Item 1. Financial Statements
Item 1. Financial Statements.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited) March 31,
2021 December 31,
2020
(Dollars in thousands, except per share and share data)
ASSETS
Cash and Due From Banks:
Interest Bearing $ 216,753 $ 145,636
Non-Interest Bearing 13,247 15,275
Total Cash and Due From Banks 230,000 160,911
Securities:
Available-for-Sale Debt Securities, at Fair Value 139,406 142,897
Equity Securities, at Fair Value 2,750 2,503
Total Securities 142,156 145,400
Loans, Net of Allowance for Loan Losses of $ 12,725 and $ 12,771 at March 31, 2021 and December 31, 2020, Respectively
1,028,972 1,031,982
Premises and Equipment, Net
20,240 20,302
Bank-Owned Life Insurance
24,916 24,779
Goodwill
9,732 9,732
Intangible Assets, Net
7,867 8,399
Accrued Interest Receivable and Other Assets 12,938 15,215
TOTAL ASSETS
$ 1,476,821 $ 1,416,720
LIABILITIES
Deposits:
Non-Interest Bearing Demand Deposits $ 377,137 $ 340,569
NOW Accounts 280,929 259,870
Money Market Accounts 198,975 199,029
Savings Accounts 246,725 235,088
Time Deposits 180,697 190,013
Total Deposits 1,284,463 1,224,569
Short-Term Borrowings
45,352 41,055
Other Borrowings
6,000 8,000
Accrued Interest Payable and Other Liabilities 7,230 8,566
TOTAL LIABILITIES
1,343,045 1,282,190
STOCKHOLDERS' EQUITY
Preferred Stock, No Par Value; 5,000,000 Shares Authorized
— —
Common Stock, $ 0.4167 Par Value; 35,000,000 Shares Authorized, 5,680,993 Shares Issued and 5,434,374 and 5,434,374 Shares Outstanding at March 31, 2021 and December 31, 2020, Respectively
2,367 2,367
Capital Surplus
82,844 82,723
Retained Earnings
52,673 51,132
Treasury Stock, at Cost ( 246,619 and 246,619 Shares at March 31, 2021 and December 31, 2020, Respectively)
( 5,094 ) ( 5,094 )
Accumulated Other Comprehensive Income
986 3,402
TOTAL STOCKHOLDERS' EQUITY
133,776 134,530
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 1,476,821 $ 1,416,720
The accompanying notes are an integral part of these consolidated financial statements
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 31,
2021 2020
(Dollars in thousands, except share and per share data)
INTEREST AND DIVIDEND INCOME
Loans, Including Fees $ 10,146 $ 10,764
Investment Securities:
Taxable 646 1,201
Tax-Exempt 78 106
Dividends 20 20
Other Interest and Dividend Income 98 238
TOTAL INTEREST AND DIVIDEND INCOME 10,988 12,329
INTEREST EXPENSE
Deposits 947 1,681
Short-Term Borrowings 23 45
Other Borrowings 41 70
TOTAL INTEREST EXPENSE 1,011 1,796
NET INTEREST AND DIVIDEND INCOME 9,977 10,533
Provision For Loan Losses — 2,500
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,977 8,033
NONINTEREST INCOME
Service Fees 546 605
Insurance Commissions 1,595 1,283
Other Commissions 165 110
Net Gain on Sales of Loans 86 127
Net Gain (Loss) on Securities 447 ( 438 )
Net Gain on Purchased Tax Credits 18 15
Net Gain on Disposal of Fixed Assets — 17
Income from Bank-Owned Life Insurance 137 139
Other Income 180 14
TOTAL NONINTEREST INCOME 3,174 1,872
NONINTEREST EXPENSE
Salaries and Employee Benefits 4,894 4,731
Occupancy 710 733
Equipment 266 257
Data Processing 518 425
FDIC Assessment 250 158
PA Shares Tax 265 275
Contracted Services 687 378
Legal and Professional Fees 189 235
Advertising 140 183
Other Real Estate Owned Income ( 38 ) ( 17 )
Amortization of Intangible Assets 532 532
Other Expense 982 1,113
TOTAL NONINTEREST EXPENSE 9,395 9,003
Income Before Income Tax Expense 3,756 902
Income Tax Expense 911 129
NET INCOME $ 2,845 $ 773
EARNINGS PER SHARE
Basic $ 0.52 $ 0.14
Diluted 0.52 0.14
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 5,434,374 5,431,199
Diluted 5,436,881 5,456,867
The accompanying notes are an integral part of these consolidated financial statements
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
March 31,
2021 2020
(Dollars in thousands)
Net Income $ 2,845 $ 773
Other Comprehensive (Loss) Income:
Change in Unrealized (Loss) Gain on Investment Securities Available-for-Sale
( 2,851 ) 3,518
Income Tax Effect 612 ( 739 )
Reclassification Adjustment for Gain on Sale of Debt Securities Included in Net Income (1)
( 225 ) —
Income Tax Effect (2)
48 —
Other Comprehensive (Loss) Income, Net of Income Tax Effect ( 2,416 ) 2,779
Total Comprehensive Income $ 429 $ 3,552
(1) Reported in Net Gain (Loss) on Securities on the Consolidated Statements of Income.
(2) Reported in Income Tax Expense on the Consolidated Statements of Income.
The accompanying notes are an integral part of these consolidated financial statements
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Shares Issued
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other
Comprehensive Income (Loss) Total Stockholders' Equity
(Dollars in thousands, except share and per share data)
December 31, 2020 5,680,993 $ 2,367 $ 82,723 $ 51,132 $ ( 5,094 ) $ 3,402 $ 134,530
Comprehensive Income:
Net Income — — — 2,845 — — 2,845
Other Comprehensive Loss — — — — — ( 2,416 ) ( 2,416 )
Stock-Based Compensation Expense
— — 121 — — — 121
Dividends Paid ($ 0.24 Per Share)
— — — ( 1,304 ) — — ( 1,304 )
March 31, 2021 5,680,993 $ 2,367 $ 82,844 $ 52,673 $ ( 5,094 ) $ 986 $ 133,776
Shares Issued Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other
Comprehensive Income Total Stockholders' Equity
(Dollars in thousands, except share and per share data)
December 31, 2019 5,680,993 $ 2,367 $ 82,971 $ 66,955 $ ( 3,842 ) $ 2,646 $ 151,097
Comprehensive Income:
Net Income — — — 773 — — 773
Other Comprehensive Income — — — — — 2,779 2,779
Restricted Stock Awards Forfeited — — 96 — ( 96 ) — —
Stock-Based Compensation Expense — — 145 — — — 145
Exercise of Stock Options — — 4 — ( 68 ) — ( 64 )
Treasury Stock Purchased, at cost ( 67,816 shares)
— — — — ( 1,908 ) — ( 1,908 )
Dividends Paid ($ 0.24 Per Share)
— — — ( 1,297 ) — — ( 1,297 )
March 31, 2020 5,680,993 $ 2,367 $ 83,216 $ 66,431 $ ( 5,914 ) $ 5,425 $ 151,525
The accompanying notes are an integral part of these consolidated financial statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 2021 2020
(Dollars in thousands)
OPERATING ACTIVITIES
Net Income $ 2,845 $ 773
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities
Amortization (Accretion) on Securities 31 ( 70 )
Depreciation and Amortization 562 941
Provision for Loan Losses — 2,500
(Gain) Loss on Securities ( 447 ) 438
Gain on Purchased Tax Credits ( 18 ) ( 15 )
Income from Bank-Owned Life Insurance ( 137 ) ( 139 )
Proceeds From Mortgage Loans Sold 2,251 4,771
Originations of Mortgage Loans for Sale ( 2,165 ) ( 4,644 )
Gain on Sale of Loans ( 86 ) ( 127 )
Gain on Sale of Other Real Estate Owned and Repossessed Assets — ( 4 )
Noncash Expense for Stock-Based Compensation 121 145
Decrease in Accrued Interest Receivable 134 23
Net Gain on Disposal of Fixed Assets — ( 17 )
Increase (Decrease) in Taxes Payable 893 ( 1,165 )
Payments on Operating Leases ( 88 ) ( 110 )
Decrease in Accrued Interest Payable ( 141 ) ( 124 )
Refund of Federal and State Income Taxes 1,311 —
Other, Net ( 597 ) 414
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,469 3,590
INVESTING ACTIVITIES
Investment Securities Available for Sale:
Proceeds From Principal Repayments and Maturities 10,953 46,498
Purchases of Securities ( 22,299 ) ( 19,824 )
Proceeds from Sale of Securities 11,930 —
Net Decrease (Increase) in Loans 3,148 ( 18,861 )
Purchase of Premises and Equipment ( 199 ) ( 17 )
Proceeds From Sale of Other Real Estate Owned — 22
Decrease in Restricted Equity Securities 200 66
NET CASH PROVIDED BY INVESTING ACTIVITIES 3,733 7,884
FINANCING ACTIVITIES
Net Increase (Decrease) in Deposits 59,894 ( 11,719 )
Net Increase in Short-Term Borrowings 4,297 4,396
Principal Payments on Other Borrowed Funds ( 2,000 ) ( 3,000 )
Cash Dividends Paid ( 1,304 ) ( 1,297 )
Treasury Stock, Purchases at Cost — ( 1,908 )
Exercise of Stock Options — ( 64 )
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 60,887 ( 13,592 )
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 69,089 ( 2,118 )
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 160,911 80,217
CASH AND DUE FROM BANKS AT END OF PERIOD $ 230,000 $ 78,099
The accompanying notes are an integral part of these consolidated financial statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 2021 2021 2020
(Dollars in thousands)
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Paid For:
Interest on Deposits and Borrowings (Including Interest Credited to Deposits of $ 1,084 and $ 1,799 , Respectively)
$ 1,153 $ 1,920
SUPPLEMENTAL NONCASH DISCLOSURE:
Other Real Estate Acquired in Settlement of Loans — 76
Securities Sold Not Settled — 2,450
Right of Use Asset Recognized — 23
Lease Liability Recognized — 23
The accompanying notes are an integral part of these consolidated financial statements
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of CB Financial Services, Inc. (“CB Financial”) and its wholly owned subsidiary, Community Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Exchange Underwriters, Inc. (“Exchange Underwriters” or “EU”). CB Financial, the Bank and Exchange Underwriters are collectively referred to as the “Company”. All intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading in any material respect. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, evaluation of securities for other-than-temporary impairment including related cash flow projections, goodwill and intangible assets impairment, and the valuation of deferred tax assets.
In the opinion of management, the accompanying unaudited interim financial statements include all adjustments considered necessary for a fair presentation of the Company’s financial position and results of operations at the dates and for the periods presented. All these adjustments are of a normal, recurring nature, and they are the only adjustments included in the accompanying unaudited interim financial statements. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Interim results are not necessarily indicative of results for a full year.
The Company evaluated subsequent events through the date the consolidated financial statements were filed with the SEC and incorporated into the consolidated financial statements the effect of all material known events determined by Accounting Standards Codification ("ASC") 855, Subsequent Events , to be recognizable events.
Branch Optimization and Operational Efficiency Update
As previously disclosed by the Company on February 23, 2021, the Company announced the implementation of strategic initiatives to improve the Bank’s financial performance and to position the Bank for continued profitable growth. The Bank intends to optimize its current branch network through the consolidation of six branches and the possible divestiture of others, while expanding technology and infrastructure investments in its remaining locations. The decision was the result of a comprehensive internal study that measured branch performance by comparing financial and non-financial indicators to growth opportunities, while evolving changes in consumer preferences, largely driven by the global pandemic, led to an acceleration of branch optimization efforts. The branch optimization, which is expected to be completed in 2021, will result in the Company incurring restructuring related expenses predominantly from branch consolidations, lease termination and severance costs.
The Bank also completed a comprehensive review of its branch network and operating environment to identify solutions to improve operating performance. This review prioritized profitability, efficiency, infrastructure and client experience improvements, automation in operations, and digital marketing and technology investments.
Nature of Operations
The Company derives substantially all its income from banking and bank-related services which include interest earnings on commercial, commercial mortgage, residential real estate and consumer loan financing, as well as interest earnings on investment securities and fees generated from deposit services to its customers. The Company provides banking services through its subsidiary, Community Bank, a Pennsylvania-chartered commercial bank. The Bank operates 15 offices in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania, six offices in Brooke, Marshall, Ohio, Upshur and Wetzel Counties in West Virginia, and one office in Belmont County in Ohio. The Bank is a community-oriented institution offering residential and commercial real estate loans, commercial and industrial loans, and consumer loans as well as a variety of deposit products for individuals and businesses in its market area. Property and casualty, commercial liability, surety and other insurance products are offered through Exchange Underwriters, a full-service, independent insurance agency.
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Reclassifications
Certain comparative amounts for the prior year have been reclassified to conform to the current year presentation. Such reclassifications did not affect net income or stockholders’ equity.
Recent Accounting Standards
In March 2020, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The elective guidance in the ASU applies to modifications of contract terms that will directly replace, or have the potential to replace, an affected rate with another interest rate index, as well as certain contemporaneous modifications of other contract terms related to the replacement of an affected rate. The ASU notes that changes in contract terms that are made to effect the reference rate reform transition are considered related to the replacement of a reference rate if they are not the result of a business decision that is separate from or in addition to changes to the terms of a contract to effect that transition. The optional expedient allows companies to account for the modification as if it was not substantial (i.e., do not treat as an extinguishment of debt). The ASU is intended to help stakeholders during the global market-wide reference rate transition period. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. While the LIBOR reform may require extensive changes to the contracts that govern LIBOR based products, as well as our systems and processes, we cannot yet determine whether the Company will be able to use the optional expedient for the changes to contract terms that may be required by LIBOR reform and therefore, the Company cannot yet determine the magnitude of the impact or the overall impact of the new guidance on the Company’s consolidated financial condition or results of operation.
In December 2019, FASB issued ASU 2019-12, Income taxes (Topic 740); Simplifying the Accounting for Income Taxes . ASU 2019-12 provides amendments intended to reduce the cost and complexity in accounting for income taxes while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 removes the following exceptions from ASC 740, Income Taxes: (i) exceptions to the incremental approach for intraperiod tax allocation; (ii) exceptions to accounting for basis differences when a foreign subsidiary becomes an equity method investment or a foreign equity method investment become a subsidiary; and (iii) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 provides the following amendments that simplify and improve guidance with Topic 740: (i) franchise taxes that are based partially on income; (ii) transactions that result in a step up in the tax basis of goodwill; (iii) separate financial statements of legal entities that are not subject to tax; (iv) enacted changes in tax laws in interim periods; and (v) employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this ASU did not have a material impact on the Company's consolidated statements of financial condition or results of operation.
In September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP; and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however this ASU requires that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects companies holding financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU 2016-13 amendments affect loans, debt securities, trade receivables, net investments in leases, off balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 was originally effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, including the Company, resulting in a required implementation date for the Company of January 1, 2023. Early adoption will continue to be permitted. The Company is evaluating the impact of this ASU and expects to recognize a one-time adjustment to the allowance for loan losses upon adoption, but we cannot yet determine the magnitude of the one-time adjustment or the overall impact of the new guidance on the Company’s consolidated financial condition or results of operation.
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Note 2. Earnings Per Share
There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statements of Income is used as the numerator.
The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.
Three Months Ended
March 31,
2021 2020
(Dollars in thousands, except share and per share data)
Net Income $ 2,845 $ 773
Weighted-Average Basic Common Shares Outstanding
5,434,374 5,431,199
Dilutive Effect of Common Stock Equivalents (Stock Options and Restricted Stock)
2,507 25,668
Weighted-Average Diluted Common Shares and Common Stock Equivalents Outstanding
5,436,881 5,456,867
Earnings Per Share:
Basic
$ 0.52 $ 0.14
Diluted
0.52 0.14
The dilutive effect on weighted average diluted common shares outstanding is the result of outstanding stock options and nonvested restricted stock. The following table presents for the periods indicated (a) options to purchase shares of common stock that were outstanding but not included in the computation of earnings per share because the options’ exercise price was greater than the average market price of the common shares for the period, and (b) shares of restricted stock awards that were not included in the computation of diluted earnings per share because the hypothetical repurchase of shares under the treasury stock method exceeded the weighted average nonvested restricted awards, therefore the effects would be anti-dilutive.
Three Months Ended
March 31,
2021 2020
Stock Options 201,662 78,545
Restricted Stock 33,610 30,250
When there is a net loss for the period, the exercise or conversion of any potential shares increases the number of shares in the denominator and results in a lower loss per share. In that situation, the potential shares are antidilutive and not included in the Company's loss per share calculation. Therefore, if there is a net loss, diluted loss per share is the same as basic loss per share.
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Note 3. Securities
The following table presents the amortized cost and fair value of securities available-for-sale at the dates indicated:
March 31, 2021
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(Dollars in thousands)
Available-for-Sale Debt Securities:
U.S. Government Agencies
$ 50,992 $ — $ ( 2,304 ) $ 48,688
Obligations of States and Political Subdivisions
20,664 1,063 — 21,727
Mortgage-Backed Securities - Government-Sponsored Enterprises
66,495 2,673 ( 177 ) 68,991
Total Available-for-Sale Debt Securities 138,151 3,736 ( 2,481 ) 139,406
Equity Securities:
Mutual Funds
1,001
Other
1,749
Total Equity Securities 2,750
Total Securities $ 142,156
December 31, 2020
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(Dollars in thousands)
Available-for-Sale Debt Securities:
U.S. Government Agencies
$ 41,994 $ 12 $ ( 595 ) $ 41,411
Obligations of States and Political Subdivisions
20,672 1,321 — 21,993
Mortgage-Backed Securities - Government-Sponsored Enterprises
75,900 3,593 — 79,493
Total Available-for-Sale Debt Securities 138,566 4,926 ( 595 ) 142,897
Equity Securities:
Mutual Funds
1,019
Other
1,484
Total Equity Securities 2,503
Total Securities $ 145,400
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The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at the dates indicated:
March 31, 2021
Less than 12 months
12 Months or Greater
Total
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
(Dollars in thousands)
U.S. Government Agencies
12 $ 48,688 $ ( 2,304 ) — $ — $ — 12 $ 48,688 $ ( 2,304 )
Mortgage Backed Securities- Government Sponsored Enterprises
3 13,097 ( 177 ) — — — 3 13,097 ( 177 )
Total 15 $ 61,785 $ ( 2,481 ) — $ — $ — 15 $ 61,785 $ ( 2,481 )
December 31, 2020
Less than 12 months
12 Months or Greater
Total
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
(Dollars in thousands)
U.S. Government Agencies
7 $ 32,399 $ ( 595 ) — $ — $ — 7 $ 32,399 $ ( 595 )
Total
7 $ 32,399 $ ( 595 ) — $ — $ — 7 $ 32,399 $ ( 595 )
For debt securities, the Company does not believe that any individual unrealized loss as of March 31, 2021 or December 31, 2020, represents an other-than-temporary impairment. The Company performs a review of the entire securities portfolio on a quarterly basis to identify securities that may indicate an other-than-temporary impairment. The Company’s management considers the length of time and the extent to which the fair value has been less than cost, and the financial condition of the issuer. The securities that are temporarily impaired at March 31, 2021 and December 31, 2020 relate principally to changes in interest rates subsequent to the acquisition of the specific securities. The Company does not intend to sell, and it is not more likely than not that it will be required to sell any of the securities in an unrealized loss position before recovery of its amortized cost or maturity of the security.
Securities available-for-sale with a fair value of $ 129.1 million and $ 119.7 million at March 31, 2021 and December 31, 2020, respectively, are pledged to secure public deposits, short-term borrowings and for other purposes as required or permitted by law.
The following table presents the scheduled maturities of debt securities as of the date indicated:
March 31, 2021
Amortized
Cost
Fair
Value
(Dollars in thousands)
Due in One Year or Less
$ 500 $ 500
Due after One Year through Five Years
4,807 4,872
Due after Five Years through Ten Years
64,948 64,085
Due after Ten Years
67,896 69,949
Total
$ 138,151 $ 139,406
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The following table presents the gross realized gain and loss on sales of debt securities, as well as gain and loss on equity securities from both sales and market adjustments for the periods indicated. All gains and losses presented in the table below are reported in net gain (loss) on securities on the Consolidated Statements of Income.
Three Months Ended
March 31,
2021 2020
(Dollars in thousands)
Debt Securities
Gross Realized Gain $ 225 $ —
Gross Realized Loss — —
Net Gain on Debt Securities $ 225 $ —
Equity Securities
Net Unrealized Gain (Loss) Recognized on Securities Held $ 222 $ ( 438 )
Net Realized Gain Recognized on Securities Sold — —
Net Gain (Loss) on Equity Securities $ 222 $ ( 438 )
Net Gain (Loss) on Securities $ 447 $ ( 438 )
Note 4. Loans and Allowance for Loan Losses
The Company’s loan portfolio is segmented to enable management to monitor risk and performance. Real estate loans are further segregated into three classes. Residential mortgages include those secured by residential properties and include home equity loans, while commercial mortgages consist of loans to commercial borrowers secured by commercial real estate. Construction loans typically consist of loans to build commercial buildings and acquire and develop residential real estate. The commercial and industrial segment consists of loans to finance the activities of commercial customers. The consumer segment consists primarily of indirect auto loans as well as personal installment loans and personal or overdraft lines of credit.
Residential mortgage loans are typically longer-term loans and, therefore, generally present greater interest rate risk than the consumer and commercial loans. Under certain economic conditions, housing values may decline, which may increase the risk that the collateral values are not sufficient.
Commercial real estate loans generally present a higher level of risk than loans secured by residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income-producing properties, and the increased difficulty in evaluating and monitoring these types of loans. Furthermore, the repayment of commercial real estate loans is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired.
Construction loans are originated to individuals to finance the construction of residential dwellings and are also originated for the construction of commercial properties, including hotels, apartment buildings, housing developments, and owner-occupied properties used for businesses. Construction loans generally provide for the payment of interest only during the construction phase, which is usually 12 to 18 months. At the end of the construction phase, the loan generally converts to a permanent residential or commercial mortgage loan. Construction loan risks include overfunding in comparison to the plans, untimely completion of work, and leasing and stabilization after project completion.
Commercial and industrial loans are generally secured by business assets, inventories, accounts receivable, etc., which present collateral risk.
Consumer loans generally have higher interest rates and shorter terms than residential mortgage loans; however, they have additional credit risk due to the type of collateral securing the loan.
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The following table presents the classifications of loans as of the dates indicated.
March 31, 2021 December 31, 2020
Amount
Percent
Amount
Percent
(Dollars in thousands)
Real Estate:
Residential
$ 339,596 32.6 % $ 344,142 32.9 %
Commercial
370,118 35.5 373,555 35.9
Construction
77,714 7.5 72,600 6.9
Commercial and Industrial
128,931 12.4 126,813 12.1
Consumer
111,650 10.7 113,854 10.9
Other
13,688 1.3 13,789 1.3
Total Loans
1,041,697 100.0 % 1,044,753 100.0 %
Allowance for Loan Losses
( 12,725 ) ( 12,771 )
Loans, Net
$ 1,028,972 $ 1,031,982
The Small Business Administration reopened the Payroll Protection Program ("PPP") the week of January 11, 2021 and began accepting applications for both First Draw and Second Draw PPP Loans. As of March 31, 2021, as part of this round of PPP, the Bank funded 156 PPP loans totaling $ 25.0 million with net deferred origination fees of $ 984,000 . Combined with $ 19.7 million of loan forgiveness processed in the first quarter of 2021, total PPP loans increased $ 5.3 million to $ 60.4 million at March 31, 2021 compared to $ 55.1 million at December 31, 2020. At March 31, 2021, the largest sectors of PPP loans were $ 15.2 million for construction and specialty-trade contractors, $ 10.1 million in loans for health care and social assistance, $ 8.2 million for professional and technical services, $ 3.5 million for retail trade, $ 5.0 million for restaurant and food services, $ 4.9 million for manufacturing, and $ 4.5 million for wholesale trade. Net unamortized PPP loan origination fees as of March 31, 2021 and December 31, 2020 were $ 1.5 million and $ 1.1 million, respectively. $ 535,000 of net PPP loan origination fees were earned for the three months ended March 31, 2021. All PPP loans are classified as commercial and industrial loans held for investment. No allowance for loan loss was allocated to the PPP loan portfolio due to the Bank complying with the lender obligations that ensure SBA guarantee.
Total unamortized net deferred loan fees were $ 2.5 million and $ 2.0 million at March 31, 2021 and December 31, 2020, respectively.
The Company uses an eight-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are not considered criticized and are aggregated as “pass” rated. The criticized rating categories used by management generally follow bank regulatory definitions. The special mention category includes assets that are currently protected but are below average quality, resulting in an undue credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Loans classified as doubtful have all the weaknesses inherent in loans classified as substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as loss are considered uncollectable and of such little value that continuance as an asset is not warranted.
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The following table presents loans summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of the dates indicated. At March 31, 2021 and December 31, 2020, there were no loans in the criticized category of Loss within the internal risk rating system.
March 31, 2021
Pass
Special
Mention
Substandard
Doubtful
Total
(Dollars in Thousands)
Real Estate:
Residential
$ 336,031 $ 1,090 $ 2,475 $ — $ 339,596
Commercial
322,743 31,818 15,557 — 370,118
Construction
72,969 2,145 2,600 — 77,714
Commercial and Industrial
114,911 7,943 5,493 584 128,931
Consumer
111,598 — 52 — 111,650
Other
13,612 76 — — 13,688
Total Loans
$ 971,864 $ 43,072 $ 26,177 $ 584 $ 1,041,697
December 31, 2020
Pass
Special
Mention
Substandard
Doubtful
Total
(Dollars in Thousands)
Real Estate:
Residential
$ 340,573 $ 1,115 $ 2,454 $ — $ 344,142
Commercial
320,358 37,482 15,715 — 373,555
Construction
68,343 53 4,204 — 72,600
Commercial and Industrial
113,797 7,787 4,620 609 126,813
Consumer
113,805 — 49 — 113,854
Other
13,711 78 — — 13,789
Total Loans
$ 970,587 $ 46,515 $ 27,042 $ 609 $ 1,044,753
The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of the dates indicated.
March 31, 2021
Loans
Current
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
Or More
Past Due
Total
Past Due
Non-
Accrual
Total
Loans
(Dollars in Thousands)
Real Estate:
Residential
$ 336,483 $ 1,253 $ — $ — $ 1,253 $ 1,860 $ 339,596
Commercial
363,057 — — — — 7,061 370,118
Construction
77,714 — — — — — 77,714
Commercial and Industrial
127,127 — — — — 1,804 128,931
Consumer
111,346 249 3 — 252 52 111,650
Other
13,688 — — — — — 13,688
Total Loans
$ 1,029,415 $ 1,502 $ 3 $ — $ 1,505 $ 10,777 $ 1,041,697
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December 31, 2020
Loans
Current
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
Or More
Past Due
Total
Past Due
Non-
Accrual
Total
Loans
(Dollars in Thousands)
Real Estate:
Residential
$ 339,067 $ 2,919 $ 315 $ — $ 3,234 $ 1,841 $ 344,142
Commercial
365,712 1 740 — 741 7,102 373,555
Construction
72,600 — — — — — 72,600
Commercial and Industrial
124,916 — — — — 1,897 126,813
Consumer
112,952 784 61 8 853 49 113,854
Other
13,789 — — — — — 13,789
Total Loans
$ 1,029,036 $ 3,704 $ 1,116 $ 8 $ 4,828 $ 10,889 $ 1,044,753
Total unrecorded interest income related to nonaccrual loans was $ 61,000 and $ 11,000 for the three months ended March 31, 2021 and 2020, respectively.
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The following table sets forth the amounts and categories of nonperforming assets at the dates indicated. Included in nonperforming loans and assets are troubled debt restructurings (“TDRs”), which are loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties. Nonaccrual TDRs are included in their specific loan category in the nonaccrual loans section. Nonperforming loans do not include loans modified under Section 4013 of the CARES Act and interagency guidance as further explained below.
March 31,
2021 December 31,
2020
(Dollars in Thousands)
Nonaccrual Loans:
Real Estate:
Residential
$ 1,860 $ 1,841
Commercial
7,061 7,102
Commercial and Industrial
1,804 1,897
Consumer
52 49
Total Nonaccrual Loans
10,777 10,889
Accruing Loans Past Due 90 Days or More:
Real Estate:
Residential
— —
Consumer
— 8
Total Accruing Loans Past Due 90 Days or More
— 8
Total Nonaccrual Loans and Accruing Loans Past Due 90 Days or More
10,777 10,897
Troubled Debt Restructurings, Accruing:
Real Estate
Residential
641 650
Commercial
2,777 2,861
Commercial and Industrial
57 80
Total Troubled Debt Restructurings, Accruing
3,475 3,591
Total Nonperforming Loans
14,252 14,488
Other Real Estate Owned:
Residential
— —
Commercial
208 208
Total Other Real Estate Owned
208 208
Total Nonperforming Assets
$ 14,460 $ 14,696
Nonperforming Loans to Total Loans
1.37 % 1.39 %
Nonperforming Assets to Total Assets
0.98 1.04
The recorded investment of residential real estate loans for which formal foreclosure proceedings were in process according to applicable requirements of the local jurisdiction was $ 754,000 and $ 806,000 at March 31, 2021 and December 31, 2020, respectively.
TDRs typically are the result of loss mitigation activities whereby concessions are granted to minimize loss and avoid foreclosure or repossession of collateral. For a loan modification to be considered a TDR, the borrower must be experiencing financial difficulty and a concession must be granted, except for an insignificant delay in payment. Section 4013 of the CARES Act and regulatory guidance promulgated by federal banking regulators provide temporary relief from accounting and financial reporting requirements for TDRs regarding certain short-term loan modifications related to COVID-19. Specifically, the CARES Act provides that the Bank may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and suspend any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Any modification involving a loan that was not more than 30 days past due as of December 31, 2019 and that occurs beginning on March 1, 2020 and ends on the earlier of January 1, 2022 (as extended by the
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Consolidated Appropriations Act, 2021) or the date that is 60 days after the termination date of the national emergency related to the COVID-19 outbreak qualify for this exception, including a forbearance arrangement, interest rate modification, repayment plan or any other similar arrangement that defers or delays the payment of principal or interest.
Bank regulatory agencies released an interagency statement that offers practical expedients for modifications that occur in response to the COVID-19 pandemic, but it differs with the CARES Act in certain areas. The expedients require a lender to conclude that a borrower is not experiencing financial difficulty if either short-term (e.g., six months or less) modifications are made, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented or the modification or deferral program is mandated by the federal government or a state government. The bank regulatory agencies have subsequently confirmed that their guidance could be applicable for loans that do not qualify for favorable accounting treatment under Section 4013 of the CARES Act. Both Section 4013 of the CARES Act and the interagency statement can be applied to a second modification that occurs after the first modification provided that the second modification does not qualify as a TDR under Section 4013 of the CARES Act or the interagency statement.
The Bank offered forbearance options for borrowers impacted by COVID-19 that provide a short-term delay in payment by primarily allowing: (a) deferral of three to six months of payments; or (b) for consumer loans not secured by a real estate mortgage, three months of interest-only payments that also extends the maturity date of the loan by three months . During the forbearance period, the borrower is not considered delinquent for credit bureau reporting purposes. The Company has elected the practical expedients related to TDRs that are available in the CARES Act and interagency guidance as an entity-wide accounting policy and does not consider any of the forbearance agreements TDRs, delinquent, or nonaccrual.
The following table provides details of loans in forbearance as of the dates indicated.
March 31, 2021 December 31, 2020
Number
of
Loans Amount % of Portfolio Number
of
Loans Amount % of Portfolio
(Dollars in thousands)
Real Estate:
Residential 7 1,343 0.4 % 4 749 0.2 %
Commercial 7 13,814 3.7 % 8 19,818 5.3 %
Construction 1 1,958 2.5 % 1 1,958 2.7 %
Commercial and Industrial 5 1,219 0.9 % 5 1,219 1.0 %
Consumer 5 106 0.1 % 13 356 0.3 %
Total Loans in Forbearance 25 $ 18,440 1.8 % 31 $ 24,100 2.3 %
Loans in deferral at March 31, 2021 include two commercial real estate loans totaling $ 4.6 million and one construction loan totaling $ 2.0 million that are all secured by hotels, one commercial real estate loan totaling $ 5.5 million secured by office space and a business relationship that rents equipment, supplies and other materials for events comprised of three commercial real estate loans totaling $ 3.3 million, and five commercial and industrial loans totaling $ 1.2 million. All loans will have exited their deferral periods by July 2021.
The concessions granted for the TDRs in the portfolio primarily consist of, but are not limited to, modification of payment or other terms, temporary rate modification and extension of maturity date. Loans classified as TDRs consisted of 16 loans totaling $ 4.1 million at March 31, 2021 and 17 loans totaling $ 4.2 million at December 31, 2020, respectively.
During the three months ended March 31, 2021, there were no loans that were modified that were considered a TDR and one residential real estate loan modified in a TDR totaling $ 3,000 that paid off. During the three months ended March 31, 2020, there were no loans that were modified that were considered a TDR and no loans modified in a TDR that paid off. No TDRs subsequently defaulted during the three months ended March 31, 2021 and 2020, respectively.
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The following table presents a summary of the loans considered to be impaired as of the dates indicated.
March 31, 2021
Recorded
Investment
Related
Allowance
Unpaid
Principal
Balance
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in thousands)
With No Related Allowance Recorded:
Real Estate:
Residential
$ 1,174 $ — $ 1,178 $ 1,177 $ 12
Commercial
33,497 — 33,627 33,666 361
Construction
2,599 — 2,599 2,599 23
Commercial and Industrial
3,703 — 3,938 3,956 28
Total With No Related Allowance Recorded
$ 40,973 $ — $ 41,342 $ 41,398 $ 424
With A Related Allowance Recorded:
Real Estate:
Residential
$ — $ — $ — $ — $ —
Commercial
571 269 571 576 6
Construction
— — — — —
Commercial and Industrial
2,487 502 2,487 2,512 17
Total With A Related Allowance Recorded
$ 3,058 $ 771 $ 3,058 $ 3,088 $ 23
Total Impaired Loans:
Real Estate:
Residential
$ 1,174 $ — $ 1,178 $ 1,177 $ 12
Commercial
34,068 269 34,198 34,242 367
Construction
2,599 — 2,599 2,599 23
Commercial and Industrial
6,190 502 6,425 6,468 45
Total Impaired Loans
$ 44,031 $ 771 $ 44,400 $ 44,486 $ 447
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December 31, 2020
Recorded
Investment
Related
Allowance
Unpaid
Principal
Balance
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in thousands)
With No Related Allowance Recorded:
Real Estate:
Residential
$ 1,183 $ — $ 1,187 $ 1,194 $ 46
Commercial
31,865 — 32,887 37,443 1,418
Construction 4,204 — 4,204 4,013 159
Commercial and Industrial
3,296 — 3,506 3,426 89
Total With No Related Allowance Recorded
$ 40,548 $ — $ 41,784 $ 46,076 $ 1,712
With A Related Allowance Recorded:
Real Estate:
Residential
$ — $ — $ — $ — $ —
Commercial
1,524 293 1,524 1,585 72
Construction — — — — —
Commercial and Industrial
2,069 356 2,069 2,114 57
Total With A Related Allowance Recorded
$ 3,593 $ 649 $ 3,593 $ 3,699 $ 129
Total Impaired Loans
Real Estate:
Residential
$ 1,183 $ — $ 1,187 $ 1,194 $ 46
Commercial
33,389 293 34,411 39,028 1,490
Construction 4,204 — 4,204 4,013 159
Commercial and Industrial
5,365 356 5,575 5,540 146
Total Impaired Loans
$ 44,141 $ 649 $ 45,377 $ 49,775 $ 1,841
The following tables present the activity in the allowance for loan losses summarized by primary segments and segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for potential impairment at the dates and for the periods indicated.
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
December 31, 2020 $ 2,249 $ 6,010 $ 889 $ 1,423 $ 1,283 $ — $ 917 $ 12,771
Charge-offs
— — — — ( 95 ) — — ( 95 )
Recoveries
9 — — 12 28 — — 49
Provision
( 283 ) ( 93 ) 50 108 ( 113 ) — 331 —
March 31, 2021 $ 1,975 $ 5,917 $ 939 $ 1,543 $ 1,103 $ — $ 1,248 $ 12,725
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March 31, 2021
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ — $ 269 $ — $ 502 $ — $ — $ — $ 771
Collectively Evaluated for Potential Impairment
$ 1,975 $ 5,648 $ 939 $ 1,041 $ 1,103 $ — $ 1,248 $ 11,954
December 31, 2020
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ — $ 293 $ — $ 356 $ — $ — $ — $ 649
Collectively Evaluated for Potential Impairment
$ 2,249 $ 5,717 $ 889 $ 1,067 $ 1,283 $ — $ 917 $ 12,122
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
December 31, 2019 $ 2,023 $ 3,210 $ 285 $ 2,412 $ 1,417 $ — $ 520 $ 9,867
Charge-offs
( 25 ) — — — ( 99 ) — — ( 124 )
Recoveries
2 14 — 9 54 — — 79
Provision
685 1,651 379 ( 829 ) 507 — 107 2,500
March 31, 2020 $ 2,685 $ 4,875 $ 664 $ 1,592 $ 1,879 $ — $ 627 $ 12,322
March 31, 2020
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ — $ 392 $ — $ 259 $ — $ — $ — $ 651
Collectively Evaluated for Potential Impairment
$ 2,685 $ 4,483 $ 664 $ 1,333 $ 1,879 $ — $ 627 $ 11,671
The following table presents the major classifications of loans summarized by individually evaluated for impairment and collectively evaluated for potential impairment as of the dates indicated. At March 31, 2021 and December 31, 2020, commercial and industrial loans include $ 60.4 million and $ 55.1 million, respectively, of PPP loans collectively evaluated for potential
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impairment. No allowance for loan loss was allocated to the PPP loan portfolio due to the Bank complying with the lender obligations that ensure SBA guarantee.
March 31, 2021
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ 1,174 $ 34,068 $ 2,599 $ 6,190 $ — $ — $ 44,031
Collectively Evaluated for Potential Impairment
338,422 336,050 75,115 122,741 111,650 13,688 997,666
Total Loans
$ 339,596 $ 370,118 $ 77,714 $ 128,931 $ 111,650 $ 13,688 $ 1,041,697
December 31, 2020
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ 1,183 $ 33,389 $ 4,204 $ 5,365 $ — $ — $ 44,141
Collectively Evaluated for Potential Impairment
342,959 340,166 68,396 121,448 113,854 13,789 1,000,612
Total Loans $ 344,142 $ 373,555 $ 72,600 $ 126,813 $ 113,854 $ 13,789 $ 1,044,753
The following table presents changes in the accretable discount on the loans acquired at fair value at the dates indicated.
Accretable Discount
(Dollars in Thousands)
December 31, 2020 $ 1,194
Accretable Yield
( 138 )
March 31, 2021 $ 1,056
Note 5. Deposits
The following table shows the maturities of time deposits for the next five years and beyond at the date indicated.
March 31,
2021
(Dollars in thousands)
One Year or Less
$ 79,821
Over One Through Two Years
51,301
Over Two Through Three Years
25,961
Over Three Through Four Years
8,582
Over Four Through Five Years
11,237
Over Five Years
3,795
Total
$ 180,697
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The balance in time deposits that meet or exceed the FDIC insurance limit of $250,000 totaled $ 53.9 million and $ 59.2 million as of March 31, 2021 and December 31, 2020, respectively.
The aggregate amount of demand deposits that are overdrawn and have been reclassified as loans was $ 181,000 and $ 231,000 as of March 31, 2021 and December 31, 2020, respectively.
Note 6. Short-Term Borrowings
Borrowings with original maturities of one year or less are classified as short-term and may consist of borrowings with the Federal Home Loan Bank ("FHLB"), securities sold under agreements to repurchase or borrowings on revolving lines of credit with the Federal Reserve Bank or other correspondent banks, Securities sold under repurchase agreements are comprised of customer repurchase agreements, which are overnight sweep accounts with next-day maturities utilized by commercial customers to earn interest on their funds. Securities are pledged as collateral under these agreements in an amount at least equal to the outstanding balance and the collateral pledging requirements are monitored on a daily basis.
The following table sets forth the components of short-term borrowings as of the dates indicated.
March 31, 2021 December 31, 2020
Amount Weighted
Average
Rate Amount Weighted
Average
Rate
(Dollars in thousands)
Securities Sold Under Agreements to Repurchase:
Balance at Period End $ 45,352 0.21 % $ 41,055 0.21 %
Average Balance Outstanding During the Period 41,094 0.23 37,819 0.36
Maximum Amount Outstanding at any Month End 45,352 46,123
Securities Collaterizing the Agreements at Period-End:
Carrying Value 47,430 46,312
Market Value 46,571 47,283
Note 7. Other Borrowed Funds
Other borrowed funds consist of fixed rate advances from the FHLB. The following table sets forth the scheduled maturities of other borrowed funds at the dates indicated.
March 31, 2021 December 31, 2020
Amount
Weighted
Average
Rate
Amount
Weighted
Average
Rate
(Dollars in thousands)
Due in One Year
$ 3,000 2.23 % $ 2,000 2.12 %
Due After One Year to Two Years
3,000 2.41 3,000 2.23
Due After Two Years to Three Years
— — 3,000 2.41
Total
$ 6,000 2.32 % $ 8,000 2.27 %
As of March 31, 2021, the Company maintained a credit arrangement with a maximum borrowing limit of approximately $ 433.0 million with the FHLB and available borrowing capacity of $ 332.7 million. This arrangement is subject to annual renewal, incurs no service charge, and is secured by a blanket security agreement on $ 580.9 million of residential and commercial mortgage loans and the Company’s investment in FHLB stock. Under this arrangement the Company had available a variable rate Line of Credit in the amount of $ 150.0 million as of March 31, 2021, of which there was no outstanding balance.
As an alternative to pledging securities, the FHLB periodically provides standby letters of credit on behalf of the Bank to secure certain public deposits in excess of the level insured by the FDIC. If the FHLB is required to make payment for a beneficiary’s draw, the payment amount is converted into a collateralized advance to the Bank. Standby letters of credit issued on our behalf by the FHLB to secure public deposits were $ 99.6 million and $ 90.3 million as of March 31, 2021 and December 31, 2020, respectively.
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At March 31, 2021, the Company maintained a Borrower-In-Custody of Collateral line of credit agreement with the Federal Reserve Bank (“FRB”) for $ 84.4 million that requires monthly certification of collateral, is subject to annual renewal, incurs no service charge and is secured by $ 131.7 million of commercial and industrial and consumer indirect auto loans. In addition, the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $ 50.0 million of which no draws had been taken.
Note 8. Fair Value Disclosure
FASB ASC 820 “Fair Value Measurement” defines fair value and provides the framework for measuring fair value and required disclosures about fair value measurements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the transaction date. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used in valuation methods to determine fair value.
The three levels of fair value hierarchy are as follows:
Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.
Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs.
Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques.
This hierarchy requires the use of observable market data when available. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.
The following table presents the financial assets measured at fair value on a recurring basis and reported on the Consolidated Statements of Financial Condition as of the dates indicated, by level within the fair value hierarchy. The majority of the Company’s securities are included in Level 2 of the fair value hierarchy. Fair values for Level 2 securities were primarily determined by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. The standard inputs that are normally used include benchmark yields of like securities, reportable trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. There were no transfers into or out of Level 3 during the three months ended March 31, 2021 or year ended December 31, 2020.
Fair Value
Hierarchy
March 31
2021 December 31
2020
(Dollars in thousands)
Securities:
Available-for-Sale Debt Securities
U.S. Government Agencies Level 2
$ 48,688 $ 41,411
Obligations of States and Political Subdivisions Level 2
21,727 21,993
Mortgage-Backed Securities - Government-Sponsored Enterprises Level 2
68,991 79,493
Total Available-for-Sale Debt Securities 139,406 142,897
Equity Securities
Mutual Funds Level 1
1,001 1,019
Other Level 1
1,749 1,484
Total Equity Securities 2,750 2,503
Total Securities $ 142,156 $ 145,400
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The following table presents the financial assets on the Consolidated Statements of Financial Condition measured at fair value on a nonrecurring basis as of the dates indicated by level within the fair value hierarchy for only those nonrecurring assets that had a fair value below the carrying amount. The table also presents the significant unobservable inputs used in the fair value measurements.
Financial Asset Fair Value Hierarchy March 31,
2021 Valuation
Techniques Significant Unobservable Inputs Range Weighted Average
(Dollars in thousands)
Impaired Loans Individually Assessed Level 3 $ 2,287 Appraisal of Collateral (1)
Appraisal Adjustments (2)
0 % to 50 % —
Mortgage Servicing Rights Level 3 766 Discounted Cash Flow Discount Rate 9 % to 11 % 9.8 %
Prepayment Speed 8 % to 23 % 13.8 %
Financial Asset Fair Value Hierarchy December 31,
2020 Valuation
Techniques Significant Unobservable Inputs Range Weighted Average
(Dollars in thousands)
Impaired Loans Individually Assessed Level 3 $ 2,944 Appraisal of Collateral (1)
Appraisal Adjustments (2)
0 % to 50 % —
Mortgage Servicing Rights Level 3 656 Discounted Cash Flow Discount Rate 9 % to 11 % 10.0 %
Prepayment Speed 12 % to 27 % 18.7 %
OREO Level 3 34 Appraisal of Collateral (1)
Liquidation Expenses (2)
10 % to 30 % —
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which may include various Level 3 inputs, which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of appraisal adjustments and liquidation expense are presented as a percent of the appraisal.
Impaired loans are evaluated when a loan is identified as impaired and valued at the lower of cost or fair value at that time. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Fair value is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. At March 31, 2021 and December 31, 2020, the fair value of impaired loans consists of the loan balances of $ 3.1 million and $ 3.6 million, respectively, less their specific valuation allowances of $ 771,000 and $ 649,000 , respectively.
The fair value of mortgage servicing rights ("MSRs") is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSRs. MSRs are considered impaired if the carrying value exceeds fair value. Since the valuation model includes significant unobservable inputs as listed above, MSRs are classified as Level 3. MSRs are reported in Other Assets in the Consolidated Statements of Financial Condition and are amortized into mortgage servicing income in Other Income in the Consolidated Statements of Income.
OREO properties are evaluated at the time of acquisition and recorded at fair value, less estimated selling costs. After acquisition, OREO is recorded at the lower of cost or fair value, less estimated selling costs. The fair value of an OREO property is determined from a qualified independent appraisal and is classified as Level 3 in the fair value hierarchy.
Financial instruments are defined as cash, evidence of an ownership in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.
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. If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses and other factors, as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the estimated fair values are based may have significant impact on the resulting estimated fair values.
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As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.
The following table presents the estimated fair values of the Company’s financial instruments at the dates indicated.
March 31, 2021 December 31, 2020
Fair Value
Hierarchy
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
(Dollars in thousands)
Financial Assets:
Cash and Due From Banks:
Interest Bearing
Level 1
$ 216,753 $ 216,753 $ 145,636 $ 145,636
Non-Interest Bearing
Level 1
13,247 13,247 15,275 15,275
Securities See Above
142,156 142,156 145,400 145,400
Loans, Net
Level 3
1,028,972 1,065,445 1,031,982 1,073,633
Restricted Stock
Level 2
3,784 3,784 3,984 3,984
Mortgage Servicing Rights Level 3 766 766 656 656
Accrued Interest Receivable
Level 2
3,738 3,738 3,872 3,872
Financial Liabilities:
Deposits
Level 2
1,284,463 1,287,325 1,224,569 1,231,606
Short-Term Borrowings Level 2
45,352 45,352 41,055 41,055
Other Borrowed Funds
Level 2
6,000 6,098 8,000 8,067
Accrued Interest Payable
Level 2
626 626 767 767
Note 9. Commitments and Contingent Liabilities
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business primarily to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and performance 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 Statements of Financial Condition. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and performance letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments and conditional obligations are evaluated the same as on-balance-sheet instruments but do not have a corresponding reserve recorded. The Company’s opinion on not implementing a corresponding reserve for off-balance-sheet instruments is supported by historical factors of no losses recorded due to these items. The Company is continually evaluating these items for credit quality and any future need for the corresponding reserve.
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The following table presents the unused and available credit balances of financial instruments whose contracts represent credit risk at the dates indicated.
March 31,
2021 December 31,
2020
(Dollars in thousands)
Standby Letters of Credit
$ 110 $ 120
Performance Letters of Credit
2,753 2,947
Construction Mortgages
54,628 60,312
Personal Lines of Credit
7,120 6,930
Overdraft Protection Lines
6,189 6,287
Home Equity Lines of Credit
23,160 22,110
Commercial Lines of Credit
74,272 69,738
Total Commitments
$ 168,232 $ 168,444
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 and may require payment of a fee by the customer. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each 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 counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Performance letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon expiration of the letter. For secured letters of credit, the collateral is typically Company deposit instruments or customer business assets.
Note 10. Leases
The Company evaluates contracts at commencement to determine if a lease is present. The Company’s lease contracts are all classified as operating leases and create operating right-of-use (“ROU”) assets and corresponding lease liabilities on the balance sheet. The leases are primarily ROU assets of land and building for branch and loan production locations. ROU assets are reported in Accrued Interest Receivable and Other Assets and the related lease liabilities in Accrued Interest Payable and Other Liabilities on the Consolidated Statements of Financial Condition.
The following tables present the lease expense, ROU assets, weighted average term, discount rate and maturity analysis of lease liabilities for operating leases for the periods and dates indicated.
Three Months Ended
March 31,
2021 2020
(Dollars in thousands)
Operating Lease Expense $ 95 $ 116
Short-Term Lease Expense 8 —
Variable Lease Expense 8 9
Total Lease Expense $ 111 $ 125
March 31,
2021 December 31,
2020
(Dollars in thousands)
Operating Leases:
ROU Assets $ 1,118 $ 1,206
Weighted Average Lease Term in Years 7.00 6.95
Weighted Average Discount Rate 2.42 % 2.39 %
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March 31,
2021
(Dollars in throusands)
Maturity Analysis:
Due in One Year $ 346
Due After One Year to Two Years 249
Due After Two Years to Three Years 125
Due After Three Years to Four Years 107
Due After Four to Five Years 60
Due After Five Years 352
Total $ 1,239
Less: Present Value Discount 118
Lease Liabilities $ 1,121
Note 11. Other Noninterest Expense
The details of other noninterest expense for the Company’s Consolidated Statements of Income for the periods indicated are as follows:
Three Months Ended
March 31,
2021 2020
(Dollars in thousands)
Non-Employee Compensation $ 148 $ 147
Printing and Supplies 99 101
Postage 63 61
Telephone 188 169
Charitable Contributions 15 51
Dues and Subscriptions 50 76
Loan Expenses 92 145
Meals and Entertainment 34 40
Travel 22 54
Training 17 7
Bank Assessment 44 44
Insurance 60 56
Miscellaneous 150 162
Total Other Noninterest Expense $ 982 $ 1,113
Note 12. Segment and Related Information
At March 31, 2021, the Company’s business activities were comprised of two operating segments, which are community banking and insurance brokerage services. CB Financial is the parent company of the Bank and Exchange Underwriters, a wholly owned subsidiary of the Bank. Exchange Underwriters has an independent board of directors from the Company and is managed separately from the banking and related financial services that the Company offers. Exchange Underwriters is an independent insurance agency that offers property, casualty, commercial liability, surety and other insurance products.
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The following is a table of selected financial data for the Company’s subsidiaries and consolidated results at the dates and for the periods indicated.
Community Bank Exchange Underwriters, Inc. CB Financial Services, Inc. Net Eliminations Consolidated
(Dollars in thousands)
March 31, 2021
Assets $ 1,477,053 $ 5,207 $ 133,797 $ ( 139,236 ) $ 1,476,821
Liabilities 1,349,183 1,746 21 ( 7,905 ) 1,343,045
Stockholders' Equity 127,870 3,461 133,776 ( 131,331 ) 133,776
December 31, 2020
Assets $ 1,416,132 $ 5,379 $ 134,546 $ ( 139,337 ) $ 1,416,720
Liabilities 1,287,148 2,325 16 ( 7,299 ) 1,282,190
Stockholders' Equity 128,984 3,054 134,530 ( 132,038 ) 134,530
Three Months Ended March 31, 2021
Interest and Dividend Income $ 10,971 $ 1 $ 1,320 $ ( 1,304 ) $ 10,988
Interest Expense 1,011 — — — 1,011
Net Interest and Dividend Income 9,960 1 1,320 ( 1,304 ) 9,977
Provision for Loan Losses — — — — —
Net Interest and Dividend Income After Provision for Loan Losses 9,960 1 1,320 ( 1,304 ) 9,977
Noninterest Income 1,343 1,591 240 — 3,174
Noninterest Expense 8,390 1,001 4 — 9,395
Undistributed Net Income of Subsidiary 407 — 1,301 ( 1,708 ) —
Income Before Income Tax Expense 3,320 591 2,857 ( 3,012 ) 3,756
Income Tax Expense 715 184 12 — 911
Net Income $ 2,605 $ 407 $ 2,845 $ ( 3,012 ) $ 2,845
Three Months Ended March 31, 2020
Interest and Dividend Income $ 12,313 $ 1 $ 15 $ — $ 12,329
Interest Expense 1,796 — — — 1,796
Net Interest and Dividend Income 10,517 1 15 — 10,533
Provision for Loan Losses 2,500 — — — 2,500
Net Interest and Dividend Income After Provision for Loan Losses 8,017 1 15 — 8,033
Noninterest Income (Loss) 1,046 1,281 ( 455 ) — 1,872
Noninterest Expense 8,023 975 5 — 9,003
Undistributed Net Income of Subsidiary 213 — 1,123 ( 1,336 ) —
Income Before Income Tax Expense (Benefit) 1,253 307 678 ( 1,336 ) 902
Income Tax Expense (Benefit) 130 94 ( 95 ) — 129
Net Income $ 1,123 $ 213 $ 773 $ ( 1,336 ) $ 773
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Note 13. Intangible Assets
The following table presents a summary of intangible assets subject to amortization at the dates indicated.
March 31, 2021 December 31, 2020
Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value
(Dollars in thousands)
Core Deposit Intangible $ 14,103 $ ( 7,532 ) $ 6,571 $ 14,103 $ ( 7,047 ) $ 7,056
Customer List 1,800 ( 504 ) 1,296 1,800 ( 457 ) 1,343
Total Intangible Assets $ 15,903 $ ( 8,036 ) $ 7,867 $ 15,903 $ ( 7,504 ) $ 8,399
The estimated amortization expense of intangible assets assumes no activities, such as acquisitions, which would result in additional amortizable intangible assets. Estimated amortization expense of intangible assets in subsequent fiscal years is as follows.
Amount
(Dollars in thousands)
Remaining in 2021 $ 1,596
2022 2,128
2023 2,128
2024 1,430
2025 189
2026 and Thereafter 396
Total Estimated Intangible Asset Amortization Expense $ 7,867
Note 14. Mortgage Servicing Rights
The following table presents MSR activity and net carrying values for the periods indicated.
Three Months Ended
March 31,
2021 2020
(Dollars in thousands)
Mortgage Servicing Rights:
Balance, Beginning of Period $ 1,029 $ 1,001
Additions 17 45
Amortization ( 79 ) ( 54 )
Balance, End of Period $ 967 $ 992
Valuation Allowance:
Balance, Beginning of Period $ ( 373 ) $ ( 71 )
Valuation Allowance Adjustment 172 —
Balance, End of Period $ ( 201 ) $ ( 71 )
Mortgage Servicing Rights, Net Carrying Value $ 766 $ 921
Amortization of MSRs and the period change in the valuation allowance are reported in Other Income on the Consolidated Statements of Income.
Real estate loans serviced for others, which are not included in the Consolidated Statements of Financial Condition, totaled $ 101.6 million and $ 105.8 million at March 31, 2021 and December 31, 2020, respectively.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.