CURRENT |
| PAST DUE |
| PAST DUE |
| PAST DUE |
| PAST DUE |
| LOANS |
| ACCRUING | ||||||||
(IN THOUSANDS) | |||||||||||||||||||||
Commercial and industrial | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Paycheck Protection Program (PPP) | | | | | | | | ||||||||||||||
Commercial loans secured by owner occupied real estate |
| |
| | |
| |
| | |
| | |||||||||
Commercial loans secured by non-owner occupied real estate |
| |
| | |
| |
| | |
| | |||||||||
Real estate – residential mortgage |
| |
| | |
| |
| | |
| | |||||||||
Consumer |
| |
| |
| |
| |
| | |
| | ||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
An allowance for loan losses (“ALL”) is maintained to support loan growth and cover charge-offs from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are complemented by consideration of other qualitative factors.
Management tracks the historical net charge-off activity at each risk rating grade level for the entire commercial portfolio and at the aggregate level for the consumer, residential mortgage and small business portfolios. A historical charge-off factor is calculated utilizing a rolling 12 consecutive historical quarters for the commercial portfolios. This historical charge-off factor for the consumer, residential mortgage and small business portfolios is based on a three-year historical average of actual loss experience.
The Company uses a comprehensive methodology and procedural discipline to maintain an ALL to absorb inherent losses in the loan portfolio. The Company believes this is a critical accounting policy since it involves significant estimates and judgments. The allowance consists of three elements: (1) an allowance established on specifically
22
identified problem loans, (2) formula driven general reserves established for loan categories based upon historical loss experience and other qualitative factors which include delinquency, non-performing and TDR loans, loan trends, economic trends, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies, and trends in policy, financial information, and documentation exceptions, and (3) a general risk reserve which provides support for variance from our assessment of the previously listed qualitative factors, provides protection against credit risks resulting from other inherent risk factors contained in the Company’s loan portfolio, and recognizes the model and estimation risk associated with the specific and formula driven allowances. The qualitative factors used in the formula driven general reserves are evaluated quarterly (and revised if necessary) by the Company’s management to establish allocations which accommodate each of the listed risk factors.
“Pass” rated credits are segregated from “Criticized” and “Classified” credits for the application of qualitative factors.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
10. Non-Performing Assets Including Troubled Debt Restructurings (TDR)
The following table presents information concerning non-performing assets including TDR (in thousands, except percentages):
June 30, 2022 | December 31, 2021 | ||||||
Non-accrual loans: | |||||||
Commercial and industrial | $ | | $ | | |||
Commercial loans secured by non-owner occupied real estate | | | |||||
Real estate – residential mortgage |
| |
| | |||
Consumer | | — | |||||
Total |
| |
| | |||
Total non-performing assets including TDR | $ | | $ | | |||
Total non-performing assets as a percent of loans, net of unearned income, other real estate owned and repossessed assets |
| | % |
| | % | |
The Company had $
Consistent with accounting and regulatory guidance, the Bank recognizes a TDR when the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that would not normally be considered. Regardless of the form of concession granted, the Bank’s objective in offering a TDR is to increase the probability of repayment of the borrower’s loan.
23
The Company had
Loans in non-accrual status | # of Loans |
| Current Balance |
| Concession Granted | ||
Commercial and industrial | | $ | | ||||
The Company had
Loans in non-accrual status | # of Loans |
| Current Balance |
| Concession Granted | ||
Commercial and industrial |
| | $ | |
| ||
All TDRs are individually evaluated for impairment and a related allowance is recorded, as needed. The specific ALL reserve for loans modified as TDRs was $
The Company had
The Company is unaware of any additional loans which are required to either be charged-off or added to the non-performing asset totals disclosed above.
Loan Modifications Related to COVID-19
Under section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. A financial institution can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes and reporting the loan as past due. Financial institutions wishing to utilize this authority must make a policy election, which applies to any COVID-19 modification made between March 1, 2020 and the earlier of either December 31, 2020 or the 60th day after the end of the COVID-19 national emergency so long as the loan was current on payments as of December 31, 2019. The suspension of TDR identification and accounting triggered by the effects of the COVID-19 pandemic was extended by the Consolidated Appropriations Act, 2021, signed into law on December 27, 2020. The period established by Section 4013 of the CARES Act was extended to the earlier of January 1, 2022 or 60 days after the date on which the national COVID-19 emergency terminates. Additionally, the Financial Accounting Standards Board has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs.
In response to the COVID-19 pandemic, the Company remains committed to prudently working with and supporting our borrowers that have been hardest hit by the pandemic by granting them loan payment modifications. The following table presents information comparing loans which were subject to a loan modification related to COVID-19, as of June 30, 2022 and December 31, 2021. Note that the percentage of outstanding loans presented below was calculated based
24
on loan totals excluding PPP loans. Management believes that this method more accurately reflects the concentration of COVID-19 related modifications within the loan portfolio.
At June 30, 2022 | At December 31, 2021 | ||||||||||
| % of Outstanding |
|
|
| % of Outstanding |
| |||||
Balance | Non-PPP Loans |
| Balance | Non-PPP Loans |
| ||||||
(in thousands) |
| (in thousands) |
| ||||||||
CRE/Commercial | $ | |
| | % | $ | |
| | % | |
Home Equity/Consumer |
| |
| — |
| |
| | |||
Residential Mortgage |
| |
| |
| |
| | |||
Total | $ | |
| | $ | |
| | |||
The balance of loan modifications related to COVID-19 at June 30, 2022 represents a decrease of $
Borrower requested modifications primarily consist of the deferral of principal and/or interest payments for a period of three to six months. The following table presents the composition of the types of payment relief that have been granted.
At June 30, 2022 | At December 31, 2021 | ||||||||
Number of Loans |
| Balance |
| Number of Loans |
| Balance | |||
(in thousands) | (in thousands) | ||||||||
Type of Payment Relief |
|
|
|
|
|
|
| ||
Interest only payments | | $ | |
| | $ | | ||
Complete payment deferrals | |
| |
| |
| | ||
Total | | $ | |
| | $ | | ||
Management continues to carefully monitor asset quality with a particular focus on customers that have requested payment deferrals during this difficult economic time. Deferral extension requests were considered based upon the customer’s needs and their impacted industry, borrower and guarantor capacity to service debt, and issued regulatory guidance. At June 30, 2022, the COVID-19 related modifications within the commercial real estate and commercial loan portfolios are to
11. Short-Term Borrowings and Advances from Federal Home Loan Bank
Total short-term and Federal Home Loan Bank (FHLB) borrowings and advances consist of the following (in thousands, except percentages):
At June 30, 2022 |
| |||||||
Weighted |
| |||||||
Type | Maturing | Amount | Average Rate |
| ||||
Open Repo Plus |
| Overnight |
| $ | |
| | % |
FHLB Advances |
| 2022 |
| |
| | ||
| 2023 |
| |
| | |||
| 2024 |
| |
| | |||
Total FHLB advances |
|
|
| |
| | ||
Total short-term and FHLB borrowings |
|
| $ | |
| | % | |
25
At December 31, 2021 |
| |||||||
Weighted |
| |||||||
Type | Maturing | Amount | Average Rate |
| ||||
Open Repo Plus |
| Overnight |
| $ | |
| | % |
FHLB Advances |
| 2022 |
| |
| | ||
| 2023 |
| |
| | |||
| 2024 |
| |
| | |||
Total FHLB advances |
|
|
| |
| | ||
Total short-term and FHLB borrowings |
|
| $ | |
| | % | |
The rate on Open Repo Plus advances can change daily, while the rates on the advances are fixed until the maturity of the advance. All FHLB stock along with an interest in certain residential mortgage, commercial real estate, and commercial and industrial loans with an aggregate statutory value equal to the amount of the advances are pledged as collateral to the FHLB of Pittsburgh to support these borrowings.
12. Accumulated Other Comprehensive Loss
The following table presents the changes in each component of accumulated other comprehensive loss, net of tax, for the three and six months ended June 30, 2022 and 2021 (in thousands):
Three months ended June 30, 2022 | Three months ended June 30, 2021 | |||||||||||||||||
| Net |
|
|
| Net |
|
| |||||||||||
Unrealized | Unrealized | |||||||||||||||||
Gains and | Gains and | |||||||||||||||||
Losses on | Defined | Losses on | Defined | |||||||||||||||
Investment | Benefit | Investment | Benefit | |||||||||||||||
Securities | Pension | Securities | Pension | |||||||||||||||
AFS(1) | Items(1) | Total(1) | AFS(1) | Items(1) | Total(1) | |||||||||||||
Beginning balance | $ | ( | $ | ( | $ | ( | $ | | $ | ( | $ | ( | ||||||
Other comprehensive income (loss) before reclassifications |
| ( |
| ( |
| ( |
| |
| |
| | ||||||
Amounts reclassified from accumulated other comprehensive loss |
| — |
| |
| |
| ( |
| |
| | ||||||
Net current period other comprehensive income (loss) |
| ( |
| ( |
| ( |
| |
| |
| | ||||||
Ending balance | $ | ( | $ | ( | $ | ( | $ | | $ | ( | $ | ( | ||||||
| (1) | Amounts in parentheses indicate debits on the Consolidated Balance Sheets. |
Six months ended June 30, 2022 | Six months ended June 30, 2021 | ||||||||||||||||||
| Net |
|
|
| Net |
|
|
| |||||||||||
Unrealized | Unrealized | ||||||||||||||||||
Gains and | Gains and | ||||||||||||||||||
Losses on | Defined | Losses on | Defined | ||||||||||||||||
Investment | Benefit | Investment | Benefit | ||||||||||||||||
Securities | Pension | Securities | Pension | ||||||||||||||||
AFS(1) | Items(1) | Total(1) | AFS(1) | Items(1) | Total(1) | ||||||||||||||
Beginning balance | $ | | $ | ( | $ | ( | $ | | $ | ( | $ | ( | |||||||
Other comprehensive income (loss) before reclassifications |
| ( |
| ( |
| ( |
| ( |
| |
| | |||||||
Amounts reclassified from accumulated other comprehensive loss |
| — |
| |
| |
| ( |
| |
| | |||||||
Net current period other comprehensive income (loss) |
| ( |
| ( |
| ( |
| ( |
| |
| | |||||||
Ending balance | $ | ( | $ | ( | $ | ( | $ | | $ | ( | $ | ( | |||||||
| (1) | Amounts in parentheses indicate debits on the Consolidated Balance Sheets. |
26
The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the three and six months ended June 30, 2022 and 2021 (in thousands):
Amount reclassified from accumulated | ||||||||
other comprehensive loss(1) | ||||||||
For the three | For the three | |||||||
Details about accumulated other | months ended | months ended | Affected line item in the | |||||
comprehensive loss components |
| June 30, 2022 |
| June 30, 2021 |
| statement of operations | ||
Realized gains on sale of securities | ||||||||
$ | — | $ | ( | Net realized gains on investment securities | ||||
— | | Provision for income taxes | ||||||
$ | — | $ | ( |
| ||||
Amortization of estimated defined benefit pension plan loss(2) | ||||||||
$ | | $ | |
| Other expense | |||
| ( |
| ( |
| Provision for income taxes | |||
$ | | $ | |
| ||||
Total reclassifications for the period | $ | | $ | |
| |||
(1) Amounts in parentheses indicate credits.
(2) These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost (see Note 17 for additional details).
Amount reclassified from accumulated | |||||||||
other comprehensive loss(1) | |||||||||
For the six | For the six | ||||||||
Details about accumulated other | months ended | months ended | Affected line item in the | ||||||
comprehensive loss components |
| June 30, 2022 |
| June 30, 2021 |
| statement of operations |
| ||
Realized gains on sale of securities | |||||||||
$ | — | $ | ( | Net realized gains on investment securities | |||||
— | | Provision for income taxes | |||||||
$ | — | $ | ( |
| |||||
Amortization of estimated defined benefit pension plan loss(2) | |||||||||
$ | | $ | |
| Other expense | ||||
| ( |
| ( |
| Provision for income taxes | ||||
$ | | $ | |
| |||||
Total reclassifications for the period | $ | | $ | |
| ||||
(1) Amounts in parentheses indicate credits.
(2) These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost (see Note 17 for additional details).
13. Regulatory Capital
The Company is subject to various capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. For a more detailed discussion, see the Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations (MDA).
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total, common equity tier 1, and tier 1 capital to risk-weighted assets (as defined) and tier 1 capital to average assets. Additionally, under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. As of June 30, 2022, the
27
Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action promulgated by the Federal Reserve. The Company believes that no conditions or events have occurred that would change this conclusion as of such date. To be categorized as well capitalized, the Bank must maintain minimum total capital, common equity tier 1 capital, tier 1 capital, and tier 1 leverage ratios as set forth in the table.
At June 30, 2022 |
| ||||||||||||||
TO BE WELL |
| ||||||||||||||
MINIMUM | CAPITALIZED |
| |||||||||||||
REQUIRED | UNDER |
| |||||||||||||
FOR | PROMPT |
| |||||||||||||
CAPITAL | CORRECTIVE |
| |||||||||||||
ADEQUACY | ACTION |
| |||||||||||||
COMPANY | BANK | PURPOSES | REGULATIONS* |
| |||||||||||
| AMOUNT |
| RATIO |
| AMOUNT |
| RATIO |
| RATIO |
| RATIO | ||||
| (IN THOUSANDS, EXCEPT RATIOS) | ||||||||||||||
Total Capital (To Risk Weighted Assets) | $ | |
| | % | $ | |
| | % | | % | | % | |
Tier 1 Common Equity (To Risk Weighted Assets) |
| |
| |
| |
| |
| |
| | |||
Tier 1 Capital (To Risk Weighted Assets) |
| |
| |
| |
| |
| |
| | |||
Tier 1 Capital (To Average Assets) |
| |
| |
| |
| |
| |
| | |||
At December 31, 2021 |
| ||||||||||||||
TO BE WELL |
| ||||||||||||||
MINIMUM | CAPITALIZED |
| |||||||||||||
REQUIRED | UNDER |
| |||||||||||||
FOR | PROMPT |
| |||||||||||||
CAPITAL | CORRECTIVE |
| |||||||||||||
ADEQUACY | ACTION |
| |||||||||||||
COMPANY | BANK | PURPOSES | REGULATIONS* |
| |||||||||||
| AMOUNT |
| RATIO |
| AMOUNT |
| RATIO |
| RATIO |
| RATIO | ||||
| (IN THOUSANDS, EXCEPT RATIOS) | ||||||||||||||
Total Capital (To Risk Weighted Assets) | $ | |
| | % | $ | |
| | % | | % | | % | |
Tier 1 Common Equity (To Risk Weighted Assets) |
| |
| |
| |
| |
| |
| | |||
Tier 1 Capital (To Risk Weighted Assets) |
| |
| |
| |
| |
| |
| | |||
Tier 1 Capital (To Average Assets) |
| |
| |
| |
| |
| |
| | |||
*Applies to the Bank only.
14. Derivative Hedging Instruments
The Company can use various interest rate contracts, such as interest rate swaps, caps, floors and swaptions to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities. The Company can use derivative instruments, primarily interest rate swaps, to manage interest rate risk and match the rates on certain assets by hedging the fair value of certain fixed rate debt, which converts the debt to variable rates and by hedging the cash flow variability associated with certain variable rate debt by converting the debt to fixed rates.
Interest Rate Swap Agreements
To accommodate the needs of our customers and support the Company’s asset/liability positioning, we may enter into interest rate swap agreements with customers and a large financial institution that specializes in these types of transactions. These arrangements involve the exchange of interest payments based on the notional amounts. The Company entered into floating rate loans and fixed rate swaps with our customers. Simultaneously, the Company entered into offsetting fixed rate swaps with this large financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay the large financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These transactions allow the Company’s customers to effectively convert a variable rate loan to a fixed rate. Because the Company acts as an intermediary for its customers, changes in the fair value of the underlying derivative contracts offset each other and do not significantly impact the Company’s results of operations.
28
These swaps are considered free-standing derivatives and are reported at fair value within other assets and other liabilities on the Consolidated Balance Sheets. Disclosures related to the fair value of the swap transactions can be found in Note 18.
The following table summarizes the interest rate swap transactions that impacted the Company’s first six months of 2022 and 2021 performance (in thousands, except percentages).
At June 30, 2022 | ||||||||||||
INCREASE | ||||||||||||
AGGREGATE | WEIGHTED | (DECREASE) | ||||||||||
NOTIONAL | AVERAGE RATE | REPRICING | IN INTEREST | |||||||||
HEDGE TYPE | AMOUNT | RECEIVED/(PAID) | FREQUENCY | EXPENSE | ||||||||
Swap assets |
|
| $ | |
| | % |
| $ | ( | ||
Swap liabilities |
|
| ( |
| ( |
|
| | ||||
Net exposure |
|
| — |
| — |
|
|
| — | |||
At June 30, 2021 | ||||||||||||
INCREASE | ||||||||||||
AGGREGATE | WEIGHTED | (DECREASE) | ||||||||||
NOTIONAL | AVERAGE RATE | REPRICING | IN INTEREST | |||||||||
HEDGE TYPE | AMOUNT | RECEIVED/(PAID) | FREQUENCY | EXPENSE | ||||||||
Swap assets |
|
| $ | |
| | % |
| $ | ( | ||
Swap liabilities |
|
| ( |
| ( |
|
| | ||||
Net exposure |
|
| — |
| — |
|
|
| — | |||
Risk Participation Agreement
The Company entered into a risk participation agreement (RPA) with the lead bank of a commercial real estate loan arrangement. As a participating bank, the Company guarantees the performance on a borrower-related interest rate swap contract. The Company has no obligations under the RPA unless the borrower defaults on their swap transaction with the lead bank and the swap is a liability to the borrower. In that instance, the Company has agreed to pay the lead bank a pre-determined percentage of the swap’s value at the time of default. In exchange for providing the guarantee, the Company received an upfront fee from the lead bank.
RPAs are derivative financial instruments and are recorded at fair value. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings with a corresponding offset within other liabilities. Disclosures related to the fair value of the RPA can be found in Note 18. The notional amount of the risk participation agreement outstanding at June 30, 2022 and 2021 was $
The Company monitors and controls all derivative products with a comprehensive Board of Directors approved Hedging Policy. This policy permits a total maximum notional amount outstanding of $
15. Segment Results
The financial performance of the Company is also monitored by an internal funds transfer pricing profitability measurement system which produces line of business results and key performance measures. The Company’s major business units include community banking, wealth management, and investment/parent. The reported results reflect the underlying economics of the business segments. Expenses for centrally provided services are allocated based upon the cost and estimated usage of those services. The businesses are match-funded and interest rate risk is centrally managed and accounted for within the investment/parent business segment. The key performance measure the Company focuses on for each business segment is net income contribution.
29
The community banking segment includes both retail and commercial banking activities. Retail banking includes the deposit-gathering branch franchise and lending to both individuals and small businesses. Lending activities include residential mortgage loans, direct consumer loans, and small business commercial loans. Commercial banking to businesses includes commercial loans, business services, and CRE loans. The wealth management segment includes the Trust Company, West Chester Capital Advisors (WCCA), our registered investment advisory firm, and Financial Services. Wealth management activities include personal trust products and services such as personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts. Also, institutional trust products and services such as 401(k) plans, defined benefit and defined contribution employee benefit plans, and individual retirement accounts are included in this segment. Financial Services include the sale of mutual funds, annuities, and insurance products. The wealth management businesses also include the union collective investment funds (ERECT funds) which are designed to use union pension dollars in construction projects that utilize union labor. The investment/parent includes the net results of investment securities and borrowing activities, general corporate expenses not allocated to the business segments, interest expense on corporate debt, and centralized interest rate risk management. Inter-segment revenues were not material.
The contribution of the major business segments to the Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
Three months ended | Six months ended | |||||||||||
June 30, 2022 | June 30, 2022 | |||||||||||
Total revenue | Net income (loss) | Total revenue | Net income (loss) | |||||||||
Community banking |
| $ | |
| $ | |
| $ | |
| $ | |
Wealth management |
| |
| |
| |
| | ||||
Investment/Parent |
| ( |
| ( |
| ( |
| ( | ||||
Total | $ | | $ | | $ | | $ | | ||||
Three months ended | Six months ended | |||||||||||
June 30, 2021 | June 30, 2021 | |||||||||||
Total revenue | Net income (loss) | Total revenue | Net income (loss) | |||||||||
Community banking |
| $ | |
| $ | |
| $ | |
| $ | |
Wealth management |
| |
| |
| |
| | ||||
Investment/Parent |
| ( |
| ( |
| ( |
| ( | ||||
Total | $ | | $ | | $ | | $ | | ||||
16. Commitments and Contingent Liabilities
The Company had various outstanding commitments to extend credit approximating $
Additionally, the Company is also subject to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of the Company, neither the resolution of these claims nor the funding of these credit commitments will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
17. Pension Benefits
The Company has a noncontributory defined benefit pension plan covering certain employees who work at least
30
(including U.S. Treasury and Agency securities, corporate notes and bonds), listed common stocks (including shares of AmeriServ Financial, Inc. common stock which is limited to
Three months ended | Six months ended | |||||||||||
| June 30, | June 30, | ||||||||||
2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
COMPONENTS OF NET PERIODIC BENEFIT COST: |
|
|
|
|
|
| ||||||
Service cost | $ | | $ | | $ | | $ | | ||||
Interest cost |
| |
| |
| |
| | ||||
Expected return on plan assets |
| ( |
| ( |
| ( |
| ( | ||||
Amortization of net loss |
| |
| |
| |
| | ||||
Settlement charge |
| |
| |
| |
| | ||||
Net periodic pension cost | $ | | $ | | $ | | $ | | ||||
The service cost component of net periodic benefit cost is included in salaries and employee benefits and all other components of net periodic benefit cost are included in other expense on the Consolidated Statements of Operations.
The Company recognized a $
The accrued pension liability, which had a positive (debit) balance of $
The Company implemented a soft freeze of its defined benefit pension plan to provide that non-union employees hired on or after January 1, 2013 and union employees hired on or after January 1, 2014 are not eligible to participate in the pension plan. Instead, such employees are eligible to participate in a qualified 401(k) plan. This change was made to help reduce pension costs in future periods.
18. Disclosures about Fair Value Measurements and Financial Instruments
The following disclosures establish a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The three broad levels defined within this hierarchy are as follows:
Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
31
Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
Assets and Liabilities Measured and Recorded on a Recurring Basis
Equity securities are reported at fair value utilizing Level 1 inputs. These securities are mutual funds held within a rabbi trust for the Company's executive deferred compensation plan. The mutual funds held are open-end funds that are registered with the Securities and Exchange Commission. These funds are required to publish their daily net asset value and to transact at that price.
Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.
The fair values of the interest rate swaps used for interest rate risk management and the risk participation agreement associated with a commercial real estate loan are based on an external derivative valuation model using data inputs from similar transactions as of the valuation date and classified Level 2.
The following table presents the assets and liabilities measured and reported on the Consolidated Balance Sheets on a recurring basis at their fair value as of June 30, 2022 and December 31, 2021, by level within the fair value hierarchy (in thousands).
Fair Value Measurements at June 30, 2022 | ||||||||||||
| TOTAL |
| (LEVEL 1) |
| (LEVEL 2) |
| (LEVEL 3) | |||||
Equity securities (1) | $ | | $ | | $ | — | $ | — | ||||
Available for sale securities: | ||||||||||||
U.S. Agency |
| |
| — |
| |
| — | ||||
U.S. Agency mortgage-backed securities | | — | | — | ||||||||
Municipal |
| |
| — |
| |
| — | ||||
Corporate bonds |
| |
| — |
| |
| — | ||||
Interest rate swap asset (1) |
| |
| — |
| |
| — | ||||
Interest rate swap liability (2) |
| ( |
| — |
| |
| — | ||||
Risk participation agreement (2) |
| — |
| — |
| — |
| — | ||||
Fair Value Measurements at December 31, 2021 | ||||||||||||
| TOTAL |
| (LEVEL 1) |
| (LEVEL 2) |
| (LEVEL 3) | |||||
Equity securities (1) | $ | | $ | | $ | — | $ | — | ||||
Available for sale securities: | ||||||||||||
U.S. Agency |
| |
| — |
| |
| — | ||||
U.S. Agency mortgage-backed securities | | — | | — | ||||||||
Municipal |
| |
| — |
| |
| — | ||||
Corporate bonds |
| |
| — |
| |
| — | ||||
Interest rate swap asset (1) |
| |
| — |
| |
| — | ||||
Interest rate swap liability (2) |
| ( |
| — |
| ( |
| — | ||||
Risk participation agreement (2) |
| — |
| — |
| — |
| — | ||||
| (1) | Included within other assets on the Consolidated Balance Sheets. |
| (2) | Included within other liabilities on the Consolidated Balance Sheets. |
Assets Measured and Recorded on a Non-Recurring Basis
Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired
32
loans are reported at the fair value of the underlying collateral if the repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on observable market data which at times are discounted using unobservable inputs. At June 30, 2022 and December 31, 2021, impaired loans evaluated using the collateral method with a carrying value of $
Other real estate owned is measured at fair value based on appraisals, less estimated costs to sell at the date of foreclosure. The Bank’s internal Collections and Assigned Risk Department estimates the fair value of repossessed assets, such as vehicles and equipment, using a formula driven analysis based on automobile or other industry data, less estimated costs to sell at the time of repossession. Valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less cost to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO and repossessed assets.
Assets measured and recorded at fair value on a non-recurring basis are summarized below (in thousands, except range data):
Fair Value Measurements | ||||||||||||
June 30, 2022 |
| TOTAL |
| (LEVEL 1) |
| (LEVEL 2) |
| (LEVEL 3) | ||||
Impaired loans | $ | — | $ | — | $ | — | $ | — | ||||
Fair Value Measurements | ||||||||||||
December 31, 2021 |
| TOTAL |
| (LEVEL 1) |
| (LEVEL 2) |
| (LEVEL 3) | ||||
Impaired loans | $ | — | $ | — | $ | — | $ | — | ||||
Quantitative Information About Level 3 Fair Value Measurements |
| |||||||||
Valuation | Unobservable | |||||||||
June 30, 2022 |
| Fair Value |
| Techniques |
| Input |
| Range (Wgtd Avg) |
| |
Impaired loans | $ | — |
| Appraisal of |
| Appraisal |
| |||
collateral (1) | adjustments (2) | |||||||||
Quantitative Information About Level 3 Fair Value Measurements |
| |||||||||
Valuation | Unobservable | |||||||||
December 31, 2021 |
| Fair Value |
| Techniques |
| Input |
| Range (Wgtd Avg) |
| |
Impaired loans |
| $ | — |
| Appraisal of |
| Appraisal |
| ||
|
|
| collateral (1) |
| adjustments (2) |
| ||||
| (1) | Fair Value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable. Also includes qualitative adjustments by management and estimated liquidation expenses. |
| (2) | Appraisals may be adjusted by management for qualitative factors such as economic conditions. |
FAIR VALUE OF FINANCIAL INSTRUMENTS
For the Company, as for most financial institutions, approximately
Fair values have been determined by the Company using independent third party valuations that use the best available data (Level 2) and an estimation methodology (Level 3) the Company believes is suitable for each category of financial instruments. Management believes that cash and cash equivalents, bank owned life insurance, regulatory stock, accrued interest receivable and payable, deposits with no stated maturities, and short-term borrowings have fair values which approximate the recorded carrying values. The fair value measurements for all of these financial instruments are Level 1 measurements.
33
The estimated fair values based on U.S. GAAP measurements and recorded carrying values at June 30, 2022 and December 31, 2021 for the remaining financial instruments not required to be measured or reported at fair value were as follows:
June 30, 2022 | |||||||||||||||
| Carrying |
|
|
|
| ||||||||||
Value | Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||
(IN THOUSANDS) | |||||||||||||||
FINANCIAL ASSETS: |
|
|
|
|
|
|
|
|
|
| |||||
Investment securities – HTM | $ | | $ | | $ | — | $ | | $ | | |||||
Loans held for sale |
| | | |
| — |
| — | |||||||
Loans, net of allowance for loan loss and unearned income |
| | | — |
| — |
| | |||||||
FINANCIAL LIABILITIES: |
|
|
|
|
|
|
|
|
|
| |||||
Deposits with stated maturities | | | — | — | | ||||||||||
All other borrowings (1) |
| |
| |
| — |
| — |
| | |||||
December 31, 2021 | |||||||||||||||
| Carrying | ||||||||||||||
Value |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) | |||||||
(IN THOUSANDS) | |||||||||||||||
FINANCIAL ASSETS: | |||||||||||||||
Investment securities – HTM | $ | | $ | | $ | — | $ | | $ | | |||||
Loans held for sale |
| | | |
| — |
| — | |||||||
Loans, net of allowance for loan loss and unearned income |
| | | — |
| — |
| | |||||||
FINANCIAL LIABILITIES: |
|
|
|
|
|
|
|
|
|
| |||||
Deposits with stated maturities | | | — | — | | ||||||||||
All other borrowings(1) |
| |
| |
| — |
| — |
| | |||||
| (1) | All other borrowings include advances from Federal Home Loan Bank and subordinated debt. |
Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company’s remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary under historical cost accounting.
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MDA”) |
…..2022 SECOND QUARTER SUMMARY OVERVIEW…..AmeriServ Financial, Inc. reported second quarter 2022 net income of $1,981,000, or $0.12 per diluted common share. This earnings performance was a $273,000, or 16.0%, increase from the second quarter of 2021 when net income totaled $1,708,000, or $0.10 per diluted common share. For the six-month period ended June 30, 2022, the Company reported net income of $4,399,000, or $0.26 per diluted common share. This represents an 18.2% increase in earnings per share from the six-month period of 2021 when net income totaled $3,789,000, or $0.22 per diluted common share. The improved earnings performance in 2022 reflects the full benefit of several important strategic actions that our company executed in 2021 along with the successful management of our asset quality throughout the pandemic.
It is common knowledge that the first six months of 2022 has been a period of extreme economic volatility. But in this very demanding six months, AmeriServ has been remarkably stable. Loan growth has trailed expectations, but deposit totals have been quite stable, so liquidity has been a very real positive. The loan portfolio itself has continued to be strong even while it has been declining. This continued strength has permitted the Company to reduce the allowance for loan losses. Thus, the balance sheet remained strong with increasing regulatory capital levels. In this unusually volatile time, the strengthening of the balance sheet is indeed very timely.
The wealth management group has also been especially active in their clients’ best interests. Pathroad Account client assets have already been moved to cash to limit losses from the bear market. Meanwhile, our team is actively rebalancing the investment strategy program to be ready to quickly take advantage of the eventual turnaround in the markets. We
34
believe in the long-term viability of the market and the wealth management Pathroad Account investment strategy. Our goal is to provide our clients with the opportunity for gains as soon as the turnaround begins. Patience is the watchword for the moment.
The residual effects of the pandemic period continue to be with us. To protect our staff members, we’ve enacted a hybrid work from home policy for those job functions that can be performed remotely. But all controls and safeguards are in place to be certain that AmeriServ remains a totally safe and sound financial institution for our customers.
THREE MONTHS ENDED JUNE 30, 2022 VS. THREE MONTHS ENDED JUNE 30, 2021
…..PERFORMANCE OVERVIEW…..The following table summarizes some of the Company’s key performance indicators (in thousands, except per share and ratios).
| Three months ended |
| Three months ended |
| |||
June 30, 2022 | June 30, 2021 |
| |||||
Net income | $ | 1,981 | $ | 1,708 | |||
Diluted earnings per share |
| 0.12 |
| 0.10 | |||
Return on average assets (annualized) |
| 0.59 | % |
| 0.51 | % | |
Return on average equity (annualized) |
| 7.10 | % |
| 6.46 | % | |
The Company reported net income of $1,981,000, or $0.12 per diluted common share. This earnings performance represented a $273,000, or 16.0%, increase from the second quarter of 2021 when net income totaled $1,708,000, or $0.10 per diluted common share. The Company continued its positive earnings momentum in the second quarter of 2022 and again posted increased earnings when compared to the 2021 results. AmeriServ Financial continues to benefit from our diversified revenue streams due to strong levels of loans, deposits, and fee income from our wealth management business.
Second quarter earnings results reflect the impact of continued strengthening asset quality, which enabled the Company to recognize a loan loss provision recovery during the second quarter of 2022. Overall, the increase to net interest income, along with the loan loss provision recovery, more than offset a lower level of non-interest income and higher non-interest expense resulting in an improved earnings performance for the second quarter of 2022.
…..NET INTEREST INCOME AND MARGIN…..The Company’s net interest income represents the amount by which interest income on earning assets exceeds interest paid on interest bearing liabilities. Net interest income is a primary source of the Company’s earnings, and it is affected by interest rate fluctuations as well as changes in the amount and mix of earning assets and interest bearing liabilities. The following table compares the Company’s net interest income performance for the second quarter of 2022 to the second quarter of 2021 (in thousands, except percentages):
| Three |
| Three |
|
|
|
|
| ||||
months ended | months ended |
| ||||||||||
June 30, 2022 | June 30, 2021 | Change | % Change |
| ||||||||
Interest income | $ | 11,527 | $ | 11,838 | $ | (311) |
| (2.6) | % | |||
Interest expense |
| 1,403 |
| 1,971 |
| (568) |
| (28.8) | ||||
Net interest income | $ | 10,124 | $ | 9,867 | $ | 257 |
| 2.6 | ||||
Net interest margin |
| 3.23 | % |
| 3.13 | % |
| 0.10 | % | N/M | ||
N/M — not meaningful
The Company’s net interest income in the second quarter of 2022 increased by $257,000, or 2.6%, from the prior year’s second quarter while the net interest margin of 3.23% for the second quarter of 2022 improved by ten basis points when compared to the net interest margin of 3.13% for the second quarter of 2021. The Company has also benefitted from the higher U.S. Treasury yield curve as interest rates have increased due to the Federal Reserve’s action to tighten monetary policy in their effort to tame decades high inflation. The higher national interest rates have favorably impacted the Company’s financial performance, particularly net interest income in the second quarter of 2022. The termination of the Paycheck Protection Program (PPP) caused a reduced level of loan fee income and was the primary
35
factor causing total interest income to decrease between the second quarter of 2022 and last year’s second quarter. However, the Company’s 2022 financial performance has been favorably impacted by the strategic actions taken by management in 2021 to lower funding costs. Therefore, deposit and borrowing interest expense declined by more than the decrease in total interest income, resulting in net interest income improving in the second quarter of 2022 compared to last year’s second quarter.
Total average loans in the second quarter of 2022 are lower than the 2021 second quarter average by $14.5 million, or 1.5%. Improved loan pipelines resulted in increased production during the second quarter of 2022, but a higher than typical level of payoff activity more than offset the new production. However, given the core loan growth experienced during 2021 and excluding PPP loans, total average loans in the second quarter of 2022 exceed the 2021 second quarter average by $41.3 million, or 4.4%, as growth of commercial real estate (CRE), residential mortgage, and home equity loans more than offset a decrease in the level of commercial industrial loans. Residential mortgage loan production was down in the second quarter of 2022 when compared to last year’s second quarter. Refinance transactions have been severely impacted with the quick escalation of interest rates since the beginning of 2022. Residential mortgage loan production totaled $6.6 million in the second quarter of 2022 and was 76.2% lower than the production level of $28.0 million achieved in the second quarter of 2021. Total PPP loans averaged $4.7 million in the second quarter of 2022, representing a decrease of $55.8 million, or 92.2%, from the second quarter of last year. Additionally, on an end of period basis, the total amount of PPP loans is only $2.2 million as we continue to work with our customers through the SBA forgiveness process. Overall, despite the higher average volumes of CRE, residential mortgage, and home equity loans, total loan interest income declined by $558,000, or 5.4%, in the 2022 second quarter compared to the 2021 second quarter. This decrease is primarily due to the Company recording a total of $136,000 of processing fee income and interest income from PPP lending activity in the 2022 second quarter, which is $629,000, or 82.2%, lower than PPP income in the second quarter of 2021. Finally, on an end of period basis at June 30, 2022, excluding total PPP loans, the total loan portfolio is approximately $18.6 million, or 2.0%, higher from the June 30, 2021 level.
Total investment securities averaged $240.6 million for the second quarter of 2022 which is $28.3 million, or 13.3%, higher than the $212.3 million average for last year’s second quarter. The U.S. Treasury yield curve increased and became more favorable for purchasing activity so far in 2022. The two-year to ten-year portion of the yield curve increased by approximately 135 to 230 basis points since the beginning of the year, with shorter yields in that range increasing to a higher degree than the longer yields. Overall, the higher rates resulted in yields for new federal agency mortgage-backed securities and federal agency bonds improving and exceeding the overall average yield of the existing securities portfolio. Management purchased more of these investments for our portfolio and, therefore, was able to more profitably deploy a portion of the increased liquidity on our balance sheet into the securities portfolio as opposed to leaving these funds in low yielding federal funds sold. This redeployment of funds contributed to total securities growing between years. Management also continued to purchase taxable municipals and corporate securities to maintain a well-diversified portfolio. Overall, the average balance of total interest earning assets for the second quarter of 2022 was $7.9 million, or 0.6%, lower than the second quarter of 2021 while total interest income decreased by $311,000, or 2.6%, between years.
Although reduced from its high levels when government stimulus initially impacted the economy, our liquidity position continues to be strong as total short-term investments averaged $28.7 million in the second quarter of 2022, which is lower than it has been trending over the past several quarters due to the additional investment in the securities portfolio. In addition, uncertainty remains regarding the duration that the increased funds from government stimulus will remain on the balance sheet. Diligent monitoring and management of our short-term investment position remains a priority. Continued loan growth and prudent investment in securities are critical to achieve the best return on the Company’s liquid funds with management expecting to continue to be active with new security purchases during the remainder of 2022 given the increase in interest rates.
On the liability side of the balance sheet, total deposits have demonstrated stability over the past year as indicated by the second quarter 2022 average balance being only $2.0 million, or 0.2%, lower than the second quarter 2021 average balance. Deposit volumes continue to reflect the favorable impact of government stimulus which provided support to many Americans and financial assistance to municipalities and school districts during the pandemic. Deposit volumes were also favorably impacted by the Company’s successful business development efforts and the Somerset County branch acquisition, which was completed in late May 2021. Overall, the loan to deposit ratio averaged 84.0% in the
36
second quarter of 2022, which indicates that the Company has ample capacity to continue to grow its loan portfolio and is strongly positioned to support our customers and our community during times of economic volatility.
Total interest expense for the second quarter of 2022 decreased by $568,000, or 28.8%, when compared to the second quarter of 2021, due to lower levels of both deposit and borrowing interest expense. Deposit interest expense was lower by $350,000, or 26.8%. The late third quarter 2021 maturity of a large, high-cost institutional deposit, which was replaced by lower cost funds from the branch acquisition, resulted in significant interest expense savings. The higher national interest rates this year did result in total deposit interest expense increasing between the first and second quarters of 2022 as certain deposit products tied to a market index repriced upward with the move in interest rates. Specifically, our total deposit cost averaged 0.33% in the second quarter of 2022, which is five basis points higher than the first quarter of 2022; but still compares favorably to total deposit cost of 0.45% in the second quarter of 2021, representing a decrease of 12 basis points. Overall, management believes that total deposit cost will continue to rise given the expectation of additional short-term interest rate increases by the Federal Reserve throughout 2022. However, given the Company’s strong liquidity position, along with that of the banking industry, we expect that future deposit rate increases will occur in a controlled manner.
Total borrowings interest expense decreased by $218,000, or 32.8%, when comparing the second quarter of 2022 to last year’s second quarter. The decrease between years results from the favorable impact of the August 2021 subordinated debt offering which was used to replace higher cost debt. This transaction effectively lowered debt cost on these long-term funds by nearly 4.0%. This savings is recognized even though the size of the new subordinated debt is $7.0 million higher than the debt instruments it replaced. The remaining portion of the favorable variance in borrowings interest expense between the second quarter of 2022 and the second quarter of 2021 is due to reduced interest expense from Federal Home Loan Bank (FHLB) borrowings. The average balance of total short-term and FHLB borrowings is lower in the second quarter of 2022 by $12.8 million, or 25.3%, as strength of the Company’s liquidity position allows management to let higher cost FHLB term advances mature and not be replaced.
The table that follows provides an analysis of net interest income on a tax-equivalent basis (non-GAAP) for the three month periods ended June 30, 2022 and 2021 setting forth (i) average assets, liabilities, and stockholders’ equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) the Company’s interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) the Company’s net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of this table, loan balances include non-accrual loans, and interest income on loans includes loan fees or amortization of such fees which have been deferred, as well as interest recorded on certain non-accrual loans as cash is received. Regulatory stock is included within available for sale investment securities for this analysis. Additionally, a tax rate of 21% was used to compute tax-equivalent interest income and yields (non-GAAP). The tax equivalent adjustments to interest income on loans and municipal securities for the three months ended June 30, 2022 and 2021 was $4,000 and $5,000, respectively, which is reconciled to the corresponding GAAP measure at the bottom of the table. Differences between the net interest spread and margin from a GAAP basis to a tax-equivalent basis were not material.
37
Three months ended June 30 (In thousands, except percentages)
| 2022 |
| 2021 | ||||||||||||||
Interest | Interest | ||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | ||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||
Interest earning assets: |
|
|
|
|
|
|
|
|
|
| |||||||
Loans and loans held for sale, net of unearned income | $ | 976,995 | $ | 9,729 | 3.95 | % | $ | 991,527 | $ | 10,288 |
| 4.12 | % | ||||
Short-term investments and bank deposits |
| 28,684 |
| 64 | 0.89 |
| 50,357 | 11 |
| 0.09 | |||||||
Investment securities – AFS |
| 180,881 |
| 1,304 | 2.89 |
| 162,282 | 1,171 |
| 2.89 | |||||||
Investment securities – HTM |
| 59,734 |
| 434 | 2.91 |
| 50,050 | 373 |
| 2.98 | |||||||
Total investment securities |
| 240,615 |
| 1,738 | 2.89 |
| 212,332 | 1,544 |
| 2.91 | |||||||
Total interest earning assets/interest income |
| 1,246,294 |
| 11,531 | 3.69 |
| 1,254,216 | 11,843 |
| 3.77 | |||||||
Non-interest earning assets: |
|
|
|
|
|
|
|
|
| ||||||||
Cash and due from banks |
| 17,882 |
|
| 17,770 |
|
| ||||||||||
Premises and equipment |
| 17,395 |
|
| 17,805 |
|
| ||||||||||
Other assets |
| 80,729 |
|
| 75,267 |
|
| ||||||||||
Allowance for loan losses |
| (12,070) |
|
| (11,876) |
|
| ||||||||||
TOTAL ASSETS | $ | 1,350,230 |
| $ | 1,353,182 |
|
| ||||||||||
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
| ||||||||
Interest bearing deposits: |
|
|
|
|
|
|
|
|
| ||||||||
Interest bearing demand | $ | 229,394 | $ | 127 | 0.22 | % | $ | 213,968 | $ | 59 |
| 0.11 | % | ||||
Savings |
| 139,963 |
| 34 | 0.09 |
| 125,545 | 43 |
| 0.14 | |||||||
Money markets |
| 291,998 |
| 241 | 0.33 |
| 269,814 | 170 |
| 0.25 | |||||||
Time deposits |
| 284,935 |
| 554 | 0.78 |
| 339,331 | 1,034 |
| 1.22 | |||||||
Total interest bearing deposits |
| 946,290 |
| 956 | 0.41 |
| 948,658 | 1,306 |
| 0.55 | |||||||
Short-term borrowings |
| 1,500 |
| 3 | 0.83 |
| — | — |
| — | |||||||
Advances from Federal Home Loan Bank |
| 36,190 |
| 156 | 1.82 |
| 50,469 | 227 |
| 1.83 | |||||||
Guaranteed junior subordinated deferrable interest debentures |
| — |
| — | — |
| 13,085 | 281 |
| 8.57 | |||||||
Subordinated debt |
| 27,000 |
| 263 | 3.90 |
| 7,650 | 130 |
| 6.80 | |||||||
Lease liabilities |
| 3,475 |
| 25 | 2.91 |
| 3,766 | 27 |
| 2.85 | |||||||
Total interest bearing liabilities/interest expense |
| 1,014,455 |
|
| 1,403 |
| 0.55 | 1,023,628 |
| 1,971 | 0.77 |
| |||||
Non-interest bearing liabilities: |
|
|
|
|
|
|
|
| |||||||||
Demand deposits |
| 216,596 |
|
|
| 216,223 |
|
|
| ||||||||
Other liabilities |
| 7,281 |
|
|
| 7,322 |
|
|
| ||||||||
Shareholders’ equity |
| 111,898 |
|
|
| 106,009 |
|
|
| ||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,350,230 |
|
| $ | 1,353,182 |
|
|
| ||||||||
Interest rate spread |
|
|
| 3.14 |
|
| 3.00 |
| |||||||||
Net interest income/ Net interest margin (non-GAAP) |
| 10,128 | 3.23 | % |
| 9,872 | 3.13 | % | |||||||||
Tax-equivalent adjustment |
| (4) |
|
|
| (5) |
| ||||||||||
Net Interest Income (GAAP) | $ | 10,124 |
|
|
| $ | 9,867 |
| |||||||||
…..PROVISION FOR LOAN LOSSES…..The Company recorded a $325,000 loan loss provision recovery in the second quarter of 2022 as compared to a $100,000 provision expense in the second quarter of 2021. The 2022 provision recovery reflects improved credit quality for the overall portfolio due to several loan upgrades, a reduced loan portfolio size due to increased payoff activity including one substandard credit, and lower levels of criticized assets. As demonstrated historically, the Company continues its strategic conviction that a strong allowance for loan losses is needed, which has proven to be essential given the support provided to certain borrowers as they fully recover from the
38
COVID-19 pandemic. Overall, we believe that non-performing assets remain well controlled totaling $3.2 million, or 0.34% of total loans, on June 30, 2022. The Company experienced net loan charge-offs of $29,000, or 0.01% of total loans, in the second quarter of 2022 compared to net loan recoveries of $21,000, or 0.01% of total loans, in the second quarter of 2021.
The Company remains committed to prudently working with our borrowers that have been hardest hit by the pandemic by granting them loan payment modifications. On June 30, 2022, loans totaling approximately $5.2 million, or only 0.5% of total loans, were on a payment modification plan. These loans include three commercial borrowers in the hospitality and personal care industries. Management continues to carefully monitor asset quality with a particular focus on these customers that have requested payment deferrals. The Asset Quality Task Force is meeting at least monthly to review these particular relationships, receiving input from the business lenders regarding their ongoing discussions with the borrowers. In summary, the allowance for loan losses provided 357% coverage of non-performing assets, and 1.20% of total loans, on June 30, 2022, compared to 373% coverage of non-performing assets, and 1.26% of total loans, on December 31, 2021.
…..NON-INTEREST INCOME…..Non-interest income for the second quarter of 2022 totaled $4.1 million and decreased by $261,000, or 5.9%, from the second quarter of 2021 performance. Factors contributing to the lower level of non-interest income for the quarter included:
| ● | an $87,000, or 71.3%, decrease in net gains on loans held for sale due to the lower level of residential mortgage loan production which reflects a reduced level of mortgage loan refinance activity due to the quick escalation of interest rates. The reduced level of mortgage loan production also caused mortgage related fees to decline by $67,000, or 67.7%; |
| ● | the Company recognized an $84,000 gain on investment security sales in 2021 as compared to this year when no securities were sold; |
| ● | a $46,000, or 1.5%, decrease in wealth management fees due to the unfavorable impact of the declining equity markets which was partially offset by new customer business development. The fair market value of wealth management assets declined since the fourth quarter of 2021 by $339.9 million, or 12.5%, and totaled $2.4 billion at June 30, 2022; and |
| ● | a $39,000, or 17.4%, increase in service charges on deposit accounts as consumers are more active this year, increasing their spending habits. |
…..NON-INTEREST EXPENSE….. Non-interest expense for the second quarter of 2022 totaled $12.1 million and increased by $72,000, or 0.6%, from the prior year’s second quarter. Factors contributing to the higher level of non-interest expense for the quarter included:
| ● | no additional costs related to the branch acquisition were recognized during the second quarter of 2022 after $193,000 of expense was recognized during the second quarter of 2021; |
| ● | the Company was required to recognize a settlement charge in connection with its defined benefit pension plan in the second quarter of 2022, which is explained in Note 17, Pension Benefits. The amount of the 2022 charge was $1,014,000 which is $163,000, or 19.2%, higher than the $851,000 settlement charge recognized in the second quarter of 2021; |
| ● | a $114,000, or 8.2%, increase in professional fees due primarily to higher legal costs within our wealth management group; |
| ● | a $96,000, or 1.4%, increase in salaries and employee benefits expense. Within total salaries and benefits expense, salaries cost increased by $359,000 due to merit increases and a higher level of full-time equivalent employees (FTEs), which are up by ten FTEs. Also, there were additional increases to health care costs and other employee benefits. Partially offsetting these higher costs within salaries and benefits was lower incentive |
39
| compensation by $109,000 due to the reduced level of loan production and a $64,000 decline in pension service cost; and |
| ● | a $48,000, or 7.4%, increase in net occupancy expense due to increased utilities cost along with maintenance and repair expense which was primarily related to the new branch office. |
…..INCOME TAX EXPENSE…..The Company recorded an income tax expense of $496,000, or an effective tax rate of 20.0%, in the second quarter of 2022. This compares to an income tax expense of $420,000, or an effective tax rate of 19.7%, for the second quarter of 2021.
SIX MONTHS ENDED JUNE 30, 2022 VS. SIX MONTHS ENDED JUNE 30, 2021
…..PERFORMANCE OVERVIEW…..The following table summarizes some of the Company’s key performance indicators (in thousands, except per share and ratios).
| Six months ended | Six months ended | |||||
| June 30, 2022 |
| June 30, 2021 |
| |||
Net income | $ | 4,399 | $ | 3,789 | |||
Diluted earnings per share |
| 0.26 |
| 0.22 | |||
Return on average assets |
| 0.66 | % |
| 0.58 | % | |
Return on average equity |
| 7.80 |
| 7.24 | |||
For the six-month period ended June 30, 2022, the Company reported net income of $4,399,000, or $0.26 per diluted common share. This earnings performance was a $610,000, or 16.1%, improvement from the six-month period of 2021 when net income totaled $3,789,000, or $0.22 per diluted common share. The earnings per share performance for the six-month period of 2022 increased 18.2% when compared to the six-month period of 2021. The improved earnings performance in 2022 reflects the full benefit of several important strategic actions that the Company executed in 2021 along with the successful management of our asset quality throughout the pandemic. Overall, the increase to net interest income, along with the loan loss provision recovery, more than offset a lower level of non-interest income and higher non-interest expense resulting in an improved earnings performance for the first six months of 2022.
…..NET INTEREST INCOME AND MARGIN….. The following table compares the Company’s net interest income performance for the first six months of 2022 to the first six months of 2021 (in thousands, except percentages):
| Six months ended | Six months ended |
|
|
|
| ||||||
| June 30, 2022 |
| June 30, 2021 |
| Change | % Change |
| |||||
| ||||||||||||
Interest income | $ | 22,555 | $ | 23,607 | $ | (1,052) |
| (4.5) | % | |||
Interest expense |
| 2,664 |
| 4,048 |
| (1,384) |
| (34.2) | ||||
Net interest income | $ | 19,891 | $ | 19,559 | $ | 332 |
| 1.7 | ||||
Net interest margin |
| 3.19 | % |
| 3.18 | % |
| 0.01 | % | N/M | ||
N/M — not meaningful
The Company’s net interest income in the first six months of 2022 increased by $332,000, or 1.7%, when compared to the first six months of 2021. The Company’s net interest margin of 3.19% for the first half of 2022 improved by one basis point from the prior year’s first six-month time period. While the size of the Company’s balance sheet remains high by historical standards, both total loans and total deposits have demonstrated stabilization since the second half of last year which corresponds with the conclusion of the government stimulus programs. The 2022 financial performance has been favorably impacted by the strategic actions taken by management in 2021 to lower funding costs. The Company has also benefitted from the higher U.S. Treasury yield curve as interest rates have increased due to the Federal Reserve’s action to tighten monetary policy in their effort to tame decades high inflation. The higher national
40
interest rates have favorably impacted the Company’s financial performance, particularly net interest income in the second quarter of 2022 when compared to the first quarter of 2022. Specifically, the higher interest rates caused total interest income to increase to a higher level than the corresponding increase in total interest expense. In comparison to 2021, the termination of the PPP caused a $1.3 million reduction in the level of loan fee income and was the primary factor causing total interest income to decrease for the first six months of 2022 when compared to the same time period from last year. Deposit and borrowing interest expense declined by more than the decrease to total interest income, resulting in net interest income improving for the first half of 2022 compared to the prior year’s first six-month time period. Financial results also reflect the impact of continued strengthening of our asset quality, which enabled the Company to recognize a loan loss provision recovery during the first six months of 2022.
Total loans averaged $978.3 million in the first half of 2022 which was $8.4 million, or 0.9%, lower than the 2021 first six-month average. As previously mentioned, improved loan pipelines have resulted in increased production during the second quarter of 2022, but a higher than typical level of payoff activity more than offset the new production causing total loan amounts to decrease since the end of the first quarter of 2022. However, given the core loan growth experienced during 2021 and excluding PPP loans, total average loans in the first six months of 2022 exceed the 2021 first six months average by $45.3 million, or 4.9%, as growth of CRE, residential mortgage, and home equity loans more than offset a decrease in the level of commercial industrial loans. Residential mortgage loan production totaled $15.3 million in the first six months of 2022 and was 73.4% lower than the production level of $57.7 million achieved in the first half of 2021 as refinance transactions have been severely impacted with the quick escalation of interest rates since the beginning of 2022. Overall, despite the higher average volumes of CRE, residential mortgage, and home equity loans, total loan interest income declined by $1.4 million, or 6.7%, for the first six months of 2022 when compared to the first six months of last year. This decrease is primarily due to the Company recording a total of $376,000 of processing fees and interest income from PPP loans in the first half of 2022, which is $1.3 million, or 77.4%, lower than PPP income in the first half of 2021.
Total investment securities averaged $231.0 million for the first six months of 2022, which is $29.6 million, or 14.7%, higher than the $201.4 million average for the first six months from last year. As mentioned in the quarterly performance comparison of this MDA, the increase in the U.S. Treasury yield curve has resulted in a more favorable market for securities purchasing activity so far in 2022. Overall, the higher rates resulted in yields for new federal agency mortgage-backed securities and federal agency bonds improving and exceeding the overall average yield of the existing securities portfolio. Management purchased more of these investments and was able to redeploy the cash flow from the excess payoff activity from the loan portfolio and also more profitably utilize a portion of the increased liquidity on our balance sheet into the securities portfolio. This redeployment of funds contributed to total securities growing between years. Management also continued to purchase taxable municipals and corporate securities to maintain a well-diversified portfolio.
Although reduced from its high levels when government stimulus initially impacted the economy, our liquidity position continues to be strong as total short-term investments averaged $37.6 million in the first half of 2022, which is $3.0 million, or 7.4%, lower than the 2021 six-month average. Diligent monitoring and management of our short-term investment position remains a priority. Continued loan growth and prudent investment in securities are critical to achieve the best return on the Company’s liquid funds with management expecting to continue to be active with new security purchases during the remainder of 2022 given the increase in interest rates. Overall, through the first six months of 2022, the average balance of total interest earning assets was $18.2 million, or 1.5%, higher than the first six-month average of 2021 while total interest income decreased by $1.1 million, or 4.5%, between years despite the increased average volume.
Total interest expense for the first six months of 2022 decreased by $1.4 million, or 34.2%, when compared to the first six months of 2021, due to lower levels of both deposit and borrowing interest expense. Through six months, total average deposits are $26.8 million, or 2.4% higher compared to the first six months of 2021. Deposit interest expense in 2022 was lower by $956,000, or 35.3%, despite the higher year to date average volume of total deposits. The deposit growth reflects new deposit inflows as well as the loyalty of the bank’s core deposit base. Also, the late third quarter 2021 maturity of a large, high-cost institutional deposit, which was replaced by lower cost funds from the branch acquisition, resulted in significant interest expense savings. Specifically, our total deposit cost averaged 0.30% in the first half of 2022 compared to 0.48% in the first half of 2021, representing a decrease of 18 basis points. Total borrowings interest expense in the first six months of 2022 is lower by $428,000, or 31.9%, compared to the same time
41
frame in 2021. As previously mentioned, the decrease between years results from the favorable impact of the August 2021 subordinated debt offering which was used to replace higher cost debt. The remaining portion of the favorable variance in borrowings interest expense between the first six months of 2022 and the first six months of 2021 is due to reduced interest expense from FHLB borrowings. The average balance of total short-term and FHLB borrowings was lower in the first half of 2022 by $15.9 million, or 28.7%, as strength of the Company’s liquidity position allows management to let higher cost FHLB term advances mature and not be replaced.
The table that follows provides an analysis of net interest income on a tax-equivalent basis (non-GAAP) for the six month periods ended June 30, 2022 and 2021. For a detailed discussion of the components and assumptions included in the table, see the paragraph before the quarterly table on page 37. The tax equivalent adjustments to interest income on loans and municipal securities for the six months ended June 30, 2022 and 2021 was $7,000 and $10,000, respectively, which is reconciled to the corresponding GAAP measure at the bottom of the table. Differences between the net interest spread and margin from a GAAP basis to a tax-equivalent basis were not material.
42
Six months ended June 30 (In thousands, except percentages)
| 2022 |
| 2021 | ||||||||||||||
Interest | Interest | ||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | ||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||
Interest earning assets: |
|
|
|
|
|
|
|
|
|
| |||||||
Loans and loans held for sale, net of unearned income | $ | 978,272 | $ | 19,228 | 3.92 | % | $ | 986,702 | $ | 20,620 |
| 4.17 | % | ||||
Short-term investments and bank deposits |
| 37,608 |
| 82 | 0.43 |
| 40,605 | 19 |
| 0.09 | |||||||
Investment securities – AFS |
| 173,474 |
| 2,427 | 2.80 |
| 154,100 | 2,259 |
| 2.93 | |||||||
Investment securities – HTM |
| 57,563 |
| 825 | 2.87 |
| 47,289 | 719 |
| 3.04 | |||||||
Total investment securities |
| 231,037 |
| 3,252 | 2.82 |
| 201,389 | 2,978 |
| 2.96 | |||||||
Total interest earning assets/interest income |
| 1,246,917 |
| 22,562 | 3.62 |
| 1,228,696 | 23,617 |
| 3.85 | |||||||
Non-interest earning assets: |
|
|
|
|
|
|
|
|
| ||||||||
Cash and due from banks |
| 17,824 |
|
| 17,921 |
|
| ||||||||||
Premises and equipment |
| 17,386 |
|
| 17,894 |
|
| ||||||||||
Other assets |
| 81,145 |
|
| 72,763 |
|
| ||||||||||
Allowance for loan losses |
| (12,291) |
|
| (11,729) |
|
| ||||||||||
TOTAL ASSETS | $ | 1,350,981 |
| $ | 1,325,545 |
|
| ||||||||||
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
| ||||||||
Interest bearing deposits: |
|
|
|
|
|
|
|
|
| ||||||||
Interest bearing demand | $ | 229,333 | $ | 196 | 0.17 | % | $ | 204,970 | $ | 119 |
| 0.12 | % | ||||
Savings |
| 137,925 |
| 67 | 0.10 |
| 120,588 | 81 |
| 0.14 | |||||||
Money markets |
| 291,569 |
| 401 | 0.28 |
| 263,548 | 342 |
| 0.26 | |||||||
Time deposits |
| 287,340 |
| 1,088 | 0.76 |
| 339,275 | 2,166 |
| 1.29 | |||||||
Total interest bearing deposits |
| 946,167 |
| 1,752 | 0.37 |
| 928,381 | 2,708 |
| 0.59 | |||||||
Short-term borrowings |
| 750 |
| 3 | 0.83 |
| 590 | 1 |
| 0.12 | |||||||
Advances from Federal Home Loan Bank |
| 38,691 |
| 332 | 1.74 |
| 54,709 | 464 |
| 1.71 | |||||||
Guaranteed junior subordinated deferrable interest debentures |
| — |
| — | — |
| 13,085 | 561 |
| 8.57 | |||||||
Subordinated debt |
| 27,000 |
| 526 | 3.90 |
| 7,650 | 260 |
| 6.80 | |||||||
Lease liabilities |
| 3,504 |
| 51 | 2.91 |
| 3,803 | 54 |
| 2.84 | |||||||
Total interest bearing liabilities/interest expense |
| 1,016,112 |
|
| 2,664 |
| 0.53 | 1,008,218 |
| 4,048 | 0.81 |
| |||||
Non-interest bearing liabilities: |
|
|
|
|
|
|
|
| |||||||||
Demand deposits |
| 214,745 |
|
|
| 205,764 |
|
|
| ||||||||
Other liabilities |
| 6,346 |
|
|
| 6,093 |
|
|
| ||||||||
Shareholders’ equity |
| 113,778 |
|
|
| 105,470 |
|
|
| ||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,350,981 |
|
| $ | 1,325,545 |
|
|
| ||||||||
Interest rate spread |
|
|
| 3.09 |
|
| 3.04 |
| |||||||||
Net interest income/ Net interest margin (non-GAAP) |
| 19,898 | 3.19 | % |
| 19,569 | 3.18 | % | |||||||||
Tax-equivalent adjustment |
| (7) |
|
|
| (10) |
| ||||||||||
Net Interest Income (GAAP) | $ | 19,891 |
|
|
| $ | 19,559 |
| |||||||||
…..PROVISION FOR LOAN LOSSES…..For the first six months of 2022, the Company recorded a $725,000 provision recovery for loan losses compared to a $500,000 provision expense recorded in the first six months of 2021 resulting in a net favorable change of $1.2 million. The 2022 provision recovery reflects improved credit quality for the overall portfolio due to several loan upgrades, a reduced loan portfolio size, and lower levels of criticized assets. The Company continues to experience low net loan charge-offs, which were $105,000, or 0.02% of total average loans, in the first half of 2022 and is relatively consistent with net loan charge-offs of $93,000, or 0.02% of total average loans, for
43
the first half of 2021. Even though the Company recognized a loan loss provision recovery during the first half of the year, the balance in the allowance for loan losses at June 30, 2022 is only slightly lower than the balance of the allowance at June 30, 2021 by $184,000, or 1.6%.
…..NON-INTEREST INCOME….. Non-interest income for the first six months of 2022 totaled $8.5 million and decreased by $540,000, or 6.0%, from the first six months of 2021 performance. Factors contributing to the lower level of non-interest income for the six-month period included:
| ● | a $487,000, or 78.9%, decrease in net gains on loans held for sale due to the lower level of residential mortgage loan production which reflects a reduced level of mortgage loan refinance activity due to the quick escalation of interest rates. The reduced level of mortgage loan production also caused mortgage related fees to decline by $164,000, or 71.6%; |
| ● | a $247,000, or 4.2%, increase in wealth management fees as the continued strong performance of our wealth management group actively working with clients and adding new business through the first quarter of 2022 more than offset the negative impact that the declining equity markets had on wealth management fees during the second quarter of 2022; |
| ● | a $110,000, or 25.9%, increase in service charges on deposit accounts as consumers are more active this year, increasing their spending habits; |
| ● | a $110,000, or 20.0%, decrease in revenue from bank owned life insurance (BOLI) after the Company received a death claim in 2021; and |
| ● | the Company recognized an $84,000 gain on investment security sales in 2021 as compared to this year when no securities were sold. |
…..NON-INTEREST EXPENSE….. Non-interest expense for the first six months of 2022 totaled $23.6 million and increased by $246,000, or 1.1%, from the prior year’s first six months. Factors contributing to the higher level of non-interest expense for the six-month period included:
| ● | a $560,000, or 4.1%, increase in salaries and employee benefits expense. Within total salaries benefits expense, salaries cost increased by $727,000 due to merit increases and a higher level of full-time equivalent employees. Also, there were additional increases to health care costs and other employee benefits. Partially offsetting these higher costs within salaries benefits was lower incentive compensation by $215,000 due to the reduced level of loan production and a $127,000 decline in pension service cost; |
| ● | no additional costs related to the branch acquisition were recognized in 2022 after $303,000 of expense was recognized in 2021; |
| ● | a $277,000, or 8.8%, decrease in other expense due to the impact of a $149,000 credit for the unfunded commitment reserve in the first half of 2022 after $56,000 of expense was recognized in the first half of last year, resulting in a $205,000 favorable shift; |
| ● | the Company was required to recognize a settlement charge in connection with its defined benefit pension plan in 2022, which is explained in Note 17, Pension Benefits. The amount of the 2022 charge was $1,014,000 which is $163,000, or 19.2%, higher than the $851,000 settlement charge recognized in 2021; |
| ● | a $124,000, or 4.6%, increase in professional fees due primarily to higher legal costs within our wealth management group; and |
| ● | a $109,000, or 8.2%, increase in net occupancy expense due to increased utilities cost along with maintenance and repair expense which was primarily related to the new branch office. |
44
…..INCOME TAX EXPENSE…..The Company recorded an income tax expense of $1.1 million, or an effective tax rate of 20.0%, in the first six months of 2022. This compares to an income tax expense of $940,000, or an effective tax rate of 19.9%, for the first six months of 2021.
…..SEGMENT RESULTS.…..The community banking segment reported a net income contribution of $2,947,000 in the second quarter of 2022 which was consistent with the second quarter of last year, exceeding by $9,000. For the six month time period the community banking segment’s net income contribution of $6,134,000 was $124,000 lower than the first six months of 2021. The increase in the quarterly comparison results from the higher national interest rates having a favorable impact on the Company’s financial performance, particularly net interest income in the second quarter of 2022. The decline for the six month time period is due to a lower level of total revenue which more than offset the favorable impact from the recognition of the loan loss provision recovery in the first half of 2022 as well as reduced non-interest expense. Net interest income declined for the six month time period as the reduction to total interest income more than offset the reduction to total interest expense. The primary reason for the lower level of total interest income was due to a reduction in PPP processing fees and interest income as well as a lower level of total loan charges in the first six months of 2022 which combined were $1,536,000 lower when compared to the first six months of 2021. However, the higher national interest rates along with an increased balance of average total loans excluding PPP loans resulted in an additional $148,000 of loan interest income. This segment continues to benefit from the strong production of both commercial real estate loans and residential real estate loans that occurred throughout 2021, which resulted in the six month average balance for both of these loan categories exceeding the 2021 average by $52.0 million. Total interest income from CRE and residential mortgage loans was $393,000 higher through six months of 2022 when compared to the first six months of 2021. Also, favorably impacting net interest income and partially offsetting the lower level of total interest income was lower deposit cost in 2022 despite total deposit cost increasing between the first and second quarters of 2022 because of the higher national interest rates. Total deposit interest expense decreased between years due to management’s action in 2021 to lower pricing of several deposit products. The decrease to total deposit interest expense occurred even though total average deposits in the first half of 2022 exceeded the 2021 first half average by $26.8 million. This segment was also favorably impacted by management electing to replace the third quarter of 2021 maturity of a high cost, large institutional deposit with the additional lower cost deposits obtained from the 2021 Somerset County branch acquisition. Overall, total deposit interest expense is $956,000 lower between years. This segment was also favorably impacted by the Company recording a $725,000 loan loss provision revovery in the first half of 2022 compared to a $500,000 provision expense in first half of 2021. This was discussed previously in the Provision for Loan Losses section within this document. Non-interest income was unfavorably impacted by a reduced level of loan sale gain income by $487,000 due to the lower level of residential mortgage loan production in 2022, which also caused mortgage related fees to decline by $164,000 in the first half of 2022. This segment was also unfavorably impacted by lower levels of income from bank owned life insurance (BOLI). Overall, these unfavorable items more than offset the favorable impact of higher service charges on deposit accounts by $110,000. Non-interest expense in the first half of 2022 compares favorably to the same time period in 2021 due to lower miscellaneous expense after the Company had additional costs for the the branch acquisition in the first half of 2021 while there were no such costs in 2022. This segment was also favorably impacted by reduced incentive compensation and the Company recognizing a credit to the unfunded commitment reserve of $149,000 after $56,000 of expense was recognized in the first half of last year, resulting in a $205,000 favorable shift. These favorable items were partially offset by higher salaries cost as well as the Company recognizing a settlement charge on its defined benefit pension plan, which was discussed previously in the MDA.
The wealth management segment’s net income contribution was $510,000 in the second quarter of 2022 which was $224,000 lower than the second quarter of 2021. Through six months, the wealth management segment’s net income contribution was $1,233,000 which was $163,000 lower than the net income contribution for the first six months of 2021. The decrease in both time periods between years reflects the unfavorable impact of the declining equity markets on wealth management fee income which was partially offset by new customer business growth. Also contributing to the decline in both time periods between years were higher levels of legal fees, total employee costs and meals travel related expenses for business development. Overall, the fair market value of wealth management assets declined since the fourth quarter of 2021 by $339.9 million, or 12.5%, and totaled $2.4 billion at June 30, 2022.
The investment/parent segment reported a net loss of $1,476,000 in the second quarter of 2022 and a net loss of $2,968,000 for the first half of 2022 which is a lower loss by $488,000 than the second quarter of 2021 and a lower loss by $897,000 than the first half of 2021. The reduced loss results from lower borrowings interest expense primarily due to
45
the favorable impact of the 2021 subordinated debt offering which was used to replace higher cost debt. This transaction effectively lowered debt cost on long-term funds by nearly 4.0%. The remaining portion of the favorable variance in borrowings interest expense between years is due to reduced interest expense from Federal Home Loan Bank (FHLB) borrowings. Finally, and also contributing to the reduced loss in this segment, was an increase in interest income from the securities portfolio due to the higher average volume of total securities. The increase to the U.S. Treasury yield curve resulted in improved yields for federal agency mortgage-backed securities and federal agency bonds making purchases of these investments more attractive. Therefore, management was able to more profitably deploy a portion of the increased liquidity on our balance sheet into the securities portfolio.
…..BALANCE SHEET…..The Company’s total consolidated assets were $1.3 billion at June 30, 2022, which decreased by $14.2 million, or 1.1%, from the December 31, 2021 asset level. This change was related, primarily, to decreased levels of cash and cash equivalents and loans which were partially offset by an increased level of investment securities. Specifically, cash and cash equivalents decreased $12.1 million, or 29.4%, as the U.S. Treasury yield curve increased during the first half of the year allowing management to purchase investment securities to more profitably deploy a portion of the increased liquidity on the Company’s balance sheet. This redeployment of funds contributed to total investment securities growing by $14.3 million, or 6.6%. Loans, net of unearned fees, and loans held for sale decreased by $20.5 million, or 2.1%, as improved loan pipelines resulted in increased production during the second quarter of 2022, but a higher than typical level of payoff activity more than offset the new production.
Total deposits increased by $3.4 million, or 0.3%, in the first six months of 2022. This reflects new deposit inflows as well as the loyalty of the Company’s core deposit base. Deposit volumes were favorably impacted by the government stimulus which provided support to many Americans and financial assistance to municipalities and schools districts during the pandemic. However, with government stimulus ending in 2021, deposit balances have demonstrated stabilization. As of June 30, 2022, the 25 largest depositors represented 17.9% of total deposits, which is a slight decrease from December 31, 2021 when it was 18.9%. Total borrowings have decreased by $8.7 million, or 12.0%, since year-end 2021. The decrease was driven by a lower level of FHLB term advances. Specifically, FHLB term advances decreased by $8.6 million, or 20.2%, and totaled $34.0 million at June 30, 2022. The current strong liquidity position has allowed the Company to let higher cost FHLB term advances mature and not be replaced. However, the Company does continue to utilize the FHLB term advances to help manage interest rate risk.
The Company’s total shareholders’ equity decreased by $10.2 million, or 8.7%, over the first six months of 2022. The decrease in capital during the first half of 2022 is the result of the negative impact on accumulated other comprehensive loss due to the reduced market value of the available for sale investment securities portfolio. Additionally, the revaluation of the pension obligation resulting from a drop in the value of the pension plan assets had a negative impact on accumulated other comprehensive loss. These decreases more than offset the Company’s improved first six months earnings performance.
The Company continues to be considered well capitalized for regulatory purposes with a total capital ratio of 14.33%, and a common equity tier 1 capital ratio of 10.65% at June 30, 2022. See the discussion of the Basel III capital requirements under the Capital Resources section below. As of June 30, 2022, the Company’s book value per common share was $6.22 and its tangible book value per common share (non-GAAP) was $5.41. When compared to December 31, 2021, book value per common share declined by $0.60 per common share and tangible book value per common share declined by $0.61 per common share. The tangible common equity to tangible assets ratio (non-GAAP) was 7.08% at June 30, 2022 and decreased by 70 basis points when compared to December 31, 2021. The decrease in tangible book value and tangible common equity ratio relate to the previously discussed increase in the accumulated other comprehensive loss.
The tangible common equity ratio and tangible book value per share are considered to be non-GAAP measures and are calculated by dividing tangible equity by tangible assets or shares outstanding. The Company believes that these non-GAAP financial measures provide information to investors that is useful in understanding its financial condition. This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures, and, because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. The following table sets forth the calculation of the Company’s
46
tangible common equity ratio and tangible book value per share at June 30, 2022 and December 31, 2021 (in thousands, except share and ratio data):
June 30, |
| December 31, |
| ||||
2022 | 2021 |
| |||||
Total shareholders’ equity | $ | 106,392 |
| $ | 116,549 |
| |
Less: Intangible assets |
| 13,753 |
|
| 13,769 |
| |
Tangible common equity |
| 92,639 |
|
| 102,780 |
| |
Total assets |
| 1,321,402 |
|
| 1,335,560 |
| |
Less: Intangible assets |
| 13,753 |
|
| 13,769 |
| |
Tangible assets |
| 1,307,649 |
| 1,321,791 | |||
Tangible common equity ratio (non-GAAP) |
| 7.08 | % |
| 7.78 | % | |
Total shares outstanding |
| 17,109,097 |
| 17,081,500 | |||
Tangible book value per share (non-GAAP) | $ | 5.41 | $ | 6.02 | |||
…..LOAN QUALITY…..The following table sets forth information concerning the Company’s loan delinquency, non-performing assets, and classified assets (in thousands, except percentages):
| June 30, |
| December 31, |
| June 30, | |||||
2022 | 2021 | 2021 | ||||||||
Total accruing loan delinquency (past due 30 to 89 days) |
| $ | 2,228 |
| $ | 6,336 |
| $ | 1,904 | |
Total non-accrual loans |
| 3,240 |
| 3,323 |
| 3,713 | ||||
Total non-performing assets including TDRs* |
| 3,240 |
| 3,323 |
| 3,727 | ||||
Accruing loan delinquency, as a percentage of total loans, net of unearned income |
| 0.23 | % | 0.64 | % | 0.19 | % | |||
Non-accrual loans, as a percentage of total loans, net of unearned income |
| 0.34 |
| 0.34 |
| 0.37 | ||||
Non-performing assets, as a percentage of total loans, net of unearned income, and other real estate owned and repossessed assets* |
| 0.34 |
| 0.34 |
| 0.38 | ||||
Non-performing assets as a percentage of total assets* |
| 0.25 |
| 0.25 |
| 0.27 | ||||
As a percent of average loans, net of unearned income: |
|
|
|
|
|
| ||||
Annualized net charge-offs |
| 0.02 |
| — |
| 0.02 | ||||
Annualized provision for loan losses |
| (0.15) |
| 0.11 |
| 0.10 | ||||
Total classified loans (loans rated substandard or doubtful)** | $ | 18,778 | $ | 17,009 | $ | 10,002 | ||||
* | Non-performing assets are comprised of (i) loans that are on a non-accrual basis, (ii) loans that are contractually past due 90 days or more as to interest and principal payments, (iii) performing loans classified as a troubled debt restructuring and (iv) other real estate owned and repossessed assets. |
** | Total classified loans include non-performing residential mortgage and consumer loans. |
Overall, the Company continued to maintain good asset quality in the first six months of 2022 as evidenced by low levels of non-accrual loans, non-performing assets, and loan delinquency levels that continue to be below 1% of total loans. The decrease in accruing loan delinquency is primarily attributable to a decrease in residential mortgage loan delinquency and, to a lesser extent, commercial loan delinquency. The increase in classified loans is the result of the risk rating downgrade of a commercial and industrial loan relationship which was partially offset by the payoff of a substandard credit during the first half of 2022.
The Company remains committed to prudently working with and supporting our borrowers that have been hardest hit by the pandemic by granting them loan payment modifications. Management continues to carefully monitor asset quality with a particular focus on customers that have requested payment deferrals. The Asset Quality Task Force meets at least monthly to review these particular relationships, receiving input from the business lenders regarding their ongoing discussions with the borrowers. See the disclosures regarding COVID-19 related modifications within the Non-Performing Assets Including Troubled Debt Restructurings (TDR) footnote.
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We also continue to closely monitor the loan portfolio given the number of relatively large-sized commercial and commercial real estate loans within the portfolio. As of June 30, 2022, the 25 largest credits represented 22.5% of total loans outstanding, which represents a slight increase from the second quarter of 2021 when it was 22.1%.
…..ALLOWANCE FOR LOAN LOSSES…..The following table sets forth the allowance for loan losses and certain ratios for the periods ended (in thousands, except percentages):
| June 30, |
| December 31, |
| June 30, |
| ||||
2022 | 2021 | 2021 |
| |||||||
Allowance for loan losses | $ | 11,568 | $ | 12,398 | $ | 11,752 | ||||
Allowance for loan losses as |
|
|
|
|
|
| ||||
a percentage of each of the following: |
|
|
|
|
|
| ||||
total loans, net of unearned income |
| 1.20 | % |
| 1.26 | % |
| 1.18 | % | |
total accruing delinquent loans |
|
|
|
|
|
| ||||
(past due 30 to 89 days) |
| 519.21 |
| 195.68 |
| 617.23 | ||||
total non-accrual loans |
| 357.04 |
| 373.10 |
| 316.51 | ||||
total non-performing assets |
| 357.04 |
| 373.10 |
| 315.32 | ||||
…..LIQUIDITY…..The Company’s liquidity position continues to be strong due to effective business development efforts as well as management’s ability to retain the significant influx of deposits that resulted from the government stimulus programs. Also, deposit levels were positively impacted in the second quarter of 2021 by the Somerset County branch acquisition which more than offset the third quarter 2021 maturity of the high cost, institutional deposit. In addition, the Company’s loyal core deposit base continues to prove to be a source of strength for the Company during periods of market volatility. As a result, through six months, total average deposits are $26.8 million, or 2.4%, higher compared to the first six months of 2021. Total deposits have demonstrated stability over the past year as indicated by the second quarter 2022 average balance being only $2.0 million, or 0.2%, lower than the second quarter 2021 average balance. Deposit volumes continue to reflect the favorable impact of government stimulus which provided support to many Americans and financial assistance to municipalities and school districts during the pandemic. Deposit volumes were also favorably impacted by the Company’s successful business development efforts. The core deposit base is adequate to fund the Company’s operations. Cash flow from maturities, prepayments and amortization of securities is used to help fund loan growth.
Average short-term investments declined during the first half of 2022 but continue to be higher than they have been historically. Although eased somewhat by the additional investment in the securities portfolio, the challenge remains as to the uncertainty regarding the duration that these increased funds will remain on the balance sheet which will be determined by customer behavior as the economic conditions change. Diligent monitoring and management of our short-term investment position remains a priority. Continued loan growth and prudent investment in securities are critical to achieve the best return on the remaining liquid funds with management expecting to continue to be active with new security purchases in the second half of 2022 given the increase in interest rates. On an end of period basis, at June 30, 2022, total interest bearing deposits and short-term investments decreased by $5.6 million since December 31, 2021. Given the increase to national interest rates experienced so far during 2022, a portion of the increased balance sheet liquidity was invested in additional securities to more profitably deploy the increased liquidity. In addition, loan production during 2022 was more than offset by a higher than typical level of payoff activity causing total loans to decrease since the end of the 2021 by $20.7 million. We strive to operate our loan to deposit ratio in a range of 80% to 100%. The Company’s loan to deposit ratio averaged 84.0% in the second quarter of 2022, which indicates that the Company has ample capacity to continue to grow its loan portfolio and is strongly positioned to support our customers and our community during times of economic volatility. We are also well positioned to service our existing loan pipeline and grow our loan to deposit ratio while remaining within our guideline parameters.
Liquidity can also be analyzed by utilizing the Consolidated Statements of Cash Flows. Cash and cash equivalents decreased by $12.1 million from December 31, 2021, to $29.0 million at June 30, 2022, due to $7.0 million of net cash used in investing activities and $6.2 million of net cash used in financing activities more than offsetting $1.1 million of net cash provided by operating activities. Within investing activities, cash advanced for new loans originated totaled $104.8 million and was $21.0 million lower than the $125.8 million of cash received from loan principal payments. Within financing activities, total FHLB borrowings decreased by $8.6 million while total deposits increased by $3.4
48
million. Within operating activities, $7.5 million of mortgage loans held for sale were originated while $7.4 million of mortgage loans were sold into the secondary market.
The holding company had $9.5 million of cash, short-term investments, and investment securities at June 30, 2022, which represents a $149,000 increase from the holding company’s cash position since the end of the fourth quarter of 2021. Dividend payments from our subsidiaries also provide ongoing cash to the holding company. At June 30, 2022, our subsidiary Bank had $12.5 million of cash available for immediate dividends to the holding company under applicable regulatory formulas. Management follows a policy that limits dividend payments from the Trust Company to 75% of annual net income. Overall, we believe that the holding company has sufficient liquidity to meet its subordinated debt interest payments, and its new increased dividend payout level with respect to its common stock.
Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and borrowers, take advantage of market opportunities, and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. Sources of asset liquidity are provided by short-term investments, interest bearing deposits with banks, and federal funds sold. These assets totaled $29.0 million and $41.1 million at June 30, 2022 and December 31, 2021, respectively. Maturing and repaying loans, as well as the monthly cash flow associated with mortgage-backed securities and security maturities are other significant sources of asset liquidity for the Company.
Liability liquidity can be met by attracting deposits with competitive rates, using repurchase agreements, buying federal funds, or utilizing the facilities of the Federal Reserve or the FHLB systems. The Company utilizes a variety of these methods of liability liquidity. Additionally, the Company’s subsidiary bank is a member of the FHLB, which provides the opportunity to obtain short- to longer-term advances based upon the Company’s investment in certain residential mortgage, commercial real estate, and commercial and industrial loans. At June 30, 2022, the Company had $390 million of overnight borrowing availability at the FHLB, $42 million of short-term borrowing availability at the Federal Reserve Bank and $35 million of unsecured federal funds lines with correspondent banks. The Company believes it has ample liquidity available to fund outstanding loan commitments if they were fully drawn upon.
…..CAPITAL RESOURCES…..The Bank meaningfully exceeds all regulatory capital ratios for each of the periods presented and is considered well capitalized. The Company’s common equity tier 1 capital ratio was 10.65%, the tier 1 capital ratio was 10.65%, and the total capital ratio was 14.33% at June 30, 2022. The Company’s tier 1 leverage ratio was 8.40% at June 30, 2022. We anticipate that we will maintain our strong capital ratios throughout the remainder of 2022. There is a particular emphasis on ensuring that the subsidiary bank has appropriate levels of capital to support its non-owner occupied commercial real estate loan concentration, which stood at 342% of regulatory capital at June 30, 2022. We currently believe that we have sufficient capital and earnings power to continue to pay our common stock cash dividend at its increased rate of $0.03 per quarter. At June 30, 2022, the Company had approximately 17.1 million common shares outstanding.
The Basel III capital standards establish the minimum capital levels in addition to the well capitalized requirements under the federal banking regulations prompt corrective action. The capital rules also impose a 2.5% capital conservation buffer (CCB) on top of the three minimum risk-weighted asset ratios. Banking institutions that fail to meet the effective minimum ratios once the CCB is taken into account will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (four quarter trailing net income, net of distributions and tax effects not reflected in net income). The Company and the Bank meet all capital requirements, including the CCB, and continue to be committed to maintaining strong capital levels that exceed regulatory requirements while also supporting balance sheet growth and providing a return to our shareholders.
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Under the Basel III capital standards, the minimum capital ratios are:
MINIMUM CAPITAL RATIO |
| ||||
MINIMUM | PLUS CAPITAL |
| |||
| CAPITAL RATIO |
| CONSERVATION BUFFER |
| |
Common equity tier 1 capital to risk-weighted assets | 4.5 | % | 7.0 | % | |
Tier 1 capital to risk-weighted assets |
| 6.0 |
| 8.5 | |
Total capital to risk-weighted assets |
| 8.0 |
| 10.5 | |
Tier 1 capital to total average consolidated assets |
| 4.0 |
|
|
…..INTEREST RATE SENSITIVITY…..The following table presents an analysis of the sensitivity inherent in the Company’s net interest income and market value of portfolio equity. The interest rate scenarios in the table compare the Company’s base forecast, which was prepared using a flat interest rate scenario, to scenarios that reflect immediate interest rate changes of 100 and 200 basis points. Note that we suspended the 200 basis point downward rate shock since it has little value due to the absolute low level of interest rates. Each rate scenario contains unique prepayment and repricing assumptions that are applied to the Company’s existing balance sheet that was developed under the flat interest rate scenario.
VARIABILITY OF |
| CHANGE IN |
| ||
NET INTEREST | MARKET VALUE OF | ||||
INTEREST RATE SCENARIO |
| INCOME |
| PORTFOLIO EQUITY | |
200 bp increase | 2.4 | % | 4.7 | % | |
100 bp increase |
| 1.1 |
| 4.0 | |
100 bp decrease |
| (2.1) |
| (6.9) |
The Company believes that its overall interest rate risk position is well controlled. The variability of net interest income is positive in the upward rate shocks due to the Company’s short duration investment securities portfolio and the scheduled repricing of loans tied to an index, such as SOFR or prime. Also, the Company will continue its disciplined approach to price its core deposit accounts in a controlled but competitive manner. The variability of net interest income is negative in the 100 basis point downward rate scenario as the Company has more exposure to assets repricing downward to a greater extent than liabilities due to the absolute low level of interest rates. The fed funds rate is currently at a targeted range of 1.50% to 1.75% as the Federal Reserve took action several times in 2022 to increase the rate a total of 150 basis points. Further, there is an expectation of additional short-term interest rate increases by the Federal Reserve throughout the remainder of 2022. The market value of portfolio equity increases in the upward rate shocks due to the improved value of the Company’s core deposit base. Negative variability of market value of portfolio equity occurs in the downward rate shock due to a reduced value for core deposits.
…..OFF BALANCE SHEET ARRANGEMENTS…..The Company incurs off-balance sheet risks in the normal course of business in order to meet the financing needs of its customers. These risks derive from commitments to extend credit and standby letters of credit. Such commitments and standby letters of credit involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Company had various outstanding commitments to extend credit approximating $236.1 million and standby letters of credit of $12.1 million as of June 30, 2022. The Company’s exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The Company uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending.
…..CRITICAL ACCOUNTING POLICIES AND ESTIMATES…..The accounting and reporting policies of the Company are in accordance with Generally Accepted Accounting Principles (GAAP) and conform to general practices within the banking industry. Accounting and reporting policies for the pension liability, allowance for loan losses, intangible assets, income taxes, and investment securities are deemed critical because they involve the use of estimates and require significant management judgments. Application of assumptions different than those used by the Company could result in material changes in the Company’s financial position or results of operation.
50
ACCOUNT — Pension liability
BALANCE SHEET REFERENCE — Other assets
INCOME STATEMENT REFERENCE — Salaries and employee benefits and Other expense
DESCRIPTION
Pension costs and liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors. In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation of future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future expense. Additionally, pension expense can also be impacted by settlement accounting charges if the amount of employee selected lump sum distributions exceed the total amount of service and interest component costs of the net periodic pension cost in a particular year. Our pension benefits are described further in Note 17 of the Notes to Unaudited Consolidated Financial Statements.
ACCOUNT — Allowance for Loan Losses
BALANCE SHEET REFERENCE — Allowance for loan losses
INCOME STATEMENT REFERENCE — Provision (credit) for loan losses
DESCRIPTION
The allowance for loan losses is calculated with the objective of maintaining reserve levels believed by management to be sufficient to absorb estimated probable credit losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio and other relevant factors. However, this quarterly evaluation is inherently subjective as it requires material estimates, including, among others, likelihood of customer default, loss given default, exposure at default, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on consumer loans and residential mortgages, and general amounts for historical loss experience. This process also considers economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios. All of these factors may be susceptible to significant change. Also, the allocation of the allowance for credit losses to specific loan pools is based on historical loss trends and management’s judgment concerning those trends.
Commercial and commercial real estate loans are the largest category of credits and the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan losses. Approximately $8.9 million, or 77%, of the total allowance for loan losses at June 30, 2022 has been allocated to these two loan categories. This allocation also considers other relevant factors such as actual versus estimated losses, economic trends, delinquencies, levels of non-performing and troubled debt restructured (TDR) loans, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies and trends in policy, financial information and documentation exceptions. To the extent actual outcomes differ from management estimates, additional provision for loan losses may be required that would adversely impact earnings in future periods.
ACCOUNT — Intangible assets
BALANCE SHEET REFERENCE — Intangible assets
INCOME STATEMENT REFERENCE — Other expense
DESCRIPTION
The Company considers our accounting policies related to goodwill and core deposit intangible to be critical because the assumptions or judgment used in determining the fair value of assets and liabilities acquired in past acquisitions are subjective and complex. As a result, changes in these assumptions or judgment could have a significant impact on our financial condition or results of operations.
The fair value of acquired assets and liabilities, including the resulting goodwill and core deposit intangible, was based either on quoted market prices or provided by other third party sources, when available. When third party information was not available, estimates were made in good faith by management primarily through the use of internal cash flow modeling techniques. The assumptions that were used in the cash flow modeling were subjective and are
51
susceptible to significant changes. The Company routinely utilizes the services of an independent third party that is regarded within the banking industry as an expert in valuing core deposits to monitor the ongoing value and changes in the Company’s core deposit base. These core deposit valuation updates are based upon specific data provided from statistical analysis of the Company’s own deposit behavior to estimate the duration of these non-maturity deposits combined with market interest rates and other economic factors.
Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. The Company’s goodwill relates to value inherent in the banking and wealth management businesses, and the value is dependent upon the Company’s ability to provide quality, cost-effective services in the face of free competition from other market participants on a regional basis. This ability relies upon continuing investments in processing systems, the development of value-added service features and the ease of use of the Company’s services. As such, goodwill value is supported ultimately by revenue that is driven by the volume of business transacted and the loyalty of the Company’s deposit and customer base over a longer time frame. The quality and value of a Company’s assets is also an important factor to consider when performing goodwill impairment testing. A decline in earnings as a result of a lack of growth or the inability to deliver cost-effective value added services over sustained periods can lead to the impairment of goodwill.
Goodwill, which has an indefinite useful life, is tested for impairment at least annually and written down and charged to results of operations only in periods in which the recorded value is more than the estimated fair value. The core deposit intangible, which is a wasting asset, is amortized and reported in other expense for a period of ten years using the sum of the years digits amortization method.
ACCOUNT — Income Taxes
BALANCE SHEET REFERENCE — Net deferred tax asset and Net deferred tax liability
INCOME STATEMENT REFERENCE — Provision for income taxes
DESCRIPTION
The provision for income taxes is the sum of income taxes both currently payable and deferred. The changes in deferred tax assets and liabilities are determined based upon the changes in differences between the basis of assets and liabilities for financial reporting purposes and the basis of assets and liabilities as measured by the enacted tax rates that management estimates will be in effect when the differences reverse. This income tax review is completed on a quarterly basis.
In relation to recording the provision for income taxes, management must estimate the future tax rates applicable to the reversal of tax differences, make certain assumptions regarding whether tax differences are permanent or temporary and the related timing of the expected reversal. Also, estimates are made as to whether taxable operating income in future periods will be sufficient to fully recognize any gross deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. Alternatively, we may make estimates about the potential usage of deferred tax assets that decrease our valuation allowances. As of June 30, 2022, we believe that all of the deferred tax assets recorded on our balance sheet will ultimately be recovered and that no valuation allowances were needed.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.
52
ACCOUNT — Investment Securities
BALANCE SHEET REFERENCE — Investment securities
INCOME STATEMENT REFERENCE — Net realized gains on investment securities
DESCRIPTION
Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statements of Operations. At June 30, 2022, the unrealized losses in the available-for-sale securities portfolio were comprised of securities issued by government agencies or government sponsored agencies and certain high quality corporate and taxable municipal securities. The Company believes the unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.
…..FORWARD LOOKING STATEMENT…..
THE STRATEGIC FOCUS:
AmeriServ Financial is committed to increasing shareholder value by striving for consistently improving financial performance; providing our customers with products and exceptional service for every step in their lifetime financial journey; cultivating an employee atmosphere rooted in trust, empowerment and growth; and serving our communities through employee involvement and a philanthropic spirit. We will strive to provide our shareholders with consistently improved financial performance; the products, services and know-how needed to forge lasting banking for life customer relationships; a work environment that challenges and rewards staff; and the manpower and financial resources needed to make a difference in the communities we serve. Our strategic initiatives will focus on these four key constituencies:
| ● | Shareholders — We strive to increase earnings per share; identifying and managing revenue growth and expense control; and managing risk. Our goal is to increase value for AmeriServ shareholders by growing earnings per share and narrowing the financial performance gap between AmeriServ and its peer banks. We try to return earnings to shareholders through a combination of dividends and share repurchases (none currently authorized) subject to maintaining sufficient capital to support balance sheet growth and economic uncertainty. We strive to educate our employee base as to the meaning/ importance of earnings per share as a performance measure. We will develop a value added combination for increasing revenue and controlling expenses that is rooted in developing and offering high-quality financial products and services; an existing branch network; electronic banking capabilities with 24/7 convenience; and providing truly exceptional customer service. We will explore branch consolidation opportunities and further leverage union affiliated revenue streams, prudently manage the Company’s risk profile to improve asset yields and increase profitability and continue to identify and implement technological opportunities and advancements to drive efficiency for the holding company and its affiliates. |
| ● | Customers — The Company expects to provide exceptional customer service, identifying opportunities to enhance the Banking for Life philosophy by providing products and services to meet the financial needs in every step through a customer’s life cycle, and further defining the role technology plays in anticipating and satisfying customer needs. We anticipate providing leading banking systems and solutions to improve and enhance customers’ Banking for Life experience. We will provide customers with a comprehensive offering of financial solutions including retail and business banking, home mortgages and wealth management at one location. We have upgraded and modernized select branches to be more inviting and technologically savvy to |
53
| meet the needs of the next generation of AmeriServ customers without abandoning the needs of our existing demographic. |
| ● | Staff — We are committed to developing high-performing employees, establishing and maintaining a culture of trust and effectively and efficiently managing staff attrition. We will employ a work force succession plan to manage anticipated staff attrition while identifying and grooming high performing staff members to assume positions with greater responsibility within the organization. We will employ technological systems and solutions to provide staff with the tools they need to perform more efficiently and effectively. |
| ● | Communities — We will continue to promote and encourage employee community involvement and leadership while fostering a positive corporate image. This will be accomplished by demonstrating our commitment to the communities we serve through assistance in providing affordable housing programs for low-to-moderate-income families; donations to qualified charities; and the time and talent contributions of AmeriServ staff to a wide-range of charitable and civic organizations. |
This Form 10-Q contains various forward-looking statements and includes assumptions concerning the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, operations, future results, and prospects, including statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “project,” “plan” or similar expressions. These forward-looking statements are based upon current expectations, are subject to risk and uncertainties and are applicable only as of the dates of such statements. Forward-looking statements involve risks, uncertainties and assumptions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Form 10-Q, even if subsequently made available on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Form 10-Q. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors (some of which are beyond the Company’s control) which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.
Such factors include the following: (i) the effect of changing regional and national economic conditions; (ii) the effects of trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve; (iii) significant changes in interest rates and prepayment speeds; (iv) inflation, stock and bond market, and monetary fluctuations; (v) credit risks of commercial, real estate, consumer, and other lending activities; (vi) changes in federal and state banking and financial services laws and regulations; (vii) the presence in the Company’s market area of competitors with greater financial resources than the Company; (viii) the timely development of competitive new products and services by the Company and the acceptance of those products and services by customers and regulators (when required); (ix) the willingness of customers to substitute competitors’ products and services for those of the Company and vice versa; (x) changes in consumer spending and savings habits; (xi) unanticipated regulatory or judicial proceedings; (xii) potential risks and uncertainties also include those relating to the duration of the COVID-19 outbreak and its variants, and actions that may be taken by governmental authorities to contain the outbreak or to treat its impact, including the distribution and effectiveness of COVID-19 vaccines; and (xiii) other external developments which could materially impact the Company’s operational and financial performance.
The foregoing list of important factors is not exclusive, and neither such list nor any forward-looking statement takes into account the impact that any future acquisition may have on the Company and on any such forward-looking statement.
Item 3…..QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK…..
The Company manages market risk, which for the Company is primarily interest rate risk, through its asset liability management process and committee, see further discussion in Interest Rate Sensitivity section of the MDA.
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Item 4…..CONTROLS AND PROCEDURES…..
(a) Evaluation of Disclosure Controls and Procedures. The Company’s management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and the operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2022, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer along with the Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of June 30, 2022, are effective.
(b) Changes in Internal Controls. There have been no changes in AmeriServ Financial Inc.’s internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II Other Information
Item 1. Legal Proceedings
There are no material proceedings to which the Company or any of our subsidiaries are a party or by which, to the Company’s knowledge, we, or any of our subsidiaries, are threatened. All legal proceedings presently pending or threatened against the Company or our subsidiaries involve routine litigation incidental to our business or that of the subsidiary involved and are not material in respect to the amount in controversy.
Item 1A. Risk Factors
Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
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Item 6. Exhibits
3.1 | |
3.2 | |
15.1 | Report of S.R. Snodgrass, P.C. regarding unaudited interim financial statement information. |
15.2 | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101 | Includes the following financial and related information from AMERISERV FINANCIAL, INC.’s Quarterly Report on Form 10-Q as of and for the quarter and six months ended June 30, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Comprehensive (Loss) Income (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to the Unaudited Consolidated Financial Statements. |
104 | The cover page from this Quarterly Report on Form 10-Q formatted in Inline XBRL. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AmeriServ Financial, Inc. | |
Registrant | |
Date: August 10, 2022 | /s/ Jeffrey A. Stopko |
Jeffrey A. Stopko | |
President and Chief Executive Officer | |
Date: August 10, 2022 | /s/ Michael D. Lynch |
Michael D. Lynch | |
Executive Vice President and Chief Financial Officer |
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