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EX-32.2 - EX-32.2 - FIDELITY D & D BANCORP INCfdbc-20200331xex32_2.htm
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EX-31.2 - EX-31.2 - FIDELITY D & D BANCORP INCfdbc-20200331xex31_2.htm
EX-31.1 - EX-31.1 - FIDELITY D & D BANCORP INCfdbc-20200331xex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION      

Washington, D.C. 20549



FORM 10-Q



[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2020



OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the transition period from ______________to______________________



Commission file number: 001-38229



FIDELITY D & D BANCORP, INC.



STATE OF INCORPORATION:  IRS EMPLOYER IDENTIFICATION NO:

PENNSYLVANIA                                    23-3017653



Address of principal executive offices:

BLAKELY & DRINKER ST.

DUNMORE,  PENNSYLVANIA 18512

TELEPHONE: 570-342-8281

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



 

 

Title of each class

Trading Symbols(s)

Name of each exchange on which registered

Common stock, without par value

FDBC

The NASDAQ Stock Market, LLC



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 subjected to such filing requirements for the past 90 days.  [X] YES [  ] NO



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).       [X] YES [  ] NO



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.





 

 

 

 

 

Large accelerated filer 

Non-accelerated filer 

Accelerated filer 

 

Smaller reporting company 

Emerging growth company



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [  ]



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  [  ] YES [X] NO



The number of outstanding shares of Common Stock of Fidelity D & D Bancorp, Inc. on April 30, 2020, the latest practicable date, was 3,799,213 shares.

 

 


 

FIDELITY D & D BANCORP, INC.



Form 10-Q March 31, 2020



Index







 

 

Part I.  Financial Information

 

Page

Item 1.

Financial Statements (unaudited):

 



Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

3



Consolidated Statements of Income for the three months ended March 31, 2020 and 2019

4



Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019

5



Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2020 and 2019

6



Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

7



Notes to Consolidated Financial Statements (Unaudited)

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

50

Item 4.

Controls and Procedures

55



 

 

Part II.  Other Information

 

 

Item 1.

Legal Proceedings

56

Item 1A.

Risk Factors

56

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 3.

Defaults upon Senior Securities

56

Item 4.

Mine Safety Disclosures

56

Item 5.

Other Information

56

Item 6.

Exhibits

57

Signatures

 

59











2


 

PART I – Financial Information

Item 1: Financial Statements





 

 

 

 

 

 

Fidelity D & D Bancorp, Inc. and Subsidiary

 

 

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

 

 

(Unaudited)

 

 

(dollars in thousands)

 

March 31, 2020

 

December 31, 2019

Assets:

 

 

 

 

 

 

Cash and due from banks

 

$

4,148 

 

$

14,583 

Interest-bearing deposits with financial institutions

 

 

54,812 

 

 

1,080 

Total cash and cash equivalents

 

 

58,960 

 

 

15,663 

Available-for-sale securities

 

 

203,984 

 

 

185,117 

Federal Home Loan Bank stock

 

 

2,732 

 

 

4,383 

Loans and leases, net (allowance for loan losses of

 

 

 

 

 

 

$10,017 in 2020; $9,747 in 2019)

 

 

735,107 

 

 

743,663 

Loans held-for-sale (fair value $1,620 in 2020, $1,660 in 2019)

 

 

1,591 

 

 

1,643 

Foreclosed assets held-for-sale

 

 

116 

 

 

369 

Bank premises and equipment, net

 

 

21,412 

 

 

21,557 

Leased property under finance leases, net

 

 

260 

 

 

280 

Right-of-use assets

 

 

5,977 

 

 

6,023 

Cash surrender value of bank owned life insurance

 

 

23,426 

 

 

23,261 

Accrued interest receivable

 

 

3,239 

 

 

3,281 

Goodwill

 

 

209 

 

 

209 

Other assets

 

 

5,482 

 

 

4,478 

Total assets

 

$

1,062,495 

 

$

1,009,927 

Liabilities:

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Interest-bearing

 

$

675,719 

 

$

643,714 

Non-interest-bearing

 

 

243,942 

 

 

192,023 

Total deposits

 

 

919,661 

 

 

835,737 

Accrued interest payable and other liabilities

 

 

8,910 

 

 

7,674 

Finance lease obligation

 

 

267 

 

 

286 

Operating lease liabilities

 

 

6,517 

 

 

6,556 

Short-term borrowings

 

 

 -

 

 

37,839 

FHLB advances

 

 

15,000 

 

 

15,000 

Total liabilities

 

 

950,355 

 

 

903,092 

Shareholders' equity:

 

 

 

 

 

 

Preferred stock authorized 5,000,000 shares with no par value; none issued

 

 

 -

 

 

 -

Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 3,797,646 in 2020; and 3,781,500 in 2019)

 

 

31,342 

 

 

30,848 

Retained earnings

 

 

73,948 

 

 

72,385 

Accumulated other comprehensive income

 

 

6,850 

 

 

3,602 

Total shareholders' equity

 

 

112,140 

 

 

106,835 

Total liabilities and shareholders' equity

 

$

1,062,495 

 

$

1,009,927 



 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

 

 

 

 

 

3


 







 

 

 

 

 

 

Fidelity D & D Bancorp, Inc. and Subsidiary

 

 

 

 

 

 

Consolidated Statements of Income

 

 

 

 

 

 

(Unaudited)

 

 

(dollars in thousands except per share data)

 

March 31, 2020

 

March 31, 2019

Interest income:

 

 

 

 

 

 

Loans and leases:

 

 

 

 

 

 

Taxable

 

$

8,063 

 

$

7,891 

Nontaxable

 

 

297 

 

 

267 

Interest-bearing deposits with financial institutions

 

 

12 

 

 

15 

Restricted regulatory securities

 

 

65 

 

 

100 

Investment securities:

 

 

 

 

 

 

U.S. government agency and corporations

 

 

846 

 

 

960 

States and political subdivisions (nontaxable)

 

 

423 

 

 

422 

States and political subdivisions (taxable)

 

 

 

 

 -

Total interest income

 

 

9,711 

 

 

9,655 

Interest expense:

 

 

 

 

 

 

Deposits

 

 

1,516 

 

 

1,331 

Other short-term borrowings and other

 

 

75 

 

 

271 

FHLB advances

 

 

114 

 

 

143 

Total interest expense

 

 

1,705 

 

 

1,745 

Net interest income

 

 

8,006 

 

 

7,910 

Provision for loan losses

 

 

300 

 

 

255 

Net interest income after provision for loan losses

 

 

7,706 

 

 

7,655 

Other income:

 

 

 

 

 

 

Service charges on deposit accounts

 

 

559 

 

 

539 

Interchange fees

 

 

557 

 

 

494 

Service charges on loans

 

 

438 

 

 

280 

Fees from trust fiduciary activities

 

 

419 

 

 

294 

Fees from financial services

 

 

159 

 

 

235 

Fees and other revenue

 

 

250 

 

 

256 

Earnings on bank-owned life insurance

 

 

165 

 

 

146 

Gain (loss) on write-down, sale or disposal of:

 

 

 

 

 

 

Loans

 

 

215 

 

 

218 

Available-for-sale debt securities

 

 

-

 

 

(4)

Premises and equipment

 

 

(7)

 

 

(1)

Total other income

 

 

2,755 

 

 

2,457 

Other expenses:

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,923 

 

 

3,704 

Premises and equipment

 

 

1,118 

 

 

1,075 

Data processing and communication

 

 

460 

 

 

411 

Advertising and marketing

 

 

434 

 

 

399 

Professional services

 

 

411 

 

 

366 

Merger-related expenses

 

 

273 

 

 

19 

Automated transaction processing

 

 

227 

 

 

186 

Office supplies and postage

 

 

106 

 

 

105 

PA shares tax

 

 

66 

 

 

40 

Loan collection

 

 

29 

 

 

41 

Other real estate owned

 

 

27 

 

 

51 

FDIC assessment

 

 

-  

 

 

67 

Other

 

 

230 

 

 

306 

Total other expenses

 

 

7,304 

 

 

6,770 

Income before income taxes

 

 

3,157 

 

 

3,342 

Provision for income taxes

 

 

523 

 

 

540 

Net income

 

$

2,634 

 

$

2,802 

Per share data :

 

 

 

 

 

 

Net income - basic

 

$

0.69 

 

$

0.74 

Net income - diluted

 

$

0.69 

 

$

0.73 

Dividends

 

$

0.28 

 

$

0.26 



 

 

 

 

 

See notes to unaudited consolidated financial statements

 

 

 

 

 

 



















4


 





 

 

 

 

 



 

 

 

 

 

Fidelity D & D Bancorp, Inc. and Subsidiary

 

 

 

 

 

Consolidated Statements of Comprehensive Income

Three months ended

(Unaudited)

March 31,

(dollars in thousands)

2020

 

2019



 

 

 

 

 

Net income

$

2,634 

 

$

2,802 



 

 

 

 

 

Other comprehensive income, before tax:

 

 

 

 

 

Unrealized holding gain on available-for-sale debt securities

 

4,111 

 

 

2,516 

Reclassification adjustment for net losses realized in income

 

 -

 

 

Net unrealized gain

 

4,111 

 

 

2,520 

Tax effect

 

(863)

 

 

(529)

Unrealized gain, net of tax

 

3,248 

 

 

1,991 

Other comprehensive income, net of tax

 

3,248 

 

 

1,991 

Total comprehensive income, net of tax

$

5,882 

 

$

4,793 



 

 

 

 

 

See notes to unaudited consolidated financial statements

 

 

 

 

 

5


 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fidelity D & D Bancorp, Inc. and Subsidiary

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2020 and 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 



 

 

 

 

 

 

 

 

 

other

 

 

 



Capital stock

 

Retained

 

comprehensive

 

 

 

(dollars in thousands)

Shares

 

Amount

 

earnings

 

income (loss)

 

Total

Balance, December 31, 2018

 

3,759,426 

 

$

29,715 

 

$

64,937 

 

$

(1,095)

 

$

93,557 

Net income

 

 

 

 

 

 

 

2,802 

 

 

 

 

 

2,802 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

1,991 

 

 

1,991 

Effect of adopting ASU 2016-02

 

 

 

 

 

 

 

(107)

 

 

 

 

 

(107)

Issuance of common stock through Employee Stock Purchase Plan

 

4,535 

 

 

175 

 

 

 

 

 

 

 

 

175 

Issuance of common stock from vested restricted share grants through stock compensation plans

 

15,049 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock through exercise of SSARs

 

1,965 

 

 

 -

 

 

 

 

 

 

 

 

 -

Stock-based compensation expense

 

 

 

 

314 

 

 

 

 

 

 

 

 

314 

Cash dividends declared

 

 

 

 

 

 

 

(990)

 

 

 

 

 

(990)

Balance, March 31, 2019

 

3,780,975 

 

$

30,204 

 

$

66,642 

 

$

896 

 

$

97,742 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

3,781,500 

 

$

30,848 

 

$

72,385 

 

$

3,602 

 

$

106,835 

Net income

 

 

 

 

 

 

 

2,634 

 

 

 

 

 

2,634 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

3,248 

 

 

3,248 

Issuance of common stock through Employee Stock Purchase Plan

 

3,885 

 

 

219 

 

 

 

 

 

 

 

 

219 

Issuance of common stock from vested restricted share grants through stock compensation plans

 

12,261 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

275 

 

 

 

 

 

 

 

 

275 

Cash dividends declared

 

 

 

 

 

 

 

(1,071)

 

 

 

 

 

(1,071)

Balance, March 31, 2020

 

3,797,646 

 

$

31,342 

 

$

73,948 

 

$

6,850 

 

$

112,140 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

 

 

 

 

 

 

 

 

 

 



6


 





 

 

 

 

 

 



 

 

 

 

 

 

Fidelity D & D Bancorp, Inc. and Subsidiary

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

 

(Unaudited)

 

Three months ended March 31,

(dollars in thousands)

 

2020

 

2019



 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income 

 

$

2,634 

 

$

2,802 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

835 

 

 

740 

Provision for loan losses

 

 

300 

 

 

255 

Deferred income tax expense

 

 

442 

 

 

218 

Stock-based compensation expense

 

 

243 

 

 

279 

Excess tax benefit from exercise of SSARs

 

 

 -

 

 

23 

Proceeds from sale of loans held-for-sale

 

 

13,055 

 

 

12,702 

Originations of loans held-for-sale

 

 

(11,232)

 

 

(6,231)

Earnings from bank-owned life insurance

 

 

(165)

 

 

(146)

Net gain from sales of loans

 

 

(215)

 

 

(218)

Net loss from sales of investment securities

 

 

-

 

 

Net loss from sale and write-down of foreclosed assets held-for-sale

 

 

17 

 

 

21 

Net loss from write-down and disposal of bank premises and equipment

 

 

 

 

Operating lease payments

 

 

 

 

Change in:

 

 

 

 

 

 

Accrued interest receivable

 

 

42 

 

 

(50)

Other assets

 

 

(903)

 

 

(633)

Accrued interest payable and other liabilities

 

 

(178)

 

 

(1,583)

Net cash provided by operating activities

 

 

4,890 

 

 

8,191 



 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

Proceeds from sales

 

 

7,765 

 

 

4,705 

Proceeds from maturities, calls and principal pay-downs

 

 

8,832 

 

 

9,052 

Purchases

 

 

(31,617)

 

 

(11,145)

Decrease in FHLB stock

 

 

1,651 

 

 

2,676 

Net decrease in loans and leases

 

 

5,837 

 

 

12,129 

Principal portion of lease payments received under direct finance leases

 

 

759 

 

 

717 

Purchase of life insurance policies

 

 

 -

 

 

(2,000)

Purchases of bank premises and equipment

 

 

(271)

 

 

(334)

Proceeds from sale of foreclosed assets held-for-sale

 

 

236 

 

 

26 

Net cash used in investing activities

 

 

(6,808)

 

 

15,826 



 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Net increase in deposits

 

 

83,924 

 

 

55,102 

Net decrease in short-term borrowings

 

 

(37,839)

 

 

(70,460)

Repayment of FHLB advances

 

 

 -

 

 

(10,000)

Repayment of finance lease obligation

 

 

(18)

 

 

(19)

Proceeds from employee stock purchase plan participants

 

 

219 

 

 

175 

Dividends paid

 

 

(1,071)

 

 

(990)

Net cash provided by financing activities

 

 

45,215 

 

 

(26,192)

Net increase (decrease) in cash and cash equivalents

 

 

43,297 

 

 

(2,175)

Cash and cash equivalents, beginning

 

 

15,663 

 

 

17,485 



 

 

 

 

 

 

Cash and cash equivalents, ending

 

$

58,960 

 

$

15,310 



 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

 

 

 

 

 



7


 





 

 

 

 

 

 

Fidelity D & D Bancorp, Inc. and Subsidiary

 

 

 

 

 

 

Consolidated Statements of Cash Flows (continued)

 

 

 

 

 

 

(Unaudited)

 

Three months ended March 31,

(dollars in thousands)

 

2020

 

2019

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

Interest

 

$

1,784 

 

$

1,626 

Income tax

 

 

 -

 

 

 -

Supplemental Disclosures of Non-cash Investing Activities:

 

 

 

 

 

 

Net change in unrealized gains on available-for-sale securities

 

 

4,111 

 

 

2,520 

Transfers from loans to foreclosed assets held-for-sale

 

 

 -

 

 

277 

Transfers from loans to loans held-for-sale

 

 

1,662 

 

 

1,925 

Security settlement pending

 

 

1,445 

 

 

1,698 

Right-of-use asset

 

 

 -

 

 

4,133 

Lease liability

 

 

 -

 

 

4,540 



 

 

 

 

 

 



 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

 

 

 

 

 



 

 

 

 

 

 



8


 



FIDELITY D & D BANCORP, INC.



Notes to Consolidated Financial Statements

(Unaudited)

1.   Nature of operations and critical accounting policies

Nature of operations

Fidelity D & D Bancorp, Inc. (the Company) is a bank holding company and the parent of Fidelity Deposit and Discount Bank (the Bank).  The Bank is a commercial bank chartered under the law of the Commonwealth of Pennsylvania and a wholly-owned subsidiary of the Company.  Having commenced operations in 1903, the Bank is committed to provide superior customer service, while offering a full range of banking products and financial and trust services to both our consumer and commercial customers from our main office located in Dunmore and other branches located throughout Lackawanna and Luzerne Counties.

Effective May 1, 2020, the Company completed its acquisition of MNB Corporation (MNB) and its wholly-owned subsidiary, Merchants Bank of Bangor.  At the effective time of the acquisition, MNB merged with and into the Company with the Company surviving the merger.  In addition, Merchants Bank of Bangor merged with and into the Bank with the Bank as the surviving bank.  With the combination of the two organizations, the Company, on a consolidated basis, has approximately $1.6 billion in assets, $1.4 billion in deposits, and $1.1 billion in loans with 21 community banking offices located in the counties of Lackawanna, Luzerne and Northampton in Pennsylvania and a Wealth Management office in Schuylkill and Lebanon Counties in Pennsylvania.  Further discussion of the acquisition of MNB can be found in Footnote 9, “Acquisition”.

Principles of consolidation

The accompanying unaudited consolidated financial statements of the Company and the Bank have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to this Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements.  In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial condition and results of operations for the periods have been included.  All significant inter-company balances and transactions have been eliminated in consolidation.

For additional information and disclosures required under GAAP, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Management is responsible for the fairness, integrity and objectivity of the unaudited financial statements included in this report.  Management prepared the unaudited financial statements in accordance with GAAP.  In meeting its responsibility for the financial statements, management depends on the Company's accounting systems and related internal controls.  These systems and controls are designed to provide reasonable but not absolute assurance that the financial records accurately reflect the transactions of the Company, the Company’s assets are safeguarded and that the financial statements present fairly the financial condition and results of operations of the Company.

In the opinion of management, the consolidated balance sheets as of March 31, 2020 and December 31, 2019 and the related consolidated statements of income, consolidated statements of comprehensive income and consolidated statements of changes in shareholders’ equity for the three months ended March 31, 2020 and 2019, and consolidated statements of cash flows for the three months ended March 31, 2020 and 2019 present fairly the financial condition and results of operations of the Company.  All material adjustments required for a fair presentation have been made.  These adjustments are of a normal recurring nature.  Certain reclassifications have been made to the 2019 financial statements to conform to the 2020 presentation. 

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after March 31, 2020 through the date these consolidated financial statements were issued.

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2019, and the notes included therein, included within the Company’s Annual Report filed on Form 10-K.

Critical accounting policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.  Actual results could differ from those estimates.

A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses.  Management believes that the allowance for loan losses at March 31, 2020 is adequate and reasonable to cover incurred losses.  Given the subjective nature of identifying and estimating loan losses, it is likely that well-informed individuals could make different assumptions and could, therefore, calculate a materially different allowance amount.  While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in the future.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses.  Such

9


 

agencies may require the Company to recognize adjustments to the allowance based on their judgment of information available to them at the time of their examination.

Another material estimate is the calculation of fair values of the Company’s investment securities.  Fair values of investment securities are determined by pricing provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.  Based on experience, management is aware that estimated fair values of investment securities tend to vary among valuation services.  Accordingly, when selling investment securities, price quotes may be obtained from more than one source.  All of the Company’s debt securities are classified as available-for-sale (AFS).  AFS debt securities are carried at fair value on the consolidated balance sheets, with unrealized gains and losses, net of income tax, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (AOCI). 

The fair value of residential mortgage loans, classified as held-for-sale (HFS), is obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank (FHLB).  Generally, the market to which the Company sells residential mortgages it originates for sale is restricted and price quotes from other sources are not typically obtained.  On occasion, the Company may transfer loans from the loan portfolio to loans HFS.  Under these circumstances, pricing may be obtained from other entities and the residential mortgage loans are transferred at the lower of cost or market value and simultaneously sold.  For other loans transferred to HFS, pricing may be obtained from other entities or modeled and the other loans are transferred at the lower of cost or market value and then sold.  As of March 31, 2020 and December 31, 2019, loans classified as HFS consisted of residential mortgage loans.

Financing of automobiles, provided to customers under lease arrangements of varying terms, are accounted for as direct finance leases.  Interest income on automobile direct finance leasing is determined using the interest method to arrive at a level effective yield over the life of the lease.  The lease residual and the lease receivable, net of unearned lease income, are recorded within loans and leases on the balance sheet.

Foreclosed assets held-for-sale includes other real estate acquired through foreclosure (ORE) and may, from time-to-time, include repossessed assets such as automobiles.  ORE is carried at the lower of cost (principal balance at date of foreclosure) or fair value less estimated cost to sell.  Any write-downs at the date of foreclosure are charged to the allowance for loan losses.  Expenses incurred to maintain ORE properties, subsequent write downs to the asset’s fair value, any rental income received and gains or losses on disposal are included as components of other real estate owned expense in the consolidated statements of income.   

Goodwill is recorded on the consolidated balance sheets as the excess of liabilities assumed over identifiable assets acquired on the acquisition date.  Goodwill is recorded at its net carrying value which represents estimated fair value.  The goodwill is deductible for tax purposes over a 15-year period.

The Company holds separate supplemental executive retirement (SERP) agreements for certain officers and an amount is credited to each participant’s SERP account monthly while they are actively employed by the bank until retirement.  A deferred tax asset is provided for the non-deductible SERP expense.  The Company also entered into separate split dollar life insurance arrangements with four executives providing post-retirement benefits and accrues monthly expense for this benefit.  The split dollar life insurance expense is not deductible for tax purposes.  Monthly expenses for the SERP and post-retirement split dollar life benefit are recorded as components of salaries and employee benefit expense on the consolidated statements of income.

For purposes of the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and interest-bearing deposits with financial institutions. 

2.  New accounting pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (CECL).  The amendments in this update require financial assets measured at amortized cost basis 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.  Previously, when credit losses were measured under GAAP, an entity only considered past events and current conditions when measuring the incurred loss.  The amendments in this update broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually.  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.  An entity must use judgement in determining the relevant information and estimation methods that are appropriate under the circumstances.  The amendments in this update also require that credit losses on available-for-sale debt securities be presented as an allowance for credit losses rather than a writedown. 

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, which clarifies that receivables arising from operating leases are not within the scope of Topic 326.  In December 2018, regulators issued a final rule related to regulatory capital (Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations) which is intended to provide regulatory capital relief for entities transitioning to CECL.  In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments.  As it relates to CECL, this guidance amends certain provisions contained in ASU 2016-13, particularly in regards to the

10


 

inclusion of accrued interest in the definition of amortized cost, as well as clarifying that extension and renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract should be considered in the entity’s determination of expected credit losses. 

The amendments in this update are effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019 for public companies.  Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years.  An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption (modified-retrospective approach).  Upon adoption, the change in this accounting guidance could result in an increase in the Company's allowance for loan losses and require the Company to record loan losses more rapidly.  The Company has engaged the services of a qualified third-party service provider to assist management in estimating credit allowances under this standard and is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.  On October 16, 2019, the FASB decided to move forward with finalizing its proposal to defer the effective date for ASU 2016-13 for smaller reporting companies to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods.  Since the Company currently meets the SEC definition of a smaller reporting company, the delay will be applicable to the Company.

3.  Accumulated other comprehensive income

The following tables illustrate the changes in accumulated other comprehensive income by component and the details about the components of accumulated other comprehensive income as of and for the periods indicated:





 

 



 

 

As of and for the three months ended March 31, 2020



Unrealized gains



(losses) on



available-for-sale

(dollars in thousands)

debt securities

Beginning balance

$

3,602 



 

 

Other comprehensive income before reclassifications, net of tax

 

3,248 

Amounts reclassified from accumulated other comprehensive income, net of tax

 

 -

Net current-period other comprehensive income

 

3,248 

Ending balance

$

6,850 











 

 

As of and for the three months ended March 31, 2019



Unrealized gains



(losses) on



available-for-sale

(dollars in thousands)

securities

Beginning balance

$

(1,095)



 

 

Other comprehensive income before reclassifications, net of tax

 

1,988 

Amounts reclassified from accumulated other comprehensive income, net of tax

 

Net current-period other comprehensive income

 

1,991 

Ending balance

$

896 



 

 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Details about accumulated other

 

 

 

 

 

 

 

 

comprehensive income components

 

Amount reclassified from accumulated

 

Affected line item in the statement

(dollars in thousands)

 

other comprehensive income

 

where net income is presented



 

For the three months ended

 

 



 

March 31,

 

 



 

2020

 

2019

 

 



 

 

 

 

 

 

 

 

Unrealized gains (losses) on AFS debt securities

 

$

 -

 

$

(4)

 

Gain (loss) on sale of investment securities

Income tax effect

 

 

 -

 

 

 

Provision for income taxes

Total reclassifications for the period

 

$

 -

 

$

(3)

 

Net income

11


 









4. Investment securities

Agency – Government-sponsored enterprise (GSE) and Mortgage-backed securities (MBS) - GSE residential

Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), FNMA, FHLB and Government National Mortgage Association (GNMA).  These securities have interest rates that are fixed and adjustable, have varying short to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government.

Obligations of states and political subdivisions

The municipal securities are bank qualified or bank eligible, general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities.  Fair values of these securities are highly driven by interest rates.  Management performs ongoing credit quality reviews on these issues.

The amortized cost and fair value of investment securities at March 31, 2020 and December 31, 2019 are summarized as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

(dollars in thousands)

 

cost

 

gains

 

losses

 

value

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

Agency - GSE

 

$

5,945 

 

$

411 

 

$

 -

 

$

6,356 

Obligations of states and political subdivisions

 

 

52,813 

 

 

3,441 

 

 

 -

 

 

56,254 

MBS - GSE residential

 

 

136,555 

 

 

4,819 

 

 

 -

 

 

141,374 



 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale debt securities

 

$

195,313 

 

$

8,671 

 

$

 -

 

$

203,984 



 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

(dollars in thousands)

 

cost

 

gains

 

losses

 

value

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

Agency - GSE

 

$

5,941 

 

$

218 

 

$

 -

 

$

6,159 

Obligations of states and political subdivisions

 

 

51,857 

 

 

2,871 

 

 

(10)

 

 

54,718 

MBS - GSE residential

 

 

122,759 

 

 

1,609 

 

 

(128)

 

 

124,240 



 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale debt securities

 

$

180,557 

 

$

4,698 

 

$

(138)

 

$

185,117 



 

 

 

 

 

 

 

 

 

 

 

 



The amortized cost and fair value of debt securities at March 31, 2020 by contractual maturity are summarized below:



 

 

 

 

 

 



 

 

 



 

Amortized

 

Fair

(dollars in thousands)

 

cost

 

value

Available-for-sale securities:

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

Due in one year or less

 

$

3,580 

 

$

3,594 

Due after one year through five years

 

 

6,868 

 

 

7,336 

Due after five years through ten years

 

 

1,625 

 

 

1,675 

Due after ten years

 

 

46,685 

 

 

50,005 



 

 

 

 

 

 

MBS - GSE residential

 

 

136,555 

 

 

141,374 



 

 

 

 

 

 

Total available-for-sale debt securities

 

$

195,313 

 

$

203,984 



12


 

Actual maturities will differ from contractual maturities because issuers and borrowers may have the right to call or repay obligations with or without call or prepayment penalty.  Agency – GSE and municipal securities are included based on their original stated maturity.  MBS – GSE residential, which are based on weighted-average lives and subject to monthly principal pay-downs, are listed in total.  Most of the securities have fixed rates or have predetermined scheduled rate changes and many have call features that allow the issuer to call the security at par before its stated maturity without penalty.

The following table presents the fair value and gross unrealized losses of debt securities aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of December 31, 2019:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Less than 12 months

 

More than 12 months

 

Total



 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

(dollars in thousands)

 

value

 

losses

 

value

 

losses

 

value

 

losses



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

$

2,867 

 

$

(10)

 

$

 -

 

$

 -

 

$

2,867 

 

$

(10)

MBS - GSE residential

 

 

5,084 

 

 

(19)

 

 

16,518 

 

 

(109)

 

 

21,602 

 

 

(128)

Total

 

$

7,951 

 

$

(29)

 

$

16,518 

 

$

(109)

 

$

24,469 

 

$

(138)

Number of securities

 

 

 

 

 

 

 

12 

 

 

 

 

 

17 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



The Company had no debt securities in an unrealized loss position at March 31, 2020.

Management believes the cause of the unrealized losses is related to changes in interest rates, instability in the capital markets or the limited trading activity due to illiquid conditions in the debt market and is not directly related to credit quality.  Quarterly, management conducts a formal review of investment securities for the presence of other than temporary impairment (OTTI).  The accounting guidance related to OTTI requires the Company to assess whether OTTI is present when the fair value of a debt security is less than its amortized cost as of the balance sheet date.  Under those circumstances, OTTI is considered to have occurred if: (1) the entity has the intent to sell the security; (2) more likely than not the entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost.  The accounting guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold be recognized in other comprehensive income (OCI).  Non-credit-related OTTI is based on other factors affecting market value, including illiquidity.

The Company’s OTTI evaluation process also follows the guidance set forth in topics related to debt securities.  The guidance set forth in the pronouncements require the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the ability and intent to hold investments until a recovery of fair value which may be to maturity and other factors when evaluating for the existence of OTTI.  The guidance requires that credit-related OTTI be recognized as a realized loss through earnings when there has been an adverse change in the holder’s expected cash flows such that the full amount (principal and interest) will probably not be received.  This requirement is consistent with the impairment model in the guidance for accounting for debt securities.

For all debt securities, as of March 31, 2020, the Company applied the criteria provided in the recognition and presentation guidance related to OTTI. That is, management has no intent to sell the securities and nor any conditions were identified by management that, more likely than not, would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there was no presence of OTTI in the Company’s security portfolio. In addition, management believes the change in fair value is attributable to changes in interest rates.

13


 

5.  Loans and leases

The classifications of loans and leases at March 31, 2020 and December 31, 2019 are summarized as follows:





 

 

 

 

 



 

 

(dollars in thousands)

March 31, 2020

 

December 31, 2019

Commercial and industrial

$

118,140 

 

$

122,594 

Commercial real estate:

 

 

 

 

 

Non-owner occupied

 

95,630 

 

 

99,801 

Owner occupied

 

125,976 

 

 

130,558 

Construction

 

3,196 

 

 

4,654 

Consumer:

 

 

 

 

 

Home equity installment

 

35,456 

 

 

36,631 

Home equity line of credit

 

46,850 

 

 

47,282 

Auto loans

 

102,213 

 

 

105,870 

Direct finance leases

 

17,356 

 

 

16,355 

Other

 

7,025 

 

 

5,634 

Residential:

 

 

 

 

 

Real estate

 

175,453 

 

 

167,164 

Construction

 

18,767 

 

 

17,770 

Total

 

746,062 

 

 

754,313 

Less:

 

 

 

 

 

Allowance for loan losses

 

(10,017)

 

 

(9,747)

Unearned lease revenue

 

(938)

 

 

(903)

Loans and leases, net

$

735,107 

 

$

743,663 



Net deferred loan costs of $3.0 million have been included in the carrying values of loans at both March 31, 2020 and December 31, 2019.

Direct finance leases include the lease receivable and the guaranteed lease residual.  Unearned lease revenue represents the difference between the lessor’s investment in the property and the gross investment in the lease.  Unearned revenue is accrued over the life of the lease using the effective interest method. 

The Company services real estate loans for investors in the secondary mortgage market which are not included in the accompanying consolidated balance sheets.  The approximate unpaid principal balance of mortgages serviced amounted to $299.0 million as of March 31, 2020 and $302.3 million as of December 31, 2019.  Mortgage servicing rights amounted to $1.0 million and $1.0 million as of March 31, 2020 and December 31, 2019, respectively.

Management is responsible for conducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed as the case may be. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted.  The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis. Results of these reviews are presented to management and the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Non-accrual loans

The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan.  C&I and CRE loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection.  Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at 120 days past due as to principal and interest and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest. The Company considers all non-accrual loans to be impaired loans.

14


 

Non-accrual loans, segregated by class, at March 31, 2020 and December 31, 2019, were as follows: