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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission File Number:
(Exact name of registrant as specified in its charter) |
| ||
(State or other jurisdiction of |
| (I.R.S. Employer |
| ||
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “small 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 7(a)(2)(B) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered | ||
OTC: Pink |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:
Common Stock, $2 Par Value,
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited) | ||||||||
(Dollars in thousands, except share and per share data) | June 30, | December 31, |
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| 2022 |
| 2021 |
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ASSETS |
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Cash and due from banks | $ | | $ | | ||||
Interest-bearing deposits in other banks |
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Total cash and cash equivalents |
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Time deposits with other banks |
| — |
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Debt securities available-for-sale, at fair value |
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Marketable equity securities, at fair value |
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Restricted investment in bank stocks, at cost |
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Loans |
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Loans held for sale |
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Allowance for loan losses |
| ( |
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Net loans |
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Premises and equipment, net |
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Operating lease right-of-use assets | | | ||||||
Accrued interest receivable |
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Cash surrender value of bank owned life insurance |
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Investments in low-income housing partnerships |
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Goodwill |
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Deferred income taxes |
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| — | ||||
Other assets |
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TOTAL ASSETS | $ | | $ | | ||||
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LIABILITIES |
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Deposits: |
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Non-interest bearing | $ | | $ | | ||||
Interest bearing |
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Total deposits |
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Short-term borrowings |
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Long-term borrowings |
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Subordinated debentures | | | ||||||
Operating lease liabilities | | | ||||||
Accrued interest payable |
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Deferred income taxes | — | | ||||||
Other liabilities |
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TOTAL LIABILITIES |
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STOCKHOLDERS’ EQUITY |
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Preferred stock, par value $ | | | ||||||
Common stock, par value $ | | | ||||||
Surplus |
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Retained earnings |
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Accumulated other comprehensive (loss) income |
| ( |
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Treasury stock, at cost, |
| ( |
| ( | ||||
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TOTAL STOCKHOLDERS’ EQUITY |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | | $ | | ||||
See accompanying notes to consolidated financial statements.
2
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
(Dollars in thousands, except per share data) | Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
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INTEREST INCOME | |||||||||||||
Interest and fees on loans | $ | | $ | | $ | | $ | | |||||
Interest and dividend income on securities: |
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Taxable |
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Tax-exempt |
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Dividends |
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Dividend income on restricted investment in bank stocks |
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Interest on interest-bearing deposits in other banks |
| — |
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Total interest income |
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INTEREST EXPENSE |
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Interest on deposits |
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Interest on short-term borrowings |
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Interest on long-term borrowings |
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Interest on subordinated debt | | | | | |||||||||
Total interest expense |
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Net interest income |
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Provision for loan losses |
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Net interest income after provision for loan losses |
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NON-INTEREST INCOME |
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Trust department |
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Service charges and fees |
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Increase in cash surrender value of life insurance |
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ATM fees and debit card income |
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Net (losses) gains on sales of mortgage loans |
| — |
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| ( |
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Net securities (losses) gains |
| ( |
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| ( |
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Other |
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Total non-interest income |
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NON-INTEREST EXPENSE |
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Salaries and employee benefits |
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Occupancy, net |
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Furniture and equipment expense |
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Computer expense |
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Professional services |
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Pennsylvania shares tax |
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FDIC insurance, net |
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ATM and debit card fees |
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Data processing fees |
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Foreclosed assets held for resale expense, net |
| — |
| — |
| — |
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Advertising |
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Other |
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Total non-interest expense |
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Income before income tax expense |
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Income tax expense |
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NET INCOME | $ | | $ | | $ | | $ | | |||||
PER SHARE DATA |
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Net income per share: |
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Basic | $ | | $ | | $ | | $ | | |||||
Diluted |
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Dividends per share |
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See accompanying notes to consolidated financial statements.
3
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
(Dollars in thousands) | Three Months Ended | |||||
June 30, | ||||||
| 2022 |
| 2021 | |||
| ||||||
Net Income | $ | | $ | | ||
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Other comprehensive (loss) income: |
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Unrealized net holding (losses) gains on debt securities available-for-sale arising during the period, net of income taxes of $( |
| ( |
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Less reclassification adjustment for net gains included in net income, net of income taxes of $( | ( | — | ||||
Total other comprehensive (loss) income |
| ( |
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Total Comprehensive (Loss) Income | $ | ( | $ | | ||
(Dollars in thousands) | Six Months Ended | ||||||
June 30, | |||||||
| 2022 |
| 2021 |
| |||
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Net Income | $ | | $ | | |||
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Other comprehensive loss: |
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Unrealized net holding losses on debt securities available-for-sale arising during the period, net of income taxes of $( |
| ( |
| ( | |||
Less reclassification adjustment for net gains included in net income, net of income taxes of $( | ( | — | |||||
Total other comprehensive loss |
| ( |
| ( | |||
Total Comprehensive (Loss) Income | $ | ( | $ | | |||
______________________________
| (a) |
| (b) |
See accompanying notes to consolidated financial statements.
4
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
Accumulated | ||||||||||||||||||||
(Dollars in thousands, except | Other | Total | ||||||||||||||||||
per share data) | Common Stock | Retained | Comprehensive | Treasury | Stockholders’ | |||||||||||||||
| Shares |
| Amount |
| Surplus |
| Earnings |
| (Loss) Income |
| Stock |
| Equity | |||||||
Balance at January 1, 2022 |
| | $ | | $ | | $ | | $ | | $ | ( | $ | | ||||||
Net Income |
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Other comprehensive loss, net of taxes |
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| ( |
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| ( | ||||||
Issuance of common stock under dividend reinvestment plan |
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Dividends - $ |
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| ( |
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| ( | ||||||
Balance at March 31, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net Income |
| |
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Other comprehensive loss, net of taxes |
| ( |
| ( | ||||||||||||||||
Issuance of common stock under dividend reinvestment plan |
| | | |
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Dividends - $ |
| ( |
| ( | ||||||||||||||||
Balance at June 30, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Accumulated | ||||||||||||||||||||
(Dollars in thousands, except | Other | Total | ||||||||||||||||||
per share data) | Common Stock | Retained | Comprehensive | Treasury | Stockholders’ | |||||||||||||||
| Shares |
| Amount |
| Surplus |
| Earnings |
| Income |
| Stock |
| Equity | |||||||
Balance at January 1, 2021 |
| | $ | | $ | | $ | | $ | | $ | ( | $ | | ||||||
Net Income |
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Other comprehensive loss, net of taxes |
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| ( |
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Issuance of common stock under dividend reinvestment plan |
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Dividends - $ |
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| ( |
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| ( | ||||||
Balance at March 31, 2021 |
| | $ | | $ | | $ | | $ | | $ | ( | $ | | ||||||
Net Income |
| | | |||||||||||||||||
Other comprehensive income, net of taxes |
| | | |||||||||||||||||
Issuance of common stock under dividend reinvestment plan |
| | | | | |||||||||||||||
Dividends - $ |
| ( | ( | |||||||||||||||||
Balance at June 30, 2021 |
| | $ | | $ | | $ | | $ | | $ | ( | $ | | ||||||
See accompanying notes to consolidated financial statements.
5
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
(Dollars in thousands) |
| 2022 |
| 2021 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Provision for loan losses |
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Depreciation and amortization |
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Net premium amortization on securities |
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Deferred income tax expense benefit |
| ( |
| ( | ||
Net losses (gains) on sales of mortgage loans |
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Proceeds from sales of mortgage loans originated for sale |
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Originations of mortgage loans originated for sale |
| ( |
| ( | ||
Net securities losses (gains) |
| |
| ( | ||
(Increase) decrease in accrued interest receivable |
| ( |
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Increase in cash surrender value of bank owned life insurance |
| ( |
| ( | ||
Net losses on disposals of premises and equipment |
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Increase in other assets |
| ( |
| ( | ||
Amortization of investment in low-income housing partnerships |
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Increase (decrease) in accrued interest payable |
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Increase in other liabilities |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Proceeds from sales of equity securities and debt securities available-for-sale |
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| — | ||
Proceeds from maturities and redemptions of debt securities available-for-sale |
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Purchases of debt securities available-for-sale |
| ( |
| ( | ||
Net decrease in time deposits with other banks |
| |
| — | ||
Net change in restricted investment in bank stocks |
| ( |
| ( | ||
Net increase in loans |
| ( |
| ( | ||
Purchase of premises and equipment |
| ( |
| ( | ||
Purchase of investment in real estate venture |
| ( |
| — | ||
Proceeds from sales of foreclosed assets held for resale |
| — |
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NET CASH USED IN INVESTING ACTIVITIES |
| ( |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net (decrease) increase in deposits |
| ( |
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Net increase in short-term borrowings |
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Repayment of finance lease obligations | ( | ( | ||||
Repayment of long-term borrowings |
| ( |
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Common stock issued |
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Dividends paid |
| ( |
| ( | ||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
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(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
| ( |
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CASH AND CASH EQUIVALENTS, BEGINNING |
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CASH AND CASH EQUIVALENTS, ENDING | $ | | $ | | ||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
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Interest paid | $ | | $ | | ||
Income taxes paid |
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SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES |
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Purchased securities settling after quarter end | — | | ||||
Loans transferred from held for sale portfolio |
| ( |
| — | ||
Common stock subscription receivable | ||||||
Right-of-use assets obtained in exchange for lease liabilities | | |||||
See accompanying notes to consolidated financial statements.
6
FIRST KEYSTONE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 ― BASIS OF PRESENTATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SUBSEQUENT EVENTS
The consolidated financial statements include the accounts of First Keystone Corporation (the “Corporation”) and its wholly owned subsidiary First Keystone Community Bank (the “Bank”) (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three and six months ended June 30, 2022, are not necessarily indicative of the results for the year ending December 31, 2022. For further information, refer to the consolidated financial statements and notes thereto included in First Keystone Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021.
Subsequent Events
The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of June 30, 2022 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.
NOTE 2 ― RECENT ACCOUNTING STANDARDS UPDATES (“ASU”)
Recently adopted ASUs:
There were no ASUs adopted during the first two quarters of 2022.
Pending ASUs:
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), to delay the effective date for smaller reporting companies to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. It is currently unclear how the adoption of this standard will impact the Company’s consolidated financial statements, but the Company is currently evaluating the provisions of ASU 2016-13 to determine the potential impact that the adoption of the standard may have on the Company. The Company has taken steps to prepare for the implementation when it becomes effective, such as: forming an internal committee, gathering pertinent data, consulting with outside professionals, subscribing to a new software system, and running existing and new methodologies concurrently through the period of implementation.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance on troubled debt restructurings (“TDRs”) by creditors that have adopted the current expected credit losses (“CECL”) model and enhances disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial
7
difficulty. The ASU also amends the guidance on “vintage disclosures” to require disclosure of current-period gross charge-offs by year of origination. For entities that have not yet adopted ASU 2016-13, the amendments in ASU 2022-02 are effective upon adoption of ASU 2016-13. Entities may elect to apply the guidance on TDR recognition and measurement by using a modified retrospective transition method, which would result in a cumulative-effect adjustment to retained earnings, or to adopt the amendments prospectively. If an entity elects to adopt the updated guidance on TDR recognition and measurement prospectively, the guidance should be applied to modifications occurring after the date of adoption. The amendments on TDR disclosures and vintage disclosures should be adopted prospectively. The Company plans to adopt ASU 2022-02 upon the adoption of ASU 2016-13 and is currently evaluating the provisions of ASU 2022-02 and ASU 2016-13 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.
NOTE 3 — SECURITIES
The Company classifies its securities as either “Held-to-Maturity” or “Available-for-Sale” at the time of purchase. Securities are accounted for on a trade date basis. Debt securities are classified as Held-to-Maturity when the Company has the ability and positive intent to hold the securities to maturity. Securities classified as Held-to-Maturity are carried at cost adjusted for amortization of premium and accretion of discount to maturity.
Debt securities not classified as Held-to-Maturity are included in the Available-for-Sale category and are carried at fair value. The amount of any unrealized gain or loss, net of the effect of deferred income taxes, is reported as accumulated other comprehensive (loss) income (AOCI) in the consolidated balance sheets and consolidated statements of changes in stockholders’ equity. Management’s decision to sell Available-for-Sale securities is based on changes in economic conditions, controlling the sources and applications of funds, terms, availability of and yield of alternative investments, interest rate risk and the need for liquidity.
Equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. Equity securities without readily determinable fair values are recorded at cost less impairment, if any.
The cost of debt securities classified as Held-to-Maturity or Available-for-Sale is adjusted for amortization of premiums to the earliest call date and accretion of discounts to expected maturity. Such amortization and accretion, as well as interest and dividends, are included in interest and dividend income from securities. Realized gains and losses are included in net securities gains and losses. The cost of securities sold, redeemed or matured is based on the specific identification method.
The amortized cost, related estimated fair value, and unrealized gains and losses for debt securities classified as “Available-For-Sale” were as follows at June 30, 2022 and December 31, 2021:
Debt Securities Available-for-Sale | ||||||||||||
(Dollars in thousands) |
|
| Gross |
| Gross |
| ||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
June 30, 2022: | Cost | Gains | Losses | Value | ||||||||
U.S. Treasury securities | $ | | $ | — | $ | ( | $ | | ||||
Obligations of U.S. Government Agencies and Sponsored Agencies: |
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Mortgage-backed | | | ( | | ||||||||
Other |
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| ( |
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Other mortgage backed securities |
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| — |
| ( |
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Obligations of state and political subdivisions |
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| ( |
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Asset backed securities |
| |
| — |
| ( |
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Corporate debt securities |
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| |
| ( |
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Total | $ | | $ | | $ | ( | $ | | ||||
8
Debt Securities Available-for-Sale | ||||||||||||
(Dollars in thousands) |
|
| Gross |
| Gross |
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Amortized | Unrealized | Unrealized | Fair | |||||||||
December 31, 2021: | Cost | Gains | Losses | Value | ||||||||
U.S. Treasury securities | $ | | $ | — | $ | ( | $ | | ||||
Obligations of U.S. Government Agencies and Sponsored Agencies: |
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Mortgage-backed | | | ( | | ||||||||
Other |
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| ( |
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Other mortgage backed securities |
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| ( |
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Obligations of state and political subdivisions |
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| ( |
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Asset backed securities |
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| ( |
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Corporate debt securities |
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| ( |
| | ||||
Total | $ | | $ | | $ | ( | $ | | ||||
Securities Available-for-Sale with an aggregate fair value of $
The amortized cost and estimated fair value of debt securities, by contractual maturity, are shown below at June 30, 2022. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
June 30, 2022 | ||||||||||||||||||
Debt Securities Available-For-Sale | ||||||||||||||||||
(Dollars in thousands) | U.S. Government | Other | Obligations | |||||||||||||||
Agency | Mortgage | of State | Asset | Corporate | ||||||||||||||
| U.S. Treasury |
| Sponsored Agency |
| Backed Debt |
| Political |
| Backed |
| Debt | |||||||
| Securities |
| Obligations1 |
| Securities1 |
| Subdivisions |
| Securities |
| Securities | |||||||
Within 1 Year: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Amortized cost | $ | — | $ | — | $ | — | $ | | $ | — | $ | | ||||||
Fair value |
| — |
| — |
| — |
| |
| — |
| | ||||||
1 - 5 Years: |
| |||||||||||||||||
Amortized cost |
| |
| |
| |
| |
| |
| | ||||||
Fair value |
| |
| |
| |
| |
| |
| | ||||||
5 - 10 Years: |
| |||||||||||||||||
Amortized cost |
| |
| |
| |
| |
| — |
| | ||||||
Fair value |
| |
| |
| |
| |
| — |
| | ||||||
After 10 Years: |
| |||||||||||||||||
Amortized cost |
| — |
| |
| |
| |
| |
| — | ||||||
Fair value |
| — |
| |
| |
| |
| |
| — | ||||||
Total: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Amortized cost | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Fair value |
| |
| |
| |
| |
| |
| | ||||||
1 | Mortgage-backed securities are allocated for maturity reporting at their original maturity date. |
There were no aggregate securities with a single issuer (excluding the U.S. Government and U.S. Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at June 30, 2022. The quality rating of the obligations of state and political subdivisions are generally investment grade, as rated by Moody’s,
9
Standard and Poor’s or Fitch. The typical exceptions are local issues which are not rated, but are secured by the full faith and credit obligations of the communities that issued these securities.
There were
There were
At June 30, 2022 and December 31, 2021, the Company had $
(Dollars in thousands) | Six months ended | Six months ended | |||||
| June 30, 2022 |
| June 30, 2021 |
| |||
Net (losses) and gains recognized during the period on equity securities | $ | ( | $ | | |||
Less: Net gains recognized during the period on equity securities sold during the period |
| |
| — | |||
Net (losses) and gains recognized during the reporting period on equity securities still held at the reporting date | $ | ( | $ | | |||
There were
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Securities classified as Available-for-Sale or Held-to-Maturity are generally evaluated for OTTI under FASB ASC 320, Investments - Debt and Equity Securities. In determining OTTI under the FASB ASC 320 model, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
When OTTI occurs on debt securities, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected, and the realized loss is recognized as impairment charges on securities on the consolidated statements of income. The amount of the total OTTI related to the other factors shall be recognized in other comprehensive (loss) income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the security.
The Company and its investment advisors monitor the entire portfolio monthly with particular attention given to securities in a continuous loss position of at least ten percent for over twelve months. Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at June 30, 2022 or December 31, 2021.
10
The summary below shows the gross unrealized losses and fair value of the Company’s debt securities. Totals are aggregated by investment category where individual securities have been in a continuous loss position for less than 12 months or 12 months or more as of June 30, 2022 and December 31, 2021:
June 30, 2022
(Dollars in thousands) | Less Than 12 Months | 12 Months or More | Total | |||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||
Available-for-Sale: |
| Value |
| Loss |
| Value |
| Loss |
| Value |
| Loss | ||||||
U.S. Treasury securities | $ | | $ | ( | $ | — | $ | — | $ | | $ | ( | ||||||
Obligations of U.S. Government Agencies and Sponsored Agencies: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed | | ( | | ( | | ( | ||||||||||||
Other |
| | ( | | ( |
| |
| ( | |||||||||
Other mortgage-backed debt securities |
| | ( | | ( |
| |
| ( | |||||||||
Obligations of state and political subdivisions |
| | ( | | ( |
| |
| ( | |||||||||
Asset backed securities |
| | ( | | ( |
| |
| ( | |||||||||
Corporate debt securities |
| | ( | | ( |
| |
| ( | |||||||||
Total | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
December 31, 2021
(Dollars in thousands) | Less Than 12 Months | 12 Months or More | Total | |||||||||||||||
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | |||||||
Available-for-Sale: | Value | Loss | Value | Loss | Value | Loss | ||||||||||||
U.S. Treasury securities | $ | | $ | ( | $ | — | $ | — | $ | | $ | ( | ||||||
Obligations of U.S. Government Agencies and Sponsored Agencies: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed | | ( | | ( | | ( | ||||||||||||
Other |
| — | — | | ( |
| |
| ( | |||||||||
Other mortgage-backed debt securities |
| | ( | | ( |
| |
| ( | |||||||||
Obligations of state and political subdivisions |
| | ( | | ( |
| |
| ( | |||||||||
Asset backed securities |
| | ( | | ( |
| |
| ( | |||||||||
Corporate debt securities |
| | ( | | ( |
| |
| ( | |||||||||
Total | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
The Company invests in various forms of agency debt including residential and commercial mortgage-backed securities and callable debt. The mortgage-backed agency securities are issued by Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”) or Small Business Administration (“SBA”). The other mortgage-backed securities consist of private (non-agency) residential and commercial mortgage backed securities. The municipal securities consist of general obligations and revenue bonds. Asset backed securities consist of bonds backed by consumer loans. Corporate debt securities consist of senior debt and subordinated debt holdings.
The fair market value of the above securities is influenced by market interest rates, prepayment speeds on mortgage securities, bid-offer spreads in the market place and credit premiums for various types of agency debt. These factors change continuously and therefore the market value of these securities may be higher or lower than the Company’s carrying value at any measurement date. Management does not believe any of their
11
NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans
Net loans are stated at their outstanding recorded investment, net of deferred fees and costs, unearned income and the allowance for loan losses. Interest on loans is recognized as income over the term of each loan, generally, by the accrual method. Loan origination fees and certain direct loan origination costs have been deferred with the net amount amortized using the straight line method or the interest method over the contractual life of the related loans as an interest yield adjustment.
The loans receivable portfolio is segmented into commercial, residential and consumer loans. Commercial loans consist of the following classes: Commercial and Industrial, and Commercial Real Estate.
Commercial and Industrial Lending
The Company originates commercial and industrial loans principally to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes, which include short-term loans and lines of credit to finance machinery and equipment, inventory and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and are reviewed annually.
Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum thresholds have been established by the Company and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, business financial statements, collateral appraisals or internal evaluations, etc. Commercial and industrial loans are typically supported by personal guarantees of the borrower.
In underwriting commercial and industrial loans, an analysis is performed to evaluate the borrower’s character and capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as the conditions affecting the borrower. Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Company’s analysis of the borrower’s ability to repay. SBA Paycheck Protection Program (“PPP”) loans that have been issued by the Company as a result of the enactment of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) in response to the economic impact of the COVID-19 pandemic are included in the Company’s Commercial and Industrial portfolio and are underwritten according to all terms and conditions pursuant to the PPP as administered by the SBA under the CARES Act. See the Coronavirus Pandemic Impact on the Loan Portfolio section on page 14 for more information regarding the Company’s underwriting of these loans.
Commercial and industrial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions. Commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from cash flows from the borrower’s primary business activities. As a result, the availability of funds for the repayment of commercial and industrial loans is dependent on the success of the business itself, which in turn, is likely to be dependent upon the general economic environment.
As an addition to the commercial loans receivable portfolio, the Company may purchase the guaranteed portion of loans secured by the U.S. Government. The originating bank retains the unguaranteed portion of the loan. The loans are sponsored by one of the various government agencies including the SBA, United States Department of Agriculture (“USDA”), and the Farm Service Agency (“FSA”). Government Guaranteed Loans (GGLs) carry no credit risk due to an unconditional and irrevocable guarantee (which is supported by the full faith and credit of the U.S. Government) on all principal and the balance of interest accruing through ninety days beyond the date that demand is made to the originating bank for repurchase of the loan. As of June 30, 2022, the Company's balance of GGLs was $
12
Commercial Real Estate Lending
The Company engages in commercial real estate lending in its primary market area and surrounding areas. The Company’s Commercial Real Estate portfolio is secured primarily by commercial retail space, commercial office buildings, residential housing and hotels. Generally, commercial real estate loans have terms that do not exceed
In underwriting these loans, the Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. The value of the property is determined by either independent appraisers or internal evaluations performed by Bank officers.
Commercial real estate loans generally present a higher level of risk than residential real estate secured loans. Repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project and/or the effect of the general economic conditions on income producing properties.
Residential Real Estate Lending (Including Home Equity)
The Company’s Residential Real Estate portfolio is comprised of one-to-four family residential mortgage loan originations, home equity term loans and home equity lines of credit. These loans are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. These loans originate primarily within or with customers from the Company’s market area.
The Company’s one-to-four family residential mortgage originations are secured principally by properties located in its primary market area and surrounding areas. The Company offers fixed-rate mortgage loans with terms up to a maximum of
In underwriting one-to-four family residential mortgage loans, the Company evaluates the borrower’s ability to make monthly payments, the borrower’s prior loan repayment history and the value of the property securing the loan. The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial conditions and credit background. A majority of the properties securing residential real estate loans made by the Company are appraised by independent appraisers. The Company generally requires mortgage loan borrowers to obtain an attorney’s title opinion or title insurance and fire and property insurance, including flood insurance, if applicable.
Residential mortgage loans, home equity term loans and home equity lines of credit generally present a lower level of risk than consumer loans because they are secured by the borrower’s primary residence. Risk is increased when the Company is in a subordinate position, especially to another lender, for the loan collateral.
Residential mortgage loans held for sale are carried at the lower of cost or market on an aggregate basis determined by independent pricing from appropriate federal or state agency investors. These loans are sold without recourse. Loans held for sale amounted to $
13
Consumer Lending
The Company offers a variety of secured and unsecured consumer loans, including vehicle loans, stock secured loans and loans secured by financial institution deposits. These loans originate primarily within or with customers from the Company’s market area.
Consumer loan terms vary according to the type and value of collateral and creditworthiness of the borrower. In underwriting personal loans, a thorough analysis is performed regarding the borrower’s willingness and financial ability to repay the loan as agreed. The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial condition and credit background.
Consumer loans may entail greater credit risk than residential real estate loans, particularly in the case of personal loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, repossessed collateral for a defaulted personal loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, personal loan collections are dependent on the borrower’s continuing financial stability and therefore, are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
Coronavirus Pandemic Impact on the Loan Portfolio
As a result of the economic impact of the COVID-19 coronavirus pandemic, the CARES Act was enacted in the United States on March 27, 2020. The Company is approved by the SBA to fund loans under the SBA’s Paycheck Protection Program created as part of the CARES Act. The PPP loans have
An additional provision of the CARES Act, Section 4013 provides financial institutions the option to suspend requirements to categorize certain loan modifications as troubled debt restructurings as long as specific criteria are met. To qualify, the loan modifications must be made on a good-faith basis in response to the COVID-19 pandemic, must occur between March 1, 2020 and the earlier of September 30, 2021 or the termination date of the national emergency related to the COVID-19 pandemic as declared by the President of the United States, and the loans must have been paid current (less than 30 days past due prior to any relief) as of December 31, 2019. In compliance with Section 4013 of the CARES Act, the Company granted modification requests to defer principal and/or interest payments or modify interest rates on various loans across all portfolio segments. Of the loan modifications that were granted in compliance with Section 4013 of the CARES Act, there were
14
Delinquent Loans
Generally, a loan is considered to be past-due when scheduled loan payments are in arrears
Commercial and industrial and commercial real estate loans are charged off in whole or in part when they become sufficiently delinquent based upon the terms of the underlying loan contract and when a collateral deficiency exists. Because all or part of the contractual cash flows are not expected to be collected, the loan is considered to be impaired, and the Company estimates the impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell. Should a GGL default, demand is made to the originating bank for repurchase of the loan. If the originating bank does not repurchase the loan, demand for repurchase is then made to the appropriate government agency which has provided the guarantee for the loan.
Residential real estate and consumer loans are charged off when they become sufficiently delinquent based upon the terms of the underlying loan contract and when the value of the underlying collateral is not sufficient to support the loan balance and a loss is expected. At that time, the amount of estimated collateral deficiency, if any, is charged off for loans secured by collateral, and all other loans are charged off in full. Loans with collateral are written down to the estimated fair value of the collateral less cost to sell.
Existing loans in which the borrower has declared bankruptcy are considered on a case by case basis to determine whether repayment is likely to occur (eg. reaffirmation by the borrower with demonstrated repayment ability). Otherwise, loans are charged off in full or written down to the estimated fair value of collateral less cost to sell.
Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level estimated by management to be adequate to absorb potential loan losses. Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.
15
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are individually classified as impaired. Select loans are not aggregated for collective impairment evaluation, as such; all loans are subject to individual impairment evaluation should the facts and circumstances pertinent to a particular loan suggest that such evaluation is necessary. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from collateral. TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s contractual rate at inception. If a TDR is considered to be a collateral dependent loan, the loan may be reported at the net realizable value of the collateral. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers all other loans not identified as impaired (aside from GGLs, which do not require an allowance) and is based on historical losses and qualitative factors. The historical loss component of the allowance is determined by losses recognized by portfolio segment over an eight quarter lookback period that management has determined best represents the current credit cycle. Qualitative factors impacting each portfolio segment may include: delinquency trends, loan volume trends, Bank policy changes, management processes and oversight, economic trends (including change in consumer and business disposable incomes, unemployment and under-employment levels, and other conditions), concentrations by industry or product, internal and external loan review processes, collateral value and market conditions, and external factors including regulatory issues and competition.
GGLs do not require an associated allowance for loan losses due to the underlying irrevocable and unconditional guarantee, which is supported by the full faith and credit of the U.S. Government. Should a GGL default, the loan will be repurchased by the originating bank or the appropriate government agency that has provided the guarantee for the loan.
Although PPP loans do not require an associated allowance for loan losses due to the program’s call for a full guarantee by the SBA, the Company has calculated a qualitative allocation for the PPP loans under the general component of the allowance for the Commercial and Industrial portfolio.
The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A reserve for unfunded lending commitments is provided for possible credit losses on off-balance sheet credit exposures. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and, if necessary, is recorded in other liabilities on the consolidated balance sheets. As of June 30, 2022 and December 31, 2021, the amount of the reserve for unfunded lending commitments was $
The Company is subject to periodic examination by its federal and state examiners, and may be required by such regulators to recognize additions to the allowance for loan losses based on their assessment of credit information available to them at the time of their examinations.
16
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the existing loan agreement. Under current accounting standards, the allowance for loan losses related to impaired loans is based on discounted cash flows using the loan’s contractual interest rate at inception or the net realizable value of the collateral for certain collateral dependent loans.
From time to time, the Bank may agree to modify/restructure the contractual terms of a borrower's loan. The restructuring of a loan is considered a TDR if both the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the Company has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, and (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan. A less common concession is the forgiveness of a portion of the principal.
The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower were a concession not granted. Similarly, the determination of whether a concession has been granted is subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.
Loans modified in a troubled debt restructuring are considered impaired and may or may not be placed on non-accrual status until the Company determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrates a period of performance according to the restructured terms of six months. Any loan modifications made in response to the COVID-19 pandemic are not considered TDRs as long as the criteria set forth in Section 4013 of the CARES Act are met. See page 24 for further discussion of the Section 4013 CARES Act modifications.
The Company utilizes a risk grading matrix as a tool for managing credit risk in the loan portfolio and assigns an asset quality rating (risk grade) to all Commercial and Industrial, Commercial Real Estate, Residential Real Estate and Consumer borrowings. An asset quality rating is assigned using the guidance provided in the Company’s loan policy. Primary responsibility for assigning the asset quality rating rests with the credit department. The asset quality rating is validated periodically by both an internal and external loan review process.
The commercial loan grading system focuses on a borrower’s financial strength and performance, experience and depth of management, primary and secondary sources of repayment, the nature of the business and the outlook for the particular industry. Primary emphasis is placed on financial condition and trends. The grade also reflects current economic and industry conditions; as well as other variables such as liquidity, cash flow, revenue/earnings trends, management strengths or weaknesses, quality of financial information, and credit history.
The loan grading system for Residential Real Estate and Consumer loans focuses on the borrower’s credit score and credit history, debt-to-income ratio and income sources, collateral position and loan-to-value ratio.
Risk grade characteristics are as follows:
Risk Grade 1 – MINIMAL RISK through Risk Grade 6 – MANAGEMENT ATTENTION (Pass Grade Categories)
Risk is evaluated via examination of several attributes including but not limited to financial trends, strengths and weaknesses, likelihood of repayment when considering both cash flow and collateral, sources of repayment, leverage position, management expertise, and repayment history.
17
At the low-risk end of the rating scale, a risk grade of 1 – Minimal Risk is the grade reserved for loans with exceptional credit fundamentals and virtually no risk of default or loss. Loan grades then progress through escalating ratings of 2 through 6 based upon risk. Risk Grade 2 – Modest Risk are loans with sufficient cash flows; Risk Grade 3 – Average Risk are loans with key balance sheet ratios slightly above the borrower’s peers; Risk Grade 4 – Acceptable Risk are loans with key balance sheet ratios usually near the borrower’s peers, but one or more ratios may be higher; and Risk Grade 5 – Marginally Acceptable are loans with strained cash flow, increasing leverage and/or weakening markets. Risk Grade 6 – Management Attention are loans with weaknesses resulting from declining performance trends and the borrower’s cash flows may be temporarily strained. Loans in this category are performing according to terms, but present some type of potential concern.
Risk Grade 7 − SPECIAL MENTION (Non-Pass Category)
Assets in this category are adequately collateralized but have potential weakness which may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. The loans may constitute increased credit risk, but not to the point of justifying a classification of substandard. No loss of principal or interest is envisioned, but risk is increasing beyond that at which the loan originally would have been granted. Historically, cash flows are inconsistent; financial trends show some deterioration. Liquidity and leverage are above industry averages. Financial information could be incomplete or inadequate. A Special Mention asset has potential weaknesses that deserve management’s close attention.
Risk Grade 8 − SUBSTANDARD (Non-Pass Category)
Generally, these assets are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have “well-defined” weaknesses that jeopardize the full liquidation of the debt.
These loans are characterized by the distinct possibility that the Company will sustain some loss if the aggregate amount of substandard assets is not fully covered by the liquidation of the collateral used as security. Substandard loans have a high probability of payment default and require more intensive supervision by Company management.
Risk Grade 9 − DOUBTFUL (Non-Pass Category)
Generally, loans graded doubtful have all the weaknesses inherent in a substandard loan with the added factor that the weaknesses are pronounced to a point whereby the basis of current information, conditions, and values, collection or liquidation in full is deemed to be highly improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens on additional collateral and/or refinancing plan is completed. Loans are graded doubtful if they contain weaknesses so serious that collection or liquidation in full is questionable.
18
The following table presents the classes of the loan portfolio summarized by risk rating as of June 30, 2022 and December 31, 2021:
Commercial and | ||||||||||||
(Dollars in thousands) | Industrial | Commercial Real Estate | ||||||||||
June 30, | December 31, | June 30, | December 31, | |||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Grade: |
|
|
|
|
|
|
|
| ||||
1-6 Pass | $ | | $ | | $ | | $ | | ||||
7 Special Mention |
| — |
| — |
| |
| | ||||
8 Substandard |
| |
| |
| |
| | ||||
9 Doubtful |
| — |
| — |
| — |
| — | ||||
Add (deduct): Unearned discount and |
| — |
| — |
| — |
| — | ||||
Net deferred loan fees and costs |
| |
| |
| |
| | ||||
Total loans | $ | | $ | | $ | | $ | | ||||
Residential Real Estate | ||||||||||||
Including Home Equity | Consumer | |||||||||||
June 30, | December 31, | June 30, | December 31, | |||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Grade: | ||||||||||||
1-6 Pass | $ | | $ | | $ | | $ | | ||||
7 Special Mention |
| — |
| |
| |
| — | ||||
8 Substandard |
| |
| |
| — |
| | ||||
9 Doubtful |
| — |
| — |
| — |
| — | ||||
Add (deduct): Unearned discount and |
| — |
| — |
| — |
| — | ||||
Net deferred loan fees and costs |
| ( |
| ( |
| |
| | ||||
Total loans | $ | | $ | | $ | | $ | | ||||
Total Loans | ||||||
June 30, | December 31, | |||||
|
| 2022 |
| 2021 | ||
Grade: |
|
|
|
| ||
1-6 Pass | $ | | $ | | ||
7 Special Mention |
| |
| | ||
8 Substandard |
| |
| | ||
9 Doubtful |
| |
| | ||
Add (deduct): Unearned discount and |
| |
| | ||
Net deferred loan fees and costs |
| |
| | ||
Total loans | $ | | $ | | ||
Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of $
19
The activity in the allowance for loan losses, by loan class, is summarized below for the periods indicated.
(Dollars in thousands) | Commercial |
| Commercial |
| Residential |
|
|
| |||||||||
and Industrial | Real Estate | Real Estate | Consumer | Unallocated | Total | ||||||||||||
As of and for the three months ended June 30, 2022: | |||||||||||||||||
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
| ||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Charge-offs |
| ( |
| — |
| — |
| ( |
| — |
| ( | |||||
Recoveries |
| |
| — |
| |
| |
| — |
| | |||||
Provision (credit) |
| |
| |
| |
| |
| ( |
| | |||||
Ending Balance | $ | | $ | | $ | | $ | | $ | | $ | | |||||
(Dollars in thousands) | Commercial |
| Commercial |
| Residential |
|
|
| |||||||||
and Industrial | Real Estate | Real Estate | Consumer | Unallocated | Total | ||||||||||||
As of and for the six months ended June 30, 2022: | |||||||||||||||||
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
| ||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Charge-offs |
| ( |
| — |
| — |
| ( |
| — |
| ( | |||||
Recoveries |
| |
| |
| |
| |
| — |
| | |||||
Provision (credit) |
| |
| |
| |
| ( |
| ( |
| | |||||
Ending Balance | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Ending balance: individually |
|
|
|
|
|
|
| ||||||||||
evaluated for impairment | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||
Ending balance: collectively |
|
|
|
|
|
| |||||||||||
evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Loans Receivable: |
|
|
|
|
|
| |||||||||||
Ending Balance | $ | | $ | | $ | | $ | | $ | — | $ | | |||||
Ending balance: individually |
|
|
|
|
|
| |||||||||||
evaluated for impairment | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||
Ending balance: collectively |
|
|
|
|
|
| |||||||||||
evaluated for impairment | $ | | $ | | $ | | $ | | $ | — | $ | | |||||
(Dollars in thousands) | Commercial |
| Commercial |
| Residential |
|
|
| |||||||||
and Industrial | Real Estate | Real Estate | Consumer | Unallocated | Total | ||||||||||||
As of and for the three months ended June 30, 2021: | |||||||||||||||||
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
| ||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Charge-offs |
| — |
| ( |
| ( |
| ( |
| — |
| ( | |||||
Recoveries |
| — |
| |
| |
| |
| — |
| | |||||
Provision (credit) |
| |
| |
| ( |
| |
| ( |
| | |||||
Ending Balance | $ | | $ | | $ | | $ | | $ | | $ | | |||||
20
(Dollars in thousands) | Commercial |
| Commercial |
| Residential |
|
|
| |||||||||
and Industrial | Real Estate | Real Estate | Consumer | Unallocated | Total | ||||||||||||
As of and for the six months ended June 30, 2021: | |||||||||||||||||
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
| ||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Charge-offs |
| ( |
| ( |
| ( |
| ( |
| — |
| ( | |||||
Recoveries |
| — |
| |
| |
| |
| — |
| | |||||
Provision (credit) |
| |
| |
| ( |
| |
| |
| | |||||
Ending Balance | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Ending balance: individually |
|
|
|
|
|
|
|
|
|
|
|
| |||||
evaluated for impairment | $ | — | $ | | $ | — | $ | — | $ | — | $ | | |||||
Ending balance: collectively |
|
|
|
|
|
|
|
|
|
|
|
| |||||
evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Loans Receivable: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Ending Balance | $ | | $ | | $ | | $ | | $ | — | $ | | |||||
Ending balance: individually |
|
|
|
|
|
|
|
|
|
|
|
| |||||
evaluated for impairment | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||
Ending balance: collectively |
|
|
|
|
|
|
|
|
|
|
|
| |||||
evaluated for impairment | $ | | $ | | $ | | $ | | $ | — | $ | | |||||
(Dollars in thousands) | Commercial |
| Commercial |
| Residential |
|
|
| |||||||||
and Industrial | Real Estate | Real Estate | Consumer | Unallocated | Total | ||||||||||||
As of and for the year ended December 31, 2021: | |||||||||||||||||
Allowance for Loan Losses: |
|
|
|
|
|
|
|
|
|
|
| ||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Charge-offs |
| ( |
| ( |
| ( |
| ( |
| |
| ( | |||||
Recoveries |
| |
| |
| |
| |
| |
| | |||||
Credit (provision) |
| ( |
| |
| ( |
| |
| |
| | |||||
Ending Balance | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Ending balance: individually |
|
|
|
|
|
|
|
|
|
|
|
| |||||
evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Ending balance: collectively |
|
|
|
|
|
|
|
|
|
|
|
| |||||
evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Loans Receivable: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Ending Balance | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Ending balance: individually |
|
|
|
|
|
|
|
|
|
|
|
| |||||
evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | |||||
Ending balance: collectively |
|
|
|
|
|
|
|
|
|
|
|
| |||||
evaluated for impairment | $ | | $ | | $ | | $ | | $ | | $ | | |||||
The outstanding recorded investment of TDRs as of June 30, 2022 and December 31, 2021 was $
21
During the three months ended June 30, 2022,
The following table presents the outstanding recorded investment of TDRs at the dates indicated:
(Dollars in thousands) |
| June 30, |
| December 31, | ||
| 2022 | 2021 | ||||
Non-accrual TDRs | $ | | $ | | ||
Accruing TDRs |
| |
| | ||
Total | $ | | $ | | ||
At June 30, 2022,
Of the loans that were modified as TDRs within the twelve months preceding June 30, 2022,
The following table presents information regarding the loan modifications categorized as TDRs during the three and six months ended June 30, 2022 and the six months ended June 30, 2021.
(Dollars in thousands) | For the Three Months Ended June 30, 2022 | ||||||||||
Pre-Modification | Post-Modification | ||||||||||
Outstanding | Outstanding | ||||||||||
| Number of | Recorded | Recorded | Recorded | |||||||
Contracts | Investment | Investment | Investment | ||||||||
Commercial Real Estate | | $ | | $ | | $ | | ||||
Total | | $ | | $ | | $ | | ||||
(Dollars in thousands) | For the Six Months Ended June 30, 2022 | ||||||||||
Pre-Modification | Post-Modification | ||||||||||
Outstanding | Outstanding | ||||||||||
| Number of | Recorded | Recorded | Recorded | |||||||
Contracts | Investment | Investment | Investment | ||||||||
Commercial Real Estate | | $ | | $ | | $ | | ||||
Total | | $ | | $ | | $ | | ||||
22
(Dollars in thousands) | For the Six Months Ended June 30, 2021 | ||||||||||
Pre-Modification | Post-Modification | ||||||||||
Outstanding | Outstanding | ||||||||||
| Number of | Recorded | Recorded | Recorded | |||||||
Contracts | Investment | Investment | Investment | ||||||||
Commercial Real Estate | | $ | | $ | | $ | | ||||
Total | | $ | | $ | | $ | | ||||
The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the three and six months ended June 30, 2022 and the six months ended June 30, 2021 with the total number of each type of modification performed.
For the Three Months Ended June 30, 2022 | ||||||||
|
| Rate | Term | Payment | Number | |||
Modification | Modification | Modification | Modified | |||||
Commercial Real Estate | — | — | | | ||||
Total | — | — | | | ||||
For the Six Months Ended June 30, 2022 | ||||||||
|
| Rate | Term | Payment | Number | |||
Modification | Modification | Modification | Modified | |||||
Commercial Real Estate | — | — | | | ||||
Total | — | — | | | ||||
For the Six Months Ended June 30, 2021 | ||||||||
|
| Rate | Term | Payment | Number | |||
Modification | Modification | Modification | Modified | |||||
Commercial Real Estate | — | | | | ||||
Total | — | | | | ||||
23
In the wake of the COVID-19 pandemic, during the second quarter of 2020, the Company began granting loan modification requests to defer principal and/or interest payments or modify interest rates. These loans are not classified as TDRs according to Section 4013 of the CARES Act, as long as the specific criteria set forth in the Act are met. The table below presents information related to loan modifications made in compliance with Section 4013 of the CARES Act for the six months ended June 30, 2022:
(Dollars in thousands) | Commercial and | Commercial | Residential | ||||||||||||||||||||||
Industrial | Real Estate | Real Estate | Consumer | Total | |||||||||||||||||||||
Recorded | Recorded | Recorded | Recorded | Recorded | |||||||||||||||||||||
| Count | Investment | Count | Investment | Count | Investment | Count | Investment | Count | Investment | |||||||||||||||
Balance at December 31, 2021 |
| — | $ | — | | $ | | — | $ | — | — | $ | — | | $ | | |||||||||
Additional modifications granted for the three months ended March 31, 2022 |
| — | — | — | — | — | — | — | — | — | — | ||||||||||||||
Section 4013 CARES Act modifications returned to normal payment status during the three months ended March 31, 2022 (a) |
| — | — | ( | ( | — | — | — | — | ( | ( | ||||||||||||||
Principal payments net of draws on active deferred loans for the three months ended March 31, 2022 (b) |
| N/A | — | N/A | — | N/A | — | N/A | — | N/A | — | ||||||||||||||
Balance at March 31, 2022 |
| — | $ | — | — | $ | — | — | $ | — | — | $ | — | — | $ | — | |||||||||
Additional modifications granted for the three months ended June 30, 2022 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||
Section 4013 CARES Act modifications returned to normal payment status during the three months ended June 30, 2022 (a) | — | — | — | — | — | — | — | — | — | — | |||||||||||||||
Principal payments net of draws on active deferred loans for the three months ended June 30, 2022 (b) | N/A | — | N/A | — | N/A | — | N/A | — | N/A | — | |||||||||||||||
Balance at June 30, 2022 | — | $ | — | — | $ | — | — | $ | — | — | $ | — | — | $ | — | ||||||||||
Percent of Total Section 4013 CARES Act Modifications as of June 30, 2022 |
|
|
|
|
|
| |||||||||||||||||||
Percent of Total Section 4013 CARES Act Modifications to Total Loans as of June 30, 2022 |
|
|
|
|
|
| |||||||||||||||||||
Subsequent modifications granted during the three months ended June 30, 2022 for active deferred loans outstanding as of June 30, 2022 |
| — | $ | — | — | $ | — | — | $ | — | — | $ | — | — |
| $ | — | ||||||||
(a) Includes payments made prior to return to normal payment status during the three month period
(b) Draws include those made on lines of credit and other loans contractually allowing draws of principal. No construction loans have experienced a Section 4013 CARES Act modification at the dates indicated.
24
The recorded investment, unpaid principal balance, and the related allowance of the Company’s impaired loans are summarized below at June 30, 2022 and December 31, 2021.
(Dollars in thousands) | June 30, 2022 | December 31, 2021 | ||||||||||||||||
|
|
| Unpaid |
|
|
| Unpaid |
| ||||||||||
| Recorded | Principal | Related | Recorded | Principal | Related | ||||||||||||
| Investment | Balance | Allowance | Investment | Balance | Allowance | ||||||||||||
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial and Industrial | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Commercial Real Estate |
| |
| |
| |
| |
| |
| | ||||||
Residential Real Estate |
| |
| |
| |
| |
| |
| | ||||||
|
|
|
|
|
|
|
| |||||||||||
With an allowance recorded: |
|
|
|
|
|
|
|
| ||||||||||
Commercial and Industrial |
| |
| |
| |
| |
| |
| | ||||||
Commercial Real Estate |
| — |
| — |
| — |
| — |
| — |
| | ||||||
Residential Real Estate |
| |
| |
| |
| |
| |
| | ||||||
Total | $ | | $ | | $ | — | $ | | $ | | $ | | ||||||
Total consists of: |
|
|
|
|
|
|
|
| ||||||||||
Commercial and Industrial | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Commercial Real Estate | $ | | $ | | $ | — | $ | | $ | | $ | | ||||||
Residential Real Estate | $ | | $ | | $ | — | $ | | $ | | $ | | ||||||
At June 30, 2022 and December 31, 2021, $
The average recorded investment and interest income recognized for the Company’s impaired loans are summarized below for the three and six months ended June 30, 2022 and 2021.
(Dollars in thousands) | For the Three Months Ended | For the Three Months Ended | ||||||||||
June 30, 2022 | June 30, 2021 | |||||||||||
|
| Average |
| Interest |
| Average |
| Interest | ||||
| Recorded | Income | Recorded | Income | ||||||||
| Investment | Recognized | Investment | Recognized | ||||||||
With no related allowance recorded: |
|
|
|
|
|
|
|
| ||||
Commercial and Industrial | $ | | $ | | $ | | $ | | ||||
Commercial Real Estate |
| |
| |
| |
| | ||||
Residential Real Estate |
| |
| |
| |
| | ||||
|
|
|
|
|
| |||||||
With an allowance recorded: |
|
|
|
|
|
| ||||||
Commercial and Industrial |
| |
| |
| |
| | ||||
Commercial Real Estate |
| |
| |
| |
| | ||||
Residential Real Estate |
| |
| |
| |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
|
|
|
|
|
| |||||||
Total consists of: |
|
|
|
|
|
| ||||||
Commercial and Industrial | $ | | $ | | $ | | $ | | ||||
Commercial Real Estate | $ | | $ | | $ | | $ | | ||||
Residential Real Estate | $ | | $ | | $ | | $ | | ||||
Of the $
25
(Dollars in thousands) | For the Six Months Ended | For the Six Months Ended | ||||||||||
June 30, 2022 | June 30, 2021 | |||||||||||
|
| Average |
| Interest |
| Average |
| Interest | ||||
| Recorded | Income | Recorded | Income | ||||||||
| Investment | Recognized | Investment | Recognized | ||||||||
With no related allowance recorded: |
|
|
|
|
|
|
|
| ||||
Commercial and Industrial | $ | | $ | | $ | | $ | | ||||
Commercial Real Estate |
| |
| |
| |
| | ||||
Residential Real Estate |
| |
| — |
| |
| | ||||
|
|
|
|
|
| |||||||
With an allowance recorded: |
|
|
|
|
|
| ||||||
Commercial and Industrial |
| — |
| — |
| — |
| — | ||||
Commercial Real Estate |
| — |
| — |
| |
| — | ||||
Residential Real Estate |
| — |
| — |
| — |
| — | ||||
Total | $ | | $ | | $ | | $ | | ||||
|
|
|
|
|
| |||||||
Total consists of: |
|
|
|
|
|
| ||||||
Commercial and Industrial | $ | | $ | | $ | | $ | | ||||
Commercial Real Estate | $ | | $ | | $ | | $ | | ||||
Residential Real Estate | $ | | $ | — | $ | | $ | | ||||
Of the $
Total non-performing assets (which includes loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing interest) as of June 30, 2022 and December 31, 2021 were as follows:
(Dollars in thousands) | June 30, | December 31, | ||||
|
| 2022 |
| 2021 | ||
Commercial and Industrial | $ | | $ | | ||
Commercial Real Estate |
| | | |||
Residential Real Estate |
| |
| | ||
Total non-accrual loans |
| |
| | ||
Foreclosed assets held for resale |
| — |
| — | ||
Loans past-due 90 days or more and still accruing interest |
| |
| — | ||
Total non-performing assets | $ | | $ | | ||
There were
26
The following tables present the classes of the loan portfolio, including non-accrual loans and TDRs, summarized by past-due status at June 30, 2022 and December 31, 2021:
(Dollars in thousands) |
|
|
|
|
|
|
| 90 Days | |||||||||||||
Or Greater | |||||||||||||||||||||
| Past Due | ||||||||||||||||||||
| 90 Days | Current- | and Still | ||||||||||||||||||
| 30-59 Days | 60-89 Days | or Greater | Total | 29 Days | Total | Accruing | ||||||||||||||
| Past Due | Past Due | Past Due | Past Due | Past Due | Loans | Interest | ||||||||||||||
June 30, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial and Industrial | $ | | $ | — | $ | | $ | | $ | | $ | | $ | | |||||||
Commercial Real Estate |
| |
| — |
| |
| |
| |
| |
| | |||||||
Residential Real Estate |
| |
| |
| |
| |
| |
| |
| | |||||||
Consumer |
| |
| |
|
| |
| |
| |
| |||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
(Dollars in thousands) |
|
|
|
|
|
|
| 90 Days | |||||||||||||
| Or Greater | ||||||||||||||||||||
Past Due | |||||||||||||||||||||
| 90 Days | Current- | and Still | ||||||||||||||||||
| 30-59 Days | 60-89 Days | or Greater | Total | 29 Days | Total | Accruing | ||||||||||||||
| Past Due | Past Due | Past Due | Past Due | Past Due | Loans | Interest | ||||||||||||||
December 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial and Industrial | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | |||||||
Commercial Real Estate |
| |
| |
| |
| |
| |
| |
| — | |||||||
Residential Real Estate |
| |
| |
| |
| |
| |
| |
| — | |||||||
Consumer |
| |
| |
|
| |
| |
| |
| — | ||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | |||||||
At this time, there have been no material fluctuations in past-due loans as a result of the COVID-19 pandemic.
At June 30, 2022 and December 31, 2021, commitments to lend additional funds with respect to impaired loans consisted of one irrevocable letter of credit totaling $
NOTE 5 — DEPOSITS
Major classifications of deposits at June 30, 2022 and December 31, 2021 consisted of:
(Dollars in thousands) |
| June 30, | December 31, | |||
2022 |
| 2021 | ||||
Non-interest bearing demand |
| $ | | $ | | |
Interest bearing demand |
| |
| | ||
Savings |
| |
| | ||
Time certificates of deposits less than $250,000 |
| |
| | ||
Time certificates of deposits $250,000 or greater |
| |
| | ||
Other time |
| |
| | ||
Total deposits | $ | | $ | | ||
Total deposits decreased $
27
NOTE 6 — BORROWINGS
Short-Term Borrowings
Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, the Federal Discount Window, and Federal Home Loan Bank of Pittsburgh (“FHLB”) advances, which generally represent overnight or less than
(Dollars in thousands) | June 30, 2022 | December 31, 2021 |
| ||||||||||
| Average | Average |
| ||||||||||
|
| Amount |
| Rate |
| Amount |
| Rate |
|
| |||
Federal funds purchased |
| $ | | | % | $ |
| | % |
| |||
Securities sold under agreements to repurchase |
| | | % |
| |
| | % | ||||
Federal Discount Window |
| | % |
| |
| | % | |||||
Federal Home Loan Bank of Pittsburgh |
| | | % |
| |
| | % | ||||
Total | $ | | | % | $ | |
| | % | ||||
Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)
The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets.
As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability on the Company’s consolidated balance sheets, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is not offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Company does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.
The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Company be in default (e.g., fails to make an interest payment to the counterparty). The collateral is held by a correspondent bank in the counterparty’s custodial account. The counterparty has the right to sell or repledge the investment securities.
The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of June 30, 2022 and December 31, 2021.
(Dollars in thousands) |
|
| Gross |
| Net Amounts |
|
|
| ||||||||||
Amounts | of Liabilities | |||||||||||||||||
| Offset | Presented | ||||||||||||||||
| Gross | in the | in the | |||||||||||||||
| Amounts of | Consolidated | Consolidated | Cash | ||||||||||||||
| Recognized | Balance | Balance | Financial | Collateral | Net | ||||||||||||
| Liabilities | Sheet | Sheet | Instruments | Pledge | Amount | ||||||||||||
June 30, 2022 |
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|
|
|
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| ||||||
Repurchase agreements (a) | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
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| |||||||
December 31, 2021 |
|
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|
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| ||||||
Repurchase agreements (a) | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
| (a) | As of June 30, 2022 and December 31, 2021, the fair value of securities pledged in connection with repurchase agreements was $ |
28
The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of June 30, 2022:
(Dollars in thousands) | Remaining Contractual Maturity of the Agreements | ||||||||||||||
Overnight | Greater | Greater | |||||||||||||
| and | Up to | 30 -90 | than | |||||||||||
| Continuous | 30 days | Days | 90 Days | Total | ||||||||||
June 30, 2022: | |||||||||||||||
Repurchase agreements and repurchase-to-maturity transactions: |
|
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|
|
|
|
|
|
|
| |||||
U.S. Treasury and/or agency securities | $ | | $ | | $ | | $ | | $ | | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
Long-Term Borrowings and Letters of Credit
Long-term borrowings are comprised of advances from the FHLB.
Irrevocable standby letters of credit may be issued to a customer/beneficiary by the FHLB on the Company’s behalf in order to secure public/municipal unit deposits, provide credit enhancement to certain transaction types, or to support payment obligations to third parties. These irrevocable standby letters of credit are supported by an irrevocable and independent guarantee by the FHLB for the Company’s pledging obligation to secure public/municipal unit deposits which eliminates the need for the Company to pledge collateral in the amount necessary to secure these funds. The Company began utilizing this service offered by the FHLB during the second quarter of 2021. There were
Under terms of a blanket agreement, collateral for the FHLB loans and letters of credit consists of certain qualifying assets of the Corporation’s banking subsidiary. Principal qualifying assets are certain real estate mortgages and investment securities. As of June 30, 2022, loans of $
NOTE 7 — SUBORDINATED DEBT
On December 10, 2020, the Corporation issued $
The 2020 Notes bear a fixed interest rate of
Holders of the 2020 Notes may not accelerate the maturity of the 2020 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar law of the Corporation or the Bank.
29
NOTE 8 — COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various pending legal actions and proceedings that are not reflected in the consolidated financial statements. Management does not believe the outcome of these actions and proceedings will have a material effect on the consolidated financial position or results of operations of the Company.
The Bank currently leases
The Bank recognized total operating lease costs for the six months ended June 30, 2022 and 2021 of $
The Bank currently has
Total finance lease costs that were recognized by the Bank for the six months ended June 30, 2022 and 2021 were immaterial. Cash payments totaled $
The following table displays the weighted-average term and discount rates for operating and finance leases outstanding as of June 30, 2022 and December 31, 2021.
| June 30, | December 31, |
| June 30, | December 31, |
| ||||||
2022 | 2021 | 2022 | 2021 | |||||||||
Operating |
|
| Operating | Finance |
|
| Finance | |||||
Weighted-average term (years) |
|
|
| |||||||||
Weighted-average discount rate |
|
|
|
A maturity analysis of operating and finance lease liabilities and reconciliation of the undiscounted cash flows to the total operating or finance lease liability is as follows:
(Dollars in thousands) | June 30, | December 31, | June 30, | December 31, | ||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Minimum Lease Payments due: | Operating | Operating | Finance | Finance | ||||||||
Within one year | $ | | $ | | $ | | $ | | ||||
After one but within two years |
| |
| |
| |
| | ||||
After two but within three years |
| |
| |
| — |
| — | ||||
After three but within four years |
| |
| |
| — |
| — | ||||
After four but within five years |
| |
| |
| — |
| — | ||||
After five years |
| |
| |
| — |
| — | ||||
Total undiscounted cash flows |
| |
| |
| |
| | ||||
Discount on cash flows |
| ( |
| ( |
| ( |
| ( | ||||
Total lease liability | $ | | $ | | $ | | $ | | ||||
30
NOTE 9 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company does not engage in trading activities with respect to any of its financial instruments with off-balance sheet risk.
The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments.
The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
The Company may require collateral or other security to support financial instruments with off-balance sheet credit risk.
The contract or notional amounts at June 30, 2022 and December 31, 2021 were as follows:
(Dollars in thousands) |
|
| |||||
June 30, 2022 |
| December 31, 2021 | |||||
Financial instruments whose contract amounts represent credit risk: |
|
|
|
|
| ||
Commitments to extend credit | $ | | $ | | |||
Financial standby letters of credit | $ | | $ | | |||
Performance standby letters of credit | $ | | $ | | |||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses that may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, owner-occupied income-producing commercial properties, and residential real estate.
Standby letters of credit are conditional commitments issued by the Company to guarantee payment to a third party when a customer either fails to repay an obligation or fails to perform some non-financial obligation. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company may hold collateral (similar to the items held as collateral for commitments to extend credit) to support standby letters of credit for which collateral is deemed necessary.
Financial Instruments with Concentrations of Credit Risk
The Company originates primarily commercial and residential real estate loans to customers in northeastern Pennsylvania. The ability of the majority of the Company’s customers to honor their contractual loan obligations is dependent on the economy and real estate market in this area. At June 30, 2022, the Company had $
31
June 30, 2022 and December 31, 2021, management is of the opinion that there were no concentrations exceeding 10% of total loans with regard to loans to borrowers who were engaged in similar activities that were similarly impacted by economic or other conditions.
As all financial instruments are subject to some level of credit risk, the Company requires collateral and/or guarantees for all loans. Collateral may include, but is not limited to property, plant, and equipment, commercial and/or residential real estate property, land, and pledge of securities. In the event of a borrower’s default, the collateral supporting the loan may be seized in order to recoup losses associated with the loan. The Company also establishes an allowance for loan losses that constitutes the amount available to absorb losses within the loan portfolio that may exist due to deficiencies in collateral values.
NOTE 10 — FAIR VALUE MEASUREMENTS
Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance provides additional information on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes information on identifying circumstances when a transaction may not be considered orderly.
Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.
This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the asset or liability based upon the best information available. Fair value measurement and disclosure guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 Inputs: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;
Level 3 Inputs: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth as follows.
32
Financial Assets Measured at Fair Value on a Recurring Basis
At June 30, 2022 and December 31, 2021, securities measured at fair value on a recurring basis and the valuation methods used are as follows:
(Dollars in thousands) |
| |||||||||||
June 30, 2022 | Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Debt Securities Available-for-Sale: |
|
|
|
|
|
|
|
| ||||
U.S. Treasury securities | $ | | $ | | $ | | $ | | ||||
Obligations of U.S. Government Agencies and Sponsored Agencies: |
|
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|
|
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| ||||||
Mortgaged-backed | | | | | ||||||||
Other |
| |
| |
| |
| | ||||
Other mortgage backed debt securities |
| |
| |
| |
| | ||||
Obligations of state and political subdivisions |
| |
| |
| |
| | ||||
Asset backed securities |
| |
| |
| |
| | ||||
Corporate debt securities |
| |
| |
| |
| | ||||
Total debt securities available-for-sale |
| |
| |
| |
| | ||||
Marketable equity securities |
| |
|
| |
| | |||||
Total recurring fair value measurements | $ | | $ | | $ | | $ | | ||||
(Dollars in thousands) |
| |||||||||||
December 31, 2021 | Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Debt Securities Available-for-Sale: |
|
|
|
|
|
|
|
| ||||
U.S. Treasury securities | $ | | $ | | $ | | $ | | ||||
Obligations of U.S. Government Agencies and Sponsored Agencies: |
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| ||||
Mortgaged-backed | | | | | ||||||||
Other |
| |
| |
| |
| | ||||
Other mortgage backed debt securities |
| |
| |
| |
| | ||||
Obligations of state and political subdivisions |
| |
| |
| |
| | ||||
Asset backed securities |
| |
| |
| |
| | ||||
Corporate debt securities |
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| |
| |
| | ||||
Total debt securities available-for-sale |
| |
| |
| |
| | ||||
Marketable equity securities |
| |
| |
| |
| | ||||
Total recurring fair value measurements | $ | | $ | | $ | | $ | | ||||
The estimated fair values of equity securities and US Treasury debt securities classified as Level 1 are derived from quoted market prices in active markets; the equity securities consist mainly of stocks held in other banks. The estimated fair values of all debt securities classified as Level 2 are obtained from nationally-recognized third-party pricing agencies. The estimated fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds. The significant inputs utilized in the cash flow models are based on market data obtained from sources independent of the Company (observable inputs), and are therefore classified as Level 2 within the fair value hierarchy. The Company does not have any Level 3 inputs for securities. There were no transfers between Level 1 and Level 2 during 2022 or 2021.
33
Financial Assets Measured at Fair Value on a Nonrecurring Basis
At June 30, 2022 and December 31, 2021, impaired loans measured at fair value on a nonrecurring basis are as follows:
(Dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets at June 30, 2022 |
|
|
|
|
|
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| ||||
Impaired loans: |
|
|
|
|
|
|
|
| ||||
Commercial Real Estate | $ | | $ | | $ | | $ | | ||||
Residential Real Estate |
| |
| |
| |
| | ||||
Total impaired loans | $ | | $ | | $ | | $ | | ||||
(Dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets at December 31, 2021 |
|
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| ||||
Impaired loans: |
|
|
|
|
|
|
|
| ||||
Commercial Real Estate | $ | | $ | | $ | | $ | | ||||
Residential Real Estate |
| |
| |
| |
| | ||||
Total impaired loans | $ | | $ | | $ | | $ | | ||||
The Company’s impaired loan valuation procedure for any loans greater than $
Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis
There were no foreclosed assets held for resale measured at fair value on a nonrecurring basis at June 30, 2022 and December 31, 2021.
The Company’s foreclosed asset valuation procedure requires an appraisal or a Certificate of Inspection, which considers the sales prices of similar properties in the proximate vicinity, to be completed periodically with the exception of those cases in which the Bank has obtained a sales agreement. These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. There were
34
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine the fair value:
(Dollars in thousands) | Quantitative Information about Level 3 Fair Value Measurements | ||||||||||
Fair Value | Weighted | ||||||||||
June 30, 2022 |
| Estimate |
| Valuation Technique |
| Unobservable Input |
| Range |
| Average | |
Impaired loans - collateral dependent | $ | |
|
|
|
|
| ( |
| ( | |
Impaired loans - other | $ | |
|
|
| ( |
| ( | |||
|
|
|
|
|
|
|
|
|
| ||
December 31, 2021 |
|
|
|
|
|
|
|
|
|
| |
Impaired loans - collateral dependent | $ | |
|
|
|
|
| ( |
| ( | |
Impaired loans - other | $ | |
|
|
| ( |
| ( | |||
1. Fair value is generally determined through independent appraisals or Certificates of Inspection of the underlying collateral, as defined by Bank regulators.
2. Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The typical range of appraisal adjustments are presented as a percent of the appraisal value.
3. Includes qualitative adjustments by management and estimated liquidation expenses.
4. Collateral values may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses.
Fair Value of Financial Instruments Measured on a Nonrecurring Basis
(Dollars in thousands) | Carrying | Fair Value Measurements at June 30, 2022 | |||||||||||||
| Amount |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||
FINANCIAL ASSETS: |
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Cash and due from banks | $ | | $ | | $ | $ | $ | | |||||||
Interest-bearing deposits in other banks |
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Time deposits with other banks |
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Restricted investment in bank stocks |
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Net loans |
| |
|
|
| |
| | |||||||
Mortgage servicing rights |
| |
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| |
| | |||||||
Accrued interest receivable |
| |
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| |
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| | |||||||
FINANCIAL LIABILITIES: |
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Demand, savings and other deposits |
| |
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| |
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| | |||||||
Time deposits |
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Short-term borrowings |
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Long-term borrowings |
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| |
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| | |||||||
Subordinated debentures | | | | ||||||||||||
Accrued interest payable |
| |
|
| |
|
| | |||||||
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS |
| |
| |
| |
| |
| | |||||
35
(Dollars in thousands) | Carrying | Fair Value Measurements at December 31, 2021 | |||||||||||||
| Amount |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||||
FINANCIAL ASSETS: |
|
|
|
|
|
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|
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| |||||
Cash and due from banks | $ | | $ | | $ | $ | $ | | |||||||
Interest-bearing deposits in other banks |
| |
|
| |
|
| | |||||||
Time deposits with other banks |
| |
|
| |
|
| | |||||||
Restricted investment in bank stocks |
| |
|
| |
|
| | |||||||
Net loans |
| |
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| |
| | |||||||
Mortgage servicing rights |
| |
|
|
| |
| | |||||||
Accrued interest receivable |
| |
|
| |
|
| | |||||||
FINANCIAL LIABILITIES: |
|
|
|
|
| ||||||||||
Demand, savings and other deposits |
| |
|
| |
|
| | |||||||
Time deposits |
| |
|
| |
|
| | |||||||
Short-term borrowings |
| |
|
| |
|
| | |||||||
Long-term borrowings |
| |
|
| |
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| | |||||||
Subordinated debentures |
| | | | |||||||||||
Accrued interest payable | |
|
| |
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| | ||||||||
| |||||||||||||||
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS | |
| |
| |
| |
| | ||||||
NOTE 11 — REVENUE RECOGNITION
In accordance with ASU 2014-09 Revenue from Contracts with Customers – Topic 606, and all subsequent ASUs that modified ASC 606, the main types of revenue contracts included in non-interest income within the consolidated statements of income are as follows:
Deposits related fees and service charges
Service charges and fees on deposits, which are included as liabilities in the consolidated balance sheets, consist of fees related to monthly fees for various retail and business checking accounts, automated teller machine (“ATM”) fees (charged for withdrawals by our deposit customers from other bank ATMs) and insufficient funds fees (“NSF”) (which are charged when customers overdraw their accounts beyond available funds). All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers. The Company elected to adopt practical expedient related to incremental costs of obtaining deposit contracts. As such, any costs associated with acquiring the deposits, except for time deposits with maturities in excess of one year, are recognized as an expense within non-interest expense in the consolidated statements of income when incurred as the amortization period of the deposit liabilities that otherwise would have been recognized is one year or less.
Wealth/Asset/Trust Management Fees
Wealth management services are delivered to individuals, corporations and retirement funds located primarily within our geographic markets. The Trust Department of the Company conducts the wealth management operations, which provides a broad range of personal and corporate fiduciary services, including the administration of estates.
Assets held in a fiduciary capacity by the Trust Department are not assets of the Company and, therefore, are not included in our consolidated financial statements. Wealth management fees, which are contractually agreed with each customer, are earned each month and recognized on a cash basis based on average fair value of the trust assets under management. The services provided under such a contract are considered a single performance obligation under ASC 606 because they embody a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. Wealth management fees charged by the Trust Department follow a tiered structure
36
based on the type and size of the assets under management. Wealth management fees are included within non-interest income in the consolidated statements of income. As of June 30, 2022 and December 31, 2021, the fair value of trust assets under management was $
Interchange Fees and Surcharges
Interchange fees are related to the acceptance and settlement of debit card transactions, both point-of-sale and ATM, to cover operating costs and risks associated with the approval and settlement of the transactions. Interchange fees vary by type of transaction and each merchant sector. Net income recognized from interchange fees is included in non-interest income on the consolidated statements of income. A surcharge is assessed for use of the Company’s ATMs by non-customers. All interchange fees and surcharges are recognized as received on a daily basis for the prior business day’s transactions. All expenses related to the settlement of debit card transactions (both point-of-sale and ATM) are recognized on a monthly basis and included in non-interest expense on the consolidated statements of income.
NOTE 12 — EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. At June 30, 2022 and 2021, there were
(In thousands, except earnings per share) | Three Months Ended | ||||
June 30, | |||||
2022 |
| 2021 | |||
Net income | $ | | $ | | |
Weighted-average common shares outstanding |
| |
| | |
Basic and diluted earnings per share | | | |||
(In thousands, except earnings per share) | Six Months Ended | ||||
June 30, | |||||
2022 |
| 2021 | |||
Net income | $ | | $ | | |
Weighted-average common shares outstanding |
| |
| | |
Basic and diluted earnings per share | | | |||
NOTE 13 — GOODWILL
Goodwill resulted from the acquisition of the Pocono Community Bank in November 2007 and of certain fixed and operating assets acquired and deposit liabilities assumed of the branch of another financial institution in Danville, Pennsylvania, in January 2004. Such goodwill represents the excess cost of the acquired assets relative to the assets’ fair value at the dates of acquisition. In accordance with current accounting standards, goodwill is not amortized. Goodwill totaled $
Impairment testing is performed on an annual basis, using either a qualitative or quantitative approach. The assumptions used in the impairment test of goodwill are susceptible to change based on changes in economic conditions and other factors, including our stock price. Any change in the assumptions utilized to determine the carrying value of goodwill could adversely affect our results of operations.
37
Goodwill was evaluated for impairment at December 31, 2021, and it was determined that goodwill was not impaired. Management evaluated the need for an interim goodwill impairment analysis and determined that there were no triggering events or negative factors affecting goodwill since the previous test that would indicate goodwill was impaired as of June 30, 2022.
38
Item 2. First Keystone Corporation Management’s Discussion and Analysis of Financial Condition and Results of Operation
This quarterly report contains certain forward-looking statements, which are included pursuant to the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995, and reflect management’s beliefs and expectations based on information currently available. These forward-looking statements are inherently subject to significant risks and uncertainties, including changes in general economic and financial market conditions, the Company’s ability to effectively carry out its business plans and changes in regulatory or legislative requirements. Other factors that could cause or contribute to such differences are changes in competitive conditions, and pending or threatened litigation. Although management believes the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially.
CRITICAL ACCOUNTING ESTIMATES
The Company has chosen accounting policies that it believes are appropriate to accurately and fairly report its operating results and financial position, and the Company applies those accounting policies in a consistent manner. The Significant Accounting Policies are summarized in Note 1 to the consolidated financial statements included in the 2021 Annual Report on Form 10-K. There have been no changes to the Critical Accounting Estimates since the Company filed its Annual Report on Form 10-K for the year ended December 31, 2021.
RESULTS OF OPERATIONS
Quarter ended June 30, 2022 compared to quarter ended June 30, 2021
First Keystone Corporation realized earnings for the three months ended June 30, 2022 of $3,822,000, an increase of $217,000, or 6.0% from the second quarter of 2021. The increase in net income for the three months ended June 30, 2022 was primarily due to an increase in interest income, mainly due to increased interest rates and growth in commercial real estate loans and increased interest and dividend income earned on securities.
On a per share basis, for the three months ended June 30, 2022, net income was $0.64 versus $0.61 for the same three month period of 2021. Cash dividends amounted to $0.28 and $0.27 per share for the three months ended June 30, 2022 and 2021, respectively.
NET INTEREST INCOME
The major source of operating income for the Company is net interest income, defined as interest income less interest expense. In the three months ended June 30, 2022, interest income amounted to $11,111,000, an increase of $852,000 or 8.3% from the three months ended June 30, 2021, while interest expense amounted to $1,330,000 in the three months ended June 30, 2022, an increase of $42,000 or 3.3% from the three months ended June 30, 2021. As a result, net interest income increased $810,000 or 9.0% to $9,781,000 from $8,971,000 for the same period in 2021.
The Company’s net interest margin for the three months ended June 30, 2022 was 3.36% compared to 3.23% for same period in 2021. The increase in net interest margin was primarily a result of increases in yields earned on securities and commercial loans.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended June 30, 2022 and 2021 was $218,000 and $135,000, respectively. The increase in the provision for loan losses resulted from the Company’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors. The provision for loan losses for the three months ended June 30, 2022 is also reflective of management’s assessment of the continued credit risk associated with the uncertainty surrounding geopolitical and economic concerns. Charge-off and recovery activity in the allowance for loan losses resulted in net recoveries of $5,000
39
and net charge-offs of $58,000 for the the three months ended June 30, 2022 and 2021, respectively. See Allowance for Loan Losses on page 45 for further discussion.
NON-INTEREST INCOME
Total non-interest income was $1,514,000 for the three months ended June 30, 2022, as compared to $1,865,000 for the same period in 2021, a decrease of $351,000, or 18.8%.
Net securities (losses) gains decreased $96,000 to ($68,000) for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021. This decrease was due to the Company recognizing $68,000 in net losses on held equity securities in the second quarter of 2022 as compared to recognizing $28,000 in net gains on held equity securities in the second quarter of 2021. Trust department income increased $3,000 or 1.1% to $268,000 for the three months ended June 30, 2022 as compared to the same period in 2021.
Service charges and fee income increased $68,000 or 14.1%. The increase was mainly due to increases in overdraft fees as compared to the same period in 2021. ATM fees and debit card income decreased $10,000 or 1.8% to $558,000 for the three months ended June 30, 2022.
Net (losses) gains on sales of mortgage loans decreased $308,000 or 100.0% to $0 due to no sales of mortgage loans in the second quarter of 2022 as the rate environment has led to many loans being sold at a loss and there have been fewer mortgages originated with intent to sell. Other non-interest income decreased $6,000 or 9.2% to $59,000 for the three months ended June 30, 2022.
NON-INTEREST EXPENSE
Total non-interest expense was $6,595,000 for the three months ended June 30, 2022, as compared to $6,547,000 for the three months ended June 30, 2021
Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense. Salaries and benefits amounted to $3,462,000 or 52.5% of total non-interest expense for the three months ended June 30, 2022, as compared to $3,461,000 or 52.9% for the three months ended June 30, 2021.
Net occupancy, furniture and equipment, and computer expense amounted to $983,000 for the three months ended June 30, 2022, an increase of $43,000 or 4.6% which was due to the implementation of several new software programs throughout 2021 and early 2022 to increase security and efficiency. Professional services increased $97,000 or 35.5% to $370,000 as of June 30, 2022. The increase was mainly the result of an increase in consulting expense as the result of strategic planning and consulting services associated with implementing new internal systems contracts along with normal increases in annual audit expenses. Pennsylvania shares tax expense amounted to $324,000 for the three months ended June 30, 2022, an increase of $11,000 or 3.5% as compared to the three months ended June 30, 2021.
Federal Deposit Insurance Corporation (“FDIC”) insurance expense amounted to $120,000 for the three months ended June 30, 2022 and 2021. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.
ATM and debit card fees expense amounted to $242,000 for the three months ended June 30, 2022, a decrease of $41,000 or 14.5% as compared to the three months ended June 30, 2021. The decrease was the result of negotiations of new internal systems contracts resulting in vendor relationship credits that were applied to the expenses related to those systems. Data processing expenses amounted to $251,000 for the three months ended June 30, 2022 as compared to $323,000 for the same period of 2021, a decrease of $72,000 or 22.3%. This decrease was also the result of the negotiations of new systems contracts.
Advertising expense amounted to $118,000 in the second quarter of 2022, an increase of $9,000 or 8.3% as compared to the three months ended June 30, 2021. Other non-interest expense amounted to $725,000 for the three months ended June 30, 2022 and 2021.
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INCOME TAXES
Income tax expense amounted to $660,000 for the three months ended June 30, 2022, as compared to $549,000 for the three months ended June 30, 2021, an increase of $111,000. The effective total income tax rate was 14.7% for the three months ended June 30, 2022 as compared to 13.2% for the three months ended June 30, 2021. The increase in the effective tax rate was mainly due to higher overall operating income. The Company recognized $58,000 and $101,000 of tax credits from low-income housing partnerships in the three months ended June 30, 2022 and 2021, respectively.
Six months ended June 30, 2022 compared to six months ended June 30, 2021
First Keystone Corporation realized earnings for the six months ended June 30, 2022 of $7,365,000, a decrease of $118,000, or 1.6% from the same period in 2021. The decrease in net income for the six months ended June 30, 2022 was primarily due to less PPP loan fees and a decrease in non-interest income, mainly due to fewer sales of mortgage loans and net securities losses.
On a per share basis, net income was $1.24 for the six months ended June 30, 2022 versus $1.27 for the same period in 2021. Cash dividends amounted to $0.56 and $0.55 per share for the six months ended June 30, 2022 and 2021, respectively.
NET INTEREST INCOME
The major source of operating income for the Company is net interest income, defined as interest income less interest expense. For the six months ended June 30, 2022, interest income amounted to $21,740,000, an increase of $1,206,000 or 5.9% from the six months ended June 30, 2021, while interest expense amounted to $2,503,000 in the six months ended June 30, 2022, a decrease of $90,000 or 3.5% from the six months ended June 30, 2021. As a result, net interest income increased $1,296,000 or 7.2% to $19,237,000 from $17,941,000 for the same period in 2021.
The Company’s net interest margin for the six months ended June 30, 2022 was 3.28% compared to 3.30% for same period in 2021. The decrease in net interest margin was a result of a decrease in yield earned on loans plus an increase in cost of short term borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the six months ended June 30, 2022 and 2021 was $437,000 and $270,000, respectively. The increase in the provision for loan losses resulted from the Company’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors. The provision for loan losses for the six months ended June 30, 2022 is also reflective of management’s assessment of the continued credit risk associated with the uncertainty surrounding geopolitical and economic concerns. Charge-off and recovery activity in the allowance for loan losses resulted in net recoveries of $43,000 and net charge-offs of $79,000 for the six months ended June 30, 2022 and 2021, respectively. See Allowance for Loan Losses on page 45 for further discussion.
NON-INTEREST INCOME
Total non-interest income was $2,903,000 for the six months ended June 30, 2022, as compared to $3,740,000 for the same period in 2021, a decrease of $837,000, or 22.4%. The decrease was due to recognizing net losses on the sales of mortgage loans and net securities losses on held equity securities during the first half of 2022 as compared to recognizing net gains on both during the same period of 2021.
ATM fees and debit card income decreased $17,000 or 1.6% to $1,067,000 for the six months ended June 30, 2022. Service charges and fee income increased $202,000 for the six months ended June 30, 2022. The increase was mainly due to increased overdraft fees on DDA accounts. Gains on sales of mortgage loans decreased $696,000 or 105.1% due to a low number of individual loans sold in the first half of 2022 and many of the loans sold in 2022 being
41
sold at a loss. These factors were due to the current rate environment and fewer loans being originated with the intent to sell in 2022.
Trust department income was $518,000 for the six months ended June 30, 2022 and 2021. Net securities (losses) gains decreased $274,000 or 191.6% to ($131,000) for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021. The decrease was due to the Company recognizing $131,000 in net losses on held equity securities in the first half of 2022 as compared to recognizing $143,000 in net gains on held equity securities in the same period in 2021.
NON-INTEREST EXPENSE
Total non-interest expense was $13,111,000 for the six months ended June 30, 2022, as compared to $12,744,000 for the six months ended June 30, 2021. Non-interest expense increased $367,000 or 2.9%.
Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense. Salaries and benefits amounted to $7,016,000 or 53.5% of total non-interest expense for the six months ended June 30, 2022, as compared to $6,761,000 or 53.1% for the six months ended June 30, 2021. The increase was mainly due to normal merit increases and new hires along with an increase in medical insurance costs as compared to the first half of 2021.
Net occupancy, furniture and equipment, and computer expense amounted to $2,000,000 for the six months ended June 30, 2022, an increase of $155,000 or 8.4%. The increase is the result of the implementation of several new software programs to increase security and efficiency. Professional services increased $136,000 or 25.6% to $668,000 for the six months ended June 30, 2022. The increase was mainly the result of an increase in consulting expense as the result of strategic planning and consulting services associated with implementing new internal systems contracts along with normal increases in annual audit expenses. Pennsylvania shares tax expense amounted to $648,000 for the six months ended June 30, 2022, an increase of $22,000 or 3.5% as compared to the six months ended June 30, 2021.
FDIC insurance expense increased $50,000 or 24.2% for the six months ended June 30, 2022. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.
ATM and debit card fees expense amounted to $370,000 for the six months ended June 30, 2022, a decrease of $113,000 or 23.4% as compared to the six months ended June 30, 2021. The decrease was the result of negotiations of new internal systems contracts resulting in vendor relationship credits that were applied to the expenses related to those systems. Data processing expenses amounted to $509,000 for the six months ended June 30, 2022, a decrease of $108,000 or 17.5% as compared to the six months ended June 30, 2021. This decrease was also the result of the negotiations of new systems contracts.
Advertising expense increased $9,000 or 5.0% during the six months ended June 30, 2022. Other non-interest expense amounted to $1,453,000 for the six months ended June 30, 2022, a decrease of $36,000 or 2.4% as compared to the six months ended June 30, 2021. This decrease was mainly due to a decrease in the provision for unfunded commitments, as the result of higher line of credit usage and lower officer commitments, along with a decrease in loan collections expenses, as the result of legal and insurance reimbursements following the payoff of a non-accrual commercial real estate loan.
INCOME TAXES
Income tax expense amounted to $1,227,000 for the six months ended June 30, 2022, as compared to $1,184,000 for the six months ended June 30, 2021, an increase of $43,000. The effective total income tax rate was 14.3% for the six months ended June 30, 2022 as compared to 13.7% for the six months ended June 30, 2021. The increase in the effective tax rate was mainly due to higher overall operating income. The Company recognized $132,000 and $202,000 of tax credits from low-income housing partnerships in the six months ended June 30, 2022 and 2021, respectively.
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FINANCIAL CONDITION
SUMMARY
Total assets decreased to $1,304,582,000 as of June 30, 2022, a decrease of $15,768,000 from year-end 2021. Total assets as of December 31, 2021 amounted to $1,320,350,000.
Total debt securities available-for-sale decreased $27,656,000 or 6.3% to $410,260,000 as of June 30, 2022 from December 31, 2021.
Total loans increased $51,979,000 or 6.9% to $804,820,000 as of June 30, 2022 from December 31, 2021. Loan demand grew in the six months ended June 30, 2022 as the Bank has realized an increase in loan originations, primarily in the commercial real estate portfolio.
Total deposits decreased $84,361,000 or 7.8% to $993,608,000 as of June 30, 2022 from December 31, 2021. The decrease was mainly due to a decrease in highly rate sensitive deposits and other normal fluctuations.
The Company continues to maintain and manage its asset growth. The Company’s strong equity capital position provides an opportunity to further leverage its asset growth. Total borrowings increased in the six months ended June 30, 2022 by $92,346,000 to $154,723,000 from $62,377,000 as of December 31, 2021. Borrowings increased mainly due to decreased deposit balances and growth in the loan portfolio.
Total stockholders’ equity amounted to $125,379,000 at June 30, 2022, a decrease of $23,176,000 or 15.6% from December 31, 2021 due to a decrease in the market value of the securities portfolio resulting in an accumulated other comprehensive loss position.
SEGMENT REPORTING
Currently, management measures the performance and allocates the resources of the Company as a single segment.
EARNING ASSETS
Earning assets are defined as those assets that produce interest income. By maintaining a healthy asset utilization rate, i.e., the volume of earning assets as a percentage of total assets, the Company maximizes income. The earning asset ratio (average interest earning assets divided by average total assets) equaled 94.1% at June 30, 2022 and 94.0% at June 30, 2021. This indicates that the management of earning assets is a priority and non-earning assets, primarily cash and due from banks, fixed assets and other assets, are maintained at minimal levels. The primary earning assets are loans and securities.
Our primary earning asset, total loans, increased to $804,820,000 as of June 30, 2022, up $51,979,000, or 6.9% since year-end 2021. The loan portfolio continues to be well diversified. Non-performing assets decreased since year-end 2021, and overall asset quality has remained consistent. Total non-performing assets were $6,136,000 as of June 30, 2022, a decrease of $930,000, or 13.2% from $7,066,000 reported in non-performing assets as of December 31, 2021. Total allowance for loan losses to total non-performing assets was 149.28% as of June 30, 2022 and 122.84% at December 31, 2021. See the Non-Performing Assets section on page 47 for more information.
In addition to loans, another primary earning asset is our overall securities portfolio, which decreased in size from December 31, 2021 to June 30, 2022. Debt securities available-for-sale amounted to $410,260,000 as of June 30, 2022, a decrease of $27,656,000 from year-end 2021. The decrease in debt securities available-for-sale is mainly due to a $35,521,000 decrease in the market value of the portfolio as a result of the current interest rate environment and $22,444,000 in principal paydowns on debt securities, offset by the deployment of $38,349,000 in cash to purchase debt securities, along with other portfolio activity.
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Interest-bearing deposits in other banks decreased as of June 30, 2022, to $783,000 from $51,738,000 at year-end 2021 due to decreased cash held at the Federal Reserve Bank. Time deposits with other banks were $0 at June 30, 2022 and $247,000 at December 31, 2021 due to the maturity of the one remaining time deposit.
LOANS
Total loans increased to $804,820,000 as of June 30, 2022 as compared to $752,841,000 as of December 31, 2021. The table on page 19 provides data relating to the composition of the Company’s loan portfolio on the dates indicated. Total loans increased by $51,979,000 or 6.9%.
Steady demand for borrowing by businesses accounted for the 6.9% increase in the loan portfolio from December 31, 2021 to June 30, 2022. Overall, the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) increased $13,000 or 0.02% from $82,526,000 at December 31, 2021 to $82,539,000 at June 30, 2022. The small increase in the Commercial and Industrial portfolio during the six months ended June 30, 2022 was mainly the result of a reduction of $4,748,000 in the portion of the Commercial and Industrial portfolio attributable to SBA PPP loans, the balance of which decreased from $4,894,000 at December 31, 2021 to $146,000 at June 30, 2022, as a result of loan forgiveness. The portion of the Commercial and Industrial portfolio excluding SBA PPP loans increased $4,761,000 during the six months ended June 30, 2022, mainly resulting from $7,438,000 in new loan originations for the six months ended June 30, 2022 and an increase in utilization of existing Commercial and Industrial lines of credit of $1,801,000, offset by loan payoffs of $1,587,000 and regular principal payments and other typical fluctuations in the Commercial and Industrial portfolio during the six months ended June 30, 2022. The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased $46,604,000 or 8.9% from $521,654,000 at December 31, 2021 to $568,258,000 at June 30, 2022. The increase is mainly attributable to new loan originations of $87,507,000 for the six months ended June 30, 2022, offset by loan payoffs of $36,826,000 and a decrease in utilization of existing Commercial Real Estate lines of credit of $761,000, as well as regular principal payments and other typical amortization in the Commercial Real Estate portfolio during the six months ended June 30, 2022. Residential Real Estate loans increased $5,238,000 or 3.7% from $143,383,000 at December 31, 2021 to $148,621,000 at June 30, 2022. The increase was mainly the result of $17,062,000 in new loan originations and an increase in utilization of existing Residential Real Estate (Home Equity) lines of credit of $2,491,000, offset by net loans sold of $2,719,000, loan payoffs of $10,187,000 (of which $3,600,000 was refinanced with the Bank during the six months ended June 30,2022 with the new refinanced loan balances included in the new loan origination total), and regular principal payments and other typical amortization in the Residential Real Estate portfolio during the six months ended June 30, 2022. Net loans sold for the six months ended June 30, 2022 consisted of total loans sold during the six months ended June 30, 2022 of $4,463,000, offset with loans opened and sold in the same quarter during the first two quarters of 2022 which amounted to $1,744,000. The Company continues to originate and sell certain long-term fixed rate residential mortgage loans, which conform to secondary market requirements, when the market pricing is favorable. The Company derives ongoing income from the servicing of mortgages sold in the secondary market. The Company continues its efforts to lend to creditworthy borrowers.
Management believes that the loan portfolio is well diversified. The total commercial portfolio was $650,797,000 at June 30, 2022. Of total loans, $568,258,000 or 70.6% were secured by commercial real estate, primarily lessors of residential buildings and dwellings and lessors of non-residential buildings. The Company continues to monitor these portfolios.
Overall, the portfolio risk profile as measured by loan grade is considered low risk, as $781,530,000 or 97.3% of gross loans are graded Pass; $1,080,000 or 0.1% are graded Special Mention; $20,961,000 or 2.6% are graded Substandard; and $0 are graded Doubtful. The rating is intended to represent the best assessment of risk available at a given point in time, based upon a review of the borrower’s financial statements, credit analysis, payment history with the Bank, credit history and lender knowledge of the borrower. See Note 4 — Loans and Allowance for Loan Losses for risk grading tables.
Overall, non-pass grades decreased to $22,041,000 at June 30, 2022, as compared to $24,737,000 at December 31, 2021. Commercial and Industrial non-pass grades decreased to $755,000 as of June 30, 2022 as compared to $796,000 as of December 31, 2021. Commercial Real Estate non-pass grades decreased to $20,313,000 as of
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June 30, 2022 as compared to $22,346,000 as of December 31, 2021. The Residential Real Estate and Consumer loan non-pass grades decreased to $973,000 as of June 30, 2022 as compared to $1,595,000 as of December 31, 2021.
The decrease in Commercial Real Estate non-pass grades from December 31, 2021 to June 30, 2022 is mainly the result of a payoff that was completed during the second quarter of 2022 on a Substandard non-accrual loan to a contractor specializing in modular construction that carried a balance of $1,000,000 at December 31, 2021. Four loans to the owners/operators of an indoor family entertainment complex that carried an aggregate balance of $753,000 at December 31, 2021 were also upgraded from Substandard to pass-grade status during the six months ended June 30, 2022.
The Company continues to internally underwrite each of its loans to comply with prescribed policies and approval levels established by its Board of Directors.
Total Loans
(Dollars in thousands) | June 30, | December 31, | |||||
| 2022 |
| 2021 |
| |||
Commercial and Industrial | $ | 82,539 |
| $ | 82,526 | ||
Commercial Real Estate |
| 568,258 |
| 521,654 | |||
Residential Real Estate |
| 148,621 |
| 143,383 | |||
Consumer |
| 5,402 |
| 5,278 | |||
Total Loans | $ | 804,820 | $ | 752,841 | |||
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses constitutes the amount available to absorb losses within the loan portfolio. As of June 30, 2022, the allowance for loan losses was $9,160,000 as compared to $8,680,000 as of December 31, 2021. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for possible loan losses when management believes that the collectability of the principal is unlikely. The risk characteristics of the loan portfolio are managed through various control processes, including credit evaluations of individual borrowers, periodic reviews, and diversification by industry. Risk is further mitigated through the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees.
Management performs a quarterly analysis to determine the adequacy of the allowance for loan losses. The methodology in determining adequacy incorporates specific and general allocations together with a risk/loss analysis on various segments of the portfolio according to an internal loan review process. This assessment results in an allocated allowance. Management maintains its loan review and loan classification standards consistent with those of its regulatory supervisory authority.
Management considers, based upon its methodology, that the allowance for loan losses is adequate to cover foreseeable future losses. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, that might be incurred in the future. On a quarterly basis, management evaluates the qualitative factors utilized in the calculation of the Company’s allowance for loan losses and various adjustments are made to these factors as deemed necessary at the time of evaluation. The uncertain economic climate has played a large role in the qualitative factor adjustments that have been implemented throughout 2021 and the first half of 2022. Qualitative factors remained unchanged during the first quarter of 2021, as the economy and unemployment levels showed marked improvement over the prior quarter. During the second quarter of 2021, the qualitative factors related to the local/regional economy were decreased by one basis point across all loan segments, as the economy and job growth in the Company’s market areas demonstrated marked improvement over the prior quarter, and the qualitative factor related to collateral values was increased by one basis point for both the Commercial Real Estate and Residential Real Estate portfolio segments due to an artificial increase in market values in the real estate sector as individuals’ willingness to pay above-average market prices has sparked uncertainty surrounding collateral values in the real estate market.
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Qualitative factors remained unchanged during the third quarter of 2021. During the fourth quarter of 2021, the qualitative factors related to external factors/conditions were increased by one basis point across all loan segments due increased inflation rates, as well as elevated unemployment levels (although improved from 2020 and early 2021) and the uncertainty of how broad the changes implemented by the Federal Reserve would be. The qualitative factors related to collateral values were also increased by one basis point across all loan segments during the fourth quarter of 2021, as collateral values continued to artificially increase as individuals were willing to pay above-average market prices in all sectors. During the first quarter of 2022, the qualitative factors related to the local/regional economy were increased by one basis point across all loan segments due to ongoing economic uncertainty resulting from supply chain disruptions caused by the COVID-19 pandemic, conflicts in foreign countries causing inflationary pressures due to reductions/disruptions in the production of the commodities controlled by these countries, increased interest rates, and the overall inflation rate continuing to rise. During the second quarter of 2022, the qualitative factors remained unchanged. Modifications granted in compliance with Section 4013 of the CARES Act were highest in the Commercial Real Estate portfolio segment, the long-term effects of which are still very unclear, as there is still economic uncertainty related to the COVID-19 pandemic, especially in relation to this segment of the Company’s loan portfolio. See Allowance for Loan Losses on page 15 for further discussion.
The Analysis of Allowance for Loan Losses table contains an analysis of the allowance for loan losses indicating charge-offs and recoveries for the six months ended June 30, 2022 and 2021. Net recoveries as a percentage of average loans was 0.006% for the six months ended June 30, 2022 and net charge-offs as a percentage of average loans was 0.011% for the six months ended June 30, 2021. Net recoveries amounted to $43,000 the six months ended June 30, 2022 as compared to net charge-offs of $79,000 for the six months ended June 30, 2021.
For the six months ended June 30, 2022, the provision for loan losses was $437,000 as compared to $270,000 for the six months ended June 30, 2021. The provision, net of charge-offs and recoveries, resulted in the quarter end allowance for loan losses of $9,160,000 of which 7.4% was attributed to the Commercial and Industrial component; 65.0% attributed to the Commercial Real Estate component; 17.5% attributed to the Residential Real Estate component; 0.9% attributed to the Consumer component; and 9.2% being the unallocated component (refer to the activity in Note 4 – Loans and Allowance for Loan Losses on page 12). The Company determined that the provision for loan losses made during the current quarter was sufficient to maintain the allowance for loan losses at a level necessary for the probable losses inherent in the loan portfolio as of June 30, 2022.
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Analysis of Allowance for Loan Losses
(Dollars in thousands) | ||||||||
June 30, | June 30, | |||||||
As of and for the six months ended: |
| 2022 |
| 2021 | ||||
Beginning balance | $ | 8,680 |
| $ | 7,933 | |||
Charge-offs: |
|
|
|
| ||||
Commercial and Industrial |
| 9 |
| 13 | ||||
Commercial Real Estate |
| — |
| 29 | ||||
Residential Real Estate |
| — |
| 55 | ||||
Consumer |
| 6 |
| 20 | ||||
| 15 |
| 117 | |||||
Recoveries: |
|
|
|
| ||||
Commercial and Industrial |
| 2 |
| — | ||||
Commercial Real Estate |
| 38 |
| 30 | ||||
Residential Real Estate |
| 14 |
| 1 | ||||
Consumer |
| 4 |
| 7 | ||||
| 58 |
| 38 | |||||
Net (recoveries) charge-offs |
| (43) |
| 79 | ||||
Additions charged to operations |
| 437 |
| 270 | ||||
Balance at end of period | $ | 9,160 | $ | 8,124 | ||||
Ratio of net (recoveries) charge-offs during the period to average loans outstanding during the period |
| (0.006) | % |
| 0.011 | % | ||
Allowance for loan losses to average loans outstanding during the period |
| 1.177 | % |
| 1.120 | % | ||
It is the policy of management and the Company’s Board of Directors to make a provision for both identified and unidentified losses inherent in its loan portfolio. A provision for loan losses is charged to operations based upon an evaluation of the potential losses in the loan portfolio. This evaluation takes into account such factors as portfolio concentrations, delinquency trends, trends of non-accrual and classified loans, economic conditions, and other relevant factors.
The loan review process, which is conducted quarterly, is an integral part of the Bank’s evaluation of the loan portfolio. A detailed quarterly analysis to determine the adequacy of the Company’s allowance for loan losses is reviewed by the Board of Directors.
With the Bank’s manageable level of net charge-offs and recoveries along with the additions to the reserve from the provision out of operations, the allowance for loan losses as a percentage of average loans amounted to 1.177% and 1.120% at June 30, 2022 and 2021, respectively.
NON-PERFORMING ASSETS
The table on page 50 details the Company’s non-performing assets and impaired loans as of the dates indicated. Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against current period income. A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession that the Company would not otherwise consider. Modifications to loans classified as TDRs generally include reductions in contractual interest rates, principal deferments and extensions of maturity dates at a stated interest rate lower than the current market for a new loan with similar risk characteristics. While unusual, there may be instances of loan principal forgiveness. Any loan modifications made in response to the COVID-19 pandemic
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are not considered TDRs as long as the criteria set forth in Section 4013 of the CARES Act are met. Foreclosed assets held for resale represent property acquired through foreclosure, or considered to be an in-substance foreclosure.
Total non-performing assets amounted to $6,136,000 as of June 30, 2022, as compared to $7,066,000 as of December 31, 2021. The economy is very unstable. Inflation is at a four-decade high. The war between Ukraine and Russia is creating worldwide turmoil. The unemployment rate has dropped significantly compared to the beginning of the COVID-19 pandemic, but the labor force participation rate has also fallen. The need for workers has driven wages up in most sectors. Inflation is causing extreme concerns in all areas of the economy. The war abroad and its effects on various commodities are pushing inflationary concerns. Values of new and used homes and automobiles continue to climb. The Federal Reserve has indicated a plan to continue to raise interest rates at an accelerated level throughout the year. There has also been a resurgence of the COVID-19 pandemic in some areas of the country and world. These forces have had a direct effect on the Company’s non-performing assets. The Company is closely monitoring all segments of its loan portfolio because of the current uncertain economic environment. Non-accrual loans totaled $5,970,000 as of June 30, 2022, as compared to $7,066,000 as of December 31, 2021. The decrease in non-accrual loans from December 31, 2021 to June 30, 2022 was mainly the result of the payoff of one non-accrual loan to a contractor specializing in modular construction which carried a balance of $1,000,000 at December 31, 2021. There were no foreclosed assets held for resale as of June 30, 2022 and December 31, 2021. There was one loan past-due 90 days or more and still accruing interest at June 30, 2022 that carried a balance of $166,000 and was well-secured by residential real estate and in the process of collection. There were no loans past-due 90 days or more and still accruing interest as of December 31, 2021.
Non-performing assets to total loans was 0.76% at June 30, 2022 and 0.94% at December 31, 2021. Non-performing assets to total assets was 0.47% at June 30, 2022 and 0.54% at December 31, 2021. The allowance for loan losses to total non-performing assets was 149.28% as of June 30, 2022 as compared to 122.84% as of December 31, 2021. Additional detail can be found on page 50 in the Non-Performing Assets and Impaired Loans table and page 26 in the Non-Performing Assets table. Asset quality is a priority and the Company retains a full-time loan review officer to closely track and monitor overall loan quality, along with a full-time loan workout department to manage collection and liquidation efforts.
Performing substandard loans which are not deemed to be impaired have characteristics that cause management to have doubts regarding the ability of the borrower to perform under present loan repayment terms and which may result in reporting these loans as non-performing loans in the future. Performing substandard loans not deemed to be impaired amounted to $10,416,000 at June 30, 2022, compared to $10,463,000 at December 31, 2021.
Impaired loans were $12,284,000 at June 30, 2022 and $13,673,000 at December 31, 2021. The largest impaired loan relationship at June 30, 2022 and December 31, 2021 consisted of a non-performing loan to a student housing holding company which is secured by commercial real estate. At June 30, 2022, the loan carried a balance of $3,090,000, net of $1,989,000 that had been charged off to date, compared to December 31, 2021 when the loan carried a balance of $3,090,000, net of $1,989,000 that had been charged off to date. The second largest impaired loan relationship at June 30, 2022 and December 31, 2021 consisted of one performing loan to a student housing holding company, which is classified as a TDR. The loan is secured by commercial real estate and carried a balance of $2,829,000 as of June 30, 2022, net of $943,000 that had been charged off to date, compared to December 31, 2021 when the loan carried a balance of $2,864,000, net of $943,000 that had been charged off to date. The third largest impaired loan relationship at June 30, 2022 and December 31, 2021 consisted of five non-performing loans to a plastic processing company focused on non-post-consumer recycling. Three loans are classified in the Commercial and Industrial portfolio and modified as TDRs and two loans are secured by commercial real estate. The loans carried an aggregate balance of $1,128,000 at June 30, 2022, compared to December 31, 2021 when the loans carried an aggregate balance of $1,176,000.
The Company estimates impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell. For collateral dependent loans, the estimated appraisal or other qualitative adjustments and cost to sell percentages are determined based on the market area in which the real estate securing the loan is located, among other factors, and therefore, can differ from one loan to another. Of the $12,284,000 in impaired loans at June 30, 2022, none were located outside of the Company’s primary market area.
48
The outstanding recorded investment of TDRs as of June 30, 2022 and December 31, 2021 was $7,669,000 and $8,020,000, respectively. The decrease in TDRs at June 30, 2022 as compared to December 31, 2021 is mainly attributable to regular principal payments and paydowns on existing TDRs that were completed during the six months ended June 30, 2022. Of the twenty-nine restructured loans at June 30, 2022, four loans were classified in the Commercial and Industrial portfolio, twenty-four loans were classified in the Commercial Real Estate portfolio, and one loan was classified in the Residential Real Estate portfolio. Troubled debt restructurings at June 30, 2022 consisted of ten term modifications beyond the original stated term, three rate modifications, and fifteen payment modifications. There was also one troubled debt restructuring that experienced all three types of modifications—payment, rate, and term. TDRs are separately evaluated for payment disclosures, and if necessary, a specific allocation is established. There were no specific allocations attributable to the TDRs at June 30, 2022 or December 31, 2021. There were no unfunded commitments attributable to the TDRs at June 30, 2022 and December 31, 2021.
At June 30, 2022, three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $682,000, six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $318,000, and one Residential Real Estate loan classified as a TDR with a balance of $12,000 were not in compliance with the terms of their restructure, compared to June 30, 2021 when three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $736,000, seven Commercial Real Estate loans classified as TDRs with a combined recorded investment of $479,000, and one Residential Real Estate loan classified as a TDR with a recorded investment of $17,000 were not in compliance with the terms of their restructure.
Of the loans that were modified as TDRs within the twelve months preceding June 30, 2022, no loans experienced payment defaults during the three months ended June 30, 2022. One Commercial Real Estate loan that was modified as a TDR within the twelve months preceding June 30, 2022 experienced a payment default during the six months ended June 30, 2022, but the loan was subsequently paid off during the first quarter of 2022. Of the loans that were modified as TDRs during the twelve months preceding June 30, 2021, three Commercial Real Estate loans totaling $300,000 experienced payment defaults during the three months ended June 30, 2021. No loans that were modified as TDRs during the twelve months preceding June 30, 2021 experienced payment defaults during the first three months of 2021.
The Company’s non-accrual loan valuation procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year end, unless the Board of Directors waives such requirement for a specific loan, in favor of obtaining a Certificate of Inspection instead, defined as an internal evaluation completed by the Company. A quarterly collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values.
For non-accrual loans less than $250,000 upon classification and typically at year end, the Company completes a Certificate of Inspection, which includes the results of an onsite inspection, and may consider value indicators such as insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations.
Improving loan quality is a priority. The Company actively works with borrowers to resolve credit problems and will continue its close monitoring efforts in 2022. Excluding the assets disclosed in the Non-Performing Assets and Impaired Loans tables below and the Troubled Debt Restructurings section in Note 4 — Loans and Allowance for Loan Losses, management is not aware of any information about borrowers’ possible credit problems which cause serious doubt as to their ability to comply with present loan repayment terms.
In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for possible loan losses. They may require additions to allowances based upon their judgments about information available to them at the time of examination.
The economic climate remains in a very frail state. The war between Ukraine and Russia has exacerbated the difficulties in the national and state economy and experts at all levels are attempting to calculate the intermediate or long term affects. The Company may experience difficulties collecting payments on time from its borrowers, and certain types of loans may need to be modified, which could cause a rise in the level of impaired loans, non-performing assets, charge-offs, and delinquencies. Should such metrics increase, additions to the balance of the Company’s allowance for
49
loan losses could be required. The extent of the impact of these stressors on the Company’s operational and financial performance will depend on certain developments including inflationary controls enacted, the labor force, supply bottlenecks, the longevity of the war, and the effectiveness in controlling the lingering effects of the COVID-19 outbreak, etc. and any after-effects of these factors. These factors may not immediately impact the Company’s operational and financial performance, as the effects of these factors may lag into the future. The Company is also susceptible to the impact of economic and fiscal policy factors that may evolve in the current economic environment.
A concentration of credit exists when the total amount of loans to borrowers, who are engaged in similar activities that are similarly impacted by economic or other conditions, exceed 10% of total loans. As of June 30, 2022 and December 31, 2021, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.
Non-Performing Assets and Impaired Loans
(Dollars in thousands) | June 30, | December 31, | |||||
| 2022 |
| 2021 | ||||
Non-performing assets |
|
|
|
| |||
Non-accrual loans | $ | 5,970 | $ | 7,066 | |||
Foreclosed assets held for resale |
| — |
| — | |||
Loans past-due 90 days or more and still accruing interest |
| 166 |
| — | |||
Total non-performing assets | $ | 6,136 | $ | 7,066 | |||
Impaired loans |
|
|
|
| |||
Non-accrual loans | $ | 5,970 | $ | 7,066 | |||
Accruing TDRs |
| 6,314 |
| 6,607 | |||
Total impaired loans |
| 12,284 |
| 13,673 | |||
Allocated allowance for loan losses |
| — |
| — | |||
Net investment in impaired loans | $ | 12,284 | $ | 13,673 | |||
Impaired loans with a valuation allowance | $ | — | $ | — | |||
Impaired loans without a valuation allowance |
| 12,284 |
| 13,673 | |||
Total impaired loans | $ | 12,284 | $ | 13,673 | |||
Allocated valuation allowance as a percent of impaired loans |
| — | % |
| — | % | |
Impaired loans to total loans |
| 1.53 | % |
| 1.81 | % | |
Non-performing assets to total loans |
| 0.76 | % |
| 0.94 | % | |
Non-performing assets to total assets |
| 0.47 | % |
| 0.54 | % | |
Allowance for loan losses to impaired loans |
| 74.57 | % |
| 63.48 | % | |
Allowance for loan losses to total non-performing assets |
| 149.28 | % |
| 122.84 | % | |
Real estate mortgages comprise 89.1% of the loan portfolio as of June 30, 2022, as compared to 88.3% as of December 31, 2021. Real estate mortgages consist of both residential and commercial real estate loans. The real estate loan portfolio is well diversified in terms of borrowers, collateral, interest rates, and maturities. Also, the residential real estate loan portfolio is largely comprised of fixed rate mortgages. The real estate loans are concentrated primarily in the Company’s market area and are subject to risks associated with the local economy. The commercial real estate loans typically reprice approximately every three to five years and are also concentrated in the Company’s market area. The Company’s loss exposure on its impaired loans continues to be mitigated by collateral positions on these loans. The allocated allowance for loan losses associated with impaired loans is generally computed based upon the related collateral value of the loans. The collateral values are determined by recent appraisals or Certificates of Inspection, but are generally discounted by management based on historical dispositions, changes in market conditions since the last valuation and management’s expertise and knowledge of the borrower and the borrower’s business.
50
DEPOSITS, OTHER BORROWED FUNDS AND SUBORDINATED DEBT
Consumer and commercial retail deposits are attracted primarily by the Bank’s eighteen full service office locations, one loan production office and through its internet banking presence. The Bank offers a broad selection of deposit products and continually evaluates its interest rates and fees on deposit products. The Bank regularly reviews competing financial institutions’ interest rates, especially when establishing interest rates on certificates of deposit.
Total deposits decreased $84,361,000 to $993,608,000 as of June 30, 2022 as non-interest bearing deposits decreased by $18,527,000 and interest bearing deposits decreased by $65,834,000 from year-end 2021. The decrease in deposits was the result of a $95,504,000 decrease in highly rate sensitive deposits and other normal fluctuations. Total short-term and long-term borrowings increased to $154,723,000 as of June 30, 2022, from $62,377,000 at year-end 2021, an increase of $92,346,000 or 148.0%. The increase in total borrowings was mainly the result of increased short-term borrowings as deposits decreased and cash balances were deployed into earning assets.
On December 10, 2020, the Corporation issued $25,000,000 aggregate principal amount of Subordinated Notes due December 31, 2030 (the “2020 Notes”). The 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes. The 2020 Notes bear a fixed interest rate of 4.375% per year for the first five years and then float based on a benchmark rate (as defined).
CAPITAL STRENGTH
Normal increases in capital are generated by net income, less dividends paid out. During the six months ended June 30, 2022, net income less dividends paid increased capital by $4,031,000. Accumulated other comprehensive (loss) income derived from net unrealized gains on debt securities available-for-sale also impacts capital. At December 31, 2021 accumulated other comprehensive income was $7,588,000. Accumulated other comprehensive loss stood at $20,438,000 at June 30, 2022, a decrease of $28,026,000. Fluctuations in interest rates have regularly impacted the gain/loss position in the Bank’s securities portfolio, as well as its decision to sell securities at a gain or loss. The fluctuations from net unrealized gains on debt securities available-for-sale do not affect regulatory capital, as the Bank elected to opt-out of the inclusion of this item with the filing of the March 31, 2015 Call Report.
The Company held 231,611 and 231,612 shares of common stock as treasury stock at June 30, 2022 and December 31, 2021, respectively. This had an effect of reducing our total stockholders’ equity by $5,709,000 as of June 30, 2022 and December 31, 2021.
Total stockholders’ equity was $125,379,000 as of June 30, 2022, and $148,555,000 as of December 31, 2021.
At June 30, 2022 the Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action and the minimum capital requirements under Basel III. The following table presents the Bank’s capital ratios as of June 30, 2022 and December 31, 2021:
|
|
|
|
| |||
To Be Well |
| ||||||
Capitalized |
| ||||||
Under Prompt |
| ||||||
June 30, | December 31, | Corrective Action | |||||
| 2022 |
| 2021 |
| Regulations |
| |
Tier 1 leverage ratio (to average assets) |
| 10.77 | % | 10.14 | % | 5.00 | % |
Common Equity Tier 1 capital ratio (to risk-weighted assets) |
| 15.29 | % | 15.52 | % | 6.50 | % |
Tier 1 risk-based capital ratio (to risk-weighted assets) |
| 15.29 | % | 15.52 | % | 8.00 | % |
Total risk-based capital ratio |
| 16.34 | % | 16.57 | % | 10.00 | % |
Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer
51
requirement was phased in over three years beginning in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis as of January 1, 2019. As of June 30, 2022, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.
The Corporation’s capital ratios are not materially different than those of the Bank.
LIQUIDITY
The Company’s objective is to maintain adequate liquidity to meet funding needs at a reasonable cost and provide contingency plans to meet unanticipated funding needs or a loss of funding sources, while minimizing interest rate risk. Adequate liquidity is needed to provide the funding requirements of depositors’ withdrawals, loan growth, and other operational needs.
Sources of liquidity are as follows:
| ● | Growth in the core deposit base; |
| ● | Proceeds from sales or maturities of securities; |
| ● | Payments received on loans and mortgage-backed securities; |
| ● | Overnight correspondent bank borrowings on various credit lines, notes, etc., with various levels of capacity; |
| ● | Securities sold under agreements to repurchase; and |
| ● | Brokered CDs. |
At June 30, 2022 the Company had $458,318,000 in maximum borrowing capacity at FHLB (inclusive of the outstanding balances of FHLB long-term notes, FHLB short-term borrowings, and irrevocable standby letters of credit issued by FHLB); the maximum borrowing capacity at ACBB was $15,000,000 and the maximum borrowing capacity of the Federal Discount Window was $2,519,000.
The Company enters into “Repurchase Agreements” in which it agrees to sell securities subject to an obligation to repurchase the same or similar securities. Because the agreement both entitles and obligates the Company to repurchase the assets, the Company may transfer legal control of the securities while still retaining effective control. As a result, the repurchase agreements are accounted for as collateralized financing agreements (secured borrowings) and act as an additional source of liquidity. Securities sold under agreements to repurchase were $25,311,000 at June 30, 2022.
Asset liquidity is provided by securities maturing in one year or less, other short-term investments, federal funds sold, and cash and due from banks. The liquidity is augmented by repayment of loans and cash flows from mortgage-backed and asset-backed securities. Liability liquidity is accomplished primarily by maintaining a core deposit base, acquired by attracting new deposits and retaining maturing deposits. Also, short-term borrowings provide funds to meet liquidity needs.
Net cash flows provided by operating activities were $7,606,000 and $8,676,000 at June 30, 2022 and 2021, respectively. Net income amounted to $7,365,000 for the six months ended June 30, 2022 and $7,483,000 for the six months ended June 30, 2021. During the six months ended June 30, 2022 and 2021, net premium amortization on securities amounted to $1,633,000 and $1,366,000, respectively. Net losses on sales of mortgage loans amounted to $34,000 for the six months ended June 30, 2022, compared to net gains on sales of mortgage loans of $662,000 for the six months ended June 30, 2021. Originations from sales of mortgage loans originated for resale exceeded proceeds (net of gains/losses) from sales of mortgage loans originated for resale by $1,639,000 for the six months ended June 30, 2022, and proceeds (net of gains/losses) from sales of mortgage loans originated for resale exceeded originations of mortgage loans originated for resale by $937,000 for the six months ended June 30, 2021. Net securities losses amounted to $131,000 for the six months ended June 30, 2022, compared to net securities gains of $143,000 for the six months ended June 30, 2021. Accrued interest receivable increased by $112,000 and decreased by $170,000 during the six months ended June 30, 2022 and 2021, respectively. Other assets increased by $639,000 and $1,116,000 during the six
52
months ended June 30, 2022 and 2021, respectively. Other liabilities increased by $37,000 during the six months ended June 30, 2022 and increased by $241,000 during the six months ended June 30, 2021.
Investing activities used cash of $64,171,000 and $56,580,000 during the six months ended June 30, 2022 and 2021, respectively. Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions, net against purchases) used cash of $9,283,000 during the six months ended June 30, 2022, compared to $34,469,000 for the six months ended June 30, 2021. Changes in restricted investment in bank stocks used cash of $3,834,000 and $359,000 during the six months ended June 30, 2022 and 2021, respectively. Net cash used to originate loans amounted to $50,331,000 for the six months ended June 30, 2022, compared to $21,649,000 for the six months ended June 30, 2021.
Financing activities provided cash of $5,451,000 and $120,348,000 during the six months ended June 30, 2022 and 2021, respectively. Deposits decreased by $84,361,000 during the six months ended June 30, 2022, compared to an increase of $125,859,000 during the six months ended June 30, 2021. Short-term borrowings increased by $102,346,000 and $7,005,000 during the six months ended June 30, 2022 and 2021, respectively. Repayment of long-term borrowings used cash of $10,000,000 at both June 30, 2022 and 2021, respectively. Dividends paid amounted to $3,334,000 for the six months ended June 30, 2022, compared to $3,240,000 for the six months ended June 30, 2021.
Managing liquidity remains an important segment of asset/liability management. The overall liquidity position of the Company is maintained by an active asset/liability management committee. The Company believes that its core deposit base is stable even in periods of changing interest rates. Liquidity and funds management are governed by policies and are measured on a monthly basis. These measurements indicate that liquidity generally remains stable and exceeds the Company’s minimum defined levels of adequacy. Other than the trends of continued competitive pressures and volatile interest rates, there are no known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way. Given our financial strength, we expect to be able to maintain adequate liquidity as we manage through the current environment, utilizing current funding options and possibly utilizing new options.
MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The Company’s market risk is composed primarily of interest rate risk. The Company’s interest rate risk results from timing differences in the repricing of assets, liabilities, off-balance sheet instruments, and changes in relationships between rate indices and the potential exercise of explicit or embedded options.
Increases in the level of interest rates also may adversely affect the fair value of the Company’s securities and other earning assets. Generally, the fair value of fixed-rate instruments fluctuates inversely with changes in interest rates. As a result, increases in interest rates have and could result in further decreases in the fair value of the Company’s interest-earning assets, which could adversely affect the Company’s results of operations if sold, or, in the case of interest-earning assets classified as available-for-sale, the Company’s stockholders’ equity, if retained. Under FASB ASC 320-10, Investments – Debt Securities, changes in the unrealized gains and losses, net of taxes, on debt securities classified as available-for-sale are reflected in the Company’s stockholders’ equity. The Company does not own any trading assets.
Asset/Liability Management
The principal objective of asset/liability management is to manage the sensitivity of the net interest margin to potential movements in interest rates and to enhance profitability through returns from managed levels of interest rate risk. The Company actively manages the interest rate sensitivity of its assets and liabilities. Several techniques are used for measuring interest rate sensitivity. Interest rate risk arises from the mismatches in the repricing of rates on assets and liabilities within a given time period, referred to as a rate sensitivity gap. If more assets than liabilities mature or reprice within the time frame, the Company is asset sensitive. This position would contribute positively to net interest income in a rising rate environment. Conversely, if more liabilities mature or reprice, the Company is liability sensitive. This
53
position would contribute positively to net interest income in a falling rate environment. The Company’s cumulative gap at one year indicates the Company is liability sensitive at June 30, 2022.
Earnings at Risk
The Bank’s Asset/Liability Committee (“ALCO”) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by ALCO are reviewed by the Company’s Board of Directors. The Company recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet beyond interest rate sensitivity gap. Although the Company continues to measure its interest rate sensitivity gap, the Company utilizes additional modeling for interest rate risk in the overall balance sheet. Earnings at risk and economic values at risk are analyzed.
Earnings simulation modeling addresses earnings at risk and net present value estimation addresses economic value at risk. While each of these interest rate risk measurements has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk to the Company.
Earnings Simulation Modeling
The Company’s net income is affected by changes in the level of interest rates. Net income is also subject to changes in the shape of the yield curve. For example, a flattening of the yield curve would result in a decline in earnings due to the compression of earning asset yields and increased liability rates, while a steepening would result in increased earnings as earning asset and interest-bearing liability yields widen.
Earnings simulation modeling is the primary mechanism used in assessing the impact of changes in interest rates on net interest income. The model reflects management’s assumptions related to asset yields and rates paid on liabilities, deposit sensitivity, size and composition of the balance sheet. The assumptions are based on what management believes at that time to be the most likely interest rate environment. Earnings at risk is the change in net interest income from a base case scenario under various scenarios of rate shock increases and decreases in the interest rate earnings simulation model.
The table on the next page presents an analysis of the changes in net interest income and net present value of the balance sheet resulting from various increases or decreases in the level of interest rates, such as two percentage points (200 basis points) in the level of interest rates. The calculated estimates of change in net interest income and net present value of the balance sheet are compared to current limits approved by ALCO and the Board of Directors. The earnings simulation model projects net interest income would decrease 8.63%, 16.56% and 24.40% in the 100, 200 and 300 basis point increasing rate scenarios presented. In addition, the earnings simulation model projects net interest income would increase 2.41% and decrease 0.35% in the 100 and 200 basis point decreasing rate scenarios presented. All of these forecasts are within the Company’s one year policy guidelines.
The analysis and model used to quantify the sensitivity of net interest income becomes less reliable in a decreasing rate scenario given the current low interest rate environment with federal funds trading in the 150 - 175 basis point range. Results of the decreasing basis point declining scenarios are affected by the fact that many of the Company’s interest-bearing liabilities are at rates below 1% and therefore likely may not decline 100 or more basis points. However, the Company’s interest-sensitive assets are able to decline by these amounts. For the six months ended June 30, 2022, the cost of interest-bearing liabilities averaged 0.54%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 3.68%.
Net Present Value Estimation
The net present value measures economic value at risk and is used for helping to determine levels of risk at a point in time present in the balance sheet that might not be taken into account in the earnings simulation model. The net present value of the balance sheet is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows. At June 30, 2022, net present value is projected to decrease 1.65%, 8.10%, and 16.34% in the 100, 200, and 300 basis point immediate increase scenarios, respectively. Additionally, the 100 and 200
54
basis point immediate decrease scenarios are estimated to affect net present value with a decrease of 7.51% and 26.68%, respectively. All of these scenarios presented are within the Company’s policy limits.
The computation of the effects of hypothetical interest rate changes are based on many assumptions. They should not be relied upon solely as being indicative of actual results, since the computations do not account for actions management could undertake in response to changes in interest rates.
Effect of Change in Interest Rates
| Projected Change |
| |
Effect on Net Interest Income | |||
1-Year Net Income Simulation Projection |
|
| |
+300 bp Shock vs. Stable Rate |
| (24.40) | % |
+200 bp Shock vs. Stable Rate |
| (16.56) | % |
+100 bp Shock vs. Stable Rate |
| (8.63) | % |
Flat rate |
|
| |
‒100 bp Shock vs. Stable Rate |
| 2.41 | % |
‒200 bp Shock vs. Stable Rate |
| (0.35) | % |
Effect on Net Present Value of Balance Sheet |
|
| |
Static Net Present Value Change |
|
| |
+300 bp Shock vs. Stable Rate |
| (16.34) | % |
+200 bp Shock vs. Stable Rate |
| (8.10) | % |
+100 bp Shock vs. Stable Rate |
| (1.65) | % |
Flat rate |
|
| |
‒100 bp Shock vs. Stable Rate |
| (7.51) | % |
‒200 bp Shock vs. Stable Rate |
| (26.68) | % |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information with respect to quantitative and qualitative disclosures about market risk is included in the information under Management’s Discussion and Analysis in Item 2.
Item 4. Controls and Procedures
a) | Evaluation of Disclosure Controls and Procedures. First Keystone Corporation maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those disclosure controls and procedures performed as of the end of the period covered by this report, the Chief Executive Officer and Chief Financial Officer of the Company concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022. |
b) | Changes in internal control over financial reporting. There were no other changes in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 2022, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. |
55
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Although the Company is subject to various claims and legal actions that occur from time to time in the ordinary course of business, the Company is not party to any pending legal proceedings that management believes could have a material adverse effect on its business, results of operations, financial condition or cash flows.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in Item 1A “Risk Factors” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Period | (a) | (b) | (c) | (d) |
April 1 - April 30, 2022 | ― | ― | ― | 120,000 |
May 1 - May 31, 2022 | ― | ― | ― | 120,000 |
June 1 - June 30, 2022 | ― | ― | ― | 120,000 |
Total | ― | ― | ― | 120,000 |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
56
Item 6. Exhibits and Reports on Form 8-K
(a) | Exhibits required by Item 601 Regulation S-K |
Exhibit Number |
| Description of Exhibit |
3.1 | ||
3.2 | ||
10.1(a) | ||
10.1(b) | ||
10.1(d) | ||
10.2 | ||
14 | ||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.** | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.** | |
32.1 | ||
32.2 | ||
101.INS | Inline XBRL Instance Document.** | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document.** | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.** | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.** | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.** | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.** | |
104 | Cover Page Interactive Data File (Formatted as Inline XBRL and Contained in Exhibit 101) |
* Denotes a compensatory plan.
** Filed herewith.
The Company will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired. All requests should be addressed to the Company’s principal executive offices.
57
FIRST KEYSTONE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly cause this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| FIRST KEYSTONE CORPORATION |
| Registrant |
|
|
|
|
August 5, 2022 | /s/ Elaine A. Woodland |
| Elaine A. Woodland |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
|
|
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August 5, 2022 | /s/ Diane C.A. Rosler |
| Diane C.A. Rosler |
| Senior Vice President and Chief Financial Officer |
| (Principal Financial Officer) |
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